Sunday, December 4, 2011

A Macro View of Current Economic Conditions

The following post is a temporary change in direction from recent posts.  It is posted as a reminder to all of us not to fall in to the trap of thinking the economy is "recovering", or that we are out of danger.

I don't normally follow Chinese finances that closely, but this one coupled with another about Europe are of particular interest.  Especially the opinion that we are in greater danger now, than in 2008.  The wording is not mine. The articles were not copyrighted, and are quoted in their entirety.

December 4, 2011 11:11pm.  As you read this, ask whether you are doing everything that you can to create new jobs, and or to increase sustainable, non tax originated revenues.


By Zhou Xin and Nick Edwards
BEIJING (Reuters) - China's services sector cooled in November to its weakest growth in three months, an HSBC purchasing managers' index showed on Monday, the latest data portraying an economy slowing quickly and in need of policy support.
The index fell to 52.5, a sharp decline given that October's reading was 54.1 -- the highest in four months -- though the index remains above the 50 level that separates expansion from contraction in the sector.
Expectations for new business dropped to their lowest level in three months too, but remained firmly above 50.

"With price pressures easing further, Beijing can and should use policies that are targeted on small businesses and service sectors to keep GDP growth at above 8 percent for the coming year," Qu Hongbin, HSBC's chief China economist, said in a statement.

China's official PMI for its non-manufacturing sector, released on Saturday, fell to 49.7 in November from 57.7 in October, the China Federation of Logistics and Purchasing said.

The readings mirror similar weakness in the country's giant manufacturing sector and underline expectations that Beijing will ease monetary policy further to cushion the blows of the global economy.

PMI data in the past week has shown that both domestic and export orders are weakening, helping explain the central bank's decision last week to cut bank reserve requirements for the first time in three years.

The move to free up cash was a signal that the central bank was shifting toward loosening monetary policy to support the economy, which is widely expected to grow next year at less than 9 percent for the first time in a decade, economists said.
Some economists are reluctant to read too much significance into the services indexes given their volatility, lack of seasonal adjustments, simple calculation methodology and their consequently weaker predictive power.

For instance the reading of 49.7 in China's official services PMI for November was an 8 point plunge from October, but smaller than the 9.5 point average since 2007, the starting point for this series, said Tim Condon, head of Asian economic research at ING in Singapore.

Past performance suggests that half that decline will be recovered in December, leaving the index in the mid-50s, though that is well below the near-60 level it has been at for most of the last 18 months and a clear sign of a slowing economy.

"The weakness in the manufacturing sector is spreading to the non-manufacturing economy. We think the policy fine-tuning also will spread," ING's Condon said.
Manufacturing dominates the Chinese economy and made up some 58 percent of activity in 2010. Services accounted for around 38 percent in 2010, losing some share in recent years to manufacturing which benefited from government stimulus programs to help the economy through the global financial crisis.

Factories elsewhere are also feeling the force of the global economic slowdown. A global PMI released last Thursday by JPMorgan, with research and supply management organizations, fell to 49.6, suggesting a contraction in global manufacturing.

Chinese officials have expressed growing alarm at the slide in the global economy as Europe struggles to produce a decisive solution to its debt crisis. China's economic growth has eased for three straight quarters to 9.1 percent in the July-September period.

Vice Finance Minister Zhu Guangyao said last week that the world economy faced a worse crisis now than during 2008 and that stimulating growth should be a priority.

Vice Premier Wang Qishan in November said a chronic global recession was certain.
Most analysts say the central bank has room for further cuts in banks' reserve requirements to release cash into the economy given than inflation is less of a concern. Consumer inflation fell back in October to 5.5 percent from a three-year high in July of 6.5 percent.

Before last week's 50 basis point cut in the ratio from a record 21.5 percent for big banks to 21 percent, a Reuters survey had shown analysts expected 200 basis points of cuts in 2012.

Some analysts have now increased their expectations. Kevin Lai, a senior economist at Daiwa Capital Markets in Hong Kong, said he expects 200 basis points of cuts in addition to last week's reduction.

Few analysts expect the central bank to start cutting interest rates anytime soon though. Rates are already below inflation levels, so a cut could encourage savers to pull money out of the banking system in search of higher returns elsewhere and so crimp bank lending.
(Editing by Ken Wills and Neil Fullick) "

The following is also quoted in it's entirety (copied) - red colored fonts added to direct the readers attention to specific comments.

