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No Chance of a V-Shaped Recovery
Given political and fiscal constraints and banks' unwillingness to lend, it is doubtful that policy can prevent a double-dip. Even if a new round of monetary and quantitative easing can provide limited stimulus, the real issue facing the U.S. is the need for balance sheet deleveraging and repair, and that will be a multi-year process. The U.S. must brace itself for a long period of below-potential growth.
Mind the (Current Account) Gap
Turkey's current account deficit is unlikely to show a sustainable decrease without significant reforms. This means country needs to keep attracting sufficient capital flows from abroad to finance the shortfall. Increasing short-term capital flows, however, are raising Turkey's vulnerability to sudden shifts in global risk appetite. The danger is that an increase in risk aversion could place upward pressure on interest rates to attract the necessary external financing.
FOMC Warms Up the Helicopter
The Fed has been laying the verbal groundwork for further monetary stimulus. The August 10 announcement by the Federal Open Market Committee appears to be another signal of a gradual policy shift. On its own, the latest move is likely to have limited implications for the broader economy. More importantly, however, the decision to reinvest the repayments in Treasury bonds reflects the preference many FOMC members have expressed for an expeditious return to the Fed's traditional Treasury security-only portfolio.
The Sick Man is Europe
Something other than leaves will fall in Europe this autumn. American attention, no doubt, will focus on Barack Obama's date with an angry electorate this November. Yet across the pond, governments of the right, left and center in Europe appear ready to crumble, their positions eroded by a wave of austerity and high unemployment and government debt, plus a smattering of nasty corruption scandals.
How the Other Half Looks
The global adjustment process has been delayed. In order to support growth and income generation, the over-saving investment- and export-driven nations - China, emerging Asia, Germany and Japan - continue to look to the overspending countries following an Anglo-Saxon model. There is a risk of a weak recovery of global aggregate demand relative to supply, which could contribute to deflationary pressures. As such, the recovery will continue to be multi-speed and rocky, exit strategies will remain uncoordinated and the risk of policy gridlock is high.
Still Stressed After Tests
According to the Committee of European Bank Supervisors, only seven of the continent's banks failed to pass muster out of the 91 assessed in recent stress tests. These tests contained a crucial flaw, however: the absence of a sovereign default scenario. Optimistic commentators point to the rebound in U.S. markets after the Supervisory Capital Assessment Program, which faced significant criticism, as Europe's equivalent is now. However, while the U.S. SCAP tests modeled the key concern of the market - future property risk - and forced banks to recapitalize, the European tests did neither.
No Golden Ticket
Why aren't we giddy about gold? In the abstract, gold is most attractive as a hedge in one of three extreme scenarios: high inflation, persistent deflation, or when the risk of global financial meltdown is large. Once national balance sheets are repaired through a protracted and gradual deleveraging of households and governments following the relatively rapid deleveraging of the financial sectors, particularly in the United States, excessive deflation and inflation fears will subside.
Emerging Asia's On/Off Switch
In 2009 and the first half of 2010, low interest rates and an uncertain global outlook led to strong, volatile capital inflows into some of Asia's most promising economies. Policymakers in these places - which include, among others, Hong Kong, Taiwan, Singapore, South Korea, Indonesia and India - need to tighten monetary policy sooner rather than later. New inflows from the rest of the world might prove problematic, but at present low or negative real interest rates seem to be fueling speculative investment by domestic players, and that too is a dangerous dynamic.
Gloomy News on U.S. Employment
The most recent U.S. employment report was even worse than we thought it would be, less because headline employment retreated (this was expected due to Census layoffs) than because weekly hours worked, average hourly earnings, and private sector payroll gains all took a plunge. The second half of the year should bring even weaker growth as personal consumption growth aligns with income growth, inventory growth aligns with final sales (still a weak spot) and fiscal stimulus turns neutral or becomes a drag on growth.
Will Debt Problems Metastasize to ?Core? European States?
One of the major issues is whether the problems of the PIIGS will metastasize from the eurozone periphery into the ?core? countries of the continent. This commentary focuses specifically on Belgium, which has the third highest debt-to-GDP ratio in Europe. It is uncertain how Belgium?s necessary belt-tightening measures can be implemented, particularly given the dim prospects of a durable political consensus.
