What's Important in the Financial World (8/7/2012)

In another sign that most of the world’s largest economies are slowing, and that austerity programs may have taken a toll on growth in the United Kingdom in particular, the Office for National Statistics released weak production and manufacturing data for June. In its press release, the agency reported:

The seasonally adjusted Index of Production fell by 4.3 per cent in June 2012 compared with June 2011

• The seasonally adjusted Index of Manufacturing fell by 4.3 per cent in June 2012 compared with June 2011

Production fell by 2.5 per cent between May 2012 and June 2012, with manufacturing falling by 2.9 per cent

Official government figures have shown that the United Kingdom is close to recession, if it has not entered one already. The new data will put more pressure on the government of David Cameron. He has used cost cuts as the primary means to try to close England’s deficit. That has not worked, many economists say. The U.K. will be the next battleground for the value of stimulus over austerity in turning around the troubled financial fortunes of nations in the region.

Gross: A Sucker’s Bet

In an opinion piece in the Financial Times, bond king Bill Gross of PIMCO says that the European Union wants to lure private investors back into the sovereign paper of the region. He advises that such investments are a sucker’s bet. The yields paid out by nations like Spain may seem attractive, but they really are not, Gross argues. Better to put capital into lower-yielding but safer instruments as he has. Gross writes:

The ultimate goal of monetary and fiscal policy in the EU is to re-engage the private sector. The EU needs the private sector as a willing (but not necessarily equal) partner in funding its economy. This often gets lost in the noisy details of all too frequent promises such as the one to defend the euro made by Mr Draghi, European Central Bank president.

Oil Prices Inch Higher

Oil prices continued to inch up as Brent crude crossed above $109. A belief that economic stimulus may be put into place from Europe to China has encouraged investors to gamble that supply will begin to dwindle. The increases raise the question again of what will happen if fuel prices return to where they were this last spring. The cost of gas and oil did not seem to throttle the economy then, but something did as global gross domestic product began to sputter. And GDP growth around the world is less robust now than it was in March or April, so the concern about the effects of energy prices should be more extreme.

Douglas A. McIntyre