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Global Economic Picture May Come into Focus This Week

Sunday, 19 May 2013 03:06 PM

This week offers the first major gauge of the health of the global economy for May, with big implications for policymakers and investors banking on a steady pickup in activity during the second half of 2013.

Disappointing factory output and service sector data in April, particularly in the eurozone but also in the United States and China, have pointed to a world economy slowing after a pick up in the first quarter and a very weak end to 2012.

This week's initial estimates of Purchasing Managers' Indexes (PMIs) for China, the eurozone and the United States are expected to show a slight pickup from April, but not enough to dispel fears of a sluggish outlook. The data, from survey compiler Markit, is due on May 23.

"We don't think there will be a further acceleration of growth in the second or the third quarter. The first quarter was probably as good as it's going to get," said Andrew Kenningham senior global economist at Capital Economics.

Capital Economics estimate global growth was running at 2.9 percent in quarter-on-quarter annualised terms for January to March and expect the world economy to grow just 3 percent this year, little changed from 2012.

World economic activity slowed in April as measured by JPMorgan's Global Total Output index, which dropped to 51.9 from 53.0 in March, although the index has now held above the 50 mark that divides growth from contraction for nearly four years.


The PMI data will likely show a growing divergence in economic performance around the world, pointing to relentless recession in the euro area, a recovery in the United States restrained by fiscal tightening, and slowing growth in China.

The readout on the U.S. economy will add fuel to a growing debate over when the Federal Reserve will begin tapering back its $85 billion a month bond buying plan, which has been a major driver of a strong dollar and rising U.S. Treasury bond yields.

"The flash U.S. manufacturing PMI fell sharply in April, signalling the weakest pace of expansion in six month," Chris Williamson, chief economist at Markit said.

More recent data on factory activity in the industrialised eastern states has added to the signs of a slowdown although weekly jobless claims numbers, which the Fed is likely to monitor closely, have pointed to strength in the labour market.

The Fed will publish the minutes from its last policy meeting on Wednesday, and these will be scrutinised for clues to which way its members are leaning on the economic outlook and the need to maintain the stimulus policy.

"The reaction in the Treasury market suggests there is a growing belief that the resumption of growth in the U.S. is becoming sustainable," said Frances Hudson, global thematic strategist at Standard Life Investments.

The benchmark U.S. Treasury 30-year bond yield has risen to around 3.16 percent from 2.83 at the start of May.


In Europe another weak PMI reading in May would increase speculation about the ECB's next move, after its President Mario Draghi said the bank was ready to cut rates if the outlook for the economy worsened.

The publication of a weak PMI in April was among the main reasons the ECB cut its main refinancing rate to an all-time low of 0.50 percent at its May governing council meeting.

The ECB is considering cutting the deposit rate it offers to below zero to encourage banks to stop parking cash and start lending it again.

The Bank of England also releases the minutes of the last policy meeting under current governor Mervyn King. These are likely to show policymakers are more confident about the UK's economic outlook after a recent run of upbeat data.

UK consumer price figures for April due on Tuesday should show sterling strength and lower oil prices helping to keep the annual inflation rate falling. 

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This week offers the first major gauge of the health of the global economy for May, with big implications for policymakers and investors banking on a steady pickup in activity during the second half of 2013.
Sunday, 19 May 2013 03:06 PM
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