|A slowdown in global industrial production is becoming evident, as the inventory cycle is drawing to a
close, notably in the United States, and as fiscal support measures in key economies are being withdrawn.
Growth in industrial output is expected to slow in high-income countries and the large developing economies, especially in China, which has been leading the business cycle. The Euro Area continues to lag other economies, with exports being the main driver of the recovery, notably for Germany. Stronger exports boosted business and consumer confidence, despite concerns about European sovereign stress.
|Global industrial production (IP) growth is moderating in line with a normal recovery. Purchasing managers’ indexes (PMIs) point to moderation in the pace of IP growth in major developing countries (Brazil, Russia, China, India, and South Africa) and in core high-income economies. June manufacturing PMIs suggest a slowdown to near 7% among the BRICS in the third quarter from nearly 10% in the second, and to 3.1% in core high-income countries from 7.5%―as growth in China and the G3 countries ease. The fall below the threshold "50" mark for China’s new orders and output PMI components suggests that East Asian economies, which benefitted from strong Chinese import demand, will see moderation in coming quarters. Taiwan (China) reported a monthly decline in factory and export orders in June; and IP corrected sharply in Singapore after an impressive six-month rise.|
|Euro-Area confidence surveys surprise to the upside. Confidence surveys for July unveiled surprising improvement in expectations for the economic outlook, jobs, investment returns and more confidence in banking systems. Germany’s IFO business climate index unexpectedly surged to a 3-month high, up 4.4 points to 106.2; and the EM flash manufacturing PMI jumped to 61.2 as consumer confidence increased to pre-crisis levels. Core Euro zone countries are viewed to moderate to a near-trend growth pace, as the positive contribution to growth from inventories is likely to run its course by the third quarter, and bank funding stress will continue to weigh on growth. Pent-up demand for durables and the effects of monetary policy should aid growth. Germany’s IP is likely to ease to a still robust 12% pace in the third quarter down from 22% in the second (saar).|
|EU stress test results reveal that seven banks failed to maintain a minimum 6% Tier-1 capital ratio; €3.5bn in capital to be raised. Covering 91 European banks, the test focused on how they would cope with another economic downturn and losses on trading portfolios of government bonds. A group of five Spanish cajas (unlisted savings banks), Germany’s Hypo Real Estate, and the Agricultural Bank of Greece failed the tests. These banks would require €1.84bn, €1.25bn and €243mn respectively. In an adverse ‘sovereign stress’ scenario, the EU banking system’s average aggregate Tier-1 capital ratio would decline to 9.2% by 2011 from 11.2%, with overall impairments totaling €566bn. Some of the test assumptions were considered overly benign by analysts, but the disclosure of sovereign debt exposure is broadly seen as a positive, and spreads have narrowed by 24 basis points since the release of the results. The key test is still on the funding side, with European banks having to refinance €1.6trn by 2012.|
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