* Capital spending grows in Japan
* Latest Purchasing Managers Index surveys point to an improvement in the manufacturing sector in several emerging markets
* Strong emerging markets demand boosts Audi´s 2011 results
UK manufacturing continues to show signs of growth
The latest data continues to indicate that the UK economy is growing slowly, with overall conditions less favourable than in the US, but more favourable than in much of Europe. The Purchasing Manager’s Index (PMI) compiled by Markit and the Chartered Institute of Purchasing and Supply (CIPS) fell slightly from 52.0 in January to 51.2 in February (a figure of more than 50 indicates an expansion in activity). While activity is growing, CIPS Chief Executive David Noble observed that ‘the return of rising oil prices and lacklustre demand is a cause of some trepidation.’
The latest Distributive Trades Survey, conducted by the Confederation of British Industry (CBI), showed that 34% of retailers surveyed had reported an increase in sales volumes over the previous year, while 36% had experienced a reduction. The net balance of -2% represents an improvement on the previous month’s survey (-22%) and exceeded expectations. Judith McKenna, the Chair of the CBI Distributive Trades Panel (and Chief Operating Officer of ASDA) noted, ‘It’s good to see there are more positive signs on our high streets. But consumers are clearly continuing to focus their spending on day-to-day needs, rather than big ticket or luxury items.’
Bernanke indicates that further quantitative easing in the US is unlikely
Much of the newsflow during the week highlighted the ongoing resilience of the US economy. As such, it was relatively unsurprising that Federal Reserve Chairman Ben Bernanke gave no indication that the Federal Open Market Committee is looking to undertake another round of quantitative easing (QE) to provide the economy with an additional boost.
The Bureau of Economic Analysis said that the US economy grew by 3.0% in the final quarter of 2011 compared to the same period 12 months previous. The Federal Reserve’s Beige Book of economic conditions in different parts of the US indicated that ‘overall … activity continued to increase at a modest to moderate pace in January and early February’. For its part, the Institute of Supply Management (ISM) reported that its PMI for the US manufacturing sector slipped slightly – from 54.1 in January to 52.4 in February. Nevertheless, manufacturing activity has risen for 31 consecutive months. The ISM noted that new orders, production and employment have been growing: meanwhile, suppliers have been delivering more rapidly and inventories have been contracting.
The Conference Board’s index of consumer sentiment rose from 61.5 in January to 70.8 in February. Lynn Franco, the Director of the Conference Board’s Consumer Research Centre noted that ‘consumers are considerably less pessimistic about current business and labour market conditions than they were in January. And, despite further increases in gas prices, they are more optimistic about the short-term outlook for the economy, job prospects and their financial situation.’
ECB conducts its second LTRO
A highlight of the week was the second long-term refinancing operation (LTRO) implemented by the European Central Bank (ECB). The ECB allocated €530bn in three-year loans to around 800 banks. In the ECB’s first LTRO, which took place in December last year, the ECB lent €489bn to European banks.
Economic data released in Europe was generally mixed. The European Commission (EC) reported that its Business Climate Indicator for the euro area rose marginally in the month of February. The EC noted that ‘the improvement was mainly driven by a more positive assessment of production expectations, order books and stocks of finished products. By contrast, export order books and past production were assessed more negatively.’ Elsewhere, the EC’s Economic Sentiment Indicator rose for the second consecutive month in both the euro area and across the European Union as a whole. The EC said that ‘the improvement was broad-based across all sectors except for services, where a decrease in confidence partly offset the rebound observed in January.’
Eurostat noted that annual inflation in the euro area fell from 2.7% in December to 2.6% in January. Across the EU as a whole, the equivalent figures were 3.0% and 2.9%. Markit reported that its PMI for the euro area remained unchanged at 49.0 in February, indicating a contraction in activity. Conditions in manufacturing remain particularly adverse in Greece, and are weakening in other ‘peripheral’ countries. In contrast, the PMIs for manufacturing in Austria, the Netherlands and France are at six-to-eight month highs. Activity in France is stabilising, while Austria and the Netherlands are experiencing growth in manufacturing activity.
