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Robust Recovery - Global Economics Weekly

Robust Recovery -

Global Economics Weekly Brief

The UK economy grew by 0.8%q/q in the third quarter of the year, capping-off a recent strong run of data. The Monetary Policy Committee’s minutes spoke of a “robust recovery”. And government borrowing shrank a little. With the labour and housing markets improving too (thanks to the Help to Buy programme and more `part-time` workers being taken on board), the data make the UK seem almost like a Boomtown (without the rats).

But there is still a long way to go, especially given the fragility of the international environment. October’s business survey results from the US and Europe show things are not yet like clockwork. The UK economy growth is still less than 1% and there is still more challenges ahead for a few more years yet! Plus, China's companies are buying up thousands of other companies globally. In the UK over the last two years China`s conglomerates have spent £10 billion on buying UK businesses! In the US, the figure of buying up companies is in excess of $30 billion!

UK looking after No.1. Gross Domestic Product rose by 0.8% in Q3, an improvement on Q2's 0.7% and the fastest quarterly growth since 2010. This strong performance leaves UK output 2.5% below its previous peak and gaining ground fast. Will that strength endure? In the short term there are some good signs. Growth is well spread across the major sectors of the economy, with services, manufacturing and construction all adding to output in Q3. But the longer term picture is less certain. Few forecasters are yet daring to predict that growth at an annualised pace of above 3% will be with us for long. Too many products being purchased by credit!

No surprises from the MPC. The Committee voted unanimously to leave Bank Rate on hold and QE unchanged. The minutes were upbeat, noting that data pointed to a "robust recovery". They were more cautious about the global picture, flagging the risk that the recovery might be less well balanced between exports and consumption "than was ultimately needed". Sterling's recent gains against the dollar and euro, which will push up prices, were seen as somewhat unhelpful. Inflation in the UK to rise soon!

Mind the Gap. The upturn in economic activity is providing a little relief for the beleaguered public finances. Government borrowing in September was £11.1bn, an 8% decline on last year’s reading. Moreover, total borrowing in the current fiscal year is £6bn lower than the same period of 2012. But the financial crisis has blown a gap between government expenditure and receipts which will persist regardless of the business cycle. It is this gap that austerity is targeting, but it will take well into the next parliament before it is closed. More savings are required by the UK government rapidly!

The Fed was right. US unemployment fell by 0.1 percentage points to 7.2% in September and the number of people in work increased by 148,000. Good? Well, not good enough for the Fed to rein in quantitative easing. Although the unemployment rate continues to fall, it is partly because some Americans are giving up looking for work and quitting the job market. Just like British trains in autumn confronting the wrong kind of leaves, the US is enjoying the wrong kind of fall in its unemployment rate. The Fed will also have been wary about the government shutdown when it met in September. It was right about that, too. The preliminary manufacturing Purchasing Managers Index (PMI) for October fell to a 12-month low of 51.5. So, manufacturing grew but the pace of expansion slowed. Falling output was the main reason for a lower PMI, making September the first month in which production has contracted since mid-2009. More unemployment is on the way with many new challenges!

Up or down in the Eurozone. In October, the Eurozone PMI for manufacturing and services remained above the 50 mark for the fourth month running, indicating that economic activity continued to expand on the Continent. But it dropped from 52.2 in September to 51.5 on the back of slower growth in output and new orders. There was slower growth in Germany and none in France. But peripheral countries continued to expand, adding signs that even the weaker part of the Eurozone is in recovery mode. A recovery is in place but it will be slow, uneven and fragile. The Eurozone is still experiencing many challenges!

Japan inflates. On the face of it, Japan is achieving its goal of ridding itself of deflation. Prices rose 1.1%y/y in September. But dig a little deeper and it is still higher energy prices and falls in the currency that are boosting the headline reading. Prices were unchanged from a year ago once energy and food prices are excluded. But given that this was the highest rate since late 2008, the government will at least be encouraged that things are moving in the right direction. Japan is on the way up in their fight against deflation!

China's activity and interest rate up. China's manufacturing PMI hit a seven-month high of 50.9 in October, suggesting that the economy's recent mini-rebound has some legs in it yet. Separately, one of the key interest rates used by banks in lending to one another spiked higher, raising fears of a re-run of events in June when the same interest rate saw a dramatic rise that put the squeeze on banks. But last week's interest rate spike was very modest in comparison to June and it's not out of the ordinary for this particular rate to see some volatility. Additionally, the authorities will be keen to keep growth on track as they build consensus around economic reform. China pulling away with their many challenges for more growth! Plus, buying up businesses globally to stimulate the growth of China`s manufacturing and financial services expansion!
Global Economic Outlook for 2013 revealed - United Nations ...

* `10-Step Double-Dip Recession Survival Guide` - click on the connection below for comprehensive information.

Colin Thompson
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email: colin@cavendish-mr.org.uk

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Robust Recovery - Global Economics Weekly

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