Wmc 090420

20 April 2009

Weekly Macro Comment Han de Jong, Chief Economist

Here is deflation…well, negative inflation at least •

Inflation negative in US, China, Japan, Switzerland, Spain, Ireland…

•

Green shoots here and there

•

Japan and the eurozone remain in poor shape

Inflation has now turned negative in a number of countries: US

In the US, for example, capacity utilisation in the manufacturing

-0.4%, China -1.2%, Japan -0.1%, Switzerland -0.4%, Spain

sector was only 65.8% in March, the lowest since records

-0.1%, Ireland -0.7% and perhaps others I have missed. This

began in the 1950s. So a third of manufacturing capacity is

development is largely due to base effects and the drop in

idle! And unemployment is rising rapidly. This will surely have

energy prices since the middle of last year. So you cannot

further persistent disinflationary effects on the economy at

really call this deflation. Core inflation indices are much

large, even if we were to see a recovery. In economists’ jargon,

stickier. However, core inflation tends to follow headline

it will take a couple of years for the output gap to close again.

inflation with a lag. In addition, the economy is functioning

Indeed, according to the April small business survey by the US

significantly below potential, as there is an unprecedented

National

degree of excess capacity.

companies surveyed are reducing employee compensation, a

Federation

of

Independent

Business,

11% of

record high for this survey (although I don’t know how long the

China: inflatiion and core inflation

history is). At the same time, 11% (again!) of companies say they are raising wages, a record low for this survey. This

% yoy

suggests that downward pressure on wages—and presumably

10

on inflation—is starting to build. We are far from generalised

8

deflation, but if we wanted to go there, this is the way to do it. I

6

reaffirm my view that the risk of deflation during the next

4

eighteen months or so is significantly larger than the risk of

2

inflation.

0

The famous green shoots everyone is talking about

-2 2005

2006

2007

Inflation

2008

2009

Core inflation

Early signs of an improvement in economic conditions continue to appear—particularly in emerging Asia and the US, with Japan and the eurozone lagging behind. However, the improvement is not everywhere to be seen, not even in Asia. It

Source: Bloomberg

is early days yet. Chinese GDP was up by ‘only’ 6.1% yoy in Q1, down from 6.8% in Q4 and the weakest in ten years or so.

Industrial production

In Singapore, GDP fell by 11.5% yoy in Q1, the largest decline

% yoy

ever. Singapore is, of course, a very open economy and has

10

been especially vulnerable to the collapse in world trade. This

5

collapse was undoubtedly partly caused by a sudden freezing

0

up of trade finance and credit insurance following the demise

-5

of Lehman Brothers. It seems that the situation with regard to trade finance and credit insurance is thawing somewhat. Take

-10

Singapore’s exports: its non-oil domestic exports were down by

-15

17.0% yoy in March. Not great, certainly, but significantly better

-20 2005

than the 34.9% decline in January. The same with electronics 2006

2007 US

Eurozone

Source: Bloomberg

2008

2009

exports: -25.7% yoy in March, an improvement from -38.4% in January. I realise that many people may wonder about the relevance of Singapore electronics export, not a decisive force in global economics. Yet, this is the sort of indicator one would

HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT

20 April 2009 expect to show improvement before many others, so recent

disappointing to many, but bear in mind that US households

developments are encouraging.

are excessively leveraged. We cannot have a sustainable recovery based on US consumer spending.

In the US, both the Empire State and the Philly Fed indices of business confidence improved. The particularly encouraging

Also negative was industrial production. Eurozone production

element was the sharp rise of new orders in both surveys. This

fell by 2.3% in February and 18.4% yoy. US industrial

is consistent with the anecdotal evidence on an upturn in the

production dropped by 1.5% mom in March and was -12.8%

inventory cycle. This upturn should continue to support the

yoy. Japan’s production level was confirmed at -38.4% yoy in

improvement in the wider economic data for a couple of

February.

months. More negatives on Japan: nationwide department store sales A surprising positive came from the US index of confidence in

were down by -13.1% yoy in March, against 11.5% yoy in

the construction sector. The index of the National Association

February.

of Home Builders rose to 14 in April, from 9 in March. 14 is still a low level, but it was the highest since October. The US

On balance, the sharp drop in economic activity of recent

housing market is certainly not even close to being out of the

months seems to be coming to an end. The combination of

woods, but perhaps its darkest hour now lies behind it.

policy stimulus, the inventory cycle and the perhaps improved availability of trade finance and credit insurance may well lead

US: NAHB index

to better economic numbers in the period ahead. However, the situation remains fragile.

index

80

Quant easing, what quant easing?

70

The US Federal Reserve continues its programme of

60

quantitative easing. Since the beginning of the year, the Fed

50

has bought USD 54 billion in Treasury securities, USD 41

40

billion in Agency debt (securities issued by government-

30

sponsored enterprises such as Freddie Mac) and USD 355

20

billion in mortgage-backed securities (MBS). Nevertheless, the

10

Fed withdrew liquidity from the system through other balance

0 2005

2006

2007

2008

2009

Source: Bloomberg

sheet items and the total balance sheet actually shrunk by USD 89 billion. I cannot really see how you can call that quantitative

easing.

Granted,

since

the

Fed

formally

announced in mid-March that it was embarking on quant Another modestly positive piece of news came from European

easing, its balance sheet has actually expanded by USD 120

car registrations. They were down by 9.1% yoy in March, the

billion.

best figure since July last year. There is a significant

The ECB is giving mixed signals. Some representatives are

divergence between different countries. Where incentives have

saying that 1% on the refi rate should be the bottom, others

been implemented, car sales are doing well. Germany is

seem to question that. Not exactly a reflection of harmony.

leading the charge, with sales up by 39.9% yoy, and French

ECB president Jean-Claude Trichet has said a couple of times

car sales rose by 8.0%. Sales were also positive in Poland

that the central bank will soon announce non-standard

(+2.5%) and the Czech Republic (+0.9%). The countries most

measures of monetary policy. But it seems these measures will

affected by the economic downturn continue to show poor

be different from the US approach. Trichet keeps saying that

sales numbers: Iceland (-91.5%), Latvia (-80.3%), Estonia

the new measures will be focused on the banks rather than

(-67.8%), Romania (-64.8%) and Ireland (-63.8%).

specific financial markets. We will have to wait and see.

But not everything is looking good On the less positive side, US retail sales were weaker than expected in March, falling by 1.1% mom. This is perhaps 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