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World Economies
The true effect of the current financial crisis’ impact on world economies has been revealing itself in the later half of 2008. Economies around the world have been forced to quickly implement extensive strategies to tackle the deterioration in both the global and domestic economy. The United States’ strategies may have been implemented to avert world economic meltdown, having pumped almost $2 trillion into the global market place, but conversely the highly internal policies implemented by emerging economies seem to have had a greater impact on world markets. The fear of falling demand for commodities in China has fuelled an 80% drop in oil prices over the four months to November, while the two US bailout plans stabilised the equity market at a lower threshold.
Here is a brief account of some of the most influential economic powers written by Phillip Butler, currently on placement at the Bank of England, and contributed to by Christian Esposito and Bhavin Dhanani, currently on placement at Goldman Sachs and Morgan Stanley respectively.
The questions we are asking are;
· Which economies will suffer the greatest economic impact?
· Which economies are likely to be dragged into the longest deepest recession?
UK
With the Bank rate at the lowest level for 50 years, unemployment and debt rising, technical recession all but official and a stalling housing market is the fiscal stimulus package announced in November enough to stop the UK entering a long deep recession?
Strictly BIF view: A Recession that will certainly compete with the 90’s and 80’s, all dependant on the success of the fiscal package and the credit stream made available.
US
Job losses have breached the 1990’s recession lows and are inevitably going to sink past the trough of the mid 70’s. Bank rates calamitously close to the dreaded 0% and the country has a budget deficit of over $400bn with predictions suggesting it will breach $1000bn in 2009 after the full implementation of its TARP and TALF initiatives.
Strictly BIF view: More likely to see a deep painful Recession than a long drawn out depression.
Euro Area
Already in recession and consumer confidence appearing to be the weakest since the formation of the Economic area, but bank rates seemingly well placed for more manoeuvre in the short term will the Euro area avoid the worst?
Strictly BIF view: Recession but eastern economies may help the Euro Area to a quick recovery.
France
After releasing a €26bn fiscal stimulus package to alleviate fears of a sharp downturn in the economy experienced an economic unicorn of third quarter. Unemployment however stands at 8.2%, 0.5% above the euro zone rate, and this is set to get worse as France’s manufacturing sector begins to feel the brunt of slowing consumer spending. France has some good news though the country is set to leap frog the UK in terms of economic size due to our speed of economic decline and the weaker pound.
Strictly BIF view: Long recession fuelled mainly by its proximity to other floundering European countries.
Germany
Output in the Euro area’s largest economy fell by twice that of the euro zone average for October at 2.1%, signalling the usually robust economy will suffer a third straight quarterly retraction at a forecasted rate of -1.5%. This contraction rate is the largest since the country’s reunification in 1990, there is yet to be any substantial fiscal stimulus offered due to policy maker concerns at throwing money at the impending recession.
Strictly BIF view: Long deep Recession of which only the UK and Spain can compare.
Spain
It is hard to extract anything but negative news from the Spanish economy which is set to enter recession for the first time in 15 years. The country’s unemployed number is increasing rapidly, the housing market is collapsing due to an increase in supply and PMI data is showing 28.2, especially bad when economic growth starts at 50.0.
Strictly BIF view: Long Recession set to last into 2010.
Italy
If it was not for one single quarter of positive growth in Q1 of 2008 then Italy would already have had a full year of retraction. However this is not a surprise as Italy has been in recession four times in the last ten years. A lack of control over monetary policy and not being a European super power could spell trouble for the one of the world’s most Jekyll and Hyde economies?
Strictly BIF view: Recession guaranteed for 2009, but will it make a quick recovery for 2010 amid fears of catastrophic inflation.
Japan
Interest rates are anchored at their historic lows, they have not passed 1% since 1995. The economy is technically in a recession and revised Q3 GDP figures show a worsening in the economy. Fears have increased that the 2nd largest world economy could be facing the longest contraction ever. This is primarily fuelled by the fact that Japan has not fully recovered from the last banking crisis.
Strictly BIF view: Pro-Longed Shallow Recession.
China
Industrial output has fallen to 5% the lowest level since the Asian Crisis, exports have fallen nearly 20% since October and GDP growth is projected to fall by as much as a third. Will the rigorous interest rate cuts, 4 trillion Yuan stimulus package and a desire to keep growth above 8% be enough for the economy which could save the world from a 1930’s style recession?
Strictly BIF view: Little chance of recession unless the Chinese economy implodes from reverse migration and a collapse of world demand, worst case scenario would suggest 5% growth for 2009.
Russia
With natural resource prices falling following the lack of global demand, the Russian economy is being hit hard. Construction output data shows that yearly growth has halved indicating that Russia could be the hardest hit out of the so-called BRIC’s. Standard and Poor’s seems to agree with this hypothesis it has downgraded Russia to just two places above Junk.