What a Flexible Yuan Means for the Economy
Even if the Chinese authorities allow two-way movement of the yuan against the dollar to reduce speculation, Chinese policies could support the U.S. Treasury market, commodities and risky assets more generally - especially if other emerging market countries take a cue from China and allow only gradual depreciation. However, a sharp appreciation against the euro and dollar without other policies to support Chinese consumption could contribute to much slower global growth and higher inflation as increased Chinese production costs are transmitted to G10 consumers.
The Economics of the World Cup
Although the short-term gains from hosting the World Cup are rather limited, if the event goes well and the country avoids labor strikes and other destabilizing events, it could provide a chance for South Africa to showcase its institutional development and help cement its longer-term recovery. There are, however, several structural challenges to overcome, such as limited access to services, transportation bottlenecks, worsening demographics and extensive inequality, which could hamper the country's potential output growth.
Hungary Suffers from Foot-in-Mouth Syndrome
While Hungary may not be 'another Greece,' the country's government announced an economic action plan last week aimed at reining in public finances amidst growing investor concern. The plan includes a special bank tax, public sector spending cuts, a cut in the corporate tax rate, and a recommendation to ban foreign exchange-denominated mortgage lending. It's unclear, however, that this plan will be enough for Hungary to reduce its deficit to meet this year's 3.8 percent of GDP target agreed upon with the IMF.
Whither the Regulatory Winds?
While reforms like eliminating the 'too-big-to-fail' card and adopting Glass-Steagall-like regulations to unbundle different types of financial activity are necessary to ward off asset bubbles and combat systemic risks, they might not be feasible for political reasons. In the event of a Glass-Steagall type separation, we would expect a divergence in credit spreads between banks with and without insured deposits, but expect the cost of credit for depository institutions to be very close to sovereign risk. On the flip side, dilution risk would be concentrated in depository institutions.
Renewed Risks and Multi-Speed Global Recovery to Restrain World Trade Flows
Global trade growth is unlikely to reach its pre-recession highs in the short term, with exports of several trade-dependent economies, particularly emerging markets, growing at a slower pace due to weaker import demand in the U.S. and EU amidst consumer deleveraging, fiscal austerity and slow recoveries in labor markets and household wealth. In the medium term, however, structural reforms in emerging markets and surplus countries to increase domestic demand will boost trade among emerging markets, as well as global trade flows, changing their direction and composition.
Currency Considerations at the U.S.-China Summit
The U.S.-China Strategic and Economic Dialogue will recommence in Beijing on May 24, 2010. Behind closed doors, Chinese leaders will repeat their complaints about the U.S. dollar's role as a reserve currency and their concerns about the safety of their massive $1 trillion U.S. Treasury holdings given the eroding U.S. fiscal position. Meanwhile, the U.S. will struggle to prove it has a workable long-term plan to reduce the fiscal deficit. These constraints will soften the U.S. approach to the renmibi.
Has the EMU Skirted Disaster?
Although many operational questions remain unanswered, the ?750 billion headline number for this week's euro area stabilization mechanism - in addition to the European Central Bank liquidity facilities and quantitative easing - should help fight contagion. It is now up to euro area periphery countries to fulfill the fiscal consolidation requirements. In addition, the relatively high interest rates on joint loans should serve as an incentive for euro area members to put their fiscal houses in order without recurring to the facility.
Greek Contagion Spreads?Time for Plan B
The euro continued to plunge this week, and long-term government bond yields in Greece and in the periphery countries, including Italy, spiked upward again after a short rally before the recent International Monetary Fund-European Union rescue agreement. The market?s lukewarm reaction to the financing package confirms RGE?s view that a traditional financing package, extended at unsustainable interest rates, will not allay solvency fears, but rather will lead to a disorderly outcome and contagion.
Focusing in on Latin America
Latin American economies will expand in 2010 after contracting more than 2 percent in 2009. Better global growth prospects and solid commodity prices will support growth in the region. Inflation will grow, but will remain within central bank target ranges, except in Mexico. Current account deficits will widen and surpluses will narrow as growth in domestic demand outpaces external demand. Wider growth and interest rate differentials, as well as a relatively weak U.S. dollar and solid commodity prices, will continue to support currencies.
Reading the Tea Leaves for Q2 and Beyond
While the second half of 2009 brought signs of stabilization in growth rates and industrial production for many economies and early 2010 has brought continuing strong global trade and improvement in output, the path to a self-sustaining recovery is not yet clearly shaped, at least in advanced economies. The recovery will be multi-speed. Most advanced economies, weighed down by debt, excess capacity and slack in labor markets will grow well below potential and in many cases, their potential output growth has fallen.
