You are here

Business

Business section

Global growth to slow as populations age — Moody's

By - Aug 07,2014 - Last updated at Aug 07,2014

PARIS — As populations age around the world, economies will be held back and growth trends will slow sharply in the next 20 years, a report forecast on Thursday.

The mismatch of old people to the numbers of people at work is no longer a shadow only over advanced economies; it now extends to emerging markets as well, a report by rating agency Moody's said.

This demographic time bomb, and related drop in household savings, could reduce the trend of annual growth worldwide by 0.4 per cent by 2019, the agency warned.

Between 2020 and 2025 the impact could be "much larger", amounting to 0.9 per cent, it said. 

Analysing the impact of a major shift in the age demographics of workers around the world, the agency indicated that more than 60 per cent of countries which feature in its credit ratings will be classified as ageing by next year, with more than 7 per cent of their populations aged over 65.

By 2020, it pointed out, the number of "super-aged" societies, where more than a fifth of the population are 65 and older, will increase from three today to 13. By 2030, the number will reach 34.

US-based Moody's monitors the resilience of public finances and issues credit ratings for government debt bonds.

 

Ageing a worldwide 'problem' 

 

When a population ages faster than it is replaced by people of working age who produce goods, services and wealth, the costs of providing for the aged can outstrip public and private resources available, over-stretching pensions systems, overburdening public finances and pushing up interest rates on the bond market. 

In its report, which was based on a sample of 33 developed and 22 emerging market countries, Moody's concluded that ageing is no longer "just a developed-world problem", with a broad spectrum of countries affected.

"Demographic transition, frequently considered a long-term problem, is upon us now and will significantly lower economic growth," said Elena Duggar, a senior vice president at the agency and one of the authors of the Moody's Investors Service report.

"The demographic dividend that drove economic growth in the past will turn into a demographic tax that will ultimately slow this growth for most countries worldwide," the report added.

The global working-age population will grow nearly half as fast in the years to 2030 as in the previous 15 years, increasing by only 13.6 per cent, down from growth of 24.8 per cent, Moody's estimated.

It said that all countries, with the exception of a handful in Africa, face either a declining working-age population, or a slower growth rate.

The working-age population will fall by more than 10 per cent in about 16 countries, including Germany, Russia, Ukraine and Japan, between now and 2030, the report indicated.

The authors highlighted a number of policy areas in which governments can mitigate the impacts of an ageing society on the economy, such as by increasing the number of women and young people who are available for work, and by raising the retirement age.

It said workplace innovation, higher productivity rates and "streamlined migration" could also help.

"Innovation and technological progress that improve labour productivity and human capital can also dampen the effects of the rapid demographic changes on economic growth over the long term," the report concluded.

Separately, an Associated Press dispatch shows that the 2008 financial crisis did more than wipe out billions in wealth and millions of jobs. It also sent birth rates tumbling around the world as couples found themselves too short of money or too fearful about their finances to have children. Six years later, birthrates haven't bounced back.

For those who fear an overcrowded planet, this is good news. For the economy, not so good.

We tend to think economic growth comes from working harder and smarter. But economists attribute up to a third of it to more people joining the workforce each year than leaving it. The result is more producing, earning and spending.

Now this secret fuel of the economy, rarely missing and little noticed, is running out.

"For the first time since World War II, we're no longer getting a tailwind," says Russ Koesterich, chief investment strategist at BlackRock, the world's largest money manager. "You're going to create fewer jobs.... All else equal, wage growth will be slower."

Births are falling in China, Japan, the United States, Germany, Italy and nearly all other European countries. Studies have shown that births drop when unemployment rises, such as during the Great Depression of the 1930s. Birthrates have fallen the most in some regions that were hardest hit by the financial crisis.

In the United States, three-quarters of people surveyed by Gallup last year said the main reason couples weren't having more children was a lack of money or fear of the economy.

