Europe Outlook 2023: Is a recession really avoidable?

MARCH 12, 2023, SUNDAY AT 12:09 AM

ON the back of macroeconomic data which has come through better than expected, the biggest drivers of the rally to date in the STOXX 600 can be attributed to the 

• weakening of the USD, 
• lower rate expectations and 
• falling bond yields.

After posting one of the worst years in decades in 2022, equities and bonds had one of their best Januarys on record year-to-date, rallying more than 20 per cent from its lows in late September 2022, as it has become clear that Europe has managed to avoid the near term energy crisis this winter.

However, the rally is likely driven by investor sentiment rather than fundamental reasons, with 

• systematic algorithms, 
• trend-following investors buying back into equities, and 
• hedge funds massively short-covering from an overly pessimistic positioning from last year.

Furthermore, with strong economic data coming from the US and Eurozone inflation numbers falling back to single digits, investors are increasingly hopeful of a potential soft landing. Combined with the expectation that central banks are heading towards the end of the monetary tightening cycle this year, investors have a renewed sense of optimism, resulting in a risk-on climate.

However, we argue that the markets may be overly optimistic, and the current rally is not sustainable. While high frequency indicators suggest that the Eurozone may defy the odds of potentially avoiding a recession, it is unlikely that the European economy will go unscathed from the delayed effects of the rapid ECB tightening, so there could be more downside risk ahead should Europe experience an economic contraction, especially after the recent rally.

 

STOXX 600 has rallied furiously ever since bottoming in late September 2022.

Growth outlook has improved from before but remains weak

With the recent release of GDP figures, Europe managed to narrowly avoid a fourth-quarter contraction projected in November 2022, on the back of a warmer-than-expected winter and a strong labour market.

Since the last economic projections, there have been favourable developments which have improved the growth outlook for 2023. The diversification of supply sources and a drastic drop in consumption has left gas storage levels above the seasonal average of past years, and wholesale gas prices have fallen well below pre-Ukraine war levels.

Furthermore, Europe’s labour market continues to remain strong, with unemployment rate coming in at 6.7 per cent for 2022, which is the lowest figure in the past few years, well below the 5-year and 10-year rolling average figures (Figure 2).

In addition, consumer confidence is slowing rebounding ever since bottoming in September 2022, but figures remain at secular lows even as conditions have improved in the short term.

However, looking at leading economic indicators such as the PMI, the data points towards a possible mild economic contraction. Although there has been a small uptick in the both manufacturing and services PMI, manufacturing PMI continues to be contractionary territory, dimming the near-term growth outlook.

Next, the tightening to date has begun to pass through to less supportive conditions for households. Higher borrowing costs have significantly increased the debt service costs of existing borrowers and made new mortgage borrowing less attractive and these have led to a decline in home prices.

As home prices fall, there will be a negative impact on household wealth, which can lead to a decrease in household spending and ultimately impact economic growth.

With the recent turn of events and rosier than expected macroeconomic backdrop, GDP forecasts for the Eurozone have been revised upwards on a quarterly basis. However, coming off a low base, these revisions are likely to be overly optimistic as Europe still faces longer-term issues, like the ongoing energy crisis which is structural in nature, and lagged effect of policy tightening which has yet to be reflected in consumer spending.

Even with the recent revisions to the upside, GDP in Europe is expected to expand by only 0.3 per cent in 2023 for the entire year, which lags behind that of US and Japan, making it the weakest developed market within our coverage.

 

Labour market continues to remain tight as unemployment rate trends down.

Euro area inflation remains elevated

Next, headwinds arising from rising prices continue to persist, which affects both consumers and businesses detrimentally.

Although the headline inflation in the Eurozone has been trending down towards single-digit territory from its peak of 10.6 per cent year-over-year back in October 2022, it is still currently running at multi-year highs.

Furthermore, core inflation (which excludes volatile items such as energy and food) has yet to peak and was still rising in January, which erodes the purchasing power of households.

Although the surge in European inflation was initially concentrated in energy and goods, the problem has become more broad-based. The more alarming issue is the pickup in nominal wages, on the back of tight labour markets. Higher incomes can cause a self-reinforcing cycle of spending, making it more difficult for the ECB to achieve its two per cent target inflation.

