* British Chamber of Commerce expects UK interest rates to stay on hold until mid-2012
* European Central Bank hints at change in interest rate strategy as consumer and business confidence falls
* US Q2 2011 GDP growth revised down to 1%
* Japan´s jobless rate rises to 4.7%
* China´s manufacturing sector continues to expand; Chinese central bank further tightens monetary policy
* Justice Department blocks AT&T´s US$39bn takeover of T-Mobile
BCC: UK rates should stay on hold till mid-2012
The British Chamber of Commerce (BCC) announced that it expects the Bank of England (BoE) to keep interest rates at a record-low of 0.5% until the second half of 2012. In addition, the industry group anticipates that if signs of weakness in the UK economy persist, the central bank will consider increasing its £200bn (US$326bn) emergency bond-purchase plan by £50bn. The BCC lowered its forecasts for UK output to 1.1% this year and 2.1% in 2012, from a June projection of 1.3% and 2.2% respectively.
BoE data showed that UK banks approved more mortgages in July than in any month for more than a year. Loans to consumers rose by around £200m in July, lower than the average increase of the previous six months. Separately, GfK’s measure of UK consumer sentiment declined for a third month in August. The latest manufacturers’ Purchasing Managers’ Index also fell to 49 in August from a revised 49.4 in July, in line with forecasts (a number under 50 indicates a contraction in activity.) Manufacturers said that the drop in demand was due to weaker domestic and export sales and “rising global economic uncertainty.” The survey also showed that, while input prices continued to rise in August, they did so at the slowest rate for 20 months. Output prices rose at their slowest rate for nine months.
A separate survey by YouGov showed that UK inflation expectations were stable in August at a median of 3.5% for the year ahead. Inflation expectations have receded slightly since June.
ECB hints at change in interest rate strategy
This week saw European Central Bank (ECB) President Jean-Claude Trichet suggest that the gloom over Euroland prospects would lead to a rethink of the central bank’s interest rate strategy at next week’s policy meeting. The President said that medium-term inflation risks were “under study”. (The ECB has raised the Refi rate twice in 2011, taking it to 1.5% from 1%).
The case for a policy rethink was strengthened by European Commission figures which showed that business and consumer confidence in the 17-nation region had dropped far more than had been expected in August. A separate manufacturing gauge based on a survey of purchasing managers in Euroland fell in July. Manufacturing output in France and Italy contracted for the first time since June 2009 and September 2009 respectively.
Eurostat, the European Union’s statistical office, said that the region’s jobless total rose in July. As a share of the labour force, the unemployment rate was unchanged at 10%. Unemployment in France and Spain rose slightly while joblessness in Germany remained unchanged at 6.1%. A separate Eurostat report showed that inflation in the Euro area in August remained steady at 2.5%.
In Italy Silvio Berlusconi’s government reversed a decision on an emergency austerity budget and scrapped a proposed tax on the wealthy, resulting in a budget shortfall of an estimated €4bn. Italy saw weaker-than-expected demand for its first auction of Treasury bonds since the ECB stepped in earlier this month to buy Italian bonds. In return for bond purchases, Italy had agreed to undertake sweeping budget cuts and impose structural reforms.
Meanwhile, Portugal announced new austerity measures to cut its budget deficit to almost zero in under five years and to meet targets set out in its €78bn bail-out agreement with the European Union and International Monetary Fund.
Swiss GDP in the second quarter expanded by 2.3% compared with the same period last year. On a quarterly basis, the economy grew 0.4% compared with the first quarter and follows a quarterly increase of 0.6% in the first three months of the year.
US growth rate revised down to 1%
Federal Open Market Committee (FOMC) Chairman Ben Bernanke hinted this week that he would support further fiscal stimulus to reduce US long-term unemployment – which he described as the one factor that could leave a “major scar” on the economy. Charles Evans of the Chicago Federal Reserve called for more monetary stimulus and became the first FOMC policymaker to explicitly countenance letting US inflation rise above the central bank’s target of 2%. Minutes of the FOMC’s August meeting - which forecast that interest rates will stay exceptionally low until mid-2013 - revealed that some members had pushed for even stronger action in August but were willing to accept the mid-2013 guidance “as a step in the direction of additional accommodation”.