The trend emerges as a gauge of future economic health — the growth in the pool of potential workers, ages 20-64 — is signalling trouble ahead. This labour pool had expanded for decades, thanks to the vast generation of baby boomers born in the first few decades after World War II in many countries. Now the boomers are retiring, and there are barely enough new workers to replace them, let alone add to their numbers.

Growth in the working-age population has halted in developed countries overall. Even in France and the United Kingdom, with relatively healthy birthrates, growth in the labour pool has slowed dramatically. In Japan, Germany and Italy, the labour pool is shrinking.

"It's like health — you only realise it exists until you don't have it," says Alejandro Macarron Larumbe of Demographic Renaissance, a think tank in Madrid.

The drop in birthrates is rooted in the 1960s, when many women entered the workforce for the first time and couples decided to have smaller families. Births did begin rising in many countries in the new millennium. But then the financial crisis struck. Stocks and home values plummeted, blowing a hole in household finances, and tens of millions of people lost jobs. Many couples delayed having children or decided to have none at all.

Couples in the world's five biggest developed economies — the United States, Japan, Germany, France and the United Kingdom — had 350,000 fewer babies in 2012 than in 2008, a drop of nearly 5 per cent. The United Nations forecasts that women in those countries will have an average 1.7 children in their lifetimes. Demographers say the fertility rate needs to reach 2.1 just to replace people dying and keep populations constant.

The effects on economies, personal wealth and living standards are far reaching:

— A return to "normal" growth is unlikely: Economic growth of 3 per cent a year in developed countries, the average over four decades, had been considered a natural rate of expansion, sure to return once damage from the global downturn faded. But many economists argue that that pace can't be sustained without a surge of new workers. The Congressional Budget Office has estimated that the US economy will grow 3 per cent or so in each of the next three years, then slow to an average 2.3 per cent for next eight years. The main reason: Not enough new workers.

— Reduced pay and lifestyles: Slower economic growth will limit wage gains and make it difficult for middle-class families to raise their living standards, and for those in poverty to escape it. One measure of living standards is already signalling trouble: Gross domestic product per capita — the value of goods and services a country produces per person — fell 1 per cent in the five biggest developed countries from the start of 2008 through 2012, according to the World Bank.

— A drag on household wealth: Slower economic growth means companies will generate lower profits, thereby weighing down stock prices. And the share of people in the population at the age when they tend to invest in stocks and homes is set to fall, too. All else equal, that implies stagnant or lower values. Homes are the biggest source of wealth for most middle-class families.

Big banks still threaten economy — US regulators

By - Aug 06,2014 - Last updated at Aug 06,2014

NEW YORK — US regulators warned Tuesday that 11 giant banks have unrealistic contingency plans in the event of bankruptcy and warned that if they fail they could plunge the world into a new financial crisis.

The Federal Reserve (Fed) and Federal Deposit Insurance Corporation (FDIC) said the 11 titans, popularly known as “those too big to fail”, must make better plans to restructure their firms if they get into trouble.

FDIC Vice Chairman Thomas Hoenig said they had failed to show “how, in failure, any one of these firms could overcome obstacles to entering bankruptcy without precipitating a financial crisis”.

“The plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support,” Hoenig warned.

The group comprises JPMorgan Chase, Goldman Sachs, Deutsche Bank, Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Morgan Stanley, State Street and UBS.

Living will 

Wayne Abernathy, executive vice president at the American Bankers Association, said the banks will now be able to rework their plans based on the FDIC’s criticism. 

Up until this point, the industry has not known what regulators wanted, he complained, rejecting the calls from some expert critics and US lawmakers for large banks to be broken up.

“This isn’t a question of whether a bank is too big,” Abernathy said. “This is a question of a tool that needs to be refined.”

Under the Dodd-Frank Act enacted in response to the 2008 financial crisis, the banks must demonstrate a strategy “for rapid and orderly resolution” in the event of bankruptcy or major financial distress.

But the submissions by the financial giants fail to adequately prepare a so-called “living will” that could avert disaster, FDIC said. 

The rule was intended to address the problem of having financial institutions that are “too big to fail” because their demise could wreak havoc on the broader economy.

