A Weekly Review of Global Markets, 23rd March 2012
UK announces “pro-business” budget as positive signs emerge in the manufacturing sector
UK Chancellor George Osborne presented his 2012 budget this week. The UK deficit is expected to fall to 7.6% of gross domestic product (GDP) in 2012, while economic growth is forecast to come in at 0.7% in this period, followed by 2.0% in 2013. The budget also included, amongst other measures, a reduction in the top rate of personal income tax from 50% to 45%, an increase in the personal income tax threshold to £9,205, a lowering of the corporate tax rate (initially to 24% and to 22% in 2014) and a further clampdown on tax evasion by the very wealthy.
The latest survey by the Confederation of British Industry (CBI) found that 39% of manufacturers expect output to rise over the coming three months, while 15% expect it to fall. The resulting balance of +24% is the highest since March 2011. Ian McCafferty, the CBI’s Chief Economist, observed that momentum is building in the UK manufacturing sector and noted that the anticipated rise in output prices had probably been driven by the recent rise in oil prices. He noted, ‘Any further rise in oil prices would be a significant concern, given the additional cost burden this would place on UK manufacturers.’
For now, though, inflationary pressures are declining. The Office of National Statistics (ONS) noted that annual Consumer Prices Index (CPI) inflation in the UK fell from 3.6% in January to 3.4% in February. Retail Prices Index (RPI) annual inflation dropped from 3.9% to 3.7%. Retail Prices Index excluding Mortgage Interest Payments (RPIX) annual inflation, retreated from 4.0% to 3.8%.
US jobless claims fall to four year low
Conditions in the US labour market continue to improve. The Department of Labor reported that there were 348,000 initial jobless claims in the week to March 17, or 5,000 fewer than in the preceding week. The latest figure is the lowest number of initial jobless claims for four years.
The improving employment picture underlines the resilience of the US economy, with the Conference Board’s Leading Economic Indicator (LEI) rising by 0.7% to 95.5% in February. This rise follows increases of 0.2% and 0.5% in December and January, respectively. Ken Goldstein, an economist at the Conference Board, commented that ‘…an unseasonably mild winter has contributed to many of the recent positive economic reports. But the consistent signal for the leading series suggests that progress on jobs, output and incomes may continue through the summer months, if not beyond.’
Economic conditions in the eurozone deteriorate
Markit said that its ‘flash’ composite purchasing managers’ index (PMI) for the euro area fell from 49.3 in February to 48.7 in March (a figure of less than 50 represents a decline in activity). The ‘flash’ PMIs for services, manufacturing and manufacturing output also declined in March. Chris Wilkinson, Markit’s Chief Economist, said that the more intense contraction in activity in March suggested that the euro area had fallen back into recession. He noted that ‘Germany and France look to have avoided a return to recession, but only by very narrow margins. Elsewhere in the euro area, the situation is worse, with both business activity and employment falling sharply again in March.’
Germany’s Federal Statistics Office noted that the producer price index (PPI) rose by 0.4% in February, an increase of 3.2% over the same period one year previous. PPI inflation has been boosted by a 12.4% rise in energy prices since February 2011. Excluding, the impact of higher energy prices, PPI inflation in Germany would have stood at 1.6% year-on-year.
Japan announces unexpected trade surplus in February
Commentators were surprised by figures published by Japan’s Finance Ministry which indicated that the country posted a trade surplus in February of ¥32,921m. Relative to February 2011, exports were 2.7% lower at ¥5,440,866m, while imports (which have been boosted by the rise in energy prices) were 9.2% higher at ¥5,407,945m. In the recent past, exporters have been helped by the weakness of the yen, which has depreciated by around 7% against the US dollar since the Bank of Japan expanded its monetary stimulus in mid-February.
The Ministry of Economy Trade and Industry (METI) said that its index of all economic activity fell by 1.0% in seasonally-adjusted terms, from 96.9 in December last year to 95.9 in January. The index is 0.2% lower than it was in January 2011. Activity in the construction sector is slightly higher than it was a year ago, as is activity in the public sector. Overall, the figures confirm subdued economic activity in Japan.
Emerging markets news
The Monetary Policy Committee of the Central Bank of Egypt (CBE) kept interest rates unchanged The Committee noted that CPI inflation inched upwards from an annual rate of 8.60% in December to 9.19% in January, largely due to substantially higher food prices. Economic activity was hit hard in 2011 due to well publicised political unrest although positive signs are slowly emerging. The Committee warns, however, that political uncertainties may continue to adversely impact upon consumption and investment
in Egypt.
In Asia, the Bank of Thailand’s Monetary Policy Committee also opted to keep interest rates unchanged and remains upbeat about economic conditions in Thailand. The Committee said, ‘Latest indicators pointed towards improvements in all key areas of the economy. Domestic demand continued to be the main driving force for the economy, supported by improvements in income, employment and private sector confidence, as well as government stimulus measures and accommodative monetary conditions.’ The Committee noted that inflationary pressures remain ‘stable’ for the time being.
Divergent indicators of conditions in China’s manufacturing sector were published during the week. HSBC’s ‘flash’ PMIs for manufacturing and manufacturing output fell in March, to 48.1 and 47.9 respectively (a figure of less than 50 represents a decline in activity). Elsewhere, the PMI compiled by the China Federation of Logistics and Purchasing (CFLP) rose from 50.5 in January to 51.0 in February, having advanced in January and December as well. The index was boosted by a recovery in export orders.
Company news
The People’s Bank of China cut the reserve requirement ratio (the percentage of deposits that cannot be lent to non-bank customers) by 200 basis points to 18.5% for 379 branches of Agricultural Bank of China. As a result, an additional 23bn yuan (US$3.6bn) will be available for lending, mostly in rural areas. This can be seen as a further move to stimulate economic activity in Asia’s largest economy.
Westin Hotels & Resorts, a business of Starwood Hotels & Resorts Worldwide Inc., is investing to take advantage of the growth opportunities in emerging markets. A spokesman indicated that the company hopes to add seven or eight hotels, mainly in China and India, to the 23 properties that it already has in Asia. Westin has also doubled the number of hotels that it operates in Latin America over the last
18 months.
Flurry Inc., a US company that makes software which tracks the use of mobile devices (e.g. smartphones and tablets) said that China accounted for 23% of all activations of devices based on Apple’s iOS or Google’s Android software in February. By this measure, China has overtaken the US, which accounted for 22% of activations last month. In January 2011, China accounted for just 8% of activations, while the US accounted for 28%.
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