* Britain´s Q2 GDP rises by 0.2% as tsunami-related supply constraints slow growth
* Details of Greece´s second bail out unfold
* US Dollar weakens against major currencies as negotiations over debt ceiling continue
* Deflationary pressures ease in Japan
* Central banks in emerging markets grapple with strong growth
* Indian carmaker Maruti Suzuki reports Q2 2011 profits rise of 18%
UK Q2 2011 GDP growth estimated at more than 0.2%
The Office for National Statistics said that Britain’s GDP rose by 0.2% in the three months to June, quarter-on-quarter following growth of 0.5% in the first three months of the year. After removing the effects of some unusual events, including a slowdown in motor production from supply-chain disruptions after the tsunami in Japan that depressed output, Q2 GDP is estimated to have expanded by as much as 0.5%. Some parts of the economy showed signs of recovery. In particular, the index of services for May, which accounts for roughly 75% of GDP, bounced back sharply from April, gaining 1.6%, the biggest month-on-month increase since July 2002.
Separately, the Confederation of British Industry said that its UK index of factory orders fell to minus 10 in July from 1 in June while a quarterly measure of sentiment slid to minus 16 from 9 in April. Export orders were up, with 4% more employers reporting that orders had risen rather than fallen in the past three months although that was down sharply from the balance of 24% more employers reporting rising export orders in April. Inflation pressures may be easing, with an index of expected selling prices dropping to 4, the lowest since December 2009. Meanwhile, the CBI’s Distributive Trades Survey showed that in July a balance of 5% more retailers reported sales lower than a year earlier.
Details of Greece’s new rescue package unfold
This week further details of the agreement reached between heads of government/state of the Euro area and relevant European Union institutions’, designed to ensure financial stability for Greece and prevent ‘contagion’ of financial problems to other countries), were revealed. European leaders agreed to give Greece another €109 billion in loans through the European Financial Stability Facility (EFSF) and the International Monetary Fund – a programme involving long debt maturities (15-30 year maturities) and low interest rates (3.5%). Private bondholders, including Europe’s biggest banks and insurance companies which hold around €135 billion in Greek debt will be asked voluntarily to accept new securities with a lower value. The lending terms that are available to Greece through the EFSF will also be available to Ireland and Portugal. In addition, the EFSF is able to directly recapitalise troubled banks in the Euro area. Prices of Greek two-year notes soared the most in 14 months, pushing the yield down 6.17% to 27.64% while Irish two-year note yields fell below 15% (as prices rose).
Meanwhile, Cypriot banks’ large exposure to Greek bonds, the island nation’s “fractious” politics and a dominance of the banking sector to the Cyprus economy led ratings agency Moody’s to downgrade Cyprus’ sovereign debt rating to just two notches above junk status. Yields on the nation’s 10-year bonds maturing in 2014 jumped 0.85% to 10.18% (and prices fell). The IMF warned that France will miss its target of cutting its budget deficit to 3% of GDP by 2013 unless it carries out more spending cuts. By contrast, the IMF praised Ireland’s progress in shoring-up its banking system and bringing its public sector deficit under control by “steadfastly” implementing its austerity programme.
US Dollar weakens against major currencies
This week the US Dollar tumbled to a record low of SFr0.7989 against the Swiss Franc and depreciated to ¥77.54 against the Yen, its weakest level since the Japanese authorities intervened to stem the Yen’s strength in March. In the meantime, it would appear that negotiations are continuing between President Barack Obama, the Republican leadership of the US Congress and other interested parties to move towards an agreement whereby the US government’s debt ceiling is lifted, with the result that it is able to make payments that are required in August.
Separately, orders for US durable goods unexpectedly dropped 2.1% in June after a 1.9% gain the previous month. The Commerce Department said that orders excluding volatile transportation equipment increased 0.1% following a 0.7% gain in May. Meanwhile, applications for unemployment benefits fell by 24,000 to 398,000 in the week ended July 23 - the lowest level since April - suggesting that the weakness in the US labour market is fading. In other positive economic news, the National Association of Realtors said that its index of pending home resales unexpectedly rose 2.4% in June.
Price declines in Japan
Preliminary data this week showed that Japan’s input price index for manufacturing fell 0.5% compared to the previous month but rose 5.5% compared to the corresponding month in 2010. The output price index for manufacturing fell 0.2% during the month, half the decline of the previous month. Separate preliminary data showed that corporate services prices rose 0.3% from May to June following two consecutive monthly declines. Year-on-year prices fell by 0.7% in June, less than May’s 0.9% decline. In its July interim economic assessment, Bank of Japan Policy Board members noted that the pace of decline in Japan’s CPI has moderated steadily “reflecting the improvement in the aggregate supply and demand.” The central bank forecasts CPI to increase by 0.7% in fiscal year 2011 and 2012. GDP growth of 0.4% is expected for 2011, a slight downward revision from the previous estimate - reflecting the fact that the March earthquake resulted in significant negative growth in the January-March quarter. A growth forecast of 2.9% in 2012 remains unchanged.
Emerging market news
Much of the newsflow from emerging markets related to central banks dealing with challenges associated with strong growth. The Reserve Bank of India, for instance, surprised many observers by increasing its key repurchase rate by 0.50% to 8.00%. This marked the 11th rate increase since March 2010. The central bank is concerned about inflationary pressures, which are partly the result of past increases in food prices. It is also concerned about deficiencies in India’s infrastructure, which have produced supply bottlenecks. The Reserve Bank of India is looking for GDP growth of 8% in the current fiscal year, which ends in March 2012. Wholesale price inflation accelerated to 9.44% in June. However, there are several early and positive developments. One is that wholesale price inflation for food items has slipped from 7.58% in the week to July 9 to 7.33% in the week to July 16. Thanks to easing prices for pulses, milk, meat and fish, food price inflation is now at the lowest level since February 2009. Another development is that there are indications that the government may be looking to change the rules governing foreign ownership of retailing businesses. If foreign companies are allowed to own up to 51% of multi-brand retailers, the resulting investment in distribution could have a very positive effect. Currently, an estimated 40% of India’s fruit and vegetables rot before they can be sold because a lack of suitable transport and refrigeration infrastructure. Meanwhile, longer-term trends such as the growth of India’s middle classes remain intact.
The latest trade statistics from Hong Kong indicate that global trade remains healthy, even if it is increasing marginally less rapidly than in recent months. According to the government of the Special Administrative Region, exports rose by 9.2% in June to HK$292bn. Imports increased by 11.5%. The significance of the figures is that trade through Hong Kong is still growing at near double-digit rates in spite of the latest softening of economic activity in Europe, the weakness of domestic demand in the USA and lingering disruption to global supply chains following the earthquake, tsunami and nuclear disaster in Japan in mid-March.
In South Africa, chemical, print/paper and oil workers returned to work following an 18-day strike in which they secured pay increases of around 9%. However, miners went on strike following a breakdown in negotiations between the major gold mining companies – who are offering 7-9% pay rises - and the National Union of Mineworkers – which wants a 14% pay rise.
Brazil’s government imposed a new tax of 1% on short US Dollar positions in the country’s futures market that have a nominal value of US$10mn or more. The new rules allow the government to increase the tax to 25%. The tax is a response to very strong and destabilising capital inflows which have pushed Brazil’s currency, the Real, to a 12-year high against the US Dollar. Portfolio and direct investors have been attracted to Brazil by the strength – and resilience – of the economy and the high interest rates that are available.
Company news
In India, Maruti Suzuki, which makes almost half of all cars sold in the country, reported that profits for 2Q11 rose by 18% - or by more than had generally been expected. This was partly because of a jump in ‘other income’ and partly because of continuing growth in sales in a country where increasing numbers of households are able to afford motor vehicles.
India’s cabinet approved the purchase by global oil major BP of a 30% stake in an offshore natural gas joint venture with Reliance Industries. BP’s investment, which is worth US$7.2bn, is one of the largest single Foreign Direct Investment (FDI) transactions ever in India. BP expects that demand for natural gas in India will double over the next 20 years. Separately, Reliance Industries reported its highest ever quarterly profit, thanks to the strong performance of its refining and petrochemicals businesses.
Elsewhere, Petrobras, the predominantly state-owned but listed oil giant, revealed its plans to invest around US$224bn over the next four years. 95% of the investment will be in Brazil, where the company is focusing on the development of major offshore oilfields.
Investment banking group Credit Suisse reported that the net revenues of its fixed income, currencies and commodities trading business in 2Q11 amounted to SFr595mn, or 59% less than in 2Q10. Group net profits dropped by 52% to SFr768mn. Credit Suisse announced that it will trim its global headcount by 4%, or around 2,000 people.
