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Weakness in Manufacturing - Economics Weekly

Weakness in Manufacturing and
European Economic Storm Clouds Thicken

Global Economics Weekly Brief

There’s not much reason for economic policymakers to sing right now
unless it's the blues. There were striking similarities in world economic data last week, but not in a very good way. There are clear signs of weakness in manufacturing sectors in the developed nations, particularly in exports. This doesn’t bode well for employment, which is already weakening rapidly. These anaemic activity rates increase the risk that the global economic recovery could stall which would push the major economies back into recession. Policymakers are looking seriously at ways they can improve matters. The Federal Reserve Bank in the US has given some indication that monetary loosening could be on the way. But deep divisions about how to do this could upset the harmony. More deep thought needs to be discussed before any action taken!

Manufacturing surveys signal a further slowdown in activity across the world. When surveys of economic activity record numbers less than 50 it's a signal that things are contracting rapidly. This was the message from surveys in the UK and the Eurozone. In the UK the overall manufacturing Purchasing Managers’ Index (PMI) fell to a 26 month low of 49 in August. The underlying data showed production fell for the first time since May 2009 because of falling orders - particularly exports. This is affecting hiring too. The index showed the first fall in employment in the sector for 17 months. In the Eurozone the aggregate manufacturing PMI slumped to 49 in August from 50.4 in July. Conditions were worse everywhere, except Ireland. Even Germany, the engine of the Eurozone economic recovery up until now, stuttered. Its reading of 50.9 was a 23-month low and indicates virtual stagnation in the sector. Watch this space for more dramatic news.

The US picture was similar and Chinese and Japanese manufacturing sectors slowed too. The US manufacturing ISM index slowed from 50.9 in July to 50.6 in August and the production component collapsed from 52.3 to 48.6, signalling a fall in output for the first time in 26 months. In China, the government's manufacturing PMI data showed a rise to 50.9 from 50.7. But the HSBC PMI continues to show a slight contraction at 49.9, albeit up from 49.3 in July. Again weakness is coming mostly from the export side. In Japan to the manufacturing PMI weakened from 52.1 in July to 51.9 in August. This was despite a faster expansion of new business, but new export orders fell at the fastest rate since April. This, on top of slowing Japanese industrial production has raised concerns that the post earthquake bounce may already be over. Production is still 10% below its pre-Lehman's level and at current growth rates, it would take 18 months to get back there. Unfortunately more gloom to come over the next few months!

Slower activity rates will threaten a recovery in weak labour markets. US employment data was another big disappointment in August. Non-farm payroll data showed no change in US employment and private sector payrolls actually declined by 17,000. It was only a pickup in government employment which prevented an overall decline. Unemployment is still very uncomfortably high at 9.1%. Eurozone unemployment was also stuck at high levels in July. The harmonised rate was 10%, unchanged since last December, and only marginally lower than the 10.2% recorded this time last year. Vast differences remain across the Eurozone, with Spain suffering most with unemployment at 21.2%. More unemployment to come!

US FOMC minutes show deep splits in the committee. Augusts' meeting of the Federal Open Market Committee seems to have been a particularly divisive event. The minutes show that three members felt the statement that interest rates would remain low until at least mid 2013 went too far, but others were pressing hard for more action immediately. That action could be more quantitative easing, or neat policy tricks to achieve the same effect. But whatever they may be it’s clear that the committee is concerned about growth in the economy. September's extended two day meeting is eagerly awaited. The USA is in serious financial trouble!

Eurozone inflation steady in August. Inflation in the euro area was unchanged at 2.5%y/y in August, but is still well above the European Central Bank’s target. Rates have been raised by 50bps this year but weakness in the global economy mean they are unlikely to rise again for a long time.

House prices are falling in the US (rapidly) and the UK. The Case-Shiller 20-city index showed US house prices fell by 5.5%y/y in July. Prices are still 32% below their peak and there are few prospects of a recovery given the overhang of supply. In Q2 foreclosures were running at a rate of 4.4%, compared with a long term average of 1%. In the UK house prices fell by 0.6%m/m in August after a rise of 0.3%m/m in July according to Nationwide. This isn't a surprise given the state of the economy. In contrast the private rented market is buoyant. Data from RICS shows agents believe rents have been rising for the last year and a half. The strongest growth is in London and the South and the weakest in Scotland. In general, house prices will increase in the UK due to the shortage of housing.

Europe`s Bleak Outlook

Storm clouds are gathering over much of southern and western Europe. Central and northern areas will enjoy the best of the economic weather.



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Storm warning: As the European debt crisis spreads across the continent, the outlook for the single currency has never looked so grim.

Financial markets fluctuated violently as fears that Italy and Spain will be dragged into the eurozone debt crisis triggered another day of turmoil for investors.
The causes of the credit crisis in a short, engaging video: click on the link below;

The Crisis of Credit Visualized

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US GDP and the Global Economics Weekly Brief

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