The Consumer Confidence Dilemma
Global Economics Weekly Brief
The Quandary of Consumer Confidence
Wimbledon is over now, but households across the UK, Europe and the US could probably do with another distraction to keep their minds off the very tricky times ahead. Confidence is weakening everywhere as consumers realise that there is more pain to come. In the UK, inflation continues to squeeze incomes, which are falling in real terms, while higher interest rates in the Eurozone will make conditions harder for those in the countries where growth is sluggish. It’s not hard to find things to be worried about. Yet the passing of the Greek austerity package, the buoyancy of US firms and signs that inflation may be moderating provide grounds for hope. More inflation to come big time!
05 July 2011
UK household income fell again in Q1 2011. Not a consumer confidence helper! The third and final release of UK output growth revealed just how tough a time UK households are having. Real household disposable income fell by 0.8%q/q in Q1 2011 after a 0.9%q/q fall in Q4 2010. With the continuing squeeze on budgets it’s no wonder that consumer confidence fell further than expected in June. Price rises are partly to blame for falling real incomes, so things should get easier when inflation starts to slow, but when? But this isn’t likely to happen until next year at the very earliest, probably just as interest rates are rising. So there will be little respite for most households for a good while yet. More pain, and higher unemployment!
The UK housing and mortgage markets remain stagnant. UK house prices didn't change between May and June, according to the Nationwide index, but are 1.2% lower than this time last year. Gross mortgage lending was £11.2bn in May - around the same level it’s been at for over a year. Net lending was up by 5%m/m in May but still only reached £1.1bn. To put it in context, this is about a third of the levels reached 10 years ago, even though today’s house prices are twice as high.
The US housing market is underwhelming too. US house prices fell again in April, declining 4%y/y, but the pace of the fall is slowing. Sales of existing homes increased sharply in April as very low prices attracted demand. This could lead to some improvement in prices in the short term. But a large overhang of foreclosures, along with high unemployment and stringent loan conditions, is likely to dominate market conditions for some time yet. No wonder both the University of Michigan and the Conference Board measures of consumer confidence fell in June.
Eurozone inflation rose by less than forecast in June. Consumer Price Inflation (CPI) in the Eurozone was unchanged at 2.7%y/y in June. However, the ECB remains poised to raise rates to 1.5% this week, the first since the 25bps hike in April. This will be an extra blow for the peripheral countries in the Eurozone already struggling with high debt costs and attempts to implement fiscal austerity. This is likely to get worse as the turmoil in Greece rumbles on. There is more pain to come from Greece.
Increasing signs of a slowdown in global manufacturing growth...excluding the US. The bulk of the world’s Purchasing Managers Indices (PMI) last week confirmed that global manufacturing growth slowed sharply in Q2. The UK PMI reached a 21-month low of 51.3, with the spur from overseas demand fading, casting doubt on the ability of exports to make a larger contribution to growth. The Eurozone PMI fell to an 18-month low of 52, with the periphery showing particular weakness. China’s PMI fell more than expected to a 28-month low of 50.9 and slowing manufacturing growth is the theme across the rest of Asia, including South Korea, India and Taiwan. However, the US economy bucked the trend, recording a slight rise in its PMI equivalent, the ISM, to 55.3 from 53.5 in May – suggesting US growth may pick-up in the months ahead.
Moderating input price pressures. The other positive news from the PMIs was that input price pressures are moderating, suggesting less upward pressure on firms costs and hence consumer prices. In China, signs of waning inflationary pressures and weaker manufacturing growth will drive speculation that the authorities will halt monetary tightening. This should provide some respite for the global economy, which has entered something of a soft-patch of late.
The Greek parliament voted in favour of austerity. Sugar rush for Consumer Confidence? I doubt it. Despite violent protests and still more predicted on the way , the EUR 28bn austerity package was passed by 155 votes to 138, opening the way for the next EUR 12 bn tranche of funds from the EU and the IMF. Granted, the problems in Greece, and the risks to global financial stability are not over yet. Agreement on a second bailout package has yet to be reached, indeed all Greece has managed to do is avoid default for another month. There are many obstacles to overcome but Eurozone finance ministers can congratulate themselves on buying some more time. Are there any more skeletons to come out of the cupboard?
Financial Firms have `not learned` says FSA Chief. Financial Service firms have learned nothing about treating customers fairly in the last `eight years`, according to the man who regulates the industry - Hector Sants, Chief Executive of the City watchdog, the Financial Services Authority. "The biggest disappointment of my time at the FSA has been the `failure` of firms, in particular their senior management, to learn the lessons of past mis-selling" They continue to mis-sell to customers for pure greed. When will the UK government send these people to jail?
We still do not grasp how little we matter to China! There is a mismatch. We in the UK perceive that it is our right, even our responsibility to criticise Chinese human rights. In China such comments are seen as intrusive and offensive. When such matters are raised at a time of trade negotiations, as they have been this week during the talks between David Cameron and his counterpart Wen Jiabao, the dis-junction leads to an obvious question. Are we acting in our self-interest to jeopardise exports to China by striking such a tone? Yes! China are only interested in exports to the UK really and the UK government will believe what the Chinese say! The truth is that China has far more important global partners than the UK.
