The global economy has taken another knock, as Japan unexpectedly falls back into recession hours after the UK prime minister warns of ‘instability and uncertainty’.
Summary: Japan’s recession hits the Nikkei
Bundesbank opposes stimulus despite weak growth prospects
2.39pm GMT
Mario Draghi concludes with a loud call to arms to the European parliament, and to politicians and central bankers across the eurozone.
2014 has been a year of profound change, but what has been achieved so far is not enough.
2015 needs to be the year when all actors in the euro area, governments and European institutions alike, will deploy a consistent common strategy to bring our economies back on track.
2.27pm GMT
Now Draghi is talking about how the ECB provides liquidity to banks by offering them credit in return for collateral (various financial assets).
He is trying to reassure MEPS that these activities have a good track record. The eurosystem has never made a loss through these collateral programme -- in the rare cases of a financial crisis, the ECB recovered its collateral by seizing the underlying assets that banks had placed with it.
So far the Euro system has not yet realised a loss from our credit operations...we recovered from Lehman by claiming back collateral- Draghi
2.24pm GMT
Draghi: However, monetary policy alone cannot overcome financial fragmentation in the euro area @acardenasfx
2.23pm GMT
Draghi moves onto a reminder that monetary policy can’t do everything itself. National governments must act too, and implement structural reforms
2.22pm GMT
Draghi: We have tasked relevant staff and committees with the timely preparation of further measures to be implemented, if needed
2.21pm GMT
Mario Draghi repeats some key news lines from the ECB’s most recent governing council meeting -- the GC is unanimously committed to expanding its balance sheet towards 2012 levels, and has tasked staff to develop further measures if needed.
2.20pm GMT
Draghi says the ECB can see early indications that its credit easing package is delivering tangible benefits, but a full recovery will take some time.
2.18pm GMT
#Draghi looks pretty tired.
2.17pm GMT
Credit market fragmentation has made it harder for the ECB to fulfil its mandate, Draghi says.
Some markets have improved recently, but other credit markets are still impaired. So overall credit availability is still tight on a historical basis.
2.15pm GMT
Draghi tells the committee that the ECB still expects a moderate pick-up in growth next year. But, euro area growth momentum did weaken over the summer.
And the risks to the economic outlook continue to be to the downside.
2.12pm GMT
Mario Draghi begins by telling MEPs that 2014 has been a year of profound change. He cites the changes to the way eurozone banks are supervised and regulated.
He also says that 2014 was “a challenging year for monetary policy”, which saw the ECB takes a number of measures to address an increasingly sobering financial landscape.
2.09pm GMT
Mario Draghi’s testimony at the European Parliament is just starting now.... (livefeed here)
2.04pm GMT
Capital Economics reckons the Japanese yen will weaken sharply in 2015, from around ¥116 to the $1 today to ¥140 next year.
Capital Economics on Japan recession: "we now expect the yen to fall to 140 against the dollar next year"
1.55pm GMT
Over in Greece, demonstrators marking the 1973 Athens Polytechnic uprising – the event that triggered the fall of seven years of hated military dictatorship the following year – are amassing in the Greek capital.
“It is quite clear that despite all the talk of success the economy has seized up and the government is in no position to leave the bailout program and go out to the markets,”
“We are essentially in a pre-election period. A new government will have to negotiate with creditors when elections are held early next year, which everyone believes.”
1.49pm GMT
Heads-up: Mario Draghi, ECB chief, will begin testifying to the European Parliament Committee on Economic and Monetary Affairs. in 10 minutes.
It’ll be livestreamed here.
.@EP_Economics discusses with Mario #Draghi at 15:00 the @ECB 's perspective on economic & monetary developments.LIVE http://t.co/JlQO1eIiwY
1.38pm GMT
Time for a recap.
Japan’s stock market has suffered its biggest fall in three months, as the unexpected news that the country is back in recession spooked the Tokyo stock market.
"Europe remains very weak... not immune from that...that's why red lights are warning... " Mr Osborne says in Rochester in a neon jacket
The truth that emerges clearly from Japan’s experience so far this year is that fiscal policy nowadays exerts a much more powerful effect than monetary policy.
The BoJ’s unprecedented efforts, injecting liquidity through its QQE policy, have left Japan’s economy still slumping while consumer price inflation, stripping out the effects of the sales tax increase, is beginning to slip, despite households’ expectation that it is on a solid rising trend.
