Tuesday, 22 November 2005

Outlooks for US, UK economies positive but China worried by deflation

The Conference Board's leading index for the US economy is on the rise again.

The Conference Board announced today that the U.S. leading index increased 0.9 percent, the coincident index increased 0.1 percent, and the lagging index increased 0.8 percent in October.

The leading index increased sharply in October offsetting the large decrease in September, which partly reflects the economic impact of the hurricanes which hit the Gulf region in late August and September. In addition, October’s increase was widespread among the leading indicators. The largest positive contributors to the leading index were (inverted) initial claims for unemployment insurance and average weekly hours in manufacturing, whereas the largest negative contributors were housing permits and stock prices...

The leading index now stands at 137.9 (1996=100). Based on revised data, this index decreased 0.8 percent in September and remained unchanged in August. During the six-month span through October, the leading index increased 1.2 percent, with seven out of ten components advancing (diffusion index, six-month span equals seventy percent).

However, as the Conference Board points out, the latest data on the housing market is a source of concern, while Calculated Risk points out that housing affordability has fallen amid rising home prices and interest rates.

But house prices in the UK have proven resilient so far, as Reuters reported yesterday.

House price inflation picked up to an annual 3.3 percent in September from 2.8 percent the month before, the government said on Monday... A report overnight from property Web site Rightmove showed that house prices climbed 0.8 percent between October 9 and November 12 compared with a rise of 0.5 percent in the previous period, the biggest rise since April.

That resilience probably extends to the rest of the UK economy, if a recent Reuters poll of economists is anything to go by.

The poll of 30 economists gave mid-range forecasts for economic growth to average 2.2 percent in 2006, up from an estimated 1.7 percent this year, helped by better export prospects and lower interest rates... Despite high oil prices, inflation is expected to remain relatively subdued, thanks partly to an uncertain jobs market keeping a lid on wage claims.

But in China, deflation worries persist.

Beijing University economics professor Justin Lin noted that China's retail price index was flat in September... "I think deflation is likely to occur later this year or early next year because investment has been growing rapidly," Lin told an economics forum in Beijing. Inflation for all of 2006 would be low, at around 1 percent, Lin added... Lin said he expected investment growth, concentrated in real estate, autos and construction materials, to continue to grow strongly in 2006 because, unlike in the West, Chinese investors were less sensitive to signals suggesting falling prices.

And a possible slowing in China's demand for oil might also moderate inflation worldwide.

It is estimated that China will import 130 million tons of crude oil in 2005, rising only six percent year on year. This means the rate of growth of oil imports has dropped 30 percent, said Lu [Jianhua, Director of Foreign Trade Department of the Ministry of Commerce].

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