Is a limping US economy about to fall down or regain its stride? Is the euro doomed or can governments solve their debt problems? Will stock prices keep falling or have they found a floor? These questions won’t be fully answered this week, but we will get some clues. Here’s what to look for, and when.
United States
The US economy is struggling. Data released over the past few weeks has made that much imminently clear. Unemployment remains stubbornly high. Economic growth has been far below expectations and stock markets have tumbled. The only question remaining is how bad can it get? Hints at an answer to that question will dominate news out of the world’s largest economy in the week ahead.
News on Tuesday will focus on the government’s release of new home sales data for the month of July. A house is the most expensive purchase most consumers will make. In order to commit to buying, and likely borrowing the money to do so, people need to feel confident in their current and future financial situations. Recognising this, economists believe that this data provides important insight into the potential direction of the economy as a whole, not just the housing market. New home sales fell 1% in June to an annual rate of 312 000 units. Analysts expect July’s numbers to remain flat. If sales fell significantly, this data will add to economists’ fears of further economic deterioration. Expect extensive coverage.
On Wednesday, the US Commerce Department will release data on durable goods orders for the month of July. Durable goods include consumer items such as cars and washing machines as well as industrial machinery and other business equipment. This data shows economists what to expect from the US’s manufacturing sector over the coming months. Orders fell 1.9% in June. Analysts expect that growth rebounded by about 2% in July. If numbers fail to meet expectations economists will interpret the data as a sign that US factories expect a slowdown.
On Thursday, the US will release weekly initial jobless claim numbers. This data shows the number of new claims for unemployment benefits filed during the previous week. New filings rose last week to 408 000, after an unexpected drop the week before. Analysts consider applications below a level of 375 000 to be a sign of healthy job growth. This week’s numbers are expected to come in at 405 000. A lower than expected number would be a pleasant surprise which very few economists expect.
Finally, this week’s biggest economic news event will occur on Friday when Federal Reserve chairperson Ben Bernanke speaks to an annual central bankers’ conference in Jackson Hole, Wyoming. At last year’s meeting, Bernanke announced the Fed’s intention to embark on a second round of “quantitative easing” — the purchasing of financial assets from banks to increase the amount of money available for lending. Markets are hoping that he will announce a third round of asset purchases, but most analysts do not expect a major policy announcement.
Also on Friday, the US releases revised gross domestic product (GDP) numbers for the April to June quarter. GDP is the broadest measure of economic activity tracked by economists, capturing data from all segments of the economy. Revised GDP data for the January to March quarter showed that the US economy grew at the anaemic rate of 0.4%, far below expectations. Economists expect to see growth of 1.1% in the April to June figures.
Europe
Europe is confronting two interrelated economic challenges simultaneously. The first is the continent’s ongoing government debt situation. The second is the increasing possibility that large portions of the eurozone are heading back into recession. Both stories will drive the economic news out of Europe in the week ahead.
The more acute concern of the two is containing the fallout from the debt crisis. A growing lack of confidence in the ability of Europe’s political leaders to find a long-term solution to the problem is beginning to threaten Europe’s banking sector. Investors and analysts are becoming increasingly concerned that some banks are holding too much potentially bad government debt in their portfolios.
The problem is that no one knows who is holding what. When this type of fear becomes pervasive, bank stocks plummet, institutions stop lending to one another and short-term funding markets freeze up. Financial institutions can quickly find themselves without sufficient cash to meet their obligations. Some evidence of such a scenario has already begun to appear. European bank stocks reached 29-month lows on Friday. Further deterioration in financial stock prices in the week ahead will be widely reported in the press.
The longer-term dilemma facing Europe is another recession. This is a particular concern for South Africa, as over a third of the country’s exports flow to Europe. The irony is that by solving their immediate debt crisis, Europe’s leaders may be increasing the chances of another economic downturn.
Portugal and Greece are already in recession and some of the continent’s largest economies appear likely to join them. Germany, Europe’s largest economy, reported gross domestic product (GDP) growth of just 0.1% last week. The previous week, France, the continent’s second largest, reported zero growth for the April to June period. And Italy, the EU’s third largest, has announced plans to close a budget gap equal to 3.9 % by 2013. The tax rises and/or spending cuts required to achieve this, by draining additional funding from the already fragile economy, could easily tip the country into recession.
Finally, on the data front, the week’s most widely reported release will come from Germany on Tuesday when ZEW Centre for Economic Research releases their monthly economic survey results. The indicator reflects the collective opinion of approximately 350 economists and analysts on economic performance for the six months ahead. The index has fallen for five consecutive months and analysts expect to see further deterioration. On the heels of disappointing GDP numbers, analysts will be watching this indicator closely for the size of the expected drop in confidence.
South Africa
The most significant economic event on South Africa’s economic calendar this week is Wednesday’s release of consumer price index (CPI) data by StatsSA. Inflation is a significant contributor to interest rate decisions by the South African Reserve Bank (SARB). Consumer inflation rose to a 15-month high of 5% in June. Analysts expect the index to have edged up to 5.2% in July.
SARB has kept the repo rate at 30-year lows through four consecutive meetings and economists expect rates to remain low through next year. A higher than anticipated number could suggest that policymakers may hike rates sooner than expected.
- Matt Quigley writes the weekly economic preview for the Mail & Guardian. He is a former divisional director at the US Treasury’s office of the comptroller of the currency and fiscal policy analyst at the Federal Reserve Bank of Boston.