Strictly BIF view: Flirting with recession, but growth of 2-3% should be realistic, however this is half the GDP growth of the current decade.
India
Expected GDP growth of 6.8% for 2008 and yet India needs to prepare further for second wave of tightening in the economy. With interest rates cut by 100bps to 6.50% and a 280trillion rupee injection planned it is hard to believe the Indian economy will stutter in 2009. Contrary to this, is this the time for the economy which is less reliant on foreign demand to outpace its BRIC cousin China?
Strictly BIF view: Markedly slower growth but will lie between 3-5%.
Brazil
Boosted by the higher than expected 1.2% Q3 GDP growth, the Latin America economy is on course to achieve above 5% growth for 2008. However with interest rates at 13.75% and the financial crisis spreading to the tenth largest economy the unemployment figures are set to increase as businesses retreat.
Strictly BIF view: Growth will slow, but with Interest rates in their favour recession should be a long way off.
Global downturn finally hitting China?
The biggest rate cut in 10 years and an economic growth forecast which is the lowest for nearly two decades, it appears the wheels of the Chinese economic boom have become derailed as the financial crisis powers in to Asia. China's prospects darken with social unrest and unemployment on the up…
Are We Doomed?
With 170,000 banking jobs lost since the American sub-prime market collapse and a further 180,000 expected to go worldwide just in the next 6 months. Will graduate placements be culled in the process?
Citigroup threatening to cull 52,000 jobs is just the latest twist in the banking sector job outflow. Recent survey state that graduate job opportunities will decrease by around 15% this year with certain areas affected harder than others. Areas such as Mergers and Acquisitions will be hardest hit as this region of banking has almost halted due to the increase in credit spreads and lack of longer term funding. Other divisions such as Private banking are still growing strong, one of the very few parts that look healthy on banks interim reports.
Competition is going to be a lot higher with more applicants after fewer jobs whilst graduate recruitment may be reduced due to banks picking experienced bankers over junior recruits.
But is all lost? Not at all. The one thing banks love is young graduates who they can mould and carve to meet their needs but now we as Cass graduates will have to be more flexible. Being willing to move to areas such as Dubai will help no end as this is one of the few places in the world where job cuts have been non-existent. Do we have what it takes to set us apart from others? Cass is an iconic business school which is well known in the corporate world and is regarded as one of the most up and coming schools not only in London but the world. This puts Cass graduates in the upper segments of the graduate recruitment wish lists, meaning top financial institutions will still want to acquire our skills.
Panic, worry and doomed are not words we should be using when describing our future prospects. Our employment opportunities have diminished but it is just a time when you have to set yourself apart from other applicants and having Cass on your CV is the first step to achieving this. The rest is up to the individual and how much you want a job in finance…
Interest rates not cut but slashed by the Bank of England
During this financial crisis the BoE has been finding credibility very hard to come across with our goals differing from our cross Atlantic counterparts. The BoE focus is fully on inflation, economic stimulus is second on the list, and this makes the latest rate cut even more interesting. Medium term inflation seems to be dipping just at the right time giving the BoE an excellent opportunity to assist our ailing economy where fiscal stimulus, from a once well respected chancellor, now prime minister, seems non existent.
Now that all the main lenders have passed on these full rate cuts the wider economy, from households to firms, the hope is to stimulate demand and supply now that mortgage and loan costs are considerably lower. It seems that this is step one in an aim to make sure that the UK does not hit a long hard recession the like that have crippled Japan. All the news is positive, we have targeted the original problem by making banks recapitalise and then aided the economy early and not waited before we are in the first recession for over 15 years.
However there are a few key issues. What does the Bank of England know that we don't know? Have they reduced rates by such a steep margin because they are courageous and believe that now that have the appropriate market rates or is the economy outlook a lot worse than the market believes?
The further issue is that, yes, this rate cut will be stimulus to our economy but only in the short term. Remember the banks lending is all based on how easily they themselves can get credit and they do this based on Libor rates (London Interbank Offer Rates) which are still high. If these themselves do not come down then it is a vicious cycle where banks cannot get finance to in return give to the market. It seems the huge cut has solved a tiny slice of a massively entangled web of problems.The next question persists is how much lower can rates go? 2%? 1%? Dare we even say 0%? The US is currently at 1% but they not only have different policy beliefs than us but acted quicker. If the UK were to approach 1% that would almost be check mate for monetary policy because the room for manoeuvre would be next to none. The Japanese have this problem, what effect did the 0.2% rate cut have? Very little if any! It would be a very tricky situation indeed.
