Weekly Macro Comment Green Shoots Encountering Headwinds

18 May 2009

Weekly Macro Comment Han de Jong, Chief Economist

Green shoots encountering headwinds •

Early recovery questioned by some data

•

Improvement in China’s exports stalling

•

Significant decline in eurozone GDP

Summary

is now also firmly negative, an unusual phenomenon,

After several weeks of pleasant surprises outnumbering

confirming the strong deflationary forces.

disappointments, last week’s crop of data was more balanced, casting some doubt over the alleged imminent improvement of

China: CPI and CPI ex food

global economic conditions. This is to be expected. The data is always

volatile

around

turning

points,

and

given

the

unprecedented nature of the problems, it is hard to determine how things will evolve. Nevertheless, I repeat my cautiously optimistic message expressed here in recent weeks. While there is still a lot of bad news to come, the darkest hour is most likely behind us. That is to say: the sharpest contraction is probably behind us. I am not saying that our economies will

% yoy

10 8 6 4 2 0

start growing from here or that all economic indicators will

-2

improve from now on. Many economies are facing continuing

-4 00

economic decline. But less negative growth is the first step on

01

02

03

04

05

CPI

the road to recovery.

06

07

08

09

CPI ex food

Source: Bloomberg

Improvement in Chinese economic conditions challenged Of the large economies, China stands out as the one where

US: Empire State PMI

economic stimulus has already produced a clear turnaround. It is hard to know to what extent Chinese data can be considered accurate, but it is clear that significant stimulus by the central governments

and

local

policymakers

as

well

as

encouragement for banks to increase lending have been implemented and have been successful to some extent. It was

index

40 30 20 10

therefore disappointing that last week saw some poorer/less

0

positive data on trade and production. In April, exports were

-10

down 22.6% yoy, considerably worse than the -17.1%

-20

registered in March. Imports fared marginally better, actually

-30

improving to -23% from -25%. Industrial production was up

-40

7.3% yoy in April, a little worse than the +8.3% in March. There may be some noise in the data for specific administrative

02

03

04

05

06

07

08

09

Source: Bloomberg

reasons, so we must wait for next month’s figures. On a more positive note, the pace of monetary expansion continues to accelerate. M2 growth reached 26% yoy in April - a record. The People’s Bank is obviously doing what it can to assist the government in stimulating activity and preventing a deflationary spiral. While they are successful in boosting M2 growth, deflation is taking hold. Headline inflation fell to -1.5% yoy in April (from -1.2%). More striking is the fact that ex-food inflation

HAN DE JONG +31 (0)20 628 4201

US data more mixed The US also saw some disappointing data. Retail sales for April were weaker than expected, falling 0.4% mom, while the ex-auto series fell 0.5%. Initial jobless claims edged higher again in the most recent week; industrial production continued to fall in April; the new orders component of the Empire State survey of business confidence in NY State was weaker than

ECONOMICS DEPARTMENT

18 May 2009 expected, while mortgage applications weakened and home

Eurozone GDP

foreclosures continued to rise.

% yoy

This is, indeed, disappointing. However, let’s put things into perspective. US consumers are not going to lead the recovery. They can’t and shouldn’t. The US consumer is excessively leveraged, and must save. So don’t be disappointed by relatively weak US consumption data. As to the rise of initial jobless claims (637,000, versus 605,000 in the previous week) - the most recent tally was impacted by the closure of Chrysler

5.0 2.5 0.0 -2.5

facilities. That does not change the fact that last week’s numbers were a disappointment, but it suggests that there is not a widespread deterioration. As to the Empire State survey of business confidence - the headline number was actually

-5.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Bloomberg

better than expected, even if the new orders data was softer. The headline rose from -14.7 in April to -4.6 in May. The

Of the big economies, Germany fared poorly, shrinking 3.8%

numbers

qoq and 6.9% yoy, reflecting the fact that Germany’s economy

for

the

six-month

outlook

were

particularly

encouraging.

had benefitted relatively strongly from economic growth, and in particular capital investment, in Eastern Europe. The downturn

