UK grows for first time in a year
UK Q3 GDP grew by 1%q/q, according to the preliminary estimate. This is the first quarter of growth since Q3 2011 and the strongest since Q3 2007 (not, perhaps, the most reassuring date for comparison). The largest individual sector contribution came from ‘government and other services', but this received a large boost from Olympic ticket sales. Another one-off effect came with the ‘bounce' in activity from Q2, which was held-back by extra bank holidays and the Jubilee. However, there are signs that growth slowed at the end of the quarter as output in September was estimated to have fallen in services, production and construction.
Bank of England governor contemplates the limits of monetary policy
In contrast to the GDP figures, Sir Mervyn King warned last week of a darkening economic sky and said that the UK faces a long period of economic adjustment. Despite the bleak outlook, he sees monetary policy as approaching its limit and poured cold water on suggestions that the Bank should be contemplating more dramatic policies, such as giving away new money. The governor thinks this would lead to a loss of control of the money supply and is uncomfortable about stepping into the realms of fiscal policy. With Governor King stepping down next year, it will be interesting to see whether his successor holds similar views.
The Bank also displays confidence in the UK corporate bond market
A long time ago in a country not far away, the Bank of England began quantitative easing. At that time, the Bank bought UK corporate bonds as well as government ones. What's less well known is those assets, which peaked at about £3bn, have practically all been sold. The reason is because the corporate bond market has performed a lot better than the wider economy. UK corporate bond issuance in 2012 has already surpassed that achieved in any of the last three years. And the premium investors charge for corporate over public debt has been falling recently as well. As a result, the Bank of England thinks this is a market that doesn't need central bank help and is very close to removing all of its interventions. That is good news.
Eurozone private sector off to a poor start in Q4
The composite Purchasing Managers' Index (PMI) for the Eurozone, covering manufacturing and services, continues to make gloomy reading. The index dropped from 46.1 in September to 45.8 in October, the worst reading since June 2009, confounding expectations that activity might have improved. Manufacturing was the main culprit, falling to 45.3 from 46.1. The weakness in the so-called core countries, particularly France, appears to be intensifying. It all raises more questions over pursuing aggressive austerity in the face of a recession that now looks to be engulfing the single-currency area.
American consumers power US growth
The US economy grew 0.5%q/q in Q3. This is half the UK pace but they didn't have an ‘Olympic-effect'. In fact, US growth looks more sustainable. Household spending was the most important source of growth as consumers had a bit more money in their pockets. Personal income was 3.6% higher than a year ago. The other strong point was government spending, which grew in real terms for the first time in over two years. Yet the export engine ran out of steam, contracting for the first time since Q1 2009. This was unsurprising as data from the Dutch Bureau of Economic Policy Analysis revealed that world trade volume fell by 0.4%m/m in July and August. This is not good news.
China's economy seems to be stabilising - if so, the rest of Asia will be happy
The initial reading for China's manufacturing PMI for October provided evidence that China's economy seems to be stabilising. The index rose to 49.1, the highest reading since April. Encouragingly the inventories component fell again after reaching an historic high in August. In other words, manufacturers are finally beginning to run down excess stock, paving the way for an increase in production. If so, the rest of Asia would cheer. South Korea's economy grew at the slowest pace in three years in Q3, while Japan's exports fell 10%y/y in September on waning global demand. Help from China would be welcome.
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