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Good News, Bad News - Global Economics Weekly

Good Economic News - Bad Economic News

Global Economics Weekly Brief

There was some good economic news last week, but most of it had a bad bit in there somewhere. In the US, economic growth was revised up and confidence improved, but the Chairman of the Fed is still very cautious. In the UK, manufacturing and housing looked better, but are not expected to for very long. In Europe, another round of lending to banks by the European Central Bank (ECB) has calmed nerves and taken pressure off bond yields. Again there’s a spoiler. Unemployment reached a record high, inflation increased and the banking system is still far from normal.

And there are yet more complications in sorting out Greece’s rescue package. There are signs that things could get a bit better, but it’s clear that we’re still in very dangerous times. There are many villains waiting in the wings, the biggest of all is the threat that rising oil prices could hamper recovery worldwide.
UK manufacturing performance was ‘good in parts’ in February. The Purchasing Managers’ Index (PMI) survey of UK manufacturing showed that the sector expanded for the second month in a row, but the rate of growth slowed. Factory production increased, leading to a rise in employment, but this is due to work on backlogs rather than new orders. Less good news is that domestic demand is still low and the boost from better exports to Asia and the US has been offset by poor Eurozone demand for UK goods. News on prices wasn’t good either. The surge in oil prices caused input prices to rise at their fastest monthly rate in over 19 years. More oil rises to follow for the next few months to very high levels.

UK housing market data were stronger, but won’t be for long. The price of a typical house in the UK increased by 0.6%m/m in February, which brought the annual rate of growth up to 0.9%. This may seem at odds with the current difficult economic conditions, but it does chime with other recent data. Mortgage approvals for house purchase reached their highest level in more than two years in January, up a whopping 36%y/y. Some of this is due to particularly weak levels in January 2011, but the improvement in prices and approvals is more likely due to activity brought forward to beat the end of the stamp duty concession later this month. More interest rises in mortgages to follow to dampen buying.

The US economy ended 2011 in better shape than first thought. The second estimate for Q4 US GDP confirmed that growth gathered pace in the final three months of the year. The number was revised up from 2.8% to 3.0%y/y (annualised), but the overall 2011 growth rate was a lacklustre 1.7%y/y. The revision was due to higher inventory investment, lower imports and higher personal consumption. Indeed US consumer confidence increased to its highest level in 12 months in February. But US Federal Reserve Chairman Bernanke noted that fundamentals supporting consumption are still weak and, notwithstanding recent data, the economy needs to be stronger for the labour market to improve. Unfortunately, more unemployment expected.

US house prices fell 4%y/y in 2011.
US house prices have fallen in three quarters of the months since May 2006, and after the 0.4%m/m fall in December prices are now at 2002 levels. More distressed sales are expected in 2012 which will add to the drag on the market from existing foreclosures. There are very few buyers so prices declining rapidly.

Eurozone banks were eager to take up the ECB’s second dose of long-term funding. 800 banks took advantage of the ECB’s liquidity operation, compared with 523 in December, as collateral rules were loosened. The move has reduced tensions on bond yields in the most vulnerable countries, which is good news. But it’s unlikely ECB Chairman Mario Draghi will offer another dose. He is keen that banks don’t become addicted to the ECB’s medicine and to begin to operate ‘normally’ again by borrowing from each other. But jitters about bank solvencies in the face of the sovereign debt problems are preventing this happening at the moment. Do we have another banking issue around the corner?

Inflation increased and Eurozone unemployment reached a record high. Eurozone unemployment rose to a record high of 10.7% in January. Spain is suffering most with an unemployment rate of 22.3% and a youth unemployment rate just under 50%. And if this wasn’t gloomy enough, inflation rose to 2.7% in February up from 2.6% in January. Oil is the culprit as prices rise because of increased political tensions in the Middle East. As I said last week, this is another threat to economic recovery, not just in the Euro area but everywhere else too. Unemployment is becoming a global issue in many countries!

China reduces its growth target.
After economic growth of 9.2% in 2011, China has brought down its target for 2012 to 7.5%y/y. This is the first time the target has been moved from 8% for eight years. More news to follow on the slowdown in China!

The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland who are `all` in `deep` financial difficulty as first stated here in January 2008. Who will leave the euro currency first? 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.

Good economic news, bad economic news!

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