Tuesday, 2 June 2009

world gdp: west under 50% / shift of german eco policy (3 texts)


Western economies poised to account for less than 50pc of world GDP

Western world economies will account for less than 50pc of global gross domestic product (GDP) this year, six years earlier than expected, a think-tank has warned.

By Angela Monaghan

Published: 12:01AM BST
02 Jun 2009

The Centre for Economics and Business Research (CEBR) is forecasting that because of the downturn and China's economic resilience, the combined contribution from the US, Canada and Europe to world GDP will be 49.4pc in 2009, down from 52pc in 2008.

CEBR said prior to the financial crisis Western world GDP was not expected to fall below 50pc until 2015. The West's contribution to global GDP has been steadily falling since 2004, when it was about 60pc, but the recession has accelerated that process, CEBR said.

"The recession has brought forward the time when the non-Western economies produce more than half of world GDP, for the first time since the middle of the 19th century. We had expected this to happen, but not quite so soon. The West will have to start to get to grips with the fact that we are no longer dominant and cannot expect to have things our own way," said Douglas McWilliams, CEBR's chief executive.

The think-tank predicts the West will account for just 45pc of the world economy by 2012, and expects global GDP to fall by 1.4pc this year, the first decline since 1946. The global economy will start to grow again in the second half of 2009 but will moderate in 2010 as governments embark on "fiscal retrenchment," according to the CEBR.

China will overtake Japan in 2009 to become the world's second largest economy in dollar terms, it said.

"One of the factors causing the shift in shares of world GDP is the fact that the Chinese economy has bounced back rapidly," said Jörg Radeke, economist at CEBR. "This will have knock on effects on oil and commodity prices and is one reason why we are forecasting a price of oil of $80 a barrel in 2012," he added.



Merkel attacks central banks

By Bertrand Benoit in Berlin and Ralph Atkins in Frankfurt

Published: June 2 2009 17:25

Angela Merkel, the German chancellor, criticised the world's main central banks in surprisingly strong terms on Tuesday, suggesting that their unconventional monetary policies could fuel rather than defuse the economic crisis.

The attack on the US Federal Reserve, the Bank of England and the European Central Bank is remarkable coming from a leader who had so far scrupulously adhered to her country's tradition on never commenting on monetary policy.

"What other central banks have been doing must stop now. I am very sceptical about the extent of the Fed's actions and the way the Bank of England has carved its own little line in Europe," she told a conference in Berlin.

"Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds," she said. "We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years' time."

Ms Merkel's decision to ignore one of the cardinal rules of German politics – an unwritten ban on commenting monetary policy out of respect from central bank independence – suggests Berlin is far more concerned about the route taken by the ECB than had hitherto transpired.

Berlin is concerned that the central banks will struggle to re-absorb the vast amount of liquidity they are pouring into the markets and about the long-term inflationary potential of hyper-lose monetary policies.

The ECB's efforts have been focused on pumping unlimited liquidity into the eurozone banking system for increasingly long periods. But last month (May), it followed the US Federal Reserve and Bank of England in announcing an asset purchase programme to help a return to more normal market conditions.

The ECB announced it had agreed in principle to buy €60bn in "covered bonds", which are issued by banks and backed by public sector loans or mortgages.

The covered bond purchases, however, were only agreed after extensive discussions within the 22-strong ECB governing council. According to one version of May's meeting, the council had discussed a €125bn asset purchase programme that would also have included other private sector assets, but only the purchase of covered bonds was agreed.

Axel Weber, ECB council member and president of Germany's Bundesbank, has been among those who expressed scepticism about direct intervention in financial markets. In a Financial Times interview in April he expressed "a clear preference for continuing to focus our attention on the bank financing channel".

Mr Weber has also been among the most proactive council members in warning that the monetary stimulus injected into the economy will have to be reduced or even reverse quickly once the economic situation improves.

Details of the covered bond purchase scheme will be unveiled by the ECB after its meeting on Thursday. One likely solution is that the package will be split according to eurozone countries' capital shares in the ECB, which would result in Germany accounting for about 25 per cent of the €60bn programme. Meanwhile, the ECB is widely expected to leave its main interest rate unchanged at 1 per cent, its lowest ever.

Copyright The Financial Times Limited 2009

Berlin breaks the unwritten rule

By Bertrand Benoit in Berlin and Ralph Atkins in Frankfurt

Published: June 2 2009 19:15 | Last updated: June 2 2009 19:15

It is not the first time that Angela Merkel, the German chancellor, has complained about the ultra-loose monetary policy being conducted in the Anglo-Saxon world. But when she attacked the European Central Bank on Tuesday, for its planned purchase of cover bonds – an unconventional way to help financial markets recover – Ms Merkel broke an unwritten ban on German leaders commenting on monetary policy close to home. The message, it seems, is that Berlin is more worried than people had assumed.

The chancellor is not just concerned about the long-term inflationary potential of excessive monetary loosening. Her main concern is that the expansionary fiscal and monetary policy being deployed across the industrial world to fight the economic crisis could be planting the seeds of future crises.

"We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years' time," she said after criticising European, British and US central bankers.

Like Peer Steinbrück, her finance minister, Ms Merkel has urged fellow Europeans to start working on their "exit strategies". Governments, she says, should commit now to reducing their budget deficits while central bankers should think about how to re-absorb the liquidity they're pouring into markets.

"Our most complex task," she told a conference on Tuesday, "will come once we have overcome the crisis. The question will be … can we return to a path of virtue, as far as public debts are concerned for instance."

The concerns are not new, but her strong and clear comments suggest Berlin is afraid that it may be losing the argument in the global debate about how to overcome the crisis. The evidence, in Berlin's eyes is the ECB plan, announced last month, to purchase €60bn of covered bonds.

Covered bonds, largely backed by mortgages, have suffered in the past two years because of the collapse in many European housing markets and worries about securitised products.

Perversely, her comments could have the effect of helping the ECB by offering a counter argument to the criticism heard from many economists that it has not been sufficiently responsive to the unfolding economic crisis. Since the failure of Lehman Brothers investment bank last year, the ECB taken exceptional steps to pump liquidity into the banking system – but has been more cautious than the US Federal Reserve Bank and Bank of England about asset purchase programmes.

Still, the German chancellor's attack might appear incongruous at a time when inflation pressures are easing markedly – as a result of the weakness in economic activity as well as lower energy costs compared with a year ago.

Eurozone annual inflation fell to zero in May, the lowest since at least 1991, according to official figures last week. In Germany, inflation has turned negative, with consumer prices 0.1 per cent lower in May than a year before.

The worry of German policymakers is that the inflation outlook could change quickly once a sustainable economic recovery gets under way. As such, Ms Merkel's comments could have reflected warnings she has heard from Germany's famously hawkish Bundesbank.

Axel Weber, the German central bank's president, warned in a speech in London last month that "monetary policy has created an enormous expansionary stimulus – not just in the euro area but also worldwide". The impulse it was providing would have "to be reduced or even inverted very quickly as soon as the overall situation improves", he argued.

Changes in monetary policy would take some time to take effect and there was a risk of the economy recovering more quickly than expected, Mr Weber said. "Both factors could lead to inflationary risks making a rapid and powerful comeback, and we should all be aware of this," he said – a remark that the German chancellor might have had in mind when she made her remarks on Tuesday.

Copyright The Financial Times Limited 2009


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