Financial markets as stimulus junkies; Eurozone recession 'to persist'; Pound seen vulnerable after AAA fall

1 Financial markets as stimulus junkies (Larry Elliott in The Guardian) Financial markets have become stimulus junkies. They crave their next fix of quantitative easing and when they don't get it they turn ugly. The rush they get from the drug wears off after a while, and then they become needy and whiny. Witness last week’s sell-off on Wall Street following the hint from the Federal Reserve that it was about to cut off the drug supply.

A similar dependency exists in the UK, where stock market traders expectantly await an injection of QE, courtesy of the Bank of England, after deterioration in the UK's economic outlook. Governor Sir Mervyn King voted for another £25bn of cheap money and his colleagues should endorse his view in the coming months. The loss of the UK’s much coveted AAA status, thanks to the credit ratings agency Moody's, is likely to make the markets salivate even more.

The situation today is the closest the world has been to a depression since the 1930s. Then, Keynes said a depression was a "chronic condition of subnormal activity for a considerable period without any marked tendency towards recovery or towards complete collapse". The global economy has exhibited all these traits since the deep slump of 2008-09. Growth has been sub-par for a long period. There is no real sign that output is about to slump as it did four years ago, but the sort of strong recovery expected after previous post-war recessions has proved elusive. It's a depression all right.
Analysts at Morgan Stanley say we are on the brink of the third wave of global monetary easing.

Phase one came in the winter of 2008-09 when interest rates were slashed virtually to zero and quantitative easing was introduced as a "temporary" measure. The drying up of credit meant the money supply was contracting and there was a fear of being sucked back to the 1930s. The hard economic data at the time suggested this was a genuine prospect. So money was made cheap and plentiful, just as Keynes would have suggested.

But by late 2011, the global economy needed another fix of the monetary stimulus drug. In part, this was because the drugs had side-effects – QE led to asset-price speculation which pushed up commodity prices, which in turn raised business costs and cut the real incomes of consumers. In part, it was because certain finance ministers – no names, no pack drill – tried a course of cold turkey too soon. In part, it was because the eurozone crises hit the rest of the world.
Now we are entering the third phase of monetary easing. The Bank of England has decided to adopt a "flexible approach" to the government's 2% inflation target and looks likely to increase its QE programme to £400bn within the next couple of months.

2 Eurozone recession ‘to presist’ (BBC) The eurozone recession will persist into 2013, the European Commission has conceded in its latest forecast. Governments face an uphill battle to rein in their overspending, with Spain, France and Portugal all failing to cut their deficits to agreed targets.

Spain's deficit, at 10.2% of GDP in 2012, was well above its 6.3% target, and would stay above target into 2014. The eurozone economy would shrink 0.3% in 2013, the Commission said, making the governments' task even harder. Previously, the Commission had expected the 17 economies in the eurozone to collectively enjoy 0.1% positive growth this year. In 2012 the economy is estimated to have shrunk 0.6%.

Commission Vice-President Olli Rehn said that unemployment across the single currency area expected to continue rising to 12.2% this year as the recession lingers. Last year's jobless rate was 11.4%. However, he said the eurozone was expected to rebound in the last three months of this year, registering 0.7% growth in the fourth quarter. The Commission's acknowledgement that the eurozone is in worse economic shape than previously mirrors a change in the International Monetary Fund's thinking. The IMF said in January that it expected the eurozone to experience a "mild recession" in 2013, having previously predicted growth.

3 Pound seen vulnerable after AAA fall (Juliette Jowit, Phillip Inman & Graeme Wearden in The Guardian) Two former Conservative chancellors have issued grave warnings about the British economy as the government braced itself for the pound to slide following the loss of UK’s AAA credit rating. Sterling is expected to fall against other major currencies as the financial markets respond to Moody's decision to cut the national credit rating, repeatedly used by the chancellor, George Osborne, to validate his tough economic measures, by one notch to AA1.

While clearly supportive of the coalition's austerity programme of deep public spending cuts, the two senior Tories, Kenneth Clarke and Lord Lawson, both cautioned that the UK was vulnerable.
Clarke, now minister without portfolio in the cabinet, defended Osborne's previous claims that the government's economic policy could be judged on its credit rating, arguing that problems with the global economy and particularly in the eurozone had pushed recovery "several years" beyond what had been expected at the general election in 2010.

"It seemed perfectly sensible to me at the time," Clarke said. "It would now if it were not for the fact that it is quite clear that the global economic and financial crisis is persisting, it's worse than we thought, several more years are required." Lawson said it was vital that ministers and the Bank of England made no suggestions they would like to see a further weakening of the value of the pound – which could help boost exports by making British goods cheaper for foreign customers – in case it prompted "a run on sterling".

"That would not be clever, that would not be sensible, that would not be helpful," said Lawson. "But I don't think that George Osborne wants that."