Five in a row - Economics weekly


Five in a row - Economics weekly

America hasn’t won the Ryder Cup since 2008. But it can console itself with the knowledge that, in each of the four years since then, the US economy has grown more quickly than Europe.

11 March 2013

Another strong jobs figure from the US

The US economy added an impressive 236k jobs in February. This was well above the expected rise of 165k and strong enough to put another dent in unemployment. The jobless rate is now at a five-year low of 7.7%. There's still a long way to go before 6.5% is hit (the rate at which the Fed will look to raise rates) but unemployment is heading in the right direction. But as always with economists, good news comes with a caveat. There is $85 bn of spending cuts to work their way through the economy this year, and that's on top of tax rises implemented earlier in January. These seem almost certain to drag on the economy and in turn slow job growth. But at least the US appears to be facing them with a bit of wind at its back.

US service sector adds to the good news

Last week, I reported that American manufacturing businesses were at their most confident. This week the services industry pulled off the same trick, according to the Institute of Supply Management (ISM). The ISM survey of non-manufacturing firms hit 56.0 in February – the highest seen since this time last year. Firms reported rising prices and new orders, with employment still growing strongly. Notably the real estate sector was particularly positive, chiming with reports that a property-based recovery is improving sentiment all round.

EZ in the doldrums in Q4

The second estimate of Eurozone Q4 GDP confirmed a 0.6%q/q contraction in activity, driven by falls in consumer spending and investment. Portugal was bottom of the Eurozone league table, shrinking an alarming 1.8% over the quarter. But weakness was widespread, with fourteen of the seventeen member states contracting (we are still waiting on data for Ireland, Greece and Malta). The Eurozone has been in recession for over a year and the results of the Italian election show how difficult this can make it to build consensus for reform in countries that are struggling. Policymakers need to do more to address longstanding growth issues or political risk will remain a stumbling block for the Eurozone. A rate cut from the European Central Bank would be a step in the right direction, though the Governing Council voted for no change at its meeting last week.

Q1 not looking much better for the EZ, with alarm bells in France

Hot on the heels of the disappointing Eurozone GDP figures came the purchasing managers’ index (PMI). January's reading for the service sector had shown a tentative improvement but this was unwound last month as the index fell from 48.6 to 47.9 in February. A reading below 50 means that activity is contracting. France’s index edged up marginally, but remains heavily depressed at 43.7. It meant that France's composite PMI, which combines manufacturing and services, was worse than both Spain and Italy for the second month in a row. And other indicators point to increasing problems for the world's fifth biggest economy. The number of unemployed rose by 124,000 in Q4 2012, the most in three years. On a more positive note, Germany's services reading remains in healthy shape. Can Germany's economy withstand the ever-increasing strain from its neighbours?

At least EZ retailers get a boost

With so much bad news about the Eurozone these days, consumers decided they needed some retail therapy in January. Sales across the single currency area rose 1.2% m/m – the highest rate of growth in three years. German consumers provided a significant boost to January's retail sales as sales rose 3.1% m/m. But, in a mirror image of the Q4 GDP league table, it was Portugal that took top spot for sales growth.

No change from MPC, after encouraging service sector survey for the UK

There was an outside chance that the Monetary Policy Committee (MPC) would vote to re-start quantitative easing last week, after that woeful manufacturing PMI. But policy was left unchanged in March, and an encouraging increase in the service sector PMI may have been the decisive factor. The headline output index reached a five-month high of 51.8 in February and confidence continued to improve. Also, the employment index rose to the highest level since May, suggesting the recent strength of the labour market will continue. The sector is hardly shooting the lights out, but this release provides hope that the UK economy will manage to squeeze out a bit more growth this year.

I wouldn’t bet against America making it five in a row in 2013, if the data we have so far are anything to go by. Last week was a case in point. America is adding jobs and building momentum, while the Eurozone remains mired in recession.

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