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By HaleStewart November 7, 2014 3:27 pm
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International Economic Week In Review: A Return To The "New Normal" Edition

     This week’s economic news can be characterized as “more of the same.” The overall macro-level bullet point analysis of the major countries are as follows:

  • The EU is still in a woefully slow economic environment, just barely growing.  The threat of a deflationary spiral is still very real.
  • The UK continues to release very positive economic numbers that are consistent with 2% GDP growth.
  • US economic news continues to point to a solidly expanding economy.
  • Canada is also growing at good rates.
  • The Abenomics experiment in Japan is still facing an extremely difficult environment, and may be failing.
  • Australia is still growing at a decent pace, but is having difficulty making the transition from a mining based economy to one more oriented towards consumer-led growth and non-manufacturing investment.

This indicates that the economic situation has returned to a "new normal" state.

     Australia released a large number of economic data points, starting with he manufacturing, service and construction surveys, which were 49.4, 43.6 and 53.4, respectfully.  The manufacturing report was especially revealing, as it indicated businesses are concerned about the macro environment is a large enough degree to hold off making any significant investments.  There is also concern about the high level of the Australian dollar and its negative impact on exports.  And while exports increased 1%, they are clearly subdued as shown in this chart:

Unemployment remained at the 6.2% level while retail sales increased 1.2% M/M.  Finally, the Reserve Bank of Australia kept rates at 2.5%, making the following observations about the overall economic condition of the country:

In Australia, most data are consistent with moderate growth in the economy. Resources sector investment spending is starting to decline significantly, while some other areas of private demand are seeing expansion, at varying rates. Public spending is scheduled to be subdued. Overall, the Bank still expects growth to be a little below trend for the next several quarters.

     Three key pieces of data were released for the US economy.  The first two were the respective service sector and manufacturing reports, issued by ISM.  The manufacturing number was 55.9, while the service numbers was 60.  As this chart shows, both have been solidly above the 50 (indicating expansion) line for some time:

On the employment front, the unemployment rate dropped to 5.8% with the economy adding 214,000 total jobs.  This is the ninth month in a row with a 200,000+ jobs data number.

     Canadian exports increased 1.1%.  As this graph shows, exports have been increasing at a decent pace. 

However, the overall growth of the Canadian export industry has been lacking this expansion.  Canadian Central bank head Poloz offered the following analysis:

However, it is clear that our export sector is less robust than in previous cycles. Last spring, as you may recall, we identified which non-energy subsectors could be expected to lead the recovery in exports, and which would not.

We have since investigated in more detail the subsectors that have been underperforming. After sifting through more than 2,000 product categories, we have found that the value of exports from about a quarter of them has fallen by more than 75 per cent since the year 2000. Had the exports of these products instead risen in line with foreign demand, they would have contributed about $30 billion in additional exports last year.

By correlating these findings with media reports, we could see that many were affected by factory closures or other restructurings. In other words, capacity in these subsectors has simply disappeared. This analysis helps us understand a significant portion of the gap in export performance.

Our research also tells us that most of the sectors expected to lead the recovery in non-energy exports still have some excess capacity. Our Business Outlook Survey interviews indicate that while companies plan to invest in new machinery and equipment, few are planning to expand their capacity, at least so far. This helps explain why business investment might be delayed relative to what would be expected in a normal cycle. 

The Ivey manufacturing number decreased, but is still positive at 51.2.  And the unemployment rate dipped again, this time being reported at 6.5%, another solid decrease.

     The EU manufacturing sector is just barely expanding with the Markit PMI printing at 50.6.   Italy and France’s numbers were both contractionary (49 and 48.5, respectfully) while Germany and Spain were expanding (51.4 and 52.6).  The report’s analysis section offered the following insights:

“The performance of eurozone manufacturing remained broadly flat at the start of the final quarter, as the sector struggles to recover the traction lost following its mid-year slowdown. Manufacturing is therefore unlikely to provide any meaningful boost to the currency union’s anaemic GDP growth.

“Perhaps most worrying is the trend in new orders, a key bellwether of future output growth, which declined for the second month running. It is hard to see any significant near-term boost to performance while market demand remains insipid and beset by lacklustre domestic conditions, slowing export growth and ongoing economic uncertainties.

On the good news side, retail sales did increase .6%. 

     Economic releases about the UK economy were all very positive.  Markit’s manufacturing number was 53.2, the service was 56.2 and the construction was reported at 61.4.  While manufacturing and service have declined a bit, they are still in solidly positive territory: 

Industrial production also increased at a 1.5% M/M rate while manufacturing increased 2.9%.  And finally, the BOE kept rates at .5%. 

     Essentially, we're back to the following: the EU is right at the borderline of expansion and recession with the added potential for deflation, the UK, US and Canada are expanding and Australia is holding its own.

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


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