August Manufacturing PMI Report

1. The Global Manufacturing Recession Tightens Its Grip In August
August Monthly Manufacturing PMI Report Edward Hugh - Barcelona: August 2012

3. Europe’s Debt Crisis Transformed into Global
Manufacturing Crunch
The pattern we have seen in recent months - whereby international trade
problems drag the global economy down with diminishing export orders leading
to a reduced pace of manufacturing output - consolidated itself further this
month, with manufacturing conditions deteriorating notably in Japan, China and
the United States.
In Europe, which has been the epicentre of the problem, conditions continued to
deteriorate, although somewhat more slowly than in July. Core countries
continued to be affected, while the deterioration in Italy suggested the country is
undergoing a deeper recession than previously anticipated.
Globally, there were few bright spots. Ireland’s manufacturing sector continues to
grow slowly, as does the Indonesian one. Russia struggles along, India continues to
grow but at well under half the pace seen six months ago, conditions in Turkey
remain stable (just) while economic activity in Brazil barely turns over.
It also seems we will see little change before the end of the year as export order
books continue to shrink.

4. More QE Likely In The US and Japan
A much weaker than expected US employment
report for August has finally tipped the balance in
favour of more active easing steps by the Fed next
week. In addition to strengthening accommodation
language, it is highly probable the FOMC will
announce a new round of QE, or unsterilized asset
purchases. As can be seen in the PMI Composite
below, each round of QE has been followed by a
surge in global economic activity as demand for risk
assets in the Emerging Economies is boosted. Equally
it should be noted that each wave of activity has
been weaker.
The Bank of Japan is also expressing
increasing concern about the
damage being inflicted by a high yen
on exports. In the event of
continuing economic weakness
intervention by the central bank
would seem likely.

5. Asia
Viewed as a continent, it is very hard to make generalitzacions about Asia. Japan is
among the oldest countries on the planet. Domestic demand is congenitally weak, and
exports struggle against the weight of an overvalued yen. The important point to notice
is that all last years predictions about Tsunami reconstruction bring a new lease of life to
the country have proven to be ill founded. All the associated damage has done is
produce more debt. And still the economy struggles to grow. This issue will doubtless
become worse after the government introduces the long promised increase in
consumption tax.
China is suffering from a real estate adjustment which influences internal demand, while
the global trade slowdown harms the export sector. In addition, the country’s potential
growth rate, after hitting double digits at one point, is now slowing steadily as China
steadily moves from emerging economy to mature economy status.
India continues to advance at rates which are not seen in most Asian economies these
days, but the country has an endemic inflation problem which remains unresolved, and
growth is also hampered by poor infrastructure and widespread corruption.
The semi developed economies like South Korea and Singapore still struggle to
overcome weak export demand, and even new emergers like Vietnam and Indonesia
remain challenged to find growth at this point.

7. Emerging Economies Hold The Key
Most of the strategic emerging economies – Brazil, Turkey, India, Indonesia – are
struggling to find growth at the moment, despite their undoubted growth
potential. This situation is unlikely to last forever, and especially if there is more
QE (or talk of it) in the US and continuing stabilisation in the Euro debt crisis.
The most probable outcome is that we will start to see a return to growth in the
EMs as the year draws to a close, and this will work its way through to export
demand in the developed economies. Pent up demand is there, it just isn’t in the
developed world.

8. .

9. Developments in China seem to
be a particular cause for
concern in terms of growth
prospects for 2013. Internal
demand is not responding to
the current stimulus, while
exports are hit by weak
demand in both Europe and
Japan.
China's August export growth was higher
than July’s 1 per cent but far below the
double-digit growth rates China’s export-
driven economy has become accustomed
to over the past decadeMuch of the
weakness came from crisis-hit
Europe, China’s biggest trading
partner, with exports to the EU falling
12.7 per cent in August from a year
earlier. Exports to Japan also
disappointed, registering a decline of 6.7
per cent in August, while shipments to
the US rebounded with 3 per cent
growth, compared with an increase of
just 0.6 per cent in July.

