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Obama the UK and Unstable Times - Global Economics Brief

Even president Barack Obama of the US could not help lift the UK's economic performance -

Global Economics Weekly Brief

Even Barack Obama’s state visit wasn't enough to lift the mood on UK economic performance last week. Disappointing GDP data and a reduced growth forecast from the OECD will have left the UK Chancellor wondering if we really can stick to his deficit reduction plan and maintain recovery.
The US President will not have been happy that there was no improvement in his own country’s economic performance either. But he wasn’t alone. Most of the economic news last week pointed to softer growth – even in China. But if, as the OECD points out, commodity prices stabilise and inflation expectations stay anchored, the recovery should strengthen, despite all of the fiscal consolidation. Maybe we can? Global stagnation at present!

Q1 UK GDP growth is still disappointing. The second estimate of UK Q1 GDP growth was unchanged at 0.5%, puncturing hopes of an upward revision. Unsurprisingly, household consumption fell for the second consecutive quarter. This contributed to a 1.3%q/q fall in total domestic demand, despite a 1%q/q rise in government spending. But investment was the biggest disappointment. Fixed investment fell by 4.4%q/q, with survey data pointing the finger at transport and communications. The good news was that net trade did well. Exports surged by 3.7%q/q while imports shrank by 2.3%q/q. This is encouraging for rebalancing the economy, but the weak trend in the domestic economy is still a worry. The trend is a rapid decline in domestic expenditure in the coming months.

The OECD kept its global growth forecast constant, but urged rises in UK and US interest rates. The OECD global growth forecast stayed at 4.2%y/y for 2011, rising to 4.6%y/y next year. But it reduced its UK growth forecast to 1.4% and 1.8%, respectively. The Organisation is hawkish on inflation and thinks a rise in rates in the UK and US is ‘merited’. But its supportive tone on the UK’s austerity measures has softened a bit. This could be seen as a veiled warning that the pace of deficit reduction is a bit fast. On top of this, rising government borrowing is casting doubt on whether the reduction target is achievable anyway. Special factors meant that government revenue was 0.8%y/y lower in April, but even so, spending was up 5%y/y, making this the largest April budget deficit on record. Interest rates will rise soon and continue to rise over the next few years.

Eurozone growth may be beginning to fade. The latest composite PMI index dropped unexpectedly to a seven month low in May. While any number above 50 signifies expansion, the slowdown from 57.8 in April to 55.4 in May was still disappointing. Expectations for the six months ahead continued to soften too and fell to an eleven month low in May. Confidence was no better. Eurozone manufacturing and service confidence fell for the third consecutive month in May. On a positive note, falling commodity prices have helped to ease cost pressures and this could improve prospects. And consumers seem slightly happier than a month ago. The consumer confidence index rose from -11.6 in April to -9.8 in May.

Q1 US GDP growth held back by lower government spending. Like the UK, the second estimate of US Q1 GDP growth was unchanged at an annualised rate of 1.8%. But unlike the UK, lower government spending was a drag. State spending fell by just over 3% and federal spending fell by almost 8%. Corporate profitability also slipped a little. The good news is that exports are growing; although not enough to prevent the 7.5%y/y increase in imports worsening the net trade position.

US housing prices are still falling, but they rise a little in the UK. Federal Housing Finance Agency data shows US house prices fell by 2.5%q/q in Q1, and by 5.5%y/y. Foreclosed and distressed sales are holding prices down, but a fall in serious delinquencies could be a signal of better conditions ahead. In the UK, house prices increased by 0.3%m/m in May according to Nationwide, but they are still 1.6% lower than this time last year. Lower prices have done little to whet the appetite to buy in either country. US mortgage applications for house purchase increased by only 1.2%m/m in the last four weeks, while in the UK, data from the Major British Banking Group showed a 6%m/m fall in mortgage approvals in April. The housing market is still depressed with continuous falling of prises and more unemployment on the way!

Slow death of the dollar. The greenback remains reserve currency of the world but China`s renminbi is starting to draw followers. America`s colossal budget deficit which increases by about `$4 billion a day`! The dollar is slowly going out of fashion and there will be `big` problems as the years roll by with excessive debt. Who will bail out America? China is the only country globally that can afford to rescue America.

China's growth may be moderating, but a hard-landing seems unlikely. China’s manufacturing PMI dropped to a 10 month low of 51.3 in May. While this is still expanding, the contraction in the export orders component will have raised eyebrows in Beijing. The key question for the global economy is whether this slowing in the pace of growth is the start of the much-feared 'hard-landing' in China. But this seems unlikely. Growth is now at 9.7%y/y and other surveys suggesting a robust outlook, so there is a long way to go before we hear any smashing porcelain. Indeed, some slowing is welcome to help reduce inflationary pressure. It’s also likely that supply-chain disruptions from Japan have affected the reading. So, even though a moderation in China's growth can be expected, it will remain a big driver of global growth. At least for now.

We live in explosive times where the world is in terminal and we await the next up-rising of people who will not seat back and be controlled!


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Obama the UK and Unstable Times a Global Economics Brief.

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