Global Economics Weekly Brief
UK vs World Economy
UK economy gaining ground, but is it a losing battle?
If it wasn’t serious it would be funny. But with almost perfect timing, the UK economy appears to be gaining momentum just as the global economy is hitting a very soft spot! UK retail sales are growing solidly, if not spectacularly and inflation continues to ease. Yet like the autumnal weather, the economic headwinds are blowing in from abroad.
The Eurozone probably entered recession in Q3 and world trade, an excellent bellwether of the global economy, is slowing very sharply. This makes the already challenging UK fiscal outlook even more onerous. However, the Governor of the Bank of England Mervyn King suggested the Eurozone crisis provides justification for breaking one of the Coalition’s fiscal rules – that debt as a share of GDP should be falling by 2015-16. Could this represent a “Plan C”, with the pace of tightening left unchanged despite fiscal targets being missed? As the old adage goes, rules are made to be broken. The future can be successful if the Leaders are the `right` Leaders!
Another disappointing month for UK public finances. The UK Government borrowed £14.4bn in August, meaning total borrowing is now £11.6bn higher over the current fiscal year than the equivalent period of 2011-12. Both higher spending and lower tax receipts are to blame. Corporation tax in particular is driving the shortfall in taxes, while welfare expenditure leads the rise in spending. The data is highly volatile and the situation may not be as downbeat as feared. Indeed there was some good news, as total borrowing over the previous fiscal year was revised down by £5.7bn, a pretty large adjustment. Government employees need to understand how finance works and budgets to be under control!
Lower inflation should provide some comfort for UK consumers. UK CPI inflation slowed to 2.5%y/y in August, partly reversing the surprise rise to 2.6%y/y seen in July, and a significant fall from the 5.2%y/y peak in September 2011. Recent rises in oil prices could dampen further slowdowns somewhat, with prices at the pump up by 2.5%m/m over August. Nonetheless UK households will continue to welcome a slowdown in inflation, especially given that meagre pay rises seem set to continue. Why are central and local government employees getting a pay rise and bonuses when we are in a recession?
Despite no Olympic boost for UK retailers the underlying trend is positive. Retail sales increased by just 0.2% m/m in August. The Olympics didn't help, with most of us choosing to watch TV rather than hit the shops, although there was a bounce in sporting goods and toys. Even so, the overall picture remains relatively upbeat: compared with a year ago, the volume of sales over the three months to August grew at its fastest rate since 2008 (2.4%) - not exactly warp speed, but perfectly respectable in current conditions. More issues are on their way to solve!
Bank of England decision to maintain current QE programme was "relatively straightforward". At its September meeting, the Monetary Policy Committee (MPC) voted unanimously to continue with its current asset purchase programme and maintain the Bank rate at 0.5%. For most members the decision was "relatively straightforward". Moreover, some members believe that further stimulus will more than likely be needed in due course. The MPC also noted that it was encouraged by the initial impact that the Bank of England's Funding for Lending Scheme (FLS) was having on lending rates. More time is however needed to determine its impact on economic activity. While the possibility of further quantitative easing is clearly on the table, the success or otherwise of the FLS could have a bearing on its timing and quantity. Watch this space!
Private sector activity survey signals a Eurozone recession. The preliminary composite Purchasing Managers Index (PMI) for the Eurozone, covering manufacturing and services, made grim reading. The index dropped from 46.3 in August to 45.9 in September, the worst reading since June 2009. Production and new orders declined with weakness widespread across the currency union. France may be suffering more than Germany from the troubles in southern Europe, with the drop in its manufacturing PMI the largest since 2001. Overall the survey shows that the Eurozone economy deteriorated over Q3. Indeed, the average composite PMI reading of 46.2 over the quarter is consistent with a GDP contraction of 0.6%. Ouch! How long can the Eurozone survive?
China’s manufacturing sector remains weak month after month. China’s flash PMI gave a marginally better, but still weak reading, rising from 47.6 to 47.8. New export orders continue to fall at 46.3. Continued weakness in China’s export sector was reinforced by data showing that the volume of world trade fell in both June and July. The World Trade Organization (WTO) has lowered its forecasts for world trade growth due to a slowing global economy and the Eurozone debt crisis. The WTO now expects trade to grow by 2.5% in 2012 (from 3.7% forecast in April), and 4.5% next year (down from 5.6%). World Economy Barometer below examines global economic conditions and in particular a subdued China. China have many people issues they need to solve, if not, there will be very serious problems for the economy!