Tuesday’s announcement marks a second rejection of the banks’ planning by regulators. US financial agencies found fault with the original bank submissions in April 2013. 

Excessively leveraged  

Regulators have noted “some improvements” since the first round, but still point to huge flaws. The banks have until July 2015 to make “significant progress” to address the shortcomings identified.

At a recent congressional, hearing, Senator Elizabeth Warren pointedly questioned Fed Chair Janet Yellen on the adequacy of the industry’s contingency plans.

She suggested some of the banks should be broken up and noted that JPMorgan is far bigger than Lehman Brothers was when it failed in the early stages of the 2008 financial crisis.

Hoenig warned that banks today are “generally larger, more complicated and more interconnected” than they were prior to 2008.

The large banks are also generally “excessively leveraged” compared with the banking industry as a whole, he remarked. 

The regulators listed a series of actions expected of banks in their next submissions, such as simplifying their legal structure and amending financial contracts with counterparties in an insolvency.

Abernathy said the suggested measures were possible, but warned against indiscriminate moves to break up the financial behemoths.

Replacing the 11 banks with 40 smaller banks would “reduce diversification” and the banks’ “ability to handle the transactions their customers need”, he indicated. “I think that’s economic chaos.”

Separately, Moody’s Investors Service has revised down its outlook on British banks, saying new regulations designed to prevent taxpayers having to stump up funds to rescue failing banks make them more risky investments.

Moody’s said on Tuesday it had downgraded its view of the sector to “negative” from “stable”, citing plans by Britain’s financial regulator to introduce new rules for the rescue of ailing banks and to force lenders to ring-fence their retail operations from riskier investment banking operations which could be allowed to fail.

In the past, British banks had benefited from an implicit guarantee that the government would not allow them to fail. The new regime would see bondholders and big depositors take hits when large banks need rescuing.

Britain pumped a combined £66 billion ($111.3 billion) into Royal Bank of Scotland and Lloyds Banking Group  to prevent their collapse during the 2008 financial crisis.

Moody’s said the new rules “are designed to prevent the use of taxpayer funds to support failed institutions and to facilitate the going-concern loss-absorption of creditors, including senior unsecured bondholders”.

“The key driver of the change in outlook to negative for the UK banking system is that the UK government is now able to finalise the secondary legislation to implement the structural reforms relating to the UK resolution and bail-in regime and the related ring-fencing framework,” said senior Moody’s analyst Carlos Suarez Duarte.

US-Africa summit garners over $17b in investment pledges

By - Aug 06,2014 - Last updated at Aug 06,2014

WASHINGTON — African leaders on Tuesday called for a deeper economic relationship with the United States, hailing investment pledges totalling more than $17 billion at a Washington summit as a fresh step in the right direction.

US and African companies and the World Bank pledged new investment in construction, energy and information technology projects in Africa at the US-Africa Business Forum, including several joint ventures between US and African partners.

“The United States is determined to be a partner in Africa’s success,” President Barack Obama said in a speech at the forum. “A good partner, an equal partner, and a partner for the long term.”

The US president also urged African officials to create conditions to support foreign investment and growth.

“Capital is one thing, development programmes and projects are one thing, but rule of law, regulatory reforms, good governance, those things matter even more,” he stressed.

African leaders said they were optimistic of becoming full partners in a relationship worth an estimated $85 billion a year in trade flows, as US business leaders eyed opportunities in the region, home to six of the world’s 10 fastest-growing economies — even if they might be late to the party.

“We gave it to the Europeans first and to the Chinese later, but today it’s wide open for us,” said the chief executive of General Electric Co., Jeff Immelt, who on Monday announced $2 billion to boost infrastructure, worker skills and access to energy.

Tanzanian President Jakaya Kikwete said Africa wanted to move away from a relationship of “aid donor and aid recipient” to one of investment and trade.

Kikwete told the forum that with Obama and senior officials encouraging the business community “to take Africa seriously, I think this time we will make it”.