13. Central and Eastern Europe
Russia’s economy continues to struggle, but the energy and commodity factor
to rely on the country should be able to avoid an outright recession unless we
see a Lehman type event, which seems unlikely in the near future.
Other parts of Eastern Europe seem much more problematic, and there are
clear signs of growing export dependence across the region. The Czech
Republic has been stuck in recession for a year now, and Hungary has now
joined it there. Beyond Hungary government debt is not a problem, but if the
Euro Area continues to be unable to find growth then those countries
dependent on customers there may be tempted to use fiscal policy to plug
the gap. In which case sovereign debt could soon become a problem.

17. Hungary HALPIM Manufacturing PMI

19. ECB To The Eurozone Rescue
But No Bond Purchases Without Strict Conditionality
The announcement by the ECB of a bond buying programme – to be called Outright
Monetary Transactions (OMT) - for countries on the Euro Area periphery who ask for a
bailout from Europe’s leaders marks a new stage in the Euro crisis. The unlimited
quantity of short term bonds the ECB is prepared to buy will undoubtedly bring down
borrowing costs and avoid pressure on country spreads for those involved.
Nonetheless many questions remain. Most importantly relating to the conditionality
attached to the activation of the ECB purchases. Mario Draghi left no doubt that
countries eligible for OMT operations would need to apply to the EU for a relevant
programme. This will involve signing a Memorandum of Understanding (MoU) and
accepting Troika supervision of the implementation of the terms of the MoU. Draghi
explicitly mentioned the IMF, and Christine Lagarde has since expressed enthusiasm for
IMF involvement. IMF financial involvement in the form of a precautionary credit line
(one of the two modalities of programme mentioned by Draghi) has neither been
confirmed nor denied.
The situation is complicated, however, by the fact that neither of the two principal
candidates for receiving OMT seem in any hurry to ask for the relevant EU
programme, although Spain seems nearer to doing so than Italy.

20. At first sight the involvement of the ECB in containing interest rates means
that the acute stage of the Euro government financing crisis has come to an
end. Mario Draghi stressed the quantity of purchases would be unlimited, and
in the case of a central bank unlimited really can mean unlimited. So despite
the fact that the bank did not specify any specific interest rate target, it surely
has the power to impose one should it chose to do so. Naturally it is unlikely
this target rate will be made public, although what it is will doubtless become
the source of much speculation.
Of course, stress could still arise on the spreads of other countries (Belgium or
France, for example) but once Spanish and Italian bonds are being liberally
purchased, the logical next move would not be individual country programmes
but all-out QE as a first step on the road to full fiscal union. Once you have
crossed the Rubicon there does not seem to be any going back, especially
after you have gotten in so deep it is hard to see how you can get out again.

21. Naturally this move does not solve all the Euro Area problems – it is simply one
more step. In particular growth issues remain the principal concern. France is
the latest country to announce a major set of austerity issues for 2013, and
given the likely weakness in the external environment growth in the common
currency zone will be meagre at best, and several countries beyond Greece –
Portugal, Italy, Spain – seem at risk to continuing deep recessions.
In this context the principal risk seems to be that voters will not back their
political leaders, and will adopt attitudes which put continuation of the
Eurozone in doubt. This radicalisation of views is not only occurring in southern
Europe, the process is visible in the core countries too, with one group of
people getting increasingly tired of making sacrifices, and the other group
getting tired of what they perceive as continually being asked to pay for the
failure of others.

22. Euro Area

23. Europe’s Recession Worsens As Q3 Progresses
Core Now Affected Along With The Periphery, Recession Risk Grows in Germany
Germany’s economy seems to be
headed steadily back into recession.
With export growth already
weakened by the impact of austerity
measures on the periphery, the
slowdown in Chinese consumption
seems to have acted as some kind of
killer app.
The current situation highlights just how dependent the German economy is on exports, and in this
sense on the rest of the Euro Area. The core has as much interest in finding solutions to the debt
problem as does the periphery.
Still No Sign Of German Inflation
Despite steady loosening in monetary policy at the
ECB, and 3% growth in GDP in 2011, there is no real
sign of domestic demand driven inflation in
Germany. Inter-annual inflation in Germany was
only 2% in August, compared with the 2.7%
registered in credit crunch driven Spain. Fears of (or
hopes for) a substantial surge in German inflation as
the ECB moves towards some form of QE are greatly
exaggerated. Social engineering isn’t that easy.