IMF warns on fragile US economy. Consumer confidence boaster it is not! The United States was last night told failure to address its debts could deliver a `severe shock` to the rest of the world. In its annual health check on the world`s largest economy, the International Monetary Fund said government debts were `unsustainable` and warned `losing fiscal` credibility would be extremely damaging. Have not the US lost their credibility anyway? The Washington based fund said failure to tackle the problem risked a sudden increase in interest rates and a downgrade to America`s top notch credit rating. President Barack Obama said " `If the US government for the first time cannot pay its bills, if it defaults, then the consequences for the US economy will be significant and unpredictable. The US problem will affect a global down turn in the economy never seen before at this level. Read the book `The Rise and Fall of the Roman Empire` and this will show you what can happen when an economy fails, big time!
Greece. A group of French banks has suggested turning maturing Greek debt into 30 year loans - a plan similar to the Brady loans of the 1980`s that helped solve the Latin American debt crisis. Greece is a very mature economy with less chance of growing its way out of difficulty. Therefore, Greece needs structural reforms immediately with help from other countries to show them how to succeed. If not, Greece is financial dead and the people will have no money to live.
Global economic recovery slips into lower gear as industrial activity dips
• UK factory output grew at its slowest for two years
• Growth in manufacturing activity in China declines
Britain's manufacturing sector expanded at its slowest pace in two years in June. Still more to come in July and August with traditional slow manufacturing out-put.
The manufacturing boom that has spurred the global recovery of the last 18 months dropped into a lower gear last month as the UK, the eurozone and China registered a significant drop in growth. Chine`s manufacturing is starting to slow down due to lack of interest from the rest of the world.
Britain's manufacturing sector expanded at the slowest pace in nearly two years while the eurozone, dragged down by Italy and slowing Germany activity, fell from 54.6 points in May to an 18-month low of 52 in June. Watch July and August very closely.
A PMI reading above 50 indicates an expansion in manufacturing activity, while a reading below 50 indicates contraction.
China's main index of activity dropped to a low of 50.9 in June, a position that analysts fear could show contraction next month if a slide registered in recent months continues. This could be the start of another global decline due to high unemployment in Europe and USA.
The general slowdown will pose a dilemma for central bankers who are all poised to raise rates to combat rising inflation. Watch interest rates over the next few months start to rise at a rapid rate!
A succession of weak indicators in the UK has in effect taken interest rate rises off the table, with the Bank of England governor Sir Mervyn King hinting that a rise is unlikely until at least the new year. Sir Mervyn King has been watching tennis all week at Wimbledon so he will have to catch up soon!
However, the European Central Bank gave its firmest indication it will raise rates for a second time to 1.5% next week, despite vociferous complaints from many countries still in recession that a shift to higher rates will choke off their recoveries.
Several left and rightwing commentators in Spain, Italy, Portugal and Ireland argue higher interest rates are solely designed to keep the German export boom in check without regard to their own recession hit economies. This could be true!
Ireland's manufacturing sector shrank for the first time in nine months, while Italy, which has struggled to expand, saw its key manufacturing sector contract. Russian manufacturing expanded at its slowest pace in 15 months in June after the headline reading fell to 50.6 from 50.7 the previous month, its weakest since March 2010.
A sharp bounce in stock markets following agreement in the Greek parliament to pursue EU-sponsored austerity measures became more muted after it became clear a global slowdown in manufacturing was firmly under way.
"Over the past two months, [euro-zone manufacturing] output growth has weakened to the greatest extent since late-2008," said Chris Williamson, chief economist at Markit, which compiled the surveys.
The US was the only bright spot (is it?), adding to expectations the economy may be recovering from a recent slowdown. The US Institute for Supply Management said its index of national factory activity rose to 55.3 from 53.5 the month before. The reading beat expectations for a decline to 51.8, according to a Reuters poll of economists. Just look at the US debt mountain!
The UK's Markit/CIPS purchasing managers' index showed a bigger than expected drop to 51.3 from 52 in May, revised from 52.1.
David Noble, chief executive at the Chartered Institute of Purchasing & Supply, said: "The UK's manufacturing sector is slipping into 'growth-lite' mode, a far cry from the strong expansion seen earlier in the year."
For the second quarter as a whole, the average PMI reading of 52.6 is the lowest since the recovery began in the autumn of 2009. Export orders and employment slowed to the weakest growth rate since last September.
Rob Dobson, senior economist at Markit, said: "It is worrying to see that slowdown is not just being driven by the demise of domestic market strength, with growth in new exports having also slowed since the start of the year as the global economic recovery drifts into a softer patch."
Input price inflation slowed sharply to the slowest rate in one-and-a-half years, reflecting recent falls in the cost of oil and other commodities. Output price inflation – measuring the prices charged by manufacturing – was the weakest since last December.
China's factory production dropped to a 28-month low of 50.9 in June. Still more to come!
Lee Hopley, chief economist at EEF, the manufacturers' organisation, was hopeful the recovery remained on track.
"Despite the pace of expansion in [UK] activity easing for the fifth month running this shouldn't be overplayed. Behind the headline the figure the detail shows production, export orders and employment all still edging up, albeit at a more subdued pace than earlier in the year," she said.
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