What the Finance » Global Economics

UK Economy Contraction 2009

The What Girl — Tue, 30 Jun 2009 14:35:49 +0000

The UK economy shrank by 2.4% in the first quarter of the year in what is now thought to be the biggest contraction since 1958, the Office for National Statistics reported today in London. The median estimate in an earlier Bloomberg survey of about 30 economists was a 2.1% decline.

The construction activity fell by 6.9%, three times as much as initially predicted. The UK’s Gross Domestic Product (GDP) is now estimated to plunge by 4.3% in 2009, the Organisation for Economic Cooperation and Development reported on 24th of June. The GDP decline for the euro area is estimated to be 4.8% which compares with a 2.8% estimated decline in the USA.

To make things a bit worse, unemployment figures are still on the rise as financial services companies are still trying to strengthen their balance sheets by controlling their leverage (debt) and cutting down their expenses. The only pleasant surprise in this week’s economic data releases is the stabilisation of house prices. However, demand is still low and mortgage lending too limited to support the scenario of a full recovery in house purchase activity.

Bank of England Governor Mervyn King confessed last week he feels “more uncertain now than ever”…

Global De-Industrialisation

The What Girl — Tue, 17 Mar 2009 09:55:48 +0000

According to Wikipedia, manufacturing production is a wealth-producing sector of an economy, whereas a service sector tends to be wealth-consuming. However, as the recent economic data indicate even the strongest of the world economies undergo the reverse process of de-industrialisation.

De-industrialization as a concept can generally be defined as “a decline in the ratio of the workforce employed in industry” (Patnaik, 2003). Drawing upon previous analysis by Alford (1997) it was decided that the key measures of de-industrialisation that should be considered would be the number of people employed within the manufacturing industry, manufacturing output/productivity, and the level of import and exports of manufactured goods.

The outlook for Gross Domestic Product in 2009 has deteriorated once again based on national accounts data submitted that show that most economies saw a contraction in the last quarter of 2008.

In Western Europe, all indicators show further huge falls in manufacturing production in the first quarter of 2009, following substantial contractions in the last quarter of the previous year. This is particularly true for Germany which is Europe’s main industrial power.

In the United States, the Federal Reserve’s beige book survey of activity in 12 Fed districts over January and most of February showed job losses spreading beyond manufacturing and the financial services.

In France, manufactured output contracted by 4.1% in one month in January and sentiment is definitely worsening. There is however some evidence, that industry could potentially receive a boost from the government.

In the UK business expansion plans have been hit by credit restrictions and dropping demand and output has fallen by over 10% in December from its October 2007 peak. Unemployment also rose to 3.8% in January.

In Canada, exports have fallen substantially and both industrial and manufacturing output contracted on the bank of the deepening recession in the industry.

In Netherlands, manufacturers are more pessimistic than ever before and analysts expect a huge manufacturing production contraction of 9.5% for 2009. Investments also feel by 8.7% with businesses cutting off costs and expansion plans. Unemployment is still on the rise.

In Norway, both consumption and investment has contracted in the last quarter of 2008 and the industrial sector is feeling the pain with manufacturing output down by 2.8%. This comes as a result of weakening external demand for manufacturing exports.

In Sweden, the manufacturing sector has been especially hard-hit by the global financial crisis, with production down by almost 8% from the previous quarter and new orders slumping. The labor market has worsened further, with unemployment climbing to 7.3% in January.

G20 Meeting

The What Girl — Mon, 16 Mar 2009 16:29:58 +0000

The situation in the markets is a rather strange one at the moment… everyone is simply repeating pretty much what has been said before but the truth is that nobody really knows will lies ahead.

The G20 meeting over the weekend could not be much different and it was bound to let people down as there was no speculation of new policy agreements. Good intentions were voiced though in the shape of more regulations both for hedge funds and rating agencies. More money supply to help emerging countries and clearance of toxic assets were also discussed but the markets remained heavily indifferent as all of this is pretty much a repetition of what has been heard before.

A Sunday Times article discussing the ‘Cracks in the Euro’ could weigh on the single currency today and tomorrow as the current crisis is putting a large strain on the Euro zone as it celebrates its first ten years. Many commentators are saying it will buckle under the strain.