On the other hand the European rates are higher standing at 3.75%. Have the EU got anything to be worried about. It does seem the economic slowdown is appearing to affect the EU less than UK and US, so are the rates appropriate? Or have the EU left it too late? In a world where globalisation is becoming more and more prominent it is amazing that the three most important economies on the planet have such different views on how to tackle this global recession. At this important time in the economic markets the Bank of England must believe that it has the better hand over the Federal Reserve and the European Central Bank!!!
The UK or the US way? Two controversial plans developed this week but is one more so than the other? The UK led the recapitalisation programme, encouraging banks to do it without government help before taking stakes in the banks. However the US has different ideas, forcing US banks to take tax payers money. Does this damage healthy US banks or guarantee a healthier US financial market? There are views on both but it would seem that the US is taking the intervention in the banking world a step to far and almost promoting public owned financial institutions in the free market culture of developed economies. The positive with the UK plan is it allows banks to increase their tier one capital with out taking the dramatic steps of government help which will be detrimental in the long-term of the banks future. At the same time there is also much needed cash should UK banks run in to trouble, a compromise which seems sensible and methodical. The US states that it is using such a drastic measure to remove stigma from only a few banks using government money and then allowing banks in trouble to have access to even further funding. Who's taken the correct approach? UK or the US?
Bank Recapitialisation... Is it the way forward? After the UK announced an unprecedented strategy to combat the credit crisis by buying stakes in UK banks, the US have followed suit by putting aside some of the $700bn fund to buy equity in US banks. As the G7 meet the Euro area are being pushed to follow suit. But will this solve the banking crisis? The underlying discomfort for many is that the governments are gambling away tax payer's money to save the banks. In the long term I don't see this as an issue as when the banking system recovers to an amicable degree the governments will see an upside to their stakes in banks. In short term will this solve the liquidity problem of banks not wanting to lend to each other? I fear not in the very short term, but what other options are available? One is for governments to guarantee loans to increase confidence back in to the money markets, something the UK is very keen. But is this just throwing money at the now deepened crisis?
What does the bill that has just been passed actually achieve? It gives banks that have caused the world economy to come to a near standstill large sums of money for what is in effect 'worthless assets'. No doubt something had to be done, but other options exist. An alternative and less risky method suggested was for the Federal Reserve to buy shares in any struggling banks both to bail them out and then reep the rewards when the crisis ended.
Universal or Specialist bank? With Goldman Sachs and Morgan Stanley the last two investment banks standing in the current climate, does this pave the way for Universal banking to take over from Specialist banking?
MPC and ECB interest rate decisions With both the ECB and the MPC holding rates at 4% and 5.25% respectively, there has been a lot of discussion as to whether the decisions made were correct. The US opted for an aggressive interest rate strategy by cutting rates twice in the space of nine days, in an attempt to stimulate economic activity. Their Eurozone counterparts have decided to use a more passive approach to tackling the latest credit crisis.
The US has certainly been hit most by the credit crisis, but was far too aggressive in reducing interest rates. It now finds itself in the position where it is almost certain to enter a recession. Along with the current inflation problems, especially with oil, food and energy prices surging, it could find itself in the unpleasant situation of stagflation.
The MPC on the other hand are keeping inflation in their reach at 2.2%, with the UK economy in limbo on whether it will enter a recession. The MPC has taken the more medium term approach rather than the short term view of dropping rates to rouse the economy. This has to be the best decision when so much uncertainty at stake.
The ECB however is digging a deeper hole and is quickly losing sight of the escape rope. Not only is inflation 1.2% above the target level at 3.2%, but with its widening gap to the US rates, the euro has become exceptionally strong against the dollar. Medium term effects of this coupled with a US recession, could damage Eurozone exports to the US eventually slowing the Eurozone economy. The ECB should have had inflation under control a long time ago so that it could cut rates now to stimulate growth and assist in encouraging exports.
Northern Rocks Nationalisation A lot has been said about the Nationalisation of Northern Rock, with views having a very wide spectrum. Being the Financial Capital of the world, this was the last thing that city analysts would have thought about if you had asked them a year ago when the economy was growing strongly and the financial services was booming. The Nationalisation of Northern Rock has certainly dented our reputation, but things could get far worse with the competition commission hot on the heels of the treasury to make sure that Northern Rock does not gain an unfair advantage from having the Governments financing behind it. This has guarantees that Northern Rock will shrink in size, reducing its assets furthermore. With hindsight the Northern Rock could have been left to fail but with only two other options open to it, Virgin's consortium bid and a management buyout, both undesirable options, the government had no choice but to bite the bullet and nationalise the stricken Bank. It is however, as mentioned before, a massive disappointment to such an advanced financial city which must be rueing such dramatic step to preserve financial stability. But what other options did it have?
Were the House of Representatives and the Senate right to pass the new $700billion bill?