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Prospects daily: Markets' concern shifts to factory sector in Europe and China

Global Macroeconomics Team's picture

Important developments today:

1.  Global markets slump as China and Euro-Zone manufacturing prompt growth worries

2.  Canada becomes first among G-7 countries to raise interest rates

3.  European unemployment reaches 12-year peak



Global markets slump as China and Euro-Zone manufacturing prompt growth worries. World markets turned lower on Tuesday as speculation that slower manufacturing growth in China and Europe would hamper the global economic recovery. Lingering worries over the ability of European banks to endure a growing debt crisis also weighed on market sentiment. Following the most volatile month of trading since the Lehman crisis of 2008, investors are now concerned that growth may slow in the Euro Zone, grappling to rein-in fiscal deficits, and dampening demand for exports from economies like China. Global stocks, the euro, and oil prices all tumbled, while government bonds gained.

Stocks in Asia and Europe declined on Tuesday, extending their biggest monthly retreat since October 2008, amid jitters about the health of the global economy’s manufacturing base. Emerging-market stocks fell for the first time in five days, with the benchmark MSCI-EM index dropping 1.1%, ending a four-day rally which produced a cumulative 8.3% gain. U.S. equities also opened slightly lower in morning trades, with the S&P 500 Index sliding 0.2%.

Meanwhile, the euro continued to tumble, hitting new 4-year lows against the dollar on Tuesday, as worries that the Euro Area’s sovereign debt difficulties could lead to a new round of substantial write-downs for the banking sector, adding to concerns about the region’s economic outlook. The single currency hit $1.2112 in Tuesday morning trade, the lowest since April 2006, from $1.2301 late Monday. The European Central Bank said on Monday it estimates the continent’s banking system will face potentially large loan losses this year and next. Meanwhile, oil prices dropped as well, falling as much as 3.2% amid concern that the global economic rebound may slow.

In contrast, government bonds advanced as rising risk aversion drove investors to safe-haven assets. The yield on the U.S. 2-year Treasury note slid to its lowest level in a week, as negative sentiment dominated world stock markets. German government bonds advance, rising for a third day, pushing 10-year yields to 2.61%, down 5 basis points from Monday. And a credit downgrade of Spain sovereign debt by Fitch last Friday seemed to boost demand for German bunds as investor sought safe assets.


Canada becomes first among G-7 countries to raise interest rates. The Bank of Canada increased its policy rate from a record low 0.25% by 25 basis points to 0.50% today, emerging as the first G-7 central bank to “snug-up” interest rates against the background of firming economic activity. It was the Bank’s first move since July 2007 and the first for Governor Mark Carney. Canada’s GDP grew at a strong 6.1% pace in the first quarter (saar)– effectively double that of the United States, while the Bank believes that its 2 percent inflation target will be eclipsed this year.


European unemployment reaches 12-year peak. The Euro Zone’s unemployment rate increased to 10.1% of the labor force in April, up from 10% recorded the month before. The current unemployment rate represents about 15.9 million persons across the 16-nation currency zone, with increased layoffs in Spain, Portugal, Ireland and Italy offsetting modest declines in levels of the unemployed in Germany and the Netherlands. Indeed, German unemployment dropped to a seasonally adjusted 3.25 million (7.7% of the labor force), the lowest seen since December 2008.


German retail sales increase modestly. Retail sales in Germany increased 1% (m/m) in April following a 1.6% decrease in the previous month, while in year-over-year terms the volume of retail sales declined 1.1% from April 2009. Consumer spending at the retail level remains weak, despite recent improvements in domestic labor markets, and the strength of the manufacturing sector recovery in the economy. Indeed, sales have declined 0.1% on average every month since the beginning of this year, while momentum growth (3 month average, saar), though improved from an average of -2.3% in 2009, has been close to zero on average for 2010. Households are keeping spending plans on hold, and worsening confidence indicators for both Germany and the broader Euro Area in May indicate that they may continue to restrain spending over concerns regarding the southern European debt crisis.


U.S. Headline PMI-manufacturing eases slightly in May. ISM’s survey of purchasing managers in the manufacturing sector yielded slightly lower “headline” results in May, a reading of 59.7 from 60.4 in April. But the 10th successive indicator of growth in the factory sector (a level above ‘50’ connotes gains) also carried some favorable supporting elements. The ISM export index advanced to the highest level in two decades, with export order books firming quickly. And the index of orders waiting to be filled (back-orders) increased modestly; importantly, the employment gauge climbed to 59.8, the highest since May 2004, suggesting a move toward hires, away from layoffs in coming months.


Among emerging markets:

In East Asia and the Pacific, China’s seasonally adjusted purchasing managers’ index dropped to 53.9 in May from 55.7 in April, raising concerns that China’s strong economic recovery may slow, affecting countries that depend heavily on China’s demand. Meanwhile passenger car sales grew at a weaker pace in May, as falling stock prices had a negative effect on wealth. Auto prices rose 25% year-on-year in May, compared to 34% in April.

In Central and Eastern Europe and the CIS, Poland’s consumer price inflation probably eased to 2.1% in May from 2.4% in April, marking the slowest pace since August 2007, as the purchasing managers’ index dropped to 52.2 in May from 52.5 in April. GDP growth eased to 3% in the first quarter (y/y) from 3.3% in the previous three months, according to the statistics office, indicating a loss of momentum in the economy. Russia’s manufacturing output expanded at a slower pace in May, as suggested by the VTB Capital purchasing managers’ index, which stepped down to 52 in May from 52.1 in April.

In Sub-Saharan Africa, South Africa’s home prices increased 2.3% year-on-year in May, to a median price of R579,000 ($74,500), following a 2% increase in April, as the economy is coming out of its first recession in 17 years. Meanwhile the purchasing managers’ index slid to 51.5 in May from 55.2 in April, the lowest level since November and the third consecutive month of decline, as employment and business measures weakened. Mauritius’ trade deficit increased to 14.5 billion rupees ($433.5 million) in the first quarter of 2010, up from a deficit of 11.1 billion rupees a year earlier, as exports dropped 0.7% year-on-year, while imports increased 13%.

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