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Friday, May 23, 2008

Slowing Growth

The ECB bank lending survey earlier forecast weakness. The combined European manufacturing and services survey showed a real slackening in the first quarter:
A preliminary estimate of Royal Bank of Scotland Group Plc's composite index fell to 51.1 from April's 51.9, NTC Economics Ltd, which carries out the survey, reported today.
``All forward-looking indicators are very weak,'' said Sunil Kapadia, an economist at UBS Ltd. in London. ``The economy will continue to deteriorate. Banks will continue to tighten credit. We expect real disposable income to shrink in 2008.''
Not surprising. The UK is not in great shape:
Gross domestic product rose 0.4 percent in the three months through March, the Office for National Statistics said in London today.
``Firms have cut back on investment sharply, and that's only natural when you have the biggest financial shock since the Great Depression,'' said Dominic White, an economist at ABN Amro Holding NV in London and a former U.K. Treasury official. ``We're looking at a weak picture, and the odds of a negative second quarter are fairly high.''
Investment dropped 1.6 percent in the first quarter from the previous three month after economists in a Bloomberg survey forecast a gain of 0.2 percent.
The drop in investment is a bad sign. Industrial production contracted 0.2% from the previous quarter, and imports dropped 0.6%. For more on the UK economy, I strongly recommend the UK Bubble blog. This post and graph caught my attention earlier in the week:

This one made me suspect that times are going to be tougher in London for a while than I had thought:

Spanish GDP slowed to 0.3% in the first quarter from 0.8% in the fourth quarter. The construction slackening has more relative effect on Spain than most other economies, since at least 13% of employees were working in that sector. As securitized mortgage delinquencies mount, it appears that construction will continue to slow.

In Europe it looks like countries that have been the most dependent on housing are the worst affected, although inflation is hitting them all. European economists have been somewhat dour:
Economists from Dresdner Kleinwort were less than optimistic about the euro zone's growth outlook, saying that actual figures are likely to disappoint.

"The Eurozone is likely to see on-going growth divergence by country," they continued. "The one economy where our 2009 GDP forecast is above consensus is Germany. But, we continue to highlight the substantial imbalances that exist in other countries, especially with banks continuing to tighten lending standards. Not just Spanish GDP could disappoint, but also Italy's and that of France."
Italian GDP rose in the first quarter, though. It had been slack last year.

Irish economic news hasn't been good and appears to be worsening:
"One can't rule out the possibility...(of) Ireland posting its first negative average (GDP) growth rate for the year as a whole since 1983," said Bloxham Chief Economist Alan McQuaid.
"With construction sector activity falling off sharply, the last thing the economy needs now is a significant retrenchment in consumer spending," McQuaid said.
"But that's how it looks at the moment, and despite a healthy performance from exports in the opening quarter of this year, the Irish economy is set for a hard landing in 2008," he said.
There is an excellent roundup of current stats for many of the major Euro countries in this CEP article. The hefty drop in May's service PMI was the big surprise. Those readings can be quite volatile, but in general a drop from 52.0 to 50.6 in one month would make economists and banks twitchy. Germany is the standout but even Germany saw minor declines in May; France's manufacturing improved but services dropped.

Elsewhere in the enlarged Europe the major threat appears to be runaway inflation.

I realize that most people have better things to do than read hours of boring economic articles a day, so I just wanted to mention the overall recent depressive tone that is emerging from national assessments. For example, Japan:
Speaking to multiple newswires, Bank of Japan Governor Maasaki Shirakawa said that, given uncertainties in the global financial marketplaces, it was impossible to determine the future of monetary policy and that the bank would consequently have to asses incoming upside and downside risks.
Commenting on the recent spike in global prices, including oil, he said that conducting monetary policy to address soaring global prices was not a good idea and that central banks should instead focus on how asset prices affected the economy.

"Our objective is to achieve sustainable economic growth under price stability and we also pay attention to how strongly asset price moves affect the economy," he said.
Japan has almost been begging for looser monetary policies in the major developed economies in recent months. This is the penalty Japan pays for having such huge exports - it is dependent on other countries to keep importing.
Sentance of BofE:
...Andrew Sentance, Bank of England monetary policy committee member, said that while the BOE was not forecasting a recession in the UK, one could not be ruled out. He went on to say that a significant slowdown was to be expected.
He said that, as consumer spending slowed, the economy would probably become more dependent on the export sector.
That last means that the UK is somewhat dependent on world growth.

The quandary for countries such as Poland is that export growth seems threatened, and so further efforts to control inflation are felt to be a bit risky:
"In the opinion of the majority of the Council...the risk of a fall in economic growth in Poland and of an excessive appreciation of the zloty exchange rate, both of which would be reducing inflation in the medium term, justified no interest rate change at the current (April) meeting," the minutes said.
"They assessed that the deceleration of economic growth in Western European countries, in combination with the zloty appreciation observed over the past months, may be lowering the growth rate of Polish exports and, consequently, have a negative impact on GDP growth in Poland," the minutes said.
The zloty has been flirting with an all-time high and is some 30 percent up since Poland joined the European Union in 2004.
In April alone, the zloty firmed 1.8 percent against the euro. The Czech economy is still doing quite well, but has slowed somewhat in the first quarter (to 5.5%) according to the flash GDP estimate.

Tighter bank lending standards might do more to suppress inflation than any central bank moves at this point. The key is to support healthy businesses while not throwing money at marginal enterprises.

The Eurozone PMI posted its lowest reading in 5 years. So the whole myth of global decoupling is starting to unravel. The contagion from the US is spreading.
Ed - it's not so much contagion from the US (although that will eventually have an effect) as the product of global imbalances which are correcting.
I would say that it is contagion. Yes, there have been global imbalances, which are now correcting, but you need a trigger and the credit fallout has been the trigger. The US has shown that the bubble cannot go on forever with its housing bubble bursting. As a result, the credit markets globally have suffered. This is contagion.

The high Libor and Euribor rates are clearly a result of a credit crunch that originated in the US just as in 1997 it was an Asian meltdown which contributed to contagion elsewhere.

I remember vividly because I worked in the bond markets in London at the time. It's the same again now.
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