Global Economics Weekly Brief
There will have been a few bouts of insomnia last week as economic data led to worries about the sustainability of the global recovery. With the exception of Japan, manufacturing output growth weakened in `all` of the major global economies. US policymakers’ sleep was probably most upset as this news came on top of weak data from the labour and housing markets. But there shouldn’t be nightmares. While weaker, manufacturing output is still expanding. And, as supply interruptions from Japan are mended and commodity price rises pause, there is room for further expansion, even if it is at a slower pace than we would like. Better sleep ahead? Perhaps. Euro countries still a major issue!
Manufacturing output slowed across most of the world in May. The UK manufacturing PMI fell to a 20 month low of 52.1 in May from 54.4 in April. More public holidays, weaker domestic demand and lower export growth weighed down on new orders and dragged the reading down. In the Eurozone the manufacturing PMI fell from 58 to 54.6 as Greece and Spain recorded a sharp contraction in output. China's manufacturing PMI dropped for the second consecutive month in May. It fell from 52.9 in April to 52 - its lowest level in nine months. In the US things looked worse. The US manufacturing PMI fell the most. The reading dropped to 53.5 from 60.4 in April - the first time it has dropped below 60 in 2011 and the lowest US PMI reported for the past 12 months. But each of these readings is still above the magic 50, which indicates economic expansion. And a recovery in Japanese output growth could signal better times ahead. While still only at 51.3, Japan’s manufacturing PMI made an impressive step up from 45.7 in April and was one the largest ever monthly rises.
The US labour market disappointed in May. Weak non-farm payrolls data showed that just 54k new jobs were created in the US last month, down from 232k in April. Over the last three months, 85% of the half a million new jobs were in the service sector. This was reversed in May when the retail sector actually shed jobs. An expansion of the labour force also helped to push the unemployment rate up to 9.1%. But more concerning than the headline rate is the number of people unemployed for 27 weeks or more. This rose to 6.2m in May. While 510k lower than this time last year, it's still a disappointingly high number.
US house prices are 33% below their peak, and still falling rapidly. The housing market is another drag on the US economy. US house prices fell for the ninth consecutive month in March, bringing the annual rate of decline up to 3.6%y/y, the largest in sixteen months. There are no signs of let up either. The proportion of loans in foreclosure fell slightly for prime mortgages in Q1 2011, but at 3.5% is still almost seven times the pre-crisis average. The comparable figure for sub-prime loans is 14.7%. With this overhang of supply, demand will have to pick up enormously before prices can be expected to begin to recover again. A weaker labour market will not make this easy. More unemployment on its way!
Jobs storm clouds US recovery. Storm clouds were gathering over the global economy last night amid fears concerning America`s jobs market and national debt. Unemployment ticked up from 9pc to 9.1pc or 13.9million people. The bleak report came hours after ratings agency Moody`s warned of a `very small but rising risk` that the US could default on its debt! The US Treasury has warned that if the debt ceiling is not raised by 2 August 2011 the country will not be able to pay its bills. Republicans are `demanding` deep cuts to public spending in exchange for more borrowing. The US is in terminal and with continuous high borrowing this will lead to a very dismal future!
Asian economies exports may provide the solution. Asia's lower new export orders and inventories data may be a sign of weaker exports in the coming months. This could be good news because it shows that the rebalancing required for recovery is still underway. But more than this, the solving of the supply problems in Japan after the earthquake should provide a big boost to production, particularly in the mighty automotive sector. This can only be good news, particularly for the US.
The UK housing market is also in the doldrums. House purchase approvals fell by 4%m/m in April, but remortgage approvals fell by 10%m/m. The following months will see decline in house prices and very little interest from buyers! The UK’s economic ‘soft patch’ seems to have increased borrowers’ confidence that the Bank Rate will stay at 0.5% for a bit longer. And with fewer approvals there is little chance of a pickup in lending any time soon. Land Registry data also shows a softening in transactions and prices in England and Wales. Overall prices fell 0.8%m/m in April, but London prices rose by a huge 3%m/m due to foreign buyers investing in property, while prices in the North East fell by 1.7%m/m.
Britain battered by slowdown in service and retail sectors. The faltering economy looks to have stuttered this spring in a big blow to recovery hopes. The dominant services sector, which accounts for three-quarters of GDP. grew at its slowest pace for three months in May 2011. Also, a sharp fall in the manufacturing index putting the economy on course to grow by just 0.2pc to 0.3pc in the second quarter.
Big Stores early sales pile on the pressure. Retail in the shops is in rapid decline with early summer sales already in progress. Major retailers are bringing forward their summer sales in a `dash for cash` that left some hard-pressed rivals anxious of a domino effect. Also, similar re-action is happening in mainland Europe and US.