1.03pm GMT
Delaying the planned sales tax hike would help Japan achieve ‘escape velocity’ levels of growth, according to Jesper Koll of JP Morgan (speaking on Bloomberg TV a moment ago)
12.49pm GMT
And this chart shows how Japan’s economy has struggled since the financial crisis began, with growth lagging behind the US, Germany, Britain and (even) France.
Japan GDP -1.3% v pre-crisis peak (US +7.7%, UK +3.4%, Ger +3.1%, Fra +1.4%, Spa -5.8%, Ita -9.4%, EZ -2.2%) pic.twitter.com/9k827qkPvN
12.46pm GMT
Japan’s slide into recession is worryingly reminiscent of 1997.
Then, the Hashimoto government decided to raise the sales tax in an attempt to rebuild the country’s fiscal position. But the move may have backfired -- a strong-looking recovery was snuffed out and Japan fell into an 18-month long recession.
Will Japan ever raise their sales tax again, after what just happened w/ Q2+Q3 GDP, after 1997 crisis? Fiscal reform w/Abe = dead. $USDJPY
12.25pm GMT
Over in Rochester, Kent, the UK chancellor George Osborne has repeated David Cameron’s warning that the eurozone is a threat to the UK:
"Europe remains very weak... not immune from that...that's why red lights are warning... " Mr Osborne says in Rochester in a neon jacket
12.19pm GMT
For an alternative take on Germany, check out Wolfgang Munchau in the Financial Times today.
Munchau argues that German economists and politicians are hamstrung by their devotion to the “ordoliberal” policies that emerged from the trauma of the 1920s and 1930s.
The ordoliberal doctrine may even have worked well for Germany, though I suspect that the country’s economic success is due mostly to technology, high skills and the presence of some excellent companies, rather than to economic policy.
Through its dominance of the euro system, Germany is exporting ordoliberal ideology to the rest of the single currency bloc. It is hard to think of a doctrine that is more ill suited to a monetary union with such diverse legal traditions, political system and economic conditions than this one. And it is equally hard to see Germany ever giving up on this. As a result the economic costs of crisis resolution will be extremely large.
Great lede from Munchau's latest, "The wacky economics of Germany’s parallel universe" (http://t.co/Criaixs6wF)... pic.twitter.com/cxRW1qNSrz
11.51am GMT
The Bundesbank’s chief, Jens Weidmann, has also attacked the idea that the European Central Bank should embark on a larger stimulus programme.
He told the Handelsblatt newspaper that the ECB should resist pressure for a full-blown quantitative easing programme (buying sovereign debt with new money).
“Such purchases might create new incentives to run up debt, besides adding to the reform fatigue in a number of countries.”
The Germans just don't seem to care that we're on the brink of a continent-wide recession http://t.co/wg01yU0LGS via @BI_Europe
11.40am GMT
Meanwhile in Germany, the Bundesbank has warned that economic growth in Europe’s largest economy will remain weak for the next few months.
“The further deterioration in economic expectations and the stagnation of new orders point to a rather sluggish course of economic development in Germany until at least the end of 2014.”
“No marked recovery in important euro-area partner countries has yet materialised.”
“An additional, debt-financed economic package...would not be constructive for the economic situation in Germany, or the comparatively meagre stimuli it is expected to give to the rest of the euro zone,” the Bundesbank said in its monthly report.
“In view of the considerable uncertainty surrounding the global and European economy, it seems appropriate for the moment to continue in the fiscal direction laid out in previous planning.”
11.24am GMT
#Bank control needs to fall under criminal legislation, regulars need to carry badges, not business cards.
11.22am GMT
Banking analyst Ralph Silva has applauded Bank of England governor Mark Carney’s proposal that bankers’ fixed pay should be clawback-able (see 9.01am post for details).
Controlling #bankers is controlling compensation, not bonuses, Mark #Carney gets it! He also talked about criminal sanctions. #banks beware
11.17am GMT
The mood in the financial markets has also been dented by the events at the G20 summit in Brisbane last weekend, where Vladimir Putin faced the unhappiness of fellow world leaders over the Ukraine crisis.
Rather than the plethora of sound bite-friendly empty promises that we have become accustomed to, the focus was disproportionately on sanctions against G20 member Russia.