Capital spending grows in Japan
The Ministry of Finance reported that capital spending in Japan was 4.9% higher in the fourth quarter of 2011 than it had been in the same quarter of 2010. The latest result was the strongest for nearly five years and exceeded expectations.
Other statistics released during the week in Japan were also positive. The Ministry of Economy Trade and Industry (METI) said that its index of industrial production rose by 2.0% month-on-month in January, although it remains 1.2% lower than it had been in January 2011. METI also reported that retail sales and sales at large-scale department stores rose, on a year-on-year basis, for the second consecutive month in January.
Emerging market news
Various PMIs released during the week highlighted how conditions are improving for manufacturers in a number of emerging markets. HSBC’s China PMI, for instance, rose from 48.8 in January to 49.6 in February – indicating that overall activity is stabilising. Output growth has been constrained by weak demand from China’s major export markets. However, the employment picture is unambiguously positive with jobs being created in the Chinese manufacturing sector at the fastest rate since May 2011.
In Taiwan, HSBC’s PMI rose from 48.9 to 52.7 – indicating that activity is increasing again for the first time in nine months. Brazil’s manufacturers have reported solid rises in output and new orders: the rate of job creation is the fastest for 11 months. In India, too, conditions remain buoyant: however, lingering inflationary pressures remain a challenge, despite recent policy moves by the Reserve Bank of India.
In other countries, the latest PMIs have shown that conditions have become a little harder for manufacturers over the last month or so. Examples include Russia, Poland and, thanks to inclement weather conditions, Turkey. However, in all three cases, favourable developments are underway. In Turkey, for instance, employment has been growing consistently for nearly three years. In Poland and Russia, inflationary pressures have been easing. In the latter, input price inflation is at a 32-month low.
Brazil’s government announced new measures to curb the rise of the real relative to other major currencies. In particular, the 6% financial transactions tax that had applied to foreign currency borrowings by Brazilian entities, for tenors of up to two years, will now apply to overseas borrowings for tenors of up to three years. This is at a time that the central bank has been intervening in foreign exchange markets to sell US dollars. Reports indicate that the extension of the ambit of the tax is unlikely to have much impact, because most Brazilian bonds sold overseas have maturities that exceed three years.
Company news
Audi AG, the world’s second-largest maker of luxury cars and a component of Volkswagen AG, reported that its operating profit increased by 60% in 2011, rising to €5.35bn. Revenues were also up by 24% to €44.1bn. The growth in demand for luxury cars in emerging markets was a key driver of Audi’s expansion last year. Sales in China, the company’s largest single national market, rose by 37% last year. Over the coming five years, Audi plans to invest €13bn to develop new models and to build new production capacity. Audi plans to construct a new factory in China and to expand an existing plant in Hungary.
Standard Chartered plc, the UK-based bank that focuses on emerging markets in the Middle East, Africa and Asia, said that its net income rose from US$4.33bn in 2010 to US$4.85bn in 2011. Thanks to the development of its corporate and consumer businesses, Standard Chartered’s earnings have risen for an eighth consecutive year. Standard Chartered is looking to increase its workforce by up to 2,600 people (or by around 3%) over the coming year. The bank’s strong result last year was achieved in spite of a 10-week strike which closed its branches in South Korea. In addition, the bank had to contend with the effects of rising interest rates in India, which negatively impacted upon its operating revenues in that country.
Meanwhile, global banking giant HSBC Holdings plc, which also has very extensive operations across the Asia-Pacific region and the Middle East and North Africa, reported that its net income increased from US$13.2bn in 2010 to US$16.8bn in 2011. This rise was driven by growth in HSBC’s commercial banking business and by a revaluation of its own debt. Over the coming years, the bank will cut its headcount and operating expenses as it plans to exit less profitable markets.