The recent wrangling over raising the US debt ceiling appears to have taken its toll on confidence with the Conference Board’s survey of consumer sentiment in August falling to its lowest since April 2009. In other news, the Bureau of Economic Analysis revised down second quarter GDP growth by 0.3% to an annualised rate of 1%. Export growth was cut to 3.1% from 6% while imports increased at a faster pace than previously thought. Declines were to some extent cushioned by a stronger reading of consumer spending as July spending rose 0.8% over the month, the strongest increase in five months. Elsewhere, the Institute for Supply Management’s survey of purchasing managers showed that the US manufacturing sector continued to grow in August.
Japan’s new PM to tackle rising yen
The latest data in Japan showed that unemployment rose for the third consecutive month to 4.7% in July while consumption fell 2.1% year-on-year, following a 3.5% drop in June. The Trade Ministry said that retail sales in July fell 0.3% from June. Separate Trade Ministry data showed that industrial production rose 0.6% in July from June, the slowest gain since March. For his part, Yoshihiko Noda, Japan’s newly confirmed Prime Minister (Japan’s sixth Prime Minister in five years) pledged to implement measures to combat the impact of the surging yen on Japan’s struggling economy (the yen is trading around ¥77 to the dollar.) Ministry of Finance data released this week revealed that Japan spent a record ¥4,510bn (US$58bn) on one day’s currency intervention in August as it tried to stem the rise of the yen relative to the dollar.
Emerging market news
This week’s figures showed that China’s manufacturing sector continues to expand. The China Federation of Logistics and Purchasing reported that its Purchasing Managers’ Index rose to 50.9 after falling for four consecutive months. A reading above 50 indicates expansion. A separate measure compiled by HSBC and Markit Economics stood at 49.9, up from 49.3 the previous month. Overall demand stayed at the same level in July, despite an accelerated fall in new export orders, a sign that domestic demand had provided strong support. A sub-index measuring input prices rose 0.9%.
The People’s Bank of China (PBoC) tightened monetary policy by expanding the base used to calculate banks’ required reserves - the portion of deposits that lenders must hold at the central bank. The move, designed to rein in off-balance sheet lending and help the central bank control liquidity, highlights the PBoC’s commitment to curbing inflation.
In South Korea, inflation hit a three-year high of 5.3% in August, exceeding the government’s 4% ceiling for the eighth consecutive month. Food prices rose 13.3% compared with a year earlier. The data confirmed that disruptions to supplies of agricultural products in Asia’s fourth largest economy (due to heavy rains and flooding) are weighing heavily on price increases.
In India, an index measuring wholesale prices of farm products rose 10.05% in the week ending August 20 from a year earlier. Aggressive monetary tightening by India’s central bank saw the pace of economic growth slow to 7.7% in the three months to the end of June, compared with 8.8% growth over the same period a year ago. A separate report showed that merchandise shipments jumped 81.8% to US$29.3bn in July from a year earlier, the biggest increase since 1995.
In other news, South Africa’s GDP expanded an annualized 1.3% in the second quarter from a revised 4.5% in the first quarter of 2011. Elsewhere, growth in Poland in the three months to the end of June was 4.3% from a year earlier, better than had been expected while Slovenia’s output grew by 0.9% in the second quarter compared with a revised 2.3% in the first three months. In South America, Brazil’s central bank unexpectedly cut its benchmark rate, the Selic, by 0.5% to 12.0% after increasing rates at each of the previous five meetings. Recently Brazil’s economy has shown signs of cooling following reduced government spending and an easing in demand for the nation’s exports of commodities.
Company news
This week the US Department of Justice moved to block AT&T’s US$39bn takeover of T-Mobile USA, threatening to undo plans to unite the second and fourth largest telecommunications operators in the US. The refusal to allow the merger was based on the potential substantial lessening of competition for mobile wireless telecommunications services. AT&T’s share price fell 4.7% as a result.
Greece’s fourth-largest bank, Piraeus Bank revealed that it was seeking emergency liquidity assistance (ELA) from the country’s central bank. Piraeus Bank reported first-half after-tax losses of €820m after taking a €1bn “haircut” on its Greek bond portfolio under a partial restructuring of Greek debt included in the European Union bail-out package. The decision by Piraeus Bank to request ELA funding indicates that it had run out of collateral that would be acceptable to the ECB.
