The FINANCIAL -- Unsurprisingly, no concrete policies
to sort out the Eurozone crisis came out of the G20 meeting of the
world’s leading economies last week.
But a renewed commitment to keeping the euro intact and a 130 billion euro growth stimulus package agreed at the meeting of Eurozone leaders did help a bit. Borrowing costs fell a little, but it’s not a game-changer.
According to the Royal Bank of Scotland, the markets are still very worried about Spain. On the other side of the Atlantic fears that the US recovery is slipping led the Federal Reserve to activate a second ‘Operation Twist’ in an attempt to rev things up a bit. It’s not alone in this desire. Judging by the minutes from the last Monetary Policy Committee meeting it won’t be long before the Bank of England joins the party with more quantitative easing.
UK inflation continues its slide. The consumer price index rose 2.8% in May, down from the 3% rate in April. Cheaper petrol had a big effect, as lower crude oil prices filtered their way through to the forecourt. The cost of food also helped, as big price rises last year weren't repeated. May’s reading is the closest inflation has been to the Bank of England's 2% target for two and a half years. This is good news for savers and everyone who has seen their income fail to keep pace with prices. But it doesn't mean the squeeze on consumers is over. The price of essentials, such as gas and electricity, are still 15% and 8% higher respectively than last year.
MPC minutes show further shift towards easing. Another dose of quantitative easing was a close run thing earlier this month. Four of the nine members of the Committee voted in favour of more easing. The continued deterioration in the domestic and global economic outlook, coupled with a further retreat in inflation, increases the likelihood that a majority will vote for more easing, maybe as soon as July.
UK retail sales rebound in May. Retail sales staged an encouraging rebound in May, growing by 0.8% m/m (ex auto fuel). This lifted the annual growth rate to 3.9% - slightly above the average of the past 2-3 years. The improvement is a bit surprising given weak income growth and low confidence, but lower prices seem to be encouraging consumers to splash the cash. Store price inflation has slowed to 0.9%y/y, its lowest rate since October 2009 and this has helped drive the volume of retail sales in 2012. It seems there is life in the UK consumer, but only if the price is right.
UK unemployment rate unchanged and wage growth still below inflation. The UK unemployment rate was unchanged at 8.2% although the number of unemployed fell by 51,000 on the quarter to 2.61 million. One piece of good news is that private sector job creation outpaced job losses from the public sector in Q1. Unfortunately, with the UK in recession and facing a very weak growth outlook at best, unemployment could easily resume its upward trend in the coming quarters. Wage growth accelerated slightly from 1.6% to 1.8% y/y but is still below the rate of inflation. In real terms wages have now been falling for two years.
US Fed continues to do the twist. The US central bank opted to extend ‘Operation Twist’ in an attempt to stimulate the economy. By selling short-dated government debt to purchase the longer-dated paper already out there, longer term interest rates are reduced. It’s different to the UK’s current approach as it doesn’t inject any more money into the system. Instead it targets behaviour through the manipulation of rates. The impact of the policy remains to be seen, but it’s likely to be modest. Another round of asset purchases by the Fed remains an option for the future.
Eurozone survey data indicates a deepening downturn. The initial reading of the composite Purchasing Managers’ Index (PMI) was unchanged in June, but it’s still firmly in the sub-50 contraction territory. The manufacturing index worsened in June as new orders and hiring declined. The service sector index improved a bit, but is still below 50. The biggest concern is the spread of the economic weakness to Germany. Its manufacturing index fell for the fifth straight month and the fall in the services index was the largest in a year.
China’s manufacturing sector remains sluggish. The initial reading of China’s manufacturing PMI fell to a seven-month low in June. Falling export orders were a culprit and this underlines impact of the problems in Europe and the US on overall global demand.