More than 90 US companies participated in the forum, part of a three-day summit which has brought almost 50 African leaders to the US capital, including Chevron Corp., Citigroup Inc., Ford Motor Co., Lockheed Martin Corp., Marriott International Inc. and Morgan Stanley.

Many already have a foothold in the region, which is expected to have a larger workforce than China or India by 2040 and boasts the world’s fastest-growing middle class, supporting demand for consumable goods.

Working as partners 

The Coca-Cola Co. said it would invest $5 billion with African bottling partners in new manufacturing lines and equipment, as well as safe water access programmes, over six years, and the chief executive of IBM, Ginni Rometty, said the IT giant would plow more than $2 billion into the region over seven years.

Still, Aliko Dangote, the president of Nigeria’s Dangote Group, whose operations include cement making, flour milling and sugar refining, said nothing works without adequate power.

Dangote signed an agreement to jointly invest $5 billion in energy projects in sub-Saharan Africa with Blackstone Group  funds, also calling for the US Export-Import Bank to remain open to support African companies buying US goods.

The World Bank, which committed $5 billion to support electricity generation, estimates that one in three Africans, or 600 million people, lack access to electricity despite rapid economic growth expected to top 5 per cent in 2015 and 2016.

Obama took part in a discussion with chief executive officers and government leaders at the event, also attended by US Commerce Secretary Penny Pritzker as well as former president Bill Clinton and former New York mayor Michael Bloomberg.

“These deals and investments demonstrate that the time is ripe to work together as partners, in a spirit of mutual understanding and respect — to raise living standards in all of our nations and to address the challenges that impede our ability to develop closer economic bonds,” Pritzker said.

Pritzker added that Washington would boost efforts to build commercial ties, with more government help on financing and more trade missions going both ways.

“The time to do business in Africa is no longer five years away. The time to do business is now,” she emphasised.

Pritzker stressed that building trade and investments with Africa would be good for both sides, helping African countries develop and creating jobs in the United States.

“As Africa’s middle-class continues to expand, we hope to see our export numbers grow,” she said.

“With a young, dynamic population and a burgeoning private sector, Africa is already a vital market for foreign investors. And that is why we are here today,” US Treasury Secretary Jacob Lew told political and business leaders.

“We want to drive more US investment in Africa, increase trade between Africa and the United States, and spur job creation both here and in Africa,” he said.

African telecoms billionaire Mo Ibrahim encouraged US  businesses to invest in Africa and make money but also said they should “pay their taxes”.

In the evening the African leaders joined Obama and his wife Michelle at a lavish dinner at the White House, where the president referred to his family ties to the continent.

“I stand before you as the president of the United States and a proud American. I also stand before you as the son of a man from Africa,” Obama said to applause. “The blood of Africa runs through our family, and so for us the bonds between our countries, our continents, are deeply personal.”  

But outside of a few top companies, US businesses faced criticism that they are less knowledgeable and more afraid of risks on the continent than their European and Asian rivals.

The United States remains the largest source of investment but most of that has been in the oil and gas sector.

China and Europe have built stronger positions in infrastructure, manufacturing and trade, with China’s trade with Africa more than double that of the United States.

American companies “are still thinking about Africa as a decade ago... whereas things have really changed dramatically. Africa now has been growing at about 5.5 per cent on average in the last decade,” said Dangote, Africa’s richest man whose fortune is estimated at more than $20 billion.

“There is a lot of perceived risk. People only talk about risk. But the majority of those who perceive risk don’t know the story. They have not really been there,” he added.

‘Malware sneaks into online ads’

By - Aug 05,2014 - Last updated at Aug 05,2014

WASHINGTON — Hackers are increasingly slipping malicious software into online advertising, creating risks for the Internet economic model, security researchers said Tuesday.

A report presented at the Black Hat security conference indicated that "malvertising" has become increasingly prevalent and difficult for users to detect.

"Malvertising victims are infected with malware in the course of their normal Internet browsing and therefore have no idea where or how they were infected," said the report presented by Cisco security researchers.

