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1. Fighting the Fed

Publication Date:
08-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
Since the US Federal Reserve signalled that a turn in the interest rate cycle may be on the horizon, UK and to a lesser extent Eurozone interest rates have tracked US rates higher. But the UK and Eurozone economies are less well placed than the US to cope with higher interest rates. Simulations carried out on our Global Economic Model show that higher rates would be particularly harmful to the UK economy's embryonic recovery. In an attempt to stem the rise in interest rates, the Bank of England and the ECB have introduce forward guidance but with little, if any, success. Markets do not seem convinced by the Bank of England's commitment to forward guidance and are testing its resolve. It seems likely that over time both central banks may have to strengthen their forward guidance, in the case of the Bank of England by augmenting it with further quantitative easing.
Topic:
Economics, Markets, Monetary Policy, and Financial Crisis
Political Geography:
United States, United Kingdom, and Europe

2. If the Fed threshold changes

Publication Date:
08-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
At the end of last week, there were rumours that the Fed may change its unemployment threshold from 6.5% to 6%, either at its 30-31 July meeting or, perhaps more likely, at its 17-18 September meeting. Such a move would confirm that the Fed funds rate is likely to remain in its current 0-0.25% range until 2015, which is in line with our baseline scenario. But while the change would be an acknowledgement that the US labour market has performed more strongly than expected, the change – if implemented – could still be a mistake as it may erode the value of forward guidance by moving the goalposts.
Topic:
Economics, Markets, Labor Issues, and Financial Crisis
Political Geography:
United States

3. Draghi's "Whatever it takes" speech was turning point in euro crisis

Publication Date:
07-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
Mario Draghi's commitment a year ago to do “whatever it takes” to save the euro looks to have been an important turning point in the Eurozone crisis. Systemic risk has fallen, the euro has strengthened, spreads on peripheral debt have narrowed and bond and equity markets have become less sensitive to bad Eurozone news flow. Indeed, to date markets seem to have taken Draghi at his word and seem unwilling to test his resolve. But although confidence in the outlook for the Eurozone among investors has risen over the past year, the real economy is yet to emerge from recession. We continue to expect this to happen in the second half of this year, a view supported by this week's improvement in the PMI data. However, unless action is taken to reduce borrowing costs paid by households and companies in the peripheral economies, the recovery will be anaemic. With that in mind, the ECB's announcement that it will ease its collateral rules only marginally is disappointing.
Topic:
Economics, Markets, Monetary Policy, and Financial Crisis
Political Geography:
Europe

4. US recovery on track

Publication Date:
07-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
Recent US data have been uneven. An improving manufacturing ISM survey was offset by non-manufacturing data being worse than expected. Last week a strong consumer credit number was balanced by weaker small business confidence. The US economy almost certainly went through a soft patch in Q2. However, on balance the recovery–unexciting as it has been–remains on track, with some possible further mileage to be had from equities. This is consistent with the recent dovish statement by Fed Chairman Bernanke, suggesting that the tapering of quantitative easing is still some way off.
Topic:
Economics, International Trade and Finance, Markets, Global Recession, Labor Issues, and Financial Crisis
Political Geography:
United States

5. Our bond market, your problem?

Publication Date:
06-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
Comments from the US Federal Reserve aimed at signalling that monetary policy cannot stay at historically low levels indefinitely have caused bond yields and credit spreads to rise both in the US and abroad. Higher borrowing rates are particularly inappropriate for the Eurozone which, unlike the US, is still struggling to emerge from recession. This tightening of financial conditions will place pressure on the ECB to act. Although surveys show that investors' bearishness on US government bonds is at an extreme level, suggesting that in the coming weeks bond yields are more likely to fall than rise, the longer-term trend in bond yields is now upwards. But we do not expect the rise in yields over the next two or three years to kill off the US recovery. Consequently, we believe that the US equity market is still on an upward uptrend, albeit one that will experience regular spikes in volatility as the Fed gradually moves away from its ultra-loose policy.
Topic:
Economics, International Trade and Finance, Markets, Monetary Policy, and Financial Crisis
Political Geography:
United States and Europe

