Central Bank Monetary Stimulus Actions Will Make Global Downturn Worse

Central Bank stimulus programmes have driven oil prices to a level where they have historically trigged recessions

by Justin Pugsley

(WireNews+Co) - London, England - 24 September 2012

Monetary stimulus programmes by the world's leading central banks will make the global economic downturn worse as they have driven oil prices to a level, which has always caused recessions in the past, according to a report published Monday Sept 24 by UK-based strategic consultancy IeC.

Oil prices now currently account for 5% of GDP, meaning that already hard pressed consumers are now spending more on essentials such as energy and food leaving less disposable income for discretionary purchases. Any sustained rise above 3% is usually enough to trigger a recession in the US, which remains the world's number one economy and a major influence on the economic health of the rest of the world.

High oil prices currently reflect fund inflows from the financial sector, often as a hedge against inflation, and not real demand and there is in fact no current shortage of oil in the world.

Given that household consumption accounts for over 60% of the economy in most developed countries this could see monetary stimulus programmes actually achieving the opposite effect of what they were intended to do – namely to stimulate economic growth and in the case of the US boost employment. As there is little demand in the economy higher commodity prices will result in lower profit margins for many manufacturing companies, which will not be able to pass costs on.

The report further argues that increasingly aggressive liquidity injections from central banks are now distorting the values of most assets and that they are therefore no longer reliable indicators for the economy.

Click here to view the report (http://www.new-normal.com/wp-content/uploads/2012/09/Research-Note-24Sept12.pdf) 

IeC is a London-based strategic consultancy advising Fortune 500 and FTSE 100
companies, investment banks and fund managers. For further information or for interviews please contact Justin Pugsley at JJPAssociates: justin@jjpassociates.co.uk (http://www.wirenews.co/mailto:justin@jjpassociates.co.uk).