"Tracing the source is next to impossible, because the ad that delivered the malware has long since disappeared," it added. 

According to Cisco researchers, the problem is especially thorny because almost any website can be infected with a "drive-by" ad and may not be detected either by the website operator or ad network.

"A malvertiser who wants to target a specific population at a certain time — for example, football fans in Germany watching a World Cup match — can turn to a legitimate ad exchange to meet their objectives," the report said.

"Just like legitimate advertisers, they contact companies that are gatekeepers for the ad exchanges. They will pay up front for the advertising, perhaps $2,000 or more per ad run, and instruct the companies to tell the ad exchanges to serve the ads as quickly as possible, leaving little or no time for the ad content to be inspected," it added.

Cisco said malvertising appeared to be used to distribute viruses which lock up a user's computer until he or she agrees to pay a fee — a system known as "ransomware."

The report described malvertising as a potentially huge problem because it could disrupt the massive market for online advertising.

Egypt plans to dig new Suez Canal costing $4 billion

By - Aug 05,2014 - Last updated at Aug 05,2014

CAIRO — Egypt plans to build a new Suez Canal alongside the existing 145-year-old historic waterway in a multibillion dollar project aimed at expanding trade along the fastest shipping route between Europe and Asia.

The Suez Canal earns Egypt about $5 billion a year in revenues, a vital source of hard currency for a country that has suffered a slump in tourism and foreign investment since its 2011 uprising.

The new channel, part of a larger project to expand Suez port and shipping facilities, aims to raise Egypt's international profile and establish it as a major trade hub.

"This giant project will be the creation of a new Suez Canal parallel to the current channel of a total length of 72 kilometres," Mohab Mamish, chairman of the Suez Canal Authority (SCA), told a conference in Ismailia, a port town on the canal. His comments were broadcast by state television.

He said the total estimated cost of drilling the new channel would be about $4 billion and be completed in five years, though Egypt will strive to finish it within a more ambitious three-year deadline.

The original canal, which links the Mediterranean and Red Seas, took 10 years of intense and generally poorly-paid work by Egyptians, who according to the   SCA, were drafted at the rate of 20,000 every 10 months from "the peasantry".

It took weeks if not months off journeys between Europe and Asia, otherwise necessitating a trip round the tip of Africa.

Egyptian President Adel Fattah Al Sisi, a former army chief, said the armed forces would be in charge of the new project for security reasons. 

Up to 20 Egyptian firms could be involved in the project but would work under military supervision, he added.

Any disruption to shipping along the canal tends to have a serious impact on trade and oil prices.

"Sinai to a large degree has a sensitive status. The army is responsible to Egypt for this," said Sisi, who has previously said he would not hesitate to award major projects to help revive Egypt's battered economy to the army.

The military, whose budget is not made public, has accrued a business empire ranging from automobiles to tablet computers and is seen by many Egyptians as more efficient than Egypt's government.

Some estimate the size of the military's business operations at up to 40 per cent of the economy, though Sisi says they are more like 2 per cent.

Memories of Nasser 

Sisi's allies and supporters have likened him to Gamal Abdel Nasser, the charismatic colonel who led a coup against the monarchy in 1952.

In 1956, Nasser nationalised the Suez Canal, leading to a failed invasion by Britain, which controlled the channel, as well as France and Israel. Nasser was praised by Egyptians for pursuing several big projects during his 14 years as president.

Pro-government Egyptian media did not hesitate to compare the Suez expansion plans to Nasser's own state-led infrastructure projects that were a source of national pride.

Egypt has planned for years to develop 76,000 square kilometres around the canal to attract more ships and generate more income.

Sisi said the new canal was an unannounced part of that project, which Egypt invited 14 consortia to bid for in January.

Reuters reported on Sunday that Egypt had chosen a consortium including global engineering firm Dar Al Handasah, as well as the Egyptian army, to develop the area.

A promotional video played at the launch event suggested the project would cut waiting times for vessels and allow ships to pass each other on the canal.

