Chief Economist's Weekly Brief - Investors remain jittery
Talk of a “standstill” on debt payments by a government sponsored company in Dubai spooked investors last week. The impact was amplified by the US Thanksgiving holiday and the festival Eid which made markets less liquid and information on the situation harder to come by. Global markets appear to be regaining their footing, but the episode demonstrates how fragile sentiment remains across the globe.The UK economy didn’t contract quite as much as first thought in Q3 (0.3% rather than 0.4%), but remained in recession. Trade acted as a drag, despite the competitive level of sterling and the fact that some of our key continental export markets (especially France and Germany) have already exited recession. It was also a little surprising that inventories didn’t provide a lift, as UK firms continued to liquidate stocks at a rapid pace. The only real support came from government spending, which rose by 0.2% q/q. The UK economy will probably achieve modest growth in Q4, but the recovery looks set to be lethargic as households and corporates remain focused on repairing their balance sheets and hence saving rather than spending.
The slow recuperation of the UK mortgage market is continuing. The number of mortgage approvals for house purchase rose to 42K in October, according to the British Bankers Association, the highest since January 2008. However, the number of households choosing to re-mortgage fell to just 21K, the fewest since November 1999. Low short-term interest rates remain the chief suspect. Although the average two-year, fixed-rate, 75% LTV mortgage has fallen to 4.4% in the past fortnight, this is still above the UK lenders' average standard variable rate (SVR) of 3.9%. Many households are deciding to delay re-mortgaging, despite the fact that changes to SVRs are at lenders' discretion.
Households have reduced their personal loan balances by 13% in the year to October (C£8.5bn). This is the fastest reduction on record, and was achieved despite a decline in total employee compensation in Q3 when compared with a year earlier. This points to continued weakness in consumer spending in the final quarter of the year.
Housing data from the US was mixed. New home sales surprised on the upside, rising 6.2% m/m to 430K units (at an annualised rate), but this was only 5% higher than the dismal outturn last October. In addition, the entire gain in sales was in the South, where purchases of new homes jumped by a stunning 23%. The market for new homes is facing stiff competition from the resale market, and from sales of foreclosed homes which typically sell for well below market value. Existing home sales shot up 10% m/m, no doubt in part thanks to a boost from lower prices, which were down 7% y/y.
The minutes from the Federal Reserve's November meeting made for interesting reading. The Fed does not normally comment on the value of the dollar, but the minutes revealed that board members considered the dollar's decline against major currencies since March "orderly". This was taken as a signal to investors that US policymakers were relaxed about a weaker currency, and probably helped propel the dollar to its 15-month low against the currencies of its major trading partners.
The euro area showed further signs of improvement. The PMI composite index, a key leading indicator, reached its highest level since November 2007, as manufacturing and service industry output continued to expand. The German IFO index of business confidence also increased to a 15-month high. The region’s industrial rebound appears to be gathering momentum, although the strong euro and rising unemployment pose a serious threat, and will act as significant headwinds.
Euro area money supply growth (M3) slowed to 0.3% y/y in October, the lowest rate on record. Such slow growth in an indicator used by the European Central Bank (ECB) as a guide to medium-term inflation prospects, suggests the real economy is still struggling, and cautions against the removal of generous liquidity provisions or raising interest rates too early. Indeed, lending to households and companies posted an annual decline for a second straight month in October (-0.8%).
In Japan the jobless rate fell for the third consecutive month, but this came through people removing themselves from the labour force rather than finding work. The government has pledged to create 100K jobs by March and has eased eligibility conditions for a subsidy to employers to keeps workers on their payroll. So far there has been little improvement in terms of work available.
The yen strengthened to its highest level against the dollar in 14 years. If sustained, such a strong exchange rate could weigh heavily on its export sector – a real risk for a trade dependent economy like Japan. At the same time, a strong yen will reduce the price Japan pays for its imports, intensifying deflationary pressures. Consumer price inflation fell to -2.5% in October, the lowest out-turn on record