Relief over Scotland gives way to 'Great Stagnation' worries

September 21
8:40 AM 2014

Scotland's rejection of independence and a lack of any fireworks at a Fed meeting last week have calmed investors enough to shift the focus back to what some call the "Great Stagnation", and how to avoid it.

The Group of 20 leading nations, meeting at the weekend, said they were tantalizingly close to adding an extra $2 trillion to the global economy and creating millions of new jobs.

But Europe's extended stagnation remains a major stumbling block and some big emerging economies are flagging too.

Brazil is expected to revise down its growth rate just three weeks before a presidential election, Russia is mired in economic sanctions over Ukraine, and China's weak data is partly responsible for the 15 percent fall in the price of Brent crude since early July.

Investors will be watching to see how long OPEC is willing to accept oil prices below the $100-a-barrel mark.

A common G20 concern is the risk of Europe's malaise pulling others down. U.S. Treasury Secretary Jack Lew cited "philosophical" differences with some of his counterparts in Europe, especially on the need for near-term stimulus.

However, "markets are spared one major source of political and economic uncertainty," Jorg Kramer, chief economist at Commerzbank, said of Scotland's decision to vote against independence in last week's referendum.

Sterling touched a two-week high against the dollar and a two-year peak against the euro on the result. Global stocks were lifted by the news from Scotland, as well as by the U.S. Federal Reserve's assurances last week that interest rates will remain near zero for a considerable time.

Fed Chair Janet Yellen suggested that despite an end to the U.S. bond-buying stimulus next month, the era of easy money is not yet over. But she also indicated the Fed could raise borrowing costs faster than expected when it starts moving.

While the underlying trend in the U.S. economy is one of strengthening growth, euro zone data out this week is unlikely to point to much of a pick-up.


In April-June, the euro zone economy's recovery stalled and Italy slipped into recession for the third time since 2008, underlining Europe's struggle to recover from the financial crisis, in what is often referred to as the Great Recession.

While U.S. growth has since accelerated, many European economies are now at risk from what investment banks such as Goldman Sachs have called the 'Great Stagnation'.

G20 host Australia put stuttering global growth at the center of the meeting of finance ministers and central bank governors in the tropical resort of Cairns at the weekend.

"Back in 2011, we identified five countries in stagnation," said economist Jose Ursua, naming Canada, France, Italy, New Zealand and Portugal. "Fast-forward to today and most of the economies that were stagnating still are."

Given the weakness across the euro zone, the German Purchasing Managers Index (PMI) data and the Munich-based Ifo's business climate index for September will give a sense of whether confidence is stabilizing in Europe's biggest economy.

Business morale dropped for a fourth straight month in August as concerns about the Ukraine crisis and the impact of EU and U.S. sanctions against Russia depressed the mood in corporate boardrooms across Germany.

PMIs will also be published for France and the euro zone.

The euro zone's economic sentiment indicator for September later in the week will give a fuller picture of just how much governments and the European Central Bank need to do to revive the economy and stave off deflation.

The low take-up at last week's first round of cheap four-year loans offered by the ECB has deepened doubts about its stimulus efforts and could push the central bank to take more radical measures, although resistance remains in Germany to a U.S.-style money-printing program.

ECB President Mario Draghi testifies at the European Parliament on Monday and visits Lithuania on Thursday.


Output from China's vast factories cooled to a three-month low in August. The manufacturing PMI for September will test the view among some investors that the recent slowdown will pass.

Other major emerging market central banks hold monetary policy meetings and release crucial data during the week.

The Turkish central bank, which meets on Thursday, has come under political pressure to cut its overnight rate but that could stoke already high inflation.

Hungary last month ended a two-year period of cutting interest rates every month, leaving them at a record low. The central bank, which meets on Tuesday, says it will remain on hold until the end of next year, unless inflation jumps.

Brazil's central bank will publish its September inflation report during the week and is expected to revise down its forecast for growth in the world's seventh-largest economy to close to 0.5 percent.

Brazil fell into a recession in the first half of the year as investment dropped sharply and the hosting of the World Cup suffocated economic activity, a major blow to President Dilma Rousseff's already fading hopes for re-election.

Some investors are hoping the Oct. 5 election will end the interventionist policies of the ruling Workers' Party that they blame for undermining growth.

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