1 – USA – Non financial agents’ indebtedness is at a very high level since 2009. The cumulated debt level of households, companies and the State is close to 250 % of GDP (It was 120 % in 1952).
We see on the chart that households’ debt has decreased by almost 15% since its highest level of 2009. But debt still represents 80% of GDP and is still a constraint for households and explains the not too strong demand.
For companies the debt level is almost linear. There was no strong acceleration contrary to what has been seen for households at the beginning of the 2000’s during the real estate bubble.
Government debt is increasing very rapidly since 2009. As households are in a deleveraging process, the government accepts to have higher debt to ease this deleveraging and to help for growth. That’s a strong difference between the USA and Europe where the target is to rebalance public finance rapidly. The difference in 2012 between these two strategies is 2.7 %. It’s the difference between the 2.2% GDP growth in the USA and the -0.5% of GDP contraction in the Euro Area.
But this will change with the sequestration and the process will not work in 2013 as smoothly as it did in 2012. This will have a cost in term of growth for the USA
2 – Employment was stronger than expected in February. That’s great but February’s number was close to February 2012 number. See the chart (246 000 private jobs in February 2013 versus 265 000 in February 2012)
The good news is that job creations in the retail sector are still positive. The impact of the 2% tax on wages is not too strong yet. The other point is the positive trend in construction. This is a by-product of the sector’s recovery. This will help Bernanke to maintain his low interest rate strategy.
OK unemployment rate was lower at 7.7% versus 7.9% in January. This is low but don’t forget that the participation rate is 3 point lower than in 2006 and the employment rate 5 points below 2006 level.
New temporary jobs were positive (16 000) but not signaling strong tensions in the US economy.
Wage annual change was 2% in February well above the 1.3% seen in October. That was the good news as this will feed demand.
On the whole it is a positive report on employment. But it will not change the global picture. The interesting part will be from now to next summer as it can be seen on the chart. With the sequestration will companies be able to create more jobs?
3 – ISM global, the synthetic index composed with the manufacturing and non-manufacturing indices jumped above 55 in February for the first time since January and February 2012. Usually this index is consistent with GDP growth. New orders global index was strong too. Good report.
4 – During the week-end a lot of data were published in China. What should we keep in mind? This is a mild recovery and there is no break on the upside in the trajectory.
Industrial production was up by 9.9% in January and February versus 10.3% in December (the 2 months are published together to avoid distortions due to the Chinese New Year which can be in January or in February). This profile is important as it helps to imagine GDP profile.
Retail sales were lower than expected. The year on year change was only 12.3 % versus 15.2 % in December. Real retail sales were more disappointing as inflation surged to 3.2% in February. (real retails were up by 10.7% in Feb.vs 12.8 % in December)
Investment was better shaped. It was up by 21.2% versus 20.7% on average during the last quarter of 2012. What is bothering with this figure is that it reflects stronger real estate investment and lower productive investment. This means that this will not lead to higher productivity growth and as the government tries to reduce real estate speculation this could lead to new regulations. This imbalance in the investment dynamic is something that is puzzling and the we have to keep in mind.
The good surprise came from exports. We all thought that with the New Year period they should collapse after the strong 25% seen in January. That was not the case. On the other side imports were lower to 5.3%.
Asian countries were the main contributors to higher exports. This can be the consequences of the Chinese recovery. Since fall 2012 economic activity is stronger and we’ve seen at the turn of the year that PMI/Markit indices in Taiwan and South Korea were stronger. This probably reflects a contagion from China and the surge in exports is then just a consequence. But a positive consequence as Asia is currently the most dynamic region. The USA and Europe had higher contributions for bad reasons: February 2012 numbers were very low.
What is amazing is that at the beginning of 2013, China is going back to its old growth model based on stronger exports and investment. This will probably not continue but its shows that the rebalancing mechanism has to be monitored.
5 – The ECB has not changed its refi rate but there was an intense discussion between members of the monetary policy committee to know if they have to lower it. What we should keep in in mind is that Mario Draghi during the press conference said that “monetary policy will remain accommodative as long as it is necessary”. That’s a deep change in the message from the ECB and looks like Fed message from March 2009 “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”(Italics are mine)
This means that the ECB target is still to have low interest rate structure in the Euro Area (that’s how we have to interpret OMT mechanism) and this will probably lower euro exchange rate.
6 – The ECB has changed its forecasts for 2013 and 2014. In 2013 GDP growth is now expected to be -0.5% versus -0.3% in December. In 2014 growth is expected to be at 1 % versus 1.2% in December. Inflation rates are almost unchanged (1.6% in 2013 and 1.3% in 2014).
7 – Euro Area – GDP number for the 4th quarter was confirmed at -2.3% at annual rate. There was no positive contribution. Consumption was lower for the 5th quarter in a row and investm ent was down for the 7th consecutive quarter. Private demand is really weak as it is shown on the chart.
Austerity policies in a context of very weak private demand are the best way to get higher unemployment rate.
8 – PMI/Markit surveys in February for the whole economy were lower in the Euro Area in February. There was a group of Latin economies (Spain, Italy and France) with low but pooled indices. German index was a little above 50 showing expansion but at a weaker pace than in January.
9 – Negative number in France and in the UK for industrial production in January. The two charts do not let us imagine that both economies enter in Q1 2013 with a strong momentum. We have to imagine Q1 GDP numbers as negative. Carry over growth is negative and new orders are weak leading probably to lower indices in February and March.
10 – I will come back next week on the new Bank of Japan governor
11 – In Brazil the Central Bank kept its main interest rate (the Selic) unchanged but the wording in the press release has changed. They said that monetary strategy is becoming data dependent. This reflects higher inflation rate and is very different with what was said before (low interest rate was the good strategy).
This means that with higher inflation (6.3% close to the 6.5% upper bound), monetary policy could change its pace with higher interest rates.
To limit this risk on monetary policy Brazilian government will try to keep inflation rate lower. It has decided to reduce some taxes on everyday goods. Not sure it works as Brazil problem is low productivity. Productive investment is too low and at the same time unemployment rate is very low. As productivity cannot increase rapidly, there are pressures on wages and on inflation.(see the same document for the week ending March 3) This is Brazilian weakness. Lower taxes could have at best a temporary impact.