Global Review On 30 November 2012

3 Dec

So where do we start, there is always a “silver-lining” – not all the data was bad. There again even though the concerns over the Eurozone are real and serious, growth figures from many developing economies are declining, and many other problems. These are all known and expected, what more they are less worse than earlier in 2012. 

What does this mean in English? The likelihood of a doomsday scenario is less likely. There is more support for the argument, “we are struggling our way through”. 

What this means to me, the markets will remain volatile and economies will drop in and out of subdued technical recessions – this is an opportunity for the professional investor.

Moody’s cuts AAA rating of ESM Rescue Fund

Moody’s has cut the AAA rating of the European Stability Mechanism (ESM) euro rescue fund by one notch to Aa1 and given it a negative outlook. This follows a downgrade earlier this month of key ESM-backer France.

Moody’s also cut rating of the mechanism’s predecessor, the European Financial Stability Facility (EFSF)

Managing director of the ESM and EFSF chief executive, Klaus Regling, described the ratings agency’s decision “difficult to comprehend”. In a statement, Mr Regling was critical of Moody’s approach, which “does not sufficiently acknowledge ESM’s exceptionally strong institutional framework, political commitment and capital structure.”

The largest backer of the two schemes, Germany, remains at the top-level of Aaa.

The European Stability Mechanism (ESM) was launched in October as a permanent agency, based in Luxembourg. From 2014 it will have up to 500 Billion Euros to help countries in difficulty.

The rescue fund is available to the 17 Eurozone countries, but loans will only be granted under strict conditions, demanding that countries in trouble undertake budget reforms.

Economic growth slows in India, Brazil and Canada

Canada’s slowdown was in part due to weakening activity in its oil and gas sector. A string of major economies have reported disappointing data. Economic growth slowed in India in the third quarter, while in Canada and Brazil it dropped surprisingly sharply.

Meanwhile in the Eurozone, unemployment hit a new high of 11.7% in October, as German retail sales fell unexpectedly and French consumer spending dropped.

In the US, citizens saw their incomes stagnate in October, while spending fell slightly (in part due to disruption from Storm Sandy).

The department’s Bureau for Economic Analysis, which compiled the report, said that much of the underlying data was not yet available, and the drop in spending largely reflected its own estimates of the likely loss of business due to Storm Sandy.

Other recent data from the US has pointed to a strong rebound in the world’s biggest economy, including a surprise upward revision of the country’s third quarter annualised growth rate from 2% to 2.7%.

In contrast, Canada’s economy fared far worse over the summer with  a sudden drop in the country’s exports and weakening activity in its oil and gas sector pulled its’ annualised growth rate in the Third Quarter to 0.6% (many economists had previously announced expectations around 0.9%).

Similarly, Brazil’s growth rate for the Third Quarter was 0.6% (In 2010, growth was 7.5%); and previously, the market estimates were nearer 1.2%.

India’s growth rate was 5.3% for the third quarter and was as expected. They have clearly hit a soft patch in the last 18 months.


The Eurozone

The picture remains bleak. European Central Bank president Mario Draghi said on Friday that the region would not exit its crisis until the latter half of next year, although he conceded that the ECB’s recent monetary interventions had helped put an end to the months of financial market stress experienced up until the summer.

We seem to be in a two-speed Europe. The southern European economies of Italy and Spain have been in recession all year, thanks to government spending cuts, troubled banks that have been cutting back their lending, and in Spain’s case a steadily deflating property bubble. It seems unemployment has continued to rise in both countries, while in Germany the jobless rate held steady close to a record low.

UK banks may need more capital, Bank of England says

Major UK banks may need to raise more capital as protection against possible future losses, as reported by the Bank of England’s Financial Policy Committee.

Bank governor Sir Mervyn King said there were “good reasons” to think current capital ratios did not give an accurate picture of financial health.

The report suggested that the ‘Big Four’ UK banks need £5bn-£35bn of new capital.

The main UK banks include HSBC, Barclays, Royal Bank of Scotland and Lloyds.

Mervyn King said there were three reasons why the Bank of England thought that the banks were not strong enough :-

  • Future credit losses may be understated.
  • Costs arising from past failures of conduct may not be fully recognised.
  • Risk weights used by banks in calculating their capital ratios may be too optimistic.

Sir Mervyn added: “The problem is manageable, and is already understood at least in part by markets. But it does warrant immediate attention…..Mis-selling costs, inadequately capitalised banks hold back economic recovery and undermine investor confidence”.

The Bank is being granted greater regulatory oversight over banks from next year when it takes over the Financial Services Authority. One of its primary roles will be to make sure UK banks have sufficient capital to support the economy.

US economic growth rate revised up to 2.7%

The US economy grew at an annualised rate of 2.7% in the third quarter of the year, revised data has suggested.

The figure is significantly higher than the 2% initial estimate that the Commerce Department released just before the presidential election. Much of the growth was due to companies rebuilding their inventories, and is not expected to be sustained.

Developments in the US housing market are being watched closely by economists, as they are likely to determine the durability of the recovery. A rebound in the housing market could help to sustain the US economic recovery

Normally, periods of recovery in the US economy are led by residential construction, as building firms quickly get back to work on a backlog of projects as soon as the recession is over.

But this time round, the recession was in large part caused by the bursting of a housing market bubble, that left behind a glut of unsold homes, bankrupted many homebuilding firms, and saw the sharpest and most sustained collapse in homebuilding activity in recorded US history.

Who can drive the Global Recovery?

In the aftermath of the global financial crisis, countries like Germany, China and Brazil were the engines that kept the global economy expanding, but recent evidence suggests that they are losing steam.

The World Bank expects a soft recovery, with global growth of 2.5%. But within that there appears to be a clear divide between developing economies, which are forecast to grow by 5.3%, and advanced economies by just 1.4%.

Is China’s economy heading for a crash?

Of the major developing economies, only China appears to have recovered from a worrying slowdown before the summer, with a string of positive economic data announced just ahead of the country’s decennial leadership transition earlier this month.

China’s economic growth has slowed for six quarters and the period of rapid economic growth may be over. China’s export model may no longer be working as well. The Chinese government and many economists are now expecting growth to slip below 8% this year, with some even predicting doomsday scenarios of a crash.

So what are the prospects for China’s economy?

China is not only the world’s second-largest economy and leading exporter, it is also the world’s largest construction site. Construction has come to dominate China’s economy, accounting for roughly 25% of all activity and about 15% of all jobs.

Most analysts take comfort from the fact that there are no sub-prime mortgages or complex financial derivatives in China.


Japan is still recovering from last year’s devastating tsunami and nuclear crisis.

Recent data have shown that Japan, one of the world’s top exporters, was not exporting as much as it used to. In fact it has been massively importing – including energy, which has pushed the country’s energy bills sky-high after Tokyo stopped nuclear reactors.

The strong yen has also hurt exporters, making their products more expensive to foreign buyers.

The Bank of Japan forecast the economy would grow 2.2% in the current fiscal year and 1.7% the following year. The rosy growth projections were enough for the central bank to hold off on further easing to boost the economy.

“Japan’s economic activity has started picking up moderately as domestic demand remains firm mainly supported by reconstruction-related demand” following last year’s natural disasters, the Bank of Japan has said.

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