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Fundamentals of the Economy - Economics Weekly

The Fundamentals of the Economy

Global Economics Weekly Brief


It was a nerve wracking week, full of hopes, but also fears. The collective sigh of relief could be heard around the world as the Greek election results came in. The vote to continue with austerity calmed short-term fears of a rapid contagion to other parts of the Eurozone, but it doesn’t actually change any of the fundamentals.


The Fundamentals of the Economy
There is still a long, hard slog ahead and if there was any doubt, the markets are letting us know. The ‘relief rally’ after Spain’s banking sector bailout was short-lived and government bond yields have risen to eye-watering levels again. Italy is also feeling the pain, and being ‘too big to bail’ it has to come back from the brink pretty quickly. Growth is the answer, but how it’s achieved in a climate of severe uncertainty is the question. In the UK the plan of attack is via loans to banks to promote lending to businesses and households. But in France, the new government, strengthened after elections, is pushing for a slowdown in the pace of cuts, with a little more spending on the side.

Governor King announced plans to boost private sector lending. At this year’s Mansion House speech the Governor of the Bank of England announced two schemes to stimulate activity in the UK economy. Recognising that rebalancing towards exports is increasingly difficult as the global economy slows, Governor King unveiled a new scheme, Funding for Lending, that the Bank of England is working on with the Treasury. He also announced that the snappily named Extended Collateral Term Repo Facility would be activated. Both provide cheaper funding for commercial banks via loans from the Bank of England. The idea is that this additional funding will then be lent out to businesses and households. The question is how successful the schemes will be. The answer depends on whether these businesses and household are confident enough to want to borrow in the current uncertain climate.

Industrial production weakened in the UK and in the Eurozone in April. Lower industrial production (IP) provided yet another sign of weakening activity in the global economy. In the UK manufacturing output fell by 0.3%y/y and 0.7%m/m, which dragged overall IP growth down to just 1%y/y in April. The picture was worse in the Eurozone. IP fell by 0.8%m/m in April, the second consecutive decline. In annual terms production is now 2.3%y/y lower than April 2011 and not even Germany was immune to the slowdown. German production fell by 2%m/m, the second steepest decline in the region. These results chime with very weak manufacturing survey data. With activity slowing at such an alarming rate, it seems that the Eurozone debt crisis has had a severe impact on the real economy.

UK exports fell in April, but German exports boosted Eurozone trade. Overall, UK exports of goods and services fell by £2.1bn to £39.4bn in April - the lowest level since December 2010. The drop in exports drove the UK trade deficit from £3.0bn in March to £4.4bn in April - its second highest value since records began. The decline wasn’t all down to weakness in Eurozone demand either. Non-EU exports also fell sharply in the month. The Eurozone managed a trade surplus of €5bn in April, despite the recession. But this was really just because of Germany’s €45bn surplus. Spain, France and Italy each ran deficits. Things could improve though as the single currency depreciates. Over the past year the euro has depreciated by over 8% against sterling and by 12% against the dollar. But the flip side is not good news for UK exporters.

Lower commodity price rises are reducing inflationary pressures. The Fundamentals. The trend towards lower inflation in developed economies continues. US CPI inflation fell to 1.7%y/y in May, down from 3.9%y/y in September. In the UK, inflation fell to 3.0%y/y from its September peak of 5.2%y/y, while in the Eurozone price pressures also eased with inflation down to 2.4%y/y. The fall results from global commodity prices which have fallen significantly over recent weeks, and it is likely that the trend will continue. On top of this, weak demand conditions should also bear down on price pressures helping to ease the strain on households in particular. But with uncertainty about the amount of spare capacity in developed countries, it’s still not clear how quickly inflation will fall.

US retail sales fell for the second month in a row in May. Even though inflation is easing US shoppers haven’t been encouraged to go on a spree. Retail sales fell by 0.2% last month, Lower petrol prices helped to reduce household bills but they also reduced spending on fuel which sparked a decline in receipts for petrol retailers. The annual rate of growth was dragged down to 5.3% - the lowest since August 2010 and suggests that growth in the US economy is still sluggish. The US economy may be looking much more robust than UK or Eurozone, but these data suggest an extremely weak out-turn for consumer spending in Q2.

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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

ENDS
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.

The Fundamentals of the Economy!

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Comments on this item:

Don Holbrook
27-06-2012 15:06:44
I just wrote a whole series on my blog about the great economic transition we are all in and how we are just now coming through the eye of the storm into the fringe of the tail end of the 2008 GFC perfect storm. This next wave will be even more brutal as it will prove that this is not a typical recession but rather an economic disease fed by global fiscal failed policies. Until we start making good decisions we are in for a rough ride... the fix then is still at least a decade of repairs. Check out my blog: www.economicdeveloper.wordpress.com
 


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