ANALYSIS:With faith in markets threadbare, US central banker is expected to try to boost economy
WITH GROWING concerns about a double-dip recession, there will be much focus today on an obscure ski resort in middle America. As the world’s central bankers gather in Jackson Hole, Wyoming, for their annual think-in, expectations are high that the US central bank boss Ben Bernanke will signal additional unconventional monetary measures in an attempt to propel his economy forward.
Recent economic data have only reinforced the demand for action.
Last week, a US business confidence indicator for July was published. It caused shock waves. Its collapse, deep into negative territory, was massive and suggested that confidence among corporate executives had returned to levels last seen in February 2009 when the world economy was sliding towards depression.
It was tempting to dismiss it as a rogue result. It may well have been. But this week, two further surveys on this side of the Atlantic give reason to be concerned that sustained financial fragility has begun to batter both business and consumer confidence.
On Wednesday, Germany’s most-watched business survey of 7,000 management types’ expectations for the coming half-year registered its biggest monthly decline in July since the Ifo index went over a cliff in 2008.
While the July expectations index remained high by historical standards, the downturn last month is a sharp acceleration of a dip in progress since the spring.
This week’s EU-wide survey of consumer confidence registered an unusually large decline in August. Again, it amounted to an acceleration of a trend that has been evidence across the continent since the spring.
For Ireland, there are signs that the Euro-American slowdown is having an effect on Irish exporters.
The June trade figures published earlier this week were as good as could have been hoped for. Goods exports rose solidly month on month and remain at a high level. But the trend suggests that last year’s strong growth is running out of steam – exports for the full second quarter were down on the first quarter.
If the week ends with attention on central bankers, over most of the rest of the week it was hard to ignore some euro-zone leaders making their own crisis worse.
Finland led a charge against Greece to seek collateral on its bailout loans to the crippled Greek government. This raised further questions about Greece’s prospects of ever repaying private holders of its debt. As a result, its bond yields broke yet another new record yesterday.
Other than that, the euro area bond market enjoyed a week of unusual calm, bolstered by more constructive announcements in Madrid and Paris that greater efforts would be made to reduce very large Spanish and French budget deficits.
Remarkably, given all the uncertainty, yields on Irish bonds did better than most, continuing their month-long moderation over the course of the week. Yesterday they passed another threshold, as the yield on the 10-year fell below 9 per cent.
That brings the decline since the mid-July peak to five percentage points, pointing to a return of international faith in the Irish economy.
Next Wednesday, the Central Bank will publish monthly banking statistics. The figures include the amount held on deposit in Ireland-based banks. Previous figures showed an uninterrupted, if moderating, shrinking of deposits from September of last year to June of this year. Next week’s deposit numbers for July are likely to show that a further erosion of the banking system’s deposit base took place last month. The severity of the euro crisis in July led to a flight to safety generally, and the Irish banks were almost certainly victims of that.
But if the figures show that the deposit base did not fall, it would be a powerful piece of evidence, adding to bond market developments, of light at the end of the tunnel.
