Rescue package YES, economy NO
Friday, 3 October 2008 10:25am
Following last Monday's preview of a financial market pandemonium, there was little doubt in anyone's mind that the US Senate will pass the Treasury's US$700 billion rescue package.
The Senate voted 74 to 25 in favour of the Emergency Economic Stabilization Act of 2008. The bill will be sent back to the House of Representatives for final approval later today (AEST). And to ensure that this time it passes the House, the bill now includes an increase in the Federal Deposit Insurance Corporation's (FDIC) insurance limit on bank deposits from US$100k to US$250k. It also reportedly includes a 10-year US$150.5 billion package of tax breaks and other handouts. But whether the Senate appended these sweeteners to the bill or not, the House has no other recourse but to eventually pass the bill. The cost of failure - as we have seen - is just too great.
After ignoring the economic fundamentals over the past two weeks, financial markets are again looking at them -- now that the bill is just a House signature away - and they do not like what they see.
And just as the Financial Standard Intelligence Unit (FSIU) over the past few months, the rescue package will help stabilise the financial markets, but it is too late to prevent the global economy from falling into recession.
Wall Street went into red again last night following the release of economic data consistent with a looming recession. US initial jobless claims rose to seven-year high of 497,000 in the week ended 27 September - the highest since the September 11 terrorists attacks in 2001. The US Bureau of Labor Statistics explains that the estimate has been elevated by around 45,000 due to Hurricanes Ike and Gustav. But even accounting for this, the figures are screaming recession. Expect further job losses as a result of closure/bankruptcy in some businesses and the restructuring or merged banks and financial institutions.
More bad news in the US. Factory orders dropped by 4 per cent in August - the biggest fall since October 2006. Total orders for durable goods fell by 4.8 per cent during the month. Durable goods ex-transportation slid by 3.3 per cent.
In its Global Economic Outlook, the International Monetary Fund (IMF) warned that is a substantial likelihood of a severe US economic downturn in the United States but Europe might be partially insulated against further shocks.
Really! If this is the case, recent stats certainly do not reflect this. Reports out of Europe overnight show the UK construction purchasing managers index (PMI) fell to a record low of 38.8 in September from 40.5 in the previous month. This was to be expected as economic activity in the UK slows and house prices continue to tumble. The Nationwide Building Society reported that UK house prices fell by another 1.7 per cent in September, after a similar 1.7 per cent drop in August.
Elsewhere in Europe, reports show Spanish unemployment rising and consumer confidence slipping. And in Italy, the fiscal deficit has risen to 2.6 per cent of GDP in the June quarter from 1.9 per cent in the first.
While there is some good news in Australia, this may not last for long. The Australian Bureau of Statistics reported that the country's trade balance went into an A$1.4 billion surplus in August from a A$2.1 billion deficit in the previous month. This may have been due to the China factor. But even China is now showing signs of strain. China's manufacturing PMI fell to 47.7 in September - the lowest level for the year - from 49.2 in the previous month.
The rescue of the rescue package may be able to contain further volatility in the financial markets but now we face deteriorating economic fundamentals.
Benjamin Ong
