Financial News: Week of 2/23

This week in financial news the Dow Jones Industrial Average (DJIA) experienced both a record low and yearly high. On Monday, the DJIA dropped 216 points, a decline attributed to the threat of European recession. Fortunately, the index rebounded Tuesday, and experienced a net gain of 175 points on Wednesday. In total, the earnings from Tuesday and Wednesday, a combined 290 points, covered the 216 point loss. The positive gains in the past days can be attributed to the growing housing market, as more Americans are signing housing contracts. New home sales also rose 16%, which signals recovery in the housing market.

Over this past weekend, Moody’s Investors’ Services announced that the UK would loose its Triple-A credit rating. This decision comes with some important background information, starting with the country’s frustratingly slow growth. They have been feeling the recession in just the way the rest of the world has, and just last quarter, they experienced yet another contraction of over .3%. The drop was mainly due to downturns in the manufacturing sector. If they do not improve their performance this quarter, there is the potential for a triple dip recession.  

Their growth projections for 2013 are between .9% and 1.3%, which is not good enough to get them out of their current recession. Behind this recession are controversial austerity policies that have been practiced by the government in an effort to dig themselves out of their budget deficit. The theory behind practicing austerity is that they need to make cuts in their budget in order to reduce the amount of debt that they have. However, lower government spending is hurting their tax receipts. Evidence of this is that it is estimated that Chancellor Osborne will have to borrow another 65 billion pounds in the coming years. Due to their slow growth and failing austerity policies, it was decided that they posed too much of a risk to the world economy, so they lost their good credit rating. The Chancellor reacted to this by insisting on the importance of developing a solid recovery plan. Despite this bad news for the UK economy, markets still responded well on Monday. They closed up .3%, showing that they may still have some resilience.  

Sequestration is scheduled to take place on March 1^st as the U.S government faces rising entitlement costs and increasing debt. Originally scheduled to occur January 1^st, sequestration is the result of Congress’s inability to reach a debt compromise. Over the next 10 years, the U.S government plans to cut $1.6 trillion in deficit costs. Defense initiatives, discretionary programs, and entitlements are all subject to vast government-wide budget cuts. The U.S. GDP is also exhibiting slow-down effects as a result of the budget crisis. The Federal Reserve is responding to such economic issues by continually buying government bonds to keep interest rates low. Bond purchasing is forecasted to continue for the rest of 2013 and into 2014. The Federal Reserve’s low-interest rate policy has been justified by Chairman Ben Bernake in front of the Financial Services Committee. Overall, the sequester represents the repercussions of rising debt and government expenditures. 

By, Carolyn Gordon and Kelsey Shields

References

·      http://www.bbc.co.uk/news/business-21193525

·      http://www.newyorker.com/online/blogs/johncassidy/2013/02/uk-shows-how-austerity-policies-lead-to-more-borrowing-and-debt.html

·      http://www.guardian.co.uk/politics/2013/jan/24/imf-advises-uk-ease-austerity

·      http://www.ifs.org.uk/budgets/gb2013/gb2013.pdf

·      http://www.ft.com/intl/cms/s/0/ad9992b4-7d38-11e2-8bd7-00144feabdc0.html#axzz2LlUEqMxG

·      http://www.marketwatch.com/story/uk-stocks-shake-off-moodys-downgrade-2013-02-25?siteid=yhoof2