Sleepless in Seattle, Shanghai, Stuttgart and Sheffield- from RBS Chief Economist
6 June 2011
There will have been a few bouts of insomnia last week as economic data led to worries about the sustainability of the global recovery. With the exception of Japan, manufacturing output growth weakened in all of the major global economies. US policymakers’ sleep was probably most upset as this news came on top of weak data from the labour and housing markets. But there shouldn’t be nightmares. While weaker, manufacturing output is still expanding. And, as supply interruptions from Japan are mended and commodity price rises pause, there is room for further expansion, even if it is at a slower pace than we would like. Better sleep ahead? Perhaps.
Manufacturing output slowed across most of the world in May.
The US labour market disappointed in May
US house prices are 33% below their peak, and still falling
Asian economies exports may provide the solution.
The UK housing market is also in the doldrums.
Eurozone unemployment held steady in April and inflation slowed in May.
The rate of inflation in the Eurozone fell from 2.8%y/y to 2.7%y/y in May. This takes a bit of pressure off the European Central Bank (ECB) to raise interest rates for a second time this year. Some respite will be particularly welcome in the areas of the Eurozone which are struggling the most. The unemployment data highlights just how big the divergence across the region is. The overall rate of unemployment stayed at 9.9% in April, but in Spain it is running at 20.7% while in Austria and the Netherlands it’s only at 4.2%.
Chief Economist’s Weekly Brief
House purchase approvals fell by 4%m/m in April, but remortgage approvals fell by 10%m/m. The UK’s economic ‘soft patch’ seems to have increased borrowers’ confidence that the Bank Rate will stay at 0.5% for a bit longer. And with fewer approvals there is little chance of a pick up in lending any time soon. Land Registry data also shows a softening in transactions and prices in England and Wales. Overall prices fell 0.8%m/m in April, but London prices rose by a huge 3%m/m, while prices in the North East fell by 1.7%m/m.
Asia’s lower new export orders and inventories data may be a sign of weaker exports in the coming months. This could be good news because it shows that the rebalancing required for recovery is still underway. But more than this, the solving of the supply problems in Japan after the earthquake should provide a big boost to production, particularly in the mighty automotive sector. This can only be good news, particularly for the US.
. The housing market is another drag on the US economy. US house prices fell for the ninth consecutive month in March, bringing the annual rate of decline up to 3.6%y/y, the largest in sixteen months. There are no signs of let up either. The proportion of loans in foreclosure fell slightly for prime mortgages in Q1 2011, but at 3.5% is still almost seven times the pre-crisis average. The comparable figure for sub-prime loans is 14.7%. With this overhang of supply, demand will have to pick up enormously before prices can be expected to begin to recover again. A weaker labour market won’t make this easy.
. Weak non-farm payrolls data showed that just 54k new jobs were created in the US last month, down from 232k in April. Over the last three months, 85% of the half a million new jobs were in the service sector. This was reversed in May when the retail sector actually shed jobs. An expansion of the labour force also helped to push the unemployment rate up to 9.1%. But more concerning than the headline rate is the number of people unemployed for 27 weeks or more. This rose to 6.2m in May. While 510k lower than this time last year, it’s still a disappointingly high number.
The UK manufacturing PMI fell to a 20 month low of 52.1 in May from 54.4 in April. More public holidays, weaker domestic demand and lower export growth weighed down on new orders and dragged the reading down. In the Eurozone the manufacturing PMI fell from 58 to 54.6 as Greece and Spain recorded a sharp contraction in output. China’s manufacturing PMI dropped for the second consecutive month in May. It fell from 52.9 in April to 52 – its lowest level in nine months. In the US things looked worse. The US manufacturing PMI fell the most. The reading dropped to 53.5 from 60.4 in April – the first time it has dropped below 60 in 2011 and the lowest US PMI reported for the past 12 months. But each of these readings is still above the magic 50, which indicates economic expansion. And a recovery in Japanese
output growth could signal better times ahead. While still only at 51.3, Japan’s manufacturing PMI made an impressive step up from 45.7 in April and was one the largest ever monthly rises.
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