* Activity improves in the UK services sector
* US economy remains robust with growing activity in manufacturing and services sectors
* Business activity contracts in the eurozone, but at the slowest rate in three months
* Japan´s Suzuki announces major expansion into Indonesia
* India permits qualified foreign investors to invest in the country´s stockmarket
Increased activity in UK services sector
Released during the week, the Markit/CIPS UK Services Purchasing Managers Index (PMI) continues to point to solid growth in the UK services sector. The PMI rose from 52.1 in November to a fivemonth high of 54.0. Chris Wilkinson, the Chief Economist of Markit, noted that ‘services are likely to have expanded by 0.3-0.4% in the fourth quarter of 2011, down from 0.7% in the third quarter of 2011… to help the UK avoid a slide back into recession, at least for now.’ However, he added that there is a lack of confidence among respondents to the survey: ‘expectations of business growth slipped to the joint-weakest since March 2009, with firms anxious about the impact of the eurozone crisis and domestic austerity measures.’
The Markit/CIPS Construction PMI® also highlighted how confidence in the sector is low, despite the strength of current activity. The PMI increased from 52.3 in November to 53.2 in December, thanks to a rise in new business. December was the first time in nine months that activity expanded in commercial construction, residential construction and civil engineering.
US economic activity accelerates
During the week, the Institute of Supply Management (ISM) released indices of activity which showed that growth in both the US manufacturing and services sectors is accelerating. PMI for manufacturing rose from 52.7 in November to 53.9 in December – suggesting that activity has been growing for 29 consecutive months. Bradley Holcomb, the Chair of the ISM’s Manufacturing Business Survey Committee, noted that ‘manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012.’ The ISM’s Non-Manufacturing Index (NMI) rose from 52.0 in November to 52.6 in December. Although employment continues to contract in the US services sector, new orders and business activity are growing.
Separately, the US Census Bureau of the Department of Commerce noted that construction spending in November was estimated at US$807.1bn in seasonally adjusted terms. This represents a rise of 1.2% relative to the revised estimate of US$797.4bn for October. Construction spending in both the private and the public sector grew during November.
There were few surprises in the minutes of the 13 December meeting of the Federal Open Market Committee (FOMC), which were released during the week. The FOMC noted that ‘the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labour market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed.’ The FOMC also observed that inflationary pressures had moderated. There were no changes to monetary policy. Chicago Federal Reserve President Charles L. Evans continued to argue for additional asset purchases by the Federal Reserve and greater clarity about the situation in which the federal funds target would be maintained at the current level of 0.0-0.25%. The FOMC also said that it would start publishing specific forecasts in relation to interest rates, from each of its individual members.
Activity recovers in Germany, but contracts in Spain and Italy
Markit’s Eurozone Composite PMI rose from 47.0 in November to 48.3 in December: this indicates that business activity in the eurozone is contracting, but at the slowest rate for three months (a reading under 50 represents a decline). Activity has been declining in both the manufacturing and the services sectors. Markit’s Chief Economist Chris Wilkinson said, ‘not surprisingly, the weakness is centred on Italy and Spain, which are both likely to already be in recession as domestic austerity measures exacerbate weak export sales. France has also contracted over the fourth quarter of 2011, while Germany appears to have stagnated – although an upturn in December raises some hope that a resilient consumer sector is at least helping prevent the region’s largest economy from falling back into recession.’
Meanwhile, Eurostat announced that its ‘flash’ estimate of inflation for the eurozone in December was 2.8%. In November, inflation had been estimated at 3.0%. The latest figure therefore suggests that inflationary pressures are moderating across the eurozone at a time of weakening economic activity.
Japan: Suzuki Motor announces major expansion in Indonesia
Suzuki Motor announced that it would invest ¥60bn (US$780m) in a new factory in Indonesia, which will enable the company to triple its capacity to make engines in the country. Suzuki Motor is the hirdlargest producer of vehicles in Indonesia, where it has one plant for motorcycles and another for cars. It plans to lift total annual capacity to produce cars by 25% to 100,000 units. In 2010, the company also made 560,000 motorcycles in Indonesia. Suzuki’s announcement is another indicator of the growing importance to leading Japanese manufacturing companies of countries in the rest of the Asia-Pacific region, both as production centres and as markets.
Elsewhere, Japan’s Ministry of Economy Trade & Industry (METI) announced that it had approved a business restructuring plan, to be implemented over the next two years, by Panasonic Corporation. Panasonic is looking to further integrate its lighting, electrical appliance and device businesses in order to boost productivity. It also hopes to ‘enhance its sales base and marketing capacity.’
Emerging market news
China’s Commerce Minister Chen Deming said that the government will take steps to boost household consumption spending in the current year. The government is looking at promoting expenditure on energy-saving products and tourism. Having lowered the reserve requirement ratio (RRR- the percentage of bank deposits that cannot be lent to non-bank customers) at the end of November, the People’s Bank of China is also now looking to boost growth in Asia’s largest economy.
The Finance Ministry also announced an effective reduction in the windfall tax that must be paid by companies that produce oil in China. (Specifically, the Ministry said that the threshold above which the tax will apply will be lifted from US$40 per barrel to US$55.) The tax change offsets an increase in resources tax on oil that was applied by China’s provincial governments in November. Although this initiative will have no direct impact on consumption by households, it is consistent with easing fiscal policy in that it encourages investment and spending by the oil companies. The Ministry of Finance of India announced that qualified foreign investors would be permitted to invest directly in the country’s stock markets. Previously, they had only been able to invest through mutual funds and other specified channels. This initiative is consistent with the long-term liberalisation of India’s capital markets. It could also assist in the financing of the current account deficit, which has grown to 2.9% of GDP.
Company news
During the week, there were two corporate announcements that highlighted the opportunities for financial services companies in Latin America. Infonavit, the largest originator of mortgages in Mexico, said that it made a record 501,292 home loans in 2011 more than the 480,000 target that the company had set. In part because of past episodes of financial instability, mortgage lending is still less developed in Mexico than in North America or Europe. XL Group, the global insurance and reinsurance group, received regulatory approval to establish a non-life insurance operation in Brazil, where it already has a reinsurance business. XL’s subsidiary will ‘offer a range of casualty, property, professional and specialty insurance products’. Bruno Laval, XL’s Regional Manager for Iberia and Latin America, noted that Brazil accounted for 42% of all nonlife insurance premiums written in Latin America in 2010. Projections indicate that annual non-life premiums could rise to US$160bn – an amount comparable with European markets such as Germany – by 2030.In India, Oil & Natural Gas Corporation (ONGC), the largest energy explorer in the country, said that it would take over stakes in two offshore exploration blocks held by BG Group Plc, the UK’s third-largest natural gas producer. BG will be retaining other assets in India.
Samsung Electronics, the largest consumer electronics company in Asia, reported that its operating profit for the fourth quarter of 2011 amounted to Won 5,200bn (US$4.5bn). This was higher than analysts had been expecting, and was the result of increased sales of phone handsets (which more than offset lower profits in Samsung’s semi-conductor and flat-screen panel businesses).
