jka on economics UK

Dr Doom calls for $400bn spending plans

The U.S. government should enact an economic stimulus package of between $400 billion and $500 billion before the end of the Bush administration in January, New York University professor Nouriel Roubini said.

Dr Nouriel Roubini, said the economy risks falling into “a self-fulfilling animal spirit recession that is more severe than otherwise” because of the collapse of credit markets and weak consumer and corporate spending.

“The only way to increase aggregate demand is going to be through” government spending on roads, bridges and other infrastructure, Roubini said at a Bloomberg conference in New York. “We need a huge plan, $300 billion is not going to be enough. I think we’re going to need a plan of $400 billion to $500 billion.”

“If we don’t do that fiscal stimulus today, three months from now, six months from now the collapse of the real economy is going to be so severe that anything we’re doing today to recapitalize the financial system is going to be undone,”

“We’re entering literally a vicious circle where economies are spinning down, financial markets are spinning lower, and the policy makers in my view -- and that’s my biggest fear -- have lost control of what’s going on in financial markets,” Roubini said.

The calls echo Chancellor Darling's plans for a spending programme to stimuate activity with the UK. Bending the ficasl rules in the process. OK. We are all Keynesians now. Our best case scenario for the UK remains a 1990-1992 style slow down with seven quarters of negative growth. This even with a spending programme and a much looser monetary policy.

House Prices fall by almost 15% - Nationwide

Nationwide, the UK's largest society indicates the average price of a home in the UK has fallen to £158,872 - almost £30,000 less than a year ago., down by 14.6% in October. Prices have been driven down by falling sales volumes as buyers hold off.

The monthly fall of 1.4% was slightly lower than in September, when prices dropped by 1.5% but the annual rate of decline has increased from 12.4% last month and is the largest drop ever recorded by Nationwide. Nationwide said the number of completed house purchase transactions as a proportion of the total stock of mortgages was now at its lowest ever level since records began in 1974. House purchase approvals dropped to new lows in the third quarter of the year, at around one third of the long run trend.

Fed cuts rates to 1% - UK further cut next week expected.

Bernanke acts. The US Federal Reserve last night reduced borrowing costs by a further 0.5% slashing the Fed Funds rate to just 1%.

In a move that is expected to be followed by the Bank of Japan, European Central Bank and the Bank of England next week, America's central bank said the half-point cut in its overnight lending rate was the response to a fresh slump triggered by the recent market turmoil.

Alistair Darling last night hinted that the Bank of England could cut rates next week but avoided any suggestion the bank would be directed to cut rates. At 4.5% the UK rates look high compared to US and Euro levels despite the 5% inflation level.

For the US the danger of a real liquidity trap develops as low rates give little room for further manoeuvre and deflationary forces are present and powerful worldwide.

Don't panic - we have six days to save Pakistan says German minister

You have to admit there are some great headlines around.

Germany's foreign minister Frank-Walter Steinmeier warned yesterday that the IMF has less than a week to avoid financial crisis in Pakistan.

Foreign country reserves were just $4bn and were likely to run out by the end of next month. The IMF programme worth some $15bn is expected to last until June 2010.

Negotiations are in the final stages and agreement on a letter of intent is expected within a few days.

Don't panic.

Markets Rally as dealers sniff rate cuts

    So this is volatility. On Friday the markets had no confidence in central governments and prices plummet. Two days later with rate cuts in the air, markets world wide stage a rally. In UK the FTSE is clinging to the 4,000 level and in the US the DOW is hoping the 9,000 level will hold. In Germany, Volkswagen becomes the most highly capitalised company ahead of Microsoft and Exxon as share prices exploded in a classic Bear squeeze which left hedge funds wringing their hands in pain. Best not to short a stock in which Porsche has 75% interest.

More generally, markets are looking for a Fed rate cute this week, with hopes for an MPC rate cut next week. Rate cuts too early in the cycle will leave policy makers "pushing on string" with nothing left to stimulate the recovery. A liquidity trap and a deflationary squeeze provide a lethal cocktail, it will all make for further volatility.

Big Numbers as global bail-outs cost £4,500bn

Governments and central bank have bailed out the global financial industry with £4,500bn of taxpayers' money, according to the Bank of England's Financial Stability Report.

According to Philip Aldrick, Banking Editor 
of the Telegraph :

The size of the rescue is equivalent to 12pc of the entire $60,000bn (£38,000bn) global economy. Of the sum, £395bn will be used to recapitalise banks and £397bn will be spent buying up their "toxic" assets. State guarantees to get the wholesale markets moving again come to £2,927bn, and another £754bn has been provided in loans and through bank nationalisations.

The unregulated shadow banking market, where the Bank estimates $14,500bn of "toxic" assets responsible for the financial crisis have proliferated, is also expected to come under tight scrutiny. The report says: "Existing infrastructures need strengthening in light of the liquidity and counterparty risks which crystalised during this crisis."

Yeah you can say that again.

Markets Plummet as Governments are deemed powerless

"NEW YORK (AP) - Stock markets around the world plummeted Friday and oil prices plunged to their lowest in more than a year...The common denominator was growing fears that governments, central banks and finance ministers seem powerless to stop the deepening of a global recession that will slam corporate earnings and lead to deep job losses around the world."

This from the AP news desk Friday. Add to this margin calls and hedge fund turmoil and it all adds up to a recipe for financial melt down.

Analysts are making comparisons with the Japanese "lost decade" as the asset price boom collapses. This is Dr Doom's L shaped recession writ large. Let's hope a broad U does the trick.

UK GDP figures flag recession ahead

Markets have been under pressure as much has been made of the 0.5% decline in GDP in a quarter on quarter comparison.

A preferable comparison is a rate of growth based on a year on year comparison. On this basis GDP growth slowed to just 0.3%  in the third quarter compared to 1.5% in Quarter 2 and 3.3% in Q1.

For the year as a whole growth is expected to be 1.2% as the year on year comparisons turn negative in the final quarter. We estimate negative growth of 0.5% in Q4.

By sector, manufacturing fell by 1% but service sector growth was up by 0.7% despite weakness in the distribution, hotels and catering section. Transport, business services, finance and government activity were up by 1.2% approximately.

The UK is entering into a significant recession as consumer expenditure falls. The best case scenario is for a 1990-1992 style slow down lasting for seven quarters of negative growth. We anticipate negative GDP in 2009 of -1.4% and a recovery to 0.3% in 2010.

Global Bank Losses rise to $2.8 trillion dollars

According to the Bank of England Financial Stability Report October Global bank losses on a mark to market basis are now $2.8 trillion.

In the UK, bank losses have doubled in just six months from £63bn to £123bn.

The capital injection into the banking system has gone way to stabilising the situation but more may will have to be done as the recession bites in the UK and real economy losses develop.

The Bank points out that funding pressures and falling asset prices continue to represent a risk for other parts if the financial system including hedge funds. The report more than doubled the previous estimate of the potential losses faced by all financial institutions since the Spring, but said that given time the actual losses could be pared by between a third and a half.

The £50bn pledged by the government had helped underpin the system, the Bank said, and would provide a breathing space for UK banks so that they did not have to sell assets at cut-price values immediately. The report also expressed cautious optimism about the effectiveness of the recent global bail-out plan.

Manufacturing Prices begin to slow September

Materials and fuels purchased by manufacturing increased by 24.5% in September a lower rate than 28.8% in August and a peak of 34.0% in June.

Output prices increased by 8.5% compared to 9.1% in August and a peak of 10.0% in July.