Chief Economist's Weekly Brief 12-10-09
In politics, as in comedy, timing is everything. With the end of the summer recess being marked by MPs returning to Parliament today, political rhetoric is increasingly focused on addressing rising deficits. Withdrawing the fiscal stimulus without killing off a recovery will mean walking a fine line, with timing being of the essence.There were no surprises from the UK’s Monetary Policy Committee (MPC) meeting last week. Interest rates were kept on hold at 0.5% and asset purchases will continue as planned. Next month the decision will be trickier, as the current £175bn asset purchase ceiling will have been reached. The MPC must then decide whether the recent signs of recovery are the first rays of light in a sustained recovery, allowing a suspension of QE, or a false dawn, necessitating further stimulus. There might not be fireworks at the November 5th meeting, but the stakes will be high.
The National Institute of Economic and Social Research appeared to dash hopes for a return to growth in Q3. Their estimates suggest growth in the three months to September was flat, as a slump in industrial production deepened unexpectedly. Raw industrial output data, available only till August, echoed this result, falling 2.5% m/m after only a weak gain in July. Scarily, this meant that the value of all industrial goods produced in August, in real terms, was the same as it was in 1987.
A measure of global economic activity recorded a second month of solid growth in September. With a reading of 52.9, the purchasing managers’ index (PMI) was firmly above the 50 no change level thanks largely to expanding output and increasing new orders. But despite the signs of progress, firms remain cautious about the outlook. The majority are still reducing the number of workers employed in an effort to cut costs and stay afloat..
In the US, the ISM non-manufacturing index told a similar story. The output indicator climbed above 50 for the first time in 13 months, as new orders, work in hand, and activity all advanced. Unfortunately the employment barometer remained firmly in negative territory (at 44.3), suggesting that US firms will continue to pare back workers in the months ahead.
Balance sheet repair remains the focus of attention for US households. US consumer credit declined for a seventh straight month in August as households, in aggregate, paid back more than they borrowed. Rising unemployment, a fragile economic outlook and efforts to de-leverage, led to consumers repaying $12bn more than they borrowed, after a $19bn net repayment in July. Much of this came from repayments of credit card debt - usually the most expensive form of borrowing..
As expected, a sharp fall in car sales followed the end of the “Cash for Clunkers” program. Auto sales dropped 35% m/m in September after the program ended in late August. This confirms that the subsidy didn’t increase demand for autos, but just brought it forward - we can expect to see many months of weak sales ahead..
Finally in the US, Federal Reserve chairman Ben Bernanke didn’t offer anything new around the Fed’s exit strategy. At some point US monetary policy will have to be tightened to prevent the emergence of inflation further out. Markets had been hoping for some indication of when this might be. Alas, no such indication was given beyond an earlier statement to keep interest rates on hold for “an extended period.”
The monthly gathering of the European Central Bank’s governing council was another predictable affair, with no policy changes. There are few things to worry about on the inflation front in the region - inflation was negative in Q3, money growth slowed further and credit growth to the real economy contracted. This, together with continued signs of economic weakness and a strong exchange rate, suggest it would be premature to think about raising rates. ECB President Trichet commented that policy remains appropriate given the economic environment, but noted that risks abound in both directions. One of the key problems facing the region is the differential in performance. France and Germany may have notched up positive growth in Q2, but others like Ireland and Spain remained in the doldrums. Membership of the single currency may have saved a number of countries from much deeper contractions, but a one-size-fits-all interest rate policy has its limitations.