A chink of light from the US - Economics weekly


A chink of light from the US - Economics weekly

It was a bad news week for manufacturing across the globe. But there are chinks of light – and not just from glinting Olympic medals.

Economic Analysis

06 August 2012

No-one changed monetary policy, but the US may be beginning to show signs of economic recovery. As the world’s biggest economy this is good news for all of us, especially as the Eurozone economy is struggling along and China’s economy is taking its time to accelerate. There are lots of hurdles ahead, but as the Olympics have shown, big challenges can bring surprising results.

The European Central Bank (ECB) is exploring bond market support

After a promise to do whatever it takes to save the Euro, markets expected bold policy from the August ECB meeting. Instead the ECB left interest rates unchanged at 0.75% and sketched out a plan to reduce borrowing costs for countries under speculative attack. The ECB could buy sovereign bonds, but on condition that governments apply to the Eurozone rescue fund first. This implies strict fiscal consolidation rules will be imposed.

The UK’s Monetary Policy Committee left policy unchanged in August

UK policy rates were left at 0.5% at this month’s meeting after last month's boost to the asset purchase scheme. But the MPC is unlikely to have ruled out looser policy in future. Markets are pricing in a rate cut to 0.25%, but rates will probably stick at 0.5%, because of MPC concerns about the side effects of low rates for deposit-taking institutions. The Inflation Report will reveal more later this week.

The US opted to keep the status quo too

Markets were also looking for action from the Fed, but were disappointed. The statement said the Fed would “provide additional accommodation as needed”, but stopped short of extending the pledge to keep rates on hold beyond late 2014.

Manufacturing disappoints in the UK - and in the Eurozone, China and the US

Manufacturers across the globe have been hit hard by weaker global trade and low business confidence is also bearing down on stock building. In the UK, the Purchasing Managers Index (PMI) survey showed the sector shrank at its fastest rate for more than three years in July. In the Eurozone, the PMI showed that that the sector has been contracting for twelve straight months. More concerning is that the rot has spread - even German manufacturing contracted in July. The Chinese data wasn’t much to write home about either. Even though the HSBC flash PMI was at its highest for five months, the sector still shrank in July. In the US conditions were a little better as manufacturing stabilised in July.

Good news on the US jobs market

In a fragile global economy any chink of light is welcome, so the increase of 163,000 US jobs in July was well received. It set Q3 off to a good start and along with improving non-manufacturing activity in June, gave some reason for confidence. Indeed there are signs that the all-important American consumer is starting to feel happier. US consumer confidence rose in July after four months of decline because of a better jobs outlook. But these are still tough times. The US unemployment rate ticked up to 8.3% from 8.2% in June and the Government is still shedding jobs.

Eurozone unemployment increases and retail sales are sluggish

The US jobs market compares well to the Eurozone, where the unemployment rate increased by 1.2 points in the year to 11.2% in June. Unemployment increased in 19 of the 27 member states and youth unemployment is a particularly big problem in Spain and Greece. No wonder retail sales increased by a mere 0.1% m/m in June and fell 1.2% y/y.

US house prices increased for the fourth month in a row in May

US house prices increased at an annualised rate of 2.2% in May, up from 1.5% in April. Prices are still a bit lower than last year, but the annual rate of decline has fallen steadily all year. This is great news as the housing market is so important for the US economic recovery. But there is a lot of ground to make up; prices are still 32% below their April 2006 peak and high foreclosure rates are still a drag.

UK house prices fall at their fastest rate in three years

UK house prices fell in July bringing the annual change to -2.6% and total mortgage approvals fell to their lowest recorded level in June too. The Funding for Lending scheme may encourage more activity -and after a £355mn fall in secured borrowing in June this would be welcome. But demand and confidence are the real problem. A typical UK first time buyer's 10% deposit is almost £14k. This is disincentive enough, but if they expect prices to fall further, why should they hurry to buy now?

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