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QE3 and the Eurozone - Global Economics

QE3, Germany and the Eurozone

Global Economics Weekly Brief

The German Constitutional Court’s decision to reject an injunction against the Eurozone’s bailout fund was received with relief - and gratitude - last week. The judgement has given more breathing space to the troubled Eurozone as it removes any immediate obstacles to the European Central Bank’s bond buying programme. Markets reacted well, as they did to the US Fed’s announcement of more quantitative easing or QE3 and a steer that US interest rates will remain low until at least mid-2015.

This was especially well received after a mixed batch of data underlining the uneven nature of the US recovery. These actions have boosted confidence – share prices rallied strongly – and could be good news for the global economy as a whole, especially if they do calm jitters. But there is no getting away from the fact that it’s still a pretty poor state of affairs. Pressure to say yes to this issue from the German government! When will the money run out? Why do politicians not read history? There action with the bailout fund as failed on so many times through history! * See below

German lawmakers give a green light to the bailout fund. (under pressure to do so) The German Constitutional Court rejected an injunction against the European Stability Mechanism, the Eurozone’s €500bn bailout fund, but not without conditions. It set Germany’s maximum contribution to the fund at €190bn without further legal consent. It’s a good start but there’s more work to be done on economic and political reform before we can be comforted that the crisis is under control. More money will be needed in the future!

QE3, QE3! The US Fed sprung into more monetary policy action on two fronts. The Federal Open Market Committee did two things at its meeting last week. It changed its guidance on how long it expects rates to stay exceptionally low, extending the period from end-2014 to at least mid-2015. Second, it launched more quantitative easing (QE3) via a program to buy mortgage backed securities, chiming with concerns about the US housing market. The securities will be bought at a rate of just $40bn a month, but there was no indication of when purchases might stop. Construction, housing, printing are all in deep trouble with more unemployment on the way!

Fuel pushed US and Eurozone inflation up in August. US consumer inflation increased to 1.7%y/y in August up from 1.4%y/y in July. 80% of this was due to fuel costs. Core inflation, which excludes fuel and food, fell from 2.1% in July to 1.9% - its lowest since July 2011. Fuel boosted Eurozone inflation too. It rose to 2.6%y/y in August, up from 2.4% in July and is the first pick up for 11 months. Fuel is rapidly rising again and will continue to do so! Inflation to explode!

Production rebounded in July in the Eurozone, but faded in the US. Eurozone industrial production rose by 0.6%m/m in July as a strong performance in Germany offset declines elsewhere. But things aren’t that good. Overall output was 2.6% lower than the same month last year. In the US industrial production faltered in August. Output fell by 1.2%m/m, its fastest decline for three years as Hurricane Isaac shut down oil and gas rigs in the Gulf of Mexico.

An Olympic boost to UK jobs. There was good news on UK employment which increased by 236,000 in the three months to July. 38% of the rise was attributed to the Olympics. The economy is still struggling to generate full-time jobs though. The bulk of new jobs this year have come from part-time and self-employment. Unemployment fell by 7,000 in the three months to July, which brought the rate down to 8.1%. Earnings growth came in at 1.5%y/y in the three months to July, down 0.3 points on the previous three months. This was the 29th month that pay failed to keep up with inflation. More unemployment on its way! Plus, too many people entering the UK looking for jobs!

UK trade deficit narrows while US trade deficit widens. The UK's trade deficit narrowed to £1.5bn in July, from £4.3bn the previous month. Goods exports were up 9.3%m/m, while imports were down 2.1%. Exports to the EU rose 7.7%m/m, but even better, exports to non-EU countries rose 11%m/m. This meant that non-EU export destinations accounted for half of all UK goods exports for the first seven months of 2012. Meanwhile, the US deficit on trade in goods and services rose slightly to $42bn in July from $41.9bn in June, the first increase in four months.

China's Government reacts to slowing growth. Chinese industrial production growth slowed to 8.9%y/y, the lowest pace of growth since May 2009. Worryingly, imports contracted 2.6%y/y, only the second time this has happened in the past three years. Right on cue, last week saw the announcement of 25 urban rail transport projects in 19 cities and 20 further investment projects (13 are road projects exceeding 2,000km in length). Additionally, land supply is being increased across the major cities for residential and commercial purposes. However, these are modest measures and anyone thinking a 2008-style 4 trillion yuan stimulus is on the agenda will continue to be disappointed. The authorities are clearly not trying to engineer a rebound in growth – they are merely trying to cushion the slowdown. China are in trouble! Rapid slow down!

* The Credit Crunch of AD 33 Repeats itself time and time again!

