World Recession Spreads Through Asia, ECB Still Holds Rates Steady

[Kidicious]

The Economist

Interest rates in Asia are falling, as economies struggle with recession and the after-effects of the SARS crisis. But Europe’s central bankers are resisting the rush to cheaper money

WHAT do Britain, South Korea, Singapore and Indonesia have in common? Perhaps not that much. But on Thursday July 10th, all four countries cut interest rates as part of the effort to stimulate economic activity. The decision taken in London had been a close call, with opinion divided before the anouncement on whether the Bank of England would cut. The three Asian economies joined a growing list of countries in the region that have reduced interest rates in recent weeks. The monetary authorities in Hong Kong, the Philippines, Thailand, and Taiwan have already followed the example set by America’s Federal Reserve on June 25th. But the European Central Bank (ECB) decided against any change in rates at its monthly meeting, also on Thursday of this week. The ECB cut rates in June: that, apparently, is enough for now.

The monetary loosening in Britain and Asia only underlines the extent to which the ECB is now out of step. Singapore and South Korea acted after confirmation that their economies had slipped into recession this year. In both countries, the authorities think the worst is over and that growth will pick up during the second half of the year. But in the wake of the SARS crisis, and the general downturn in tourism following increased fears about terrorist attacks, governments in Asia are keen to restore economic confidence.

The Asian Development Bank publishes economic information for the region. The Asia Recovery Information Centre monitors news affecting the Asian economic recovery. See also the Association of South-East Asian Nations and the World Bank's East Asia section. The Bank of England, the European Central Bank and the Federal Reserve post monetary-policy information. The US Treasury Department, the Department of Labour and the Department of Commerce provide economic information and statistics. The EU's economic and financial affairs directorate posts the “stability and growth pact”, provides economic statistics and publishes a recent report on fiscal policy and budgetary imbalances in EU countries. The DIW posts some English-language economic information, and publishes its latest report in German.

Cheaper money has certainly worked in America, according to John Snow, President George Bush’s treasury secretary. In an interview published on Thursday, Mr Snow said a combination of lower interest rates and the programme of tax cuts pushed through by Mr Bush has put the economy on a path to faster growth. Mr Snow expects the economy to expand at an annual rate of 3% in the second half of this year. That might be a touch on the optimistic side—the signals about America’s economic performance continue to be mixed, with unemployment currently at the highest level for nine years.

But even the cautious Alan Greenspan, chairman of the Fed and principal architect of America’s cheap-money policy, has conceded that Mr Bush’s tax cuts have come at a fortuitous time for the economy. Nearly two years after the recession ended, American growth is still relatively sluggish. The uncertain nature of the recovery, coupled with fears about deflation, prompted last month’s rate cut, the 13th since January 2001.

America’s problems pale in comparison with those in Europe, though. The German economy is already technically in recession. Only last week, one of the leading German think-tanks, the DIW, predicted that the economy—Europe’s largest—would shrink during 2003. It said there was little prospect of a significant upturn next year. Yet the ECB’s decision to resist further interest-rate cuts this month was well-trailed. When Wim Duisenberg, the ECB president, addressed the European Parliament last week, he said that the ECB had done its part by reducing borrowing costs in June. Now, he argued, it was up to European governments to do their bit.

Mr Duisenberg does have a point. European governments have postponed much-needed economic reforms. The German government has, belatedly, embarked on a programme of reforms aimed at curbing the excesses of the welfare state. But such changes take a long time to implement, and even longer to have any impact. Germany desperately needs short-term stimulus. Chancellor Gerhard Schröder has decided to bring forward income-tax cuts to Janaury next year—though he has been vague, as yet, on how these will be financed. His government has little room for maneouvre because of the need to bring Germany back within the limits of the euro area’s stability pact, which requires governments to curb borrowing.

So it all comes back to interest rates and the ECB. Some economists suspect that the bank will cut rates again after the summer, but the ECB is building a reputation for doing too little, too late. If, as currently seems likely, Germany remains stuck in the economic doldrums and if, as is quite possible, that has a damaging impact on the rest of Europe, the ECB could find itself getting the blame.

The ECB will definitely get blamed if this turns worse. I'm pretty sure it will regardless of the other lower interest rates.

[Colon™]

What's up with the obsessive focus on Germany?

[Velociryx]

It's all capitalism's fault....

-=Vel=-

[Kidicious]

Originally posted by Colon
What's up with the obsessive focus on Germany?

Why do you say that I'm obsessed with Germany? I'm just interested because of their particular situation. That's all.

[laurentius]

It has already been turning better, at least in Finland GDP growth was 2,2 % 0,4 % better than the estimated 1,6% Germany will follow. These kinds of things always happens, everyone are too cautious and eventually it turns out that economy does better than hoped for. The only problem is that Finland has too low wages. We're a cheap-labour country considering we are the best educated workforce...employ me pls

[Main_Brain]

I would be suprised If Germany reaches a positive GDP growth.

[Colon™]

Originally posted by Kidicious


Why do you say that I'm obsessed with Germany? I'm just interested because of their particular situation. That's all.

I was reacting to that article and the financial press in general.

[Kidicious]

One of the things that interests me is the exchange rates. The Euro is not only gaining strength against the dollar, but since the Asian currencies tend to maintain value with the dollar, the Euro is also gaining strength against other currencies. This makes imports cheaper, and I think the ECB likes that, but it also makes it tough for European producers (Germany and France at least).

