Global growth is shrinking and may lead to more QE

By Financial News
Global growth is shrinking and may lead to more QE

The world economy is still at risk of slipping back in to recession as global surveys signal that growth is falling, according to a review by investment firm Schroders.

Analysts blame the continuing eurozone debt crisis and a general drop in confidence that has led to shrinking order books.

The solution is more quantitative easy, proposes the firm, as banks are investing any spare capital in government bonds rather than new loans.

Buying assets off the would speed up deleveraging and let banks have more capital to lend sooner rather than later, said the firm’s economic review.

Investors have a choice when looking at economic growth – the US is generally considered to be ahead of the UK and Eurozone, but the rest of Europe is lagging behind, which could make picking the right equities a bargain.

“The formation of a new Greek coalition government means that Greece is likely to remain in the Eurozone this year, though the risk of an exit has simply been pushed out to 2013,” said Schroders economist Azad Zangana.

“In shifting the Greek exit to 2013, we have upgraded our forecast for 2012 growth, but downgraded 2013. We also now expect the European Central Bank to cut interest rates to 0.75% in July, followed by more long term refinancing operations.”

Looking at the UK, the firm predicts the Bank of England appears ready to restart QE after admitting that their forecast from May was too optimistic.

“We expect £50 billion of QE to be announced in July, with another £25 billion in November,” said economist James Bilson.

“Meanwhile, the Chancellor is performing his own U-turns, as he reverses a series of tax increases, and thinks of more ways to avoid admitting he has moved on from ‘plan A’. Credit easing is set to be expanded through the Bank of England, with the bank also providing new emergency liquidity, for instance.”

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