Investors’ Losing Confidence on Future Growth
This week was very important for the investors and private companies as they waited to see the forecast of world economic growth to make investment decisions. Last week witnessed turmoil in the international financial markets. This started at the end of July when the US economy recorded flat line growth in the first quarter and 1.3 percent growth in the second quarter. On the other hand Euro zone and the UK just recorded a GDP growth rate of 0.2 percent.
Things are not gloomy for third quarter as well, with the contraction of the US economy, financial distress on the UK households’ and the sovereign debt crisis in the Euro zone leading to uncertainty in the global financial markets.
Private companies are facing output and profits cuts due to decrease in the households’ consumption. With the ‘air of fear for future growth’, the companies are cutting their investment plans and households’ are deferring their spending decisions.
In the Euro zone, European banks are cutting their lending due to high cost of funding that will drag down the economic growth. European banks are finding it difficult to obtain overnight funding as the banks prefer to deposit their liquidity with the Central Banks rather than lending it to other banks due to counter party risk. Financial Times reported that the foreign bank branches in the US increased their cash assets from $758 billion for the week ending August 3 to $813 billion.
Banks are finding difficulty in obtaining finance from the wholesale market and commercial paper issuance by the financial group decreased by 16 percent from mid June. If the contraction in the credit in the financial market continues and banks’ cut their lending further, we will not be witnessing increase in growth rate in the US, the UK and the Euro zone despite the European temporary bank funding guarantee scheme and ECB’s overnight “deposit facility”.