Dankeschön! Economics weekly


Dankeschön! Economics weekly

The German Constitutional Court's decision to reject an injunction against the Eurozone's bailout fund was received with relief - and gratitude - last week.

Economic Analysis

17 September 2012

The judgement has given more breathing space to the troubled Eurozone as it removes any immediate obstacles to the European Central Bank's bond buying programme. Markets reacted well, as they did to the US Fed's announcement of more quantitative easing and a steer that US interest rates will remain low until at least mid-2015. This was especially well received after a mixed batch of data underlining the uneven nature of the US recovery. These actions have boosted confidence - share prices rallied strongly - and could be good news for the global economy as a whole, especially if they do calm jitters. But there is no getting away from the fact that it's still a pretty poor state of affairs.

German lawmakers give a green light to the bailout fund

The German Constitutional Court rejected an injunction against the European Stability Mechanism, the Eurozone's €500bn bailout fund, but not without conditions. It set Germany's maximum contribution to the fund at €190bn without further legal consent. It's a good start but there's more work to be done on economic and political reform before we can be comforted that the crisis is under control.

The US Fed sprung into more monetary policy action on two fronts

The Federal Open Market Committee did two things at its meeting last week. It changed its guidance on how long it expects rates to stay exceptionally low, extending the period from end-2014 to at least mid-2015. Second, it launched more quantitative easing via a program to buy mortgage-backed securities, chiming with concerns about the US housing market. The securities will be bought at a rate of just $40bn a month, but there was no indication of when purchases might stop.

Fuel pushed US and Eurozone inflation up in August

US consumer inflation increased to 1.7%y/y in August up from 1.4%y/y in July. 80% of this was due to fuel costs. Core inflation, which excludes fuel and food, fell from 2.1% in July to 1.9% - it's lowest since July 2011. Fuel boosted Eurozone inflation too. It rose to 2.6%y/y in August, up from 2.4% in July and is the first pick up for 11 months.

Production rebounded in July in the Eurozone, but faded in the US

Eurozone industrial production rose by 0.6%m/m in July as a strong performance in Germany offset declines elsewhere. But things aren't that good. Overall output was 2.6% lower than the same month last year. In the US industrial production faltered in August. Output fell by 1.2%m/m, its fastest decline for three years as Hurricane Isaac shut down oil and gas rigs in the Gulf of Mexico.

An Olympic boost to UK jobs

There was good news on UK employment which increased by 236,000 in the three months to July. 38% of the rise was attributed to the Olympics. The economy is still struggling to generate full-time jobs though. The bulk of new jobs this year have come from part-time and self-employment. Unemployment fell by 7,000 in the three months to July, which brought the rate down to 8.1%. Earnings growth came in at 1.5%y/y in the three months to July, down 0.3 points on the previous three months. This was the 29th month that pay failed to keep up with inflation.

UK trade deficit narrows while US trade deficit widens

The UK's trade deficit narrowed to £1.5bn in July, from £4.3bn the previous month. Goods exports were up 9.3%m/m, while imports were down 2.1%. Exports to the EU rose 7.7%m/m, but even better, exports to non-EU countries rose 11%m/m. This meant that non-EU export destinations accounted for half of all UK goods exports for the first seven months of 2012. Meanwhile, the US deficit on trade in goods and services rose slightly to $42bn in July from $41.9bn in June, the first increase in four months.

China's Government reacts to slowing growth

Chinese industrial production growth slowed to 8.9%y/y, the lowest pace of growth since May 2009. Worryingly, imports contracted 2.6%y/y, only the second time this has happened in the past three years. Right on cue, last week saw the announcement of 25 urban rail transport projects in 19 cities and 20 further investment projects (13 are road projects exceeding 2,000km in length). Additionally, land supply is being increased across the major cities for residential and commercial purposes. However, these are modest measures and anyone thinking a 2008-style 4 trillion yuan stimulus is on the agenda will continue to be disappointed. The authorities are clearly not trying to engineer a rebound in growth - they are merely trying to cushion the slowdown.

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