* UK Q1 11 GDP growth confirmed at 0.5% as Organisation for Economic Co-operation Development downgrades UK growth forecast
* Euro slumps against major currencies following downgrades of the credit-rating outlook in Belgium and Italy
* US Q1 11 GDP estimate remains unchanged at 1.8%
* Japan records trade deficit in April as the impact of the March earthquake is felt
UK data confirms Q1 11 output expanded by 0.5%
Revised GDP figures released this week confirmed that the UK economy grew by 0.5% in the first quarter, following a 0.5% contraction in the fourth quarter (partly caused by weather-related stoppages.) The report also showed that household spending fell by 0.6% in the quarter – the sharpest drop since the second quarter of 2009. Exports continued to be boosted by a weaker Sterling relative to major currencies while net investment fell by 7.1% in the quarter following zero growth at the end of last year. Elsewhere, net consumer credit was flat in April with new spending outstripped by repayments – reaffirming the pattern that has characterised consumer behaviour in recent months.
In the meantime, the Organisation for Economic Co-operation and Development (OECD) predicted that the British economy would grow by only 1.4% in 2011 and 1.8% in 2012. This represented another reduction in its assessment, following downgraded forecasts in March and last November. The latest estimates are below the Office for Budget Responsibility forecasts of 1.7% growth in 2011 and 2.5% in 2012. The OECD recommended that UK interest rates should rise “soon” to prevent inflation getting out of control while supporting Chancellor of the Exchequer George Osborne’s deficit reduction plan.
In a separate report, the British Bankers’ Association said that mortgage approvals slipped to 29,355 in April, down from 31,205 in March and below the 29,956 average of the previous six months. Re-mortgage activity also slipped to its lowest level since January 2010. Lending to the nation’s private non-financial companies contracted by £500m in April. Encouragingly, the measure was less than the £3.2bn drop witnessed in March and the £1.3bn average monthly decline seen over the previous six months.
Euro slumps against US dollar and Swiss franc
This week saw the Euro temporarily fall 0.8% to $1.4051 against the US dollar, its weakest level since March 18. The Euro also sank to a record low of SFr1.2323 against the Swiss franc following disappointing reports on economic conditions. Notably, Euroland’s manufacturing and services sector purchasing managers’ surveys were worse than had been expected in May.
Italy’s national statistics institute Istat said that the manufacturingsentiment index of the Euro area’s third-largest economy declined to a disappointing 101.3 from a revised 102.6 in April. In addition, Italy’s credit-rating outlook was lowered to negative from stable by Standard & Poor’s, which cited the nation’s slowing economic growth and “diminished” prospects for reducing debt as the main reasons for the downgrade.
Elsewhere, Fitch Ratings lowered Belgium’s outlook on its AA+ investment-grade credit rating to negative amid speculation that the country may fail to adhere to its deficit targets. (A caretaker administration has ruled Belgium since elections last June.) In Greece, the government endorsed an accelerated asset-sale plan and €6 billion (US$8.bn) of budget cuts. The government also said that it would create a fund comprising assets to accelerate the sales. For his part, Jean-Claude Juncker, who leads the group of Euroland Finance Ministers, said that the International Monetary Fund may withhold aid for Greece as questions mount about how the country can avoid default next year.
Against the backdrop, the yield on Greek10-year bonds hit a Euroera high (and prices fell). If Greek bonds remain under pressure it will be difficult for Greece to tap the bond market for financing in 2012.
On a positive note for Europe, official figures showed that German GDP rose 1.5% in the first quarter from the previous three months, the fastest growth since the second quarter of 2010. Exports advanced 2.3% and construction spending jumped 6.2%. Robust export growth also helped lift German business confidence. The Ifo institute’s May business climate index defied expectations of a decline and was unchanged from the previous month. Also positive was a May measure of Italy’s consumer confidence which rebounded from a two-year low.
US Q1 11 GDP estimate unchanged at 1.8%
The latest report from the Bureau of Economic Analysis suggests that US economic growth will average about 3% this year, only slightly above the long-term trend. An initial estimate of first-quarter GDP growth of 1.8% remained unchanged in spite of expectations of an upward revision to 2.2%. The report showed that consumer spending grew at an annualised rate of only 2.2% in the first quarter, well below the 2.7% initially reported and the 4% increase in the final quarter of 2010. The lower estimate for consumption was offset by stronger business investment in buildings and inventories.
A separate report on the US labour market showed that new claims for unemployment benefits rose by 10,000 to 424,000. In other news, the Commerce Department said that new US home sales rose for a second month in April. Sales rose by 7.3%, the fastest pace since December. Meanwhile, the US Commerce Department said that new orders for durable goods fell by a larger-thanexpected 3.6% in April, following a revised 4.4% rise in March. As expected, auto orders fell by 4.5% as parts’ shortages - following the Japanese earthquake and tsunami - slowed production at US factories.
Japan records trade deficit in April
Japan recorded a trade deficit of ¥463.7bn (US$5.7bn) in April as supply chain problems caused by the March earthquake sharply curtailed the nation’s exports. Exports slumped 12.5% from a year earlier while imports rose 8.9%, buoyed by higher demand for fuel. Separately, Prime Minister Naoto Kan said in an interview this week that, in addition to the reconstruction of the coastline of North Eastern Japan destroyed by the March 11 earthquake and tsunami, Japan must address long-standing structural problems, including trade liberalisation and agricultural reform.
Emerging market news
Inflation pressures continued to be reflected in various reports in emerging markets this week. Nigeria’s central bank raised its benchmark interest rate by 0.5% to 8%, the third increase this year. Concerns over the inflation outlook and continued pressure on the exchange rate led to the policy decision. (Inflation hit 11.3% in April compared to a targeted rate of 10%.) Meanwhile, South Africa’s producer prices increased 6.6% in April year-on-year after gaining 7.3% in March. Although the strength of the Rand relative to the US dollar has countered some price pressures in previous months, recent weakness is likely to result in a sharp rise in South Africa’s inflation. On a positive note, ratings agency Standard & Poor’s raised its outlook on Brazil’s credit rating to positive from stable, praising the Latin American country for diversifying its economy and increasing exports. Elsewhere, the value of Taiwan’s export orders in April, which acts as a leading indicator for actual exports several months later, were up 10% year-on-year.
Company news
The share price of Yandex, Russia’s largest online search engine surged almost 70% at its trading debut on the New York (Nasdaq) stock exchange, giving the company a market value of $11.4bn. Yandex’s US$1.3bn initial public offering (IPO) was the second big technology IPO debut within a week on the US stockmarket following that of LinkedIn (LinkedIn’s share price also rose on its first day of trading.)
Meanwhile, this week’s company earnings’ reports were mixed. India’s biggest steelmaker Tata Steel posted a better-than-expected 72% gain in fourth-quarter profit. Sales at India’s biggest steelmaker rose 23%. The company, which buys all of its raw material from the market, said that the environment remains tough because raw material prices are moving far ahead of steel prices. The company expects that demand from India will sustain earnings and forecasts net profit to grow 10% year-on-year. The steelmaker’s share price fell nearly 1%.
Separately, Japan’s Tokyo Electric Power (Tepco) reported a ¥1,247bn (US$15bn) annual net loss – the largest ever by a Japanese non-financial company – as a result of the huge cost of fighting radiation leaks at the facility following the March 11 earthquake and tsunami which knocked out the Fukushima Daiichi nuclear plant’s cooling systems. The company said that asset sales and a ¥2,000bn emergency loan that it had secured from a group of Japanese banks in March would keep it from running short of operating capital this year.