World Economy Barometer –
The curious case of no recovery in China
The global composite PMI fell to 51.1 in August, confirming that the global economy slowed markedly over the summer. The average reading for the global new orders component between June and August was 47.3. This is identical to the average reading for the same component during the same months of 2008. The autumn of that year was turbulent to say the least. Is this a bad omen for this year? While a crisis may not be on the cards, the depressed new orders figures points to activity levels remaining very subdued in the coming months. There is certainly no reason to believe that the global economy stands ready to mount a strong recovery. Our heat map below clearly shows a summer ‘bloodbath’ for growth. Our call last month of stabilisation at low levels remains the best we can hope for. But even this is shaky. And with 2013 approaching quickly, it now seems likely that the malaise will continue into next year.
Manufacturing sectors around the globe are in a depressed state. Chart 2 on page three below shows the deviation in the manufacturing readings from long-term trends for various economies. It is uniformly bad. Germany is now firmly engulfed in the global manufacturing slowdown and is feeling the effects of the crisis on its doorstep. The months of weak manufacturing figures have led to a downturn in global trade (see chart 4 on page three below). Export growth figures, particularly from Asian economies underline the severe strain manufacturing is under. South Korea’s exports fell over 6% y/y in July, while Japan’s fell 8%. Meanwhile, Taiwanese export orders, a good leading indicator for global trade, fell over 4% y/y in July. It’s all bad news for the Asian growth story. The region is gradually decoupling from Western demand but exports still play a major role in the economies. Manufacturing sectors provide significant levels of employment and investment in their economies.
China’s slowdown compounds the problem. Another month passes without the hoped for pick-up in China’s PMI. Weakness at home and abroad is to blame. A consequence of this slowdown in demand has been anecdotal reports of building inventories across China. Indeed, the inventories component of the PMI is at an all-time high which suggests there is substance to these reports. Elevated inventories, coupled with weak new domestic and export order components, means manufacturing output and exports in China will remain weak for some months to come (see chart 5). Many market participants continue to pin their hopes on a 2008-style massive investment stimulus. But with each passing month it becomes increasingly clear that China’s authorities are looking to cushion the slowdown rather than engineer a strong rebound similar to that seen in late 2008/ early 2009. After a summer lull in policy easing, there may be another round of modest easing this autumn. In the absence of a more aggressive stimulus, which would previously have been the Government’s policy, inventory liquidation will take longer to play out. If we marry this apparent new policy environment with the current economic one we reach the following conclusion – China will have something more resembling a business cycle going forward rather than just steady, strong growth. This means growth will be lower (between 7 and 8% most likely) and more volatile. Welcome to a more mature China.
Sluggishness prompts US to restart QE. US manufacturers are suffering in tandem with the global slowdown in the sector. The US manufacturing PMI equivalent fell to 49.6 in August and has now spent three months in a row below 50 for the first time since 2009. And although global manufacturers as a whole saw a jump in their input prices during August, it was particularly acute in the US with the component rising from a subdued 40 to a heightened 54. On the services side there is a much healthier overall reading of 53.7– a figure in line with the long-run average. The weak reading on the manufacturing side is just one of many pieces of data that will have led the Fed to re-start QE. Economic momentum has been on the wane for some months. Plus the lack of clarity over fiscal policy at the turn of the year is now very likely having an impact on growth. Can recent policy action save the day? The PMIs indicate that a strong, sustainable recovery in the global economy has never seemed so far off since the crisis erupted four years ago. So it’s no surprise the world’s major central banks recently felt compelled to act. The ECB announced welcome new measures to deal with the ongoing Eurozone crisis. But these will merely buy time to solve the crisis. They are not a panacea for growth. Meanwhile the Fed launched a new round of asset purchases and intends to keep policy accommodative even when the economic recovery is clearly visible. And although QE3 will see the Fed focus on a different type of asset, it does not mark a significant departure from previous rounds. In broad terms central bankers continue to look to fix financial market issues with the hope that this provides the catalyst for recovery in the real economy. If the latest round of asset purchases fails to generate a recovery with sustainable momentum, the debate around more radical forms of monetary easing will continue to gain traction.
* 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.
Please share with me your views.
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!
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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.
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UK vs World Economy