Daily Archives: August 2, 2010

James Politi

Ben Bernanke is not quite a native of South Carolina – he was actually born in nearby Georgia. But he did grow up in the state, and returned there this morning to give his latest assessment of the US economy.

The headline, in my view, was that there is a “considerable way” to go before the US recovery is complete – a no-less dreary variation on his comments last week that the economic outlook is “unusually uncertain”.

Unemployment is high, the housing market is weak, financial conditions are less supportive of growth than they were earlier in the year, Mr Bernanke said, in his first remarks following Friday’s disappointing growth data, which showed real gross domestic product increasing at a slower pace in the second quarter than it did in the first.

But if anyone was hoping for Mr Bernanke to discuss what steps the Fed might consider at their monetary policy meeting next week to reboot the recovery, they were disappointed. Mr Bernanke did not address the issue, presumably to avoid speaking ahead of his colleagues on such a crucial, market-sensitive matter. 

Easing, not tightening, in the US.

Life just got a little easier for some small depositary banks. Rather quietly, the Fed’s board of governors reduced the seasonal discount rate to 0.3 from 0.35 per cent on July 15, reversing the rising trend prevailing since November. 

James Politi

Ben Bernanke, chairman of the Federal Reserve, on Monday warned of a “considerable way to go” before the US economy made a full recovery, as he addressed the restraints on growth posed by the fiscal crisis among state and local governments.

In a speech in South Carolina, where he grew up, Mr Bernanke reiterated the Fed’s economic outlook of moderate expansion heading into its next interest rate-setting meeting, scheduled for next week. 

Europeans can borrow at record lows, too. More than two-thirds of euro-denominated loans freshly issued to households are at record lows, according to aggregated loan rates from the ECB.

During June, of 18 types of loan, 13 were agreed at the lowest rates since the series begin in 2003. Floating and <1 year fixed consumption loans — one category — dropped from 6.7 to 5.2 per cent in the month of June alone (red line on chart, right). This 1.46 percentage point fall was precisely double the next-largest fall of 0.73pp in 2005.

Comparable deposit rates rose during the same period, suggesting banks are being squeezed (see chart – note that this spread compares 1 year fixed deposit rates to floating and <1 year fixed loan rates – but it’s the closest match available from these data). That, as you will have guessed, is the narrowest spread on record, too.

Three out of the four categories of house-related loans are also at record lows: 

The second quarter GDP figures for the US were published last Friday. The financial markets do not usually get very agitated about these figures, because the official quarterly data lag the many sources of more timely information on the economy. But this is an unusually sensitive time for the US economy. Many observers are beginning to fear the onset of a double dip recession, and even a slide towards chronic deflation. Since this is by far the biggest risk facing the global economy at present, I feel I should start this new blog on global macro-economics with a comment on what I learned from these figures. Three points stand out, all of them worrying.

First, the annualised growth in GDP in Q2 was only 2.4 per cent, a disturbing figure because it indicates decelerating momentum, compared with growth rates of 5.0 per cent and 3.7 per cent in Q4 and Q1 respectively. A growth rate of 2.4 per cent is no better than trend, and is not sufficient to bring unemployment down. The US labour market is currently trapped in its worst recession since the 1930s, with many troublesome signs which remind me of the dysfunctional European labour market in the 1980s. It cannot afford a period of sub trend GDP growth.

Second, the economy remains far too dependent on the upswing in the inventory cycle. This is an inherently temporary force which is now overdue to fade away. As the graph below shows, the swing in inventories has explained much of the recovery in the economy in the past year, but it is now well past its peak. 

Further losses expected from commercial real estate will continue to pressure the US banking system, the International Monetary Fund has said in its first detailed assessment of the US economy. Delinquent commercial real estate loans in the US are rising, and currently estimated at $60.45bn, or 7.87 per cent.

The Dodd-Frank Act was “an important step forward to address the weaknesses exposed by the global financial crisis,” said the report, issued under the Financial Sector Assessment Program. But stress tests carried out by the IMF noted that “the system would likely remain under pressure due to expected further losses in the commercial real estate sector. And in a scenario in which growth dropped and unemployment remained high, a significant number of U.S. bank holding companies—especially small and medium-sized and regional banks—would need additional capital.” 

Ralph Atkins

Expectations are not high that Thursday’s European Central Bank interest-rate setting meeting will bring much excitement. Maybe Jean-Claude Trichet, ECB president, will spring a summer surprise, although it would be against his character. With inflation low and much uncertainty remaining over the economic outlook, the main interest rate is expected to be left at 1 per cent. Mr Trichet is likely to wait until September before unveiling the next stage in the ECB’s “exit strategy” to unwind the exceptional measures taken at the height of the global economic crisis.

If the ECB has nothing to decide, why is it meeting? After all, before 2006, the governing council skipped an August gathering and press conference in Frankfurt, and met by teleconference instead. I argued last year that most governing council members were instinctively against central bank “activism” and that dropping the August meeting would act as a value confidence-building signal. By doing so, the ECB would be saying it was safe to head for the beach.

Of course, the ECB paid no attention to my suggestion.