What with the Bank of England pushing £375+ billion and the USA Federal Reserve $1+ trillion into their countries respective banking systems, readers may be interested to learn of the following from `Banking & Business in the Roman World`;

In AD 33 the lack of cash continued to become increasingly serious (where have we read this before many times?). To remedy the situation, through the intermediary of `ad hoc` financial offices directed by Senators, the Emperor himself offered interest-free loans amounting to an overall sum of 100,000,000* sesterces from his personal fortune for the duration of three years. The borrowers were required to offer security in the form of real estate or buildings. In this way they were not forced to divest themselves of their patrimony in order to pay off their debts. Fides, that is to say confidence, returned, and the situation was retrieved for a short time.

Why do politicians/bankers/lenders ignore history? and yet history repeats itself several times because these people do not read! People need to read `The Rise and Fall of the Roman Empire` and then perhaps they will learn how to avoid repeating history.

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Downturn in Eurozone manufacturing continues

The Eurozone manufacturing sector contracted for the thirteenth successive month in August. At 45.1, up from July’s 37-month low of 44.0, the final Markit Eurozone Manufacturing PMI came in below the earlier flash estimate of 45.3.

Business conditions deteriorated in the vast majority of the national manufacturing sectors covered by the survey. The sole exception was Ireland, although even here the rate of expansion was less marked than one month ago. Downturns in Germany, France, Spain, the Netherlands and Greece all eased during August, but accelerated in Italy and Austria. Greece remained rooted to the foot of the Eurozone PMI league table.

Manufacturing production was scaled back further during August, reflecting the long-running downturn in new business. Rates of contraction in output and new orders were both slower than in the previous month, despite being slightly faster than the earlier flash estimates.

Ireland was the only nation to report an increase in output during August. Modest contractions were seen in the Netherlands and Austria, but production continued to drop sharply in the other nations covered by the survey — including the big-four of Germany, France, Italy and Spain. However, Italy and Greece were the only countries to signal a faster rate of contraction than in July.

Eurozone manufacturers were hit by weaker inflows of new work from domestic markets, falling levels of intra-Eurozone trade and a broader softening of global economic growth. The level of incoming new export orders declined for the fourteenth month running in August, with the rate of contraction the steepest since November 2011. The steepest drops in new export business were registered in Germany and Greece, the fastest since April and January 2009 respectively.

Signs of excess capacity and cost cautious behaviour remained evident at Eurozone manufacturers during the latest survey period. Backlogs of work fell for the fifteenth straight month, despite reports of further job losses.

Meanwhile, the ongoing downturns in output and new orders led to reduced levels of raw material purchasing and lower holdings of both pre- and post-production stocks. A solid improvement in average vendor lead times also highlighted the availability of spare supply-side capacity.

Employment fell for the seventh successive month in August, with Ireland the only nation to report an increase. However, the rate of decline across the euro area manufacturing sector was less marked than in the previous month (when payroll numbers were cut at the fastest pace since January 2010). The steepest reductions were reported in Spain, Italy and Greece, but Italy and Austria were the only nations to report steeper rates of job losses.

Input prices decreased for the third month running in August, with lower commodity prices highlighted by companies. However, the pace of reduction eased from the sharp rate seen in July. Rates of input price deflation eased in Germany, France, Italy, the Netherlands and Austria. Higher costs were reported by Spain, Ireland and Greece.

The drop in input costs was partly passed on to clients in the form of lower output prices, although the rate of decline in prices charged was only slight. France and Austria reported marginal increases in selling prices, contrasting with reductions reported in the other nations.

“The final reading of the August PMI confirms that the Eurozone manufacturing sector remains firmly in contraction territory," Rob Dobson, Senior Economist at Markit said.

"The rate of decline was a little slower than in July, providing some heart that the manufacturing downturn may be easing, but the sector is on course to act as a drag on gross domestic product in the third quarter.

“The national picture remains one of widespread contraction. Only Ireland saw manufacturing output rise, while larger nations like France and Germany remain in reverse gear. The situation in Italy is also becoming more of a cause for concern, as it falls further down the PMI league table.

“The ongoing weakness is unsurprising given that Eurozone manufacturers and their clients are still in a largely defensive mode. The uncertainty and cost caution resulting from the currency union’s ongoing political and debt crises are now being reinforced by softer global economic growth. This is hitting domestic markets, intra-area trade and overseas trade alike and is one of the main factors underlying the job losses and excess capacity signalled by the latest PMI survey.
“The broader long-run issue is that the Eurozone product and labour markets are unlikely to show any real sustained improvement until regional structural issues are addressed and the broader global backdrop brightens.”

We live in a global trading environment of which there are so many players chasing very few opportunities that it is driving down prices globally and still people do not wish to buy!

China Export Growth Collapses as World Recovery Slows
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QE3 and the Eurozone

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