Eurozone unemployment held steady in April and inflation slowed in May. The rate of inflation in the Eurozone fell from 2.8%y/y to 2.7%y/y in May. This takes a bit of pressure off the European Central Bank (ECB) to raise interest rates for a second time this year. Some respite will be particularly welcome in the areas of the Eurozone which are struggling the most. The unemployment data highlights just how big the divergence across the region is. The overall rate of unemployment stayed at 9.9% in April, but in Spain it is running at 20.7% while in Austria and the Netherlands it’s only at 4.2%. More unemployment on its way in Greece, Spain and Ireland!
Electricity and Economics
The energy debate is currently receiving a lot of media coverage and is so wide open that we feel it is our responsibility as Energy Experts to inform you, our customers, about the potential proposed changes and solutions within the energy industry.
This month our newsletter highlights the changing face of the energy market as it now competes on a global scale. The following article also tries to put into perspective the scale of the energy conundrum facing the UK.
Why does the TRILEMMA concern you?
The UK is the fourth most developed country in the world yet we find ourselves in a situation where in a few years time the lights are going to start going out because there isn’t enough electricity to go around. It’s not just market demand that will dictate what happens to the power we use the Energy Policy will also impact very heavily in on it.
So what exactly is the crisis? Why can’t we simply just build a multitude of power stations to produce all the energy we would ever require? Generation on its own is not the problem; the problem is multi faceted. How do we produce this power and meet the strict, new Carbon Emission Targets that have been set? How do we continue to satisfy an ever increasing appetite to use more energy in our day to day lives and ensure that there will always be power available when we flick a switch? And finally, how much can we each really afford to pay for our energy? This set of questions is known as the Energy Trilemma.
For many years the UK has had the luxury of a large supply of Natural Gas within the North Sea and a wealth of coal reserves to feed our large coal fired power stations. However, we have seen in recent years, that while our demand for energy has increased, we have also developed an increased reliance on imported gas. Our power stations are rapidly aging and are not and will continue not to fulfil our future obligations around carbon emission targets. Substantial investment is required to replace existing nuclear and coal-fired power stations as they close and to meet predicted increasing demand.
Snapshot of the key issues:
* Electricity prices are estimated to rise by as much as 100% by 2020.
* 1 in 3 of our 19 power stations (Coal & Oil) need to be decommissioned in the next 10 years.
* By 2030 we need to reduce Carbon Intensity of electricity by 80% (see below).
* EU targets mean that one third of our electricity must come from Renewable Sources by 2020.
* It takes 7-12 years to build a new nuclear power station.
* Last year Wind Farms ran at 33% efficiency rate which means that every three hours they only produced enough electricity for one hour. In times of peak demand, wind cannot be our main source of power.
* CCGT stations (Gas Fired Power) are the cheapest and fastest type of power station to build, however, they still only emit half of the CO2 of a coal fired power station.
* The US’ insatiable appetite to exploit Shale Gas fields to reduce dependency on oil has helped to calm the international gas markets and especially the market for LNG. However, future increases in demand from Asia, as well as increased demand from Europe due to the planned construction of many CCGT stations, is adding pressure to this commodity.
* China is already facing its first wave of power rations across the country as power stations struggle to produce enough power under the constraints of high coal prices but low State controlled electricity prices. This leads to the conclusion that if it isn’t commercially viable to produce power, then it simply won’t get produced!
* In total the electricity network needs £200Bn of investment over the next 10 years. This is equivalent to building 20 Channel Tunnels in less time than it took to build the first one. Investment into the electricity network will be financed by taxpayers.
* The increase in demand for electric vehicles and the electrification of the public transport network will put increased demands on the supply of electricity further increasing the pressures on generating more clean energy.
The table below shows the current fuel mix of the UK economy and the forecast demand and supply levels to 2020.
As you can see big decisions don’t just need to be made, they need to be made quickly.
Electricity and Economics!
So how do we create a robust, efficient power network that satisfies the demands of every business and household at a price that everyone can afford without sacrificing the Environment? What would you be saying to the Energy Minister if you had 15 minutes of his time? Where do you believe the compromises should be? What are you willing to pay for power to guarantee the “lights don’t go out”? How would you ensure that your power generation policy will not damage the environment? Normally the answers are not expected to come from the end users or the generators; they come from Government Policy, Environmental policies and financial incentives or dis-incentives. However, in the new era of awareness and increased avenues for sharing information and opinions, the participation of all those involved to have a say and effect change has never been greater.
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