Welcome to 2012’s two-speed world

Allister Heath
ON the face of it, it would seem that nothing changed during the holiday season. Take some of the news in today’s paper. Hungary is in ever-deeper crisis, the euro reached another 15-month low yesterday and Eurozone bank shares plunged, led by those of Italy’s UniCredit. Important stuff, certainly, but more of the same. It merely shows that – surprise, surprise – continental Europe remains the world’s economic and financial basket case and that its ongoing crisis will remain one of the central stories of 2012.

Yet there has in fact been an important shift to the news flow. For those parts of the planet that aren’t saddled with the useless single currency, the data is no longer as gloomy. Welcome to a two-speed world. Global activity in December was at a nine month high, according to the JP Morgan/Markit all industry output index, which is derived from surveys of 11,000 purchasing managers in 30 countries.

It is obviously too soon to celebrate: the global trough came as recently as October 2011, when the index hit a 27-month low; its rebound in November and especially in December is not yet enough to confirm that the trend has changed. There are huge, potentially devastating challenges just around the corner. But it is clear that – for all its continuing and deep-seated structural woes – the all-important US economy is doing better. America’s manufacturing and services sectors grew at their fastest rate for nine months in December, according to the JP Morgan research; the jobs situation, while still terrible, appears to be improving at last. Growth also accelerated in the UK, India and Brazil, while activity indices for China and Japan edged back into slight expansion. Russia continued to report solid growth, albeit at a slower rate.

The UK figures are almost encouraging. The services sector’s purchasing managers’ index rose to 54 in December, up from 52.1 in November (numbers above 50 suggest output is growing). The manufacturing and construction sectors also improved. The better news over the past couple of months may not be enough to rescue GDP in the final quarter of 2011 because of a terrible October. But a UK double-dip recession now looks far less likely than it did a few weeks ago, a development which will come as a relief to George Osborne.

None of this is any justification for deluded over-optimism. It is too soon to judge whether 2012 is off to a genuinely decent start, or whether the more positive surveys of the past couple of months end up merely a flash in the pan. The situation in Hungary is deteriorating at an alarming rate; the fallout could devastate Austria’s banking sector, which is highly exposed to central Europe, and in turn inflict further pain on the Eurozone. My favourite bearish statistic of the year so far shows that UK manufacturing is becoming increasingly (and seemingly permanently and irreversibly) unprofitable. The gross return on capital in manufacturing fell from 7.1 per cent in the second quarter to just 6.4 per cent in the third quarter – the lowest since data began in 1989, according to Citigroup. It’s not all bad: the rate of return for service sector firms rose to 15.9 per cent, the highest since late 2008. But while parts of the economy are progressing, others remain dire.

The year ahead will be tough for the UK. Of that there cannot be any doubt. But maybe, just maybe, 2012 won’t be the catastrophe that many had feared. We can but hope.


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