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Reserve may stay its hand amid glimmers of hope

By Henry Thornton - posted Tuesday, 5 May 2009

Optimists, including US President Barack Obama, claim to see the green shoots of recovery.

This might keep local interest rates on hold today, along with the convention - if this is still observed - that it is important not to implicitly challenge the budget by moving rates immediately before its presentation.

In the mighty US, consumer sentiment improved in April. The Institute for Supply Management's manufacturing index rose to 40.1 last month, up from 36.3 in March and ahead of expectations. While readings under 50 indicate contracting activity, the report suggests the pace of decline is slowing.


Manufacturing inventories fell again in March for the seventh month in a row. Declining inventories mean that production is less than consumption, providing the potential for restocking.

The safe conclusion is that the pace of decline seems to be slowing.

US share markets have continued to rise, in what is beginning to look to optimists more like anticipation of recovery than a bear market rally.

The International Monetary Fund has had the embarrassment of five times revising down its forecast of global economic activity. So one expects especial care in spotting improvement.

A little over a week ago, Youssef Boutros-Ghali, who chairs the IMF's steering panel, the International Monetary and Financial Committee (IMFC), was reported as saying: "We have serious problems. We are taking very serious measures, but things are beginning to look up.

"Carefully, cautiously, we can say there is a break in the clouds," said Boutros-Ghali, echoing the guarded optimism expressed by other worthies.


An IMFC communiqué added that to ensure recovery in 2010, further action would be needed to restore the health of banks, revive lending and restart international capital flows. It urged countries to keep up fiscal stimulus and develop plans to exit from the extraordinary measures taken once recovery was established.

The health of banks remains the biggest obstacle to recovery and the biggest risk of further, possibly dramatic, deterioration in the economic outlook. The US banking system looks less dire, though it seems there will be nothing much left of the mighty American International Group when the sales of its better business units are over.

It is the European banks that could still cause a dramatic worsening of the global outlook. Of the $4 trillion in bad loans estimated by the IMF, at least $1 trillion is owed to the European banks, much due to failure of businesses and nations in Eastern Europe.

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First published in The Australian on May 5, 2009 and in Henry Thornton's blog.

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About the Author

Henry Thornton (1760-1815) was a banker, M.P., Philanthropist, and a leading figure in the influential group of Evangelicals that was known as the Clapham set. His column is provided by the writers at

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