World GDP Growth...
Global Economics Weekly Brief
The UK dodged a double dip recession in the first quarter. But the pace of growth was nothing to write home about and will have done little to harden interest rate sentiment one way or the other at the Bank of England. Eurozone growth kept its momentum, thanks to France and Germany, but things are sagging in the USA rapidly where the pace of growth slowed sharply in Q1. Meanwhile, the economic effects of the earthquakes are beginning to show in Japan. Still more interesting news to come over the next few months!
The first estimate of UK GDP shows the economy grew by 0.5% in Q1 (or did it?). The Chancellor will be sleeping better in the knowledge that the economy grew in Q1, but no-one is over the moon at the pace of recovery. The 0.5%q/q growth in Q1 cancelled out the contraction in Q4 meaning that the economy has stood still since Q3 2010. A 0.9%q/q increase in services led the rebound in Q1, especially welcome after the 0.6% q/q decline in Q4. Construction output disappointed, falling 4.7%q/q. While manufacturing grew in a few sectors by 1.1%q/q, goods output growth halved to 0.4%q/q in Q1 11 compared with Q4 10. Watch the next quarter very closely!
UK retail sales growth was subdued. In many ways, the behaviour of retail sales data is a mirror image of the GDP data: a strong end to 2010 to beat the VAT rise in January 2011, followed by a weak start to 2011. Sales went sideways in February and March, and show a modest decline if we strip out auto fuel. Food stores fared better than non-food stores, particularly those selling household goods, but non-store sales left both trailing in its wake, growing 14% y/y in March. Indeed, the internet now accounts for £1 in every £10 of total retail sales. But when it comes to recent trends in retail sales, bigger isn't better. Small businesses notched up growth of 6.9% y/y in March, compared to 4.6% y/y for large businesses (those with 100 or more employees). So why do we see more retail shopping areas being built?
British banks in probe amid collusion charges. Barclays, HSBC and Royal Bank of Scotland and 13 other banks are facing investigation by the European Commission over possible collusion in exotic derivatives one called` financial weapons of mass destruction, it emerged yesterday. The EC is investigating the market for credit default swaps (CDS), a type of derivative that will pay its buyer the face value of a loan should a borrower default. As a result they are often used as a type of insurance. It was US investment guru Warren Buffett who described them ` financial weapons of mass destruction` after they played a central role in the crisis that brought down a number of investment banks and forced taxpayers to pump in billions to bail them out. Are the bankers at it again? There has been very little reform in the global market which is a £360 trillion derivatives market. Can bankers reform or do they just do their own thing?
Eurozone economic performance is maintaining its momentum. Services and manufacturing growth accelerated in April despite surging energy costs, tough austerity measures, and a strong currency. The composite PMI index rose to 57.8, supported by manufacturing. Services output growth dipped slightly but remains high. Employment rose at the fastest pace since November 2007, as firms increased capacity to meet rising workloads. Inflation is still the party pooper, up to 2.8%y/y in April from 2.6%y/y in March. Output prices rose for the ninth month in a row and input prices were a touch below March’s 32-month high. But guess what? Take France and Germany away and the Eurozone story is one of just moderate growth. What next for Spain and Italy?
US growth slowed at the start of 2011. US economic growth slowed sharply to an annualised rate of 1.8% in Q1, down from 3.1% in Q4 2010. Private consumption slowed from 4.0% to 2.7% in Q1, partly because of the weather but rising commodity prices played a role too. A sharp fall in government spending (both federal and state) subtracted 1.1% from overall growth. US house prices are also still falling rapidly The Case Shiller 20 city index fell 3.3%y/y in February, the biggest annual fall since November 2009. The fall of 1.8%m/m in February was the smallest since last July, but that is cold comfort in the current market. Overall, a quarter to forget for the US economy and one that policy makers will hope is a blip. More unemployment to come!
The Fed held the main policy rate at 0.25% in April and confirmed it will continue with the QE2 programme. Neither is surprising. More interesting was the tone of the Fed Chairman’s first post-FOMC press conference. Bernanke stated that inflation expectations are well anchored in spite of commodity price rises. This gives the Fed the space to maintain ultra loose monetary policy to support the economic recovery and job creation. We do not expect rates to rise until Q1 next year.
Economic impacts of Japanese earthquake materialising Japan’s trade surplus fell for the first time in 16 months in March following the earthquake. Vehicle exports fell by almost a third, dragging overall exports down 2.2% m/m. The disaster also hit consumer sentiment: retail sales fell by 8.5%y/y in March, the steepest drop in 13 years. The Bank of Japan (BoJ) intervened by ramping up its monetary stimulus immediately after the earthquake. At its meeting last week, it left rates on hold at 0.1% but rejected a further expansion of the asset purchase programme. On the fiscal side, Prime Minister Naoto Kan unveiled a JPY 4tn spending package to support reconstruction – but warned that it could mean higher taxes.
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!
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