Matt Quigley
Matt Quigley

The economic week in review: Timeo Danaos

Fear of the Greeks was the dominant economic theme of the week. Greece’s failure to form a new government after inconclusive parliamentary elections last week drove markets broadly lower as concerns mounted that Europe’s debt crisis may soon get a lot worse.

Elsewhere, America’s central bank hinted that the world’s largest economy may require further stimulus, growth figures showed stagnation in Europe and state media reports in China suggested the need for further monetary policy loosening. Here are the highlights.

United States

Minutes from the Federal Reserve’s April policy meeting released on Wednesday showed that additional stimulus – beyond the more than $2-trillion in asset purchases already conducted by the central bank – is still on the table.

“Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.”

Statistics released on Tuesday showed that US retail sales expanded at their slowest pace of the year in April, rising a mere 0.1%. Analysts speculated that a portion of the slowdown may be attributable to unseasonably warm temperatures in March which pulled some spending forward.

Better news followed on Wednesday when a report from America’s commerce department showed that industrial production rose 1.1% in April, the largest monthly increase in output since December 2010.

A separate report from the commerce department showed that housing starts jumped 2.6% to a seasonally adjusted annualised rate of 717 000 units last month. The number of permits for new housing construction – an indicator of future activity – fell to 715 000 from 769 000 in March.

America’s data week closed on Thursday with the government’s release of weekly jobless claims data and the Philadelphia Federal Reserve’s manufacturing survey.

First time claims for unemployment benefits – a rough gauge of whether retrenchments are rising or falling – remained unchanged at 370 000 for the week ended May 12. The four-week average for filings fell to 375 000, the lowest level in five weeks.

The Philadelphia Fed’s survey – a widely followed indicator of manufacturing trends – plunged to a reading of -5.8 in May from 8.5 in April. A negative reading suggests that more companies are contracting than expanding. Economists had expected the measure to rise.

Europe

A caretaker government assumed office in Greece this week after political parties failed to form a coalition following last week’s parliamentary election. The non-political, technocratic government will oversee the country’s affairs until a new election in June.

Next month’s vote is being characterised by both Eurozone and Greek leaders as a referendum on the country’s membership in the 17-nation currency bloc.

Many Greeks consider the terms of a recently negotiated €174-billion bailout from Europe and the International Monetary Fund (IMF) to be destroying their country. Polls suggest that a majority of voters back parties in the upcoming election bent on tearing up the agreement.

Numerous European leaders insisted this week that Greece must stick to the agreement and that failure to do so will force the country out of the euro, with potentially devastating consequences for the country, the region and the global economy.

But Alexis Tsipras, leader of leftist coalition currently leading in the polls, was equally vociferous in his insistence that the agreement must go, all but daring Europe to risk the consequences of a disorderly Greek debt default and euro exit.

As tensions mounted and rhetoric heated up throughout the week, risk-sensitive assets across the world suffered, Greek citizens withdrew more than €2-billion from the country’s banks and the European Central Bank – which stands to lose an estimated €200-billion from a complete Greek debt default – halted lending to some Greek banks to limit its risk.

Highlighting the precariousness of Europe’s economic situation, gross domestic product (GDP) figures released this week showed that the region’s economy recorded zero growth during the first three months of the year.

Asia

A Chinese state media report deepened concerns about a slowdown in the world’s second largest economy this week. Citing an unnamed source, the state-run Shanghai Securities News reported on Wednesday that two of China’s four largest banks saw new yuan lending decline during the first two weeks of May.

Chinese bank lending fell sharply from CNY1.01-trillion in March to CNY681.8-billion in April – a far greater decline than economists had forecast – but was expected to pick up this month. If this week’s report is accurate, it is likely to bolster those calling for further monetary policy easing.

China’s central bank announced on Saturday that it will cut banks’ reserve requirement ratio by 0.5% from today in an attempt to free up additional funds for lending. The bank’s announcement marked the third reserve ratio cut in the last seven months, but some economists fear that officials have not gone far enough.

This view was given greater voice on Monday when the state-run China Securities Journal published a commentary calling on officials to cut interest rates when necessary to stimulate domestic demand and to further reduce the reserve ratio.

The newspaper also said that banks should have more flexibility to lower their own interest rates to reduce businesses’ funding costs. Banks are currently allowed to lend at a rate as low as 90% of the central bank’s 6.56% policy rate.

Elsewhere in the region, growth figures in Japan – the world’s third largest economy – and in Singapore came in better than expected this week. Japan’s economy expanded at an annualised rate of 4.1% in the first quarter. Singapore recorded 10.0% annualised growth, but warned that European risks are casting a dark shadow over the country’s economic outlook.

South Africa

South African markets and currency got hammered this week as Europe’s woes diminished global investors’ risk appetites.

On the domestic front, Wednesday saw the release of March’s retail sales data by Statistics South Africa. The report showed that sales increased by a seasonally adjusted 2.1%, following a 2.4% drop in February.

For the first quarter of 2012 as a whole, sales increased by an anaemic 1.2%, quarter on quarter. On an annual basis, quarterly sales were up 5.9%.

On Thursday, Energy Minister Dipuo Peters told Parliament that there will be a “substantial decrease in fuel prices in time for the June holiday driving season”.

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