Global Economics Weekly Brief
ECB Holds Tight
We had another set of `red-hot` business surveys for the UK last week. But “official” data was less emphatic. This makes it difficult for the Bank of England, which left policy unchanged at its September 2013 meeting, to get a firm reading on the strength of the recovery.
It’s a similar story in the US. Business surveys point to strong growth, but the labour market still isn’t firing on all cylinders. Unemployment fell in August, but for the wrong reasons, as many people gave up looking for work. Are these business surveys correct? Unemployment is increasing in the whole of main land Europe, UK and the USA!
From strength to strength. The UK Purchasing Managers’ Index for services increased further in August, to 60.5. This represents the strongest growth in the sector since December 2006. The manufacturing equivalent wasn’t far behind, rising to a two-and-a-half year high of 57.2, with the survey indicating the strongest growth in output and new orders since 1994. These really are impressive data and suggest Q3 growth might be even better than the 0.7% seen last quarter. Some perspective is required, however. The economy is still 3% below where it was operating in 2008 and there are 840,000 more people unemployed. In addition, other data releases were less emphatic. Even five years on, the recovery remains in its early stages. There are many challenges ahead and the need to `catch-up` on the growth of the early 2000-2006 is still far behind before we can say the recession is over!
Other UK data not quite as hot. The manufacturing PMI may be at a multi-year high, but “official” data for the sector were more circumspect. Output rose for the second month in a row, but only by 0.2%m/m in July, and only 6 of the 13 sub-sectors saw growth. This more subdued performance was in keeping with the trade data for July, which showed the largest trade deficit in goods and services this year (£3.1bn). Signs of life in the Eurozone helped boost exports to EU countries, but this was not enough to offset a massive 16%m/m fall in goods exports to non-EU countries. Though the decline was driven by a fall in aircraft exports, exports of cars, consumer goods, intermediate and capital goods also declined. Monthly trade data are volatile, but it’s still a little disappointing given the improving performance of the global economy. Nobody said rebalancing would be easy. Do we believe these statistics again with increasing unemployment in many sectors! More challenges for a few more years yet!
No change from Threadneedle Street. There were no surprises from the Bank of England's Monetary Policy Committee (MPC) in September. Bank Rate was left at 0.5% and there was no change to the quantitative easing programme. That’s unlikely to change anytime soon, according to the MPC. Their forward guidance suggests rates are unlikely to rise until late 2016. Markets are more aggressive, however, and think rates will start to move up in early 2015. What’s unclear is whether markets are more optimistic about the pace of the recovery, the number of jobs that it will generate, or both. Still money is not being borrowed as the future is very shaky globally!
Full steam ahead. America’s purchasing managers say growth quickened in August. The services index jumped to 58.6, hitting the highest level since its launch in 2008. The manufacturing index also improved. With both sectors recording strong growth in new orders, the outlook is encouraging. There is a grey cloud, however: will Washington turn the looming debt ceiling drama into a crisis? The possibility of unexpectedly tighter fiscal policy is something the Fed is likely to weigh heavily when it decides next week whether to start weaning the US off its monetary steroids. Where is the new employment? Many are still unemployed over the whole US!
Tough decisions for the Fed. Mixed messages from the labour (sorry, labor) market will also be clouding the Fed’s decision. Non-farm employment in the US rose by 169k in August, just short of the 180k expected. However, downward revisions to previous months’ data means the average monthly employment gain since May has been 155k - okay, but far from spectacular. Unemployment fell to 7.3%, from 7.4%, but not for 'Good' reasons as people exited the labour market, having given up trying to find work. We still expect them to start tapering in October but the August data means the decision will be a closer call than policymakers would like. Many challenges ahead with US debt at $17 trillion and rising rapidly!
ECB holds tight. The European Central Bank (ECB) left rates unchanged at 0.5% at its September meeting. President Draghi continued to use forward guidance confirming that, to support the economic recovery, the ECB will keep interest rates at present or lower levels for an “extended period of time”. Recent economic data have been positive, but Draghi made clear that we shouldn’t get too carried away as the recovery will be only slow and gradual. The ECB continues to expect the economy to contract this year and to expand by only 1% the next. Unemployment in Europe is at a `very high 'level and continues to rise rapidly!
Japan and China finding growth difficult with GDP in Japan at 210% and China with inflation growing at a rapid pace! China is suffering from growing too fast and makes too many products for stock! Chinese businesses are looking to buy companies in other countries to easy their pain by buying up businesses for growth! Japan’s debt load has passed the numerically numbing level of `Y1 QUADRILLION`. That’s fifteen zeroes: ¥1,000,000,000,000,000. Or, to be exact, ¥1,008,628,000,000,000, as of the end of June. (In US dollar terms, it’s a bit less than $10.5 trillion.)
Eye-catching, to be sure. But it isn’t especially meaningful. It’s more like a game of decimal points. Right now, the yen is about the equivalent to the US cent. You could also make the US debt look a lot more outlandish by expressing it as ¢1,674,000,000,000,000 rather than $16.74 TRILLION.
So, yes, while Japan does have a ton of debt, the outright level is not the best way to keep track of it. The more important gauge is debt as a percentage of the country’s annual economic output, or GDP. And at more than 200%, Japan’s debt load is the highest among all developed nations. Watch Japan very closely!
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ECB Holds Tight