Mamish, the chairman, said the project would involve 35 kilometres of "dry digging" and 37 kilometres would be "expansion and deepening", indicating the current Suez Canal, which is 163 kilometres long, could be widened as part of the project.

Among the bidders, according to Egypt's Al Mal newspaper, were a group including state-run Arab Contractors and James Cubitt and Partners, an international consultancy firm. Another included the McKinsey & Co. global management consulting firm.

Gulf allies Saudi Arabia, the United Arab Emirates and Kuwait donated more than $12 billion in cash and petroleum products to Egypt after the army overthrew Morsi. But Egypt remains in dire need of longer-term investments.

Jordan Electric Power Company narrows losses

By - Aug 04,2014 - Last updated at Aug 04,2014

AMMAN — Jordan Electric Power Company (JEPCO) narrowed losses during the first half of this year to JD7 million from JD9 million during the same period of the previous year. In a disclosure to the Amman Stock Exchange, the company revealed that total liabilities and equity rights rose to JD707 million compared with JD634 million. Income from sales reached JD437.7 million compared with JD359 million. 

Jordan Telecom reveals lower profit

By - Aug 04,2014 - Last updated at Aug 04,2014

AMMAN — Jordan Telecom revealed lower profit during the first half of this year. In a disclosure to the Amman Stock Exchange, the company said profit declined by 9.8 per cent to JD22.7 million compared with JD25.1 in the same period of last year. Earnings slipped by 2.7 per cent to JD174.1 million from JD178.9 million during the same comparison period. The company attributed the drop  to fierce competition in the market which affected the retail and corporate sectors, whereas revenues in the overall sales sector including international roaming increased. Capital expenditure increased to JD71.4 million versus JD15.1 million in the same period, due to renewing the licence for using the 900 megahertz frequency band for five years against JD52.4 million. The company’s total assets dropped to JD580.8 million at the end of June, down from JD618.2 million at the end of last year. 

Real estate trading rises 18% during January-July period of this year

By - Aug 04,2014 - Last updated at Aug 04,2014

AMMAN — The Department of Land and Survey (DLS) announced on Monday that  real estate trading was higher by 18 per cent during the January-July period of this year. According to the DLS data, turnover amounted to JD4.3 billion during the first seven months of this year compared to JD3.7 billion during the same period of last year. Revenues also increased to JD236 million this year, 15 per cent higher than the amount collected during January-July 2013. Purchases by non-Jordanian investors stood at 2,990 transactions during the first seven months of 2014, a 19 per cent  increase over the same period of last year. Iraqis topped the list of non-Jordanian investors (1,259 purchases) followed by Saudis (431), Kuwaitis (316) and Syrians (289). The market value of Iraqi purchases amounted to JD168.6 million, representing 58 per cent of the total amount paid by non-Jordanians.

Rattled Swiss private banks turn page on past

By - Aug 03,2014 - Last updated at Aug 03,2014

BASEL, Switzerland — Switzerland's exclusive private banking sector is turning the page on the business model that crafted its fortune and reputation, amid tougher international regulations and a crackdown on tax cheats, insiders say.

Amid international pressure on Swiss banks to make amends for past practices of allowing and even helping foreign nationals hide assets from the taxman at home, the sector has been undergoing a seismic shift and is even bracing to give up its cherished tradition of banking secrecy.

In this climate, there is no point for the tradition-laden private banking sector to "hang on to an idealised but now reevaluated past", said Christophe Gloor, the head of the Association of Swiss Private Banks (ASPB), who also heads the La Roche & Co. private bank.

Instead, he told bankers gathered recently for ASPB's general assembly in Basel, Switzerland's private banks — many of them still controlled by the families that founded them up to two centuries ago — should face the new reality "to better build the future”.

Switzerland agreed weeks ago to phase out its long tradition of banking secrecy over the next two years, caving to pressure from foreign governments who since the international financial crisis kicked in in 2008 have become increasingly eager to lay their hands on hidden assets.

