Sunday, February 24, 2013

UK downgrade, Europe PMIs and China housing

There were three developments late last week worthy of note: Moody’s downgraded the United Kingdom, Euro zone PMIs highlighted the growing divergence in economic performance between Germany and France, and China has announced renewed efforts to contain the residential property market.  Sorry I couldn’t think of a more elegant title to tie them all together!
In a move that is no real surprise, Moody’s downgraded the UK one notch to Aa1.  Moody’s cited continuing weakness in the UK’s medium-term growth outlook which they expect to last into the second half of the decade.  That’s a reasonable expectation. 
Moody’s shifted the outlook for the UK rating to stable, reflecting their expectation that “a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the UK’s debt trajectory”.
My concern for the UK is the government seems to have put all his eggs in one basket: fiscal austerity.  They are finding that, unlike in the early 1990’s, “expansionary austerity” isn’t quite so easy in the aftermath of a financial crisis when interest rates are already low and business and consumer confidence are weak.  Furthermore, I’m not convinced the UK has yet done enough structural work to be confident of robust growth in the future.
In the Euro zone, February “flash” PMI data showed that while financial tensions may have reduced in recent months, it is yet to have any meaningful impact on real economic activity.  The composite (manufacturing and services) index for the Euro zone fell from 48.6 in January to 47.3 in February.  That puts downside risk on my expectation of March 2013 quarter Euro zone GDP of zero.
The data again highlighted the divergence in economic performance between Germany and France. The composite index slipped for both countries over the month, but the German index at 52.7 is well ahead of the 42.3 recorded in France.   December quarter GDP data released last week showed Germany contracting -0.6% over the quarter and France contracting -0.3%.  I still think that was the low point in the cycle for Germany but it appears France has further to slow.  Let’s hope France doesn’t become the big story in the Euro zone in 2013.
Finally, the Chinese authorities have asked local authorities to step-up their enforcement of current policies to curb property market speculation.  Property prices rose 0.5% in the January month to be up 0.6% in the year to January, the first annual increase in 11 months. 
This is a prudent and therefore welcome move.  The authorities have been reluctant to ease monetary conditions too aggressively, for fear of reinflating the property bubble that emerged out of the post-GFC stimulus measures.  In taking modest steps now to better enforce existing policies, it reduces the risks of having to take more aggressive steps further down the track that would be more detrimental to overall economic growth.