6.3% growth in the third quarter. The UK consumer price index rose to 3.7% in the year to December, up from 3.3% in November. The producer price index rose a higherthan- expected 3.4% in December. Most of the monthly increase was a result of higher crude oil prices, although the cost of food and imported metals also added to price pressures. Output prices - prices that manufacturers charge customers - rose 4.2% in the year to December, up from 4.1% in November.
ECB expects Euroland inflation to remain subdued
This week European Central Bank (ECB) officials dampened market participants’ expectations of higher interest rates in Euroland. Policymakers said that they expect inflation in the region to remain below the central bank’s 2% limit in the medium term. Governing Council member and Bundesbank President Axel Weber said that “We do not see a need for an interest rate change in the foreseeable future”. ECB President Jean-Claude Trichet last week warned that the central bank will act if needed to contain inflation risks which he said “could move to the upside”. The Euro appreciated against the Dollar following the statement, threatening to undermine European exports.
Meanwhile, in Germany the Economy Minister said that the public sector deficit in the region’s largest economy looks set to fall below the European Union’s 3% limit in 2011 – one year ahead of schedule. The main reason for the government’s upbeat tone regarding fiscal consolidation is its confidence that the German economy will continue to grow solidly and create jobs. The government forecast economic growth of 2.3% in 2011, up 0.5% from its forecast last autumn, while average monthly unemployment is forecast to dip below the 3million mark - a rate of 7% compared with 7.7% last year. In other positive news, the Economic and Social Research Institute forecast economic expansion in Ireland following a banking and property crash in November that resulted in an €85bn ($114bn) bail-out by the European Union and the International Monetary Fund. In a quarterly report, the Institute forecast a lift in Ireland’s GDP of 1.5% in 2011 and 2.25% in 2012. Gross national product (GNP), often seen as a better measure of Irish economic activity because it strips out the dividends and profits repatriated by local subsidiaries of foreign companies, is set to grow by 0.5% in 2011 and 1.5% in 2012. This follows GNP contraction of 10.7% in 2009 and a 1.5% decline in 2010.
US economic recovery broadens
Reports this week highlighted a broadening US economic recovery. The manufacturing sector demonstrated renewed strength in December, with industrial output increasing by 0.8%, up from a 0.3% increase in November. Manufacturing output rose by 0.4%, led by production of consumer goods. Commerce Department figures showed that total retail sales in 2010 were up 6.8% from 2009, the sharpest such increase in more than a decade. In December, sales rose by 0.6% from the previous month. The National Association of Realtors said that existing home sales jumped 12.3% from November to December, reaching a seasonally-adjusted annual rate of 5.28m. A separate report showed that building permits, which signal future construction, jumped by 16.7% in December. Initial jobless claims declined by 37,000 to 404,000 last week, a steeper decline than had been expected and the less-volatile four-week average of claims also declined. The number of Americans claiming unemployment benefits sank to the lowest total since October 2008.
The US Labour Department said that the CPI increased 0.5% in December, leaving it up 1.5% year-on-year. Much of the monthly increase was due to rising energy prices, which climbed 4.6% in the month. Core prices, which exclude food and energy, rose 0.1% in December from November and gained 0.8% from the same month a year ago. Although the cost of living in the US is rising slowly, increasing energy prices have started chipping away at consumer outlooks - the Thomson Reuters/University of Michigan index of consumer sentiment in January unexpectedly fell from 74.5 to 72.7 on its index of 100.
Japan moves closer to hike in consumption tax
Japan’s new Minister for Economic and Fiscal Policy and veteran politician Kaoru Yosano warned this week that Japan has hit a “critical point” where it risks losing investor confidence if politicians fail to reach agreement on how to rein in the nation’s ballooning national debt (Japan’s gross national debt will soon rise above 200% of GDP). His comments highlight the government’s determination to introduce a sweeping reform of the tax system that would include a hike in the 5% consumption tax. The comments follow Prime Minister Naoto Kan’s second cabinet reshuffle since becoming leader of the ruling Democratic party less than a year ago. The reshuffle left most ministers in their positions and won support from the Keidanren, Japan’s most influential business lobby. The Keidanren favours a consumption tax rise as part of efforts to narrow the nation’s deficit.
Emerging market news
China’s GDP expanded at an annual rate of 9.8% in the final quarter of 2010. The measure was faster than had been expected. Output grew 10.3% for the entire year. Consumer price inflation fell to 4.6% in December from 5.1% the previous month. For the whole year, consumer prices rose 3.3%, above the official target of 3%. Food prices, the main driver of inflation, rose 7.2% for the year. Rising inflation and labour shortages in key industrial areas have sparked a series of minimum wage increases across China – Guangdong, the nation’s biggest provincial economy increased its minimum wage by 18-26%, the second increase in less than a year. Meanwhile, in India the latest data showed that the nation’s inflation rate accelerated to 8.43% driven by food prices, which rose by 16.9%. Separately, foreign direct investment (FDI) in Asia-Pacific greenfield projects fell for the second year in succession in 2010 in spite of the region’s V-shaped recovery from the global financial crisis. Figures from fDi Intelligence, which tracks FDI flows, revealed that the rate of decline slowed from 16% in 2009 to 6%. Turkey’s Monetary Policy Committee cut that nation’s interest rates by 0.25% to an historic low of 6.25% following a 0.50% cut in December. The central bank said that the easing should deter speculative capital inflows.
Separately, Brazil’s central bank raised its benchmark overnight rate, the Selic rate, by 0.50% to 11.25%, the first increase since July. A central bank survey showed that inflation expectations for 2011 rose for a sixth straight week - consumer prices in Brazil are now expected to rise 5.42% this year, up from a week-earlier forecast of 5.34%. Growth in the world’s eighth-largest economy will slow to 4.5% this year from 7.3% in 2010.
Company news
This week saw several US financial services groups release mixed fourth-quarter earnings. The share price of Goldman Sachs fell 2% following reports that the group’s fourth quarter revenue growth was less than had been expected. The company said that revenues were disappointing as a sharp fall in income from fixed income trading was only partially offset by a rise in investment banking activity. Goldman’s fourth-quarter earnings per share in the last three months of the year were down 54% from a year ago, in line with forecasts. By contrast, Wells Fargo and US Bancorp reported strong increases in earnings as losses on consumers and corporate loans abated during the quarter. Meanwhile, Morgan Stanley reported a better-than-expected jump of 88% in fourth-quarter profits on the strength of its institutional securities unit. Revenues at Morgan Stanley also showed improvement, rising by 14% from the fourth quarter of 2009.
