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Michael Baxter

Bull and bear: The economic wilderness years are drawing to a close, according to the markets

Written by: Michael Baxter on March 6th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: The economic wilderness years are drawing to a close, according to the markets. Australia sees fastest growth rate in five years. UK appears to avoiding recession – just. Eurozone sees downturn go down. US sees sharp pick-up. Companies in the news: Meggitt

The economic wilderness years are drawing to a close, according to the markets

Tuesday, March 5 2013. Mark that date in your diary. On that date the Dow Jones closed at 14253.77, a new all-time high.

Actually markets did pretty well across the world. The FTSE 100, for example, closed at 6431.95 – a five year high, although in fairness this index has been passing five years highs with regularity over the last few weeks.

This begs the question: are the markets telling us the economic troubles of the last half a decade are drawing to a close?

They say the stock market has predicted nine of the last five recessions. But that may be unfair. The crash of 1987 may have meant nothing, or may have been an early pointer to the recession of the late 1980s/early 1990s.

The FTSE 100, as you probably know, peaked on January 30 1999. Does that not tell us rather a lot? In contrast, the US stock market did see a temporary peak in January 2000, but then soared later in the noughties. Until last night, its all-time high was set on October 9 2007. It is tempting to conclude, therefore, that stock markets tell us nothing; they are not a forward indicator, rather a lagging indicator, because there appears to have been no hint hidden in US stock market data of 2007 of the troubles that were to follow.

On the other hand just remember that the US economy has enjoyed a much swifter recovery than the UK. In the UK, GDP is still almost 4 per cent below peak, whereas in the US, the prerecession high was passed some time ago.

So maybe the relative performance of the stock markets is about right. The Dow has not suffered in the same way as the FTSE 100, but then the US economy has performed better too.

The FTSE 100 is now just 289 points below the 2007 high, and 408 points off the all-time high.

On the other hand, the FTSE 100 offers more exposure to companies based overseas. Given this, why should it correspond with the performance of the economy? Maybe it is all just random, and by sheer coincidence the stock market’s performance seems to correlate with the economy occasionally.

Australia sees fastest growth rate in five years

And while on the subject of good news, a peak down under reveals that the Australian economy grew by 3.6 per cent last year, and by 0.6 per cent in Q4. Bloomberg has calculated that this is the fastest growth rate since 2007. You have to hand it to the Australians; they are lousy at sport, but they sure know how to stage an economic comeback.

Moving forward, the economy’s biggest threat lies in a potential downturn in mining. Capital Economics pointed out: “Its mining boom is already beginning to cool.”

Australia’s central bank has responded by cutting interest rates by 1.50 percentage points since November 2011 in an attempt to boost non-mining related investment.

What Australia needs is for consumers to spend more, but they are in debt, although interest rates cuts have lowered the total cost of servicing debts among households from 11.3 per cent of disposable income to 10.1 per cent over the 12 months to Q3 last year. Australian house prices have also recently seen their first annual rise in two years.

Capital Economics concludes that any rise in consumption or non-mining related investment will be insufficient to fully make up for the slowdown in mining and it therefore forecasts growth of 2.5 per cent this year and next.

UK appears to avoiding recession just

Bad news on Friday and bad news on Monday put together seemed to suggest that the UK was contracting again. Then Tuesday came along and the picture didn’t look quite so gloomy.

Friday’s story has already been told here. The Purchasing Managers’ Index (PMI) for UK manufacturing produced by Markit/CIPS fell from 50.8 in January to 47.9 in February, which was significantly below the 50 no change level. A forward looking sub-index tracking new orders dipped to an even lower level, and the index measuring new export orders saw their fourteenth successive month of decline.

Monday’s woes related to construction. The PMI for this sector fell to 46.8 from 48.7, signalling the fastest rate of contraction in the sector since October 2009.

So that was all rather worrisome. But yesterday the PMI for services was more promising, although hardly brilliant. The headline seasonally adjusted Business Activity Index posted 51.8 in February, slightly above January’s 51.5 and a five-month high.  More encouragingly, new business increased at the sharpest pace for nine months in February, with panellists suggesting improved market confidence led to stronger client demand.

So if we have the data from the three PMIs together what do we get?

The composite PMI did in fact fall from 51.7 in January to 50.8. That the index fell was disappointing, but it is still above 50, suggesting that the UK is still expanding.

Markit estimates that the UK economy is on course for expanding by 0.1 per cent in Q1.

So what can we say? It appears that the UK is going to avoid a recession, although since the first official estimate of GDP is invariably changed at a later date, it is anyone’s guess whether this finding will be supported by the initial ONS figures.

So recession looks likely to be avoided, but then again, so what? The UK is still in its worst downturn ever recorded and probably avoided recession by a hair’s breadth.

The bulls can celebrate over this if they want to, but they are charging in a field made of mud.

Eurozone sees downturn go down

Meanwhile, on the mainland, it was woe all round.

The composite PMI produced by Markit for the Eurozone fell from 48.6 in January to 47.3.

To be frank a reading of 47.3 is an awful score, but then the economic performance across the region had been so awful of late that Markit saw reason to celebrate. “The rate of decline remained less severe than seen in any of the nine months prior to January,” it said. Chris Williamson, Chief Economist at Markit, said: “The dip in the Eurozone PMI compared to January is a disappointment, but the region still looks set to see a much smaller drop in GDP in the first quarter compared to the 0.6 per cent decline seen in the final quarter of last year, with the PMI so far consistent with a 0.2 per cent GDP decline.”

Broken down per country the readings are as follows:

Germany             53.3        2-month low

Ireland                  52.8        6-month low

Spain                     45.3        2-month low

Italy                       44.4        3-month low

France                  43.1        2-month high

Markit, quite correctly pointed out the sharp divergence between France and Germany.

The decline in the French PMI is really quite shocking, but given the way the economy operates, perhaps not surprising.

US sees sharp pick-up

Finally we go back to the beginning. The Dow is at an all-time high, and the US economy appeared to do pretty well in February too.

The PMI produced by ISM for US manufacturing rose to 54.2 – a 20 month high. Furthermore, the rise was largely driven by new orders, which is a promising sign for the future.

As for non-services, the PMI, again produced by ISM, rose from 55.2 to 56, which was a 12 month high.

The sub-index tracking employment was close to last month’s score, which was a seven month high.

Much of the strength in non-manufacturing had its roots in a recovering US housing market.

Paul Dales at Capital Economics said: “The two surveys are also consistent with a pick-up in monthly gains in payroll employment to around 350,000. We’re not convinced that things will be that good. But this survey does bode well for both activity and employment in the second quarter.”

Companies in the news

Meggitt is a global engineering group specialising in extreme environment components and sub-systems for aerospace, defence and energy markets.  Tempus at the ‘Times’ took a look, and said that shares are at an all-time high, and the company looks expensive to be a bid target. Tempus said the potential to grow non-organically is limited because prices in the sector are high. It concluded: “not bad for the long term.”

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Australia GDP forecast, Dow all time high, Eurozone recession PMI, French versus German economy, Meggitt, Stock markets predicting recessions, the stock market has predicted nine of the last five recessions, UK avoid recession PMI, US PMI GDP

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