March 22, 2013
Global Economics Weekly Brief
Economic Recovery Stalled in the UK
When the Chancellor presented his first budget in 2010, he was hoping that by now the economic recovery would be well under way, with growth at a healthy 2.9%. As it turns out, the economic backdrop for his fourth budget this Wednesday could hardly be more different. The economic recovery has stalled;
there is a distinct possibility of a triple-dip recession; and there are signs that inflation expectations are rising. In addition, the Eurozone crisis continues as Cyprus becomes the fourth Eurozone economy to seek a bailout. This is in contrast to the US, where the recovery continues to show signs of improvement. Calling it the best of times and the worst of times may not be too far off. The UK has a massive challenge for the next 10 years at least to fight the over spending of the last UK Labour government of 13 years of overspending continuously.
UK manufacturing under the cosh in January. Industrial output fell 1.2%m/m, and was 2.9% lower than January last year, lowering the odds of a triple-dip recession. A fall in manufacturing was the main culprit (down 1.5%m/m, and 3%y/y). Once the darling of the UK's initial recovery, the sector is struggling with a general decline since the middle of 2011. Mervyn King has stated that there is “momentum behind the recovery that’s coming”. Manufacturers will be hoping he’s right! Construction, traditional printing, media and several other sectors in serious trouble!
UK’s trade deficit down, despite tough times for exporters. The UK's trade deficit fell to £2.4bn in January, from £2.8bn in December. But the improvement was due to a fall in imports, particularly oil, rather than an increase in exports. Though a weaker exchange rate should help exporters, these data show how difficult it is for the UK economy to trade its way to economic recovery when demand is depressed in key export markets – most notably in Europe. But our reliance on Europe for export demand is declining, with export volumes to non-EU countries rising by more than 30% since 2009. The challenges are finding new markets outside Europe!
Rise in inflation expectations is a headache for Monetary Policy Committee. One of the reasons the MPC has been willing to tolerate above-target inflation is that expectations of future inflation are well anchored. But could the anchor be slipping? The gap between nominal and index-linked gilts has risen to a 4 1/2 year high of 3.3%. Investors appear worried about higher and/or more persistent overshoots once we enter the Mark Carney era. If a similar trend becomes apparent in wage-setting behaviour, the MPC will be reluctant to print more money and may even think about starting to tighten earlier. QE is not the answer!
Another Eurozone bailout. Cyprus became the fourth Eurozone economy to seek a bailout, after Greece, Ireland and Portugal. Unlike previous Eurozone bailouts, the €10bn (£8.6bn) agreement with the EU and IMF includes a controversial one-off tax on deposit holders – 6.75% on deposits under €100k and 9.9% above that level. The levy on deposits was demanded by creditors seeking to reduce the cost of the bailout. The deal still needs to be ratified by the Cypriot parliament. It does raise concerns of a precedent being set for future bailouts, possibly leading to a run on bank deposits in Europe. More trouble on the way for the rest of the Eurozone!
Eurozone inflation slows and factory output falls. Inflation fell for a second consecutive month in February to 1.8%, from 2.0% in January, on the back of a sharp 5.2% decline in prices in the telecommunications sector. With industrial output falling 0.4% in January to be 1.3% lower than a year earlier, there is a good chance the Eurozone economy will contract again in Q1. Coupled with unemployment at 11.9%, this may prompt the European Central Bank to cut rates to stimulate economic activity. As well as the usual round-up of the global economy, our latest world economy barometer (see below) looks at the issue of rising long-term unemployment in peripheral Europe. More unemployment on its way!
US retail sales defy fiscal tightening as life gets a little dearer. Retail sales grew 1.1%m/m in February, the strongest rate since September last year, as consumers shrugged off January's increase in payroll tax and taxes on the highest earners. Car, building & garden supplies, and food & beverage sales all saw stronger demand. But the improvement was led by fuel sales, reflecting a 9.2% rise in petrol prices. The cost of filling the tank also helped push up inflation for the first time in four months as life got 0.7%m/m more expensive in February. Despite the highest jump in the cost of living since June 2009, inflation sits right on the Federal Reserve’s 2% target. The USA are fighting back!
US industrial output continues to improve. US industrial production rose 0.7%m/m in February to be 2.5% higher than a year earlier. This rise was underpinned by the manufacturing sector which grew 0.8%m/m as auto production, home electronics and business equipment all saw strong output growth. Though industrial production was flat in January, output has risen in three of the last four months, boosting the US economic recovery. And it is a boost that will be needed to offset the fiscal headwinds that are hitting the US economy this year. More improvement forecasted!
Global Economic Crisis
The Market Sentiment Globally
The current financial crisis is the worst the world has seen since the Great Depression of the 1930s. For younger generations, accustomed to mild recessions of the new phase of globalization, the misery of the Great Depression is hitherto nothing more than a distant legend. However, the collapse of two Bear Stearns Hedge funds in summer of 2007 exposed what came to be known as the subprime mortgage crisis, reintroducing the world to an era of bank failures, a credit crunch, private defaults and massive layoffs. In the new, globalized world of closely interdependent economies, the crisis affected almost every part of the world, receiving extensive coverage in the international media. “In an Interconnected World, American Homeowner Woes Can Be Felt from Beijing to Rio de Janeiro,” observed the International Herald Tribune at the onset of the crisis. “Chinese Steelmakers Shiver, Indian Miners Catch Flu,” noted the Hindustan Times. “US and China Must Tame Imbalances Together,” suggested Yale Global, as the frenzied search for a solution continues around the globe. Global greed to expand at any cost is the major issue.
In this special report, Yale Global offers essential information on why the crisis started, how it affected the industries and consumers around the world, and what solutions have been proposed by experts and regulators across countries. Click on each title below for comprehensive information.
Causes of the Crisis
What exactly caused the crash
Evolution, Effects and Response
The worst crisis since the Great Depression
Solutions for the future
World Economic Outlook (WEO)
Coping with High Debt and Sluggish Growth - http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf
The World Economic Outlook (WEO) assesses the prospects for the global recovery in light of such risks as the ongoing euro area crisis and the "fiscal cliff" facing U.S. policymakers. Reducing the risks to the medium-term outlook implies reducing public debt in the major advanced economies, and Chapter 3 explores 100 years of history of dealing with public debt overhangs. In emerging market and developing economies, activity has been slowed by policy tightening in response to capacity constraints, weaker demand from advanced economies, and country-specific factors, but policy improvements have raised these economies' resilience to shocks, an issue explored in depth in Chapter 4.
Plus, the `Global Risks 2013 Report - Risk Cases and Resilience` - contact us today....
Global economic outlook for 2013 revealed - United Nations ...
10-Step Double-Dip Recession Survival Guide for Entrepreneurs - click on the connection below for comprehensive information.
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