90 seconds at 9 am: 'Too slow for too long': IMF

IMF downgrades global growth again, warns EU on Greece; too much wheat but iron ore prices rise; Aussie confidence improving; UST 10yr yield 1.77%; oil up, gold flat; NZ$1 = 69.1 US¢, TWI-5 = 71.9

13th Apr 16, 7:12am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news a broad-based economic recovery in Australia may be occurring.

But first the bad news. The IMF warned overnight of the risk of political isolationism, notably Britain's potential exit from the EU, and growing economic inequality as it cut its global growth forecast for the fourth time in a year. It is particularly worried about the impact on emerging economies and a sharp fall in capital inflows. It is less worried about 'advanced economies' where it has left its growth forecasts unchanged.

It also wants Greece's European partners to grant Athens substantial relief on its debt which it sees remaining "highly unsustainable", according to a draft IMF memorandum seen by Reuters.

There are mixed signals in commodity markets. Record global wheat stockpiles may be even larger than expected, as China cuts back on use and the EU harvests a bigger crop, a USDA report showed. However, iron ore surged toward US$60/tonne, climbing to the highest level in a month, as purchases from steel mills in China picked up amid improving profitability.

Credit conditions in Asia-Pacific deteriorated in the first quarter of 2016 compared to the last quarter of 2015, Standard & Poor's Ratings Services said in a report.

In Australia, business confidence is improving quickly. It improved significantly last month indicating a broad based economic recovery may be underway. The NAB's closely watched monthly business survey reported conditions in March lifted to their highest level since 2008, while confidence jumped back to its long term average.

In New York the benchmark UST 10yr yield is higher today at 1.77%.

The oil price is rising as well. It is now over US$42/barrel in the US, while Brent is now just under US$45/barrel. These are the highest levels we have seen in 2016. More talk of an OPEC output freeze is the cause, although the oil glut shows no sign of ending.

The gold price is basically unchanged however at US$1,257/oz.

And finally, the NZ dollar starts today right at the top of its recent range having risen overnight to 69.1 US¢ on a weaker greenback, at 90.1 AU¢, and at 60.7 euro cents. The TWI-5 index is now at 71.9.

If you want to catch up with all the local changes yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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26 Comments

by Roger Witherspoon | 13th Apr 16, 7:50am 1460490641

What is really going on in Aussie? Is the Ponzi housing scheme breaking down as lending slows? This is by Jonathan Tepper's research outfit:

https://blog.variantperception.com/2016/04/06/aussie-housing-finance-ro…

An older article is also relevant:
https://blog.variantperception.com/2013/11/18/morbidly-obese-australian…

Click on the charts and they expand rather pleasingly.

by Stephen Hulme | 13th Apr 16, 8:39am 1460493560

One could surmise a cash-flow deficit precludes further heaping of debt upon debt.

It's no different in the stock market.

Aggressive monetary policy in the form of QE and zero or negative interest rates is all about encouraging (forcing?) borrowers to take on more and more debt in an attempt to boost economic activity, effectively mortgaging future growth to compensate for the lack of demand today. Read more

Unfortunately, the requisite demand from tomorrow never arrives. Read more

by David George | 13th Apr 16, 9:56am 1460498177

What is really going on in Oz should be ringing the alarm bells but of course nothing could possibly go wrong in "the lucky country".
Any bump in confidence or drop in unemployment is celebrated as the Aussies God Given Right or the result of their shear brilliance and hard work. The truth is that they've managed to develop the second highest household debt in the world at 124% of GDP and that propensity to create money through debt is the real "backbone" of the Oz economy.

From Phil Soos:
"To boost the bubble, government has engineered a variety of irrational policies, namely deregulation of the FIRE sector, the Big Four banks’ too big to fail status, first home owner programs and massive tax leakages. The role of government at all levels has been to act contrary to the interests of housing affordability, corrupted by the reemergence of the rapacious FIRE sector since the late 1960s."

"the colossal corporate welfare state that has spiralled out of control, concentrated in the FIRE sector. The economy has been regressively transformed by neoliberal interests into a haven for unproductive parasitic rentiers."
https://independentaustralia.net/business/business-display/the-road-to-…

by Stephen Hulme | 13th Apr 16, 10:39am 1460500785

Yes, the central bank (RBA) has much to answer for amongst other regulators with challenged Nelsonian eyes.

Germany has realised the costs to it's society imposed by failed ECB ideology and government representatives are starting complain in evermore strident tones.

