Weekly Macro Comment Hard To See Any Negatives

31 August 2009

Weekly Macro Comment Han de Jong, Chief Economist

Hard to see any negatives •

US housing showing many signs of improvement

•

Eurozone M1 is suggesting very strong recovery, but M3 is weak

•

Korea’s business confidence back to good old times

It is very hard to find disappointing economic data of any

US: New home sales

significance among last week’s releases. In fact, almost all releases were encouraging. We continue to believe that the global economy is emerging from recession with a vengeance.

thousands

1400

It is very hard to see what is going to derail the recovery any

1200

time soon. This is, of course, excellent news.

1000

US: S&P / Case Shiller home price index index

800 600

20

400

15

200

10 5 0 -5 -10 -15 -20 2001 2002 2003 2004 2005 2006 2007 2008 2009

00

01

02

03

04

05

06

07

08

09

Source: Bloomberg

US durable goods orders rose 4.9% mom while previous months were revised up sharply. These orders are volatile, but the trend is clearly positive. Companies have obviously drawn down inventories starting in the latter part of last year, but they have also slashed capital spending. It seems that business

Source: Bloomberg

investment is coming back.

US housing market recovering

US consumer confidence rose on the Conference Board

The US housing market is now clearly recovering. Virtually all

measure in August (from 47.4 to 54.1), but fell on the

housing market related data show improvement. Home

University of Michigan’s index (65.7 in July versus 66.0 in

builders’ sentiment, mortgage applications, home sales and

June). However, the latter drop was smaller than initially

home prices are all strengthening. According to the Case

reported. Personal income was unchanged in July while

Shiller index of home prices in 20 key cities, home prices were

spending increased 0.2%. While these numbers were not

15.4% down yoy in June, after -17.1% in May. Even the

strong, they were not weak either. My view remains that the

change of the price on a month-on-month basis was strongly

US consumer is at the core of the causes of the crisis and is

positive: +1.4%. New home sales surprised on the positive side

too weak to make a very significant contribution to the

in July: 433,000 units on an annualised basis. This compares

recovery. We should be happy if the US consumer is not a

with 395,000 in June, a low of 329,000 in January, though a

significant drag. Last week’s numbers are satisfactory.

peak of 1,389,000 in 2005. It must be borne in mind that housing is benefiting from a tax credit for home buyers. This

Europe surprisingly strong

credit is set to expire before the end of the year. It is hard to tell

There is more evidence that the recovery is gaining momentum

if the market can continue its recent positive trends without the

in Europe. Germany’s authoritative Ifo index rose sharply in

tax credit.

August: 90.5, versus 87.3. The expectations component has been leading the charge and rose strongly also, reaching its highest level since May last year. It is thus higher than it was just before the Lehman collapse. The current-conditions

HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT

31 August 2009 component also rose: 86.1 versus 84.4. It was only the second

or real-M1, has the best correlation with GDP growth. I am

monthly rise in this cycle. Typically, economists argue that the

more attracted to the conclusion that strong M1 growth is a

expectations component is the most important part of this

very positive sign for economic prospects.

survey, as it leads the overall index. However, this time around, the rise of the current-conditions component is

Emerging Asia booming

important. Many people believe that the economy may be

Asian economies continue to recover strongly. Thailand,

recovering but will be hit by a second dip next year or the year

Malaysia and the Philippines showed very strong Q2 GDP

after. During the early 1980s, the economy experiences a

growth numbers. Industrial production in Singapore rose 23%

terrible

current-

mom in July pushing the yoy rate up from -9.0% to +12.4%.

conditions component did not improve between the dips. The

double-dip

recession.

Interestingly,

the

OK, perhaps Singapore’s industrial production numbers are

fact that is has started to improve now is perhaps a sign that

volatile or not representative for global economic trends.

we are not heading for a double dip.

Perhaps better look at Korea. Business confidence in the manufacturing sector is showing as much a V as one could

Eurozone: M1 and M3 growth

ever imagine. Confidence in the manufacturing sector is back to levels seen in very good times.

% yoy

14

South Korea: Business survey comp. manufacturing

12

index

10 8

100

6

90

4

80

2

70

0 00

01

02

03

04 M1

05

06 M3

07

08

09

Source: Bloomberg

Eurozone M3 growth fell back again in July: 3.0% against 3.6% in June and a peak of 12.5% in October 2007. Bank lending

60 50 40 2003

2004

2005

2006

2007

2008

2009

Source: Bloomberg

was also weak. Growth of loans to non-financial corporations eased to 1.6% yoy, but on a month to month basis, loans have

On balance, let me just repeat that we feel confident that a

been falling for several months. During the last two months

global recovery is underway. We are more optimistic about

together, loans fell more than 1%. There is a particularly strong

economic prospects than the consensus is, but also feel

decline in loans with a maturity of less than one year. This is a

confident with this.

reflection of the inventory cycle. As companies reduce inventories, they need less money to finance them. Loans to households were unchanged in July from a year ago. The monetary data clearly does not look so good. A couple of points should be made here. First, loan growth is always weak or negative during recessions and also during he early phase of a recovery. Second, while M3 growth is weak, M1 growth is amazingly strong. Some economists argue that this is because households are shifting money to more liquid assets. That is why M3 growth is slowing while M1 growth is strong. They conclude that we must not read too much into this. However, history shows that M1, in particular M1 corrected for inflation, Important information The views and opinions expressed above may be subject to change at any given time. Individuals are advised to seek professional guidance prior to making any investments. This material is provided to you for information purposes only and should not be construed as an advice nor as an invitation or offer to buy or sell securities or other financial instruments. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading the brochure, you consider investing in this product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether this product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO Bank N.V. has taken all reasonable care to ensure that the information contained in this document is correct but does not accept liability for any misprints. ABN AMRO Bank N.V. reserves the right to make amendments to this material.

HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT