A series of slightly less bad economic news has been arriving from the world’s leading economies in recent days, which analysts currently attribute more to the healing abilities of governments and central banks than to the actual health of those economies, and they believe it is still too early to conclude that the worst has passed.
New indicators of activity in the industrial and service sectors around the world last week were slightly better, and there were also signs of stabilization in the U.S. real estate market, leading some economists and investors to conclude that the worst may have passed. However, a somewhat more detailed look at the state of the global economy suggests that the private sector still appears quite sick and that this quarter could be just as bad as the previous one. Public spending, as well as promises to intensify it, currently only help the global economy. The credit programs of the U.S. Fed have managed to lower mortgage rates, protected the money market from collapse, and revived some parts of the commercial credit market. Fed Chairman Ben Bernanke will be able to boast about this progress at a meeting with leaders of the Group of Seven (G7) this Friday in Rome. However, he will not bring them cheerful economic messages.
Namely, personal consumption in the U.S. has sharply fallen, as has that in most European countries and Japan. Business spending is cautious at best. Unemployment is rising. Given such a grim picture, banks continue to hesitate significantly with lending, and taxpayer money is being rapidly spent. There will be plenty of talk about this throughout the week. Specifically, the Bank of England will launch a program to purchase commercial paper from British companies, the U.S. Congress is likely to adopt an economic stimulus package worth between $800 and $900 billion, and U.S. Treasury Secretary Timothy Geithner will present ideas on how best to address the situation in the struggling banking sector.
France is expected to announce a support plan for the struggling automotive sector today, as both Renault and PSA Peugeot Citroen are announcing weak business results for 2008. Chief economist at Capital Economics, Jonathan Loynes, considers the fact that the Bank of England plans to bypass banks and directly lend to companies as perhaps “the first acknowledgment that banking operations will not normalize in the foreseeable future.” The same applies to banks in the U.S. President Barack Obama and his economic advisors realize they must urgently take action to put financial companies on stronger foundations and stimulate lending.
