Monday, April 29, 2013

Monetary policy in India and Brazil

In India further interest rate cuts seem more likely following the recent sharper-than-expected decline in the Wholesale Price Index (WPI).  WPI inflation fell to 6.0% y/y in March, down from 6.8% in February.  Core inflation also continued to decline, falling to 3.5% y/y from 3.8% y/y over the same period.

I’ve written before about the tension between the Reserve Bank of India (RBI) and the Government with the former looking for changes to fiscal policy (subsidies) and structural goods markets reform to ease inflation pressure with the latter looking for the RBI to do more work to support growth, which at 4.5% in the year to December 2012 is below trend. 

However, with WPI inflation now lower and growth looking soft, there is more room for the RBI to move.   However, we think the RBI’s comment from their last statement still holds: “the headroom for further monetary easing remains quite limited”.  That’s particularly the case given that CPI inflation remains in excess of 10%.  We think there is room for another 50 bps of easing with the next move likely to come at the policy meeting on May 3rd.

In Brazil, the central bank recently raised the official Selic rate by 25bps.  With the Brazilian economy slowing more sharply than we expected last year, the central bank eased aggressively.  The policy rate ended up lower in 2012 than it was during the GFC downturn.

With that aggressive monetary response, we warned the central bank would have to respond quickly to signs of emerging inflation pressures.  That seemed inevitable given the near 20% depreciation in the Brazilian Real.  While recent activity indicators have been somewhat softer than expected, inflation has surprised on the upside.

The good news is the Bank is responding to the inflation surprise.  While we expect to see interest rates move gradually higher in the period ahead, we are not expecting an aggressive tightening in conditions.  At this point I’m still happy with my 2013 GDP growth forecast of 3.0%. 

Sunday, April 28, 2013

US and UK GDP growth

In the last few days we have seen advance estimates of March quarter GDP growth for both the US and the UK.  In the US the result came in bang on our forecast of 2.5% while the UK posted a result which was sufficient to avert a triple-dip recession.
While the overall US result was in line with our forecast the make-up of the result was a tad different to what we had expected: private consumption was a bit stronger while government spending was a bit weaker.  Markets were not overly impressed as the result came in under average market expectations which had crept up to around 3.0% over the last few weeks.
This result needs to be seen together with the previous quarter’s weak 0.4% growth.  At the end of last year a number of factors contributed to activity being shifted into the start of the New Year – Hurricane Sandy and the uncertainty around the fiscal cliff were the primary culprits.  That was most noticeable in the inventory cycle with inventory accumulation adding one percentage point to the March quarter result following a significant negative contribution in the December quarter.  We think this (short) inventory cycle has now run its course.
Consumer spending came in stronger than expected at 3.2%, a pace that is unlikely to be sustained.  Much of the gain came early in the quarter which again reflects delayed activity from Q4 last year to early 2013.  Growth in real disposable income has slowed recently which will be a drag on consumer spending in coming months.  Government spending fell 4.1% in the March after falling 7.0% in December.  Given the sequester we expect government spending will continue to be drag on growth.  On a more positive note, residential construction rose at a double digit pace for the third consecutive quarter. 
Looking ahead this March quarter result should be the end of the volatility, especially with respect to the inventory cycle.  Domestic demand rose 1.9% over the quarter, a level that has been relatively stable over the past two years and a good indicator of trend growth which we continue to put at around 2% per annum.  However, we expect the June quarter GDP result to be weaker than trend at around 1.5% (saar), reflecting the recent tax increases and sequestration. 
In the second half of the year the effect of fiscal drag is likely to wane and the housing market recovery will help generate a more sustainable lift in growth. At this point I’m still happy with my 2.0% (annual average) GDP forecast for calendar 2013. 
There were no problems for the Fed in this result – the core personal consumption expenditure deflator came in at an annualised 1.2%.  Roll on QE.
In the UK March growth came in at 0.3% q/q, thereby narrowly avoiding a triple-dip recession.  That result was slightly ahead of average market expectations of +0.1%.  Year-on-year growth was +0.6% in the year to March. 
We expect growth will remain hard work in the UK.  The recent Budget re-committed to the Government’s medium term fiscal consolidation plans.  To help offset the fiscal drag, the Government gave the Bank of England the ability to interpret its inflation target more flexibly and put some new tools in the monetary policy toolkit, including credit easing and liquidity policy.  Up until now the BoE has had just the Bank Rate and quantitative easing at its disposal. 
We expect these new tools to be deployed after the new BoE Governor, Mark Carney takes up his position in the middle of the year.  I still think greater use of a wider range of monetary policy tools is the second-best solution to the UK’s growth woes.  The best solution still seems to me to be a less draconian fiscal consolidation plan.

