* UK economic activity remains subdued as factory output falls and unemployment rises
* The US Congress approves free trade agreements with South Korea, Colombia and Panama
* Industrial production rises in the Euro area
* The Bank of Japan´s latest Monthly Report of Recent Economic and Financial Developments notes an increase in production and exports
* The Monetary Authority of Singapore cuts its growth forecast for 2011
* China Investment Corporation increases its holdings in the ´Big Four´ state-owned commercial banks in China
Latest UK data supports official caution
Much of the data that was released in the UK this week highlighted the general weakness of the economy. This contributed to the recent decision of the Monetary Policy Committee (MPC) of the Bank of England to increase the size of the Bank’s asset purchase program by £75bn to a total of £275bn.
The Office of National Statistics (ONS) noted that factory output fell by 0.3% in August. Revised data from the ONS indicated that factory output had shrunk by 0.2% in July. The reduction in factory output in August was marginally more severe than had generally been expected. The ONS noted separately that the unemployment rate for the three months to the end of August had increased to 8.1%. This is the highest level for 15 years: in the three months to the end of July, the equivalent figure had been 7.9%. The absolute number of unemployed people has risen to 2.57m, the most since 1994.
For its part, the National Institute of Economic and Social Research said that the recovery in the UK economy is the weakest for a century: output in the third quarter of 2011 is estimated to be 4% down on the peak of early 2008. Meanwhile, researchers Academetrics Limited and LSL Property Services Plc said that the average house price in England and Wales had fallen by 0.3% in September to £218,650. This is the lowest level since June and implies that the average house price has dropped by 2.3% since September 2010. The researchers found that, on a year-on-year basis, housing prices were lower in all regions other than London. The number of home sales in September was 66,500, well below the long-term average.
During the week, three members of the MPC – Deputy Governor Charles Bean, Adam Posen and Martin Weale – indicated in separate interviews that the Bank may expand its emergency stimulus plan if necessary.
US Congress approves three FTAs.
During the week, the US Congress voted in favour of free trade agreements (FTAs) with South Korea, Colombia and Panama. The FTA with South Korea, is the most important to be introduced since the introduction of the North American Free Trade Agreement (NAFTA) in 1994. The agreement removes duties on nearly twothirds of US agricultural exports to that country, and will reduce tariffs on industrial exports. The US International Trade Commission believes that the FTAs with South Korea and Colombia will, in the first year that they are operational, boost US exports to those countries by US$10.9bn and US$1.1bn respectively. In an apparently contradictory move, the US Senate approved the Currency Exchange Rate Oversight Reform Act which provides for the imposition of countervailing trade duties by the USA against any country that maintains a ‘misaligned currency.’ This is manifestly a law that targets China. However, it is uncertain as to whether the law will pass through the US House of Representatives.
The Commerce Department noted that the US trade deficit was broadly unchanged at US$45.6bn in August. Exports of US$177.6bn were the second highest ever – thanks in part to the robust growth of emerging markets with which the USA trades. The Labor Department noted that the number of people making initial jobless claims had fallen slightly to 404,000, the lowest level in six months.
During the week, the Federal Open Market Committee (FOMC) published the minutes of its meeting on 20-21 September. The minutes provided little new information, but highlighted how three of the 11 members of the FOMC had opposed ‘Operation Twist’, a program that involves the Federal Reserve selling short-dated Treasury bonds and buying long-dated bonds in order to lengthen the overall maturity profile of the Federal Reserve’s portfolio of Treasuries. Richard Fisher and Charles Plosser felt that the program might complicate the ultimate exit by the FOMC of ‘extraordinarily accommodative monetary policy.’ Narayana Kocherlakota argued that the policy was inappropriate given that ‘inflation and the oneyear- ahead forecast for inflation had risen, while unemployment and the one-year-ahead forecast for unemployment had fallen.’
European industrial production rises
During the week, Eurostat noted that industrial production in the Euro area grew by 1.2% in August, and by 5.3% year on year. This indicates that production across the Euro area has been stronger than most commentators were expecting. It also suggests that growth in France, Italy, Spain and other countries has more than offset a decline in Germany. Industrial production in Italy, for instance, rose by 4.3% in August, according to Istat. Across the European Union (EU) as a whole, production rose by 0.9% in August. However, the news from Germany was not all bad. The Federal Statistics Office noted that exports rose by 3.5% in August: this represented a sharp turnaround from July, when exports contracted by 1.2%.
There were two other developments to note. One was the final ratification by the parliament of Slovakia of the law that will increase the size of the European Financial Stability Facility (EFSF) and give it greater powers. Slovakia’s was the last of the 17 parliaments of the Euro area countries to approve the new law. The other development was the announcement by ratings agency Standard & Poors that it would cut the sovereign rating of Spain by one notch to AA- with a negative outlook. This is the third downgrade of Spain’s rating by Standard & Poors over the last three years. However, the news had relatively little impact on financial markets.
Japan’s gradual recovery continues.
The Bank of Japan’s Monthly Report of Recent Economic and Financial Developments had a mildly upbeat tone. The Report noted that economic activity ‘has continued picking up.’ It also suggested that, ‘with regard to the outlook, Japan’s economy is expected to return to a moderate recovery path.’ ‘Production and exports have continued to increase, although their paces have moderated after going through the recovery phase immediately following the quakeinduced plunge. In this situation, business fixed investment has been increasing moderately, aided partly by the restoration of disaster-stricken facilities. Private consumption has also been picking up on the whole, although weakness remains in some aspects of consumer behaviour. Housing investment has shown clear signs of picking up and public investment has almost stopped declining.’
The minutes of the Policy Board of the Bank of Japan’s meeting that took place, on 6-7 September, (which were also released during the week), the Board noted that across Japan, ‘financial conditions generally continued to ease, albeit with weakness observed in the financial positions of some firms, mainly small ones.’
Emerging market news
During the week, Monetary Authority of Singapore (MAS) announced that it was cutting its forecast for Singapore’s economic growth through 2011 as a whole from 5-6% to 5%. In its semiannual review of exchange rate policy, the MAS said that it would slow the appreciation of the Singapore dollar. The central bank noted that, because of the deterioration in the global economic outlook, inflationary pressures were likely to be reduced. Unlike other central banks, which target interest rates, the MAS sets policy by adjusting the shape, width and centre of the band within which the Singapore dollar is allowed to trade vis-à-vis a traded weighted basket of currencies, the details of which are not disclosed. In April, the MAS had increased the centre of the band.
Elsewhere, the Monetary Policy Committee of the Bank of Korea decided to keep the base rate unchanged at 3.25%. The Committee remains concerned about the ‘sluggish’ growth of developed economies, but noted that the emerging market economies with which South Korea trades ‘have shown favourable performances.’ In addition, ‘the Committee expects the pace of decline in inflation to be modest in the coming months, given stubbornly high inflation expectations, although factors such as declines in agricultural product prices and the base effect from last year will work to bring inflation down.’ Consumer Price Index (CPI) inflation fell to 4.3% in September, while core inflation remained unchanged at 3.9%. Bank Indonesia, the country’s central bank, also cut its key policy rate by 0.25% to 6.5%.
In India, the government gave increased powers to state-owned enterprises (SOEs) to buy foreign coal, energy and mineral assets overseas, without prior consultation of the government. The objective of this change is to give Indian companies greater ability to compete with Chinese companies that are also actively looking to invest in the production of raw materials overseas. The Commerce Ministry noted that inflation in wholesale food prices exceeded 9% for the third consecutive week. Meanwhile, official statistics indicated that Industrial production in India in August was 4.1% higher than it had been a year before.
Official statistics showed that China’s exports rose by 17.1% yearon-year in September. This was less than had been expected and was largely due to slippage in exports to Europe. The trade surplus last month was US$14.51bn, the lowest since May this year. Some exporters’ sales have suffered as a result of the general strength of the Chinese yuan. Towards the end of the week, it emerged that consumer price index (CPI) inflation in China in the year to September had been 6.1%, less than previously expected. This suggests that inflationary pressures are moderating slightly (given that the CPI rose by 6.2% year-on-year in August).
The share prices of Chinese companies surged as a result of two official announcements. One was a statement from the State Council (China’s cabinet) that the government will provide financial support and tax breaks for small companies. The other was a disclosure from Central Huijin Investment Co., the holding company through which China Investment Corporation, on behalf of the government, maintains stakes in the ‘Big Four’ (partially) stateowned commercial banks and various other financial institutions. Huijin noted that it had been buying shares in the ‘Big Four.’ India’s stockmarket, and the Rupee, rose strongly when Infosys, the country’s second-largest software company, said that net income in the latest quarter was 19.1bn Rupees (US$390m), or considerably more than most analysts had been expecting.
Investors responded favourably to the news that Google, the company behind the world’s most widely-used search engine had posted sales and profits in the latest quarter of US$7.51bn and US$2.73bn respectively. The result was better than had been expected and suggested that the search engine-related businesses of Google had not been affected by the slowing of the global economy.
AIA Group, the Asia life insurance giant that was spun out of AIG last year, reported that the value of new business (VONB) rose by 53% in the last quarter, from US$160m to US$245m. The growth was driven by the expansion of AIA’s businesses in China and Malaysia. Annualised new premiums, a measure of new business, were 39% higher in the first nine months of this year than they had been in the corresponding period of 2010. These figures are an indication of the potential for growth of financial services in the emerging markets of the Asia-Pacific region.