Comment: Chill winds blowing through global economy

George Kerevan
George Kerevan
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IT MAY be spring, and the garden centres groaning with stuff to plant, but the global economy has caught an unexpected chill.

The latest US job numbers are nothing to write home about, while manufacturing output – to date the most resilient part of the economy – began to stall in April. The same pattern is emerging in China, where this week’s purchasing managers index turned resolutely downwards.

Even Thursday’s quarter per cent cut in interest rates by the European Central Bank (ECB) should not get our hopes up. This is the ECB’s first rate cut in ten months. In the interim, the eurozone economy has nose-dived.

The markets had expected a cut because the ECB had nowhere else to go. Response to the cut was muted. German bond futures (a safe haven) immediately jumped to a new high and the euro promptly fell. This indicates the markets still expect a rainy summer in the European and global economy.

What’s causing this fresh global wobble? The problem centres on manufacturing. Factory activity in Germany also fell in April. Data from Taiwan shows industrial output dropped 3.3 per cent on the year – Taiwan is normally a bellwether for other Asian economies. On the face of it, this is an odd development.

In America and Europe manufacturers are enjoying high profits, maximum factory utilisation rates, and are sitting on piles of cash. So why aren’t we seeing an investment boom?

One reason is that over-leveraged consumers are still not spending, which may be causing firms to sit on their money.

However, the real problem lies with the financial sector. Rates may be low but banks are hoarding capital. In Europe, the ECB is sleepwalking towards outright deflation, a re-run of Japan’s two lost decades.

This is taking huge demand out of global trade – Europe normally buys a fifth of America’s manufacturing exports. Meanwhile in China, we are witnessing massive industrial over-capacity colliding with rising wage militancy. Comrade Marx could tell them this ends in tears.

Osborne wants RBS off Treasury’s books

Will Royal Bank of Scotland be back in private hands before May 2015? The odds are certainly shortening after the bank turned in a respectable first-quarter pre-tax profit of £826 million yesterday, reversing a £1.5 billion loss for the same period last year.

There’s no doubt that Chancellor George Osborne would like to sell the bulk of the 81 per cent of RBS which has been in public hands since 2008, if only to tell a good tale at the 2015 election.

He would probably still have to take a loss on the original £45bn Treasury price tag but the political gain – “we cleared up Labour’s mess” – would be immense.

But there’s many a slip between a first-quarter profit and a general election. For starters, UK banks are under orders to raise £25bn of new capital reserves by the end of this year. 
Although the regulator has not yet given individual banks specific reserve targets, the biggest shortfall is likely to be at RBS.

Again, RBS is still faced with getting European regulators to extend their end-2013 deadline forcing the bank to sell 316 branches – a condition of 
receiving state aid.

A deal to sell the branches to Santander has already gone west, leaving RBS to posit a flotation. But that will take time and assumes economic conditions stay benign.