Sunday, April 21, 2013

Balanced statement from the G20

The G20 appears more relaxed about the recent monetary easing in Japan, less concerned about the advent of a currency war and more concerned about the appropriate balance between monetary policy and broader structural reforms.  That makes for a balanced and appropriate statement in my view.
Earlier in the year the G20 had been somewhat concerned about, at that time, the prospect of aggressive monetary easing in Japan and the capacity for such action to stoke the fires of a currency war.  The G20 has since seen reason stating that “Japan’s recent policy actions are intended to stop deflation and support domestic demand”.  When you think about it that’s all they can say if they want to be internally consistent.  How can the G20 have a problem with quantitative easing (QE) in Japan and not have a problem with QE in America or the UK?
Furthermore, the G20 has given the green light to central banks to do what they need to do to support growth and avoid (or recover from) deflation.  “Monetary policy should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates of central banks.”  No problem with that comment!
In terms of structural reform the communique states that while some progress has been made (in my view arguable for some countries) major policy priorities remain the same in many countries.  In the euro zone that means further steps towards banking union, further reduction in financial fragmentation and continued strengthening of bank balance sheets.  In the US the need is for a balanced medium-term fiscal consolidation plan with the same required in Japan (although for Japan “balanced” is swapped for “credible”).  The communique also requests, rather too politely, that large surplus countries consider taking further steps to boost domestic sources of growth.
While the G20 acknowledge the risks of unintended negative side-effects from extended periods of monetary easing, they don’t go as far as I would in drawing the link between lack of progress of structural reform and the over-reliance on monetary policy to support growth. Therein lays the critical challenge for G20 members: transferring the global rhetoric to demonstrable progress in implementing structural reform at home.

Wednesday, April 17, 2013

NZ CPI in line with (RBNZ) expectations

The NZ March quarter CPI came in at +0.4% q/q for an annual increase of 0.9%.  That’s a touch lower than average market expectations of +0.5% q/q, but bang on the Reserve Bank’s forecast.

The make-up of the increase was much as expected with Government charges (e.g. tobacco excise, prescription charges) contributing a significant portion of the increase.  The housing and household utilities group was up 0.6% q/q.  Within that rentals were up 0.7% q/q (Canterbury up 2.1%).  Food prices were up 0.7% over the quarter.  On the downside the transport, household contents & services, communication and clothing & footwear groups all recorded price falls.

The strong exchange rate and low imported inflation continue to be the most significant disinflationary forces.  While the overall CPI rose 0.4% over the quarter, the average price for traded goods FELL 0.5% while non-traded goods prices ROSE an average 1.1% over the same period.  The annual rate of traded goods inflation is now at -1.1% while the annual rate of non-traded goods is +2.4%.

Therein lies the conundrum for monetary policy.  On the one hand the exchange rate (in trade weighted terms) continues to go from strength-to-strength, putting continued downward pressure on inflation.  At the same time, the economy is growing in excess of potential, leading to the absorption of spare capacity in the economy and a closing of the output gap.  This will eventually put upward pressure on prices.  It’s not the absolute level of growth that matters for monetary policy it’s how fast the economy is growing relative to its potential growth rate.  We put New Zealand’s potential growth rate at around at around 2%.   Furthermore, we know the Reserve Bank is concerned about the renewed strength in the housing market.