6. Faster taper – limited impact

Publication Date:
06-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
Markets took fright after Ben Bernanke's press conference on 19 June at the prospect of an early end to QE. Bond purchases might be tapered off sooner, as the Fed now expects unemployment to fall to its target of 6.5% next year rather than in 2015. It is not yet clear whether any of the bonds bought as part of QE will eventually be sold off. While it is obvious that an end to the Fed's purchases will have an impact on output growth and asset prices, our Global Economic Model shows that the effects will be limited.
Topic:
Markets, Global Recession, Labor Issues, and Financial Crisis
Political Geography:
United States

7. UK housing market: bellows to a bubble?

Publication Date:
06-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
The housing market is recovering, according to recent price and activity data. Post-crisis price corrections were smaller in the UK than in the US and much of Europe, and demand is now being bolstered by the government's Funding for Lending and Help to Buy schemes. This has given rise to some worries that the UK is in danger of inflating another house price bubble. While housing supply is very tight, we are not convinced that these schemes will have enough impact on demand to cause prices to take off.
Topic:
Economics, Markets, Monetary Policy, and Financial Crisis
Political Geography:
United States, United Kingdom, and Europe

8. The case for rising US corporate capex

Publication Date:
05-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
Shifts in financial balances between sectors of the economy are worth watching because they can signal broader cyclical changes. The US household financial balance turned negative in Q1. But that was mainly due to distortions in income related to tax increases in 2013. Taking the average of Q4 2012 and Q1 2013, households still have a positive balance. More importantly, the conditions are in place for a rise in capital expenditure (capex) by the corporate sector. This would allow both household and public sector savings to increase. It would also mean an upside risk to our main scenario for the US economy.
Topic:
Economics, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
United States

9. Country Economic Forecasts: Thailand

Publication Date:
05-2012
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
GDP expanded by 11% on the quarter in Q1 in seasonally adjusted terms, recovering strongly after contracting by more than 10% on the same basis in Q4 when flooding decimated the manufacturing sector. But compared with a year earlier, the economy expanded by just 0.3% in Q1, illustrating the scale of the catastrophe.
Topic:
Economics, International Trade and Finance, Markets, Foreign Direct Investment, and Financial Crisis
Political Geography:
Thailand and Southeast Asia

10. Country Economic Forecasts: Czech Republic

Publication Date:
05-2012
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
GDP fell by a larger than expected 1% on the quarter in 2012Q1 according to initial data released in mid-May. As a result, we now expect GDP will fall 1.1% in 2012. On the political side, the government has avoided a snap election by surviving a confidence vote on 27 April. However, it will find it harder to stick to its austerity plans as its majority was weakened by the vote. Under current policies, we now expect the fiscal deficit to rise to 3.6% of GDP in 2012 from 3.1% in 2011 due to the weakness of the economy.
Topic:
Democratization, Economics, Government, International Trade and Finance, Politics, and Financial Crisis
Political Geography:
Czech Republic

11. Spain's fiscal targets should be eased

Publication Date:
01-2012
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
The Spanish government has announced that the fiscal deficit for 2011 may be even worse than expected, perhaps even exceeding 8% of GDP. In response to this overshoot, the authorities have so far announced additional spending cuts and tax rises amounting to €15bn. But fiscal tightening will have to be even more severe if the government wants to meet its 4.4% of GDP deficit target for 2012.
Topic:
Debt, Economics, Government, Monetary Policy, and Financial Crisis
Political Geography:
Spain

12. The Fed moves to provide more transparency

Publication Date:
01-2012
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
The Federal Reserve has taken additional actions to make its monetary policy more transparent to markets. The latest moves include the release of FOMC members' expectatins for the federal funds rate at the end of each of the next few years and in the longer term. Another is an statement of strategy for meeting its dual mandates of price stability and full employment. Although the statement included an explicit target for inflation but not for unemployment, the equal weights given to each goal afford the Fed more discretion in setting monetary policy.
Topic:
Economics, Government, Global Recession, Monetary Policy, and Financial Crisis
Political Geography:
United States

