Monday, May 13, 2002
If central bank action (or inaction) is a clue to future growth, then a still mostly soggy outlook has been unveiled over the past couple of weeks. A number of central banks including the Federal Reserve, European Central Bank, Bank of England, Swiss National Bank, Bank of Canada and Reserve Bank of Australia have made recent interest rate decisions. Both the Bank of Canada and the Reserve Bank of Australia raised rates by 25 basis points because of speedier than expected growth. In a move in the opposite direction, the Swiss National Bank lowered rates in order to puncture a hole in the steadily appreciating Swiss franc, which has been rising on safe-haven demand. The remaining banks left rates unchanged to nurture slow growing economies. The graph below shows the interest rate relationship of these and other central banks. It should be noted that the Bank of Japan has had a zero-rate policy for some time now in its effort to stem deflation and get the economy out of a recession. Interestingly, the only other country shown below that has an interest rate lower than the United States is the Swiss National Bank, which has a range of 0.75 percent to 1.75 percent.
As expected, the Bank of England left its key interest rate at the 38-year low of 4.0 percent. Although gross domestic product has not declined, in contrast to the United States and Germany, it has been teetering at near zero growth for the past two quarters. Consumers, and especially the housing sector, have been the economy's backbone, while the manufacturing sector continues to founder.
The Reserve Bank of Australia raised its key interest rate by 25 basis points from its 28-year low to 4.5 percent. In recent months the economic climate has changed markedly, with firmer prospects evident both in Australia and, to a degree, abroad. There has also been an upturn among Australia's main trading partners in the east Asian region (with the important exception of Japan) and more tentative signs of recovery in Europe. At present the Australian economy, recording growth of more than 4 percent during 2001, is outperforming by a wide margin other advanced economies, where aggregate growth has been close to zero. Growth has continued and confidence has strengthened so far this year, and the economy appears well placed to continue its strong performance in the period ahead. Unlike the United States, businesses are expanding their investment plans. And household spending has continued to grow strongly, supported by an upturn in employment and by rising wealth associated with increases in house prices.
The Federal Reserve left its key interest rate at 1.75 percent, much to no one's surprise. Growth prospects, after a gangbuster first quarter, have noticeably tailed off in the second quarter. At the same time, the Fed also decided to leave its neutral risk assessment unchanged.
Equity investors had one good day last week in the Americas and Europe, and that was Wednesday. But alas, one day does not make a trend and equities fell just about everywhere as investors lost their nerve. The outlook for technology stocks, which led the rally on Wednesday, quickly returned to the all news is bad mentality. A dearth of economic news left investors with nowhere to look but at the continual stream of so-so corporate news, labor problems in Germany and ramifications of elections in the Netherlands, France and Germany. On the week, all the indexes followed here fell. Fewer indexes remain with their heads above water - that is above their year end levels. Only the Mexican Bolsa, South Korean Kospi, and the Japanese Topix and Nikkei remain above year end levels.
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Growth prospects slow