Switzerland reluctantly agreed to opening the way to an automatic exchange of banking data, laying waste to its long-held conviction that accounts should be taxed but that all information about them should remain confidential.

 

Switzerland cannot impose its views 

 

"It is time to recognise that, unlike the United States, Switzerland does not have the capacity to impose its views on the rest of the world, even if they are based on reasonable concepts," Gloor said.

The wealthy Alpine nation has reached deals with the United States aimed at ending a dispute over charges Swiss banks in the past helped US citizens hide billions of dollars from tax authorities.

More than a dozen Swiss banks have been under criminal investigation by the US Justice Department, including the country's second largest bank Credit Suisse, which was slapped with a hefty $2.6-billion fine this year.

The country's largest private bank, Julius Baer, is also on that list.

Many other private banks have meanwhile signed up to a programme where they acknowledge they may have unwittingly helped US citizens dodge taxes and say they will agree pay large fines in exchange for avoiding criminal prosecution.

France has also launched a programme to flush out undisclosed French funds, which French Finance Minister Michel Sapin maintains allowed Paris to rake in an extra 10 billion euros last year alone.

Some 23,000 French citizens have come forward under that programme since June 2013 to fess up to undeclared accounts abroad — 80 per cent of them in Switzerland.

Swiss bankers, meanwhile, acknowledge they manage far fewer funds inside Switzerland today than they did in the past, since clients' assets are now being taxed and are therefore shrinking.

Bankers are therefore instead turning their sights abroad, where most institutions are expanding rapidly. 

"Members of our association are relentlessly internationalising," Gloor said. 

Swiss banks provide, directly and indirectly, some 260,000 jobs in the wealthy Alpine nation.

But while Swiss private banks have seen their staff sizes swell 6 per cent inside Switzerland over the past 6 years, their employee base abroad has ballooned 67 per cent to nearly 900 in total.

Central banks ending era of clear promises, return to 'artful' policy

By - Aug 03,2014 - Last updated at Aug 03,2014

NEW YORK/TOKYO — The world's major central banks are returning to a more opaque and artful approach to policymaking, ending a crisis-era experiment with explicit promises that they found risked their credibility and did not substitute for action.

From Washington to London to Tokyo, the global shift from transparency to flexibility underscores the challenges central bankers face as they test the limits of what monetary policy can achieve.

The return to a more traditional policymaking approach and nuanced statements will challenge the communication skills of central bankers who have been chastened in the last year after some too-specific messages confused and disrupted financial markets.

Complicating things on the world stage, the US Federal Reserve (Fed) and the Bank of England (BoE) are looking to telegraph plans and conditions for raising interest rates, while the European Central Bank (ECB) and the Bank of Japan (BoJ) are heading the other way.

"Central banking used to be an art," said a senior official of a Group of 7 central bank. "It became less so once, globally, but with what's happened at the Fed and the BoE, it may be back to being an art."

Both the Fed and BoE had promised to hold interest rates near zero until their jobless rates had fallen to a particular level. However, unemployment in the United States and Britain fell much more quickly than economists expected and both central banks scrambled to replace their suddenly outdated "forward guidance".

"Too much transparency may sometimes be counter-productive. The balance is always tricky," the official added, requesting anonymity.

The plan had been novel. After driving short-term borrowing costs to historical lows to battle the 2007-2009 financial crisis and deep recessions, Western central banks began offering pledges on the future rate path in an attempt to pull down long-term borrowing costs for automobiles, homes and business expansion.

Fed Chair Janet Yellen and many other policy makers routinely say the plan succeeded on that score, although other factors contributed. But Yellen, who was vice chair of the US central bank before taking the Fed's reins, is leading the charge away from specific policy forecasts.

"The idea of forward guidance was that by being transparent, you got a bigger effect on long-term rates," said Patrick Artus, global chief economist at French bank Natixis.

"But central banks take a risk on credibility," he added. "If something unexpected happens, you have to deviate from what you have been announcing."