13. Eurozone finally agrees a deal but uncertainties remain unresolved

Publication Date:
11-2011
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
After protracted negotiations, Eurozone leaders finally agreed on a new package of measures last week. The outline deal has a three-pronged approach aimed at tackling the main aspects of the crisis: reducing Greece's debt burden, avoiding a credit crunch by recapitalising European banks, and preventing contagion to other countries via a boost to the EFSF.
Topic:
Debt, Economics, Markets, Regional Cooperation, and Financial Crisis
Political Geography:
Europe and Greece

14. Are the advanced economies facing a lost decade?

Publication Date:
07-2011
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
Recent weeks have seen a slew of weaker-than-expected data releases from the major economies, raising doubts about whether the expansion in the developed nations is sustainable. One reason for the apparent loss of momentum has been the moderation of growth in the emerging markets, as central banks have tightened monetary policy in response to rising inflation. The weakening trend in growth indicators can also be linked to temporary adverse factors, including supply chain disruptions form the Japanese earthquake and tsunami, as well as the sharp rise in oil prices earlier this year.
Topic:
Economics, Globalization, International Trade and Finance, and Financial Crisis
Political Geography:
Japan

15. Balancing growth and stability in EU financial reform

Publication Date:
05-2011
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
The financial crisis has forced a reappraisal of the regulatory architecture, globally and in the EU and its member states. Around the world, policymakers are proposing significant changes to rules governing the financial sector, with the goal of making the financial system more resilient. Given the large and visible costs of financial instability for Europe, it is natural for European policymakers to make the avoidance of financial crises a high priority. But it is also important to recognise that regulation carries a range of costs that can dilute the economic benefits of a competitive and dynamic financial services sector. The academic literature has robustly established that financial development is not only the consequence of economic growth but also a driver. If the EU is to achieve the ambitious goals for unleashing private enterprise and creating jobs set out within the Europe 2020 agenda, then it cannot afford to overlook the role of the financial system in fostering innovation and growth. As supervisory authorities consider a broad set of proposals to strengthen the regulatory infrastructure, a n important quest ion that arises is how to assess the aggregate impact of these various measures. Although each may look sensible in isolation, they could still impose a larger - than - expected burden on the financial system when take n in the aggregate. The focus of policy reforms should be on forcing financial institutions to internalise the social costs of their risk - taking decisions rather than suppressing financial innovation. Credible policies to allow the failure of financial institutions would encourage market monitoring of risk - taking, reducing the need for additional prudential regulation and minimising costs to the taxpayer in the event of bankruptcy. Policymakers should aim to put in place an objective, sustainable and flexible regulatory regime, as the design of the regulatory framework will play a significant role in the future development of both the financial industry and the wider economy. International consistency in the regulatory reform agenda is also important so as not to risk fragmentation of global capital markets, which bring significant economic benefits to companies and consumers alike. The economic and social purpose of financial markets is the efficient allocation of capital, and the regulatory agenda must be framed around this goal. At a time when the European economy is struggling to recover lost ground, changes to the regulatory regime should not unduly restrict the potential of the financial sector to contribute to the continents future prosperity.
Topic:
Development, Economics, Globalization, International Trade and Finance, and Financial Crisis
Political Geography:
Europe

