Global Overview: August 2012
Thomas White International
September 17, 2012
Signs of emerging political consensus in Europe over supporting further action by the European Central Bank (ECB) and a closer banking union helped sustain investor sentiment during the month of August. Germany and select other countries that were skeptical of open ended policy measures by the ECB now appear to be scaling down their opposition. The political climate in countries such as The Netherlands, which is facing elections shortly, has also shifted and political parties that support additional financial aid for the troubled countries are back in favor. Proposals to forge a closer banking union and hand over the supervision of the region’s largest banks to the ECB are also gaining wider approval. The German constitutional court has allowed funding for the region’s emergency fund that could provide additional financial assistance to the troubled countries.
Global equity prices ended August with modest gains for the second successive month, as the sustained optimism lifted equity prices across most markets in Europe. Most emerging markets lagged, except those in Europe, as concerns about further moderation in economic growth persisted. Economic signals from most parts of the globe remained subdued, led by a revised estimate that showed that the Euro-zone economy contracted more than initially thought during the second quarter. Factory output growth in August remained subdued across most developed economies, with the exception of Canada. Among the emerging economies, manufacturing activity declined in China while Brazil and Korea reported modest improvement from July, though output continued to decline in both countries. Manufacturing activity continued to expand in most other emerging markets, including India, Russia, Indonesia, Mexico, and South Africa.
Weak global trade trends mirror restrained economic activity
The decline in global trade volumes this year reflects the more subdued demand conditions in major developed markets. Asian exports to Europe, which is facing a mild recession, have declined nearly 5 percent during the first half of this year from the year-ago period. Consumer demand in the U.S. remains restrained, though exporting countries in the region that supply the U.S. market, such as Mexico, continue to benefit from improved cost advantages relative to Asian suppliers. While export demand remains healthy in select regions such as the Middle East, those markets are not large enough to absorb the weakness in Europe. Another factor that is restricting global trade is the reduced availability of trade finance for exporters and importers. The crisis in Europe has forced most major banks in the region to be more cautious in their lending, while some of the banks that are under financial stress are withdrawing credit lines to existing customers. This has had a significant effect on trade finance availability, as European banks accounted for a third of global trade lending last year.
Capital expenditure plans being scaled down on subdued demand outlook
The demand outlook for industrial commodities has turned markedly more subdued this year, especially since big importers such as China are seeing a slowdown in economic activity. The correction in commodity prices so far this year reflects the market conditions and a recovery is considered improbable until global economic activity revives strongly. Meanwhile, metal producers and miners are responding to weaker demand by scaling down current production and deferring capital expenditure. Some of the largest steel makers in Europe, where the demand decline has been the most severe, have been idling part of their production capacity in recent months. Mining companies, especially coal producers, have also cut down production or are bringing forward scheduled maintenance shut downs.
Most metal producers and miners are also scaling down or delaying their capital expenditure plans announced in recent years. Some of the biggest projects that are affected are in Australia, where miners announced the cancellation of a copper and uranium mine expansion and delayed the enlargement of a major iron ore port facility. Rising commodity prices over the last decade had triggered an investment boom to open new mines and expand capacity at existing facilities. Most of that additional capacity is scheduled to come on line and there are concerns of excess supplies dampening prices further. However, the prices of most industrial commodities are still higher than they were even a few years earlier. For example, the price of iron ore, which has seen the steepest fall in recent months, is still above the average level seen in 2008. The scaling back of investments in additional capacity could potentially lead to supply shortages when the global economy recovers and demand for industrial commodities picks up.
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