That has us still expecting the next move in interest rates will be up, it’s just a question of when.  A cut to interest rates now would simply create a bigger headache down the track by further stoking the housing market.  And we don’t think a reduction in interest rates would make a significant amount of difference in the level of the New Zealand dollar.  There are other things at play there.

Neither do we expect the likely introduction of macro-prudential tools later this year to make much difference to the interest rate outlook.  By the time the tools are deployed the housing cycle will be well advanced, and their efficacy is still yet to be proven.  And of course much of the housing market imbalance is supply-side in nature.  Macro-prudential tools will be at most a complementary demand-side tool to work alongside the traditional demand management tool – interest rates.  I’m still expecting the first hike in rates in December this year.

Monday, April 15, 2013

China GDP growth disappoints

China’s GDP growth came in weaker than expected at 7.7% for the year to March 2013.  That compares with average market forecasts of around 8.0%.  While this is still above the recent cyclical trough of 7.4% in the September 2012 year, it’s down on the 7.9% for the year to December 2012.  We still believe China is in a modest upswing, but we can now add the occasional setback to the outlook.  It also means downside risk to our forecast of 8.2% growth for the calendar 2013 year.
My assumption was that plentiful credit would be sufficient to see the Chinese economy gather further momentum in the first quarter of 2013.  Only last week March data showed M2 money supply growth of 15.7% and 2.54 trillion in total social financing.  By itself that suggested March quarter growth might surprise on the upside, not the downside.
Weak investment was the catalyst for the disappointing result.  In terms of percentage point contributions to the annual result to March, consumption added 4.3ppt, up from 4.1ppt in the year to December.  However, the contribution from investment dropped from 3.9ppt to a surprisingly low 2.3ppt. The balance is net exports which added a robust 1.1ppt, up from -0.2ppt previously.    
On a quarterly basis growth slowed from 2.0% q/q in December to 1.6% q/q in March.  We don’t read too much into the quarterly data, but nevertheless that represents a clear loss of momentum over the quarter.  In fact this quarter is the weakest since the first quarter of 2012 – that’s also a surprise given how loose monetary and fiscal policy have been over the past year.
To make up a troika of surprises, industrial production slowed to an annual growth rate of 8.9% in the year to the March month (9.5% for the March quarter).  That’s its lowest level since August last year.  Official manufacturing PMI data was held around the 50-51 level over the past few months, but that’s not indicative of a sharp rebound on the horizon.  Indeed one the reasons we believe core inflation will only rise gradually from here is because of the spare capacity that exists in the manufacturing sector.
Looking ahead loose monetary and fiscal policy will continue support activity growth going forward.  The lower-than-expected March consumer price index result means there is no immediate concern about inflation.   Together, the weaker growth and inflation data support our view of no tightening in monetary conditions until 2014.  However, I still don’t believe there’s too much room for new stimulus – that might just create bigger problems down the track.  And the authorities will be sure to maintain their commitment to the quality of growth rather than the quantity. 
On the growth downside, however, I’d be surprised if the strength of the contribution from net exports were sustained into the current quarter.  Indeed March export growth slowed to a lower than expected 10% in March, down from the 21.8% level of January-February.  While we thought that was too strong, the size of the dip in March was surprising as was the imports growth rate which came in at a higher than expected 14.1%.
Our China story for 2013 was one of a modest upswing in growth.  I’m still happy with that story.  I think this latest result is one of “upswing postponed” rather than “upswing denied”.  So I am, somewhat nervously, hanging onto my 8.2% forecast for this year.  For now.  

Thursday, April 11, 2013

G4 central banks and the New Zealand dollar

G4 central banks are continuing to pull out all the stops to support economic growth and reflation in their respective economies.  In the past few days we have seen confirmation of the expected aggressive monetary easing in Japan, European Central Bank and Bank of England meetings that confirmed a continued bias to ease, and labour market data out of America that suggests QE3 isn’t about to end anytime soon.

This easing has created, and in some cases continues to create, significant downward pressure on G4 exchange rates.  We don’t accept the thesis of a currency war: central banks are responding to their mandates, although they are operating in an environment of little support from broader economic reforms.

