US DOLLAR, BEIGE BOOK AND SOME POSITIVE SIGNALS FROM CHINESE ECONOMY
The US Dollar index future (DXY) was traded at 82.74 at the time of my last write-up of 30 August 2010, Update 4 - Global Economies are heading for turbulence, what Ben Bernanke has not told us? DXY is a weighted geometric mean of the dollar's value compared only with Euro (EUR), 57.6% weight Japanese yen (JPY), 13.6% weight Pound (GBP), 11.9% weight Canadian dollar (CAD), 9.1% weight Swedish Krona (SEK), 4.2% weight and Swiss franc (CHF) 3.6% weight. As predicted, gold, instead of oil, has seen new strength in demand breaking records again this week as December delivery contract struck US$1,273 per ounce and the US dollar fell further even as US stock market rallied on some paltry flicker of optimistic statistics. The US Dollar index now stand at 81.40 after hitting a low of 81.10 this week, the US Dollar fell below parity with Swiss Franc again since last December but losing faster against other currencies like the Australian dollar, Canadian loonie and a host of Asian currencies particularly the Yen. The ISM index of manufacturing came in slightly better at 56.3 in August from 55.5 in July provided the initial spark to the US stock market rally.
It give hints that the US manufacturing sector has maintained its momentum at least through August even as closer look at details does not look that optimistic forward. July new orders measure, held down by declining orders for computers and machinery, fell to 53.1 from 53.5 and orders waiting to be filled fell to 51.5 from 54.5. Both indicated slower outlook ahead. Manufacturing, which accounts for about 11 percent of the US economy, is, until now, the brightest spot on the recovery trail. US stock market, however, took a positive liking for this comforting news. Whilst the current production momentum still persists, will it lasts unless new pickup in orders forward? The clues came in the latest August employment statistics and the recently released FDR Beige book report.
August private payrolls increased by 67,000, after a revised gain of 107,000 in July partially offsetting temporary census job losses.
Unemployment is rising slower as varying private sector gains offset decreasing public sector job losses. This gives some hope that the wobbly recovery growth might still be on track. That news further lit the cauldron under US stock prices.
Currency market paints a different picture. Just 4 days after my last blog’s gloomy outlook forecast of US Dollar of 30 August 2010, China warned of depreciation risks of its holdings of US Dollar-denominated debt.
Official paper, China Securities Journal revealed Chinese Government’s currency reserve at US$2.45 trillion comprised 65% in US Dollars, 26% Euro, 5 % in pounds and 3% in yen. Ms. Hu Xiaolian, Vice-Governor of the People’s Bank of China, reiterated China’s longstanding discomfort with a global financial system dominated by a single currency dollar. These comments are consistent with the stepped-up pace of Chinese diversification of its foreign reserves away from dollar assets and looking for ways of settling bilateral trade using Yuan as the settlement currency. In the same measure, Singapore dollar was intermittently testing record high against US dollar same as in the cases of many other Asian currencies. The US dollar has measurably weakened at a time when Asian PMIs are falling. The clue is that China is now more visibly diversifying risk haven away from US Dollar even as the risks of Asian manufacturing boom is showing signs of increasing deceleration. China of late had been buyer of Japanese Government’s massive borrowing needs.
Aggressive Chinese buying of Japanese Yen-denominated bonds since May 2010 put an upward pressure on the Yen hurting Japanese exports. That riles Japan. Yoshihiko Noda, the Japanese finance minister said.
"There is something unnatural about the fact that China can buy Japanese government bonds while Japan cannot [buy Chinese bonds],"
Amid political uncertainty within Japan, the depreciating US dollar-Yen exchange rate hit another 15-year low at 83.05 Yen mid-week.
Ahead, this author believes that without Bank of Japan intervention, near term, the US dollar will fall further, maybe accelerating. US Dollar/Yuan is already at a 10-year low buying 6.745 Yuan this week. Gold will be supported by declining dollar, alongside anticipated higher oil prices helped by declining inventory in US, tighter supply globally and seasonal demand coincides with the onset of winter in the northern hemisphere. SAVED OF SUDDEN TEMPOARY SAFE HAVEN REFUGE, THE KEY FACTOR TO WATCH IN THE GLOBAL ECONOMIC OUTLOOK IS THE US DOLLAR DIRECTION IN DECLINE.
