Central banks step up to the plate. This week, the ECB and, much more aggressively, the Bank of England slashed their key interest rates. Further rapid and strong rate cuts are pending (cf. chart). Even the Fed should ease once again. Monetary policy is, therefore, becoming increasingly expansive with real rates well below or close to zero (p. 2-3).
Stimuli programs. Nevertheless, covering fire from fiscal policy is imperative if the economic downturn is to be halted. Leading indicators as well as sentiment figures continue to point south and have already been at recession levels for some time now.
US. In Washington, there is already intense discussion of a second, multi-billion USD fiscal package. Federal aid, not least for the reeling housing sector, spending programs and tax breaks are on the agenda. Nor can the new administration waste time before announcing fundamental tax reform, since the Bush tax cuts expire soon (p. 4-5 & 6-8).
Europe. Alongside rescue plans for the financial sector, Spain, France and Germany have already announced stimuli programs. In Italy, an announcement is expected relatively soon. There is also help coming from the EU. It remains to be seen whether this is enough to halt the economic downturn. But what is certainly unavoidable is that recession and growth programs will see public deficits surging again (pages 9-10).
Further topics:
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Germany: Lean times ahead for the exporting sector (page 11).
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Data outlook: Growth throughout EMU probably stagnated at best in autumn; US retail sales to continue to plummet (page 14).
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Market outlook: Government bond curves to steepen further; EUR to weaken again (page 22).
