Cheif Economist's Weekly Breif 07-12-2009
The run up to Christmas is the busiest time of year for retailers, but most of the presents we will buy were made and shipped earlier in the autumn. This might go some way to explaining the dip in the global manufacturing activity in November, with a leading survey reporting the lowest global output levels since July.In the UK, the Purchasing Managers' Indices (PMI), important early indicators of activity, eased back. Both the manufacturing and services indicators stayed comfortably in expansionary territory, but manufacturing dipped to 51.8 in November, from 53.4 in October. The services index declined fractionally to 56.6 (from 56.9) suggesting the recovery in the sector was more assured. Whilst the Christmas boon for transport and logistics companies may have peaked, retailers can expect the rush to continue for a few weeks.
Net lending to individuals increased by £0.3 billion in October, the smallest rise on record. The annual rate of growth slipped to 0.7%, well below the 9% long run average, as many households paid down unsecured debt and mortgage borrowing was subdued. The number of mortgage purchase approvals did rise, however, to 57K - the highest number since March 2008. This represents just 60% of what prevails in normal market conditions.
Falling house prices may seem like something of a memory, at least for some. The Nationwide index showed a seventh consecutive monthly rise in November, by 0.5%, taking the price of an average house to £162,764. This is 2.7% higher than this time last year and means prices are back where they were in early 2006. But improvement in the housing market is not uniform across the UK. According to Hometrack, the strong growth in sales and prices is concentrated predominantly in London and the South East. Buyer demand does appear be to softening though, which could mean the upward pressure on prices may weaken in the months ahead.
There was good news from the US labour market for once. The unemployment rate fell to 10.0% in November from 10.2% in October. What’s more, although employment levels fell, the decline of only 11K was the best outturn since the recession began in December 2007. There are still likely to be a few bumps along the road, but this is confirmation that the US economy is on the gradual road to recovery, with actual employment gains likely sometime in 2010.
Other indicators of US economic activity were less encouraging. The key industry and service sector surveys both came in weaker than expected. The ISM non-manufacturing index unexpectedly fell by two points to 48.7 in November, a four-month low, and below the 50 mark that separates expansion from contraction. The manufacturing index moderated to 53.6, retracing about two-thirds of the surprisingly robust rise seen in October. Much of this was the result of firms paring back stocks to reduce their inventory/sales ratios to pre-recession levels.
In the euro area, the European Central Bank left interest rates on hold but made noises around the unwinding of emergency measures. ECB President Trichet said that financial markets had improved and he saw the gradual withdrawal of emergency measures (mostly unlimited liquidity provision) through 2010 as “appropriate”. He was quick to point out that this wasn’t a signal rates would necessarily be increased in the next 12 months.
We also got a clearer idea of where the Eurozone’s 0.4% growth in Q3 came from. Private sector demand contracted as households further reduced spending and businesses cut back on investment. A big boost to the region’s economy came from government spending, up 0.5% on the previous quarter. External demand also offered support, but the greatest contribution to growth came from inventories, as firms built up the stocks they had run down heavily earlier in the year.
The region also experienced the return of inflation. The level of consumer prices increased in November compared to a year earlier, the first such rise in seven months. However, much of this was a result of falling oil prices last year rather than a reflection of stronger demand pressure. Indeed, unemployment rose 134K to 15.6m in October, casting a shadow over near term growth prospects.
Finally, the Bank of Japan unveiled a new measure to stimulate lending. The central bank will inject 10 trillion yen (£70bn) into the economy by offering banks very cheap short-term loans. As the economy suffers a period of sharp deflation, and earlier stimulus measures begin to wane, concern over another lost decade is spurring further policy action.