Assignment 6 (Economics)

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Assignment 6 (Economics)

Paper details:

Recommend responding in a 275-word response. Check it for spelling/punctuation and develop the draft in a word document. You can use your own experience to reflect. Review the following articles and describe how they relate.


Review the following articles and describe how they relate to measuring economic growth.

Fed raises its economic outlook slightly, sees 4.2% growth next year and 5% unemployment rate

Published Wed, Dec 16 2020 Maggie Fitzgerald @mkmfitzgerald

Key Points

The Federal Reserve expects real gross domestic product to fall just 2.4% in 2020, compared to a decline of 3.7% predicted in September.
The Fed also upped its 2021 real GDP forecast to 4.2% from 4.0%.
The Jerome Powell-led Fed estimates the unemployment rate to fall to 6.7% this year, also an improvement from 7.6% projection in September.
The Federal Reserve dialed up its economic expectations slightly for the end of this year as well as for 2021, according to the central bank’s Summary of Economic Projections released on Wednesday.

The central bank now expects real gross domestic product to fall just 2.4% in 2020, compared to a decline of 3.7% predicted in September. The Fed also upped its 2021 real GDP forecast to 4.2% from 4.0% expected previously.

The Jerome Powell-led Fed estimates the unemployment rate to fall to 6.7% this year, further below the 7.6% previously predicted. The unemployment rate should fall to 5.0% in 2021, compared to the central bank’s previous estimate of 5.5%.

The Federal Open Market Committee said in its statement Wednesday (Links to an external site.) that it would continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”

The Fed kept its inflation estimates for 2020 unchanged at 1.2%. The FOMC now sees PCE inflation running to 1.8% next year, slightly above its previous estimate of 1.7%.

Core PCE inflation is expected to come in at 1.4% this year, down slightly from September’s projection of 1.4%. Next year, core PCE inflation is estimated to reach 1.8%, up from September’s forecast of 1.7%.

The Fed decided to keep interest rates unchanged in its December meeting after slashing them to near-zero in an emergency meeting in March due to the fast-spreading coronavirus.

https://www.cnbc.com/2020/12/16/fed-raises-its-economic-outlook-slightly-sees-4point2percent-growth-next-year-and-5percent-unemployment-rate.html (Links to an external site.)

World Bank estimates India’s GDP to plunge 9.6% in 2020-21
January 06, 2021

The report notes that the pandemic disproportionately affected activity in the services sector in India. Coronavirus pandemic hit the economy at a time when growth was already decelerating in India, the report said.

The World Bank has projected a 9.6 percent contraction for the Indian economy in FY 2020-2021, 6.4 percentage points lower than its previous forecast in June 2020.

In its latest January 2021 Global Economic Prospects report, the World Bank said the contraction in India’s output reflects a sharp drop in household spending and private investment.

“In India, the pandemic hit the economy at a time when growth was already decelerating. The output is projected to fall by 9.6 percent in FY2020/21, reflecting a sharp drop in household spending and private investment,” the report said.

The report notes that the pandemic disproportionately affected activity in the services sector in India, mainly in urban areas, such as retail). It also paralysed consumption, and caused significant unemployment. The informal sector, which accounts for four-fifths of employment, also suffered severe income losses, the World Bank said.

In India, growth is expected to recover to 5.4 percent in 2021, as the rebound from a low base is offset by muted private investment growth given financial sector weaknesses, the report said.

“The pandemic will likely lower potential growth, including through eroding human capital and investment growth. In the financial sector, nonperforming loans were already at high levels before the pandemic and the economic downturn may lead to further insolvencies among financial and non-financial corporations,” said World Bank in the outlook report.

India’s government debt is also expected to rise by 17 percentage points of GDP amid a severe output contraction of more than 9 percent, it found. India is also expected to post a current account surplus in FY2020/21, mainly driven by weak domestic demand.

According to the report, the global economic output is expected to expand 4 percent in 2021 but still remain more than 5 percent below its pre-pandemic trend.

Moreover, there is a material risk that setbacks in containing the pandemic or other adverse events derail the recovery. Growth in emerging market and developing economies (EMDEs) is envisioned to firm to 5 percent in 2021, but EMDE output is also expected to remain well below its pre-pandemic projection. Global growth is projected to moderate to 3.8 percent in 2022, weighed down by the pandemic’s lasting damage to potential growth, the World Bank said.

“The pandemic has exacerbated the risks associated with a decade-long wave of global debt accumulation. Debt levels have reached historic highs, making the global economy particularly vulnerable to financial market stress. The pandemic is likely to steepen the long-expected slowdown in potential growth over the next decade, undermining prospects for poverty reduction,” the World Bank said.

The heightened level of uncertainty around the global outlook highlights policymakers’ role in raising the likelihood of better growth outcomes while warding off worse ones. Limiting the spread of the virus, providing relief for vulnerable populations, and overcoming vaccine-related challenges are key immediate priorities, it said. With weak fiscal positions severely constraining government support measures in many countries, an emphasis on ambitious reforms is needed to rekindle robust, sustainable and equitable growth.

