G20 and the World Economic Worries
Global Economics Weekly Brief
Unsurprisingly, no concrete policies to sort out the Eurozone crisis came out of the G20 meeting of the world’s leading economies last week. But a renewed commitment to keeping the euro intact and a 130 billion euro growth stimulus package agreed at the meeting of Eurozone leaders did help a bit. Borrowing costs fell a little, but it’s not a game-changer. The markets are still very worried about Spain (and so are fans of German, Italian and Portuguese football!). On the other side of the Atlantic fears that the US recovery is slipping led the Federal Reserve to activate a second ‘Operation Twist’ in an attempt to rev things up a bit. It’s not alone in this desire.
Judging by the minutes from the last Monetary Policy Committee (MPC) meeting it will not be long before the Bank of England joins the party with more quantitative easing. The future of paying off all this QE will run for many generations.
Plus, 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. 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. Credit growth is not the real answer! Who will pay in the future when it happens again?
UK inflation continues its slide. The consumer price index rose 2.8% in May, down from the 3% rate in April. Cheaper fuel had a big effect, as lower crude oil prices filtered their way through to the forecourt. The cost of food also helped, as big price rises last year weren't repeated. May’s reading is the closest inflation has been to the Bank of England's 2% target for two and a half years. This is good news for savers and everyone who has seen their income fail to keep pace with prices. But it doesn't mean the squeeze on consumers is over. The price of essentials, such as gas and electricity, are still 15% and 8% higher respectively than last year. People are buying less fuel and food and this will continue for many years to come with less money being available in the pocket! Prices will have to continue to decline otherwise people will not buy!
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 cu 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. The debt crisis is spreading globally!
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 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.
MPC minutes show further shift towards easing. Another dose of quantitative easing was a close run thing earlier this month. Four of the nine members of the Committee voted in favour of more easing. The continued deterioration in the domestic and global economic outlook, coupled with a further retreat in inflation, increases the likelihood that a majority will vote for more easing, maybe as soon as July.
UK retail sales rebound in May. Retail sales staged an encouraging rebound in May, growing by 0.8% m/m (ex auto fuel). This lifted the annual growth rate to 3.9% - slightly above the average of the past 2-3 years. The improvement is a bit surprising given weak income growth and low confidence, but lower prices seem to be encouraging consumers to splash the cash. Store price inflation has slowed to 0.9%y/y, its lowest rate since October 2009 and this has helped drive the volume of retail sales in 2012. It seems there is life in the UK consumer, but only if the price is right.
UK unemployment rate unchanged and wage growth still below inflation. The UK unemployment rate was unchanged at 8.2% although the number of unemployed fell by 51,000 on the quarter to 2.61 million. One piece of good news is that private sector job creation outpaced job losses from the public sector in Q1. Unfortunately, with the UK in recession and facing a very weak growth outlook at best, unemployment could easily resume its upward trend in the coming quarters. Wage growth accelerated slightly from 1.6% to 1.8% y/y but is still below the rate of inflation. In real terms wages have now been falling for two years. More unemployment to come later in the year!
US Fed continues to do the twist. The US central bank opted to extend ‘Operation Twist’ in an attempt to stimulate the economy. By selling short-dated government debt to purchase the longer-dated paper already out there, longer term interest rates are reduced. It’s different to the UK’s current approach as it doesn’t inject any more money into the system. Instead it targets behaviour through the manipulation of rates. The impact of the policy remains to be seen, but it’s likely to be modest. Another round of asset purchases by the Fed remains an option for the future.
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 outturn for consumer spending in Q2. More unemployment on its way!
Eurozone survey data indicates a deepening downturn. The initial reading of the composite Purchasing Managers’ Index (PMI) was unchanged in June, but it’s still firmly in the sub-50 contraction territory. The manufacturing index worsened in June as new orders and hiring declined. The service sector index improved a bit, but is still below 50. The biggest concern is the spread of the economic weakness to Germany. Its manufacturing index fell for the fifth straight month and the fall in the services index was the largest in a year.
China’s manufacturing sector remains sluggish. The initial reading of China’s manufacturing PMI fell to a seven-month low in June. Falling export orders were a culprit and this underlines impact of the problems in Europe and the US on overall global demand.
Plus, the banks globally are still stashing cash at the highest levels ever recorded, why? We all know why, don`t we! Will we see a run on the banks soon?
The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland followed by France who are `all` in `deep` financial difficulty as first stated here in January 2008. Who will leave the euro currency first? Then who will follow? What future as the Euro? Watch this space!
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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.