Return of the gold standard

Last week saw further signs of slow but steady progress across the global economy.

Nevertheless, gold – so often the beneficiary of bad economic news and increased risk aversion - broke through the $1,000 an ounce mark.  The UK may be on the path back to tentative growth.

The National Institute of Economic and Social Research (NIESR) calculated the economy grew by 0.2% in the three months to August, which would be the first positive outturn since the three month period to May 2008. If progress continues, the end of the recession, in technical terms at least, may be upon us. But that does not mean a return to the heady times that prevailed pre-crisis. NIESR also cautioned that we should expect a period of stagnation, with output rising in some months and falling in others.

Industrial production data appear to support the theory that the worst of the downturn is behind us. Industrial output recorded a second month of solid growth in July, rising 0.5% on the month. The manufacturing sector provided the bulk of the growth, though the sector has suffered significantly during the recession and is only making up a small part of the ground lost. Indeed, output remains some 13% below its 2008 peak.

There was no change in sentiment expressed by the Monetary Policy Committee (MPC), which opted to maintain rates at 0.5% and progress the schedule of asset purchases as announced the previous month. The Bank Rate has been at its current record low for six months now and minutes from the August MPC meeting suggested markets were too expectant in their assessment of when the first rate hike would come. It’ll be a few weeks before we see if the minutes of the September meeting are more positive on the economy given the more positive tone of recent data releases. The Bank of England still has assets to buy over the next two months, which should help reduce longer term interest rates - or at least help cap any increases – providing ongoing support for the economy.

Finally in the UK, confidence appears to be returning to the high street shopper. According to the British Retail Consortium, an industry body for the retail sector,
consumers have gradually been returning to the shops throughout the year, often lured by ever greater discounts. Retail spending in the three months to August was up 3% compared to the same period last year, but with the exception of food, prices were lower than last August.

Households still need clothes and food, but with finances under pressure from unemployment and slower wage growth, they are being more discerning in where and what they buy.

In the United States there was more evidence of households paying down debt. According to the Federal Reserve, consumer credit fell by 10% y/y in July, or by
$21.6bn, to $2.5 trillion. The drop was more than five times larger than expected, and was the sixth month in a row that consumer credit has fallen. With incomes falling too, spending will remain under pressure.

A separate report on the labour market was more encouraging. Initial unemployment claims fell by 26K to 550K in the week ended September 5, the lowest level in two months. However, there tends to be a lot of volatility around Labor Day because of difficulties in seasonal adjustment. At 9.2 million, the sum of claimants on unemployment benefits and extended unemployment benefit claims remains high.
US Treasury Secretary, Tim Geithner, laid out a framework for reducing support for the banking system as financial markets conditions normalise. But in order to avoid
unsettling investor confidence, he made it clear that any changes would be gradual.

Following the announcement last month that growth had returned in Q2, output in the euro area looks to have improved again in July. Manufacturing in France picked up, supporting production as a whole in the wider region. In Germany, factory orders recorded their fifth consecutive rise, as businesses slowly started re-using idle capacity. Nevertheless, it’s good to keep a sense of perspective. Orders are still 28% below the peak which they initially achieved nine years ago. Imports into Germany were 22% lower than last year, the biggest fall ever recorded. Although exports expanded, trade volumes are still around a fifth lower than their previous peaks.

Gold broke through the $1,000 per ounce barrier last week, its highest level in eighteen months. Some commentators are attributing gold’s strength to worries about inflation as central banks’ printing presses around the world continue to work overtime. However, gold can also be considered a currency like any other, and with the dollar weakening across the board, it is perhaps no surprise that it is “weakening” against gold too.