What are the Political Implications of Poland's Tragedy?
The April 10 plane crash that killed Polish president Lech Kaczynski and a number of other top public figures, including the head of Poland's central bank, has caused major distress in the Polish political landscape. However, the country's constitutional mechanisms should facilitate a smooth institutional transition and ensure long-term stability. The event is unlikely to cause major geopolitical tensions, and RGE thinks speculation in some media outlets about increased tension with Russia is overdone.
Iraqi Oil: A Riddle in the Sands
Iraq has the potential to be a major source of new oil in the next 5 to 10 years, but the process of scaling up production faces many obstacles. Modernizing and expanding the country's energy infrastructure will be costly, given Iraq's fiscal position, and this may tempt the government to extract as much revenue as it can in order to meet the country's fiscal vulnerabilities. And as Iraq's oil production gradually climbs, it will face pressure from OPEC to adhere to quotas. Given these uncertainties, Iraq's plans to more than double output within 5 years seem very optimistic.
The Perils of Name-Calling
In mid-April, the U.S. Treasury is expected to publish its biannual report on foreign currency arrangements, and there is a higher probability than ever before that China will be branded as a currency manipulator. Such a move could start a trade war and force Chinese officials to clam up even further on the currency issue while stubbornly maintaining the peg to save face. Things have gotten so bad, however, that even traditional supporters of free trade are now saying it is time to get tough with explicit threats of trade sanctions.
No Greece in the American Machine
Sovereign debt risk recently graduated from an emerging economy hitch to an advanced economy problem. The Greek debt crisis occupies center stage of the political and economic debate, and Greece's problems could soon spread to Portugal, Spain, Italy and Ireland. Comparisons between these countries and troubled U.S. states are in vogue. Implicit and explicit backstopping from the federal government, however, should prevent state and municipal debt crises from reaching levels faced by European governments.
U.S.-China Tensions: Codependency Pains
Tensions between the U.S. and China have become increasingly exposed in recent weeks, with rhetorical barbs exchanged over trade, exchange rates and various political and strategic issues. These tensions seem to stem from attempts by both powers to find a 'new normal' in political and economic relations following the financial crisis. RGE expects the two countries to avoid a full-blown confrontation, but uncertain tit-for-tat trade policies still threaten to constrain global growth.
V, U and W
Debate continues to rage over whether the U.S. economy will have a V-shaped recovery with a rapid return to above-potential growth, a U-shaped recovery with below-trend growth for the next two years, or a W-shaped double-dip recession. Poor economic data released over the past two weeks suggests a U-shaped recovery at best. Consumer confidence, home sales, construction and employment suggest significant downside risk even to the current anemic levels of growth. The eurozone debt crisis, meanwhile, presents the risk of a double-dip recession in Europe that could also drag down the U.S.
Will Silver Sparkle in 2010?
Silver may never reach the price level of gold, but silver could gain relative to gold in the short term. The price volatility of silver compared to gold opens up short-term opportunities for higher capital gains. Silver has wider industrial applications than gold, and is therefore better positioned to benefit from the recovery in global industrial production. In the long run, however, silver is 16 times more abundant than gold, and has enjoyed increased mining production since 1999, and so gold probably always remain more precious than silver.
Still No Tightening in China
A credit-fueled investment boom propelled China's 8.7 percent growth rates in 2009, but cheap money also drove up asset prices, especially in property markets. Loose money may now become inflationary, particularly if China's potential growth rate has come down. China's monetary policy has shifted toward a neutral stance in recent months, but may tighten to contain inflation and the property bubble.
Obama's Recent Regulatory and Fiscal Proposals
Roubini supports the Obama administration?s regulatory policies (e.g, the Volcker Rule) and says the proposed budget will lead to a ?sluggish and jobless? recovery. ?Obama simply lacks the political support to implement aggressive fiscal reforms,? he says, adding that Obama?s political capital is likely to deteriorate after the 2010 elections.
The Greece Dilemma: Sovereign Debts Imperiling the Euro and Challenging EU Ties
Roubini discusses Greece?s sovereign debt issues, noting that Greece faces two choices: either adopt fiscal tightening (budget cuts) or increased instability due to potential insolvency. Either way,
Results 1–50 of 98 found.