Hope versus fear - Economics Weekly

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Hope versus fear - Economics Weekly

The optimism at the start of 2011 was founded on strong global economic growth, but developments throughout the year mean that we enter 2012 in a much gloomier mood.

09 January 2012

Inflation, rising unemployment and much weaker than expected growth outturns in 2011 mean that meeting the austerity challenge is going to be painful in 2012. But there is some good news. The US economy seems to be dragging itself out of the doldrums and global manufacturing surveys have picked up. However, there is still lots of uncertainty, particularly where much of the outlook depends on global developments we can’t control. It looks like 2012 will be a tussle between the hope of a continued recovery in the US and the fear of a worsening Eurozone crisis.

UK exporters and services provided some good cheer in December

Despite a contraction in the UK manufacturing sector for the third consecutive month, the new export orders component of the Purchasing Managers Index (PMI) climbed to its highest level since April. This is good news and will be even better if the UK can build on this success and rebalance toward exports during 2012. The services PMI provided even better news. It jumped firmly into expansion territory in December with a five-month high reading of 54 (a number above 50 indicates expansion). The caveat is that companies are still worried about the future because of government spending cuts and the Eurozone crisis. Combined with more household deleveraging, higher unemployment and weak income growth, this will make 2012 another challenging year.

Eurozone private sector activity contracts for a fourth month

The composite PMI, combining both the services and manufacturing sectors rose in December, but only to 48.3. The PMI has now been below 50 for four consecutive months. Over Q4 as a whole, the data suggests the sharpest contraction in Eurozone activity rates since early 2009. The fallout from the sovereign debt crisis is hitting the real economy as biting austerity, tighter credit conditions and weaker than expected growth hit confidence. It will be some time before we can expect to see a sharp rebound in the Eurozone economy.

The European Central Bank’s (ECB) Christmas present to the banks

Just before Christmas, the ECB offered a helping hand to the Eurozone banks in the form of generous three-year funding. The banks had been facing funding stresses and the ECB was keen to stimulate lending. But, so far this hasn't happened. Banks seem to have simply deposited the money back at the ECB, despite the return being less than the cost of borrowing. This isn’t a good sign and shows Eurozone banks are still anxious about the economic outlook. The Eurozone crisis will remain a dominant theme in 2012. How it unfolds will depend on the success of policy-makers in taking, and acting upon, difficult decisions.

Good news on US unemployment

US policymakers will have been very pleased with the labour market at the end of 2011. An unexpectedly high 200,000 jobs were created during December. Overall the US has added 1.6 million jobs during 2011, the largest increase since 2006. The unemployment rate is now 8.5% - well down on the 9.2% recorded in August. This is in sharp contrast to the UK. Its unemployment rate has risen from 7.9% to 8.3% since August.

US economy shows resilience

The ISM survey of manufacturers and service providers strengthened during December, providing some more good news about the US economic recovery. The manufacturing PMI rose to a six-month high of 53.9 on the back of improved output, employment and new orders. While the manufacturing PMIs of the UK and the Eurozone have been below 50 since the summer, the US manufacturing sector has remained in expansion territory.

US central bank to publish own forecasts

The Federal Open Market Committee (FOMC) revealed in the last set of minutes that it will publish its expectations for the benchmark interest rate over the "next few calendar years" from January. The idea is to explain the Fed's intentions more clearly and allow it to exert more control over long term rates. The minutes also revealed some appetite for more monetary easing. However, it will be more difficult to justify this if the economic data continues to be as robust as it has been in recent weeks.

China’s slowdown continues to be mild

The two Chinese manufacturing PMI surveys improved in December. One rebounded to 50.3 and the other rose but remained below the magic 50 mark. China’s economy is being affected by weaker demand at home as the property sector struggles, and abroad as export markets weaken. Despite a slowing economy, China will still be a major driver of global growth in 2012.

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