Signs Are Mounting That Global Central Banks Will Soon Have To Act

Friday, August 24, 2012 07:11
Signs Are Mounting That Global Central Banks Will Soon Have To Act

Tags: China | European crisis | Federal Reserve | world economy

The world economic view is quickly resigning itself to the fact that central banks around the globe will soon have no choice but to add stimulus to try to pump up their economies. The manufacturing index in China showed the largest drop in nine months.

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Falling demand for exports is the primary culprit. This is a direct offshoot from the economic woes in Europe since Europe is a primary market for Chinese goods.
The HSBC preliminary China purchasing managers index fell to 47.8 in August from a reading of 49.3 in July. Any reading below 50 indicates contraction. China’s manufacturing index has now been below that mark for 10 consecutive months.
The Chinese central bank has cut rates twice so far this year. It has lowered the reserve requirements for banks three times since last November. This week (ending August 24), it injected 278 billion yuan into the money market through its open-market operations.
This is the largest liquidity intervention in seven months.
The signals point to a second recession for Europe within a three-year time span. With distressed countries needing more and more funds to stay afloat, the fallout is beginning to affect Europe’s strongest economies, including Germany’s.
Business activity in Germany has fallen more quickly recently than it has in three years. This means Germany’s economy will struggle for the next few quarters.
And fears were recently renewed that Greece will exit the euro. Its prime minister is asking for an extra two years to meet the strict requirements set forth in its aid package from last spring.
This past Wednesday, August 22, saw the Federal Reserve in the US send its strongest signal to date that it stands ready to act if necessary. The Fed is looking for a more substantial pickup in economic activity that would make it more confident that the economy is well on the road to recovery.

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