The past week saw no major turbulences, which makes a refreshing change!
After last Friday’s strong counter reaction and the subsequent follow-through buying at light volumes, equity indices are trading higher this week. Commodities posted minor gains, with gold trading at around USD1600/oz and crude oil again above USD90/bbl. The EUR weakened slightly and is currently trading below 1.23 against the USD.
UK industrial production fell by 2.5% in June from May, partly due to an extra public holiday for the queen’s jubilee. The drop is weaker than anticipated in the second quarter GDP data estimate and will likely lead to a small upward revision of the 0.7% GDP decline in Q2. But the monthly drop in industrial output in June was the biggest since November 2008.
The latest drop in production confirms that the UK’s recession is still worsening despite the BoE’s stimulus programme, as the government’s austerity measures and the euro-area debt crisis curb demand and erode confidence.
The Bank of England cut its growth outlook for the UK. It expects the economy to grow by 2% a year in two years, down from 2.65% in the last forecast. Underlying demand growth is likely to remain muted in the near term, but the BoE expects a gentle growth pickup of households’ real incomes, combined with the stimulus from the asset purchase programme and the Funding for Lending Scheme to spur a modest recovery. Inflation is expected to fall from 2.4% in June to below the 2% target for much of the next year, reflecting falls in energy prices and some broader-based weakness in price pressure.
The current GDP and inflation outlook for the UK is weaker than in the last report, reflecting the BoE’s concerns that the financial crisis may last longer than anticipated.
German factory orders unexpectedly fell by 1.7% in June from May, more than twice the 0.8% decline anticipated by economists. The drop followed a 0.7% rise in May. Compared with a year earlier, orders dropped by 7.8%, as sales to euro area countries collapsed. Orders from the euro region sank by 4.9% in June, while domestic orders fell by 2.1% and demand from non-euro nations rose by 0.6%.
The global cyclical slowdown and the lingering eurozone debt crisis are eroding demand for German goods and are increasingly hurting the country’s manufacturing industry. Despite rising wages and unemployment at a two-decade low, domestic spending will be unable to make up for this, especially if German business confidence continues to erode.
German industrial production declined by 0.9% in June from May and contracted by 0.3% compared with a year ago. Except for a 1.2% bounce in energy output, all the main sectors saw production drop in June. Business surveys such as the PMI point to further contraction in production ahead.
If even the quite competitive German manufacturing sector is in recession, the outlook for the rest of the eurozone must be rather worrying. This week’s Spanish industrial production figures confirmed this, off 6.3% year-to-June.
Italy’s GDP contracted by 0.7% in the second quarter, according to flash estimates. This is the fourth consecutive quarterly decline and indicates that Italy is continuing to slide deeper into recession. GDP fell by 2.5% y/y. The data suggest that the contraction was mainly driven by a decline in domestic activity. The large fall in retail sales volumes indicates that household spending has been curbed substantially, which is in line with consumer sentiment falling to a record low in June. Bank lending to firms has also slowed sharply recently, suggesting that investment is falling also.
The GDP drop shows the huge economic and fiscal problems that Italy is facing and that may eventually force the nation to seek a sovereign bailout. If the situation does not improve significantly in the months ahead, bond purchases by the ECB alone may not be enough to get Italy out of trouble.
Industrial output in Italy fell by 8.2% y/y in June. Production contracted by a sharper than anticipated 1.4% on the month and by 1.8% in the second quarter. This and weak business sentiment suggests that the industrial sector currently is a significant drag on the Italian economy and will probably continue to be so in the second half of this year.
Barring a miracle, Italy’s economy looks set to contract by around 2.5% this year with potentially worse to come in 2013. Its public debt may continue to climb, although the government has implemented EUR20bn in austerity measures to trim the budget deficit to 2% of GDP this year.
Chinese industrial production and retail sales grew more slowly than expected in July, reflecting a slowing economy. Monthly industrial production climbed by 9.2% y/y in July, which is a slowdown to a three-year low. While retail sales for the month rose by a disappointing 13.1%, fixed asset investment climbed by 20.4% in the year to July, in line with expectations. Fixed asset investment is a crucial barometer of economic activity in China, accounting for 54% of GDP in 2011.
Expect more rate cuts as well as cuts in the reserve requirement ratios before the end of this year.
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