16. Is the recovery sustainable in the US and Europe?

Publication Date:
02-2010
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
Following the worst recession since the 1930s, the US, UK and Eurozone economies have all now returned to positive growth. With the boost from policy stimulus and the inventory cycle peaking, however, this raises questions about the sustainability of the current rebound. The analysis presented here suggests that the recoveries in both the US and Europe will be relatively muted compared to recent historical experience. The US is likely to be the growth leader, reflecting the more dynamic nature of its economy and financial sector. A key uncertainty relates to how labour markets will perform during the recovery phase. To date, the rise in US unemployment been particularly severe when compared to the experience of Europe. In light of the sharp falls in European productivity, we expect employment gains in Europe to be more muted in the recovery phase than in the US. The performance of residential real estate markets also remains important. Home prices in the US are now close to fair value by most metrics, suggesting that the correction in prices is likely to be bottoming out. In Europe, only Spain and Ireland appear to be in the midst of substantial housing market corrections. Commercial real estate markets are also facing ongoing corrections in many countries. While conditions in the US and Eurozone may deteriorate further, commercial property values appear to be stabilising in the UK following earlier sharp declines. The ability of the banking sector to finance the economic recoveries in the US and Europe remains a key risk to the growth outlook. As the process of absorbing credit losses and rebuilding capital is likely to be protracted, the normalisation of lending standards is likely to take longer than following recent recessions. This is a particular concern for the Eurozone, where bank funding is more important for companies. Whether domestic demand in the US and Europe recovers will also depend on whether private sector deleveraging has further to run. The destruction of household net wealth in the US suggests that the personal savings rate has further to rise, whereas there no longer appears to be a pressing need for households in the UK and Eurozone to consolidate their balance sheets. In contrast, non-financial corporations in the US are in a stronger financial position than their European peers, having not increased debt levels as rapidly during the credit boom. Risks around public finances have received the most attention in recent weeks. In particular, the adjustments underway in Greece pose a risk of potential contagion from sovereign credit risk that could threaten growth on both sides of the Atlantic.
Topic:
Economics, Markets, and Financial Crisis
Political Geography:
United States, United Kingdom, and Europe

17. Is Greece heading for default?

Publication Date:
02-2010
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
Greece has slid into a serious fiscal crisis over the last few months. A ballooning budget deficit and high levels of government debt have raised questions in the minds of investors about the sustainability of the country's public finances. The level of concern among investors can be seen from developments in Greek borrowing costs relative to those in Germany. At the beginning of 2008, the yield on Greek 10-year bonds was only around 0.3% higher than on equivalent German securities, but this gap has now risen to over 3%. This yield spread is at its widest for more than a decade and is by far the largest within the Eurozone. The root cause of Greece's problems is a long period of fiscal indiscipline. In 2009, after years of heavy spending, the budget deficit rose to almost 13% of GDP and the public debt to GDP ratio is set to reach 125% this year. The deteriorating fiscal position has led to a slew of ratings downgrades, and outside the Eurozone Greece's credit rating would probably be in 'junk' territory. On top of the fiscal problems, Greece also suffers from weak external competitiveness. The real exchange rate has appreciated substantially since Greece joined the Eurozone, contributing to a sharp widening in the current account deficit to around 12% of GDP last year. On some estimates, the real effective exchange rate is now around 20% overvalued. As a result Greece now faces a series of policy choices all of which look unpalatable. Within the Eurozone, the only realistic orthodox option is a combination of massive fiscal retrenchment and 'internal devaluation' – forcing down costs relative to those of Greece's competitors. But fiscal cutbacks and cost deflation on the scale required could plunge the country into a deep and prolonged recession and might prove politically and socially unsustainable. The Greek economy is already showing signs of serious stress, with GDP down 2.6% on the year in 2009Q4. The extreme alternatives are default and/or leaving the Eurozone and enacting devaluation. But the political barriers to such moves are immense, and while default and devaluation could ease budgetary and external imbalance problems, they would also cause massive economic and financial disruption and probably a deeper recession in the near-term. Default and devaluation would also risk huge negative contagion effects on the Eurozone and the wider global economy. With Greece's debt approaching €300 billion a default would be the largest sovereign collapse since WWII, dwarfing those in Russia and Argentina. Eurozone banks could face losses of up to €100 billion on top of the heavy writedowns already suffered, risking a renewed Europe-wide credit squeeze. There could also be collapses in demand for the debt of other weaker Eurozone members such as Spain, Portugal and Ireland. World markets for equities, corporate bonds and emerging market debt would also likely be badly affected. There could also be pressure for the major economies to accelerate their fiscal adjustment efforts, given the impact on investor confidence and the scale of their budget deficits. Our estimation results suggest that a Greek default could be a real threat to the progress of the global recovery, cutting growth in the major economies by around 1% per annum compared to our baseline forecast and world growth by 0.6%. Given the potential massive consequences of a Greek default, the pressure for a bailout has been growing. Although there are questions about the legality of such a move, we believe it is possible if the political will exists. Estimation results using the Oxford Model suggest a bailout would be likely to be less economically damaging than a default, even assuming some negative impact from higher bond yields in the core Eurozone countries. The costs of a bailout could rise rapidly, however, if it extended beyond Greece to other troubled countries. A bailout would create a big risk of moral hazard, perhaps inducing fiscal misbehaviour among other Eurozone members or being used by Greece to sidestep the necessary adjustment. To avoid this, any bailout would have to incorporate strict conditionality, perhaps raising serious questions about fiscal sovereignty within the Eurozone. Over the last two weeks, the other EU countries have taken a relatively hard line with Greece, stopping short of announcing explicit financial support and pushing for strong fiscal adjustment measures. Although a bailout remains the most likely outcome if Greece struggles to refinance its debts, there are some signs that political resistance to such a move is growing. The key risk period could be April-May, when a large volume of Greek debt matures.
Topic:
Economics, Markets, and Financial Crisis
Political Geography:
Europe, Greece, and Argentina