As these inflationary pressures persist, it would be difficult for the ECB to put the brakes on monetary tightening, at least until they see a meaningful deterioration in economic and labour market conditions, which will weigh on business activity and could cause a drag on investments.

Combined with the fact that the ECB is set to start quantitative tightening in March, which further lowers the availability of money circulating in the economy and drains liquidity away from the financial markets, these concerns look under-reflected in the relatively optimistic pricing of European equities.

 

Services PMI may have rebounded but Manufacturing PMI remains in contractionary territory.

Energy situation unlikely to be resolved soon

With the help of a milder than expected winter and targeted government policies to curb the use of natural gas, Europe has managed to escape the worst-case scenario of a severe energy crisis, with natural gas prices falling sharply from their previous peaks.

This has helped to partially diminish the effects from the rapid rise of headline inflation, and has provided some cushion to real spending.

However, the energy problem in Europe is structural, with a lack of sufficient and proper infrastructure to keep up with the demand of energy consumption in Europe.

Today, more than half of Europe’s energy consumption still comes from imported sources, leaving it vulnerable should there be any political or economic wars with other countries.

This issue has been brought to light during the Russia-Ukraine war, which has led to huge investments into renewable energy to accelerate the path to energy independence.

With that being said, the setting up of these supply chains and infrastructure upgrades require time, thus energy prices are set to continue remain elevated in the near to mid-term.

Furthermore, Russia has stated that they will cut oil output by about five per cent in March this year, after the West imposed price caps on Russian oil and oil products. This can exacerbate the supply side constraints for energy in Europe and keep energy prices higher for longer, further fueling inflation concerns.

 

Earnings may be revised downwards

The fall in European equities in 2022 was due multiple compression on the back of rising real interest rates. Just as the expected recession has not arrived yet, neither has the anticipated sharp downgrade to corporate earnings.

In fact, earnings estimate for European equities have seen strong revisions to the upside in the past few weeks, as fear of an energy crisis subsides and better than expected macroeconomic data has buoyed investor sentiments.

However, consensus estimates of EPS growth and resilient margins may be too optimistic, as we have yet to fully grasp the delayed effects of the fastest pace of rate tightening in the ECB’s two-decade history. As it stands, current projections are pricing in a mild recession or soft landing with markets pricing in the end of the tightening cycle soon.

Nonetheless, a hot labour market does not offer much room for a policy U-turn just yet, especially when core inflation has not peaked yet.

Fortunately, if the unemployment rate does not spike, it is possible to avoid a negative spiral seen in many past recessions, where falling demand leads to falling employment, which further compounds falling demand. Therefore, even if Europe experiences a recession, the downturn might be shallower than most expect.

With European equities currently trading below its historical average P/E ratio, there is room for further upside.

However, the margin of safety is shrinking as P/E multiples have rebounded from its recent lows and is approaching its long-term average (Figure 9), leaving considerably less room for any disappointment moving forward.

https://www.theborneopost.com/2023/03/12/europe-outlook-2023-is-a-recession-really-avoidable/

Eurozone officials decided levy to be imposed on all deposits in Cyprus

On Saturday, Eurozone officials decided that a 6.75% levy would be imposed on all deposits under €100,000. Accounts over €100,000 would have a levy of 9.9%. The intention is to bring down the bailout cost. Although Eurozone officials insisted that this measure of imposing levies on deposit is limited to Cyprus. There are genuine fear among investors regarding Italy and Spain.

The global anxiety due to Cyprus are now heightened.

Beaten-Down Stocks in Europe May Provide a Great Source of Income

by Jason Jenkins, Investment U Research

Friday, September 14, 2012

Time to Look for Opportunities

You should always be looking for opportunities where others are avoiding. It should be the contrarian in you. Every security in Europe isn’t bad just because Europe’s political theater is dysfunctional. Just like many money managers out there, you want to try to maintain a diversified global portfolio. And that being the case, there are a lot of beaten-down European stocks out there.

But, as always, you have to be smart. Some stocks have been knocked around because they deserve to be. But you can get a little hedge against volatility through looking for shares of cheap European companies that are going to give you a regular dividend. They are out there.

First Focus on Dividend-Paying Multi-Nationals

Last week, MarketWatch quoted Weyman Gong, a principal at Signature, a wealth management firm in Norfolk, Virginia: “This dividend-paying stock segment is the most stable in the market.” Gong has stated that he’s staying put with what’s in his portfolio now.

These are companies in Europe with a broad international influence. Some of his portfolio members listed in the United States are:

• British American Tobacco PLC (NYSE: BTI)
• Philip Morris International Inc. (NYSE: PM)
• Nestle SA (OTC: NSRGY.PK)
• Unilever PLC (NYSE: UL)

But Also Consider the Risks…

Julian Pendock, Chief Investment Officer at London-based Senhouse Capital, states, “Dividends in Europe are more attractive than elsewhere, but should be given higher levels of risk and uncertainty going forward because markets are all driven by politicians and central bankers. There are some excellent higher-yield companies around, but one has to be discerning about risk.”

Will James, a European-stock fund manager at Standard Life Investment based in Edinburgh, believes that the doom and gloom predictions are a bit over the top. He went on to say that, “It’s not as bad as the headlines suggest. You have companies across Europe that have very strong balance sheets and don’t have to go to the debt markets.”

James noted that many companies have posted meaningful dividend hikes and plan to continue dividend growth payout. They include such companies as:

• Oesterreichische Post AG (OTC: OERCF.PK), which handles the mail in Austria. Currently, it’s yielding 7%. James expects the dividend to grow about 5% every year.

• Eni SpA (NYSE: E) is an Italian multinational oil and gas company that Matt Carr has written about for Investment U before. It has already made the announcement that it will increase its dividend to keep in line with inflation. The last boost was about a 3.5% increase and it’s currently sporting a 6% dividend.

James also stated that it isn’t so bad to go after companies with lower yields if you follow an investing strategy kind of like Warren Buffett’s “moat” strategy.

He believes it’s worth the trade-off if it’s a strong franchise, the industry is difficult to enter, and the company possesses a virtual monopoly or control of a limited market. All this gives the company a steady cash flow.

The example he provided was Novo Nordisk A/S (NYSE:NVO). It’s a Denmark-based health care company that produces diabetes care equipment and medications. It also focuses on other areas, such as hemostasis management, growth hormone therapy and hormone replacement therapy.

The company has increased its dividend 40% in a year. And Novo Nordisk AS has been consistent with its dividend increases. The dividend has been increased yearly since its IPO 11 years ago.

James concluded by saying, “If I can get a 4% dividend yield from that company and it will be here in four years’ time, I’m going to get a fairly attractive total return.”

If you do your due diligence, I think you can find income bargains almost anywhere throughout Europe. Stay tuned as our experts share their most profitable findings…

http://www.investmentu.com/2012/September/beaten-euro-stocks-income.html

It’s about time to buy burnt-out European stocks

Aug. 1, 2012

It’s about time to buy burnt-out European stocks 
Commentary: The best companies will survive the euro crisis

By Matthew Lynn

LONDON (MarketWatch) — A currency that may implode at any moment. A collapsing banking system. A deepening recession, with no flexibility to boost growth through either monetary or fiscal policy. Making a bear case for euro-zone equities right now is easy.

But everything has a price. And some euro-zone markets are getting so cheap this summer that the moment to buy cannot be far away.

Such as? There are a lot of big, quality companies on both the Madrid and Milan bourses — the oil giant ENI E +0.07% , the electricity company Enel IT:ENEL -0.35% or the clothing retailer Inditex ES:ITX +1.06% , which owns the hugely successful Zara chain. Pretty much regardless of what happens to their domestic economies, these companies will thrive and prosper. And, while they may get cheaper still, the truth is they are already good value — and there may not be as much downside left as the market thinks.

Fiat

Italian blue chips, such as Fiat, will survive the euro crisis.

The first phase of the euro crisis involved minor markets. Greece and Portugal have small stock markets and no very big companies.

Not surprisingly, as they hurtled towards full-scale bankruptcy, their stock markets tanked. Yet even if you decided they were a bargain, there wasn’t much to buy. Naming a Greek blue chip is even harder than thinking of a famous Belgian — there are a couple of the latter, but virtually none of the former.

Ireland was far more successful economy: It was one of the five richest countries in the world pre-crash. But its economy was mainly made up of foreign multinationals, property companies and banks. Apart from the budget airline Ryanair RYAAY -1.56% , it did not have many big companies.

The second phase is different. As the crisis moved into Spain and Italy, equity values crashed just as they had in the smaller countries. The Italian MIB XX:FTSEMIB +0.59%  is down to 13,000, compared with 40,000 back in 2007. It is now below its 1994 levels — almost two decades ago.

Click to Play

Stocks with double-digit growth

Revenue growth is sluggish for most of the market but not at these firms.

The Spanish market XX:IBEX +1.04%  is under 7,000, compared with more than 15,000 before the crash. As Spanish bond yields have soared, and speculation has mounted that the country will need a bailout, the market has been down to levels last seen in 1999. A dozen years have been wiped out.

Unlike Greece and Portugal, these are major economies, and the markets include some global companies. The Milan index takes in the automobile manufacturer Fiat IT:F +0.40% , the electricity company Enel and the oil giant ENI. These are big, solid companies with a lot of assets. It includes the sunglasses manufacturer Luxottica LUX +0.47% , which owns Ray-Ban, and the luxury-goods giant Salvatore Ferragamo IT:SFER +2.53% , which sell its products globally. It is booming Asia that matters to them — not recession-hit Europe.

The Madrid index includes the retail chain Inditex, the owner of the Zara chain, among others, with more than 5,000 shops around the world, as well as the telecom giant Telefonica TEF +0.09% , with widespread interests in fast-growing South America, and the oil company Repsol ES:REP -0.04% .

Of course, it is not hard to understand why the markets in those countries have crashed. Their domestic economies are in deep recession. Spain, we learned this week, contracted by another 0.4% in the latest quarter. Italy is heading into another downturn. Borrowing costs have soared. Most of all, there is what the markets now politely refer to as “redenomination risk” — the possibility that your shares will be repriced from “worth-something euros” to “worth-almost-nothing new lira or pesetas.”

EUROPE IN CRISIS | Topics: Europe

 Reuters

Alexander Nevski Cathedral in Bulgarian capital Sofia.EU’s poorest countries shunning the euro
The union’s poorest members, who once looked to joining the euro as a symbol of prestige, are now shunning the currency.
• Has Draghi overpromised?
• Darkening skies over Europe
• It’s about time to buy Europe
• Europe as enemy of recovery

It is going to get worse, as well. The euro zone is prescribing precisely the same medicine for Italy and Spain that it prescribed for Greece — even though it just about killed the patient.

Yet everything, it bears repeating, has a price. And the fact remains that many of the companies on both indexes are very successful global business — and they will carry on being successful even if their domestic economy is in terrible shape.

A company doesn’t have to be based in a growing economy to do well. Japan has gone nowhere for two decades. But the likes of Uniqlo, the fashion retailer, have turned into major global companies. Britain is stuck in the longest recession since records began, but a company such as ARM Holdings, which designs the chips that power many smartphones as well as iPods and iPads, has still made huge progress.

Great companies can come from bailed-out countries. Ryanair is a case in point. The shares halved in value as Ireland went bust, but have performed reasonably well since then. If you bought in as Ireland sunk, you’d have done well. It hasn’t been destroyed by a deep recession in Ireland — and neither need many Spanish or Italian companies be ruined by a recession in their home economies. A company such as Telefonica has seen its profits hit by the recession — but it is not going to get wiped out.

True, the Spanish and Italian bourses might well get cheaper. If the euro does fall apart, there will be another crash in equity values. That said, to micro-time the market you have to be very smart or very lucky — and usually both. It will be hard to get in at the absolute bottom.

If Spain or Italy does quit the euro, trading on the main bourses will probably be suspended. Capital controls will be introduced. Banks may close their doors for several days. If you think that in a situation like that you can move in and snap up as many shares in Fiat or Inditex as you want, you may well be kidding yourself. This could be the cheapest moment when these shares are widely available to investors.

And the ECB may well step in at some point with unlimited quantitative easing. The euro zone could decide to pool its debts, and issue common euro bonds, which will immediately slash Italy’s and Spain’s debts. On either, the Italian and Spanish indexes would soar — particularly as both are heavy with hard-hit banks and insurers.

If you want to buy some very cheap equities that are good long-term values, these may be the markets to go for right now. Sure, there’s a catastrophe coming — but it is already in the price. 

Matthew Lynn is chief executive of Strategy Economics, a London-based consultancy. His latest book ‘The Long Depression: The Slump of 2008 to 2031’ is published by Endeavour Press.
http://www.marketwatch.com/story/its-about-time-to-buy-burnt-out-european-stocks-2012-08-01

Q&A: Spain's debt crisis and what it means for the eurozone and Britain

Stock markets are tumbling as Spain's borrowing rose to new record highs. Here is a look at why this is happening and what the implications might be.

Investors are concerned that Spain, one of the eurozone's biggest economies, might need a full-blown bailout. Photo: AP

By Angela Monaghan, Economics Correspondent

1:09PM BST 23 Jul 2012

2 Comments

Q: What has happened to Spain's borrowing costs?

A: Spain's borrowing costs rose to the highest level since the euro was created on Monday. The yield on benchmark 10-year yields rose to 7.5pc, where the higher the yield the lower the demand for Spanish debt.

Anything above 7pc is considered unsustainable. The Spanish government will not be able to afford to borrow indefinitely at such high levels, which means it will need a bailout if costs do not come down.

Q: Why now?

A: The crisis in Spain has escalated. It has been clear for weeks that Spain's banks needed emergency bailout funding, but now fears are mounting that the country will also require a full-blown sovereign bailout. European leaders on Friday agreed to grant up to €100bn (£78bn) of funds to Spain's banks.

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Markets have been spooked by news that two of Spain's regions - first Valencia and now Murcia - have been forced to seek emergency funding from the Spanish government, and others might follow.

There have also been further warnings on prospects for growth, as officials in Madrid warned the economy was likely to shrink throughout 2013. Spain is battling with a tough austerity programme as the government tries to bring down its debt mountain. The unemployment rate is 24pc, and roughly half of young people are out of work.

Q: What does it mean for the rest of the eurozone?

A: Eurozone leaders were already struggling to convince the rest of the world that the single currency has a sustainable future. They now face an even tougher job. Financially and politically, a bail-out for Spain would prove a huge challenge. And as we have seen with Greece, it is unlikely that it would be enough to permanently put to rest fears over Spain, and indeed other financially vulnerable countries including Italy and Portugal. Noise about a potential break up of the euro is once again building.

Q: What does it mean for Britain?

A: Europe is Britain's largest trading partner so continued problems in the region will weigh on demand for UK goods. The eurozone crisis is also damaging confidence among British businesses and consumers, who are unwilling to spend and invest at a time of heightened uncertainty. If one or more countries did ultimately exit the euro, the knock-on effect for the global economy would be huge, and Britain's recession prolonged.

Q: Is Spain the biggest problem in the eurozone?

A: Spain is an immediate concern, but so too is Greece. Greece's international creditors - the so-called "troika" comprising the European Commission, the International Monetary Fund, and the European Central Bank - will arrive in Athens on Tuesday to assess whether the government is making sufficient progress to earn another cash injection.

The visit is crucial: without further bailout funding Greece will be unable to meet its debt obligations or keep up with salary and pension payments. "If the current government fails, the next one will be a government of the drachma," said Costis Hatzidakis, the Greek development minister. Beyond Spain and Greece, there are also mounting concerns over Italy, as the government's borrowing costs rise.

http://www.telegraph.co.uk/finance/financialcrisis/9420469/QandA-Spains-debt-crisis-and-what-it-means-for-the-eurozone-and-Britain.html

Long-Term Value of International Stocks. Europe is a value and dividend play, while emerging markets are a growth play.

Europe’s battered stock markets could fall more, and the emerging markets’ hot streak may be history, at least for a while.

 

Get out?

 

No, says Benjamin C. Sullivan, a certified financial planner and portfolio manager with Palisades Hudson Financial Group in Scarsdale, N.Y.

 

“While you can’t predict how foreign stocks will do in the short run, there’s long-term value there,” he says. “You need the right amount in your portfolio.

 

Europe is a value and dividend play, while emerging markets are a growth play, Sullivan says. And both help protect against a decline in the greenback.

 

Palisades Hudson invests 35% of its clients’ equity portfolios abroad, he says. That includes about 14% in Europe, 11% in emerging markets and 10% in other developed markets, including Japan, Australia, Singapore and Canada.

 

Latin American markets turned in a tidy 16% annual return for U.S. investors over the last 10 years, while Asian emerging markets returned 9% annually, compared to 2% for the EAFE index that tracks developed international markets and 3% for the U.S.

 

Despite that outperformance, emerging nations make up just 13% of global stock-market capitalization while producing 49% of global gross domestic product, Sullivan points out.

 

“There’s more room to grow in emerging markets,” he says. “In the next few years, more than 70% of world economic growth is predicted to come from those regions. By adopting best practices from the developed world — such as advanced technology, better infrastructure, and open markets — these countries will grow their middle class, and investors should benefit as a result.”

 

Active funds vs. index funds

Depending on what market you’re in, there are different investing strategies to rely upon. Use actively managed mutual funds for emerging markets, Sullivan says. Those markets are inefficient enough for a skilled fund manager to earn its fee by outperforming the index.

 

He likes the T. Rowe Price Latin America Fund, which has outperformed the Lipper Latin American funds average over the last 10 years. He also invests his clients’ money in the T. Rowe Price New Asia Fund and Matthews Pacific Tiger Fund.

 

Sullivan avoids Russia and other Eastern European markets, deeming them too risky due to the region’s historic disregard for property rights.

 

Western Europe, in contrast, offers high dividends and deep value. The Vanguard European Stock Index fund Sullivan uses is heavily weighted in big multinationals like BP, Anheuser-Busch, Novartis, HSBC and Royal Dutch Shell that sell their products worldwide. With share prices down, major markets like Germany, France and the United Kingdom sport 4% dividend yields compared to about 2% for the U.S.

 

Sullivan separately allocates 7.5% of equities to real estate investment trusts, including 5% to U.S. funds and 2.5% to an actively managed Morgan Stanley international fund that buys real estate investments in developed and emerging countries. Investing in global property markets boosts diversification, he says.

 

The rest of the world is too big and dynamic for American investors to ignore.

 

“Limiting your investments to the U.S. would be as arbitrary as choosing to invest in U.S. companies headquartered only in New York State,” Sullivan says.

 

But don’t invest in U.S. or foreign stock funds if you’ll need that money within five years, he adds. Equities should be a long-term investment.

Henry Stimpson, Tuesday, July 10th, 2012

Your Money

Three central banks take action in sign of alarm

Arrangement of various world currencies including Chinese Yuan, US Dollar, Euro, British Pound, pictured in Warsaw, January 25, 2011

Credit: Reuters/Kacper Pempel

BEIJING/FRANKFURT | Thu Jul 5, 2012 8:30pm BST

(Reuters) - China, the euro zone and Britain loosened monetary policy in the space of less than an hour on Thursday, signalling a growing level of alarm about the world economy, although suggestions of coordinated action were played down.

Of the three, the surprise move was from Beijing which lowered its lending rate by 31 basis points to 6 percent following an interest rate cut just a month ago that also came out of the blue.

The European Central Bank cut rates to a record low 0.75 percent following a dire run of economic data. But it steered clear of bolder moves such as reviving its government bond-buying programme or flooding banks with more long-term liquidity.

Still, a Reuters poll found the ECB is expected to follow the rate cut with more steps to help the region's economy in coming months.

The Bank of England, whose rates are already at a record low 0.5 percent, said it would restart its printing presses and buy 50 billion pounds ($78 billion) of assets with newly created money to help the economy out of recession.

"It is a surprise that they are moving so quickly. It shows that policymakers' concerns about the global economy have only grown," Mark Williams, an economist at Capital Economics in London, said of the People's Bank of China's action.

A raft of Chinese data is due next week, including second-quarter gross domestic product that officials may know to be poor, he said. But they may also be trying to foster suggestions of acting in concert.

"Policymakers may have felt that cutting rates on the day that the ECB (did) the same would deliver a bigger impact, encouraging talk of a coordinated response to the slowdown in the global economy," Williams said. "Again, though, this might simply underline the seriousness of the downside risks."

"NO COORDINATION"

In Frankfurt, ECB President Mario Draghi denied any globally coordinated central bank action of the sort seen after the collapse of Lehman Brothers in 2008.

"On coordination, no, there wasn't any ... that went beyond the normal exchange of views on the state of the business cycle, on the state of the economy, and on the state of global demand," he told a news conference.

Asked if conditions were now as bad as they were in late 2008 when the world's financial system was teetering, Draghi replied: "Definitely not."

The action puts even more focus on what the U.S. Federal Reserve will do when it holds its next meeting on July 31 and August 1. The Bank of Japan meets next week.

Last month, the Fed held off on another round of bond-buying but its chief, Ben Bernanke, said there was "considerable scope to do more" and Wall Street bond firms polled by Reuters saw a 50 percent chance of another asset purchase programme.

Some encouraging data on the labour market on Thursday tempered anticipation the central bank could undertake a third round of bond purchases, known as quantitative easing or QE3.

But more weight will be given to Friday's nonfarm payrolls report, which is expected to show job growth picked up in June but still remained tepid at 90,000 jobs.

"If we get a couple of more bad jobs reports, (the Fed) will come in with more stimulus. Today's reports suggest they might hold off, but they will want to see more data before they decide," said John Canally, economist and investment strategist at LPL Financial in Boston.

In recent weeks, economic evidence from Asia, Europe and the United States has pointed to a world economy running out of steam.

WILL IT WORK?

All the major central banks, with interest rates at historic lows, face the law of diminishing returns.

The Bank had already created 325 billion pounds of new money before Thursday's addition. In doing so, it has successfully driven borrowing costs to all-time lows, yet the UK economy is languishing in recession.

"The BoE has been excessively optimistic about how powerful QE is," said Philip Rush, an economist at Nomura, referring to the money-creating strategies known as qualitative easing.

"The latest increase is more than just a token, but it is not hugely significant for the outlook for growth and inflation."

A poll conducted by Reuters found 27 out of 47 economists believe the central bank will stop at the announced 375 billion pounds in total. A minority said the Bank would do more, with a few still calling for as much as 500 billion.

The euro zone is no better off. "We see now a weakening basically of growth in the whole of the euro area, including the country or the countries that had not experienced that before," Draghi said.

Policymakers could counter that things would be much worse if they had not acted, but with most monetary policy levers already pulled, government action is also required to improve the world's fortunes.

The International Monetary Fund has urged the United States to quickly remove the uncertainty over the path of fiscal policy, which is set to tighten abruptly at the start of next year without congressional action.

Measures announced at a European summit last week bought some calm to the euro zone debt crisis with the promise of action to lower government borrowing costs, but economists say they did not tackle the root problems.

The ECB continues to put the onus on euro zone governments to solve their debt crisis and did not even discuss on Thursday "non-standard" measures such as buying Spanish and Italian bonds to lower borrowing costs which are not sustainable indefinitely.

Elsewhere, Denmark's central bank cut interest rates by 25 basis points, shadowing the ECB's action, in a historic move that put one of its secondary rates into negative territory for the first time. Kenya ended its nine-months-long hawkish stance with a bigger-than-expected 150 basis points rate cut. ($1 = 0.6419 British pounds)

(Writing by Mike Peacock, reporting by Reuters bureaus; Editing by Peter Graff and Leslie Gevirtz)

http://uk.reuters.com/article/2012/07/05/uk-centralbanks-action-idUKBRE8640RI20120705