The Fed's reputation took a hit last spring when borrowing costs shot up after then Fed chairman Ben Bernanke talked about the prospect of the central bank reducing its stimulative asset purchases "in coming meetings". Emerging markets also sold off sharply as investors priced in an earlier liftoff for US rates.

Several Fed officials felt compelled to walk back the guidance in an episode that prompted criticism from around the world over the Americans' sloppy communications.

The BoE, too, struggled with communication. In February it was forced to reconsider policy two and a half years ahead of schedule. With caveats about the economy, it had promised to keep rates low at least until the unemployment rate fell below 7 per cent, predicting that would take three years. It took six months.

A month after the BoE's reconsideration, in March, the Fed would drop a similar pledge.

The experiences, keenly scrutinised and debated, led to a growing realisation of the dangers of offering policy commitments, said officials familiar with discussions among global central bankers.

"We have to be careful [and] certain that you do not commit to things that we're not sure we can actually produce," Alan Greenspan, Bernanke's predecessor, told the Economic Club of New York in April. "Remember, we don't forecast very well."

 

From 'cheap talk' to 'useful guidance'

 

The latest guidance from the Fed and BoE is far less specific.

After Yellen's first policy-setting meeting as Fed chair in March, the US central bank said rates would likely stay at rock bottom for a "considerable time" after it shelves its bond-buying programme and, in a twist on qualitative guidance that leaves the Fed flexibility, it predicted rates would stay below-normal even after the economy has fully healed.

Yet Yellen sent markets tumbling when she stepped out of the Fed meeting that day and told reporters rates could rise "around six months" after a bond-buying programme ends.

Since then, by and large, the Fed has stuck with its broader guidance, closing the book on an era in which it rolled out eight distinct messages since 2008 on when it planned to tighten policy — at times targeting dates, at other times targeting specific unemployment and inflation rates.

The Fed is now moving away from "cheap talk" and towards "useful guidance", said Adam Posen, a former member of the BoE's policy-setting committee who is now president of the Peterson Institute for International Economics.

"It doesn't commit you to anything, or constrain you in terms of what you are responding to," he added.

Similarly, BoE Governor Mark Carney has refused to give any clear indication of the timing of a rate hike in recent appearances, instead steering markets to scrutinise both the strength and uncertainties of the economy.

But he too has struggled to sound the right tone: Investors scrambled to adjust their bets in June after Carney said they underestimated the chance of an early rate hike. He sought to soften the comment the following week, prompting one lawmaker to compare him to an "unreliable boyfriend."

 

Walk the talk

 

The example of Japanese and European central banks show that verbal commitment could prove ineffective unless backed by bold action.

The BoJ historically favoured opacity over transparency, but its approach failed to pull Japan out of deflation for nearly two decades.

Haruhiko Kuroda, a central banking outsider who took the BoJ's helm in March of last year, married bold action and words when he pledged to hit the bank's 2 per cent inflation target in roughly two years, and the BoJ doubled its aggressive asset purchases.

The double-whammy weakened the yen by 8 per cent against the dollar and lifted consumer inflation about half way to the BoJ's goal.

Even so, Kuroda has responded by following up with vague guidance, saying only that the BoJ will stick to ultra-loose policy until 2 per cent inflation is achieved in a "stable manner". So far markets do not expect a premature change in policy.

As for the ECB, it faces perhaps the greatest test as it struggles to extinguish deflation risks. After spending most of last year teasing financial markets about pending action, it had to put its money where its mouth was in June by adopting negative interest rates.

ECB President Mario Draghi has said more action would come if necessary although it is uncertain how long he can wait without launching a bond-buying programme, known as quantitative easing or QE, which is the last big option left in the bank's depleted war chest.

"There are a lot of people in central banks who are fantasising about forward guidance because it means they can stop QE and still claim they are doing something," said Posen of the US-based Peterson Institute.

"It was very attractive because... it doesn't cost us anything," he added. "And like most things that don't cost anything, it's not worth much."

Pages

Pages



Newsletter

Get top stories and blog posts emailed to you each day.

PDF