[Kidicious]

Originally posted by Colon
I was reacting to that article and the financial press in general.

I think it's because most people believe that the ECB's policy is unorthodox and risky.

[Velociryx]

Just re-read the article for kicks....

....excesses of the welfare state...:gasp: Imagine that...: shakes head:

-=Vel=-

[DanS]

I was reacting to that article and the financial press in general.

Because it's the largest Euro economy. In this sense, the focus is warranted. However, some make the mistake of using it as a bellweather of where the EU is at.

[Colon™]

I think most make that mistake.

[Kidicious]

Just because Germany is now part of a larger economy, why is it's growth insiginificant now?

[Velociryx]

That's just the thing....Germany isn't really part of a larger economy yet. That's the direction things are moving in, but each member nation keeps its own books, funds its own government, collects its own taxes.

There's a veneer of unitity placed over the whole, and a common agreement not to tariff and tax each other to death, and even a move toward standardization (including a standardized currency), but that's a far cry from having a unified economy.

-=Vel=-

[Kidicious]

Here's another interesting econ graph. I'll just put it here. I didn't know that India's foreign exchange reserves were growing so fast.

[Colon™]

Originally posted by Kidicious


I think it's because most people believe that the ECB's policy is unorthodox and risky.

Why is it unorthodox?

Risky? Would you prefer the Fed's tactic of fighting the hangover of past bubbles by creating new ones?

[laurentius]

WTF? the japanese are absolutely unbelievable!! They'we got reserves enough to maintain their deflation for another 10 years, thats just ridicilous. It's like an extremely rich guy lives with his stocks for decades after he's declared bankrupt

[Colon™]

Here's another graph



The Eurozone's money supply is growing faster than in the US, its govt bonds have lower real interest rates and its corporate bonds even have lower rates in nominal terms.

It seems to me monetary conditions are quite a bit looser in the Eurozone already. It's not because the American economy is so terribly ****ed up that Europe has to copy its monetary policy.

[Colon™]

Originally posted by Kidicious
Just because Germany is now part of a larger economy, why is it's growth insiginificant now?

Not my point. Why is the rest of the Eurozone's growth insignificant?

[DanS]

I think most make that mistake.

Germany also has too large a bully pulpit because of this focus. For instance, Joscha Fischer gets way too much play time for the votes that he and his party received.

But that's for another thread...

[DanS]

Here's some jawboning between Schroeder and the ECB.

http://news.ft.com/servlet/ContentSe...=1012571727092

[Kidicious]

Originally posted by Colon
Why is it unorthodox?

Too conservative.

Originally posted by Colon
Risky? Would you prefer the Fed's tactic of fighting the hangover of past bubbles by creating new ones?

Boy you and HO. There really are a lot of you aren't there. I don't think the danger of bubbles is nearly as bad as the danger of recession.

[DanS]

Risky? Would you prefer the Fed's tactic of fighting the hangover of past bubbles by creating new ones?

Hey, wait! I thought you spent a post showing that the Fed's stance is not as easy as Europe's.

Party foul!

[Kidicious]

Originally posted by laurentius
WTF? the japanese are absolutely unbelievable!! They'we got reserves enough to maintain their deflation for another 10 years, thats just ridicilous. It's like an extremely rich guy lives with his stocks for decades after he's declared bankrupt

If they didn't stockpile those reserves their currency would be much stronger, and I think deflation would be worse.

[Colon™]

I'm not really worried about Germany. Consumer price deflation may or may not occur, but its economy isn't as isolated as Japan's is. Imports and exports make up a vastly larger portion of Germany's GDP, and its (Eurozone) trade partners act as a safety net. Right now, the low inflation rate only serves to improve the competiveness of German producers vis-a-vis its trade partners.

[Kidicious]

Originally posted by Colon
Here's another graph



The Eurozone's money supply is growing faster than in the US, its govt bonds have lower real interest rates and its corporate bonds even have lower rates in nominal terms.

It seems to me monetary conditions are quite a bit looser in the Eurozone already. It's not because the American economy is so terribly ****ed up that Europe has to copy its monetary policy.

What does the growth in the money supply have to do with it? The Fed is lowering interest rates when the eocnomy is weak and the ECB is not. Money supply doesn't really matter. Interest rates matter. Nobody cares about money supply when they make economic decisions.

[Kidicious]

Originally posted by Colon
Not my point. Why is the rest of the Eurozone's growth insignificant?

Europe as a whole is significant. European nations other than Germany and France are not significant.

[Colon™]

Originally posted by Kidicious

Too conservative.

Based on what criteria?

Boy you and HO. There really are a lot of you aren't there. I don't think the danger of bubbles is nearly as bad as the danger of recession.

You just risk a bigger recession tomorrow.

[Kidicious]

Originally posted by Colon
Based on what criteria?

Mainstream opinion

Originally posted by Colon
You just risk a bigger recession tomorrow.

I don't believe that. You really get drag when you are tight with the money supply during times of contraction.

[Colon™]

Originally posted by DanS
Risky? Would you prefer the Fed's tactic of fighting the hangover of past bubbles by creating new ones?

Hey, wait! I thought you spent a post showing that the Fed's stance is not as easy as Europe's.

Party foul!

No, I spent a post showing monetary conditions are looser in the eurozone.