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Bulletin Issue 11 : June 2015 www.integrafinancial.co.uk
This Month : Battling the recession
 

Welcome to our Latest Bulletin!

Dear Client,

We hope this bulletin will keep you up-to-date with topical financial matters that can directly affect you… and your money!

Slaying the financial dragon

Financial crisis

THE struggle has been long and difficult. But looking across the battered economies of the rich world it is time to declare that the fight against financial chaos and deflation is won.

In 2015, the International Monetary Fund says, for the first time since 2007 every advanced economy will expand. Rich-world growth should exceed 2% for the first time since 2010 and America’s central bank is likely to raise its rock-bottom interest rates.

However, the global economy still faces many hazards, from the Greek debt saga to China’s faltering economy. Few economies have ever gone as long as a decade without tipping into recession—America’s started growing in 2009.

Sod’s law decrees that, sooner or later, policymakers will face another downturn. The danger is that, having used up their arsenal, governments and central banks will not have the ammunition to fight the next recession. Paradoxically, reducing that risk requires a willingness to keep policy looser for longer today.

The good news comes mainly from America, which leads the world’s richest economies. Its unexpected contraction in the first quarter looks like a blip, owing a lot to factors like the weather. The most recent data, including surging vehicle sales and another round of robust employment figures, show that the pace of growth is rebounding.

In other parts of the rich world things are also looking up. In the euro zone unemployment is falling and prices are rising again. Britain’s recovery has lost a bit of puff, but strong employment growth suggests that expansion will continue. Japan roared ahead in the first quarter, growing by 3.9% at an annualised rate. A recovery so broad-based and persistent is no fluke.

America's Economy : a health check

USA healthcheck

Inevitably fragilities remain. Europe is deep in debt and dependent on exports. Wage growth could quickly dent things in America. Emerging economies, which accounted for the bulk of growth in the post-crisis years, have seen better days. The economies of both Brazil and Russia are expected to shrink this year. Poor trade data suggest that Chinese growth may be slowing faster than the government wishes.

If any of these worries causes a downturn the world will be in a rotten position to do much about it. Rarely have so many large economies been so ill-equipped to manage a recession. Rich countries’ average debt has risen by about 50% since 2007. In Britain and Spain debt has more than doubled. Nobody knows where the ceiling is.

Monetary policy (the government’s ability to control thy Economy by raising or lowering interest rates) is yet more cramped. The last time the Federal Reserve raised interest rates was in 2006. The Bank of England’s base rate sits at 0.5%. Records dating back to the 17th century show that, before 2009, it had never fallen below 2%; and futures prices suggest that in early 2018 it will still be only around 1.5%. That is healthy compared with the euro area and Japan, where rates in 2018 are expected to remain stuck near zero. When central banks face their next recession, in other words, they risk having almost no room to boost their economies by cutting interest rates. That would make the next downturn even harder to escape.

The logical answer is to get back to normal as fast as possible. The sooner interest rates rise, the sooner central banks will regain the room to cut rates again when trouble comes along. The faster debts are cut, the easier it will be for governments to borrow to ward off disaster. Logical, but wrong.

Raising rates while wages are flat and inflation is well below the government’s target risks pushing economies back to the brink of deflation and precipitating the very recession they seek to avoid. Better to wait until wage growth is entrenched and inflation is at least back to its target level. Inflation that is a little too high is a lot less dangerous for an economy than premature rate rises are.

An economy at full employment and with a healthy level of inflation will be better positioned to withstand a bout of financial instability than one that is flirting with deflation.

The Best Defence

Governments can also do their bit. There has still been little growth-boosting investment in infrastructure. Governments should instead direct their energies towards overdue reforms to product and labour markets. Open product markets encourage enterprise. The freedom to hire workers under flexible contracts is the best way to keep people out of unemployment. Both reforms make an economy better able to cope with the next shock.

Having fought off the effects of the financial crisis, governments and central banks are understandably eager to get back to normal. The way to achieve their goal is to allow the recovery to gather strength first.

Sepp Blatter - Done to Death

FIFA

You can scarcely have opened a newspaper or turned on a television recently without seeing the grinning features of FIFAs corrupt Chief Sepp Blatter.

Whilst there is undoubted concern that surrounds one of the World’s Leading Sporting Bodies we thought you might enjoy this short clip from earlier this year when Mr Blatter visited the Oxford Union.

Click here to see the video clip.


regards, Jeremy Hill
  www.integrafinancial.co.uk

 

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Integra Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 612749). Registered in England & Wales at 1 Summerwood, Charters Road, Sunningdale, Ascot, Berkshire, SL5 9SQ. Company Registered Number - 6390466