Monthly Archives: June 2011

The FT led its front page on Monday with a startling headline: “Economic growth must slow, warns BIS“. That’s right, economic growth must slow. As Martin Wolf cogently argues in the FT today, simultaneous deleveraging by private and public sectors, encouraged by all wings of macro policy, could result in a prolonged slump in global demand. Yet the BIS is not alone in its thinking. More and more policymakers seem to be gravitating towards similar conclusions. Read more

By far the most important event in the financial markets this week was the unexpected release of oil stocks by the IEA, which almost immediately reduced the global oil price by about 8 per cent. The motivation for this intervention might well have been Washington politics but, if the fall in the oil price persists, it will have a very useful effect on global economic activity, just when it is most needed.

Former US vice president Dick Cheney used to describe the release of oil stocks by the IEA as a “nuclear option”, which could almost never be used. The FT’s commodities editor Javier Blas says that it is now viewed as a “smart bomb” aimed mainly at oil speculators. But others, including this FT editorial, see the IEA’s tactics as pointless or self-destructive. So is it just a damp squib? Read more

The Fed announced today that the US economic situation is far from satisfactory, but that there is nothing much that it can (or will) do about it. Real GDP growth is, by its own admission, lower than the FOMC expected in April, and unemployment has been higher than anticipated. However, its concerns about inflation have risen and, significantly, it has dropped the previous assertion that “measures of underlying inflation are still subdued”.  Chairman Bernanke believes that part of the recent slowdown is temporary, but admits that he is not fully confident that he understands the underlying causes. The FOMC is becalmed, and perhaps slightly bemused. Read more

As the EMU bloc stagggers towards a messy deal on Greek debt this week, it is worth thinking afresh whether the present strategy of “kicking the can down the road” still has anything to commend it. Increasingly, the chosen route of procrastination and obfuscation looks like the worst of all possible worlds. Instead of buying time, which was the original intention, the strategy is maximising the risk of a disorderly blow-up which would do much greater damage than the intrinsic scale of the original problem should merit. Read more

The recent slowdown in the US economy raises the question of whether the growth of output may have dropped below the so-called “stall speed”. This is the growth rate at which a healthy expansion can no longer be maintained, after which the economic engine misfires and the US heads back towards recession. For as long as this risk remains, markets are likely to remain nervous, and will certainly be extremely focused on the minutiae of weekly and monthly activity data. Up to now, the data suggest that the engine of the economy has not stalled, though it is making some ominous spluttering noises.  Read more

Global equity markets have fallen by 6 per cent since the end of April, and have now given back all of their gains for 2011. After appearing immune to higher oil prices and the global economic slowdown for quite a while, investor complacency has disappeared in the past couple of weeks, and stockmarkets have fallen fairly sharply.

In my opinion, this drop has been triggered by the realisation that policy-makers around the world are no longer in any condition to rescue the global economy from a further slowdown, should that occur. Economies, and therefore markets, are currently flying without an automatic safety net from either fiscal or monetary policy.  And that brings new risks, compared to the situation which has been in place for most of the period since the 2009. Read more

Last week, Martin Wolf drew international attention to the work of Professor Sinn of the German IFO Institute, who has made a series of alarming claims about the build-up of Target2 imbalances within the European System of Central Banks. Professor Sinn focused on the fact that the Bundesbank is now in credit to other European central banks to the tune of €325bn, with the offsetting debits being held by the central banks of troubled peripheral economies (which Professor Sinn calls the GIPS, an acronym which I prefer to the PIGS).

Sinn also claimed that the provision of German credit to the GIPS had effectively sucked lending capability out of the German banks, thus holding back the German economic recovery. This has triggered an intense debate about whether Germany is at risk from the potential failure of these debts, and whether the ECB has engaged in a “stealth bailout” of the GIPS. (For latecomers to the debate, see Paul Krugman, Tracy Alloway, Olaf Storbeck and Geoffrey Smith.) Read more

Most of the key data on global economic activity for the month of May have been published in the past few days, and they have certainly added to concerns about the strength of the recovery from the Great Recession. The speed and extent of the decline in the manufacturing growth has been unusually severe, especially in the US, where the ISM business survey suffered its ninth largest monthly decline in its entire history, which extends back to 1948. In this earlier blog, I argued that policy makers in the US might be “out of ammo” if the economy headed towards a double dip recession. But I also said that that was not yet the most likely out-turn. Here is my take on what recent data in the US and elsewhere are telling us about the recovery. Read more

The US employment numbers for May seemed to surprise the markets, but in fact they confirmed what we already knew from a string of earlier data releases, which is that the economy has slowed very markedly in recent months. The debate now is whether this slowdown has been triggered mainly by transitory factors – the fallout from the Japanese earthquake, stormy weather, and a spike in gasoline prices above $4/gallon – or whether it reflects a more fundamental malaise in the economic recovery.

The equity markets have remained fairly upbeat about this, and most economists are still strongly of the view that this is just another mid-cycle slowdown of the sort which occurred last year. This still seems to be the most probable outcome (as I will argue here on Sunday). But what if this optimism is wrong? Is there a Plan B? Read more