Focus this week will be on Central Banks with the Federal Open Market Committee (FOMC) and Bank of Japan (BoJ) meeting on Wednesday. No change is expected but comments will be closely watched for further speculation regarding quantitative easing.

“Quantitative easing” refers to the creation of ‘thin air money’, or in simpler words money that Central Banks are printing and later injecting into the private banking system in order to increase the money supply

The Bank of England has started the buying of Gilts as part of its quantitative easing operations. The Swiss Bank has weakened their currency and market is now looking to see if the FED will join in and start buying longer dated Treasuries. If this is the case then it is likely that the USD will come under some pressure in much the same way GBP has last week.

Global Credit Overview 2009

The What Girl — Wed, 24 Dec 2008 10:38:46 +0000

Investors are not expecting a quick recovery in credit markets. A rally is certainly not expected until the end of 2009. All eyes are now on lending standards with the majority of investors (64%) looking for banks to ease lending standards as an indicator of the turn in the economic crisis. A smaller number of investors cited a pickup in economic growth (14%), stabilization in US housing (9%) and improved liquidity in the structured credit market (9%) as the most important signals.

The investment landscape is radically changing and unlevered strategies will dominate the style of investing in credit markets in 2009 and into 2010. It is expected that real money and unlevered hedge funds (ie, distressed funds) to dominate flows in cash credit product.
The deleveraging spiral will continue into 2009, especially for banks and insurers.

Ironically, as equity valuations continue to decline, the leverage in many financial nstitutions will rise. This will put further pressure on asset disposals and funding A substantial 70-80% reduction in the size of the hedge fund industry is also expected. Bank proprietary trading will effectively cease as capital increasingly will be channelled towards bank dealer desks

Secondary market liquidity will remain low until repo funding costs start to abate and
dealer desk VaR appetite improves. Most activity in cash product will be driven by new issuance. Once funding and VaR appetite improves, the secondary corporate bond market will increase in importance. Primary issuance to be in the higher-quality names, where banks are comfortable lending their balance sheets to support the deal.

Reliance on state guarantees and central bank liquidity provisioning will remain the key source of funding for the banking sector. Given the massive supply and ongoing pressure on governments, spreads on bank guaranteed paper are set to widen.

Sovereign risk is a key focus, as governments have to increase their guarantees and bailouts to the financial, corporate and household sectors. With sovereign risk rising, risk premiums for financials and some corporates within the respective country will rise further.

Global slowdown in Auto Industry

The What Girl — Tue, 02 Dec 2008 13:58:05 +0000

The auto industry is showing the first deep scars of a recession from UK to Japan and all around the world. New car sales in the UK dropped by 23% in October, the highest in 17 years according to the SMMT (Society of Motor Manufacturers & Traders). It has also cut its forecast for 2008 by 10% over 2007.

The new car registrations in Europe’s biggest car markets in November were as follows:

• France drop of -14%
• Spain drop of -50%
• Italy drop of -30%

France has held up well for most of 2008 due to strong incentives for low-emission cars (Renault and Peugeot obviously) but is starting to show serious declines as well.

UK and Germany data not in yet. Germany has been more or less flat until October, but should also deteriorate quickly as German car sales fell 18 percent in November, marking the fourth consecutive monthly decline.

Big losers remain Ford and GM (Opel); the news-flow about possible bankruptcies certainly does not inspire much confidence at the consumer. General Motors reports $4.2 bn operating loss and it suspends its Chrysler merger talks. Ford also suffers $3-bn loss in Q3.
However, no carmaker is able to escape the malaise.

Japanese automakers are facing similar to their international peers problems. Isuzu Motors Ltd. and Mazda Motor Corp, will slash at least 2,700 temporary jobs in Japan as the companies reduce vehicle output production as a result of falling demand.

Hino, the country’s largest heavy-duty truckmaker, will also halt production at a Tokyo plant for five days in December, said spokesman Hidenobu Tezuka. Tokyo-based Isuzu slashed its fiscal full-year net income forecast 53 percent this month and Mazda lowered its forecast 29 percent in October.

