The year started so well for the global economy.
China was looking a little fizzy with worries of inflation taking off, but the authorities had been on the case for some months and were gradually tightening the screws; manufacturing was the beacon of hope as consumers only gradually regained a modicum of confidence; there were even hopes the housing market was finally bottoming out. Here in the UK, manufacturing growth was running at a 17-year high of 6.6 percent, according to a recent FT article.
True, there were clouds on the horizon. Euro-zone debt still looked problematic, but the hope was further contagion had been contained and the peripheral states were not enough of a worry to dent the general good mood.
The last few weeks have changed all that. The S&P 500 fell by 2.3 percent at the end of May, the largest one-day fall since August last year. Ten-year US Treasuries fell below 3 percent for the first time this year. Indeed, at 2.94 percent they are below German Bund yields, heralding further falls in the value of the Euro.
Commodity prices fell as risk assets were considered, well, too risky, and the CBOE Vix volatility index climbed 18 percent, an FT article reported this week. In the UK, that 6.6 percent growth at the start of the year plunged to 2.2 percent by March and has just kept falling since.
Various opinions are, of course, flying around, and let it not be said we at MetalMiner are short of opinions ourselves; some are logical, some less so. Suggestions that the Japanese earthquake and tsunami’s impact on the supply chain is only just being felt are, while valid, probably of only minor importance.
An argument put forward that the first-half rise in commodity prices has caused consumers to slow purchasing also has some truth. We have seen a sharp correction in Chinese buying of commodities as prices for metals such as copper rose strongly in Q1, but in themselves metal prices are not the architects of a global slow down — probably more effect than cause.
Rising commodity prices can be said to have had a significant impact in one area: gas or petrol prices on Western consumers. When seen with the backdrop of falling real wages and continuing falls in house prices, consumers have not returned to be the force for growth they were mid-decade.
Average hourly earnings of production and non-supervisory employees who make up 80 percent of non-government workers dropped to $8.76 in April. Adjusted for inflation, that’s lower than they were in the depths of the recession, according to an article by Robert Reich, former US secretary of labor under President Bill Clinton, on the prospects for the US economy.
House prices, meanwhile, have continued to fall. They are now 33 percent below their 2006 peak, says Reich. That is a bigger drop than recorded in the Great Depression. Homes are the largest single asset of the American middle class, so as housing prices drop, many Americans feel poorer. Not surprisingly, consumer confidence is therefore down.
How are manufacturing producers faring? Check in for Part Two…