A downside scenario in which infections continue to rise and the rollout of a vaccine is delayed could limit the global expansion to 1.6 percent in 2021 and 2.5 percent in 2022, it said. According to the World Bank, in a more severe downside scenario including widespread financial stress, global growth could even be negative in 2021. However, in an upside scenario with successful pandemic control and a faster vaccination process, global growth could accelerate to nearly 5 percent in 2021, noted the World Bank.

Advanced economies are seen contracting by 5.4 percent in 2020, rebounding to 3.3 percent growth by 2021, and thereafter to 3.5 percent growth by 2022. Emerging market and developing economies (EMDEs)on the other hand, are expected to contract by 2.6 percent in 2020, grow by 4.6 percent in 2021-22 largely reflecting a rebound in Chinese growth.

The World Bank said that the impact of the pandemic on investment and human capital is expected to erode growth prospects in EMDEs, set back key development goals.

https://www.cnbctv18.com/economy/world-bank-estimates-indias-gdp-to-plunge-96-in-2020-21-7906831.htm

Soros warns global boom is over

By Steve Schifferes, News economics reporter

Billionaire investor George Soros has given his gloomiest assessment of the state of the US and world economies. George Soros on why he believes the UK is in a fragile position He told BBC business editor Robert Peston that the “acute phase” of the credit crunch may be over but effects on the real economy are yet to be felt. He warned the “financial bubble” of the last 25 years could be drawing to an end and the post World War II “super-boom” era could also be over. He predicted a “more severe and longer” US slowdown than most people expect. And he said that the UK was worse-placed than America to weather to coming economic storm, because it had such a large financial sector and has had the biggest increase in house prices.

Gloomy bankers Mr. Soros said that the current mandate of most of the world’s leading central banks – where their main focus was fighting inflation – meant there was limited scope for cutting interest rates to help economies recover. As for the Bank of the England, he said, “it was like a Greek tragedy”, because they “couldn’t do a U-turn” until there was a full-blown recession, which would finally take away the price pressures. It was “inevitable” that they would keep rates too high for the good of the economy, he added. In part, Mr. Soros is echoing the gloomy forecast of the world’s central bankers in recent weeks. The head of the European Central Bank, Jean-Claude Trichet, recently told the BBC that the “market correction was still on-going”. Mervyn King, the governor of the Bank of England, warned in the Bank’s inflation report that UK inflation would rise above its target while the economy would slow sharply.

Moral hazard Mr. Soros believes that central bankers are partly to blame for the credit crunch because of their past behavior in bailing out the financial sector whenever it got into trouble for over-lending, the so-called moral hazard problem. He said that the central banks should explicitly target asset bubbles such as housing booms and try to stop them getting out of control, which is something they have resisted doing so far. And he said that tougher but smarter regulation would be needed in the future in order to reduce the excess supply of credit in the economy. These could include measures to force banks to put aside more reserves in good times to help cushion them in bad times.

Misguided markets Mr. Soros believes that oil and other commodities are over-priced, but he sees little chance of the price of oil coming down until there is a big slowdown in the richer economies. He sees the price of oil as being driven by higher demand in developing countries such as China, where subsidized energy costs mean there is less price-sensitivity. He also said that stock markets are still underestimating the severity and length of the economic downturn, especially in the US, and are now having a “bear market rally”.

Profiting from the crisis Mr. Soros has credibility partly because he is prepared to invest his own money to back up his convictions. The private investment fund he has resumed managing made a return of 34% last year betting that the credit crunch was more severe than many people expected. Mr. Soros was the man reported to have made $1bn in September 1992, betting correctly that the British currency would have to be devalued and leave the European Exchange Rate Mechanism. Mr. Soros has devoted much of time since then to philanthropy, especially in Eastern Europe.

Published: 05/19/2008

‘The Worst Is Behind Us’: Paulson Joins Street Luminaries, Declares Victory
May 07, 2008, by Aaron Task

With Treasury Secretary Hank Paulson and Merrill’s John Thain chiming in, there’s now near unanimity of opinion on Wall Street: The worst of the credit crisis is over.

Such comments seem outrageous given the latest batch of scary headlines from UBS, Fannie Mae, Legg Mason, Lazard, et al. But hope springs eternal on Wall Street, and the reality is the crisis in the debt markets has eased since JPMorgan’s Fed-engineered purchase of Bear Stearns, which Paulson called “an inflection point.” (Critics have used similar terms, but with a far different meaning.)

Meanwhile, even Henry “Mr. Sunshine” Blodget is starting to come around to the idea that the housing market may be hitting bottom, thanks to an op-ed by Cyril Moulle-Berteaux, managing partner of Traxis Partners, in The Wall Street Journal.

In making the case for a housing-market bottom, Moulle-Berteaux notes house price affordability has improved dramatically and the inventory of new homes is falling. (The piece appeared prior to Wednesday’s weak report on pending sales of existing homes for March.)