The other side of the exchange rate story creates challenges for countries like New Zealand, where the exchange rate has gone from strength to strength, especially in trade weighted (TWI) terms.  However, while the firm exchange rate is making life challenging for New Zealand exporters, an environment in which G4 central banks hadn’t taken the unconventional and aggressive steps they have might have been far worse for the New Zealand economy.

The key question is what is the likely catalyst for a change in trend of the New Zealand dollar, especially given that the next move from the Reserve Bank is likely to be an increase in interest rates?  While there are domestic reasons why the New Zealand dollar should weaken, such as the current account deficit heading to 7% of GDP, the most likely catalyst for a weaker currency will a change in fortunes for the better in the G4 economies.

The new Japanese Prime Minister Shinzo Abe was elected with a mandate of enact a three-pronged assault on two decades of recession and deflation.   The three prongs are an increase in fiscal stimulus focussing on public works, structural reforms to boost productivity and aggressive monetary easing by the Bank of Japan (BoJ).

Enter Haruhiko Kuroda, the newly appointed Governor of the BoJ.  Following the adoption of a 2% inflation target, he has launched an aggressive deflation fighting offensive.  Measures in the package included expansion of the monetary base (cash and bank reserve) and a near doubling of monthly purchases of Japanese Government Bonds.  The Yen had weakened considerably since the more aggressive approach to monetary policy was first touted and fell further with the announcement following the April BoJ meeting.  The Yen has depreciated 24% against the US dollar since November last year.   We expect it will fall further as the easing proceeds.  

United States
The US launched QE3 in September last year.  It then changed its communication policy on interest rates from time specific guidance to the unemployment rate (6.5%) and inflation expectations (2.5%).  While the unemployment rate is inching closer to the Federal Open Market Committees (FOMCs) target of 6.5%, it’s not because of the sustained improvement in the labour market the FOMC was no doubt seeking when they set the target. Much of the gains in the unemployment rate have been due to the continued fall in the participation rate which as at March 2013 stood at 63.3, its lowest level since May 1979.  Meanwhile, inflation expectations remain well in check.

The FOMC has also continued to debate the relative costs and benefits of the continued asset purchase program.  Over recent months the release of FOMC minutes have at times spooked markets into thinking that QE might end sooner than expected.  Here’s the key point: both Ben Bernanke and Janet Yellen, (his likely successor) believe the benefits continue to outweigh the costs.

We believe QE3 will continue well into 2014 which will keep the USD weak.  The first step in its withdrawal would be a reduction in quantum of monthly purchases, which could be late this year, but will require a strengthening in job growth and further reductions in the unemployment rate.  The labour market challenge in the months ahead will be the amount of the automatic spending cuts that will be met by job cuts.

Euro zone
We credit the European Central Bank with much of the calm that has descended on the Euro zone and the reduced (though not eliminated) tail risks.  Its Long-Term Refinancing Operation (LTRO) program provided liquidity to a stressed banking sector and the more recent Outright Monetary Transactions (OMT) program, while still to be accessed, did much to reduce contagion fears.  However, while financial tensions in Europe are reduced, that is yet to translate into a recovery in output and jobs.

The Euro has depreciated significantly over the period of the debt crisis, but has appreciated more recently on the back of the reduction in financial tensions.  At the same time, some of the recent activity data has been softer than expected and expectations are that inflation will move lower.

Last week’s ECB meeting saw the central bank leave interest rate unchanged, but with a bias to ease.  Importantly the statement following the meeting dropped the comment from the previous statement about seeing signs of stabilisation and instead talked about the outlook being subject to downside risks.

That makes further interest rate reductions over the next few months likely, however we continue to believe that at such low levels, interest rate cuts would be largely symbolic.  That being the case they will probably look at further non-standard measures with ECB President Draghi commenting that the Bank is looking for ways to improve lending conditions to SMEs.

United Kingdom
The UK economy remains weak on the back of extreme fiscal consolidation and weak exports.  The March budget shows the Government remains committed to its fiscal consolidation path which as we’ve said many times has lost the balance between austerity and growth.