A TECTONIC USD/EURO, USD/YEN AND USD/YUAN SHIFT MAY BE ALREADY BEEN UNDERWAY as US shifts its focus to export earnings to lift its economy out of its quagmire.
The Federal Reserve Beige Book report of 8 August showed the spring second Qtr slowdown to a mere 1.6% GDP growth did EXTENDED into August. That showed the US economy entered into the autumn of the much-feared double-dip as forecast. There was further evidence of “widespread signs of a deceleration” in US growth during August. The blunt language of Federal Reserve could not be interpreted any other way. The deceleration of growth now extends into 3 consecutive quarters from its December 2009. The only question remains is how deep further, if the slide continues, and would there be a rebound from this new low point.
Weak August numbers play up fears of a “double-dip” fall into recession. Anemic retail sales in US remain focusing on value-priced seasonal items and housing sector weakness pervades across the whole country constraint by tight credit market conditions. Manufacturing sector was steady narrowly or slightly down throughout August. The recovery track remains sluggish except for natural resources and the seasonally-relevant agriculture which will not extend into the wintry December qtr.
A 50-member panel of economists revised downward the projected US economic growth to an annualized 2.7% in 2010 for a third month in a row.
I believe that forecast is way over-optimistic. Remembering US March Qtr and June Qtr growths of 3.7% and 1.6% respectively, that forecast implies at least 2.7% growth for the rest of this year, significantly improving June qtr deceleration – requiring the US economy to stage a return to trend in the upswing instead of the actual downswing seen now. On the contrary of this optimistic forecast, the Federal Reserve Beige Book disclosed the accelerating weakness extending into August, points to September qtr more likely to report weaker GDP number than the June Qtr. Two out of three months in the September Qtr already evidenced sluggish US economy and there is no sign of turnaround in any of any key economic statistics announced except manufacturing. A current weaker outlook forecast for 2011 also means that it is most unlikely to upturn in the December qtr either, even as volatile yet up trending stock prices in US stock market cheered an agreeable Basel III agreement, last weekend reported leads of stronger Chinese August industrial production and improved 16-member Euro zone GDP forecast by the European Commission of 1.7% growth on 13 September 2010 instead of the May 2010 forecast 0.9% at the height of the financial crisis.
This upbeat Euro zone forecast contrasts, however, with more gloomy OECD’s more somber prognosis of global economic outlook.
It warned that economic expansion is running out of steam or is under severe strain in much of the industrialized world, stronger signs of deceleration in Japan, the United States, Brazil, Canada, France, Italy, Britain, China and India while likely to be peaking in Russia and Germany. If there were strong global economic recovery underway, there is no evidence of that in oil or base metal prices in recent weeks with continued cautions in negotiations of forward contract prices of iron-ore even as steel prices rose slightly. The Baltic Dry index’s gain has also slowed.
However, latest news from the Chinese front seems a bit more positive of a surprised increase August industrial production, slightly stronger-than-expected retail sales and modest increase lending by banks. Viewed together, they give the first hint of China is hitting or near to the “sweet spot” of possible soft landing thus avoiding a sharp slowdown. China’s Premier Wen Jiabao said the world’s fastest growing economy is in “good shape”. That is a sign of his confidence.
Imports also accelerated, another sign that Chinese growth is picking up, driven partly by stimulus-induced consumption gain and continued infrastructure spending after second-quarter moderation. The Yuan advanced to the highest since a peg against the dollar was scrapped in July 2005. Two consecutive months of pre-matured decline in Chinese industrial production followed by a modest uptick do NOT prove an economic “correction” has taken place and much less a “soft landing” of that “correction”. Like pre-mature birth, it could end up in a nasty abortion!
We need a few more months of sustaining economic data to give confidence as one swallow does not make a summer as residual global uncertainty looms large. Against a background of worrying rising inflationary tendencies inside China again threatening to fuel property speculation, currency turmoil outside China could also suddenly shift global demand/supply dynamics destabilizing Chinese export and potentially disrupting the seeming steadily- managed slowdown into a free-fall slide.
CHINA ECONOMY
The Market HSBC China Manufacturing Purchasing Managers Index in August rose to 51.9 from 49.4, rebounding into expansionary territory after the July contractionary readings in July – its first contraction in 16 months.
