The Trade Deficit Shows Signs of Global Improvement...
Global Economics Weekly Brief
As the G20 finance ministers met in Paris this weekend, news on the global economy improved a bit (or did it!); at least by recent standards. The trade deficits of the UK, the Eurozone and the US narrowed, suggesting that export growth could at least partly offset very weak domestic demand.
In addition, US consumers have rediscovered their appetite for spending. While it may be necessary for the US to become less reliant on household spending in the future, it’s a welcome short-term boost. Things look less rosy for UK households. The number of jobs is falling and unemployment is rising rapidly – hardly the best ingredients to encourage spending. The UK needs to employ home grown people and stop importing people the UK do not need. Just look at `all` the skills and experienced people the UK already have.
It was not a great summer for the UK labour market. Almost 178,000 jobs were lost in three months to August and the unemployment rate rose from 7.9% to 8.1%. Rather gloomily, the unemployment rate for those aged 16-24 has passed 21%, the highest rate since records began in 1992. While figures like these would usually suggest an economy already in recession, the number of job vacancies rose slightly, as did the number of hours worked. Productivity is also growing again. In addition, wage growth, despite remaining below the rate of inflation, is at least consistently stronger than it was this time last year, so the income squeeze may, at last, be moderating.
UK industrial production continues to fall. The index of industrial production fell by 1%y/y in August, after also falling by 0.9%y/y in July. The decline was higher than expected, adding to the evidence that the recovery slowed down in Q3. That said, the National Institute of Economic and Social Research (NIESR) estimates that UK output grew by 0.5% in the three months to September. If accurate, this is far greater than the 0.1% rise in output in Q2. However, it would also mean that the UK economy is still only 0.5% larger than this time last year and remains 4% below its pre-recession peak.
The UK housing market also remains subdued. September’s survey by the Royal Institution of Chartered Surveyors (RICS) revealed the continuation of three broad trends in the housing market. First, a net 23% of respondents expect prices to fall over the next quarter. Second, activity remains lacklustre as newly agreed sales fell slightly. Lastly, regional differences continue. Of the 11 regions, only London recorded an increase in prices over the past three months.
The UK trade deficit continues to improve. The UK trade deficit for August fell for a third consecutive month with both goods and services exports rising. The deficit has now more than halved since August 2010. Moreover, revisions to data for earlier in the year show that the trade gap has been much narrower than previously feared. This is good news, but growth prospects have deteriorated, especially in the Eurozone and US, which are key markets for UK exporters. Retail is in retreat and construction is at a stand-still. The traditional printing industry is in free-fall with many companies `going-bust`.
Eurozone trade balance also improves. The first estimate of the Eurozone's trade balance for August indicates the deficit is set to narrow to €1.0bn, down from July's €3.7bn. Export growth of 4.7%m/m outpaced import growth of 2.7%m/m. While the improvement in export growth is a rare piece of positive news for the beleaguered region, it will take a lot more than this to fend off the prospect of another recession. Many of the peripheral economies remain uncompetitive, and weak demand is affecting the intra-Eurozone exports of the stronger economies.
The US trade deficit narrows – a triple whammy – but trade tensions escalate rapidly. As in the UK and the Eurozone, robust growth in exports decreased the trade deficit. Interestingly, there were signs that emerging market demand was a key contributor to this improved performance. Less welcome is the news that the US Senate recently passed a bill that would allow companies to seek duties to compensate for “misaligned” exchange rates, a thinly veiled shot across Chinese bows. While this is unlikely to pass into legislation, it reflects the sensitivity of the US (and other nations) to competitive exchange rates in a weak growth environment. It was ironic then, that China's export machine slowed in September. Unemployment set to rise again over the next quarter and the housing market still suffering with lower house prices.
US consumers splash the cash in September. Retail and food services sales rose by 1.1% m/m in September, the largest monthly increase for six months. A surge in auto sales was the main reason for the increase in growth, though furniture, clothing and restaurants also stood out. As if that wasn't enough, there were upward revisions to back data for July and August. Given that retail sales account for about a third of total demand, these data suggest that the Q3 GDP data - out next week (Oct 27th) - could look much stronger than originally expected (not saying much, admittedly). Against this backdrop, QE3 will have to remain on the slipway for now.
Global Economic Crisis, World Financial Crisis, Economic Turmoil
The world financial system is now undergoing a global economic crisis of staggering proportions. The root cause of the economic and financial crisis was the United States mortgage market selling sub-prime mortgages to large numbers of consumers with inadequate incomes. These mortgages were bundled into securitized paper investments, and sold by Wall Street to major financial institutions across the globe. These were also available from many European banks and financial institutes globally
When the mortgages became non-performing, these securitized assets were transformed into toxic acid, infecting the entire worldwide financial system. The ensuing global economic and financial crisis has destroyed trust in banks and borrowers in all the major economies of the world. Depositors are withdrawing their money from uninsured and even insured accounts. Coinciding with this massive run on the world’s banks, these financial institutions are no longer lending capital to each other, reflected in the rising LIBOR short term inter-bank loan rates.
Capital is fleeing, and the global credit crunch ensuing has frozen the arteries of a global economy based on easy, cheap credit. As corporations are being denied normal flows of credit, a massive global economic crisis is transforming the financial meltdown on Wall Street into an economic disaster on Main Street. This evolving global and financial crisis and credit crunch will afflict developed and developing economies, leading to massive unemployment, demand destruction and price deflation among many pivotal asset classes. These issues are also prominent in the UK and main land Europe.
The attempts by the Federal Reserve Bank and Treasury Department in the United States to inject liquidity into the credit market, along with intervention by central banks in many other developed economies, is proving ineffective in responding to the global economic crisis. A growing number of economists are speculating that the global economic crisis will lead to a worldwide recession of such intensity, it may rival the Great Depression of the 1930’s in its calamitous economic devastation. Watch this space.
The architects of globalization never imagined this scenario. A Wall Street banking crisis in the United States creates a global financial crisis, compelling sovereigns across the world to enact a peculiar and paradoxical policy measure; preserve profligate historical profits of masters of the private banking system, while socializing their losses. This policy of saving the banks by moving their losses onto the balance sheets of nation-states creates a global banking crisis, especially in the Eurozone, due to those banks holding loans from countries that went into deep debt to bail out those same banks. Ireland, to take an example, went from budget surplus to catastrophic fiscal deficits solely due to a decision by Dublin’s politicians to guarantee all the liabilities of their formerly privately-owned and relatively unregulated banks.
The latest policy measure is austerity, forcing the taxpayers to cover the costs of the mounting global economic crisis with higher taxes and cutbacks in social services. The paradox is that these measures negate economic growth, ensuring that the public debt cannot be repaid. All these measures are exacerbating the current and worsening global economic crisis.
The Occupy Wall Street movement, which has now gone global with a rising tide of protests throughout the world, reflects a populace that has seen its economic future being dispossessed. Deprived of hope, and with no confidence in the policymakers in government and oligarchs that largely fund and control political parties in most advanced economies, a growing number of desperate people, especially the younger and emerging generation, see protest as their only option. All these developments feed into each other, leading to a cascading effect of political instability, growing public indebtedness and economic stagnation and contraction. If nothing else, the anti-Wall Street protests are a barometer of an economic and political system in disarray. And perhaps, they are a harbinger of a new age of political unrest and economic misery of prolonged duration. This campaign will gather momentum over the next few days globally.
We have another global crisis that needs urgent attention by skilled and experienced people who can do the job right!
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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.
Trade Deficit Improvements