Japan’s problems are far greater than markets had assumed and the likelihood of snap elections has taken a step closer.
Vladimir Putin’s presence and early departure from this weekend’s latest G20 summit ensured that sentiment was already frosty before this disappointment.
11.03am GMT
Starting to look like Japan might be facing a European-style lost decade.
11.00am GMT
With Abenomics looking ropey, Japan’s prime minister may be tempted to unleash more fiscal firepower to drive the economy back to growth.
But Japan’s precarious financial position doesn’t give Shinzo Abe much freedom. Especially as the unpopular sales tax hike - now to be postponed - was designed to show that Tokyo was serious about tackling its huge debt pile.
The government will be keen to draft a fiscal stimulus package, but given the precarious state of the public finances--there isn’t much room for maneouvre here and any package is unlikely to match the size of the previous supplementary budget (implemented in January 2014).
The weak data are a major setback for the BOJ and it now might take even longer for it to meet its inflation target of 2%, meaning that it is unlikely to end its ultra-loose monetary policy any time soon.
10.44am GMT
Back to the news that Japan is in recession, after GDP shrank by another 0.4% in the third quarter of the year.
With the Yen already in a weakened position after a surprise round of monetary stimulus announced very recently, this could cause the world’s third most traded currency to crumble further. This poor GDP reading is likely to have a detrimental effect on stock markets in Asia and have a ripple effect on equity markets abroad.
Although Japan officially now falls into the definition of a recessionary period (two consecutive quarters of economic contraction), it seems unlikely that this would cause a steep global equity downturn for more than a few days.
10.30am GMT
Just in...... the eurozone’s trade surplus has doubled month-on month.
The largest surplus was observed in Germany (+€138.8bn in January-August 2014), followed by the Netherlands (+€38.5bn), Italy (+€26.2bn), Ireland (+€23.2bn) and the Czech Republic (+€10.8bn).
The United Kingdom (-€89.8 bn) registered the largest deficit, followed by France (-€49.3 bn), Spain (-€16.6 bn) and Greece (-€13.6 bn).
10.10am GMT
Andy Haldane isn’t the only person feeling dovish about UK interest rates:
HSBC has shifted its BoE rate hike call by a YEAR. Q1 2015 -> Q1 2016.
9.38am GMT
When it comes to crisp wordplay and biting insights, it’s hard to beat a speech from Andy Haldane.
As Great Recession abruptly replaced Great Moderation, it was clear a grave analytical and policy error had been made. Economic and financial pride had come before a momentous fall.
Nemesis had duly followed hubris. It was the coldest of comforts that this cognitive lapse was shared by the whole economic and policy-making profession.
This, rather than alcohol, is why drunks search for lost keys under the lamppost.
Friedrich Hayek likened the process of controlling the economy as akin to taking a tiger by the tail. As far as inflation control is concerned, Hayek was right. As some countries are finding today, the tiger is capable of biting back.
Chart 6 plots inflation expectations from financial markets in the UK, US, the euro-area and Japan over recent years. In Japan, inflation expectations have been anything but well-anchored, varying significantly around a trend close to zero. Most recently, they have been falling once again. The same is true in the euro-area and, to lesser extent, in the US.
So far, inflation expectations in the UK have held up and, on a central view, the Bank expects inflation to be on target at a 2-3 year horizon. But this tiger needs careful handling. Even in the UK, some measures of household inflation expectations have fallen slightly over the course of this year. The tiger has stirred.
Wearing my MPC hat, and with UK inflation already below target, this is something I am watching like a dove.
9.12am GMT
9.01am GMT
Mark Carney, the Bank of England governor, has argued that bankers’ basic pay may need to be controlled if the financial sector is ever to put recent scandals behind it.
It is not merely that we should want to follow Churchill’s wish to see “finance less proud and industry more content”.
We want to see industry content and finance taking justifiable pride in its contribution to society.
As Bill Dudley and my colleague Minouche Shafik have argued, the succession of scandals mean it is simply untenable now to argue that the problem is one of a few bad apples. The issue is with the barrels in which they are stored.
Leaders and senior managers must be personally responsible for setting the cultural norms of their institutions. But in some parts of the financial sector the link between seniority and accountability had become blurred and, in some cases, severed.
Standards may need to be developed to put non-bonus or fixed pay at risk. That could potentially be achieved through payment in instruments other than cash. Bill Dudley’s recent proposal for certain staff to be paid partly in ‘performance bonds’ is worthy of investigation as a potentially elegant solution....
