Last week’s most important international economic development was OPEC’s agreement to limit production. As with all OPEC agreements, there are many details that could potentially unravel the consensus. But the markets sent oil prices rallying, with the price of West Texas Intermediate Crude rising over 12% on the week. Prices are now in the low 50s and are bumping up against longer term resistance:
This is an economically meaningful development. Globally, weak energy prices have kept inflation rates low; they are a primary cause of global deflationary pressures. Rising oil prices could ultimately reverse that trend.
Japanese news was mixed. The unemployment rate was 2.9%. Under standard economic analysis, this figure would be 2%+ below full employment. But this low rate is not translating into spending: retail sales decreased .1% Y/Y, the 8th consecutive month of declines:
Remember: one of the BOJ’s primary goals is to increase personal and corporate incomes, hoping this will lead to increased spending and, ultimately, increasing inflationary pressures. The very weak retail sales reading indicates increased spending is not occurring. On the plus side, industrial production rose .1% M/M while the Markit manufacturing number was only .1% lower, registering 51.3. Production and export orders increased: new orders were the highest since June.
EU news was very positive. Loan growth was 1.8%; while this figure was unchanged from the previous month, this statistic has moved from contraction to expansion and is currently increasing at a slower pace:
Inflation continues edging higher, this time by .6% M/M. And the EU Markit index rose slightly from 53.5 – 53.7. New orders had their biggest increase since February 2014 while new export orders hit a 33 month peak. Germany’s headline number is near a 3-year high, France recorded a positive number (51.7) and Spain increased to 54.4.
There were two key pieces of UK news. The first was the Markit manufacturing report, which dropped from 54.2-53.4. Although lower on a month to month basis, overall production and new orders are still above their respective long-run averages. Second, the Bank of England released the latest financial stability report, which described several potential areas of downside risk to the UK economy. Commercial real estate, which dropped post-Brexit, could see further price drops due to decreasing international investment.
The UK account deficit, which is 5.9% of UK GDP, could be negatively impacted as foreign investment, which was encouraged by the UK’s EU membership, decreases. And finally, overall household debt is at high levels. Should the UK economy slowdown, unemployment would rise, increasing the default rates. However, these are all theoretical problems. The news from the UK continues to show an economy that is growing at a healthy clip.
Canada is on the mend after being negatively impacted by the oil market rout. GDP increased .9% in the 3rd quarter. Consumption increased thanks to positive contributions from consumers and business: exports rose 2.2%. Business investment continued to be a drag on growth, falling .3% Q/Q, its 6th straight decline. This is to be expected considering the still weak oil market. Finally, after 2 solid months of growth, jobs gained a smaller 11,000. The unemployment rate fell .2% to 6.8%.
As the year winds down, there are positive developments across the globe. The UK and EU continue to grow while Canada is once again expanding after the oil market rout of the last several years. While corporate and personal incomes are still increasing in Japan, they are not translating into a high enough expenditure level to push prices higher. But, that could still happen.