Thursday, September 20, 2012

A Week Of Central Bank Action

Last week, several central banks set policy for the month.

Let's start with the Central Bank of New Zealand's global outlook:

New Zealand’s trading partner outlook remains weak.  The Bank continues to predict below-Consensus global growth. The risk of a more severe outcome remains. The cost of bank funding relative to the 90-day interest rate is expected to remain elevated over the projection due to ongoing strains in overseas funding markets.  

In the euro area, while developments over the past three months have been interpreted by markets as relatively positive, it is by no means clear that the risk of significant economic deterioration has been eliminated.  Until euro-area government debt is on a sustainable medium-term path the risk of rapid changes in marketsentiment will persist.  The Bank continues to expect euro-area activity to contract over the coming year. Beyond this, only modest recovery is forecast (figure 2.2). 

Growth in the United States economy continues to be modest. However, its near-term outlook is subject to considerable uncertainty and downside risk, related to the substantial fiscal tightening that is currently legislated to occur at the start of next year. 

In China, economic data continue to soften, with GDP growth falling further. Falling investment growth has reduced global demand for industrial commodities, with Australia’s terms of trade suffering as a result. 

Importantly, the ability to support global activity using conventional policy levers is quite limited. Many advanced economies already have policy interest rates at or near zero, and public debt has already increased markedly since the global financial crisis.

While the markets have interpreted the recent EU moves positively (The German high court ruling, the ECB's recent) the entire continent is mired in a recession right now, which has spread out to the UK.  There is little reason to think this situation will improve in the near future.  The bank also correctly analyzes the US' situation -- we're in a weak position with the possibility of a major policy shock should the fiscal cliff materialize.

They also make an important observation: there isn't much more most central banks can do at this point.  That's a big problem.

Let's turn to the South Korean Central Bank's recent policy statement:

Based on currently available information, the Committee considers the economic recovery in the US to have weakened somewhat and the sluggishness of economic activities in the euro area to have deepened. Growth has continued to slow in emerging market countries as well, due mostly to the impact of the economic slumps in advanced countries. The Committee expects the pace of global economic recovery to be very modest going forward and judges the downside risks to growth to be large, owing chiefly to the spillover of the euro area fiscal crisis to the real economy and to the possibility of the so-called fiscal cliff materializing in the US. 

We see a similar analysis, although from a cause and effect perspective; the slowdown in the large economies is driving the slowdown in emerging economies.  Also note the second mention of the US' fiscal cliff.

The Central Bank of Chile also issued its policy report.  They made the following observations about the international economy:

World growth has not changed significantly on aggregate, as compared to June;
however, its composition has changed somewhat. The most remarkable change is
that large emerging economies are slowing down more markedly than expected,
while developed economies have evolved as forecast, showing a meager and
slow recovery. Accordingly, world growth projections are revised downward, but
this time, the main adjustments come from the emerging world. Growth of our
trading partners as well as of the PPP-weighted world for 2012 have been revised by one tenth of a point at 3.5 and 3.1%, respectively (table I.1).

The main emerging economies are now feeling the effects of the complex
international scenario. The GDP of China grew 7.6% y-o-y in the second quarter
of the year, as compared to the 8.1% of the first quarter and the 9.2% of 2011,
which evidences the slowdown it is undergoing. The most recent indicators show
that this slowdown has continued. Exports to the European market show a year-on-year drop, and retail sales and loans have also slowed down (figure I.1). 

This outlook has resulted in a sharp downward adjustment of growth projections
in this country. While the projection included in the September Monetary Policy
Report stated an 8.3% and 8.7% expansion of the Chinese economy in 2012
and 2013, respectively, this Report projects 7.8% and 8.1% for those same
years (box I.1). Other Asian economies record increasingly lower y-o-y growth
rates —even negative in some cases— greatly affected by the performance of
their main trading partners, particularly, developed economies and other Asian
countries. In India, the the slowdown is also related to fiscal and energy problems, among other factors.

One distinctive aspect in the last few months in several developed and emerging
economies has been the weak performance of their manufacturing industries.
Surveys of purchasing managers in several of these countries indicate that this
will extend into the following months (figure I.2).

In Latin America, the outlook is still rather heterogeneous. The most remarkable
fact is Brazil’s significant slowdown, whose size largely accounts for the
downward revision of the growth forecast for the region for this and next year.
However, a recovery is expected going forward, resulting from the expansionary measures implemented by its authorities.
These measures include the reductionv of its monetary policy interest rate by 350 basis points in the year to date and a fiscal stimulus plan amounting to US$65 billion. Colombia and Argentina have also evidenced slowdown signs. However, other economies in the region, such as Peru and Mexico, are still growing strongly. Peru’s growth is being driven by forces similar to those driving the Chilean economy and by an important effect of mining investments. In turn, Mexico’s growth during the first half of the year exceeded expectations; however, the effects of its weakened external sector will become more clearly visible in the near future, which is now being suggested by the slowdown signs of its manufacturing industry.

The developed world is following a slow recovery path. In the United States,
although some indicators from the real estate industry and the labor market show a somewhat more positive margin, the overall assessment continues to be fragile.
  Add to this the discussion to prevent fiscal adjustments from being triggered in 2013. The market estimates suggest that, if attempts to reach agreements are unsuccessful, the cuts in expenses that would be implemented could reduce the growth of this economy by more than two percentage points in 2013. Besides, the discussion is being hindered by the proximity of the elections. Although the growth projections for the United States for 2012 are revised slightly upwards, this results from a correction of historical figures that is habitually done at this time of the year, rather than from a more favorable outlook for this economy.

The situation of the United Kingdom is also cause for concern, since its output fell for the third quarter running, as a result of a weakened external demand and a domestic demand that has been depleted by restrictive credit conditions and the fiscal consolidation program. In Japan, output in the last quarters has been favored by the reconstruction works, although more recent figures show degraded expectations.

In the Eurozone, output will continue to ail, with significant differences among its member countries. Peripheral economies have been contracting for several quarters now, while others, including Germany, are still growing (table I.2). However, the weakness of some recent indicators from Germany is cause for concern, particularly those related to domestic consumption, this compounded by the weak performance of its exports and manufactures, could imply a slowdown in the coming months. Nevertheless, some countries in the region have had to apply fiscal adjustment plans, credit conditions are still undergoing a continuing restriction, uncertainty restrains investment plans and, the deleveraging process also continues. The meager growth of this area weakens the intra-regional trade, but it helps to solve the imbalances within the region while exchange rate and wage rigidities persist.

Again, there is more or less unanimous agreement about the overall state of affairs.