The European Central Bank's record low interest rates are causing "extraordinary problems" for German banks and pensioners and risk undermining voters' support for European integration, Finance Minister Wolfgang Schaeuble told Reuters.

But the veteran minister said it would be wrong to blame the ECB entirely for this situation, stressing that central banks alone should not be relied on to restore economic growth and calling instead for Europe to press on with structural reforms.

Politicians from Chancellor Angela Merkel conservative camp, to which the finance minister belongs, have complained the ECB's ultra-low rates are creating a "gaping hole" in savers' finances and pensioners' retirement plans as returns have dropped.

Schaeuble suggested they risked fuelling the rise of euroscepticism in Germany, where voters flocked to the right-wing Alternative for Germany in state elections last month. Read more

I guess paying better than survival wages to revive inflationary impulses is assured in the not too distant future to head off nation wide support for fascism.

by Roger Witherspoon | 13th Apr 16, 12:04pm 1460505841

It is rather ironic that the French bureaucratic wet dream of a "European" (ie French) Empire has fallen foul of their attempt to steal the German currency from the German people.

by Stephen Hulme | 13th Apr 16, 11:04am 1460502296

This debacle is beyond ironic, if the true intent was to take Russia out with lower crude prices.

by Roger Witherspoon | 13th Apr 16, 12:55pm 1460508919

The story of wheat and oil and the collapse of empire is a long one. For those who think the Soviet Empire collapsed because of popular uprising in Eastern Europe:
http://www.aei.org/wp-content/uploads/2011/10/20070419_Gaidar.pdf

Putin looked on in dismay as the Berlin Wall fell and the order to shoot failed to come through.

by PeterPen | 13th Apr 16, 7:48am 1460490500

Politically motivated IMF scaremongering re "Brexit" is a key event for New Zealand? What nonsense. A Brexit would be a powerful reassertion of democracy and rule of law in the face of an dictatorial, oligarchic, Socialist EU that is ruining Europe. A Brexit would be a major boost to the world economy.

Strange though that the Merkel immigration lunacy, bringing a million+ Muslim illegals into the EU's central economy within half a year is not worth a mention at "interest" since it started in September 2015. Not a key event for New Zealand, I guess, when terrorism, social division and political polarization are brought onto Europe by a misguided politician following Soros think tank policies. I supposed we are not to know, or else we might get a bit upset when Key and his Chinese friends join into the nation wrecking effort.

by head_down_bum_up | 13th Apr 16, 8:18am 1460492287

How would it boost the world economy? What is the plan if brexit happens? Once announced, you have 2 years to leave the EU and in that time attempt to establish trade agreements with a continent you just gave the middle finger to.

by PeterPen | 13th Apr 16, 8:44am 1460493846

What a simplistic view. So Switzerland, having shown the "middle finger" to the EU for decades is being punished for it? Bs. Switzerland is a prosperous, stable and well managed country because it is not part of the EU and the EU is not "punishing" it. What interest would anyone have to create trouble after a Brexit, I mean grown-ups who do not think in terms of showing each other fingers.

If the Brits leave the Socialist EU, others might follow and form a more effective group of nations that would also put pressure on the EU to improve on its mismanagement. Competition is good for everyone. Communism under an inapt EU central government is not.

by head_down_bum_up | 13th Apr 16, 9:18am 1460495890

It's a simplistic view because I'm asking a simple question. Switzerland has negotiated its own agreements with the EU and that took years upon years. And whilst they did vote a few years back to remove/limit the freedom of movement by foreigners that has still not been implemented and doing so could bring all other existing agreements in to the spot light as they are all linked, as they refer to it the 'guillotine clause'.

My question, and genuine question, is what does brexit look like when that 2 years is up and the UK has to leave. I doubt anyone will have interest to create trouble, but do you genuinely expect trade agreements to be in place within 2 years? And do you expect those will also give the UK the restrictions on migrants and freedom of movement that are being advertised so heavily?

by PeterPen | 13th Apr 16, 9:58am 1460498326

A Brexit would rightly and severly diminish the standing of the EU. The EEA (European Economic Area) is an existing extension of the EU which contains non-EU countries like Switzerland and Norway and effectively operates like a free-trade zone, but with no political strings attached. What would stop all parties involved to simply relegate the UK into EEA status?

Lengthy negotiations about free trade processes that already exist are not in anyone's interest and not to be expected.

What you refer to are non-trade issues, e.g. migration. They may take longer to negotiate but are also no priority. I am sure a civilized solution can be found.

