Capitas Finance | News

Eurozone takes giant stride to becoming both a monetary and fiscal union

While it has been another gloomy week, there are some signs of hope. The OECD revised down its forecasts of global growth and warned about the risks of Eurozone for the future. In the UK the Chancellor’s Autumn Statement was more downbeat, while the new Governor of the European Central Bank, Mario Draghi, highlighted his concerns of sovereign debt for the banking sector. The seriousness of the situation was not lost on the world’s major central banks. To counter US financial institutions worries about their Eurozone exposures, six of them came together in a co-ordinated action to increased dollar liquidity. This was well received by the markets and was bolstered by the fact that, either by coincidence or design, China loosened its monetary policy too. The politicians are also coming together. Talks of greater fiscal union and speeding up changes to the treaties have shown that the political momentum behind action to save the euro is gathering quickly. There are still many obstacles ahead, but there is a chink of light at the end of the eurotunnel.

Gloomy George presented his Autumn Statement. The UK economy is weaker and its fiscal position is more precarious than previously thought. And we will have to swallow the austerity medicine for longer. The Office for Budget Responsibility (OBR) cut its growth forecasts for 2012 to 0.7% from the 2.5% announced in March. It also revised up its unemployment forecast, from 8.1% to 8.7%. Tax revenues will be lower and welfare payments higher as a result. The OBR is also worried that the UK’s growth potential has been damaged by the crisis. Together these mean it will take longer to cut the deficit. It now looks like it will take up to seven years. A lot longer than the Chancellor had hoped.

UK manufacturing slowed again in November. Prospects for UK growth weren’t helped by the manufacturing surveys in November. The Purchasing Manager Index (PMI) edged down for the second consecutive month to 47.6 - well into contraction territory. It is now at its lowest since June 2009. New orders continued to deteriorate due to weak domestic and global market conditions. More worrying is the implied loss of confidence. Employment levels fell at the fastest rate since October 2009, as producers shed staff in the belief that the downturn will continue. There was some good news as input prices fell, giving some relief on margins, but increased competition and poor demand means it’s still going to be tough.

Eurozone unemployment queues continued to grow in October. The Eurozone unemployment rate edged up to 10.3% in October. This is the highest rate across the 17 nation group since mid 1998. Germany continues to buck the upward trend. Its unemployment rate has fallen for three consecutive months and is just over half of the Eurozone average at 5.5%. In Italy and Spain things are much worse. Spain in particular is storing up problems for the future. With unemployment among the under 25s running at close to 50%, it faces the risk that a poorly skilled labour force will drag down its potential to grow in the future.

US unemployment surprises to the downside. US non-farm employment increased by 120k in November and US unemployment fell to 8.6% - its lowest rate since March 2009. The public sector is still shedding jobs, but retail, leisure, hospitality and heath care performed well. Some of the fall in unemployment is due to people who have stopped searching for jobs leaving the labour force. Nevertheless, rising employment and falling unemployment is still good news for the US labour market which has been struggling for so long.

Manufacturing expanded in the US, but house prices fell, again. Some more good news came from the US manufacturing sector. The manufacturing ISM survey picked up strongly in November to 52.7, well above the magic 50 which signifies expansion. The improvement was broadly based as production, new orders, and exports picked up. More of this might help to lift the housing market which is still in the dumps. House prices fell 3.6%y/y in September and are 31% below their 2006 peak, still weighed down by foreclosures.

China takes action against slowing growth. The HSBC and official PMIs both showed a contraction in China’s manufacturing activity in November. Both readings fell to their lowest since Q1 2009. This weakness and growing concerns about the impact of the euro crisis on global growth seems to justify lowering the reserve requirement ratio to ease credit conditions. The move will also have delighted the advanced economies looking for any boost to world demand.