18. What now for the 'peripheral' Eurozone countries?

Publication Date:
05-2010
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
Over the weekend the EU put together a large-scale package worth up to €720 billion aimed at stabilising all the 'peripheral' Eurozone countries, in the face of mounting contagion risks. This came on top of an earlier financial support package for Greece worth €110 billion. The latest move has brought some relief to bond markets, but major challenges remain. Investors remain concerned about the capacity of Greece to stick to the immense fiscal adjustment needed in the face of a very deep recess ion and mounting social unrest. With the debt/GDP ratio set to keep rising to almost 150% in the next few years, concerns remain that some kind of debt restructuring or default cannot be avoided. For the other peripherals, too, the outlook remains bleak – while the immediate threat of a collapse in their debt markets has been averted, years of fiscal austerity and slow growth remain ahead.
Topic:
Debt, International Political Economy, Global Recession, Monetary Policy, and Financial Crisis
Political Geography:
Greece

19. Credit Crunch Watch

Publication Date:
10-2009
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
The financial stress indicator is a composite index of a number of indicators including risk spreads, mortgage spreads, equity volatility, commercial paper and commercial loans outstanding and the spread of LIBOR rates over T-bill rates (the “Ted” spread). The stress indicator fell again last week, driven by a further narrowing of corporate bond spreads and lower equity volatility. These shifts offset a rise in 30-year mortgage spreads. Stress levels are now at their lowest levels since February 2008, and while still well above their long-term average have also dropped below the levels seen in previous periods of distress such as in the early 1990s and in 2001- 2003.
Topic:
Economics, Markets, and Financial Crisis
Political Geography:
United States

20. Financial meltdown averted – but how deep and how widespread will the recession be?

Publication Date:
01-2009
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
The credit crunch that began in July 2007 intensified dramatically in September 2008, with a series of bank failures prompting rescues and effective nationalisation of major financial institutions in the US, the UK and the Eurozone. Despite massive intervention, financial stress rose to new highs at the start of Q4 2008 as financial markets dried up, with treasury bond yields falling, interbank lending rates still high, emerging market spreads widening sharply and stock markets plunging further. Faced with financial sector meltdown, many governments have recapitalised banking sectors and guaranteed interbank loans and bank deposits to try to shore up confidence in the financial system. These moves have averted a meltdown, but the spotlight has moved onto the rapidly weakening real economy – both world growth and world trade are now expected to decline in 2009, making it the worst year since 1945.
Topic:
Economics, Markets, and Financial Crisis
Political Geography:
United States