US GDP Jitters
Global Economics Weekly Brief
Weakness in the US economy has unsettled global markets in recent weeks, so it wasn't any surprise that economists were getting excited about the Chairman of the Federal Reserve’s speech at Jackson Hole. But they were disappointed. Mr Bernanke made no specific announcement on policies to support the US through the very soft patch. In the UK, economic growth was confirmed at 0.2% in Q2. While not unexpected, and probably distorted by the Royal Wedding, it was still very disappointing for the global recovery, especially after weak German and French growth. Central bank support in the Eurozone is having some effect, but the outlook is anything but settled. With all this uncertainty across the globe, all new information is being scrutinised to the nth degree. The tension will be high for a while yet. Watch this space!
US GDP growth was weaker than previously thought in Q2. US GDP was revised down to an annualised rate of 1.0%, from a first estimate of 1.3% for Q2. Household consumption is still very weak, expanding by just 0.4%, so it was left to investment to provide most of the impetus for growth. Private investment rose by an annualised 6.4%, a modest improvement on 3.8% in Q1. Trade with the rest of the world slowed a little, but exports still rose by 3.1%. Despite the worsening economic climate, firms are still making money. Aggregate profits were almost $60bn higher in Q2 than Q1.
Bernanke highlighted the housing market's role in holding back the recovery. Federal Reserve chairman Ben Bernanke delivered a much anticipated speech at the Jackson Hole central banking symposium. Commentators were looking for clues about future Fed policy, perhaps even an internationally co-ordinated response to the recent financial market turbulence. But Bernanke delivered none of this. Instead the speech noted the importance of the housing market in driving previous recoveries. But with house prices still falling and an overhang of distressed sales still weighing on the market, the recovery is going to be very slow.
UK GDP was confirmed at 0.2%q/q in Q2. There was no change to the first estimate of UK GDP growth in Q2. 0.2%q/q growth translates to just 0.7%y/y - well below the UK’s potential. Construction and service output grew, but production shrank during the quarter.
The UK housing market showed a small sign of improvement in July, but it’s confined to the South. The British Bankers Association (BBA) reported a small rise in house purchase approvals in July among the major British banking groups. Any sign of a recovery in house purchase activity is welcome, but levels are still very low. Land Registry data suggests that any recovery is concentrated in the South. House prices were 2.1%y/y lower than last year in England and Wales. In London they were 1.3%y/y higher. In stark contrast, prices in the North East of England were 8.8%y/y lower in July. The other Northern regions fell on average by 5.5%y/y, compared with -3.5%y/y in Wales, -2.5%y/y in the Midlands, and -1%y/y in the South as a whole. Registers of Scotland data for Q1 2011 show prices grew 0.4%y/y in Scotland.
ECB bond purchases are working, but business confidence is waning. The ECB policy of buying Italian and Spanish government bonds has been successful in reducing the cost of Spanish and Italian borrowing by more than 1%. But it’s been controversial. The German President Christian Wulff labelled the bond purchases as legally questionable and Finnish demands that Greece provide collateral against default on the Finnish section of the bailout deal added to the discord. While policy makers bicker, macroeconomic conditions in the euro area continue to deteriorate. Most alarming was the sharp decline in the German IFO survey, a leading indicator of business confidence. This showed a drop in both expectations and current conditions with the headline index reaching a 14 month low in August.
China's manufacturing activity was better in July, but is still weakening. The flash reading of the manufacturing Purchasing Managers’ Index rose to 49.8 in August from 49.3 in July, but remains below the magic 50 which signifies expansion. Surprisingly, the new export orders component rose to a three month high despite the much weaker demand environment in the US and Europe, which suggests that emerging market demand still has a bit of life in it. A slowing growth trend is definitely visible in China, but it is not as dramatic as one might think. Even with slowing activity, Augusts’ industrial production growth is likely to top 14%y/y.
Uneven Recovery, Debt Worries Cloud Europe's Outlook
* Recovery continues in Europe but with big differences across countries in the region
* European integration is delivering efficiency gains and stronger competitiveness in some countries
* Better integration of European equity markets should be next step
IMF boss calls for action
The new head of the IMF called on global policymakers to pursue urgent action, including forcing European banks to bulk up their capital, to prevent a descent into a renewed world recession."Developments this summer have indicated we are in a dangerous new phase," International Monetary Fund Managing Director Christine Lagarde said at a conference for top officials and leading economists from around the globe."The stakes are clear; we risk seeing the fragile recovery derailed. So we must act now," she said.
Two years after the end of the worst of the financial crisis, growth in the United States and Europe is sputtering as government debt burdens surge. Borrowing costs for European banks are rising as lenders balk at providing any but the shortest maturity funds on fears over bank exposure to shaky eurozone sovereign debts. Sharp swings in global financial markets have intensified strains. Complicating the picture is policymaker indecision on both sides of the Atlantic. European leaders are fighting over who should pay the bill for taming a raging sovereign debt crisis.
In the United States, lawmakers and President Barack Obama fought a contentious budget battle earlier this summer that resulted in the loss of the nation's coveted "AAA" debt rating from Standard & Poor's.Federal Reserve Chairman Ben Bernanke warned here on Friday that the fight had shaken confidence and sapped US growth. Lagarde said the Group of 20 leading economies should use a meeting in November to address the global economy's woes in a convincing fashion, and she used her speech – her first major policy address since taking the helm at the IMF in July – to open a new front in dealing with strains at European banks. She called for a "mandatory substantial recapitalization," through private channels if possible, but otherwise through some form of public, Europe-wide funding, such as the European Financial Stability Facility. Lagarde also warned advanced economies away from tightening their belts so fast that it imperils recovery."Put simply, macroeconomic policies must support growth," the former French economy minister said.
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US GDP and the Global Economics Weekly Brief