The fund manager makes a compelling case, but omits the key element of financing. While demand for housing remains fairly stable and mortgage rates are still historically low, even buyers with high credit scores and large down payments are reportedly struggling to secure as lenders like Countrywide (Links to an external site.) (Links to an external site.) and WaMu grapple with the bubble’s aftermath.

The Fed’s fight to stop contagion

Details about the US Federal Reserve’s decision to offer emergency loans to Wall Street banks earlier this year have been published.

In March, the US central bank decided to help rescue Bear Stearns, which was on the brink of collapse, and offered emergency loans to other banks. Minutes of the Fed’s meeting showed it was scrambling to prevent a ‘contagion’ infecting the US financial system. The loan was seen as the boldest action from the Fed since the 1930s. The actions came at a time when the credit crisis, sparked by a collapse of the US sub-prime mortgage market, had deepened. The problem had spread to global financial markets and threatened to plunge the world’s biggest economy into recession. On 14 March, the Fed approved special funding to allow JP Morgan to buy its smaller rival Bear Stearns which faced bankruptcy without financial help.

‘Prevent serious harm’ The central bank also extended its emergency lending to other institutions on Wall Street. “This action was necessary to prevent, correct or mitigate serious harm to the economy or financial stability,” the minutes said. The minutes revealed just how worried the central bank’s members were about the risk of turmoil at one bank spreading across the entire sector.

The takeover of Bear Stearns by JP Morgan, and the Fed’s own lifeline, were ‘necessary to avoid serious disruptions to the financial markets’, the minutes revealed. Earlier this month, JPMorgan closed its acquisition of Bear Stearns, bringing to an end an 85-year-old institution.

Published: 06/27/2008

Central banks fight credit crisis


The world’s largest central banks have launched their latest co-ordinated action to calm jittery credit markets – The US Federal Reserve, the European Central Bank and central banks in the UK, Canada and Switzerland will inject billions of dollars into money markets. The news cheered investors and US stocks surged more than 3% – their biggest one-day gain in five years. The injection of more than $200bn is aimed at easing the credit crunch and its impact on the wider economy. On Wall Street, the benchmark Dow Jones industrial average soared 416.66 points, or 3.55%, to close at 12,156.81. In London, the FTSE 100 index of leading shares ended 1% higher. “The key to any sustainable rally is going to be an improvement on the credit side,” said Michael Darda, chief economist at MKM Partners. “But this is positive. The Fed’s making a major effort to get liquidity and credit into the cracks and crevices of the financial system that need it the most.” The dollar rose sharply against the yen and rebounded from a record low against the euro.

Crunch continues The authorities are worried that the credit crunch shows few signs of easing, eight months after the crisis began. In the UK, mortgage lenders announced a sharp slowdown in the number of home loans that are being approved due to the difficulties that many banks face raising funds on commercial money markets. The crisis in credit markets has threatened world economic growth and many expect the US, the world’s largest economy, to enter a recession. The problems in credit markets emerged last summer when banks began revealing losses related to investments in the ailing US housing market. Record defaults on US home loans, especially to sub-prime borrowers with poor credit histories, caused the value of these assets to plunge and made banks reluctant to lend to each other.

‘Crisis of confidence’ BBC Economics Editor Evan Davis questioned whether the central banks’ actions would help re-instil confidence into nervous credit markets in the longer term. He says the banks’ actions could help solve any liquidity problems – a temporary shortage of cash – faced by financial institutions, but would do little to ease worries about long-term solvency at some financial institutions. “We have been in a second phase of the credit crunch which has seen a reluctance for banks to lend to each other not out of liquidity shortages, but out of a general worry that the banks they lend to won’t be able to pay them back,” he said. “It is, in other words, a crisis of confidence in bank solvency. It’s not that banks don’t have cash to lend; it’s that they don’t trust each other to have sufficient assets.”

Specific measures Each of the central banks announced measures specific to their own markets, which follow on from similar emergency auctions of cash in December. The US Federal Reserve is making up to $200bn (£99bn) available to financial institutions for 28 days instead of the usual overnight auctions. “Pressures in some of these markets have recently increased again,” the US central bank said in a statement. “We all continue to work together and will take appropriate steps to address those liquidity pressures.” The Fed will also allow financial institutions to borrow the money using risky assets as collateral. These assets could include mortgage-backed securities – the source of the current crisis in credit markets.

‘More clarity needed’ The Fed is also extending a “swap lines” scheme, that will provide $30bn and $6bn through the ECB and the Swiss National Bank respectively. The ECB is also making available another $15bn, despite having said on Friday that it had no plans to do so because the market problems that had made the last auctions necessary were no longer there. The British Bankers Association welcomed the auctions but called on the Bank of England to provide more details about them. “We would urge the Bank of England to provide greater clarity on the range of acceptable collateral, the minimum bid rate, and whether these operations will continue beyond April,” director John Ewan said.

Published: 03/11/2008

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