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 % yoy
always volatile around turning points, and given the
10
unprecedented nature of the problems, it is hard to determine
8
how things will evolve. Nevertheless, I repeat my cautiously
6
optimistic message expressed here in recent weeks. While
4
there is still a lot of bad news to come, the darkest hour is most
2
likely behind us. That is to say: the sharpest contraction is
0
probably behind us. I am not saying that our economies will
-2
start growing from here or that all economic indicators will
improve from now on. Many economies are facing continuing -4

economic decline. But less negative growth is the first step on 00 01 02 03 04 05 06 07 08 09

CPI CPI ex food
the road to recovery.
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
index
is hard to know to what extent Chinese data can be considered
40
accurate, but it is clear that significant stimulus by the central
30
governments and local policymakers as well as
20
encouragement for banks to increase lending have been
10
implemented and have been successful to some extent. It was
0
therefore disappointing that last week saw some poorer/less
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 02 03 04 05 06 07 08 09
may be some noise in the data for specific administrative Source: Bloomberg
reasons, so we must wait for next month’s figures. On a more
positive note, the pace of monetary expansion continues to
US data more mixed
accelerate. M2 growth reached 26% yoy in April - a record.
The US also saw some disappointing data. Retail sales for
The People’s Bank is obviously doing what it can to assist the
April were weaker than expected, falling 0.4% mom, while the
government in stimulating activity and preventing a deflationary
ex-auto series fell 0.5%. Initial jobless claims edged higher
spiral. While they are successful in boosting M2 growth,
again in the most recent week; industrial production continued
deflation is taking hold. Headline inflation fell to -1.5% yoy in
to fall in April; the new orders component of the Empire State
April (from -1.2%). More striking is the fact that ex-food inflation
survey of business confidence in NY State was weaker than

HAN DE JONG +31 (0)20 628 4201 ECONOMICS DEPARTMENT


expected, while mortgage applications weakened and home
foreclosures continued to rise.
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
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
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
numbers for the six-month outlook were particularly
encouraging.
US deflation intensified in April. Headline CPI was unchanged
mom, but the yoy rate fell from -0.4% in March to -0.6% in
April. Core inflation, on the other hand, edged up. The mom
rate was 0.3% and the yoy rate rose to 1.9% from 1.8%. Does
that suggest inflation really is stubbornly persistent underneath
it all? I don’t think so. Allegedly, almost half of the rise of the
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
growing excess capacity and rising unemployment will fully
affect the inflation data.
On the more positive side, consumer confidence is continuing
its gradual improvement according to the University of
Michigan survey in May, and industrial production fell less in
April than expected.
Horrendous EU GDP numbers
Q1 GDP data for EU countries was extremely poor. Both the
EU and the eurozone economies shrank 2.5% qoq - the fourth
consecutive quarterly decline, following -1.6% in Q4.
Compared to Q1 in 2008 the eurozone economy was 4.6%
smaller and the economy of the EU as a whole was 4.4%
smaller. Worst hit by the crisis are the Baltics. Estonia, Latvia
and Lithuania shrank 6.5%, 11.2% and 9.5%, respectively qoq.
Latvian GDP was 18.9% down yoy. These are the economies
that had been running the largest deficits on the current
account of the balance of payments in recent years. The credit
crisis has clearly also hit international capital flows. Countries
depending on inflows have experienced what economists call a
‘sudden stop’. If you cannot finance a deficit, there is no other
option but to reduce domestic demand. This clearly is a savage
process.
HAN DE JONG +31 (0)20 628 4201
18 May 2009
Eurozone GDP
% yoy
5.0
2.5
0.0
-2.5
-5.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Bloomberg
Of the big economies, Germany fared poorly, shrinking 3.8%
qoq and 6.9% yoy, reflecting the fact that Germany’s economy
had benefitted relatively strongly from economic growth, and in
particular capital investment, in Eastern Europe. The downturn
in Eastern Europe is hitting Germany hard. France did
relatively well, registering a 1.2% qoq and 3.2% yoy decline of
GDP.
Holland performed close to the average: -2.8% qoq and -4.5%
yoy, while Belgium did better: -1.6% qoq and -3.0% yoy.
The best performing economy was Cyprus, 0.0% qoq and
+1.6% yoy. What a pity their economy is not much larger.
It is remarkable that Spain and the UK scored a little better
than the average, despite the fact that their economies are
more severely hit by the bursting of their housing bubbles
(there are no data yet for Ireland, the other country where the
property market is imploding). But then, these countries are
scoring much worse than average on other indicators, such as
the labour market.
Remarkably, the European economy is doing considerably
worse than the US. On the comparable measure, the US
economy shrank 1.6% qoq (6.1% annualised) and 2.6% yoy.
And while the recession got deeper in the EU in Q1, the most
negative quarter in the US so far was Q4.
I am often asked why Europe is performing worse than the US
although the epicentre of the crisis is seen as being located in
the US: the implosion of the housing bubble there. Not an easy
question! The fact that Europe is suffering more in terms of
growth in an absolute sense than the US demonstrates that the
crisis is about a lot more than US housing. It is a problem of
excessive leverage. The Baltics built up lots of it and are now
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
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