Btw, if there is a Brexit, I could imagine Denmark, and maybe some Eastern Europeans to leave the EU and start a new, market-oriented union without a centralized Socialist-style Brussels Commission bossing everyone around and degrading democratic principles.

by head_down_bum_up | 13th Apr 16, 10:24am 1460499849

Negotiations are always lengthy, that is why they are negotiations. Whilst migration or freedom of movement is a non-trade issue, it is so intertwined with any trade based agreement that you cannot ignore it. EU/ EEA/ EFTA all subscribe to the same principal of freedom of movement. You can't expect the UK can get the trade deal it wants without concessions in this area.

Switzerland is not part of the EEA. Perhaps have a read of the link below. Joining the EEA would still require the UK to adopt EU laws, to still be part of the freedom of movement as that is core to the EEA agreement in itself, and to still contribute financially to the EU - this rather specific line from the link below...

"The EEA countries that are not part of the EU do not bear the financial burdens associated with EU membership, although they contribute financially to the European single market. After the EU/EEA enlargement of 2004, there was a tenfold increase in the financial contribution of the EEA States, in particular Norway, to social and economic cohesion in the Internal Market (€1167 million over five years). Non-EU countries do not receive any funding from EU policies and development funds."

https://en.wikipedia.org/wiki/European_Economic_Area#Rights_and_obligat…

Thinking that other countries would also leave the EU and could create an alternative EU as you suggest would in its own right take decades. You may also have to consider the possibility of Scotland conducting another referendum to leave the UK and join the EU if their voter numbers suggest strong support.

And my initial question still goes unanswered...how would the UK leaving the EU be good for the world economy?

by PeterPen | 13th Apr 16, 10:39am 1460500769

Congratulations, Switzerland is only part of EFTA, not EEA. The point remains the same. There are enough EU association construction to pick from and nobody will have an interest in showing fingers.

You only need to read to get your question answered. A Brexit would reaffirm democracy and the rule of law and get a sizable economy (and maybe others) out of the orbit of an inefficient Brussels central administration. This would free and reinvigorate the British economy and force the EU to lift its game to prevent further deterioration. This would be excellent for Europe and the world.

I dont know why you think that the status quo is the only option. Why so dogmatic.

by head_down_bum_up | 13th Apr 16, 10:54am 1460501687

I don't care about the status quo, I have no vested interest in Brexit. I see it as a strong likelihood, but saying it will 'free and reinvigorate' the UK economy is not an answer. In all honesty, it is fluff, padding that is added to an answer to help convince the audience of a truth.

Whether it reaffirms democracy is not the question, whether Brussels, in your view, is inefficient is not the question, Brussels lifting their game (whatever this really means) is not the question.

The question is how will it be good for the world (even just the UK) economy? How will it be 'freed'? What about Brexit will 'reinvigorate' the UK economy?

by PeterPen | 13th Apr 16, 11:13am 1460502806

I think at the end of the discussion you would probably ask me for a definition of the words "do" and "be". Sorry, but you have to do some thinking of your own here. We cannot to back to Adam and Eve. Hint: market-oriented democracies have created the world economy, Socialism certainly has not. You want me to put numbers on that :-) ? Papers by academics calculating some trillion here or there in terms of the value of free market democracies vs Socialist central states? Kidding.

I dont think pig headedness represents a contribution to a discussion and the "audience" do understand that.

by head_down_bum_up | 13th Apr 16, 11:39am 1460504347

C'mon, no need for that - they are pretty straight forward questions...how is it pigheaded to try to get a straight answer? Surely as someone who appears to be wanting the UK to leave you would have weighted up the pros and cons of each with more facts than opinions, right?

I can make a statement on brexit, but the point is that both are made up to serve a point of view with no real factual basis. Reading articles on leave/remain has been disappointing to say the least. Here I was hoping for some objective information.

Brexit will be the death of the UK economy and send it in to a spiral of further austerity and hardship for many years to come not to mention severe political instability.

Brexit will allow the UK to develop into an economic and manufacturing power house that can service the world while retaining its much envied financial hub.

by murray86 | 13th Apr 16, 11:35am 1460504137

I'm sorry but I agree with Peter. The EU is an extension of Milton Friedman's economic theories and these are destroying democracy slowly but surely. Brexit would reinforce democracy, but on its own is insufficient. Balanced Government regulation, which the UK needs (just as we and most other countries), must also occur to stop the decline.

by Stephen Hulme | 13th Apr 16, 8:24am 1460492681

The IMF warned overnight of the risk of political isolationism, notably Britain's potential exit from the EU, and growing economic inequality as it cut its global growth forecast for the fourth time in a year.

