Summer calm, autumn gusts - Economics weekly

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Summer calm, autumn gusts - Economics weekly

The Eurozone crisis was again back in the headlines this week. Back in June, Eurozone leaders agreed to recapitalise banks directly, bypassing governments.

Economic Analysis

01 October 2012

Bailout funds would provide financial support to banks without adding to government debt. However this week, Germany, the Netherlands and Finland appeared to renege on this agreement. Poor timing. This backtrack comes just as Spain is about to proceed with a banking sector bailout in November. It thus creates uncertainty over the extent of the financial burden the Spanish government will have to bear. With further austerity measures and protests last week it seems that after a relatively peaceful summer, a stiff autumn breeze has emerged.

More austerity to come in Europe

Last week, markets reacted positively to the Spanish Prime Minister’s announcement of a fifth round of tax hikes and spending cuts. The latest austerity measures are aimed at reducing the country’s deficit to 4.5% of GDP in 2013, from 8.9% last year. France’s government also unveiled an “unprecedented” plan to eliminate the deficit by 2017, mainly based on increases in taxes on big companies and the wealthy. And Greece is set to implement further spending cuts of €11.5bn in order to receive the next tranche of its bailout money.

These targets are ambitious given Europe’s economies continue to deteriorate

The European Commission’s Economic Sentiment Survey, an aggregate measure of business and consumer confidence, fell for a seventh consecutive month in August to the lowest level since 2009. Meanwhile, Eurozone lending data showed a larger than expected drop in credit to the private sector over August, particularly so in Spain and Italy. Budget deficit targets are all the more difficult in a deteriorating economic environment.

UK mortgage lending availability edges up

The Bank of England Credit Conditions Survey revealed an increase in the availability of mortgage lending in Q3, and an even bigger increase in availability is expected over the next three months. Whether or not it’s down to the Funding for Lending Scheme, fingers crossed it encourages first-time buyers back to the market. The survey findings for other sectors were less encouraging with the availability of unsecured credit and corporate credit unchanged, and no improvement anticipated for the corporate sector in Q4.

UK GDP revised up again

The third estimate of UK GDP in Q2, usually considered to be the "final" estimate, shows that the economy shrank 0.4%q/q (rather than the 0.5% previously and 0.7% first time around). At a sectoral level, only the services sector output was left unchanged at -0.1%q/q. Construction was revised up but still declined 3% from Q1. A positive Q3 figure looks likely and upward revisions are always welcome. However, 2012 is turning out to be another lost year for the UK economy.

Meanwhile, US growth was revised down

The US economy expanded by 1.3% (annualised) in Q2, down from the previous estimate of 1.7%. The figure underlines the loss of momentum in the US economy in recent months after a 2% annualised expansion in Q1. The culprits were personal consumption expenditure and fixed investment. Both were revised lower. Investment doesn’t look picking up soon, as capital goods orders were very weak in July and August. A slowing global economy and the forthcoming fiscal cliff seem to be weighing on confidence and business investment, which could lead to a further slowing of the US economy into the end of 2012.

US house prices continued to recover in July

The Case-Shiller 20 City index showed US house prices increased for the sixth month in a row in July, with a y/y rise of 1.1% the strongest in two years. It’s far from dramatic, but it does show that the market may be sustaining its emergence from the doldrums at last. However, the underlying dynamics remain weak. Forced sales still make up about a fifth of all sales, and mortgage approvals are still struggling to recover.

Chinese monetary tinkering continues

China moved to give credit conditions a boost last week by injecting around £36 billion into its banking system. It was the largest injection in six years and interbank lending rates promptly fell. The move is welcome (and done partly in response to heightened demand for cash ahead of a week-long holiday) but more aggressive monetary easing in China remains conspicuous by its absence. Cushioning the slowdown rather than engineering a strong growth rebound remains the policy order of the day. There may also be some concerns amongst policy-makers on the global inflationary impacts from the latest round of quantitative easing in the US.



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