The government-run China Federation of Logistics and Purchasing PMI reading rose to 51.7 from 51.2 in July - indicating modestly below trend level expansion in manufacturing activity in August but no contraction in July after two consecutive months of decline prior. The August gains came from mainly the construction material sector.
A sub-index of the Federation’s PMI that tracks new output rose to 53.1 from 52.7 in July, while a gauge of new orders rose to 53.1 from 50.9 in July. Export orders were also stronger, with readings firming to 53.2 from 51.2 in July.
THESE SUB-INDEX UNDERLINES POSITIVE PRODUCTION OUTLOOK AHEAD. One could expect Chinese manufacturing to pick up in September as well. BUT IS THERE A SEASONAL STRENGTH IN THESE NUMBERS?
If it is early pre-Christmas export-led orders, it could be only a temporary boost with limited scope for extending forward. Beige book reported US retailers have been practicing very tight inventory management as both business and retail inventories build up faster than sales. Euro zone is similar. Except for France reporting steep fall in finished inventory, inventory levels for much of the rest of EU either declined slightly or rose modestly in the second Qtr. There is little need for substantial inventory rebuilding to generate strong demand for Chinese exports.
Chinese inflation, in continuation of recent trend, meanwhile, accelerated to 3.5% in August. That is ahead of the Government set target in March of 3% for 2010.
There must be some concern over this noting the falling Yuan is likely to “import” some inflationary pressures as well. Property prices, though stagnating sequentially when compared to July in largest cities, are showing some signs of resurgence elsewhere. If the Chinese economy rebound so urgently soon again, it might re-ignite further credit tightening measures, derailing other sectors of the economy. By and large, the property bubble in glut of supply still persists despite the recent clampdown since April 2010.
Just take a glimpse of Beijing's largest district Chaoyang as a sample - a total of 1.33 million square meters of residential space are vacant. Over half of the space has been empty for at least three years. Villas and luxury apartments totaled 521,000 square meters, accounting for 39.2% of the total, and 54.9% of homes have remained empty for over three years. Ordinary apartments accounted for 18% of the empty residential space, according to the Caixin report.
That showed that it is the speculative high end of the property market which is frothy and a lot of borrowed money trapped therein with little scope for the mass market residential owner-occupied upgrade buying to dissolve the bubble-induced glut anytime soon. The Chinese Government must be sitting on a property bubble time bomb. Any clampdown must be aiming at temporary impact of slowing the escalating bubble which ALREADY SUBSISTS FOR THREE YEARS. It is not conceivable in the mind of this author that the Chinese Government could afford or would want to re-vitalize its economy until late 2011 perhaps. The airbag economy of property asset inflation must be let out, not just temporarily looked past.
Latest Chinese trade figure give confidence that the Chinese economy will not spiral in a steep down plunge in its current state. Chinese General Administration of Customs said that annual export growth slowed to 34.4 per cent in August from 38.1 per cent in July BUT imports jumped 35.2 per cent, easily beating July's 22.7 per cent year-on-year comparison. Trade surplus narrowed to $20.03 billion in August, as imports rose to $119.27 billion and exports reached $139.3 billion
Stronger Yuan helped fuelled demand for luxury car import.
The big jump in import figures, improving higher seasonally unadjusted August PMI along with robust car sales data suggested that China's economy may have bottomed out or near there on domestic demand-pulled calibrations away from export dependency as fiscal stimulus fades ahead. A pertinent question asked is - is that strength of import signaled revitalized strength in domestic sector or was that the result of political pressure to raise import ahead of the US China economic summit due this week.
Closer detailed examination of the import data showed mechanical and electrical product imports gained 3.8 percent sequentially in August, while imports of raw materials eased somewhat last month, except copper and aluminum.
Stronger Yuan did encouraged luxury car imports but little of any detectable gains could be found in either infrastructure or construction nor manufacturing-related imports. The gain in imports is largely consumption-driven, not economic activity-stimulating of raw materials. So unless stronger imports sustains for another few months, the strength of import statistics encountered in August is NOT conclusive of revitalized broad-based domestic sector. Interesting that neither iron-ore nor metallurgical coal were featured among enhanced raw material despite inventory paring since May 2010 as imports shrunk. Goldman Sach predicted continuing copper demand in September-October which could well be the case of infrastructure construction demand needs and continuing strength of higher auto production inside China.
As for higher import drive possibly being politically motivated, it is less certain or capable of reasoned conclusion for two reasons. THE US DOLLAR IS DECLINING FORCING UP THE DOLLAR/YUAN PARITY HIGHER IN FAVOUR OF THE YUAN OF COURSE. But more valid reason can be found in the lack of relative importance of the Chinese market to US exports and economy – noting that international trade accounts for only 11% of the US GDP equation. Even though the United States runs huge trade deficits with China, the Asian giant still ranks as America's third-largest export market, taking only 6.7 percent of total U.S. exports last year.
The same could not be said of reverse of Chinese economy’s dependency on US market access, particularly its manufactured goods. Frankly, the US would be seeking cheaper dollar to all foreign currencies beyond the Chinese Yuan and Chinese domestic market.
China's retail sales of consumer goods in August hit 1.26 trillion Yuan. The growth rate in August was 0.5 percentage points higher than in July, according to national bureau of statistics.
Consumption spending was also lifted by Beijing’s decision in June to renew subsidies of 3,000 Yuan ($443) per vehicle for fuel-efficient cars and small trucks.
Bank lending also eased slightly despite the credit tightening policy in place. China's new Yuan-denominated lending in August rose to 545.2 billion Yuan ($80.53 billion) from 532.8 billion Yuan in July, the People's Bank of China (PBOC) the Central Bank. That is up 2.4%
In aggregate, the health of Chinese economy is now in better shape than the June Qtr.
JAPAN & Rest of the world economy
After having grown by a revised meager 0.4% in the June Qtr 2010, conditions have further worsened in Japan. Japanese export growth in July hits 5 consecutive months of decline, amid signs a fragile recovery is continuing to lose steam, hampered by the relentless rising strong Yen.
Strong Asian demand for cars, high-tech products and factory parts offset a weaker domestic picture but Japanese exports are widely expected to decelerate further in August and the months ahead. The Yen is now at its 15-year highs against the dollar and export volume will feel increasing downward pressure. Japan's July trade data confirms that the surge in the yen is hurting export revenues. For the first time since 2004, and a day after the re-election of Japanese Prime Minister Naoto Kan as head of the ruling party, the Bank of Japan unilaterally sold the Yen in the forex market yesterday.
The concern is that the surging Yen threatens the Japanese export-led recovery. If the US eases monetary policy further next week, the fall in US dollar could lift the Yen even higher. Following the BOJ intervention the Yen slid 2.5 percent to 85.11 per dollar but it remains to be seen whether this will be successful in capping the Yen appreciation or even significantly weakening it. Fundamentally, it would be difficult as most of the triggering event is outside Japan’s control. With sluggish domestic retail sales, the Japanese economy is very sick heading into the September qtr.
According to ST source, signs of slowdown in Singapore Factory output, 3 September 2010, PMI manufacturing readings for most key East Asian economies are weaker than either EU or US economy. China’s August PMI is 51.9 while Japan and South Korea published borderline indexes of 50.1 and 50.9 with Singapore and Taiwan reporting negative (below 50) August readings. Corresponding PMI readings were higher in Germany 59.2, India 57.3 USA 56.3 France 54.7 Britain 54.3. If economic conditions in Europe, Japan, or USA deteriorate further, the manufacturing exports-dependent East Asian economies are vulnerable to steep sudden decline in GDP growth. And this is precisely what the OECD forewarned this week of Global economic recovery is slowing. "Recent high-frequency indicators point to a slowdown in the pace of recovery of the world economy that is somewhat more pronounced than previously anticipated," the OECD said.
Growth in G7 economies could slow to an annual rate of 1.5 percent in the second half of the year – much lower than the US 2.5% GDP growth for 2010 a panel of 50 US economists predicted. OECD foresaw growth in the United States of 2.0 percent in the third quarter this year and 1.2 percent in the fourth. Both seem over-optimistic as US economy entered the third qtr on a soft note and no signs of recovery thereafter.
Other then US, OECD warned of stronger signals that the expansion may lose momentum in Japan and Brazil. Expansion in Germany and Russia "may soon peak," while in Canada, France, Italy, Britain, China and India "there are stronger signals of a slower pace of economic growth in coming months than was anticipated in last month's" report.
http://sg.news.yahoo.com/afp/20100913/tts-oecd-world-economy-growth-forecast-i-c1b2fc3.html
US ECONOMY
Nothing much has changed since the September Beige Book release. U.S. growth slowed over the summer, agriculture held up better and the pace of manufacturing growth was slower than first half. The biggest weaknesses were in real estate and construction. Bank lending to companies, a harbinger of future growth, also saw scant improvement
Continued growth in national economic activity" between mid-July and the end of August allayed fears that the economy stalled, but the Federal Reserve bluntly warned that there is “widespread signs of a deceleration.” The Federal Reserve’s Beige Book pretty much confirmed the long-feared double-dip is here except officially pronouncing it.
The remaining question is where does the US economy go from here? The strength in agriculture is seasonal as winter approaches and sets in; its contribution to GDP growth will fade. That means the Fed might have to lower its outlook for growth for the remainder of this year, particularly when there are signs that manufacturing may weakens further.
It was the initial better-than-expected unemployment statistics underpinned by growth in the services sector and supported by ISM’s manufacturing index which fired up the US and global stock markets. Unexpected strong score of ISM’s manufacturing index of 56.3, up from 55.5 in July, ahead of the Beige Book, give investors the much-needed confidence encouraging boosts.http://noir.bloomberg.com/apps/news?pid=20601103&sid=atTAuRx6Cn6g
That ISM’s manufacturing index lift did not tally very well with pessimism in the Fed’s Beige Book comments on manufacturing activity and its outlook. So where is the reconciliation? Lagging factors gave ISM's manufacturing index a bit of deceptive boost masking a further slowing in the key leading index of new orders. Specifically, new orders slowed to the lowest point since the recovery in manufacturing began in the second quarter of 2009.
U.S. industrial production just announced rose 0.2% in August, a slower pace than the downwardly revised 0.6% in July.
Excluding autos, factory output increased 0.5% in August after a 0.2% rise in July. Autos production has fallen in August. Falling auto sales in August correlates with the prevailing negative stock market trend last month. Total industry-wide deliveries fell 5% with both GM and Ford Motors reported big drop in sales while Chrysler report gains despite much weaker import competition from Toyota’s big recall. Seasonally adjusted annual rate of sales for the industry came in at 11.47 million vehicles, down from 14.17 million a year ago. The industry is now expecting second-half recovery will be much more sluggish than we had initially predicted.
Yet another forward indicator that US manufacturing is heading downtrend is the anecdotal weakness in the chip sector. National Semi-Conductor and Texas Instruments warned of weak demand in personal computers, echoing similar forward guidance of Intel. That caution tailgate the reported slim 0.1% increase in US July factory orders - held down by declining orders for computers and machinery. Demand for PC replacement was a strong element of manufacturing strength in the June Qtr GDP growth.
There are also signs of weakness in the services sector in August after some newly found strength in July. ISM said its U.S. services-sector index hit 51.5% in August, down from 54.3% in July. Services sector employment could take a hit forward.
US stock market also took comfort from improved pending home sales in July. That rose 5.2% from downwardly revised June levels. The pending home sales index plunged 29.9% in May and another 2.8% in June. In reality, it is a little uptick from big fall in May and some signs of bottoming out in June but not convincing of strength momentum of any turnaround in housing sector as warned in the Federal Reserve latest Beige Book.
Weakness in the housing market continues to slow down the recovery across the country.
Beige Book showed retail sales were up a little, but “consumers remain cautious in their purchases and are focusing on value-priced seasonal items” Kroger Co. US largest supermarket chain second-quarter profit announcement revealed just how tough is competitive pressure at the basic food retailing level. Kroger’s profit rose 2.8% from year ago same quarter comparison, same-store revenue flow actually declined 1% in the reported qtr. Kroger commented that while customer traffic did improved, “grocery deflation has yet to abate” forcing brand-name packaged food makers to spend more marketing dollars to discount their foods.
Faced with similar declining same-store sales at Wal-Mar, it is laying out a new strategy to revive business in the fourth quarter.
