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Diamond and Spain - Global Economics Weekly

Diamond Studded Week for Spain

Global Economics Weekly Brief

It ended well, especially for Spain in the football final, but it was another week of glum economic news across the globe. In the UK, the Governor of the Bank of England admitted his surprise at how quickly things had deteriorated in the last six weeks. Rather worryingly, he wasn’t just talking about the Eurozone but of the worsening situation in emerging markets. That doesn’t bode well for the UK, particularly as it turns out the recession and public finances were worse than feared. But at last there was some good news in the Eurozone – especially for the countries in need of bailout funds. The agreement among EU leaders to allow funding to recapitalise banks without impinging on government finances, was particularly welcome in Spain.

The lift may not have been the reason for the sublime performance on the pitch, but it cannot have hurt. This latest agreement isn’t a panacea for all Eurozone problems, but it is a welcome chink of light at the end of the Eurotunnel. Also, `A Time of Reckoning for the Banks` - The rate - fixing scandal has exposed the banks as dishonest as well as incompetent. Who`s going to pay the price? Bankers, vilified for almost bringing down the world economy during the credit crunch, may have experienced a rush of schadenfreude as MP` were hauled over the coals for their expenses, journalists brought to book for their practices and entertainers such as Jimmy Carr blasted for their `creative tax schemes`. What have they all in common, greed, dishonest and only care about themselves!

Barclay`s Bank CEO, Bob Diamond falls on his sword and resigns today! Also, the Financial Services Authority (FSA) were investigating Bob Diamond for the LIBRO (LONDON INTERBANK OFFERED RATE) issue before he was appointed CEO. So, why did Barclay`s and the FSA allow for the CEO appointment to take place? Plus, now a disturbing question: `Did the Bank of England collude in interest rate fiddle? Plus, did the Labour government at the time know about these issues? Probably!

The UK recession was deeper than first thought in Q1, despite strong Government spending. Official estimates confirmed that the UK economy shrank by 0.3% in the first three months of the year. But the decline in Q4 2011 was revised down to -0.4%, from -0.3%q/q. Service sector output rose by 0.2%q/q, but output in the construction sector was just awful. It fell by 4.9%q/q. It turns out households are being squeezed even harder too. They have got used to inflation eroding their after tax income, but now income has fallen in cash terms too, for the second quarter running. No wonder household consumption fell by 0.1%q/q. With this news, we should be grateful that Government spending rose by a hefty 1.9%q/q. This recession in Deeping rapidly!

UK Public Borrowing figures were a nasty surprise. Up until now the Government has managed to hit its borrowing targets over the course of austerity. May’s statistics were a nasty surprise though. They showed borrowing at £17.9bn, up £2.7bn from May 2011. Receipts over this financial year have grown at only half the rate forecast in the Budget, but Government spending rose faster than expected (8%y/y), led by a higher welfare bill (12%y/y). A £3.2bn upward revision to 2011/12 borrowing figures made things worse. Public finance statistics are prone to revision, so we shouldn’t be read too much into these data just yet, but they will raise questions about the Government’s ability to pull off ‘Plan A’. General government departments and local council`s need to stop spending money they have not got! They all need to live within their budgets instead of continually declining into more debt!

Bank of England warns on financial system. The Bank of England’s twice yearly Financial Stability Report sounded a warning to banks about being adequately protected against economic risks. In particular, the Financial Policy Committee (FPC) warned that banks should value their UK assets ‘prudently’, particularly where forbearance is exercised, and bolster capital by limiting dividends and staff compensation. But the FPC wasn’t so concerned about liquidity buffers. Indeed, it encouraged banks to use them, pointing to pledges from the Bank of England to lend to banks if needed. But the banks are holding on to tax payers money!

The latest European Union Leaders meeting made key progress. Just like the Euros semi-final, Italy managed to bring home a crucial result against Germany at the latest EU leader meeting. In fact the meeting turned out to be more effective than expected. Leaders agreed on a radical restructuring of the €100bn plan to recapitalise Spanish banks, a €120bn growth package, and the creation of a single bank supervisory unit at the ECB - the first step toward a “banking union”. The agreement means the Eurozone bail-out fund will be able to recapitalise banks directly. This means avoiding the sort of hit to government finances that affects sovereign debt ratings. Ireland has been struggling with this for nearly two years and Spain was keen to avoid a similar fate. It is just a small step on the way to recovery, but anything which helps to settle uncertainty in the markets is incredibly welcome these days. More grief to come in the next few months!

US consumer confidence fell, but house prices rose, just! US consumer confidence fell for the fourth month in a row in June. The Conference Board index fell to a pretty lacklustre 62, down from 64.4 in May. To put the numbers in context, a reading of 90 or above indicates a healthy economy. But there was better news in the housing market where prices rose by 0.7%m/m in April. That’s the third consecutive monthly increase, but prices are still 1.5% below last year’s level. More unemployment on its way!

UK house prices fell too.
UK house prices fell by 0.6%m/m in June, bringing the annual fall to 1.5%. It's no surprise and we should expect further falls this year. The traditional north-south gap in UK house prices opened up too. Price growth in the South has now been stronger than the North for thirty consecutive quarters - that’s seven and a half years. There are very few buyers and the house sales market is stagnation rapidly!

China’s manufacturing sector remains sluggish. The initial reading of China’s manufacturing PMI fell to a seven-month low in June. Rapidly falling export orders were a culprit and this underlines impact of the major problems in Europe and the US on overall global demand.

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More Economics and Business Inspiration:
`Accelerate with Impact` -
by Colin Thompson ISBN: 978-1-84549-289-2

Accreditation: UK Registered Learning Provider:10025755

Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.

Bob Diamond Studded Week for Spain!

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