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Economist Kenningham: ‘Things Could Get Much Worse’ for Global Economy

By    |   Tuesday, 10 July 2012 11:32 AM

The recent moves by central banks in Europe and China, as well as measures from the Federal Reserve, have had little effect on financial markets and show that the global economy is weak and getting weaker, according to Andrew Kenningham, senior global economist at Capital Economics, a London-based forecasting firm.

Lowering interest rates and printing money for central banks to purchase assets are “now seen as a sign of weakness rather than strength," he told CNBC.

"Hopes that the EU was finally getting to grips with its crisis and that monetary stimulus would boost global demand have faded," Kenningham wrote in a research note.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

"With euro break-up risk likely to rise in the second half of the year and monetary policy looking increasingly impotent, things could get much worse before they get better."

Few economists believe a third quantitative easing (QE) program will have much affect on the economy, as the QE program involves buying Treasurys and mortgage bonds in order to lower interest rates and boost investment in riskier assets.

However, interest rates are already near zero and lending has improved only incrementally. Therefore, one of the only things QE3 would do would be to increase stock and commodity prices.

“The global economy is in the midst of a synchronized slowdown, as reinforced by the recent spate of weak economic data," said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch. "Unlike 2008, monetary policy easing appears increasingly ineffective while fiscal policy is headed toward contraction in most countries."

She noted that the greatest obstacles to growth are monetary and fiscal missteps.

"The upshot of less effective monetary easing combined with widespread fiscal tightening is that growth could continue to weaken, both in the U.S. and globally," Misra said. "This will keep policy rates on hold at historically low levels for longer than would otherwise be the case if the monetary policy tools available were more potent."

While low rates have not resulted in economic growth, Misra noted, "The most intractable factor is that many borrowers in developed countries are less interest-rate sensitive than in past easing cycles due to the overhang of debt that plagues the U.S. and many other countries."

A recent Reuters poll showed that most economists believe the Fed will begin QE3 to boost growth.

The survey of forecasts from 16 primary dealers that do business directly with the Fed revealed a 70 percent chance that the central bank will expand its balance sheet by purchasing bonds.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

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Tuesday, 10 July 2012 11:32 AM
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