We’ve become used to the theme of emerging nations providing better growth prospects than the current crop of rich countries. But as highlighted by Fitch’s downgrade, even in hotspots like China there are signs that this growth is not sustainable.
UK production expands but trade struggles
Production and manufacturing output rose in February, which should help the UK avoid a triple dip recession. The expansion was broad based. But even this good news means that production is only just back where it was six months ago.
Meanwhile the trade deficit continued its terrible start to 2013. The gap between imports and exports rose to £3.6bn in February and will be a struggle to turn around. The World Trade Organisation expects global trade to grow by 3.3% this year, up from 2% last, but well below the 5.3% average over the last 20 years.
Housing market stays flat
Surveyors say that new supply and demand are relatively balanced at the moment, indicating that prices aren’t expected to move much at a national level. But the Royal Institute of Chartered Surveyors’ survey stresses that regional differences remain, with higher sales relative to stocks in London making agents there the most optimistic. By contrast, weak sales in Wales and the North East lead those regions to be pessimistic about future prices.
Some long awaited good news for Europe
Encouragingly, industrial production in the Eurozone rose 0.4%m/m in February, on the back of higher demand for durable and capital goods. It wasn’t great news everywhere though: Greece, Italy and Spain all showed deep declines.
Weak demand has squeezed companies’ pricing power, leading to lower inflation. In March euro-area inflation slowed to 1.7%y/y. French inflation is particularly low at just 1.1%y/y, even Germany reported only 1.4%y/y and prices in Greece are now actually falling. With the inflation rate falling further below its 2% target the chances of a rate cut by the European Central Bank are rising.
European Commission urges Spain and Slovenia to do more
Part of Europe's response to the debt crisis has been a new macroeconomic monitoring regime. The idea is that countries get assessed and those with "excessive imbalances" are told to correct them or face sanctions.
This time around Spain and Slovenia were in the firing line. Both were identified for their high debt levels, with Slovenia's financial sector a cause for concern. Right now this amounts to little more than a slap on the wrist, but to avoid further censure both will have to draw-up credible plans by the end of May.
China displays warning signs of a different kind
China's credit growth continues to astound with lending up over 66% on a year ago. Remarkably, this is actually a slowdown from late last year and not as strong as the credit binge of 2008/09 that was unleashed to battle the global crisis.
But it's still unsustainably high and prompts new worries of property bubbles and debt problems at local governments, something that the rating agency Fitch thinks will require central government resources to fix. Policymakers are likely to intervene again soon, but taming this sort of growth is rarely pain-free.
US Fed rate-setters dream of life after the crisis but economy deteriorates
It’s hard to find anyone who thinks the US economy is in worse shape than the UK or the Eurozone. And yet the Fed has been more active than the others in its quantitative easing programme this year. That looks set to change over the next six months.
Minutes from the Federal Reserve's March meeting showed that most participants was in favour of scaling bank asset purchases in the second half of this year. But the policy shift won't be dramatic. Recent US data was disappointing with the labour market doing worse than expected. Now we find out that retail sales in March fell too. Even the US can look fragile.
IMF urges central banks to do more
In the 70s, 80s and 90s there seemed to be a pretty clear trade-off between inflation and unemployment. When the economy went into recession, unemployment rose and inflation fell. But in the years since 2008 unemployment rose by an average of 4% across the G7 group of nations, whilst inflation barely budged.
The IMF puts this change down to independent central banks and their inflation-targeting mandates. Why does this matter? If inflation expectations are still relatively low then monetary policy can work harder to stimulate the economy, without the fear of inflation taking off. That's the IMF's way of telling central banks to be bolder.
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