December 2011 Archives - 8/8 - Money Morning - Only the News You Can Profit From
Why the U.S. Economy Will Be Weaker Than Expected in 2012
Anyone who hoped the U.S. economy would get back on track in 2011 was sorely disappointed.
The European sovereign debt crisis and the abysmal failure of policymakers to take effective action undermined any chance we had at a strong recovery.
And what's even worse is that we're in for more of the same in 2012. Indeed, the U.S. economy in 2012 will be even more sluggish than originally thought – and for the same reasons 2011 was a disappointment.
The Organization for Economic Cooperation and Development (OECD) estimates U.S. growth will slow to 2% next year, down from a 3.1% estimate in May. It forecasts growth will pickup to 2.5% in 2013.
Of course, these forecasts are contingent upon Congress finding a way to stimulate the economy and tighten fiscal policy – not an easy balance to achieve. Without such action, U.S. economic growth next year could be as slim as 0.3%, and only hit 1.3% in 2013.
Unfortunately, after a year of failing to reach a debt reduction agreement, there's little chance the government will rise to the occasion next year – especially when most representatives are focused more on reelection than they are resolution.
Furthermore, it's also doubtful that Europe's debt crisis will be contained enough to not severely disrupt the region's biggest nations and cause a credit crunch that ripples through the global economy.
That means another year of major risks.
"Uncertainty remains the watchword for the U.S. economy," said Money Morning Global Investing Strategist Martin Hutchinson. "The risks are still pretty high because no one's sure what the Europe outcome will be."
The likely outcome – U.S. economic growth will fall even lower.
Europe: The Biggest Unknown
The OECD earlier this week reported that Europe's weak monetary union is the main threat to the world economy. The group's 34 member nations, including the United States, will grow 1.9% this year 1.6% next, down from the May predictions of 2.3% and 2.8%.
"Contrary to what was expected earlier this year, the global economy is not out of the woods," Chief Economist Pier Carlo Padoan wrote in the OECD Economic Outlook.
China Returns to Growth Mode with Major Policy Shift
The damaging global economic effects that Europe's unfolding debt crisis pose have caused a sharp reversal in China's monetary policy – one that will lead to a greater expansion of the Red Dragon's economy.
The People's Bank of China announced yesterday (Wednesday) that it would lower the percentage of deposits commercial banks must hold in reserve by 50 basis points, effective Dec. 5.
This is China's first reserve requirement cut since 2008. It drops the level to 21% for large banks and 19% for smaller institutions.
The move was unexpected from the world's second-largest economy, which has been tightening its monetary policy for more than a year.
The change underscores the country's concern that exports, its main driver of economic growth, would weaken due to lower demand from the troubled Eurozone, China's biggest consumer. However, it's also a signal that after a year of tapping the brakes on growth to curb inflation, Beijing is ready to put its foot back on the accelerator.
"This is a clear signal that Beijing has decided that the balance of risks now lies with growth, rather than inflation," Stephen Green, greater China head of research at Standard Chartered, told The Financial Times. "This is a big move, it signals China is now in loosening mode."
China's gross domestic product (GDP) in the third quarter grew by 9.1% — the slowest pace in two years and down from 9.5% in the previous three months. That's the fourth consecutive quarter of declining GDP growth.
Loosening China's Monetary Policy
China fears its best customers, Europe and the United States, will keep reducing their imports as they're burdened with weak economies. Chinese exports in October rose by 15.9%, the smallest amount in two years.
"The weakness in exports was very much in line with the global environment, especially the slowdown in Europe, and that's going to continue through to the first quarter of next year," Li Cui, an economist with the Royal Bank of Scotland, told Reuters. "I think the underlying weakness is perhaps even weaker. [M]y estimation is that the real growth could only be around 7% to 8%, adjusting for export prices."
Why the Fed's Latest Rescue Effort is Doomed
World markets got a nice tailwind yesterday (Wednesday) on news that the U.S. Federal Reserve is stepping into the fray along with other central banks to boost liquidity and support the global economy.
Of course it's nice to see stocks get a hefty boost, but to be honest I'd rather see them rising on real news.
Not that this isn't a good development in terms of stock values – but come on, guys. When things are so bad that the Fed has to step into global markets and bail out the other bankers in the world who can't wipe their own noses, we have serious problems.
Think about it.
The Fed is going to collaborate with the European Central Bank (ECB), the Bank of England (BOE), the Bank of Japan, the Swiss National Bank and the Bank of Canada (BOC) to lower interest rates on dollar liquidity swaps to make it cheaper for banks around the world to trade in dollars as a means of providing liquidity in their markets.
Put another way, now our government is directly involved in saving somebody else's bacon at a time when, arguably, we don't have our own house in order.
The Fed is cutting the amount that it charges for international access to dollars effectively in half from 100 basis points to 50 basis points over a basic rate.
The central bank says the move is designed to "ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credits to households and businesses and so help foster economic activity."
Who writes this stuff?
Businesses are flush with more cash than they've had in years. The banks are, too. But the problem is still putting that cash in motion — just as it has been since this crisis began.
From Bad to Worse
I've have written about this many times in Money Morning. You can stimulate all you want with low rates, but if businesses cannot see a reason to spend money to turn a profit, they won't. And there's going to be little the government can do to encourage them to spend the estimated $2 trillion a Federal Reserve report estimates they're sitting on.
Similarly, if banks cannot see a reason to lend with reasonable security that loans will be repaid, they won't. And there's nothing the central bank can do about it, either. Neither low interest rates nor low-cost debt swaps will change the fact that companies and individuals are shedding debt as fast as they can despite the cost of borrowing being almost zero.
If anything, the Fed's newest harebrained scheme is going to make things worse. Absent profitable lending, many banks are already turning to bank fees and – like the airlines that are widely perceived to be nickel-and-diming passengers – this is understandably irking customers. Many are changing banks as a result, further fueling a negative feedback loop.
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