Pick it up and run with it - Economics Weekly


Pick it up and run with it - Economics Weekly

At the start of the RBS Six Nations rugby tournament many would be hoping that the European policymakers would take a leaf out of the players’ books and just get on with it.

06 February 2012

Unlike good rugby, when passing the ball leads to success, too many of the European policymakers’ passes have led nowhere. Greece has to find €14bn by 20 March to avoid a default. Without help it won’t have the funds to do this, and this is casting a shadow over the Eurozone and global economy. It’s time for the policymakers to push forward with conviction. In the UK and the US there have been some encouraging signs of economic revival. But even these are tinged with caution because of conditions in Europe. The governments on both sides of the pond will be hoping that their teams will gather enough momentum to push through this economic opposition.

The UK manufacturing and service sectors started the New Year in style

The manufacturing PMI reached an eightmonth high of 52.1 in January and the service sector index surged to an unexpected 56, its highest since March 2011. A reading above 50 in the purchasing managers' index (PMI) indicates expansion.. The improvement in both sectors was broad based and will lift hopes that the UK economy will avoid a technical recession. But uncertainty among small and medium sized manufacturers reported by the CBI probably means we shouldn’t get too excited, yet. The stronger PMI data is unlikely to be enough to prevent an increase in quantitative easing next week, though it will certainly give MPC members some sweeter food for thought.

US manufacturers and service providers followed suit

In the US the manufacturing sector grew at its fastest pace for seven months. Like the PMI, a number above 50 indicates expansion in the ISM index. The manufacturing reading rose to 54.1 in January from 53.1 in December, while the services reading surged to 56.8 from 53. Together these signal that the US economic recovery has been gathering some momentum. Employment was encouraging, particularly in the service sector where it reached 57.4 in January, the highest in almost six years, and up from 49.8 at the end of 2011. This is definitely a good start to the year which should support the US recovery.

The US labour market strengthened again in January, but in Europe unemployment is still uncomfortably high

US non-farm payrolls increased for the fifth consecutive month in January. The 243k rise helped the unemployment rate to fall by 0.2 percentage point to 8.3% - its lowest rate in almost three years. The private sector was the driver of growth and this will be well received by the Federal Reserve which has worried about structural weakness. The labour market recovery may raise questions about the need for further quantitative easing in the short term, but with continued weakness in the global economy, the real test is whether this improvement can be sustained. Eurozone policymakers looked on with envy. While unemployment was static in December, at 10.4%, its still too high for comfort, especially in Spain where the rate is 22.9%.

Eurozone and Chinese manufacturers are still struggling

Manufacturing in the Eurozone wasn’t as good as in the UK and US. The Eurozone manufacturing PMI rose to 48.8 in January, from 46.9 in December, showing that business conditions are still deteriorating, albeit at a slower rate. But even this is a remarkable turnaround, given the headwinds the Eurozone is facing. In China manufacturers are struggling a bit too. The Chinese Government's manufacturing PMI measure rose marginally to 50.5 from 50.3 in January, only just in expansion territory. The HSBC measure confirmed an improvement, but still recorded contraction at 48.8 up from 47.7 in November. Overall the combined data suggests continuing weakness.

UK and US house prices are still falling

House prices in the UK fell by 0.2%m/m in January after a similar fall in December, according to Nationwide. But the annual rate is still positive at 0.6%y/y. There’s not much chance of this picking up soon though as mortgage activity is still stagnant. Even though approvals for house purchase reached their highest level in two years, they are still only about half of the long term pre-crisis average. Given the weak economic background this isn’t surprising. But buyers are also hit by higher prices of essential goods and services. All this means that their ability to buy now is worse than in the 2009 recession.

In the US there are no signs of recovery either

ccording to the Case-Shiller 20 City index, US house prices fell by 1.3%m/m in November. This translates to a fall of 3.7%y/y and brings US house prices back to 2003 levels. Prices are not expected to go anywhere soon either. With foreclosures still running at 3.4% compared with an average of 0.5% before 2008, there is still downward pressure on prices.

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