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Economic Momentum - Global Economics Weekly

Global Economics Weekly Brief

It’s all about momentum. The US and the UK have it, the Eurozone does not. Last week saw more positive economic news, with UK and US manufacturing growing despite political brinkmanship in the US. House prices in both countries grew and there were signs that UK companies are beginning to borrow again.

But in the Eurozone, unemployment remained unchanged at a `record level` and there was a nasty surprise as prices edged towards deflationary territory. Newton’s first law says that an object is either at rest or moves at a constant velocity, unless acted upon by an external force. The Eurozone could really use a bump. Rapid rising unemployment in the Eurozone are pushing people to the UK. The UK is at bursting point as the infrastructure cannot cope with all the people who already live in the UK with still more people on the way!

UK manufacturers maintain momentum.
The Purchasing Managers' Index (PMI) suggests that UK manufacturers entered the fourth quarter with momentum behind them. October’s PMI came in at 56, as production and new orders continue to rise above their long-term averages. The strengthening UK economy was a key source of demand, while it seems the political stand-off in the US did not dent confidence too much. Weak manufacturing is still coming from the traditional Printing sector with other sectors still in recession!

Up, up and away? The price of an average UK property grew by 5%y/y in September, continuing an acceleration in house price growth that started in February this year. The pickup has been more pronounced for first time buyers than for home movers. According to Nationwide, the average price of a place to live grew to £172k. No surprises which region led the charge. Prices in London were up 10%y/y, while they barely grew at all in the North East. A boom is on the way with a crash not far behind due to the government house buying incentive!

Credit creeping back. Households borrowed more in September. This applied equally to mortgages, credit cards and loans. The number of approvals for house purchase rose again to 67k while new lending grew at a healthy 37%y/y. But repayments are still coming in almost as fast as the money is going out the door, meaning total debt barely changed. Meanwhile lending to the UK corporate sector rose for the first time since the end of 2009. The 0.2% q/q increase recorded in the third quarter of the year was marginal, but it is nonetheless encouraging as it broke a fall that lasted four years. The UK consumer is back again buying by using the credit card at very high levels! What does the future hold for them paying back these borrowing?

Are risks to the US economy diminishing? The Federal Reserve certainly thinks so. In its latest statement the rate setting committee said it saw fewer downside risks to the labour market and growth than a year ago. It also noted the underlying strength in the US economy, shown by its ability to grow through a period of extensive federal spending cuts and tax rises. But this wasn't quite enough for the Fed to change its stance on quantitative easing. The committee wants to see more improvement, particularly in the labour market, before reducing its asset purchases. And with consumer prices rising just 1.2% y/y in September, we do not expect this to happen until next year. Plus, more unemployment on its way with many challenges for industry in every sector!

A harmless fiscal spat. In contrast with the 'flash' estimate that contained around 85% of the final submissions and which concluded that manufacturing growth slowed in October, the final ISM reported a modest acceleration. Compared with September, the reading advanced by 0.2 points to 56.2, the highest level in two-and-a-half years. Remember that manufacturing is a small part of the economy and the shutdown could have damaged other sectors more. However, this result gives hope that the underlying momentum of the recovery was not damaged too much by Washington. Watch this space!

Higher and higher. US house prices increased by 12.8% in the three months to August, their fastest rise since February 2006 according to the Case-Shiller 20 cities index. Adjusted for inflation, prices are back to where they were in 2002. Is this sustainable, or a bubble? The Fed supplied part of the answer last week. Housing is being made affordable because interest rates are very low. Will the Fed be moved to intervene in the mortgage market before rates return to 'normal' levels? High borrowing for house buying seems to continue, what will the future hold?

Eurozone still isn’t working. Unemployment in the Eurozone was still stuck at its record-high of 12.2% in September, despite the economy emerging from recession earlier in the year. And the Jekyll and Hyde nature of the European labour market was once again there for all to see. Unemployment reached 26.6% in Spain and 12.5% in Italy (worst since 1977). Yet in Germany it fell to 5.2%. Clearly, more than just stabilisation is sorely needed. Massive unemployment in the Eurozone and rising rapidly together with more younger people out of work!

What’s the ECB inflation target again? Inflation in the euro area dropped from 1.1% in September to 0.7% in October on the back of a sharp reduction in energy and food prices. Inflation has been below the European Central Bank’s 2% target for nine consecutive months, and October marked the third consecutive decline in the inflation rate. Economists have a name for this: disinflation. So far the ECB has decided against cutting rates, but it has another opportunity this Thursday. What will happen on Thursday? More procrastination! maybe!

Can Japan keep rolling? Confidence among Japan's large manufacturers and small service sector firms is at its highest since the financial crisis. In keeping with this optimism, Japan's government has decided to go ahead with its plan to raise the rate of VAT next year. Abenomics has also begun to yield a positive rate of inflation, due to a weaker currency raising the cost of imported energy. For Japan to properly escape its deflationary problem and ignite domestic demand, wages need to start rising. If they do not, the recent uplift in Japan will likely prove to be simply a temporary upswing. Watch Japan very closely!

China experiencing a little pick-up… for now. Data for August confirmed that the Chinese economy is experiencing a ‘little’ rebound. Industrial production grew by 10.4%y/y - the fastest pace since early 2012. But as usual it's investment and the state-run sector that are driving growth. More encouraging would be a flourishing private sector and greater consumption. Credit growth accelerated sharply to 25%y/y. This is a short-term positive for the economy but it is also an addiction that China is in desperate need of weaning itself off of. The bigger picture is one of a long-term slowdown in growth while financial risks continue to grow!

Colin Thompson
DDL: + 44 (0) 121 244 0306

Mobile: 07831 588310

Main T: + 44 (0) 121 244 1802

email: colin@cavendish-mr.org.uk

Skype: colin.thompson384



Economic Momentum

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