What happened to economic growth?

31st August 2012

Yesterday's post touched on this matter when I discussed the United States which although growing is only growing at half the rate the US Federal Reserve forecast of the year before. Even relatively slothful organisations such as the Confederation of British Industry (CBI) are catching on as it has just reduced its forecast for UK growth in 2012 from +0.6% to -0.3%. Overnight and this morning we have seen more evidence on this front.


Spain is right in the front line of the Euro area crisis and today's update on her retail sales position will do nothing to improve that situation:

"Sales in retail trade at constant prices (ie, removing the effect of prices) have a variation of -6.9% in July, two and a half points below the rate recorded in June."

This is even worse than an already poor average for the year so far of -5.6%. And if you also use the calendar effect you find that the year on year figure dips further to -7.3%. Every number in the series since the beginning of 2011 has been negative and the underlying retail sales index where 2005=100 is now 87.7 for Spain. Rather ominously if we look back to past data we see that July is usually a good month for total retail sales presumably because of the impact of summer tourism.

When we consider Spain's already very  high official unemployment rate of 24.63% we see that the developments here are unwelcome too:

"Employment in the retail sector fell by 1.3% compared to July 2011"

What we do see from this update is that Spain's retail sales are continuing to weaken and that this is from an already low base. In other words it looks as though there is going to be no let-up in the decline in domestic demand in Spain. If we now consider her latest economic growth figures which I discussed on Wednesday she will need to keep expanding her external demand (exports-imports) at a substantial rate or we will see more substantial falls in her economic growth rate. That would be quite an achievement in the current environment.

If we try to peer forwards and get as up to date an analysis of the current situation we had this from the Euro area purchasing manager's composite index:

"There was also a further marked decline in output outside of the big-two economies (They mean Germany and France)"

How much of that applies to Spain we can only suspect for now.


Even the Deutschland express train has been showing signs of something of a go-slow. Yesterday we got an estimate for the August retail purchasing manager's index:

"At 49.9, down from 50.3 in July, the seasonally adjusted Germany Retail PMI was broadly in line with the 50.0 no-change mark."

And this was backed up today by the official report for July:

"retail turnover in July 2012 in Germany increased 1.1% in nominal terms and decreased 1.0% in real terms compared with the corresponding month of the previous year"

Nice try with the nominal number! Whilst Germany remains in positive territory on a year on year basis at +0.6% the situation is plainly deteriorating. As the supposed strongest Euro area economy this poses a question for everyone else.


The question posed by Germany's situation only sees more signs of distress here:

"The retail trade volume index, including automotive fuel, decreased by 10.6% in June 2012 compared with June 2011. The Index in June 2011 recorded a decrease of 11.5% compared with June 2010"

Adding the numbers for the previous year just reinforces the impression of something which feels like it has fallen off the edge of a cliff. The underlying index is now 72.4 on a sclae where 2005 equals 100. Or to put it another way the current series goes back to 2000 and the reading for 2000 was 80.3, if we try to reduce seasonal effects we see that July 2000 registered 79.5 giving us an overall fall of 9% since then. So retail sales levels in Greece have returned to the previous century.

The land of the rising sun

Here we have seen some worrying signs overnight. From METI we received this:

"Industrial Production in July decreased -1.2% from the previous month, showing a decrease for the first time in two months. It showed a decrease of -1.0% from the previous year. The index in July was 91.5(seasonally adjusted)."

So Japanese industrial production is falling on a monthly and a year on year basis. And an inventory ratio of 128.3 poses its own questions which seem to have fed into future expectations:

"According to the Survey of Production Forecast in Manufacturing, Production is expected to increase 0.1% in August and to decrease 3.3% in September."

Indeed the relative optimism for August does not seem to be backed up by the manufacturing PMI:

"Japanese manufacturing production declined further in August, with the rate of contraction accelerating to the fastest in 16 months."

If we take a step back we can see that these figures were perhaps not as "unexpected" as many news services are trying to present them as today. I discussed signs of economic weakness in Japan on July 9th and also in more detail on July 27th. I have put a link to the main article here.

If we look at how official hyperbole works Japanese style we see that the falls are described as "Industrial Production appears to be flat." But if we move onto a deeper analysis then we see that my theme that the scale of her likely recovery from the tsunami was over-hyped by officials and many economists is getting ever more support from the evidence.

Also there may be something of a hint to Ben Bernanke as he prepares for his speech at Jackson Hole today (3pm UK time). If Quantitative Easing was the answer then how do we explain the economic problems of the nation -Japan- who has used it the longest? In Japan QE is even struggling in an area where elsewhere it has had some success:

"The consumer price index for Japan in July 2012 was 99.3(2010=100), down 0.3% from the previous month, and down 0.4% over the year.

 The consumer price index for Ku-area of Tokyo in August 2012(preliminary) was 98.8(2010=100), up 0.1% from the previous month, and down 0.7% over the year"

As you can see disinflation continues to persist in Japan.

Continue reading…


More on Mindful Money:

UK money acceleration argues against MPC easing

Doubts cast over QE at Jackson Hole

The Gold Standard; Or is it?

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