The Bank of England has previously cut its benchmark interest rate to 0.5% and launched a £375 billion asset purchase program.  The Bank has had its hands tied more recently as it awaits the arrival of its new Governor, Mark Carney, in July. 

The signals are his arrival will coincide with more easing from the BoE.  Mr Carney is on record as saying he doesn’t believe central banks have yet reached the limits of their capacity to support growth.  More important changes to Monetary Policy Committee remit mean the BoE will be able to interpret the 2% inflation target more flexibly and will most likely have access to a wider range of tools than they currently have at their disposal. 

Monetary policy in the world’s major economies will continue to be supportive of economic growth and reflation for some time yet.  The initial signals in Japan of more aggressive monetary policy settings led to accusations of a stepping up of currency wars.  We don’t agree.  Central banks are simply implementing the necessary monetary policy settings to meet their respective domestic mandates.

If we’re grumpy about anything it’s the lack of support given central banks from broader (supply-side) policy initiatives.  That has left monetary policy to do all the heavy lifting.  And no matter how much central banks ease, monetary policy can’t achieve necessary structural reform. 

Weak exchange rates in the countries easing monetary policy, particularly through asset purchases, are a consequence of those actions, not the intention.  The problem is it is making life challenging for countries on the other side of the exchange rate such as Australia, New Zealand and some emerging economies, where exporters are suffering under high exchange rates.

However, this outcome is the lesser of two evils.  The alternative would have been for the major central banks not to ease in the manner they have, but that would have left those countries in recession and possibly depression, which would have been a worse outcome for New Zealand exporters.

The New Zealand dollar is currently overvalued against four of the five currencies that make up our Trade Weighted Exchange Rate Index (TWI).  That’s against the US dollar, the Japanese Yen, the British Pound and the Euro.  We are at around fair value against the Australian dollar. 

Of course the strength of the New Zealand dollar is not just about weakness on the other side.  There are reasons for the New Zealand dollar to be strong including the still relatively high terms of trade, interest rates differentials and the general fact that we are just in better shape that most of the major developed world economies.

But when it comes to thinking about what is the likely catalyst to a sustained depreciation in the New Zealand dollar from its current over-valued level the most likely candidate is an end to G4 monetary easing, especially asset purchases.  That will most likely be some time away.  In the meantime we will see continued strength and most likely further strengthening in the New Zealand dollar.  This will continue to make life challenging for exporters and hampers the necessary rebalancing in the New Zealand economy.  It also makes life challenging for the Reserve Bank of New Zealand which is increasingly stuck between a rock (a strong exchange rate) and a hard place (continued absorption of spare capacity and a strong domestic housing market).  More on the challenge for the Reserve Bank next week.

Wednesday, April 10, 2013

China inflation lower than expected but uptrend still likely

China’s March CPI data showed that inflation is not an immediate concern.  A decline in the annual rate of inflation had been expected following the excesses of the Lunar New Year holiday and related (mostly food) price increase, but the drop in the annual rate from 3.2% in February to 2.1% in March was lower than market expectations of a decline to around 2.5%.

Food prices fell 2.7% over the month which took the annual rate from 6.0% in February to 2.7% in March.  Non-food inflation rose 0.1% over the month for an annual increase of 1.8%.  Non-food inflation has now spent the best part of 18 months below 2.0%.

While the decline over the month was larger than expected we continue to believe we are past the low point in the China inflation cycle.  However, we expect the modest nature of the recovery in growth and relatively high levels of excess capacity in the manufacturing sector will keep the upward trend gradual (annual PPI deflation went from -1.6% in February to -1.9% in March).  We are also keeping a close eye, as will the PBoC, on food (pork) prices.

The good news is that given this latest result, the starting point will be from a lower base.  That’s not insignificant in light of the recently announced inflation target of 3.5% for 2013 which is lower than the 4.0% target in 2012.