All the eyes focus now on the second bid for $25 billion in funding that is to be presented to Congress by the three major US players (General Motors Corp., Ford Motor Co., and Chrysler LLC) today. Their first bid was turned down with some members of Congress urging the “Big Three” executives to take major pay cuts as part of the deal.

Libor Shows Signs of Recovery

The What Girl — Thu, 16 Oct 2008 16:15:55 +0000

The three-month dollar LIBOR fell 5 basis points to 4.5 percent today versus 4.55 percent yesterday, according to the British Banker’s Association. Leaders report positively that sentiment seems to be changing… Is it, really? LIBOR is so very popular as it is also the benchmark that sets the interest rate on most loans and mortgages.

The London Interbank Offered Rate or LIBOR is a benchmark that shows the interest rates that banks charge each other to borrow (lend) money, plus a premium for risk compensation.

The global credit crisis pushed LIBOR rates at extreme highs, as banks literally stopped lending to each other amid fears of insolvency. Despite the government intervention and the billions of cash pumped into the financial industry globally, confidence is not yet restored, but at least – and at last – LIBOR rates reacted and are moving in the correct direction.

The drop came as a result of the coordinated decision of central banks, including Bank of England, the European Central Bank, and the Swiss National Bank, to offer lenders unlimited access to cash. It might sound crazy and maybe even unrealistic, but having no other option in hand central banks are trying to unlock the credit markets.

With no availability of credit in the markets, lending will freeze both for consumers and businesses alike… Growth will become another word in the dictionary, and unemployment will rise and rise, as business default or dramatically cut costs down to survive in a semi-dormant world economy. And that’s scary!

The End of the Investment Banking Era

The What Girl — Wed, 08 Oct 2008 14:55:46 +0000

The global financial meltdown has forced six central banks to coordinate their efforts to ease the detrimental economic effects of the worst ever global financial collapse by lowering interest rates.

We are definitely living history in the making and as everyone is contemplating the next move after the absolute collapse of the investment banking model, the Federal Reserve, European Central bank, Bank of England, Bank of Canada and Sweden’s Riksbank, all cut their benchmark rates by 50 basis points, or half a percentage point. The Bank of Japan, although it didn’t participate in this joint effort said the move had its full support. China’s central bank also lowered its one-year lending rate by 27 basis points, in an independent move.

Liquidity is also pumped into the financial system by ventral banks around the world, and governments do not hesitate to nationalise any troubled financial institution to avoid any further seismic events with irreversible effects for the global economy.

The growing number of banks and other financial institutions that are not able to survive the ever deepening credit crunch is still sending shock waves throughout the world, and I am not only talking about the financial markets.

The current market conditions will certainly be referred to by generations to come as a key milestone, as companies and organisations are struggling to weather the storm that hammered their earnings down.

Why has Fed bailed out AIG?

The What Girl — Wed, 17 Sep 2008 08:46:10 +0000

The Fed announced today a cash injection of $95 billion in exchange for a 2-year bridge loan and a 79.9% equity stake. But why has the Fed saved AIG when only a few days ago, the Fed refrained from offering any kind of guarantees to the troubled Lehman Brothers, failing to prevent the ex-fourth-largest-US- investment-bank’s failure? What do the really mean by the term ’systemic risk’ and what do they really fear?

Seven months ago, AIG told investors it had ‘excess capital’ of $14.5 to $19.5 billion. AIG’s story would have made sense if they had an ‘excess capital’ and then claimed it evaporated within the seven month period due to the housing market crisis. What doesn’t make sense… is how they suddenly realised that they need $70-$75 billion.

Tell us the truth about the lies Mr Lewis (Chief Risk Officer)… In August 9th, Robert Lewis claimed all of AIG’s subprime mortgage holdings were safe. Of course, he was not alone. The day before his statement, AIG had posted excellent second quarter results, reporting a 34% rise in profits… What they didn’t report – despite analysts expectations to report losses of up to $3.25 billion – was any losses and writedowns on subprime assets. But why should they? Their mortage holdings were safe, intact in their…good books.

