The economic week ahead: Happy New Year?

Will 2012 bring better economic news than 2011’s grim headlines? Can American politicians manage to find common ground in the run-up to the country’s presidential election? Can European officials tackle their debt crisis and save the euro without further devastating their economies? Can Chinese policymakers strike a balance between encouraging growth and discouraging inflation? These are the questions likely to preoccupy markets in the week ahead.

United States
The first major event on America’s 2012 presidential election calendar and a series of closely followed economic data releases will likely dominate headlines in the week ahead.

On Tuesday, citizens in the American state of Iowa will vote for one of six Republican candidates hoping to challenge President Barack Obama in November’s general election. Three candidates — former Massachusetts governor Mitt Romney, former House speaker Newt Gingrich and Texas congressman Ron Paul — sit atop most polls. The Iowa caucuses, viewed as an important gauge of a candidate’s prospects, will receive widespread analysis in the financial and broader media.

Tuesday will also bring America’s first significant data release of the year. The Institute for Supply Management’s manufacturing index is a widely followed measure of the country’s industrial sector. A score of 50 or above indicates expansion. A score below 50 signals contraction.

This week’s release is expected to show a reading of 53.2 for December, up slightly from November’s 52.7 score. A number at or above expectations would be an encouraging sign to investors that America’s manufacturers ended 2011 on comparatively sure footing.

On Wednesday, attention will shift to two releases covering motor vehicle sales figures for December and factory order data for November. Analysts expect motor vehicle sales to remain flat, month-on-month, but for factory orders to register 2.0% growth.

On Thursday and Friday, information on the country’s labour sector will take centre stage. The privately-administered ADP employment report — viewed as a preview of Friday’s broader, government-issued employment situation report — is slated for release on Thursday. Data is expected to show that private sector payrolls increased by 160 000 in December.

Friday’s employment situation report is expected to show private payrolls increasing by the same amount. Nonfarm payrolls are forecast to have swelled by 150 000 in December, after a relatively strong 120 000 increase in November. The country’s unemployment rate is expected to have ticked up slightly from 8.6% in November to 8.7% in December. Average hourly earnings and the average workweek of American workers probably remained unchanged, month-on-month.

European headlines in the first week of 2012 are likely to pick up right where they left off in 2011, focused on the region’s unresolved debt crisis and the economic carnage it continues to wreak.

Last year ended with a now all-too-familiar story. Sales at an Italian bond auction last week fell short of the €8.5-billion officials had hoped to raise. This disappointing result for the nation at the heart of the continent’s troubles sent the euro to $1.2858, a new low for 2011 and the currency’s weakest level since September of 2010.

In the year ahead, analysts estimate that Italy and Europe’s other embattled governments will attempt to sell roughly €800-billion in government bonds. The first of many auctions to come is scheduled for Wednesday, when Germany — the continent’s largest economy — will attempt to auction €5-billion of 10-year bunds.

The country’s most recent auction of 10-year bunds, which occurred 23 November, was widely viewed as a disaster. Amid growing fears about Germany’s exposure to the intensifying debt crisis, commercial banks bought only 61% of the €6-billion in 2% yielding bunds on offer, forcing the Bundesbank — the country’s central bank — to buy the remaining €2.356-billion.

A sale of between €7-billion to €8-billion in long-term French bonds — of varying maturities –will follow on Thursday. France is expected to require roughly €178-billion in financing in 2012, including approximately €79-billion to cover anticipated budget shortfalls and an additional €98-billion to roll-over existing medium and long-term debt. With the country’s credit rating under threat, markets will be watching Thursday’s sale closely for signs of trouble.

Beyond these debt sales, two items on the region’s economic calendar are likely to capture investors’ attention in the week ahead. Final purchasing managers’ index (PMI) readings for the euro zone’s manufacturing and services sectors are scheduled for release on Monday and Wednesday respectively. Economists will be watching for any downward revisions to preliminary figures released in December.

Concerns about declining demand for Asian exports and signs of a slowing Chinese economy will likely dominate Asian economic headlines this week.

Europe’s troubles weighed heavily on Asia’s export-oriented economies in 2011. Most of the region’s markets — including exchanges in China, Japan, India and Australia — recorded double-digit losses for the year.

Business and government leaders across the region are increasingly worried that Europe’s deepening economic malaise and a low global growth rate will hurt Asian exports in 2012 as well. On Sunday, South Korea’s Ministry of Knowledge Economy warned that the country’s annual rate of export growth will likely slow to 6.7% in 2012 from nearly 20% in 2011.

In the week ahead, three additional countries in the region will report trade data. India and Indonesia will report monthly figures on Monday, Australia on Wednesday.

Beyond Europe, the region’s second big concern is that China’s economy, the world’s second largest, is slowing. Yesterday, the official purchasing managers’ index (PMI) for December barely broke the 50 mark separating expansion from contraction.

This follows last week’s downward revision of final figures from HSBC’s PMI — a similar, private sector measure –to 48.7 from a preliminary reading of 49.0 released in December. The average PMI reading for the final three months of 2011 was the lowest since the first quarter of 2009, a dreadful time for the global economy.

South Africa
As a small, open economy, South Africa’s economic fortunes will continue to wax and wane with those of much larger overseas markets in the year ahead. As a result, investors are likely to keep one eye on Europe and the other on developments at home this week.

In an otherwise quiet week, investors are likely to focus on the release of purchasing managers’ index (PMI) data by the Bureau for Economic Research and business confidence index (BCI) data by the South African Chamber of Commerce and Industry (SACCI).

On Tuesday, analysts will be watching to see if the PMI recorded a fifth consecutive month of gains in December. They will also scrutinise the PMI’s two forward looking components, the expected business conditions index and the PMI leading indicator.

On Friday, attention will shift to business confidence data. BCI readings have fallen in every month since July 2011, but November’s drop was the smallest of the year. Analysts will be watching this week’s release to see if last month’s results signalled a turning point.

  • Matt Quigley writes the weekly economic preview for the Mail & Guardian. He is the chief executive of African Foresight Network, a former divisional director at the US Treasury Department’s office of the comptroller of the currency and a former policy analyst at the Federal Reserve Bank of Boston.

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