Archive for November 7th, 2008

IMF projects a global recession figure but doesn’t call it

November 7, 2008

IMF has updated its economic forecast and the report is here. IMF’s previous forecast was in early October and so in just one month it has revised it. Givebn it has release a fresh forecast in such quick time, the obvious case is for a substantial downward revision.

    Latest forecast Difference from Oct 2008 projections
  2007 2008 2009 2008 2009
World output 5 3.7 2.2 -0.2 -0.8
Advanced economies 2.6 1.4 -0.3 -0.1 -0.8
  United States 2 1.4 -0.7 -0.1 -0.8
  Euro area 2.6 1.2 -0.5 -0.1 -0.7
    Germany 2.5 1.7 -0.8 -0.2 -0.8
    France 2.2 0.8 -0.5 -0.1 -0.6
  Japan 2.1 0.5 -0.2 -0.2 -0.7
  United Kingdom 3 0.8 -1.3 -0.2 -1.2
  Canada 2.7 0.6 0.3 -0.1 -0.9
Developing economies 8 6.6 5.1 -0.3 -1
  Africa 6.1 5.2 4.7 -0.7 -1.3
  Russia 8.1 6.8 3.5 -0.2 -2
  Developing Asia 10 8.3 7.1 -0.1 -0.6
    China 11.9 9.7 8.5 -0.1 -0.8
    India 9.3 7.8 6.3 -0.1 -0.6
  Middle East 6 6.1 5.3 -0.3 -0.6
  Brazil 5.4 5.2 3 -0.5
  Mexico 3.2 1.9 0.9 -0.1 -0.9

IMF has reviswed its forecasts pretty downwards and is pretty much in line with what Roubini says. UK looks like the worst affected economy and that is why BOE cut rates by 150 bps (though I still don’t see how even zero rate would help).

However, what caught my eye was this IMF officials discussion with the press as per the transcript:

QUESTIONER: I apologize for coming late, so maybe you’ve addressed this. But my understanding is the IMF defines a global recession as less than 2.5 percent. I don’t see the word, recession, as I look through it. Are we saying that the world is in a recession and can you define how the IMF—can you explain how the IMF defines recession?

MR. BLANCHARD: There has been indeed a tradition to refer to growth rates below 3 percent for the world economy as a global recession.

I’ll make the same comment I made at the previous press conference, which is I think that choosing any such number is not useful. I mean it’s very clear that growth in 2009 is going to be very low. If we’re going to use a number, it seems to me zero percent is the only correct number. By that criterion, then we’re basically saying that advanced countries will be in recession in 2009.

QUESTIONER: Can you explain then? Can you explain then why the tradition has been less than 3 percent?

MR. BLANCHARD: I was not here.

QUESTIONER: But does that have to do with population growth?

MR. BLANCHARD: I was not here. I do not find it useful to choose such a number.

QUESTIONER: Maybe Mr. Decressin was here. I think it would be useful to understand the tradition of the IMF.

MR. BLANCHARD: I cannot do it, given that I was not here.

QUESTIONER: Your partner up there who has been here for years and years?

MR. MURRAY: I think, basically, the bottom line is that we’re not defining global recession as something at 3 percent or less.

So, IMF forecasts a global recession figure but doesn’t want to call it so.

UK Financial Investments Limited

November 7, 2008

UK will float a new company by the name – UK Financial Investments Limited to manage the banks UK has acquired so far. The press release of UK Treasury is here 

UKFI will work to ensure management incentives for banks in which it has shareholdings are based on maximising long-term value and restricting the potential for rewarding failure. It will also oversee the conditions of the recapitalisation fund, including maintaining, over the next three years, the availability and active marketing of competitively-priced lending to home owners and small businesses at 2007 levels.

Roubini’s ultra-pessimistic testimony

November 7, 2008

Nouriel Roubini (Dr Doom) presented his views on faltering GDP to US Congress Joint Economic Committee. He is really bearish and expects all things to collapse. He suggest number of fiscal measures to resurrect the US economy. Roubini’s predictions are all very well known and this is a summary at one place.

Towards the end he says:

So should we worry that this financial crisis and its fiscal costs will eventually lead to higher inflation? The answer to this complex question is: likely not.

It will be interesting to see if this prediction also comes true. I am less optimistic as Roubini as this. His reasons:

 First of all, the massive injection of liquidity in the financial system – literally trillions of dollars in the last few months – is not inflationary as it accommodating the demand for liquidity that the current financial crisis and investors’ panic has triggered. Thus, once the panic recede and this excess demand for liquidity shrink central banks can and will mop up all this  excess liquidity that was created in the short run to satisfy the demand for liquidity and prevent a spike in interest rates.

Second, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized as opposed to being financed with a larger stock of public debt. As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.

Third, wouldn’t central banks be tempted to monetize these fiscal costs – rather than allow a mushrooming of public debt – and thus wipe out with inflation these fiscal costs of bailing out lenders/investors and borrowers? Not likely in my view: even a relatively dovish Bernanke Fed cannot afford to let the inflation expectations genie out of the bottle via a monetization of the fiscal bailout costs; it cannot afford/be tempted to do that because if the inflation genie gets out of the bottle the rise in inflation expectations will eventually force a nasty and severely recessionary Volcker-style monetary policy tightening to bring back the inflation expectation genie into the bottle. And such Volcker-style disinflation would cause an ugly recession.

Fourth, in the US economy a lot of debts – of the government, of the banks, of the households – are not long term nominal fixed rate liabilities. They are rather shorter term, variable rates debts. Thus, a rise in inflation in an attempt to wipe out debt liabilities would lead to a rapid re-pricing of such shorter term, variable rate debt. And thus expected inflation would not succeed in reducing the part of the debts that are now of the long term nominal fixed rate form.

I was not very convinced of the reasons. Infact all the four explain how could the entire “current fiscal support” turn into “a high future inflation”. Let’s see what happens. Roubini has been right so far. I hope he is right over the future inflation scenario as well.

Denmark finally cuts rates as well

November 7, 2008

As I said earlier, Denmark Central Bank finally cuts rates as well. The press release is here. It has reduced rates by 50 bps to 5.00%. Denmark was raising rates as there was a depreciating pressure on its currency.

The interest rate reduction is a consequence of the lowering by 0.50 per cent to 3.25 per cent in the European Central Bank’s minimum bid rate on the main refinancing operations.

After Iceland another reversal in pretty short span of time. Denmark had raised rates om 28 October 2008.

Assorted Links

November 7, 2008

1. TTR points govt moves devaluing RBI

2. WSJ points to the recent gloomy IMF forecasts

3. Rodrik points US does not want a global fin regulator and is surprised. I am not. This is typical US response.

4. Fin Prof points to a Taleb video

5. IGMB points to a new paper on US bailout

6. PSD points to a new book- Banking the poor


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