Factories stall worldwide, U.S. jobless claims rise

By Ross Finley and Emily Kaiser

LONDON/SINGAPORE (Reuters) - Manufacturing activity is contracting across Europe and most of Asia, data showed on Thursday, and a Chinese official declared that the world economy faces a worse situation than in 2008 when Lehman Brothers collapsed.

Factory activity shrank even further in the euro zone, reinforcing the view that the debt-strapped region is in recession, while British manufacturing contracted at the fastest pace in two years, raising the risk that the UK economy may suffer the same fate.
This has been the case for much of the developed world for several months, with the exception of pockets of better news from the United States. But the slowdown now appears to be spreading to economic powerhouses of the developing world.

Adding to the gloom, new U.S. claims for unemployment benefits rose unexpectedly last week, popping above 400,000 for the first time in over a month and reinforcing the view that the battered labor market was healing only slowly.

China's official purchasing managers' index (PMI) showed factory activity shrank in November for the first time in nearly three years, while a similar PMI showed Indian factory growth slowed close to stall speed.

Both China and Brazil eased monetary policy on Wednesday. It came alongside coordinated action from the world's biggest central banks to try to prevent another credit crunch by lowering the cost of dollar swaplines.

"The big picture here is this is an unwinding of a 20-year debt bubble," said Peter Dixon, global financial economist at Commerzbank. "It's going to be painful, and it's going to be nasty. What policymakers are aiming for is a smoothing of the path."
But those policymakers appear to be getting more worried.

Zhu Guangyao, China's advance coordinator to the Group of 20 talks and also a vice finance minister, said heavily indebted countries had limited scope to act now, which will make it harder to sustain global growth as the European debt saga drags on.
"The current crisis, to some extent, is more serious and challenging than the international financial crisis following the fall of Lehman Brothers," Zhu said.
"It's keenly important for countries around the world to work together in the sprit of 'co-operating in the same boat'," he added.

After the Lehman bankruptcy, G20 countries committed trillions of dollars to boosting growth and backstopping banks, and central banks cut interest rates to record lows.
But rates are still near zero in the United States, Japan and Britain, and public finances have deteriorated around the world, leaving less policy space to counter a European downdraft.


Fast-growing emerging markets such as China, Brazil and India led the recovery in 2009, and they are still growing far more rapidly than most developed economies. But they are not immune to weak demand from Europe or the United States.

China's official purchasing managers' index for November fell to 49, dipping below the 50 mark that separates growth from contraction for the first time in nearly three years.
The index of new export orders tumbled to the lowest level since February 2009, perhaps not surprisingly given that Europe is one of China's biggest trading partners.
The final euro zone manufacturing PMI was confirmed at 46.4, its weakest level in two years, with factory activity in both of its biggest economies, Germany and France, weakening.

The UK factory PMI fell to 47.6 in November, its lowest since June 2009, further evidence that Britain's economy is in dangerous territory.
"The manufacturing engine has run out of steam," said Rob Dobson, senior economist at Markit, which compiles the surveys.

Similar factory data for the U.S. are expected later on Thursday, coming on the heels of a Federal Reserve report on Wednesday that said there was moderate growth in recent weeks but that hiring and housing market activity remained anemic.

The weaker-than-expected China PMI reading came one day after Beijing lowered banks' reserve requirements by 50 basis points to try to ease credit strains.
"It's time to start reflating China's economy," said Qu Hongbin, co-head of Asian economics research at HSBC.

An HSBC PMI on China also showed manufacturing activity shrank in November as new orders fell. The index dropped to 47.7 from 51 in October.
He predicted China's central bank would cut another 1.5 percentage points off of reserve requirements by mid-2012, and said the European debt crisis along with China's weakening property market would "only add to downside pressure on growth".
Reserve requirements for big banks stand at 21 percent.

Just a few months ago, inflation was the primary concern for most of Asia's economies. But Europe is the top export destination for many countries including China, so when its crisis intensified, Asia's growth prospects dimmed.

South Korea's factory activity shrank for a fourth consecutive month. Its November exports rose faster than expected, although many economists think that won't last because export orders weakened.

In Indonesia, year-on-year export growth slowed in October to 16.7 percent, well below economists' forecast for 22.7 percent and barely one-third of the growth rate recorded in September.

India bucked the trend, reporting a pick-up in export orders, although its overall PMI dipped on weak domestic demand.

(Additional reporting by Jane Lanhee Lee in Yiwu, Yoo Choonsik in Seoul, Aileen Wang and Kevin Yao in Beijing, Yati Himatsingka in Bangalore, Jonathan Cable and Susan Fenton in London; Editing by Jeremy Gaunt)