Fine-Tuning Australian Monetary Policy

The Reserve Bank of Australia’s (RBA) recent move to raise its overnight lending rate to 3.25%—the first rate hike in a G20 country in the aftermath of the financial crisis—came earlier than many onlookers would have predicted weeks or months beforehand. But the move wasn’t inconsistent with economic fundamentals.  Resilient commodity demand from emerging markets […]

Latin America Economic Outlook

This week we are offering another preview of our global economic outlook for Q4, which will be released to RGE’s clients later this month. The following is a sample of our analysis on Latin America. The full version of the outlook goes into greater detail and includes RGE’s country-by-country projections for economic growth and several major indicators.

RGE maintains the position we took in our July outlook: Latin America will recover in 2010, but its expansion will likely be below potential. Given aggressive foreign and domestic policy responses in Latin American countries, the region is stabilizing in H2 2009 after having contracted severely in H1 2009. Although global and regional economic and financial conditions will likely improve in 2010, RGE expects the pace of external and local demand revival to be measured. Commodity prices will stay on hold in the middle ground between record highs and recent lows, mainly because of below-potential recovery in the U.S. and advanced economies, as well as in China. Though global liquidity will remain elevated in the upcoming quarters, favoring LatAm asset classes, market anxiety about the timing of exit strategies around the world represents a significant risk. Miscalculations in exit strategies and disappointing economic results pose the main risks to LatAm market dynamics in 2010.

Does Asia’s Economic Rebound Signal the Return to Stellar Growth?

Today we present a preview from our global economic outlook for Q4, which will be released to RGE clients later this month. The full version of the outlook includes a more in-depth version of the following analysis as well as RGE’s country-by-country projections for economic growth.

Asian economies rebounded in Q2 2009 as aggressive monetary and fiscal stimuli cushioned domestic demand and quick inventory adjustment eased the downturn in industrial production. Capital inflows have buoyed the asset markets and net exports have contributed to GDP growth as imports have contracted faster than exports.

The Fed’s Balance Sheet and Possible Exit Strategies

The Federal Reserve balance sheet has expanded in size and deteriorated in quality, raising concerns about the difficulty of rolling back the Fed’s monetary easing—particularly as its outright asset purchases overtake temporary credit on the asset side of its balance sheet. Worse yet, many of these asset purchases have long maturities. Despite the sharp rise […]

Chinese Credit Policy: Is Fine-Tuning Prompting Too Much of a Property Boom?

Despite worries of credit tightening, the most recent Chinese bank lending data still suggest relatively loose conditions that are supportive of growth – and asset bubbles.  Total local currency lending is still on track to exceed RMB  10 trillion (US$1.47 trillion) in 2009, well above the initial RMB 8 trillion target and about 30% of […]

Will India Get Back to 9% Growth?

In September 2009, India’s economic advisory committee lowered its GDP growth forecast for 2007-2011 from 9.0% to 7.8%. The government now expects growth to slow to 6.3% in 2009, from an average 9.0% growth in the recent years, due to the global recession. But it expects growth to return to 8% and 9% in 2010 and 2011, respectively. However, less benign global factors going forward and slow domestic reforms will make it challenging to achieve these growth targets.

The Indian economy grew 6.1% in Q2 2009 after slowing to 5.8% in both Q4 2008 and Q1 2009. Clearly, Q1 2009 was the bottom for economic activity. Starting in Q2, both domestic and global conditions somewhat improved and policy measures began to show impact. However, several domestic and external factors could constrain growth in the short to medium term, potentially undermining a V-shaped recovery scenario. Short-term risks to growth include dismal agriculture sector performance, fading impact of policy stimulus while private demand is still weak, and a slowdown in the global risk appetite. Risks over the next two to three years include a sluggish recovery in global credit conditions and domestic structural problems such as high fiscal deficit and public debt, inflationary pressures, slow reforms, and supply-side bottlenecks.

Excess Bank Reserves and Slowing Credit Supply to the Private Sector: The Mechanics

Where’s the Money?

Where is all the central bank liquidity going? Despite direct asset purchases of US$868 billion through the Fed’s $1.75 trillion asset purchase program, and despite the about $500 billion in total outstanding liquidity facilities as of the end of July (according to the Fed’s monthly report “Credit and Liquidity Programs and the Balance Sheet – August 2009”), most of the new liquidity appears not to have extended beyond banks. End consumers and non-financial corporations still face declining credit growth.


Source: Federal Reserve data, H.8 Release, own calculation

At the same time, commercial banks’ excess reserves holdings with the central bank have increased sharply. The Fed’s H.3 release shows total reserves by depository institutions for the month of July 2009 to have reached $795.6 billion—of which $62.6 billion is required reserves and $733 billion is excess reserve holdings.

The China Effect

Today we present an abridged version of a new report examining China’s direct and indirect influences on global asset markets, and particularly equity, commodity and FX markets. The full version of the report is available to RGE Monitor premium subscribers. It takes a more in-depth look at Chinese commodity demand, the place of commodities within China’s foreign asset portfolio, as well as an update of our Chinese economic outlook. The full version also includes graphical analysis that should help readers parse recent trends in Chinese markets.  Enjoy the preview!

Chinese Equities

Credit Markets Update: Fundamentals Driven or Too Much Liquidity?

What a difference a few months make. At the end of Q1 the financial world was staring into the abyss. Now, at the end of Q2, observers are asking themselves whether the next asset bubble is around the corner. This week’s newsletter reviews the recent performance of money and credit markets and asks whether the current performance drivers are likely to remain in place for the foreseeable future.

Now that the worst has been averted by central banks around the world, and especially those at the epicenter of the crisis (the Fed, the ECB, the Bank of England), observers ask whether this unprecedented amount of liquidity–which to date has mostly been hoarded by commercial banks in the form of excess reserves–is fuelling asset prices beyond their fundamental value, potentially leading to inflationary pressures down the line. The standard line of reasoning is that as long as the money multiplier remains low, the wall of liquidity created by central banks will not enter the real economic cycle in the form of loans to households and non-financial corporations. However, as economic activity and lending picks up, excess reserve holdings create a substantial risk of overheating and inflation.

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