Tuesday 6 December 2016

Daily Market Update: G7 issues global growth warning

Richard Ramsey

Published 27/05/2016 | 10:22

British Prime Minister David Cameron talks with World Bank President Jim Yong Kim (L) as the attend a family picture during the last day of the Group of Seven (G7) summit meetings in Ise Shima, Japan May 27, 2016. REUTERS/Carlos Barria
British Prime Minister David Cameron talks with World Bank President Jim Yong Kim (L) as the attend a family picture during the last day of the Group of Seven (G7) summit meetings in Ise Shima, Japan May 27, 2016. REUTERS/Carlos Barria

The G7 leaders wrapped up their two-day summit in Japan issuing a warning on global growth.

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“Global growth remains moderate and below potential, while risks of weak growth persist," the G7 leaders warned and "global growth is our urgent priority." The Brexit debate also featured in the G7 leaders’ declaration which stated “there are potential shocks of a non-economic origin”.  The communique went on to state that “a UK exit from the EU would reverse the trend towards greater global trade and investment, and the jobs they create, and is a further serious risk to growth”. Shinzo Abe, the Japanese PM, had hoped he could persuade his G7 colleagues to support a coordinated stimulus package.  However, he was unable to convince the UK or Germany.

Meanwhile in the US, the talk remains focussed on whether the world’s largest economy will reduce some of its ongoing monetary stimulus. Fed governor Jerome Powell said that the continued strengthening in US economic data could clear the way for a second increase in short-term interest rates “fairly soon”. He added the US still faces a range of risks overseas, including the forthcoming referendum on Britain’s membership of the EU, uncertainties about China’s exchange rate policy, and “stubbornly low” growth and inflation for most US trading partners. The FOMC’s next meeting on 14-15 June comes just over a week before the UK’s EU referendum vote.

While the incoming US economic data has been broadly encouraging, the same cannot be said for US corporate earnings. With the US Q1 reporting season almost over it is noted that the overall profit for S&P 500 companies was the weakest in 6.5 years.  The beleaguered financial sector posted double-digit declines. Yesterday’s US economic data was somewhat mixed. Last week’s jobless claims continued to drift lower.  Meanwhile pending home sales (which become sales in 1-2 months) surged to a 10-year high in April.  However, the bad news concerned business investment. US business spending weakened for a third straight month in April.  Durable goods orders excluding defence and aircraft related expenditure unexpectedly fell by 0.8% m/m last month.

Yesterday we were provided with further detail on the UK’s Q1 GDP growth figures.  The UK economy expanded by 0.4% q/q in Q1 in line with the previous estimate. However, the year-on-year growth rate was revised downwards marginally to 2.0%. Once again consumer spending is driving the UK economy    with a growth rate of 0.7% q/q, which beat the 0.5% q/q consensus forecast. Not quite the rebalancing of the economy that is often cited and required. The bad news was that both exports and business investment contracted.  Indeed, with business investment shrinking for the second consecutive quarter and posted its first annual decline in three years.  This morning the GfK consumer confidence survey has reported an improvement in May relative to April’s 16-month low.

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