* The Bank of England downgrades UK economic growth forecasts
* German inflation rises to 2.7% as European Central Bank warns of rising inflation and interest rates
* US statistics reflect higher oil prices
* Bank of Japan to bolster reserves from 5% to 15% to minimise potential losses
* Peoples Bank of China lifts Chinese banks´ reserve requirements by 0.5%
BoE downgrades UK growth estimates
Bank of England Governor Mervyn King said this week that the UK economy would grow by around 2.7% in 2011, down from a February forecast of 2.9%. The growth forecast for 2012 has also been revised downwards from 3.2% to 2.8% The Governor raised the forecast for UK inflation to a peak this year at around 5% in the fourth quarter, 0.5% higher than previous predictions. Inflation is expected to be above target for the whole of next year. The central bank Governor also signalled that there was likely to be a rate rise this year.
In the meantime, producer output prices rose by 5.3% in the year to April, down from 5.6% in March. The slower pace in April was in part due to a decrease in petrol excise duties. The latest trade report suggested that the UK economy is rebalancing towards greater export-driven demand. The Office for National Statistics said that the trade deficit was £3bn in March, up from £2.7bn in February, largely due to rising import prices. Indeed export volumes rose 16% in the three months to March compared with a year earlier, against a rise in imports of 6.7%.
Elsewhere, industrial production grew 0.3% in March with manufacturing output up by 0.2% in the month. Manufacturing grew by 1.1% in the three months to March – little changed from the pace of growth since September with the annualised rate of 4.4% not far off the strongest since the mid-1990s. Less positive were company insolvencies, which showed a 22% rise in businesses entering administration over the first quarter of 2011.
In other news, the Halifax House Price index fell by 1.2% in April from March, much more than the 0.2% fall that lender Nationwide reported the previous week. Separately, the Council of Mortgage Lenders said that 15% more homeowners had their properties repossessed by lenders in the first three months of 2011 than in the last quarter of 2010 – although the first quarter figures were still 10% below the level of one year earlier.
ECB policymaker warns higher rates “very likely”
Figures released this week showed that industrial production in Euroland unexpectedly slipped 0.2% in March, compared to a 0.6% rise in February. In Germany, industrial output rose 0.4% in March, although production slipped in France, Ireland, Greece and Spain.
German inflation jumped to 2.7% in April, up from 2.3% in March. Both monthly sets of data were revised up from previous estimates. In the meantime, European Central Bank (ECB) Executive Board member Jürgen Stark warned that inflation in Euroland was “very likely” to average more than 2.5% this year and decline only “slowly” in 2012. The policymaker said that higher-than-expected inflation justifies further central bank interest rate increases even as Euroland grapples with the ongoing sovereign debt crisis. He added that debt restructuring “will not resolve the Greek problems” without fiscal and structural reforms. For its part, the International Monetary Fund this week urged Greece to consider privatisation of its “extraordinary portfolio” of assets to reduce the amount of additional help needed under a revised bail-out plan. So far, the crisis-hit nation has pledged €50bn in sales (estimated to be less than 20% of its portfolio of real estate and company holdings), enough to slash debt by the equivalent of 18% of GDP by 2020. The IMF’s latest European regional economic outlook recommends that continental Europe should “move faster” to improve the financial strength of its banks and urges greater financial integration across the continent. The Fund describes the outlook for growth as “not extraordinarily rapid but still solid and sustainable.”
Elsewhere, Poland’s central bank raised the nation’s benchmark seven-day rate by 0.25% to 4.25%. As a result, the Polish zloty jumped 0.7% to 3.9 against the Euro, its highest in two months.