US deflation intensified in April. Headline CPI was unchanged

in Eastern Europe is hitting Germany hard. France did

mom, but the yoy rate fell from -0.4% in March to -0.6% in

relatively well, registering a 1.2% qoq and 3.2% yoy decline of

April. Core inflation, on the other hand, edged up. The mom

GDP.

rate was 0.3% and the yoy rate rose to 1.9% from 1.8%. Does that suggest inflation really is stubbornly persistent underneath

Holland performed close to the average: -2.8% qoq and -4.5%

it all? I don’t think so. Allegedly, almost half of the rise of the

yoy, while Belgium did better: -1.6% qoq and -3.0% yoy.

core CPI in April was due to higher tobacco taxes. And don’t forget, inflation is a slow process. It will take a while before

The best performing economy was Cyprus, 0.0% qoq and

growing excess capacity and rising unemployment will fully

+1.6% yoy. What a pity their economy is not much larger.

affect the inflation data. It is remarkable that Spain and the UK scored a little better On the more positive side, consumer confidence is continuing

than the average, despite the fact that their economies are

its gradual improvement according to the University of

more severely hit by the bursting of their housing bubbles

Michigan survey in May, and industrial production fell less in

(there are no data yet for Ireland, the other country where the

April than expected.

property market is imploding). But then, these countries are scoring much worse than average on other indicators, such as

Horrendous EU GDP numbers

the labour market.

Q1 GDP data for EU countries was extremely poor. Both the EU and the eurozone economies shrank 2.5% qoq - the fourth

Remarkably, the European economy is doing considerably

consecutive

Q4.

worse than the US. On the comparable measure, the US

Compared to Q1 in 2008 the eurozone economy was 4.6%

economy shrank 1.6% qoq (6.1% annualised) and 2.6% yoy.

smaller and the economy of the EU as a whole was 4.4%

And while the recession got deeper in the EU in Q1, the most

smaller. Worst hit by the crisis are the Baltics. Estonia, Latvia

negative quarter in the US so far was Q4.

quarterly

decline,

following

-1.6%

in

and Lithuania shrank 6.5%, 11.2% and 9.5%, respectively qoq. Latvian GDP was 18.9% down yoy. These are the economies

I am often asked why Europe is performing worse than the US

that had been running the largest deficits on the current

although the epicentre of the crisis is seen as being located in

account of the balance of payments in recent years. The credit

the US: the implosion of the housing bubble there. Not an easy

crisis has clearly also hit international capital flows. Countries

question! The fact that Europe is suffering more in terms of

depending on inflows have experienced what economists call a

growth in an absolute sense than the US demonstrates that the

‘sudden stop’. If you cannot finance a deficit, there is no other

crisis is about a lot more than US housing. It is a problem of

option but to reduce domestic demand. This clearly is a savage

excessive leverage. The Baltics built up lots of it and are now

process.

suffering the most as they are forced to de-leverage. Another aspect is exposure to the economic cycle. Germany, for example, with its prominent position globally in capital goods industries, is relatively strongly exposed to the global economic

HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT

18 May 2009 cycle. Another aspect is the policy response. US policymakers have been more aggressive than their European counterparts. Last, it is misleading to look at absolute numbers. Trend growth of the US economy is higher than for the EU economy. The US needs more growth as its population is growing faster than Europe’s. Against this background it is interesting to note that while the US performs better on recent GDP growth numbers, unemployment has so far risen much more in the US than in the eurozone. But better news from the UK Let me finish with a few positive observations. Last week saw the release of some modestly encouraging data in the UK. While the UK has not registered the worst GDP numbers of the eurozone (in fact, the UK has done marginally better than the EU as a whole), it has performed poorly as far as the housing market and retail sales are concerned. There are green shoots in both fields now. The BRC like-for-like retail sales figures for April were strong: +4.6% yoy. Perhaps that was due to special factors. But even if you take three months average, sales were up 0.5%. On the housing front, the most recent RICS survey (Royal Institution of Chartered Surveyors) continues to confirm that the housing market is bottoming out and improving at the margin. Price projections, sales expectations, new buyer enquiries and agreed sales all improved in April. This is important because an improvement in conditions on the housing market is a necessary condition for overall economic recovery.

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HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT