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By HaleStewart June 12, 2015 11:27 am
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International Economic Review For the Week of June 8-12; Much Better, Edition

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer  

  • China’s slowdown continues.
  • Australia continues to grow moderately
  • Japan has bounced back in the first quarter
  • US news is rebounding from first quarter weakness
  • The UK continues to perform strongly
  • The EU continues to emerge from its 2014 weakness

     The UK continues to print strong economic numbers.  Production increased 1.4% Y/Y, with all four sectors contributing to growth.  Manufacturing (a subset of the data) decreased .2% M/M but increased .4% Y/Y.  Both of these figures have consistently risen from their 2013 lows.  However, they are both still far below their pre-recession levels:

Continued modest industrial expansion is likely, as the latest PMI number increased slightly from 51.8 to 52.  Most of this increase, however, is in consumer goods; industrial demand is just barely so.  The latest Markit PMI report contained the following observation:

“Expectations of a broad rebound in UK economic growth during the second quarter of the year are called into question by these readings. Manufacturing looks on course to act as a minor drag on the economy, as the sector is hit by a combination of the strong pound and weak business investment spending. The strength of sterling is serving a double-whammy for economic growth by constraining manufacturer’s export performance and also driving a surge in cheap imports.

The strong pound, especially relative to the euro, is clearly hurting exports: 

Over the last year, the Sterling has risen ~10.5%, with the partners consolidating between the 1.36-1.42 since early March. 

     RBA head Glenn Stevens gave a speech earlier in the week.  It contained an excellent synopsis of current economic conditions and their preceding events:

In Australia, recent growth in the economy has not been as strong as we want. Of course, what we are witnessing is not an economy heading along the course of a normal economic cycle, but a complex and rather lengthy adjustment both to the once-in-a-century cycle in our terms of trade and an earlier increase in household leverage. During the late 1990s and early 2000s, very confident households spent and borrowed more, and saved less, in the process extending their balance sheets. That process started to fade in about 2006 and then finished more abruptly when the financial crisis hit. But by then the run-up in resources prices was imparting a very large stimulus to the economy and allowed for solid growth to continue at a time when most other countries were still feeling the aftermath of the financial crisis.

The above trends are a recipe for slow-growth.  The household debt ratio stands at 150% of DPI.  Although lower interest rates are making payments more affordable, high debt levels naturally constrain consumer spending, which explains the somewhat weaker domestic demand. 

Turning to business, Australia benefitted from a boom in natural resource investment.  These projects take several years to complete.  However, with China slowing, there is no reason to start new projects, leading to a slowdown in natural resource investment.  Non-basic materials businesses are investing less because they see an economy grinding lower from the natural resource slowdown.  The combined effect is an overall weak business investment environment:

And finally, the Australian unemployment rate decreased .1% to 6%.  This number has fluctuated in the low 6% range for the last year.      

     Japanese news was positive.  First quarter GDP was revised higher to a 3.9% annual rate.  As this table from the report shows, all sub-categories increased with the exception of private residential investment:    


The Quartz headline says it all: the world forgot about Japan, but now it’s back.  On the currency front, BOJ governor Kuroda remarked that the yen is now “fairly valued.”  As this chart shows, the yen has fallen from 80/dollar in 2012 to a current level of ~124.

The yen immediately rallied on Kuroda’s statements.

     Chinese news continued showing a slowing economy.  Producer prices declined 4.6% Y/Y, continuing their multi-year contraction:

Consumer prices are slowing as well, with the latest 1.2% Y/Y reading continuing a long slide downward. 

The 10.1% Y/Y retail sales increase and 6.1% industrial production increase rounded out the data.  Both of these data, however, are also moving lower: after the recession retail sales were 17% Y/Y while industrial production was 15%.

     Eurostat released the second reading of GDP; with the latest reading at 1%.  Investment increased .8%, household consumption was up .5%, exports increased .6% and imports were 1.2% higher. 

The best news was construction and manufacturing both contributed to the growth.  This indicates confidence may be increasing:

Industrial production increased .1% M/M and .8% Y/Y.  The 1.6% decline in energy production had the strongest negative impact on the monthly numbers.

     U.S. retail sales increased 2.7% Y/Y.  Due to the Y/Y decline since mid-2014, this increase was a very pleasant surprise.  As this table from the report shows, increases were broad:

     The news this week was mostly positive.  Although China is clearly slowing, overall growth is still strong.  The retail sales report indicates the 1Q was most likely a weather and port related slowdown.  The UK continues growing and the EU growth continues to inch higher. 






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