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Greek Financial Tragedy - Global Economics Weekly Brief

The Greek [financial] Tragedy


Global Economics Weekly Brief

The Bank of England and the ECB both left rates on hold at their May 2011 meetings and there are no signs that the Fed will raise rates either.
UK conditions have weakened since last month, while the Eurozone recovery continues unabated in a few countries. In the UK, disappointing business survey data has raised concerns that the recovery could be running out of steam. Falling commodity prices offer some good news, but UK manufacturers need to hold on in there and continue to take advantage of the weak currency to keep their leading role in the rebalancing of the economy. The fight is still on to recover in the UK!

The Monetary Policy Committee left UK rates on hold in May. This is the 27th consecutive month that UK interest rates will have been at 0.5%. The decision to hold was no surprise. The recovery has lost momentum over the past six months, and inflation worries have eased somewhat as consumers are reacting to the squeeze. Even so, a rate hike will come; it’s just a question of timing. Our current forecast is that the MPC will start to raise rates in August, but we will review that call in light of developments, including the Bank of England’s new forecasts – published later this week. Plus, credit card charges are rising again!

UK manufacturing and services activity slowed sharply in April. A disappointing reading on the manufacturing and services PMI, which are leading indicators of economic activity, added to worries that the UK recovery could be fading. The manufacturing reading dropped from 56.7 in March to 54.6. While still showing expansion, the speed of the drop, and the fact that manufacturing has led the recovery economy so far, is less good news. The services PMI also fell sharply in April, from 57.1 in March to 54.3, although this follows a big rise in March. Some companies blame the fall on public sector budget cuts. On the positive side exports are growing quickly, thanks to a weak pound. Public sector cuts will hit big time over the next six months!

Higher input prices will add to inflation pressures, but the tumble in commodity prices could help. The cost of goods at factory gates rose by 0.8%m/m in April and by 5.3%y/y. Prices are likely to continue to rise too as input prices increased by a whopping 17.6%y/y. Manufacturers will feel the squeeze, but this also adds to the UK’s inflation risk. Better news was the fall in commodity prices due to more uncertainty about the strength of the global recovery. Falls were across a broad range of commodities, but led by a decline in Brent crude. Yet, fuel prices at the pumps continue to rise rapidly!

UK house prices fall again. The price of a typical house in the UK fell by 0.2%m/m in April according to Nationwide. Halifax reported a sharper fall of 1.4% m/m. There are no signs that the market will pick up quickly. Mortgage approvals are at half their long run trend and consumers still expect prices to fall. The London and South East markets are the most resilient according to the Land Registry, while the North East and Wales are falling the most. Very few first time buyers are in the market!

Household credit growth is weak and remortgaging appetite faded. Household credit growth remains weak - net lending to individuals was just £0.4 billion in March (compared with roughly £10bn per month in the five years leading up to 2008). Mortgage lending activity remains broadly unchanged with net mortgage lending growth of just £0.3 billion. Remortgaging approvals fell by 3,500 to 32,000 during the month. Even though this is 14% higher than this time last year, it is very far below its long run trend. People are finding it very tough!

Eurozone rates held in May. The European Central Bank left rates on hold at 1.25% at its May meeting. ECB President, Jean-Claude Trichet was careful not to suggest a June hike is imminent, after Eurozone inflation hit 2.8%y/y in April. Eurozone retailers will have been pleased at the decision (and the signal!) after sharp falls in sales (-1.0%m/m) in March. Demand was weak in most Eurozone countries, but the biggest falls were in Germany and Portugal. This trend is worrying!

The Greek Financial Tragedy
European Union considers revamped bailout for Greece. The European Union publicly acknowledged that Greece needs more financial help. Yields on two year Greek government bonds increased to an alarming 25% on the news. EU finance ministers are also concerned about the repercussions for Ireland and Portugal, and the effect on the euro. These countries are in `deep` financial trouble and what is the future truth?

US labour market improves, but business survey data is mixed. The good news is that US nonfarm payrolls rose by 244,000 in April. The private sector added 268,000 jobs (how many are part-time?), easily outpacing the 24,000 net jobs lost in the public sector. Paradoxically unemployment rose to 9.0%, up from 8.8% in March as more people started looking for work. But long-term unemployment fell. This is especially welcome as the number of Americans out of work for 27 weeks or more, the definition of long-term unemployment, is the highest it's been since the Great Depression. Look at next month`s data for the new figures on unemployment!

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This week it is the continued;

Greek Financial Tragedy
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