27. Italy’s Recession Deepens As Rescue Nears
The Italian economy shrank by 0.8%
between April and June, slightly more than
previously estimated. A bigger drop in
investment and consumer spending
accounted for the downward revision from
the 0.7% contraction estimated last month.
Compared with the previous
quarter, domestic consumption fell by
0.7%, while investment dropped by 2.3%.
The Italian economy - the eurozone's third
largest - has now contracted for the past four
quarters as the government has
implemented a series of drastic spending
cuts designed to cut its debt levels, which
currently stand at more than 120% of the
country's annual economic output.
It is hard to disagee with Simon Johnson when he says:
While Draghi’s policies “may temporarily help stabilize” the crisis, “European
economies have to turn themselves around, they have to get back on a growth
track, that’s not what we’re seeing right now.”

28. The ECB’s decision to purchase short term bonds from troubled periphery countries
applies just as much to Italy as it does to Spain and Italy, even though the political
dynamics of accepting the offer look daunting. Italy’s position is becoming ever more
precarious as the deepening recession drives up the debt to GDP level, while at the
same time support for the government lead by Mario Monti weakens.
As with Spain, there will be nothing significant in the way of Italian bond purchases
until the Italian government asks for help and formally signs a MoU. This moment
seems farther away at this point than the Spanish bailout, and as such there could
be a temporary yield inversion whereby pressure on Spanish bonds relaxes even as
it intensifies on Italian ones.

30. Spanish Debt Sustainability
The main point to emerge from recent EU policy decisions is that the future of Spanish
sovereign debt is now very much tied to the evolution of the European debt crisis. If
the latter is adequately resolved Spanish debt may not even need
restructuring, although even with an adequate resolution some form of Private Sector
Involvement (PSI) at some point cannot be totally excluded.
The problem is that no one at this point knows, and there really is no way of
knowing, whether the crisis will be adequately resolved or not. We thus face a
probability distribution where the only possible outcomes are what would normally be
considered unlikely tail solutions - either the Euro Area fuses into one single
federation (like the USA) or it splinters apart. There really is no middle way.
Institutionally it is to be anticipated that no stone will remain unturned in the attempt
to save the single currency. So obviously things like leveraging the ESM which are
currently excluded may well eventually become most probable. Even an eventual QE
programme of the sort we have seen in the UK, the US or Japan cannot be excluded.
At present directly buying sovereign bonds in the primary market is not within the ECB
mandate, but as we have seen time and again during this crisis, mandates are
interpreted and reinterpreted as needs must, and the current ECB one may even
eventually be changed if the alternative is viewed as disaster.

32. There are really two sides to the Irish
story. The country is keeping pace
with its bailout targets, but the real
economy is not recovering as
expected. This suggests two things.
In the first place the bailout targets
were excessively attainable, placing
far too much emphasisis on
achieving fiscal stability, and
insufficient on getting the economy
back on a sustainable path.
The housing market is
still stuck in a bad
place, unemployment is
too high, and mortgages
are increasingly not being
paid. Young educated
Irish are leaving, making
problems worse.

34. Greece Uses It’s “Wiggle Room”
The economic crisis in Greece continues unabated, and there really does seem to
be no end in sight. Nevertheless the Troika are back in down, and Greek leaders
are practicing their wiggle. Maybe they haven’t much scope for it, but Angela
Merkel’s admission that a Greek exit from the Euro could precipitate a Lehman
type situation has given the Greek government some bargaining space.
It’s not clear what the agreement will
be, but markets and almost everyone
else are taking it for granted that there
will be one. This is a far cry from the
panic mood which prevailed before the
recent elections. But methinks we are
being too complacent. Some sort of
patched up job may be possible
now, but what happens when we get to
next spring, or even though to autumn
2013. Greece’s growth problems have
not been fixed, and the Greeks can only
take so much for so long.

35. United States

37. Africa