IMF

The week in review: Oil-heavy economies hit hard times and monetary policy quandaries

In this section, we cover the 10 most important events of the week, focusing primarily on the big stories in the markets and business as well as economic news.

1. Fears of a Chinese slowdown are heightened: It was officially confirmed on Monday. The Chinese manufacturing purchasing managers index fell to 49.7 in August, a level indicating a contraction of activity within the manufacturing sector and it meant that the index had sunk to its lowest level since 2012.

2. It wasn’t all bad news for China though: In celebration of the 70th “anniversary of victory in the war against Japanese aggression”, China held a stunning military parade with over 10000 army troops as well as an array of advanced combat weaponry being on display. This was a welcome relief to the world markets as the military parade meant that the Chinese stock markets were on a break and could not be the bearer of bad news as it has been recently.

A formation of military aircraft performs during a rehearsal ahead of celebrations to mark the 70th anniversary of the end of World War Two, in Beijing on 23 August 2015.

3. The same couldn’t be said for Canada: After a contraction of an annualised 0.8% in Q1, Tuesday’s news of an annualised 0.5% contraction in Q2 meant that the world’s 11th largest economy had officially entered recession. Analysts are pointing to the falling price of oil in recent times as being the main driver behind the poor data.

4. Similar woes for Australia: A day after the Canadians declared a recession, the world’s 12th largest economy reported a quarterly growth rate of just 0.2% in Q2 which was just half of what they had forecast. Driven by China’s drop in demand and a slump in oil prices, it was Australia’s slowest quarterly growth rate since 2013.

Canada GDP Growth RateAustralia GDP Growth Rate

5. Speaking of oil…: After a week in which oil had dropped to its lowest level in 6 years, the commodity had been making rapid gains from Monday to Wednesday with its biggest 3-day rise in 25 years. In particular, this sharp rally was driven by new estimates of lower US oil output and discussion of a cut in OPEC oil production. However, in the next few days, oil fell quite rapidly as the market had started to absorb the news of even more evidence pointing to a slackening of output in Chinese manufacturing.

6. The Jackson Hole Conference draws to its conclusion. Its message? Central banks can’t tackle inflation as well as they thought they could. The comment at the Fed’s annual symposium on Monday came after the Eurozone consumer prices index remained at a rock-bottom 0.2% in August, the same as in July. Worryingly, this was in spite of the ECB being almost six months deep into its extensive monetary easing programme.

7. Eurozone pessimism presses Draghi to adopt a more active stance: Having downgraded the forecasts for Eurozone inflation and growth, the European Central Bank’s governor Mario Draghi announced that he would be prepared to implement more monetary stimulus should the events in emerging markets, China especially, threaten the Eurozone’s recovery. Under existing plans, the ECB intends to buy €60bn worth of predominantly government bonds each month until September 2016 but to demonstrate his readiness, the purchase limit of a single country’s debt stock was raised to 33% from 25% and he commented that he would be willing to extend the asset purchases programme “beyond [the set date], if necessary”.

8. European migrant crisis intensifies: In what is already Europe’s worst migrant crisis in 70 years, images of a drowned toddler lying lifeless and face down on a Turkish beach, who had tried to reach Europe with his family, have sparked outcries on social media websites about the handling of the crisis. After circulating on Twitter, the hashtag #KiyiyaVuranInsanlik, or “humanity washed ashore” in Turkish, quickly gained traction as EU leaders met in Brussels to discuss how to resolve the crisis. Meanwhile, David Cameron revealed on Thursday that he would allow thousands more refugees from Syria, bowing to growing pressure at home and abroad,

A paramilitary police officer carries the lifeless body of a migrant near the Turkish resort of Bodrum - 2 September 2015

9. US economy shows its strength: On Friday, the monthly jobs report revealed that in August, a total of 173,000 jobs were created and the unemployment rate dropped to 5.1% from 5.3% in the month prior. With this rate being a 7-year low and a rate that the Fed deems as representing “full employment”, tit suggests that the world’s largest economy was picking up momentum ahead of the Fed’s crucial interest rate decision later this month.

10. But the IMF urges against rate rises: Raising concerns abut the current state of most developed economies in which the expected gains from low oil prices had failed to materialise, low inflation had become widespread and medium term growth had proved to be only “moderate”, the IMF gave caution on Thursday against possible rises in interest rates from countries like the US and the UK who have been considering it. Indeed, fear that a Fed rate hike may cause further turmoil in emerging markets and harm the prospects of the global economy also likely drove Christine Lagarde to make such a statement.