Tuesday, 9 June 2009

A Stable Slow Down of The declining Economy

So Bank of Finland through its Governor Mr Erkki Liikanen, gave a press conference on the outlook of the Finnish economy.

The little information that came through the media channels shows mixed signals.

Let's analyse that.

"Erkki Liikanen, the governor of the Bank of Finland, said at a news conference Tuesday that there are some signs of stabilisation in the global economy, but no quick recovery was on the horizon."
Well as economists turned politicians put it: there is a slowdown in the slump that occured in the first quarter of 2009. I think it's not surprising considering the amount of stimulus they gave in the form of interest rates cuts and government stimulus.

A stabilization was clearly expected but the issue now is: what next?

"According to Mr Liikanen world trade has stopped contracting further and stock prices have started rising. Nevertheless production volumes are still decreasing in many countries."
Stock price rose maybe a little bit too quickly as overoptimism is growing. In Finland, especially in Uusimaa it seems like almost business as usual - I suppose the same thing could have been witnessed in 1990 before the storm hit. Notice that Statistics Finland published the GDP figures and there are awful , similar to the level of the early 1990's - another worrying sign.

"Mr Liikanen also said he was concerned that an increase in credit losses could impair the ability of banks to grant credit"
I suppose regulator did not do their job, are not doing their job and provide a laughable stress test that was suppose to indicate that it's all fine with the banking system - albeit if interest rates stays low - sub 2 - for another 2 or 3 decades then most probably the banking system will survive.

But here is the dilemna, either we have a quick recovery and interest rates increase sharply and will push the banking to its knee or we don't have any recovery and unemployment will be depressed and loan losses will shoot up.

I see for the moment a lose-lose scenario due to the fact of what had hapenned during the regulators holidays period of 2003-2009...so until we do not see a sharp readjustment in the debt ratio as it happened in the US, then we are far, far away of seeing light out the tunnel...

In fact, what we see is an electrical light set by the central bank and governments to put a floor of the economical free fall that hapenned in the first quarter of 2009 and last quarter of 2008 that allow to provide some time to fix a financial system or an financial architecture that became irrelevant after 15.11.2008.

Regarding more sensible and focused speech, here is the one from Jurgen Stark

First a good summary:

"Following the default of Lehman Brothers in mid-September last year, the turmoil in financial markets which had started in August 2007 turned into a major financial crisis.

Liquidity dried up, and credit flows to the economy slowed down. Problems in the financial system quickly spilled over to the real economy, and an adverse feedback loop between the real economy and the financial sector emerged.

This has led to the most severe and synchronised global economic downturn for 80 years. The euro area has not been spared. Economic activity has declined sharply, and inflation is at its lowest level since the launch of the euro.

Monetary and fiscal authorities across the globe have responded quickly and decisively to these extraordinary developments".

And last what I think is the correct view the actual situation:

While the world economy continues to face a severe and synchronised downturn, recent international business confidence indicators suggest that the pace of the decline in economic activity is slowing down somewhat.

Source : Liikanen - BOF, Stark - ECB

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