Best Buy & Co fared better as a specialty retailer but it is electronic new product innovation accompanied by promotional discounting driving sales and tighter costs control lifted earnings. Beige Book also reported tighter inventory management among US businesses – suggesting cautious consumer outlook. Retail inventories rose 0.7% in July compared with a 0.3% increase in sales, the Commerce Department said
Stocks have moving slower off the shelves than sales. Consumer deleveraging is still ongoing - not a healthy sign for manufacturers forward. U.S. consumers shed their credit for a sixth straight month in July, with total credit falling 1.75% to $2.42 trillion, according to figures released by the Federal Reserve
The overall conclusion of the state of US economy must be a modest growth, crawling along near the bottom of positive trough in the September qtr. Despite the US stock market euphoria aided by a spate of corporate takeovers and the recent Basel III Agreement on bank capital rules relieving a lot of uncertainty in banking stocks, actual stock trading volume on US exchanges was thin of conviction. Stock broking financial institutions are going through hard times now.
Investors are still fleeing the equities market in droves.
EURO ZONE ECONOMY
After a reviving consumer demand and weakened Euro-assisted export surge lifted the Euro zone to its fastest quarterly growth in four years, the European Commission this week revised its GDP growth in the 16-nation euro zone to 1.7 percent annualized this year instead of the 0.9 percent projected at the depth of Europe’s fiscal crisis in May with a more “moderate” expansion in the second half. Germany is strongest engine but French and Italian economies are gaining momentum even as services and manufacturing weakened in August in the face of fiscal austerity and a cooling global economy.
The pace of 16-nation euro zone manufacturing edged down slightly in August. PMI fell to a six-month low of 55.1 from 56.7 in July - a slight loss of growth momentum.
Growth at Europe’s factories cooled in August and export demand dropped to the lowest in seven months. A gauge of manufacturing in the 16-nation euro region declined to 55.1 from 56.7 the previous month, London-based Markit Economics said. It reinforced the weaker PMI data of August.
Consumer sectors showed particular loss of momentum in August following strong July reflecting disappointing retail PMI data for the Euro zone. Retail sales volumes in the 16-nation euro zone rose 0.1% in July after a revised 0.2% rise in June and 0.4% rise in May. On the year-on-year comparison, the May, June and July figures rose 0.6% and 0.4% and 0.7% consecutively and they showed the recovery in exports and industry in 2010 did permeated modestly to consumers BUT ALL THAT GAIN IS FADING NOW as rising unemployment and fiscal austerity bite.
Cautious European consumers won’t benefit the German economy dogged by falling domestic retail sales. Germany's retail sales fell 0.3% in July from the previous month – a second consecutive month of decline after similar fall in June. Sluggish domestic demand has been the Achilles' heel of the German recovery. said Carsten Brzeski, economist at ING Bank, correctly pointed out, in a note to clients.
July retail sales bring evidence of private consumption downswing instead of an upswing – even though it did show a 0.8% same month prior year comparison which is an inappropriate depressed base for comparative evaluation of the current state of German consumption spending. Taking July export pattern as a rough guide, almost 59% of July exports went to other EU countries while the balance went to the rest of the world. It shows the strength of demand for German exports is still dependent substantially on the strength of EU economies.
The rapid slowdown in retail sales across EU suggest strongly that the consumer revival is fading fast and that can’t be a positive factor for German exports ahead. Other disturbing signs of weakness in EU also creep in August. German August exports declined by 1.5 percent in July and imports by 2.2 percent after a sizzling June surge.
Economists expect it to be normalizing at a slower pace of growth till the end of the year but exports will remain the key driver of German economy.
German industrial output edged 0.1 percent higher in July from the June level. Output of industrial goods stagnated but that construction advanced by 0.9 percent. “It was to be expected that industrial production assumed a more moderate rhythm," a German economy ministry statement said. Slower industrial output indicated that Europe's biggest economy was moderating following record second quarterly growth of 2.2 percent. July orders fell by 2.2 percent on the month, ministry data showed, following an upwardly revised gain of 3.6 percent in June.
Germany’s headline BME manufacturing PMI slid to 58.2 in August from 61.2 In July. Markit said output and new order growth in the German manufacturing sector eased markedly in August.
Overnight a closely watched survey on expectations for Germany's economy fell short of forecasts. Published by the ZEW economic research institute, it showed a drop in its economic expectations index to -4.3 in September, its lowest level since February 2009.
French manufacturing activity rose at a faster than expected pace in August with incoming new orders rising briskly. It is a nice turn after a gloomy July trade balance showing an increased deficit in July of 4.180 billion Euros from 3.718 billion Euros in June.
