That sinking feeling
The European Central Bank (ECB) lowered its policy rate by 25bps to 0.25% at its November meeting in reaction to the prior week’s reported sharp fall in October’s headline inflation rate to 0.7%y/y. Inflation has been below the ECB’s 2% target for the past 9 months. The rate cut was unexpected but prompted by the ECB’s expectation that inflation will remain low for a “prolonged” period of time. Consequently, President Draghi said that rates will stay low for a long time and could even be lowered further if needed.
Weak, uneven and fragile
That’s how Mario Draghi sees the Eurozone’s economy. The latest Purchasing Managers’ Index (PMI) reading seems to confirm his view, dropping from 52.2 in September to 51.9 in October. Yes, economic activity is still expanding, but not all countries are alike. October saw strong growth in Germany, further signs of stabilisation in France, and some strengthening in peripheral economies like Spain. Output in Ireland expanded at the fastest pace for over six-and-a-half years.
US rolling along nicely
The US economy grew at an annualised rate of 2.8%q/q in Q3, up from 2.5%q/q in Q2 and the fastest pace in a year. House building was the star pupil, growing by 14.6%q/q. There was a hint of slightly the wrong kind of growth, with a reliance on falling imports – which pushes up gross domestic product (GDP) – government spending and a build up of inventories by businesses. But the latest Institute of Supply Management’s survey of non-manufacturing firms showed the pace of activity quickening in October. Things are still looking up.
Worth the wait
The US Government shutdown affected much of the American economy, including the statistics agency's ability to publish labour market data. Last week's payrolls numbers were one week late but brought the welcome news that over 200k jobs were created in October. The shutdown appears to have had relatively little impact on the economy. There are now 2.3 million more jobs in the economy than this time last year, a very healthy rate of job creation. But unemployment will need to fall further from its 7.3% to persuade the Fed that it is safe to reduce the monetary stimulus.
UK scaling new heights
Activity in the services sector hit a record high in October, according to the Purchasing Managers' survey. At 62.5, this was up on September's 60.3 and signalled the fastest pace of growth since May 1997. The increasing level of activity was supported by record growth in new incoming business. Rising work loads also resulted in companies taking on more staff, with the rate of employment growth also the best since 1997. With the largest sector of the economy in such a buoyant mood, what does this mean for forward guidance?
Balancing and building
The UK's trade deficit in goods and services held steady at -£3.3bn in September. Disappointingly, it was left to the services sector to offset weaker goods exports. And the UK recorded its largest quarterly goods deficit with the EU. Not exactly the rebalancing story we were after! There was better news for UK construction, which posted its second consecutive quarterly growth, having contracted for much of the previous seven. New construction work has been driven by a solid pick-up in public and private housing over the last two quarters, with commercial construction also contributing in Q3.
Made in China
Chinese exports grew 5.6%y/y in October, ahead of expectations and a big improvement on September's 0.3%y/y decline. And in line with the rebound in our economy, China's exports to the UK have rebounded strongly, with average growth of 15%y/y over the past four months. That's even faster than shipments to the US and the EU. However, from China's perspective exports are still stuck in the slow lane. Export growth has been decelerating since the middle of 2010, alongside slowing global trade. Unfortunately, it will take more than a resurgent UK to change that.
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The central bank is expecting a long uphill journey to recovery. Let’s hope that when it gets there, the European boulder stays put. Meanwhile, the US and the UK continued to see recovery and further from home China’s exports started to grow again.