The same outfit that forecast growth as far it could forecast not so long ago.

Back in 2006, the IMF saw no reason why the boom could not go on for ever. Its flagship half-yearly World Economic Outlook expected activity to keep humming along. It saw no sub-prime crisis, no collapse of Lehman Brothers, no Great Recession.

Unbridled optimism has now been replaced by deep pessimism. The IMF has started to buy into the theory – espoused by Larry Summers, the former US treasury secretary, and others – that the world is sinking into secular stagnation. That’s a state of affairs where demand is not robust enough prompting permanently low growth and deflation. Read more

"Secular stagnation" is described thus, The key to understanding this situation lies in the concept of secular stagnation [5], first put forward by the economist Alvin Hansen in the 1930s. The economies of the industrial world, in this view, suffer from an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest. The result is that excessive saving acts as a drag on demand, reducing growth and inflation, and the imbalance between savings and investment pulls down real interest rates.

But we know this is not a fact since the BoE claimed: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits"

It's all inexplicable nonsense other than the fact mortgages are growing while the means to pay them off are not.

by PeterPen | 13th Apr 16, 8:52am 1460494370

The IMF, run by Madame Lagarde who is - incidentally - being investigated for corruption simply serves the interests of the political and financial oligarchy of the "West". And it is not even particularly creative about it. OECD, G7, G20, IMF, World Bank, EU etc are all the same: debt is good, money printing is good, blowing asset bubbles is good, illegal immigration is good. Democracy (cf. Dutch referendum last week) is bad, patriotism is bad, white people (minus the high priests of those institutions) are bad, and so on.

I wish "interest" would pick up a bit more on what moves the world, beyond silly OCR rates or IMF statements. A big part of the asset bubble in NZ has to do with wanton money printing by central planning banks globally, and not just the greed of baby boomers or Chinese empire builders.

by workingman | 13th Apr 16, 9:54am 1460498041

Powerful points, PeterPen. The foundational problems are the blind search for economic growth, at any cost, and for security for mountains of debt, no matter how unrealistic.

Together these interlinked issues are turning political systems and their financial masters worldwide into a vast wrecking ball. Political integrity, supportive social structures, the value of money, individual and family security for the coming generation, and much else, are all being hammered.

Brexit, to my mind, isn't capable of doing half the damage already consequent on current leadership thinking.

by PeterPen | 13th Apr 16, 10:06am 1460498814

Exactly. In my life-time I have not lived through a more destructive period than the past 10 years. We live in an oh-so-handy perma-crisis which is purported to be resolved by the same personel that created it in the first place but actually only used to make those people wealthier and more powerful.

Yes, the EU and similar inhumane institutions have created a degree of social disintegration in our societies that no Brexit can beat.

by dictator | 13th Apr 16, 10:22am 1460499745

Over the past few thousand years tricking people into taking on unsustainable debt has been an effective method for breaking down social constructs and enslaving people. Those people, communities and countries taking on unsustainable debt are causing themselves considerable harm.

All the interest that people are paying are inflating finance industry profits at the expense of the rest of the economy. On an individual level people are punishing their future self by spending their future earnings now. It's horrible to see and the only country that seems to approach personal finances in a sensible fashion is Germany. Although despite the debts being taken on in the US there are a lot of individuals taking action to eliminate debt.

by PeterPen | 13th Apr 16, 10:46am 1460501202

Note that the Germans are now forced out of their financial caution by the ECB mafia and its zero interest rate policy. Even in Germany a real estate bubble is brewing now because people do not know any more how to get a return otherwise.

The German model is done, the speculator model has won - and is quickly destroying our civilization. Flooding Germany with Muslim illiterates will finish it off altogether, eliminating the last competitor to the speculator model - and accelerate our descent into a new age of barbarity.

by Roger Witherspoon | 13th Apr 16, 10:34am 1460500442

The Brexit drama is certainly entertaining. The poor dumb Brits don't seem to realise that they have the institutions to create a brilliant free trade zone based on the rule of law based on concepts of fairness. England is really a Scandinavian trading/banking/manufacturing/naval country.

The US and EU (ie Germany and France) do not want any competition and will make sure it gets shut down.

by PeterPen | 13th Apr 16, 10:52am 1460501528

I also think that the Brits do not need the EU, but will be scared into staying in the loser club nonetheless.

With Germany clearly beyond its peak and France a basket case, a strong UK could have stopped the decline of Europe. With the UK staying in the EU the demise of Europe as global player is a certainty.