Slower UK manufacturing growth in March 2011
Global Economics Weekly Brief
Although there was a small slip in March, the US, Eurozone and UK manufacturing sectors are united in strong performance. But, as usual in this recovery, there are a few concerns about how long this will last. Worries are mainly because of rapid rising commodity prices, but the likelihood of weaker household demand, especially in the UK, is also adding uncertainty. Interest rates look set to rise in the Eurozone to curb above target inflation. This will add to the pain of the weaker peripheral countries where unemployment is already in double digits. The US labour market is now showing signs of improvement, but it still looks like a bumpy road ahead.
Despite the UK Office for Budget Responsibility’s weaker forecast for economic growth, the UK Chancellor stuck with austerity Plan A in the 2011 Budget. There was no change to the public spending plans announced last June and elaborated in October. As the Chancellor noted, the success of the plan depends partly on continued loose monetary policy, but with inflation at 4.4%y/y and set to rise further with a rapid tone, this is not a certainty. Indeed, the longer high inflation persists, the greater the risk of a wage-price spiral, leading to higher interest rates. In the Eurozone, Portugal looks set to join Ireland and Greece in the bail out club as the prime minister’s austerity measures were voted down. While in the US, growth is stronger than was expected, but the housing market continues to be a drag.
The UK economy shrank by 0.5% in Q4 2010. This is a shade better than the -0.6%q/q estimate issued in February, but no better than the first assessment of -0.5%q/q issued in January. The weather was still to blame for the contraction, but excluding this, economic growth was broadly flat in the final quarter. Throughout 2010 as a whole the UK economy grew at the sluggish pace of 1.3%y/y, roughly a full percentage point below trend. Real household disposable income fell by 0.8%y/y in 2010, the first full-year decline since 1981 (-0.2%). High inflation is likely to hold real income growth back in 2011 too. Yes, high inflation is in rapid mode!
UK inflation continues to break records. The CPI rose by 4.4%y/y in February. This is up from 4.0%y/y in January and is the highest since October 2008. The RPI, which includes housing costs, rose by 5.5%y/y in February - the fastest pace since July 1991. Rising costs of clothes and shoes was a major cause for the lift in February. Domestic fuel costs also pushed inflation up, but this was largely because of a big fall in costs in February 2010.
The retail sales data were a mixed bag. At first glance things look quite good for retailers. The value of sales grew by 4.4%y/y in the three months to February, the fastest growth for more than two years. But things are unlikely to get better. Surveys and anecdotal evidence from retailers suggest shoppers are already in belt tightening mode and higher prices are putting them off further. Indeed, the volume of sales increased by only 1.7%y/y in the three months to February. Decline is the feeling at present!
UK manufacturing growth slowed in March. The UK PMI manufacturing index, a good leading indicator of the sector’s performance, declined to 57.1 from 60.9 in February. In spite of the slowdown, the survey still indicates robust growth and encouraging levels of job creation. But it also showed the slowest increase in new orders since October, particularly for domestic consumer goods and this adds to concern about the outlook for household spending, especially as prices hit record highs.
UK mortgage lending remains broadly flat, but prices are rising in London and the East of England. Gross mortgage lending fell by 3%m/m in February in spite of a rise in remortgaging, while approvals for house purchase increased by 2%m/m. The Bank of England Credit Conditions survey shows a big fall in demand for mortgages, which suggests lending will continue to be subdued. However, the Land Registry reported that although prices fell by 1.7%y/y in England and Wales in December, prices rose by 1%y/y in the East of England and by 3.2%y/y in London.
Who would be a central banker? There was no change in the voting at the March MPC meeting, and little change in the thrust of the debate. The MPC is trying to balance the need to subdue rising inflation expectations with sustaining a fragile recovery. Recent rises in oil prices – up 25% since the start of the year and almost 50% over six months – only made that job tougher. Rapid rising in oil prices are on the way again!
Eurozone inflation continues to rise. Eurozone inflation increased to 2.6% y/y in March, up from 2.4% in February according to the preliminary estimate. This is the fourth consecutive month that inflation has been above the 2% ceiling set by the European Central Bank (ECB). Jean Claude Trichet, ECB president, called for “strong vigilance” on inflation earlier this month, signalling that the bank is likely to raise its benchmark interest rate when it meets on Thursday. The consensus forecast is that rates will rise by 25bps to 1.25%.
The labour market in the Eurozone is increasingly polarised. The good news is that the Eurozone harmonised unemployment rate fell just below the 10% mark to 9.9% in February, for the first time since January 2010. However, the performance of the 17 individual member states continues to diverge. Germany is the strongest performer. Its employment increased by more than 50,000 over the month, providing the bulk of the 77,000 jobs created in the Eurozone as a whole. In stark contrast, Spain’s unemployment rate increased to 20.5% in February and rising rapidly, while in Ireland and Greece unemployment of more than 14% is still painfully high and more to come!
Portugal looks set to join the bailout club. The Portuguese prime minister resigned after parliament rejected his austerity measures. This caused yields on Portuguese two-year bonds to jump to their highest since the euro's inception. There is no shortage of drama in the Eurozone. Inflation is rising at its fastest pace in two and a half years prompting the ECB signal of a rate rise as soon as April.
The Eurozone’s and US manufacturing PMIs slipped in March. The Eurozone PMI manufacturing index came in at 57.5 in March, down on the 10½ year peak of 59 recorded in February. In the US, the manufacturing index fell slightly to 61.2 in March, only just below February’s seven year high of 61.4. Just like the UK, the manufacturing sectors in the US and the Eurozone are firmly in the expansionary zone, but they each share the same worries about commodity price pressures. The index of prices paid in the US jumped from 82 to 85, its highest since July 2008.
US growth better than expected. The US economy grew at a 3.1% annualised rate in Q4 2010, up from February’s estimate of 2.8%. Business investment and stronger inventories triggered the upward revision while consumption was strong at 4% in annualised terms. It is not clear how long this will continue though. Higher oil prices, weaker consumer confidence and the housing market will all act as drags on personal expenditure.
UK Manufacturing leading the world in slippage? Not quite yet...
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Portugal faces calls to seek an EU bailout - Portugal is coming under rapid pressure to follow in the footsteps of Greece and Ireland and seek a European Union and International Monetary Fund bailout immediately. There is so much pressure in Portugal, but will they be like Greece and Ireland and be in denial?
The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland who are `all` in `deep` financial difficulty as first stated here in January 2008. Who will leave the euro currency first? What future as the Euro? Watch this space!
Without `continuous quantitative easing` where would the world be? Yes, there is still more to come!
Spending our way out of worldwide recession will take years to pay back--and create a lot of pain.
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UK manufacturing growth!