Control, Alt, Delete - Economics weekly

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Control, Alt, Delete - Economics weekly

The US Government pressed the shutdown button. The ultimate impact on the US and wider global economy is now in the hands of Congress.

Economic Analysis

07 October 2013

US Government shuts down

America's fiscal year started last Tuesday 1st October. By then Congress and the President had failed to agree a budget for the year and part of the federal government was 'shut down'. There have been 17 shutdowns since 1977, so this isn't uncommon, although it is the first since 1995. Around 800,000 employees have been sent home without pay, roughly 0.5% of American workers.

Although modest so far, the economic effects will grow the longer the shutdown continues. Already consumer confidence has plummeted, as Gallup’s daily tracker shows. But the shutdown is a sideshow to the main event, which would be the US defaulting on its debts. Unless politicians agree to extend the amount of debt the federal government can incur, the US Treasury reckons it will reach its limit on 17 October.

What might have been

The US economy was chugging along nicely until the government shutdown came along. In manufacturing, the Purchasing Managers Index for September rose 0.5 points to 56.2, the highest level of the year. However, the non-manufacturing ISM slipped a chunky 4.2 points but stood at a still-strong 54.4.

There was decent underlying momentum in the US recovery last month and it should be able to shake off the shutdown as long as it’s brief and ends with a credible deal to fix the public finances. But as the non-manufacturing data showed, growth isn't so strong as to be able to weather a prolonged fiscal storm. Let's hope Washington isn't left to rue what might have been.

UK services strong in September

At 60.3, the Purchasing Managers' Index (PMI) was marginally down on August's reading of 60.5, but continues to signal another strong month of growing business activity. The average PMI reading for the third quarter was the best quarterly performance since Q2 1997 as companies continued to benefit from increasing levels of new business.

Strengthening demand and rising pressure on existing resources also led businesses to increase staff numbers. September's data will add to expectations about a strong third quarter for UK economic growth.

A solid quarter for UK manufacturers

It's not just the services sector delivering the good news. The UK's manufacturing PMI turned in another good performance with the September reading falling only marginally to 56.7, from 57.1. It meant that Q3 was the best performance since Q1 2011.

Domestic orders in particular continue to pour in. New export orders remain solid rather than spectacular. Like the services sector, manufacturers appear keen to hire a few extra pairs of hands. If there's one concern it's that there are signs of some inflationary pressures building in both input and output prices.

UK mortgage market moving

There were 62k mortgages for house purchase approved in August, a number not seen since February 2008. And with gross lending up 32%y/y to a level last seen in November 2008, it would seem that the housing market carried some momentum through the summer. The second phase of Help to Buy already has a leg up.

No change from Paris

The European Central Bank (ECB) left rates unchanged at 0.5% at its October meeting. The Governing Council, which met in Paris in one of the two away games played by the ECB each year, discussed a rate cut. But it decided against it, comforted by continuing signs of improvement in economic activity across the monetary block. Nonetheless, President Draghi reiterated that the recovery will be only gradual, and will remain fragile in the quarters to come. The ECB stands ready to provide further support as needed.

Can Japan keep rolling?

Confidence among Japan's large manufacturers and small service sector firms is at its highest since the financial crisis. In keeping with this optimism, Japan's government has decided to go ahead with its plan to raise the rate of VAT next year. Abenomics has also begun to yield a positive rate of inflation, due to a weaker currency raising the cost of imported energy. For Japan to properly escape its deflationary problem and ignite domestic demand, wages need to start rising. If they don't, the recent uplift in Japan will likely prove to be simply a temporary upswing.

It may slow some of the momentum that many advanced economies have gathered behind their recoveries. Business surveys from the US, the UK and Japan were all strong in the run-up. Unfortunately, as the IMF showed in its recently published World Economic Outlook, it is during the bad times when different countries’ economies move most in step. Let’s hope Congress finds the restart button soon.

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