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Global Economy Losing Momentum - Economics Weekly

Global Economy Losing Steam Fast...

Global Economics Weekly Brief


The global economy continues to lose momentum rapidly. A side effect of this slowdown has been rising `stocks of finished goods` in many economies, with companies reluctant to invest and consumers keeping a tight grip on the purse strings. Although this helps to support output in the short run, it has worrying implications for future activity levels.



Unless demand picks up firms are likely to cut production to run down existing stocks. One must hope that policymakers across the globe “take stock” of the further deterioration in economic conditions and do all they can to foster growth. Indeed the Fed may be the first to move next month. Then Europe and the UK will follow! China has so much stock of goods they do not know what to do with them!

Stockpiling growth. The UK economy shrank by 0.5% in Q2. While the decline was less than previously estimated, the reading remains disheartening. Consumer spending fell 0.4%, government spending was flat, while investment and net exports shaved 0.5% and 1% off GDP, respectively. At the other extreme, inventories helped support output by a huge 1.2%. Without this, the contraction in the UK economy in Q2 would have been around -1.7%. Yep, that’s minus 1.7% on the quarter. Unless demand picks up quickly, firms are going to have a lot of excess stock hanging around. This is a globally issue with `stockpiling!

Government struggling to hit deficit reduction targets. Public finance data showed an unexpected £600mn shortfall in July. This compares unfavourably to the £3.4bn surplus seen in July 2011. Over the current fiscal year, tax receipts have risen by ‘just’ 1.1%, well short of the 3.9% target outlined by the Office for Budget Responsibility (OBR) in March. Spending has also overshot thus far, rising by 3.6% vs. a target of 3.1%. While public finance data are notoriously volatile, there will need to be a marked improvement if the OBR's November forecasts are to be anything other than bad news for the Chancellor. Public spending needs to be `under strict control` as at present it is totally out of control! Do public sector employees know how to control their departments?

The Fed has its finger poised over the printing presses again. The minutes of the latest Federal Open Market Committee (FOMC) meeting show that a clear majority of members believe inflation will remain subdued and unemployment high for some time. This implies that the Fed will (continue to) fail to achieve its statutory mandate. The FOMC commented that unless there is a substantial and sustained improvement in the flow of data, which hasn’t happened so far, it will favour a third round of QE soon. That is likely to be at the next meeting on 12-13 September. The USA still has big financial issues that need addressing rapidly! Plus, more unemployment on its way!

Eurozone survey data point to recession in Q3. The preliminary reading of the Eurozone composite Purchasing Managers’ Index (PMI) was broadly unchanged at 46.6 in August. Both manufacturing and services came in well below the 50 mark at 44 and 47.5, respectively, indicating contraction in these sectors. The downturn was led by a further drop in new orders, particularly from abroad. The slowdown is becoming more broad-based with Germany not immune to contraction. Eurozone GDP shrank 0.2% in Q2 and the latest PMI readings indicate that a recession – defined as two consecutive quarters of contraction – is almost unavoidable. More big issues for the Eurozone to address with rapid financial problems with increased unemployment!

Greek pleas fall on deaf ears. A request by the Greek Prime Minister Antonis Samaras for more time to implement austerity measures and repay Eurozone loans was rejected by Germany and France. German Chancellor Angela Merkel stated that Germany was ready to help Greece “as much as we can”, but highlighted that Greece must meet the conditions of its bailout loan. Political leaders are playing a high stakes game with Mr Samaras warning that a Greek expulsion from the Eurozone “could become a geopolitical nightmare that would go beyond the borders of Greece”. Will Greece ever pay back the money borrowed?

Global trade slowdown intensifies. China's manufacturing PMI remained firmly in the slow lane in August, falling to 47.8 from 49.3. The PMI has now been below 50 for ten straight months. New export orders fell to a worryingly low 44.7 - the most depressed figure since March 2009. This suggests a further slowdown in activity in coming months, which could well nudge the People’s Bank of China in the direction of more easing. Stock piling of goods is a major issue!

Stockpiles also rising in the world’s second largest economy. China’s inventory overhang has been rising steadily for a number of months and stands at a record high according to PMI data which goes back to 2004. With firms having struggled to anticipate the slowdown in global demand we could well see a sharp adjustment in production as companies look to reduce their inventory. This is the last thing the global economy needs with the Eurozone crisis raging on and uncertainty gathering around the US fiscal outlook. The next six months will see companies going-bust globally big-time! We live in the `real-world` so we must all plan to survive and be successful by looking ahead and plan accordingly.



China Export Growth Collapses as World Recovery Slows - click on the connection below for comprehensive information.
http://www.bloomberg.com/news/2012-08-10/china-july-exports-rise-1-vs-economists-estimate-for-8-.html

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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.


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