Italy’s manufacturing sector grew at the weakest pace since February due to slower growth in output and new orders as well as a resumption of job shedding.
The European Central Bank said Thursday it now expects euro-zone growth to be in a range between 1.4% and 1.8% in 2010
German economy, and by extension of that, euro zone economies as well will be weaker in the second half of 2010 for the following reasons.
The fundamentals sustaining the spectacular June Qtr GDP growth are unlikely to be repeated. Global trade revival coincide with lagged demand from recovering emerging economies has slowed. The most recent falling PMI manufacturing indices from export-dependent economies of South Korea, Taiwan, Singapore, and Japan, even China show that. German manufacturing export benefited strongly from a much weaker currency which of late has rebounded significantly. Unusually cold winter weather caused a greater number of construction projects to stop in early 2010 saw seasonal spring revival in construction activity having much more stronger impact on June qtr German GDP and the strength of construction gains extended into August. These vibrancy in construction activity must wear off again as winter is approaching.
Revival of private consumption EU-wide has lost much staying power. Fiscal austerity underway threatens employment and will continue to undermine consumer confidence and spending forward. Without self-sustaining quarter-to-quarter gain, the pace of restocking needs will be impair and contribution from inventories driving headline GDP growth in the first half must evaporate. France was the only country to report a sharp drop in inventories of finished products. Germany and Belgium saw small declines, while Italy, Spain and the Netherlands reported rises, causing inventories to become less insufficient than before.
These are all negative signals ahead of slower German industrial production and exports and a slower EU economy waiting.
Conclusion
Mang ren mo xiang (blind man feel the elephant), this author is of the opinion that US dollar slide will continue, gold will rise along with hard commodities and oil. Both the Euro zone and the US economies could slide into a sub-trend unit of one percent or below growth in the September qtr. The Japanese economy might skid to zero growth leaving Germany and China to hold the rest of the world up.
The difficulty of coordinating fiscal and monetary policies adjustments globally is proving hard of achieving results. There is a real risk that EU and US might join Japan in a decade of slow growth and some downside possibility of deflation in the event of a major external shock. The margin of safety in positive growth and recession has narrowed considerably. Companies globally are flushed with cash but no sign of engaging in new capital spending and some displayed interests only in acquisitions of growing businesses. Consumers are fearful of opening wallets. EU, Japan and US are pushed-up economic rebound in 2010 but already faltering. China is pushed-down deceleration yet, at this juncture, still fearful and uncertain of the risks of tumbling into an uncontrolled skid as currency markets become increasingly volatile. China alone could be left sustaining the world again but for how long and needing to further inflate its own economy in an unlikely abrupt policy about-turn? Which is more dangerous of outcome to the world – the US recession risks or China’s bubbly economy spiraling down the stairway? Obama himself admitted that the recession left a big hole in the US economy AND, IN REALITY I BELIEVE, HE HAS NO SOLUTION. This morning, the Obama signaled a tougher approach to China on trade and currency issues. Treasury Secretary Timothy Geithner, in prepared testimony, said the administration is considering what tools it might use to push China to move more quickly to allow its currency to appreciate in value against the dollar.http://finance.yahoo.com/news/Administration-signals-apf-831462522.html?x=0&sec=topStories&pos=main&asset=&ccode=
Politically, Obama has not much room for policy alternatives ahead of the US Congressional election on 2 November. The only political and economic weapon to sustain the US economy till year end is quiet currency play. The Chinese sudden aggressive buying of Japanese sovereign debt forcing the Yen up underscores that undisclosed intent as US dollar future index keep falling and the US dollar falling against currencies of Asian export-dependent economies as well.
The outlook forecast can be described as “Mei Kuang Yu Xia” (to get worse and worse) is the most likely outcome going forward. Why does gold keep rising when US 10-year Treasury bond yield improving of late alongside with the US stock market indices as the OECD revised downwards global economic outlook?
One of them must be a liar – which one? Or is the falling US dollar (forcing gold prices up) the key in this jigsaw puzzle of finding a new global economic balance that China steadfastly refused to play against US political pressure and Japan boxed in the middle?
Share your thought back in comments if you have another interesting insight and input.
Zhen He
16 September 2010.