There has been a bit of consternation recently about efforts by the Chinese authorities to contain the recovery in the housing market.  I think it’s actually a good thing. The authorities are keen not to inflate another residential property market bubble and in so-doing are likely to delay the need for a broader monetary policy response (read interest rate increases) until 2014.  That a positive for the broader economy.

Saturday, April 6, 2013

Disappointing US jobs growth

In a pattern that has become all too familiar, the US labour market was unable to sustain the pace of jobs gain at the start of the year into the end of the first quarter.  Non-farm payrolls printed at a disappointing 88k for the month although the unemployment rate ticked lower, but once again for all the wrong reasons.

The +88k gain in non-farm payrolls was around half average market expectations of +190k.  The disappointment was tempered somewhat upward revisions of a total of +61 to the prior two months.  That left the average monthly gain for the quarter at a +168k, but with an ominous dip lower at the end of the period. 
Job growth over the month was based across most sectors although manufacturing (-3k) and retail (-24k) recorded contractions in employment.
The unemployment rate fell to 7.6% in the month.  That was on the back of another dip lower in the participation rate to 63.3%.  That’s the lowest level since mid-1979.  To reinforce the soft result annual growth in hourly earnings also dipped lower, signalling caution in predicting anything other than modest consumer spending growth in the period ahead.
So how does this help shape the outlook for jobs and economic growth over 2013?  The answer remains the same: expect only modest gains in both.  Jobs growth will be held back by the impact of sequestration, with a significant proportion of lower spending likely to come through payrolls.  While many would argue that US fiscal policy is in pretty good shape relative to many other developed economies, the lack of a long-term plan and continued ad hoc decisions making is damaging.  I expect private payrolls to continue to make solid but unspectacular gains.
This result supports our view that while Q1 growth is shaping up to print at around a seasonally adjusted annual rate of 2.5%, it would be wrong to extrapolate that out for the rest of the year.  I expect the impact of fiscal drag to make itself known in the second quarter of the year when I expect growth of around 1.5% over the quarter.  That pattern is supported the hours worked data in todays result.  I’m still happy with my forecast of 2.0% annual average growth for 2013.
In terms of monetary policy, while the unemployment inched closer to the Feds target of 6.5%, they certainly won’t be seeing this result as a sign of the broad-based strengthening in the labour market they want to see.  Stronger jobs growth may herald a reduction in the quantum of asset purchases later this year, but QE3 is likely to continue well into 2014.

Friday, April 5, 2013

BoJ launches aggressive offensive against deflation

The Bank of Japan has taken aggressive steps towards ending decades of deflation in Japan.   This follows the appointment of Haruhiko Kuroda as Governor of the Bank of Japan and the recent adoption of a 2% inflation target.  Kuroda had previously been critical of the lack of boldness by the BoJ in ending deflation.

 The key decisions are as follows:

1)  The primary target for money market operations changes from the overnight interest rate to the monetary base.  Open market operations will be conducted to double the monetary base from ¥138 trillion at the end of 2012 to ¥270 trillion by the end of 2014.

2)  The asset purchase program will be merged with the program of outright purchases of Japanese Government Bonds (JGBs).  Monthly purchases of JGBs will nearly double from around ¥4 trillion to ¥7 trillion.  That will take the size of the BoJ balance sheet from ¥158 trillion at the end of 2012 to around ¥290 trillion at the end of 2014.

3)  JGB purchases will now include all maturities.  Previously purchased were concentrated at the short end of the curve. 

4)  The rule that limits holdings of JGBs to the amount of banknotes in circulation has been temporarily suspended.

5)  Purchases of risk assets will also be increased by ¥1 trillion per month for ETFs and ¥30 billion for REITs. 

These are unambiguously bold steps, but bold steps are necessary.  As speculation grew about more aggressive action from the BoJ accusations began to a fly around a stepping-up of currency wars.  We disagree with that.  An end to deflation and a move to more robust sustainable growth is the best thing Japan can do for itself and the global economy.  But that isn’t going to be easy.  As I’ve said many times before in support of bold action from other central banks to avoid deflation: it’s much harder to get out of it once you’re in it.  These actions are an important part of doing just that.