US economic data impacted by rising oil price
Higher oil prices had a mixed impact on the week’s economic data in the US. For instance, the higher price of oil saw the trade deficit rise $2.8bn to $48.2bn in March. The report showed a robust rise in exports while, in addition to oil, imports of cars and capital goods also expanded. The US Commerce Department said that retail sales rose by 0.5% from March to April, following March’s revised 0.9% rise. Sales rose 7.6% compared with April 2010 as consumers paid more for fuel and food. Rising commodity prices helped lift sales at US wholesalers by 2.9% in March in contrast to February’s revised 0.3% fall. March monthly wholesale sales were the highest since June 2008 and grew by 15.4% year-on-year. Durable goods sales in March rose by 2.3%, compared with a 0.9% fall the previous month. Inventories rose 1.1%, in line with expectations. Producer prices rose by 0.8% in April, 0.1% ahead of the gain in March – boosted by surging oil prices. The April increase left prices 6.8% above their level of April 2010, the biggest yearly rise since September 2008. Meanwhile, the National Federation of Independent Business’ optimism index slipped more than had been expected in April, indicating that US small business owners are becoming increasingly pessimistic.
The latest employment report showed that the US economy added 244,000 jobs in April, ahead of the 185,000 that had been forecast. Hourly earnings also increased. The unemployment rate in April rose to 9% from 8.8% in March. Overall, the report eased fears that the US economy might be heading for a slowdown.
BoJ to increase reserves as buffer against losses
This week the Bank of Japan (BoJ) revealed plans to bolster its legal reserves from 5% to 15% for the year ended March providing a stronger buffer against potential losses from its recently expanded asset-purchase programme. Japan’s central bank, which began buying riskier assets like corporate bonds and commercial paper last October, doubled the size of its asset-purchase scheme to $124bn in the wake of Japan’s earthquake and tsunami in March. The last time the BoJ increased its legal reserves from its net profits was following the collapse of Lehman Brothers.
Separately, Japan’s current-account surplus in March narrowed 34% from a year earlier to ¥1.68 trillion ($2bn). Exports fell 1.4% and imports increased 16.6%. Meanwhile, the Cabinet Office said that the coincident index, the broadest measure of the current state of the economy, fell at the fastest pace on record in March. Factory output declined an unprecedented 15.3% in the month and household spending slid 8.5% from a year earlier, also a record.
Asia-Pacific market news
This week the People’s Bank of China said that it had raised Chinese banks’ reserve requirements by 0.5%. In the meantime, China’s annual consumer inflation in April was 5.3%, below March’s figures of 5.4%. Separately, China’s trade surplus reached $11.4bn in April, much larger than had been expected as Chinese exporters continued to benefit from a supportive exchange rate. In Australia the trade surplus for March hit a record A$1.74bn. Australia’s surplus was boosted by shipments of commodities to China which totalled A$2.62bn in the month. Overall, Australia’s shipments climbed 9%, compared with a 1% increase in imports.
Elsewhere, India’s industrial production grew 7.3% over the 12 months to March after a revised 3.7% gain in February, the fastest pace in five months. Separate Commerce Ministry data showed that the nation’s food inflation rate fell to 7.7% in the week ended April 30, the lowest level since March 2009.
Company news
This week AIG and the US Treasury outlined plans for a scaledback share offering in the US insurance group. AIG said that it would sell 100m shares and the Treasury would sell 200m shares, raising around $9.2bn – an amount much lower than the $20bn originally targeted by the US government. The offering will reduce the government stake to 72%. AIG also said that it could begin buying back shares as early as late 2012 in order to reverse some of the dilution that shareholders had experienced in 2008. AIG’s share price rose over 3%.
Separately, Europe’s biggest insurer Allianz revealed that net income in the first quarter declined 45% due to a rise in total insured losses from catastrophes - including the earthquake and tsunami in Japan, the Australia floods, the earthquake and in New Zealand - and lower investment gains. The insurer maintained its full-year forecast in spite of the natural disasters in the first quarter. Allianz aims for operating profit of €7.5bn – €8.5bn this year, compared with €8.2bn in 2010. The insurer’s share price fell 2.1%. By contrast, UniCredit said that first-quarter profit rose by a better-than-expected 56% after Italy’s biggest bank set aside less money for bad loans and received higher income from its investment banking business.
