/ 8 August 2011

Hang on tight: a preview of the week’s economic news

A slowing US economy, growing debt crisis in Europe and South Africa's economic outlook: read our preview of this week's finance news.

Last week a slew of worrying economic news, including fears over a slowing US economy and growing debt crisis in Europe, drove many global markets to their lowest levels since 2008. This week promises to be even more chaotic. Here is a preview and explanation of the economic events likely to dominate this week’s news.

The US economy
The big worry on everyone’s mind is that the US may be slipping back into recession. US consumer spending fell in June. Consumer confidence eroded in July. And two weeks ago, the US government released data showing that America’s economy grew at a rate of less than 1% through the first half of 2011, significantly below economists’ expectations. Even the two pieces of seemingly good economic news to emerge from the US last week came with caveats.

First, employment data released on Friday showed that the US added 117 000 jobs in July. This number was far higher than the 85 000 analysts had predicted, but below the 125 000 needed to bring down the country’s high unemployment rate. Most analysts took these numbers as yet another sign that the US economy is still on shaky footing at best.

Second, US lawmakers narrowly averted defaulting on the country’s debt by crafting an eleventh hour compromise to raise America’s debt ceiling. Analysts across the globe reacted with concern that the deal, which cuts spending by $2.4-trillion over 10 years, may hamper government’s ability to pursue further stimulus spending should the economy slow further.

To make matters worse, Standard & Poor’s, a credit rating agency, downgraded the country’s credit rating on Friday after markets closed. This move is likely to wreak havoc on markets early this week and dominate the news. The longer term effects of the downgrade are much harder to predict. Expect to see reactions and predictions emerging throughout the week.

With all that as a backdrop, the US Federal Reserve (Fed) meets on Tuesday. The statement issued by the Fed following the meeting will be widely covered in the press. Analysts are not expecting any significant policy actions to be announced, but will be watching closely for reactions to market turmoil and any hint that the Fed might revise its growth forecast downwards. Expect commentary on the Fed statement to feature prominently in Wednesday’s business pages.

Finally, on Friday, the US Commerce Department will release retail sales figures for July. Retail sales account for nearly one-half of total consumer spending in the US, which itself accounts for more than two-thirds of the country’s economy. In other words, these numbers are important. Economists expect data to show a 0.5% increase. If these expectations are met, the figures could help ease mounting recession fears.

European Debt
Government debt will continue to dominate European economic news this week. Last week, Italian and Spanish bonds came under increased pressure as markets questioned both countries’ continued ability to reduce deficits and meet payment obligations. The central concern is that fearful investors will stop buying Spanish and Italian bonds, locking the countries out of credit markets. Escalating pressure on Italian and Spanish bonds could also further undermine an already damaged European banking system.

In an attempt to alleviate those fears, Italian Prime Minister Silvio Berlusconi announced on Friday that the country would accelerate a €48-billion austerity programme, accelerate sales of government assets and liberalise the country’s labour markets. He also pledged to balance Italy’s budget by 2013.

Further reassurances were issued by the European Central Bank (ECB) last night when they announced an expansion to the ECB’s bond purchasing programme to include Italian and Spanish bonds. Until yesterday’s announcement, the ECB had limited its bond purchase programme (seen as a safety net of last resort) to Greece, Ireland, and Portugal. Finance ministers from the “G-7” countries (US, UK, Canada, Germany, France, Italy and Japan) also issued a statement saying that “no change in fundamentals warrants the recent financial tensions faced by Spain and Italy”.

Economists, investors, and analysts will be watching to see if the measures announced by the ECB are sufficient or if pressure on European government bonds continues. If the situation deteriorates, investors will be looking for signs of increased willingness to take action by Europe’s governments.

South Africa
South Africa is a small, open economy so big developments outside our borders are likely to have a bigger impact this week than events happening within them. Problems in the US and Europe will exert a drag on South Africa’s economy, which is already showing signs of weakness.

Retail sales decreased significantly in May. Private borrowing failed to meet expectations in June. And last week, a survey showed that activity in South Africa’s manufacturing sector, the country’s second largest, unexpectedly fell in July. If either the US or Europe slips back into recession, South Africa will almost assuredly follow.

Despite the looming shadow of developments abroad, several important local economic indicators will be watched closely this week. On Wednesday, the South African Chamber of Commerce and Industry releases its business confidence index for July. Analysts expect to see a drop. And on Thursday, StatsSA will release manufacturing data for June. Analysts expect the data to show that growth in output slowed to 0.5%, year over year.

Matt Quigley was a divisional director at the US Treasury Department’s office of the comptroller of the currency and fiscal policy analyst at the Federal Reserve Bank of Boston.