8.50am GMT
8.49am GMT
From Tokyo, my colleague Justin McCurry reports that the Japanese government is widely expected to can the proposed sales tax hike tomorrow, and announce a snap general election:
Abe now faces a difficult balancing act: whether to address Japan’s huge public debt – now more than twice the size of its economy – by pushing ahead with what would be a deeply unpopular tax hike, or hold off and attempt to kickstart growth.
All the indications are that Abe will opt for a delay in the tax rise and call a snap election on Tuesday. Voters will probably to go to the polls in mid-December, just halfway through his current term.
Daiwa on Japan election: 'Given the opposition’s disarray, the main question then will be... the eventual size of the ruling LDP’s majority'
8.21am GMT
Michael Hewson of CMC Markets agrees that Japan’s unexpected slump has hit the mood in Europe:
European trading this week looks set to continue the weaker theme this morning as we get set to open lower after economic data showed that Japan slipped back into recession as the economy contracted 0.4% in Q3, underlining the recent decision by the Bank of Japan to increase its stimulus program.
8.11am GMT
The main European stock indices have dropped at the start of trading, as Japan’s recession weighs on the markets.
The German DAX and Italian FTSE MIB both shed 1%, and the French CAC is down 0.8%.
#FTSE opens down 04% after Japan enters recession. Biggest fallers Sainsbury (-1.9%) then Tesco (-1.9%)
uneven growth, financial risks, geopolitics, waning demand and the threat of a European (and now Japanese) recession.
8.00am GMT
Japan’s recession shows that there simply isn’t enough demand to sustain global growth and inflation, argues Daniel Alpert, managing partner of investment bank Westwood Capital.
#Nikkei down 430 points. US 10 year down 4 bps. Countries tossing around "hot potato" of inadequate demand. Today Japan dropped it. #USNext
7.57am GMT
How seriously should we take David Cameron’s warning that “red lights are flashing” for the global economy?
Our economics editor Larry Elliott says that Cameron is absolutely right to be worrying about the eurozone (a clear red-flag risk). Geopolitics and slowing emerging markets are also a concern. Global trade talks? Not so much.
The first problem he identifies is Europe, where he fears a third recession in the eurozone will lead to deflation. Given that the single currency area has never recovered from the financial and economic crisis of 2007-09, this is justified. There are already signs that the latest slowdown in Europe is having an impact on UK exports. Warning light rating: bright red.
A slowdown in emerging markets is the second risk highlighted by the prime minister. This is less problematical for the UK. Some emerging market economies – such as Brazil and Russia – have weakened, but China is still expanding at 7% a year while the worst of India’s problems seem to be behind it. What’s more, the UK exports more to the Netherlands than it does to the Bric (Brazil, Russia, India and China) countries combined. Warning light rating: amber.
7.48am GMT
The Japanese recession a “big macro-economic shock’, says Ian Williams of Peel Hunt.
Williams is alarmed that domestic demand was so weak in the last quarter, with household consumption and business investment below forecast.
The data increase the likelihood of PM Abe postponing the next sales tax hike and calling a snap election.
7.45am GMT
UBS’s former chief economist, George Magnus, is confident that prime minister Abe will now postpone the plan to raise Japan’s sales tax, from 8% to 10%.
Japan’s plight also shows the limits of quantitative easing (QE), he adds.
So what did we lesson overnight from the East? Japan's back in recession. Abe's tax hike 2,0 will be postponed. QE and growth bad bedfellows
7.36am GMT
Shares have tumbled in Tokyo after Japan fell back into recession, and there were losses across the region.
The Nikkei index of leading Japanese shares suffered its biggest one-day fall since August, shedding almost 3%.
Japan’s GDP release has been a key turning point for the session as optimism swiftly waned and traders took profits on equities and USD/JPY [positions on the US dollar versus the yen].
This week has been pinned as key for Abenomics and so far it certainly has not been a good start.
7.32am GMT
Good morning, Europe. Here's a chart of Japan entering recession (again). pic.twitter.com/V2dFPjlHlZ
7.23am GMT
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The storm clouds gathering over the global economy have darkened this morning, with the unexpected news that Japan has fallen back into recession.
“The impact of the sales tax was much more severe than expected.”
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