Interest rate rises add new risks for global economy

Economic growth

SHARE THIS STORY

JUUGS Jun13

The past week has seen major increases in global interest rates.  This would be good news if it was due to a strong global economic recovery.  But it isn’t.  Yesterday, Q1 US GDP growth was revised down to 1.8%, for example.  Instead, it seems to reflect investors’ fear that central banks may be losing control of the market.

The chart highlights the change that has taken place, using the concept of the JUUGS (Japan, US, UK, Germany, Switzerland) versus the PIIGS (Portugal, Ireland, Italy, Greece, Spain):

  • The blog first presented this 2 years ago, to argue that analysts were entirely wrong to worry about renewed inflation.  Ageing western and Chinese populations are a replacement economy, so there is little risk of a demand surge which would lead to serious inflation
  • As a result, the real issue is about return of capital, versus return on capital.  Older investors (who control 75% of investable assets in the West), have less time to recoup lost capital, as they need it for retirement.  So return of capital is their key concern
  • Thus interest rates had been falling in the JUUGS from August 2010 (red column) to May 2013 (blue).  These were seen as ‘safe’ markets.
  • They had instead been rising in the 3 main JUUGS (Greece/Ireland were supported by the ECB after their defaults)

But now investors are starting to worry that central bank bond buying via their $10tn liquidity programmes has pushed the JUUGS into a more risky position.  Their rates today (green) are higher  – for the first time since August 2010.

Clearly we don’t know what will happen next.  Investors may decide their fears were over-stated.  But they may decide to worry that China may begin to sell its $1.2tn holding of US Treasury bonds and $450bn of US housing agency bonds?  Or Japan its $1.1tn of Treasury bonds?:

  • There is no reason for either country to continue to own these bonds
  • They loaned the money to support their export sales, so Americans could buy their goods
  • But their exports today have slowed, and they need the money to support their own economies

Central banks have gambled huge amounts of money on the risky and unlikely proposition that they can kick-start growth.  They preferred to ignore the obvious fact that ageing populations cause growth to slow or go negative.  Current interest rate moves highlight that this risk is now becoming more obvious, and on a wider scale.

8 July update.  Blog readers read it here first.  Official data today shows Japanese investors were selling $29bn of foreign debt in June, as this post was being published.  This was a record amount according to the Ministry of Finance

PREVIOUS POST

US, EU auto sales hit demographic roadblock

26/06/2013

Central bank policymakers and financial analysts are seemingly convinced that th...

Learn more
NEXT POST

The blog's 6th birthday

29/06/2013

This week is the blog’s 6th birthday.  Remarkably, its audience remains e...

Learn more
More posts
G7 births hit new record low, below Depression level in 1933
14/07/2019

If a country doesn’t have any babies, then in time it won’t have an economy. But that...

Read
From subprime to stimulus…and now social division
06/07/2019

The blog has now been running for 12 years since the first post was written from Thailand at the end...

Read
Resilience amidst headwinds is key for H2
30/06/2019

Resilience is set to become the key issue as we look forward to H2, as I note in a new analysis for ...

Read
Perennials set to defeat Fed’s attempt to maintain the stock market rally as deflation looms
23/06/2019

Never let reality get in the way of a good theory. That’s been the policy of western central b...

Read
Europe’s auto sector suffers as Dieselgate and China’s downturn hit sales
16/06/2019

Trade wars, Dieselgate and recession risk are having a major impact on the European auto industry, a...

Read
2019 Global Outlook – a mid-year update: ACS webinar on Thursday
04/06/2019

There will be no shortage of important topics to discuss on Thursday, at my regular Chemistry and t...

Read
US-China trade war confirms political risk is now a key factor for companies and the economy
12/05/2019

There are few real surprises in life, and President Trump’s decision to launch a full-scale tr...

Read
Uber’s $91bn IPO marks the top for today’s debt-fuelled stock markets
28/04/2019

Uber’s IPO next month is set to effectively “ring the bell” at the top of the post...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more