Thursday, April 4, 2013

Around the world by PMI

March manufacturing PMI data supports the contention that achieving faster stronger growth remains hard work.  The results from around the world were a mixed bag with some good results and some not so good.  On average the results were slightly better in March than February, with the global index inching higher from 50.9 to 51.2.  That leaves us on track for higher global growth this year, but with emerging markets likely to do most of the work.


The US manufacturing ISM fell to 51.3 in March, down from 54.2 in February.  Much of the strength in the index in the first two months of the year reflects firms restocking efforts post the cautious approach to inventory management in the midst of the fiscal cliff uncertainty in late 2012.  Some pull-back was therefore not entirely unexpected.  This result supports our view that March 2013 quarter GDP growth will come in relatively strong at 2.5% (seasonally adjusted annual rate), but that result needs to be considered in conjunction with the soft December 2012 quarter increase of 0.4%.  An average increase of 1.5% seems closer to the true state of play.  Indeed that’s the increase we have pencilled in for the June 2013 quarter when the effect of the fiscal drag of higher taxes and lower spending will become more evident.  We expect stronger growth in the second half of the year as the fiscal drag effect wanes and as the improvement in the housing market provides some stronger momentum.  Amongst the detail of the result the new orders index fell to 51.4 (from 57.8), employment rose to 54.2 (52.6).  The most positive news in the result was the increase in the export orders index to 56.0 (53.5).  Remember, stronger exports and business investment will be a critical part of a stronger (rebalanced) US economy.

Euro zone

The Euro zone PMI fell 1.1 points in March to 46.8, however that’s still some 3 points higher than the low point reached in the middle of last year.  The most concerning aspect of the result was the fall in the new orders index from 47.9 to 45.3.  Also disappointing was the decline in the PMI indices for both Germany and Ireland, the two countries I had expected to perform relatively well (in Euro zone terms!) this year on the back of higher exports.  We will have to wait and see.  The French index is languishing at 44.0, indicative of ongoing recession.  The Italian and Spanish indices fell to 44.5 and 44.2 respectively.  No real surprise there.  Recall I recently revised my 2013 GDP forecast down from a small positive to zero.  That assumes a further contraction in GDP in the first half of the year followed by a modest recovery in the second half of the year, led by the countries that have exports as a greater proportion of GDP and, in the case of Ireland, will benefit from recent gains in competitiveness.  Outside the Euro zone it was good to see a recovery in the UK PMI over the month, although it is still down on the January level, indicating a weakening in manufacturing conditions over the quarter.


The China manufacturing PMI put in a modest increase to 50.9 in March, up from 50.1 in February.  This is the first PMI reading clear of the volatility around the Lunar New Year holidays. Importantly the production and new orders indices put in healthy increases with the production index rising 1.5 points to 52.7 and new orders up 2.2 points to 52.3.  It was also good to see an improvement in the employment index which has been sitting in contractionary territory since the middle of last year – the index rose 2.1 points to 49.8. The export index orders rose to 50.9, although that’s still not strong enough to justify the 23.6% rise in exports in January/February, so we still export that growth rate to come off over the next couple of months.  That’s supported by the still low import reading of 48.9.  Remember China exports have a high import component.  The purchasing price index fell a significant 4.9 points to 50.6 in March, indicating not pricing pressure, at least at the producer level.  That supports our view of no change in monetary conditions this year.  Overall the result is consistent with a further increase in GDP growth this year which we see peaking at around 8.5% in the third quarter.


Japan showed promising signs with its manufacturing PMI rising above the 50 benchmark for the first time since May 2012. This was largely down to the stimulatory effect on exports from a weaker Yen as well as commitment by the authorities to greater fiscal and monetary stimulus.

Among the key emerging markets, Brazil slipped further as economic conditions remained challenging. Russia was off slightly, but still in expansionary territory. India also slowed as power outages impacted on manufacturing, while recent monetary policy easing is yet to fully flow through to demand. South Korea managed to improve as growth in global demand offset the strength in the Korean Won.