Economy

Negligible growth – negligible interest rates

There is a frequently cited rule of thumb that says government bond yields should roughly correspond to nominal growth domestic product growth. However, this rule does not describe an exact correlation but rather a structural, long-term relationship between the financial markets and the real economy. The yields of government bonds are linked to a country’s economic activity based on various impact channels. In the long term, therefore, yields tend to follow the trend predetermined by potential growth. Potential growth worldwide is in turn shaped by structural changes and has been on a downward trajectory for a number of years. This is due above all to low productivity growth and persistently weak investment. However, the shift in the segments‘ shares in gross domestic product in the developed countries – away from manufacturing to the service sector – has reduced potential growth. Besides these real economic factors, low inflation momentum also plays…

Bank Lending Survey signals that lending is growing – How successful is ECB policy really?

As can be seen from the ECB’s July Euro Area Bank Lending Survey, the banks in the Euro area still expect increasing credit demand. Although the number of more optimistic banks has shrunk somewhat compared to April, they are nevertheless still clearly in the majority. Above all, the banks take a positive view of credit demand from enterprises and households. Nor do they plan to tighten their credit standards. That sounds good. So is there hope that the upturn in bank lending that is gradually emerging will pick up momentum and stimulate investment in the economy? Ultimately, this is what the ECB’s very expansionary monetary policy aims to achieve. A closer look at the statistics shows that the inundation of very cheap central bank funds has not been very efficient so far: while the volume of loans granted by commercial banks “to Euro area non-financial corporations” grew a considerable 3.1…

IMF lowers its growth forecast only marginally but points to considerable risks

The International Monetary Fund (IMF) recently made a slight downward revision to its growth forecast for the global economy in its annual July update. According to the latest IMF forecast, global output will accelerate at the same pace this year as last year, by an average 3.1 percent. Next year, the Washington-based institution expects the pace to accelerate somewhat more strongly to 3.4 percent which would then bring it in line with the year 2014. The main reason for the slightly subdued growth outlook is the British vote to leave the European Union. According to this base scenario, the fallout for the global economy and above all for the industrialized countries will only be „very“ limited, and can even be expected to have hardly any statistical impact. It would almost seem as though the forthcoming Brexit posed no real risk to the global economy at all, with the IMF offering…

US labor market: Good June figures but overall deceleration in the employment trend

The official Employment Situation Summary, published last Friday by the US Bureau of Labor Statistics (BLS), confirmed the picture of a still robust employment trend. The fact that the unemployment rate is likely to decline at a far slower pace this year than in the previous year is essentially commensurate with our expectations and has therefore not come as a surprise. However, the June report also confirms that the employment trend in the USA appears to have passed its peak. This year so far, the monthly average increase in persons employed has amounted to around 170,000 compared with the same period a year earlier when the number of persons employed grew by around 220,000 persons. In 2014 the monthly increase even came close to a quarter million in the first half-year. Against this backdrop, the increase in the unemployment rate from 4.7 to 4.9 percent should not give cause for…

The knee-jerk reflex of the financial market

The familiar knee-jerk reflex is quite simple: if the patellar ligament is tapped lightly, the lower leg lifts. The international central banks are behaving in much the same way at present. Something extraordinary happens, the current case being Brexit, and after a short period, there are vociferous promises by central banks to further ease monetary conditions in the near future. This was the case yesterday when the Bank of England announced that it would cut interest rates in the near future as a precautionary measure and the ECB announced that it would shortly amend the terms of its public sector purchase programme. In future the purchase key could be based on market capitalisation and not on countries’ shareholdings in the ECB. This could imply that the level of a country’s debts determine the share of the bonds to be purchased under the ECB’s purchase Programme. The capital market also reacted…

Brexit might be the best thing to happen to the EU

Many must feel like they have woken up to a nightmare, but this nightmare is for real – the British have decided to leave the European Union. Yet Brexit might be the best thing to have happened to the EU in recent years. Brexit could provide the impetus for a better, more modern Europe. With 52 percent voting to leave the EU, the result was very narrow – a decision that no one had seriously expected in the run up to the referendum. This was also reflected on financial markets which were caught completely off guard. In the short term, calm will return to stock markets, but further political and economic developments will prove crucial in determining the long-term direction of financial markets. Now it is up to politics and the economy to restore stability, a mammoth task for those responsible. The referendum has left Great Britain a divided country….

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