Wmc 090504improvement A Virtuous Circle

4 May 2009

Weekly Macro Comment Han de Jong, Chief Economist

Improvement; a virtuous circle? •

ECB bank lending survey shows easing of credit crisis

•

US Q1 disappoints, but Case Shiller confirms some stabilisation in housing

•

Flu pandemic expected to have only modest and temporary impact on the economy

There is still plenty of poor economic news. However, the

There are many confidence indicators in the eurozone: the

combination of improving economic sentiment, the first signs of

PMIs, German Ifo and ZEW and the European Commission’s

recovering US house prices (more accurately, house price

sentiment indices, to name the most important ones. The

declines seems to have decelerated in February), improving

European Commission indices are generally considered the

equity markets, tightening credit spreads and more positive

most reliable. While most others have shown an improvement

results from the ECB bank lending survey (to be followed

in recent months, the Commission’s indicators had failed to do

shortly by the Fed’s equivalent) could, and should, lead to a

so. However, that has now changed. In April, sentiment

virtuous circle with all these developments interacting.

improved across the board according to these indices. This is

Downside risks are still significant and we could easily have a

important as it also confirms that perhaps the worst is behind

relapse, as many economic indicators will continue to

us in the economic crisis. Bear in mind, these indicators are

deteriorate for some time. However, the darkest hour may be

forward looking and the backward-looking indicators will

behind us in the sense that the pace of economic contraction

continue to show deterioration for some time. Unemployment

will not get worse, and a gradual improvement should be

in the eurozone rose to 8.7% in March, from 8.5% in February.

expected. This should be greeted positively by markets for

Unemployment is particularly bad in Spain and also in Ireland,

risky assets.

but will worsen in other countries too. The German government has lowered its GDP growth forecast for 2009, once again, and

Economic data is improving across many regions and

is now forecasting a decline of a staggering 6%. Eastern

indicators. Perhaps the most important was the ECB’s bank

Europe is even more severely hit. Lithuania reported Q1 GDP

lending survey for Q2. It saw an across-the-board easing of

at -12.6% yoy.

credit standards, stabilisation or improvement in demand for loans and improved access to wholesale funding for banks in

Eurozone M3 growth

the eurozone. If sustained, this means that the worst of the credit crisis is behind us. That does not imply, of course, that we will get out of the recession immediately.

% yoy

14 12

Eurozone economic sentiment

10

index

120

8

110

6

100

4

90

2005

80

2006

2007

2008

2009

Source: Bloomberg

70

M3 growth in the eurozone continues to decelerate. In March,

60 05

06

07

Source: Bloomberg

08

09

M3 growth fell to 5.1% yoy, from 5.8% in February and over 12% at the cycle peak a little more than a year ago. That is a very sharp deceleration. On a month-on-month basis, M3 has been more or less stagnant for four or five months. Credit growth also continued to slow. Loans to the private sector were

HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT

4 May 2009 3.2% higher than a year earlier. While the bank lending survey

I think that we need to see meaningful improvement in three

signals that an improvement in the lending and money data

areas at the same time for a sustainable global recovery to

should be expected, it will require further easing by the ECB in

take hold:

order to secure and sustain this. This week will see another

1. stabilisation in key asset markets, especially in the US

ECB governing council meeting. The ECB is widely expected

housing market;

to lower its key rate from 1.25% to 1.0% and to announce

2. improvement in the functioning of the banks;

additional, unconventional measures it is willing to take. But

3. easing of the recession

there seems to be a serious difference in view among the various members as to how exactly to proceed. Thursday

In my opinion we are seeing some positive developments in all

should thus be interesting.

these areas, which is encouraging. However, we are not even close to being out of the woods yet.

US GDP Debt reduction at GM and Chrysler

% qoq

Packages

8

are

being

put

together

to

keep

US

car

manufacturers GM and Chrysler alive. In both cases, debt

6

reduction is a key element of the approach. One may wonder

4

about the desirability of keeping these companies in business,

2

but it is interesting to see that an orderly debt reduction is a

0

key element. I have argued in the past that debt reduction is

-2

inevitable and that it is better to have an orderly process than

-4

to have a disorderly process. Voluntary, orderly debt reduction

-6

is, however, not an easy route and I have had many critical

-8 95

97

99

01

03

05

07

09

Source: Bloomberg

comments from bondholders. Stress tests US authorities have postponed the publication of the stress

The US also saw some bad numbers. Q1 GDP disappointed,

test results for the country’s 19 largest banks. Publication was

falling 6.1% qoq annualised, only marginally better than the

due for 4 May. Apparently, more time is needed to discuss the

6.3% drop of the previous quarter. Private consumption grew

results with the banks. Not a very good sign. I must say that for

2.2% annualised, after two quarters of decline. But other

all his great qualities, Tim Geithner’s PR management leaves a

components were poor. Gross private domestic investment

lot to be desired. I still believe, though, that the authorities are

was down an unbelievable 51.8% annualised. This was partly

in complete control of these stress tests and they are not going

due to a very negative contribution from inventories, but

to let the publication of the results destroy confidence.

weakness was widespread. Excluding inventories, fixed investment was down 37.9% qoq annualised, with non-

Mexican ’flu

residential structures particularly weak at -44.2%. But this

People have asked us what the impact will be of the Mexican

should all improve in the not too distant future.

’flu on the economy and financial markets. I am not an expert, but it seems to me that this pandemic is not as bad as it might

There was some qualified positive news from the US housing

have been. Yes, it is spreading rapidly, but there do not seem

market and labour market. The Case Shiller index for house

to be too many fatalities, and people recover quickly when

prices declined again in February compared to January, but

treated. This is crucially important for confidence and therefore

the year on year rate of change actually improved a little, for

for economic behaviour. It is hard to assess the overall

the first time in some two and a half years. Initial jobless claims

economic impact. Experience with similar situations, such as

have stabilised in recent weeks, which would suggest that the

SARS, suggests that, assuming that the pandemic does not

pace at which labour market conditions are deteriorating is

turn uglier, economic effects will be modest and temporary.

stabilising. No reason to celebrate, but it is a beginning.

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HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT