Central Banks Unite - is Not Enough
Global Economics Weekly Brief
The world’s major central banks last week provided coordinated support for the Eurozone banking system. Their aim is to bleed fear from the markets by supplying unlimited dollars to Eurozone banks.
However, a slowing global economy offers a poor foundation for policy aimed at stabilising the financial crisis. The UK labour market is deteriorating and the UK is struggling to improve its trade position. Inflation continues to edge higher, both here and in the US, squeezing households just that little bit tighter. And although US industrial production posted a marginal expansion in August, two regional US manufacturing surveys suggest the sector’s outlook is less rosy. The future is bleak for the USA and Eurozone countries as rapid decline gathers momentum.
Central Banks unite. As fears over the Eurozone debt crisis have deepened, financial institutions in the euro area were having difficulty accessing dollar funding. To alleviate this fear, the Bank of England, European Central Bank, US Federal Reserve, Bank of Japan and the Swiss National Bank united to offer unlimited dollar loans, starting next month. Despite not addressing the sovereign debt crisis directly, markets responded favourably. The euro rebounded and Eurozone banking shares rose. This action will bring long term issues that will need to be solved!
UK inflation edges higher (again). UK CPI inflation rose to 4.5%y/y in August, from 4.4% in July, in line with expectations. Food and fuel continue to be the main drivers of still rapid rises. August also brought the first of the large utility price hikes announced this summer. With price increases from the other 'big six' suppliers waiting to hit the index later in the year, it’s highly likely that inflation will continue to rise in the months ahead. More energy price rises on the way!
UK jobless numbers are also rising. Although the unemployment rate held steady at 7.9% in the three months to July, there are some worrying trends in the UK labour market. The official measure of unemployment rose above 2.5 million, up by 80k since April. The public sector shed 111k jobs in the three months to July, the largest fall since records began in 1999. The private sector was able to pick up only some of the slack, adding 41k jobs, so total employment fell. UK wages continue to grow at a snail’s-pace, with regular pay (excluding bonuses) rising just 2.1%y/y in the three months to July, well below the annual inflation rate. So why do the UK still take on board foreign workers from other countries? There are the skills available in the UK already, so why import foreign workers, or is it because the foreign workers will work for less money than UK born skilled workers?
UK consumers remain constrained. With inflation high and wage growth weak, it’s no surprise that UK consumers are tightening their belts. The volume of UK retail sales, excluding auto fuel, fell 0.1% between July and August and sales volumes were broadly flat on an annual basis too. But then, with the economic outlook darkening, it would be an odd time if households chose to spend more of their income on the high-street. More companies going bust on the way!
Rebalancing the UK economy is proving difficult and the UK’s trade deficit remains high. The UK trade deficit for goods and services was unchanged between June and July at £4.5bn. On a positive note, exports increased in July, driven by rising demand for oil, chemicals, capital goods and semi-manufactured goods. However, imports rose too. Rebalancing the UK towards trade is proving very hard to do, especially when others are trying to boost their exports too.
US inflation rate hit a 35-month high in August and probably will rise again in September. The consumer price index rose by 3.8%y/y in August. Food, energy and housing posted the fastest price rises between July and August. Even stripping out increases driven by volatile food and energy prices, the core inflation index rose to 2%y/y, up from 1.8% in July. Like the Bank of England, the Fed believes that transitory factors are keeping inflation high and these are likely to moderate due to the underlying weakness of the US economy. Regardless, the Fed’s aggregate position is firmly in ‘growth support’ mode, with their focus remaining intent on keeping interest rates low and creating jobs.
US industrial production crept higher in August – but will it last? Welcome (but rare) news State-side was that US industrial production increased 0.2%m/m in August. Although growth slowed from a robust 0.9%m/m rise in July, at least the US manufacturing sector is still expanding. Total output is now 3.4% higher than it was a year ago. However, two regional US manufacturing surveys suggest the sector may be weaker than official data suggest. The reading for the New York area ‘Empire’ survey fell to a ten-month low, with new orders and employment both weakening. In addition, the Philadelphia area survey only managed to recoup just over one third of the 33.9 percentage point dive posted in August and thus still indicates that the manufacturing sector is contracting.
Storm warning: As the European debt crisis spreads across the continent, the outlook for the single currency has never looked so grim. Financial markets fluctuated violently as fears that Italy, Spain and France now, plus Germany in the future will be dragged into the eurozone debt crisis triggered another day of turmoil for investors.
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Central Banks Unite...