Reality check - Economics weekly

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Reality check - Economics weekly

Recent improvements in market sentiment were given a reality check last week.

Economic Analysis

25 February 2013

Doctor’s report: UK GDP slightly less bad

The second estimate of UK GDP for the final quarter of 2012 was unchanged at -0.3%q/q. However, revisions to earlier data mean that the UK economy actually grew last year, albeit by just 0.2%. It's probably more honest to describe this performance as ‘less bad’ rather than ‘better'. Excluding oil and gas extraction which is not only in structural decline, but had a particularly poor year, the economy is estimated to have grown by 0.4%. The data also confirmed a poor year for the manufacturing sector as the economy struggles to rebalance.

Nationwide house prices creeping up

The Bank of England’s Funding for Lending Scheme might just be starting to have a positive impact. UK Nationwide house prices posted their second successive monthly increase in February and their fourth in the last five months. But London and the South West remain the only regions where prices are above their 2010 level. The Council of Mortgage Lenders also indicated more signs of life in the housing market as 2012 saw the highest number of first-time buyer mortgages since 2007. But before getting too excited, this was still 40% lower than back then.

Demand for credit an acquired taste

Demand for credit fell in January as households continued to pay down debt. Outstanding credit card debt has now been falling steadily since 2011. For loans and overdrafts this run stretches back to 2009. At the same time, the total amount of outstanding loans to UK non-financial corporations rose for just the second time since March 2010. But with outstanding corporate balances still 27% below their peak, it’s not time to celebrate yet.

Italians reject austerity and reform

Last week’s Italian elections resulted in a deadlock as the centre-left party and its allies won the lower house but failed to secure a majority in the Senate. Control of both houses is needed to govern and continue to push through the reforms necessary to keep financial markets quiet and get Italy out of a severe recession.

Former Prime Minister Silvio Berlusconi made another comeback, but the real surprise came from the Five Star Movement led by comedian Beppe Grillo which secured the highest share of votes. The protest movement attracted a majority among young Italians who are clearly against austerity. With youth unemployment at nearly 39%, it’s easy to understand why.

Two steps forward, one step back

Revised data showed that the US economy did in fact manage to eke out some growth in the final quarter of last year. The 0.1% gain was up from the initial estimate of a -0.1% contraction. The US equivalent of the Purchasing Manager’s Index (PMI) hit its highest reading since June 2011 providing another sign that the US recovery is gaining traction.

But life isn’t easy and almost as if right on queue, US politicians failed to find a compromise agreement on dealing with the county’s rising debt. So $1.2trn of spending cuts are to be implemented over 10 years. It’s estimated that the $85bn of cuts to be imposed this year could cost up to 750k jobs and cut growth by 0.6%.

Contrasts in global manufacturing

Unlike the rise in US manufacturing activity, the UK PMI surprised in February, falling to 47.9, from 50.5. Though output across the Eurozone as a whole continues to contract, there are signs that Germany might be dragging itself out of the mire as its PMI reading moved into expansion territory for the first time in a year. China also stuttered in February. But with Chinese New Year celebrations falling in the month, these data are difficult to interpret.

Is Japan's policy revolution about to gather pace?

The Japanese government announced that Harukiko Kuroda will be the new governor of the country's central bank. Of the candidates he was considered to be the one who would pursue the country's new 2% inflation target with the most vigour. And with almost perfect timing, Japan's inflation reading for January underscored the challenge facing the new governor. The headline CPI reading fell 0.4%y/y. Never mind 2% - it has now been over four years since the inflation was above 0.5%!

The underlying fragility of the Eurozone was exposed as Italians voted en masse for comedian Beppe Grillo’s protest party, the Five Star Movement. The result made clear Italians’ dislike of the current austerity and reform programme and a disenchantment with the political establishment. There were no laughs at the White House as President Obama signed into law spending cuts of $1.2trn over 10 years. Failure by politicians to find a compromise solution to deal with the rising debt isn’t good news for the US economy, especially when the recovery is just starting to take root.

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