The premium AIG has to pay on the Fed loan is rather heftly; 8.5% above LIBOR. The high interest rate might make AIG unviable which leads analysts to believe that the two year loan is not meant to keep the company afloat. So what’s its purpose? According to a Fed statement reported on Bloomberg, the Fed concluded that “a disorderly failure of AIG could add to already significant levels of financial market fragility”.

Put in different words, the systemic risk of allowing AIG to go under was too big to take unlike Lehman Brothers. The truth is that nobody really knows how bad it could have been if they would have allowed AIG to sink, but while the scale of the exposure of specific participants is unknown, chances are that most financial institutions would have to write down more and more billions of assets….

So, basically the Fed has not saved AIG, but rather saw reason to take charge and control its bankruptcy.

Credit Crisis: A Different Type of Typhoon

The What Girl — Tue, 16 Sep 2008 13:27:10 +0000

New York

The unthinkable is happening and the world economy is buffeted about by three storms! The credit crisis on one hand, the bankruptcy of some of the largest US financial institutions and investment banks, and finally the inflationary storm that rockets energy and food prices, amid a general liquidity shortfall, i.e. where is the cash?

Lehman Brother’s ‘bomb’ exploded yesterday causing panic to the international markets, as investors now fear that more financial and non- financial institutions are about to join the list of casualties of the worst credit crisis in modern history.

The scale of last weekend’s failures (Lehman Brother and Merrill Lynch) and the fact that both the Fed and the US government avoided to punish the taxpayers for the blue-collar-boys mistakes has hopefully removed the false perception of safety that such big institutions share and will – again hopefully – force them to adopt a new risk perception based on real value/money going forward (too optimistic?).

Now, it is AIG’s (American International Group) turn to fall short of cash. The largest by fixed assets American insurance company is urgently seeking a cash-life-saving injection, valued from $70 to $75 billion in loans arranged by JPMorgan Chase and Goldman Sachs, in order to cover part of their credit crunch losses.

On Monday, AIG’s stock price plummeted by 61%, a reaction towards the credit rating downgrade b Standard & Poor’s and Moody’s Investors Service. Since the beginning of the year, the stock lost 92% of its value, and has been the company with the biggest losses in the Dow Jones index.

More bad news is definitely on its way, and I will try my best to keep you posted of any events of major importance.

WAGE RISES TO BATTLE INFLATION – LUFTHANSA LEADS THE WAY

The What Girl — Thu, 07 Aug 2008 15:54:34 +0000

Lufthansa employees won the battle with inflation, for the time being, as they managed to get a 5.1% raise in their wages, after a week’s strike and hard negotiations with the German airline’s management team.

But unfortunately, the European Central Bank (ECB) doesn’t share the same feelings, as they struggling to contain inflation by means of monetary policy, even if the high interest rates are cooling (freezing) down the economy growth.

The benchmark interest rate remained unchanged today at 4.25%, as Trichet continues warning about wage inflation which eventually will lead companies to hike prices to cope with rising production costs.

Otmar Issing, a former ECB chief economist advised companies to make one-off payments to their worried employed, or bonus, instead of offering wage rises that will permanently affect the company’s fixed costs.

Good thought, Otmar! But then again, I wouldn’t fall in this trap, and I hope you don’t either when you have that quick I’d-rather-not-have-this-conversation-with-you-right-now meeting with your boss! Let me explain you why.

First of all, the good news is that there is a 50-50 percent chance that companies will not pass the wage rises onto the customers, and they will keep their prices stable, as the economy is slowing down and they will need to hold on tight to their sales, even if the profit margins will shrink.

The bad news is that any change in the official bank rates takes around two years to have its full impact on inflation, just as Bank of England admits openly on their website. So, if central banks decide the interest rates based on what the inflation will probably be over the coming two years or so, so should consumers.

A permanent wage rise aligned with the rise in inflation does even count as rise, since the consumer’s purchasing power remains the same. This is not the case with bonuses, or any other forms of one-off payments, as the money you receive today will become of less value tomorrow if inflation continues its upward trend, and business activity slows.

No wonder why working unions in Germany have already started pressing for pay rises that match the inflationary economic environment.

Inflation in the 15-nation euro region was 4.1% in July, mainly due to record oil and food prices, making the Eurozone the worst performing economy across the globe.