Central banks to the rescue – again?
* This morning we are launching our second quarter ‘Global Economy in Charts’ report, available here - blogs.deloitte.co.uk/mondaybriefing/2019/06/global-economy-in-charts-q2-2019.html
* Created by my colleague Debo, the report examines the big global macro trends and challenges. Charts can be cut and pasted into your own reports. Do drop Debo a line at [email protected] with ideas and comments.
* Economists went into 2019 expecting growth in the West to cool. If anything, the slowdown has come quicker than expected.
* Earlier this month the World Bank scaled back its forecasts for global growth this year, warning of a “broad-based disappointment” affecting trade, investment and manufacturing. The Bank believes that trade tensions, an unexpected weakening of the euro economy and a build-up of government debt mean that the risk is that growth comes in weaker than their new, lower forecasts.
* This needs to be seen in proportion. The outlook is for continued growth in the West, albeit at a slower pace. Still, the speed of the downturn has taken policymakers by surprise and worried them.
* Earlier this month the US Fed chairman, Jerome Powell, gave a heavy hint that he will lean against the US slowdown by cutting US interest rates later this year. This is a big shift in policy. Last November financial markets thought the Fed would raise US rates by at least 50 bps in 2019. Markets now expect the Fed to cut them by 50 bps by the end of this year.
* It’s much the same story in the euro area, where growth has been especially disappointing. ECB (European Central Bank) president Mario Draghi has said the Bank is ready to “use all the instruments that are in the toolbox” if the slowdown broadens. This bland analogy from the world of DIY doesn’t quite convey the weight of Mr Draghi’s words. By suggesting that the Bank could restart quantitative easing or cut rates, Mr Draghi was reversing the ECB’s previous stance, announced at the end of last year, that extraordinary monetary easing to kick-start growth had achieved its aims and was ending.
* By collapsing interest rates and undertaking quantitative easing in 2009 central banks helped ensure that the recession did not turn into a depression. Lower interest rates and money-printing helped reflate asset prices and re-booted growth.
* Ten years on the global recovery is mature, and, by past standards, the West is overdue a recession. Forecasters don’t expect one partly because they believe that, with inflation low, central banks have plenty of scope to ease policy and keep growth going. Because central banks saved the day ten years ago many are convinced they can do so again.
* The most likely outcome is that growth will carry on over the next couple of years, albeit at a slower pace. That outcome is not, of course, guaranteed.
* Interest rates are already low and central banks’ balance sheets have expanded enormously in the last decade. The scope for monetary ease is less than it was. Central banks cannot perfectly time and calibrate interventions. If they could, recessions would never happen. Central banks are powerful, but they are not omniscient.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.2% at 7,346.
Economics and business
* The UK economy contracted in April in part due to temporary factors including an unwinding of stockpiling and a temporary fall in car production
* UK wage growth remained strong at an annual rate of 3.4% in the three months to April as unemployment remained at multi-decade lows
* Euro area industrial output fell by 0.4% in the 12 months to April in another sign of euro area weakness
* US President Donald Trump threated further tariffs on China
* US tariffs on Mexican goods may be reimposed if there is no reduction in migrants reaching the US border according to remarks by US secretary of state Mike Pompeo
* Two oil tankers were attacked near the Strait of Hormuz. The US has blamed Iran for this attack, which Iran has denied. One-third of all oil shipped by sea passes through the strait
* Japanese prime minister Shinzo Abe visited Iran in an unsuccessful attempt to broker US-Iran talks
* The growth rate of the Indian economy has been overstated for years according to research by a former economic adviser to the Indian government
* US corporations’ holdings of cash have declined as companies have spent or returned offshore earnings repatriated following 2017 tax changes
* US President Donald Trump has continued his criticism of the US Fed as he argued for easier monetary policy
* US inflation fell to 1.8% year on year in May, strengthening the case for rate cuts
* The US economic recovery is now the longest in history
* G20 finance ministers resolved to agree new rules on taxation of digital companies by 2020
* EU competition authorities have rejected a proposed merger between Thyssenkrupp and Tata Steel
* Hong Kong has seen significant protests against a proposed extradition treaty with China. The FT reports that China is accused of being behind a cyber-attack against secure messaging apps used by protestors
* Global energy demand growth reached an eight-year high last year. BP warned that rising energy demand from heating and cooling in extreme weather caused by climate change could lead to a “vicious cycle” as this demand causes further carbon emissions
* The UK government proposes to cut net emissions to near zero by 2050. A Labour government would consider bringing this forward to 2030 according to shadow chancellor John McDonnell
* Fewer babies were born in Japan last year than in any year since records began, underlining the demographic challenge facing the country
* The UK National Audit Office warned the value of government equity in help-to-buy schemes would be at risk in a market downturn
* The Arcadia group of high-street fashion retailers have avoided administration after landlords agreed to rent cuts
* The UK All-Party Parliamentary Group on inclusive growth welcomed research showing inclusive growth has outpaced GDP growth since 2001
Brexit and European politics
* At the time of writing, six candidates remain in the Conservative Party leadership contest following the first round of voting by MPs
* Boris Johnson received the greatest support from Conservative MPs cementing his status as the front-runner to be the next prime minister
* Mr Johnson received the support of 112 MPs. His nearest rivals Jeremy Hunt and Michael Gove received the support of 43 and 37 MPs respectively. Candidates are eliminated until two remain. These are then put to a ballot of Conservative Party Members
* Boris Johnson is strongly opposed to any further Brexit extension beyond 31 October but has acknowledged that no deal is a “last resort”
* A leaked UK cabinet briefing from late May suggests the UK will not be ready for a no-deal exit in October
* The UK has agreed a trade deal with South Korea for after the UK leaves the EU
* Greece is heading to the polls next month after prime minister Alexis Tsipras called a snap election. Polls suggest Mr Tsipras is likely to lose
* European Council president Donald Tusk has argued for the EU to begin accession talks with North Macedonia and Albania
And finally… Swedish pogo maker Cangaroo announced it was introducing a pogo stick rental scheme in Paris to put a spring in Parisians’ steps. The firm says they are ecological and a good way of burning calories, but adds: “We highly recommend that you use Cangaroo when you’re sober and wear a helmet.” Paris city council moved to ban the use of pogo sticks, with the deputy mayor Emannuel Grégoire telling Cangaroo. “You can keep them. We don’t want them. They’ll go straight in the bin,” – out of bounce