The mood has become wintry in the global economy. The downward pressure from the US housing sector has not eased. US consumer confidence has slumped but US exports, propelled by the weak dollar, are soaring. As the US consumer ails while US exports prevail, the world economy is feeling the pain.
The slowdown springs from the very troubled US housing market. A rising inventory of unsold homes point to further price declines, harming the finances of US homeowners— and holders of US mortgage-based securities. US consumers are losing wealth and confidence.
The Royal Bank of Scotland Group (RBS)/NTC Economics (NTC) Purchasing Managers Index (PMI) for services in the eurozone fell to a 27-month low of 54.1 in November, from 55.8 in October. The 50 mark separates growth from contraction. The index for Germany, Europe’s largest economy, fell by two points, from 55.1 to 53.1.
In the US, the Institute for Supply Management’s services index fell to 54.1 in November, from 55.8 in October; this was the weakest reading since March. The prices paid index, a gauge of inflation pressures, jumped to 76.5 from 63.5.
The Halifax Bank of Scotland Plc. index of UK house prices fell by 1.1% in November, following falls of 0.7% in October and 0.6% in September. This is the first consecutive three month fall in house prices since 1995, according to the bank. According to the index compiled by The Conference Board Inc., US consumer confidence fell to 87.3 points inNovember, from 95.2 points in October. This took the index to its lowest level since October 2005.
But soaring exports are helping to keep US workers in jobs. The latest numbers on job creation are good. Unemployment shows no clear tendency to rise. The dynamics of the world economy is shifting. The dollar is no longer king, but humble. The US consumer is no longer vigorous. Other nations must take the strain. They are feeling it.
Not least because many countries have problems all their own. In the UK, Ireland and Spain, downturns have begun in property prices. The UK slide is steep—a 3% decline in the average sales price in three months, according to Halifax. The economy is already starting to suffer. The PMI for services, an early indication of overall economic growth, is at the weakest level since 2003.
In the Eurozone, the services PMI has fallen to a 27-month low, although it is still indicating reasonable growth for the region. But for both Spain and Italy, the service PMI is only just above the line, pointing to economic contraction.
Despite the slowing growth, inflationary pressures have not abated. Until they do, central banks will find themselves torn between weakening growth and high inflation. A modest stagflation is already a reality.
We are entering a new phase. The buoyant global growth of recent years is over as house prices turn from saviour to saboteur. The world, far from decoupling from the US, feels its downturn more keenly because of the dollar’s fall. The macro story has changed: from decoupling to dominoes.