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Global economy loses momentum

German investors falter as US new home sales fall by 10%

A collapse in German investor sentiment and weakening demand for new homes in the US sent out fresh warnings about the general health of the global economy.

The Markit monthly snapshot of economic confidence in Europe’s biggest economy found that optimism was at its lowest ebb since December 2008 – the depths of the recession that followed the collapse of Lehman Brothers.

In the US, fears that the economy was losing momentum were compounded by news that sales of new homes have fallen by 10% since the end of 2010 and a regional manufacturing report pointed to weaker factory output.

Britain’s leading employers’ organisation, the CBI, said both order books and production were holding up quite well for British manufacturers despite the shock waves caused by Europe’s sovereign debt crisis and the dramatic sell-off in financial markets.

Of 510 firms responding to the survey by the employers’ organisation, 29% said order books were above normal for the time of year and the same number said they were below normal. The CBI said that, when rounded, there was a balance of +1 percentage points, well above the long-term average of -18 percentage points.

More firms (31%) said they expected to increase output over the coming months than expected production cutbacks (17%), but the CBI said the rounded balance of +13 points was weaker than the results seen earlier in the year.

Richard Woolhouse, the CBI head of fiscal policy, explained: “Manufacturing order books are holding up, and expectations for output growth are above their historical average, although they are less strong than earlier this year.”

City analysts were sceptical about the ability of British firms to emerge unscathed from the global downturn of recent months and will be anxiously awaiting the September Purchasing Managers Index for manufacturing due out next week.

ZEW, one of Germany’s leading economic institutes, said the fear of a recession in the US, the downgrade of America’s credit rating by S&P, the crisis in the eurozone and disappointing German growth figures had increased uncertainty. The institute’s forward looking indicator of economic sentiment fell sharply last month from -15.1 to -37.6.

“The scepticism with regard to future economic growth shown by a growing number of financial market experts during the previous months has increased dramatically. Besides, expectations are in line with the pessimism about economic growth prevailing on stock markets,” said Wolfgang Franz, ZEW’s president.

Germany has been the powerhouse of the European economy for the past 18 months as its export industries have benefited from the strong growth in China and other emerging countries.

Data from the US showed that 298,000 new homes were sold last month, compared with a downwardly revised 300,000 in June. Paul Dales, senior US economist at Capital Economics, said the figures showed how fragile the housing market remained five years after the boom in American property turned to bust. “And due to downward revisions to previous months’ data, July’s figures are worse than they look.”

Separately, the index of manufacturing from the Richmond Federal Reserve Bank, which covers states on the eastern side of the US, came in at -10 for August, compared with -1 the previous month.

Teunis Brosens, an analyst at ING, said it was the third regional Fed survey, after reports from New York and Philadelphia, to show deteriorating conditions in August, adding: “If the August national ISM index were to follow the regional Fed surveys, it would end up in the low 40s, dangerously close to recessionary levels.”

Despite the gloomy news, shares on Wall Street rose amid hope that the poor state of the US economy will prompt the chairman of the Federal Reserve, Ben Bernanke, to announce a third tranche of electronic money creation – or quantitative easing – in his eagerly awaited speech at Jackson Hole on Friday.

The Dow Jones industrial average was more than 200 points up by lunchtime in New York. Earlier, the FTSE 100 index had closed 34 points higher at 5129. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds