PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

16 August 2010

1 Euroland’s Economy Expanded At The Strongest Pace In

Four Years In The 2Q, Underpinned By A Stronger Growth
In Germany

2 US Core Inflation Held Stable Yoy And Retail Sales Picked

Up M-o-m In July

3 Euroland’s Exports Picked Up In June

Tracking The World Economy...

Today’s Highlight

Euroland’s Economy Expanded At The Strongest Pace In Four Years In The 2Q, Underpinned By A Stronger
Growth In Germany

Euroland’s economy expanded by 1.0% qoq in the 2Q, the fastest in four years and after inching up to +0.2% in the
1Q. This was more than economists’ forecast, powered by a robust growth in Germany. Germany, the largest economy
in the region, grew by 2.2% qoq in the 2Q, the fastest growth in two decades and compared with +0.5% in the 1Q.
Similarly, real GDP in France and Spain grew at a faster pace of 0.6% and 0.2% qoq respectively in the 2Q, compared
with the corresponding rates of +0.2% and +0.1% in the 1Q. These were aided by a pick-up in economic activities in
Netherlands, Austria, Slovakia, Estonia, Belgium and Lithuania. Economic growth in Italy, however, held stable at 0.4%
qoq in the 2Q, the same rate of increase as in the 1Q. These were, however, offset partially by a sharper decline in
Greece’s economy and a slowdown in Portugal and Latvia’s economic growth, while Hungary’s economy stagnated during
the quarter. Yoy, real GDP rose by 1.7% in the 2Q, after returning to a positive growth of 0.6% for the first time in
six quarters in the 1Q.

Although details have not been released, the Euroland’s stronger economic growth during the quarter is likely to have
been driven by a pick-up in external demand for the region’s exports. The region’s exports in nominal terms grew at
28.2% yoy in June, the fastest pace thus far this year and compared with a low of +4.4% in January. Similarly, business
confidence continued to improve in the 2Q, suggesting that business spending might have picked up during the quarter.
Consumer spending, though might have improved, is likely to have remained weak due to the high unemployment in
the region. Going forward, the Euroland’s economy will likely soften in the 2H of the year, in line with a slowdown in
the global economy. This will likely be made worse by the austerity measures undertaken by some countries to rein
in their budget deficits. Nevertheless, Germany will likely continue to provide a cushion to the region’s economic growth.

The US Economy

US Core Inflation Held Stable Yoy, Providing The Fed More Room To Ease Its Policy

◆ US headline inflation rose by 0.3% mom in July, a rebound from -0.1% in June. This was the first increase in four
months, mainly on account of a pick-up in gasoline prices, which grew by 4.6% mom in July, compared with -4.5%
in June and -5.2% in May. This was made worse by a pick-up in the costs of housing and education. These were,
however, offset partially by a slowdown in the prices of apparel and declines in the costs of healthcare and

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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recreation. Prices of food & beverages, on the other hand, remained stable during the month. Excluding energy
prices, inflation held stable at 0.1% mom during the month, the same rate of increase as in the previous month.
Excluding food and energy prices, the core inflation rate, on the other hand, moderated to 0.1% mom in July, from
+0.2% in June. Yoy, the headline inflation inched up to 1.2% in July, after slowing down to +1.1% in June
but off the peak of +2.7% in December. The core inflation rate, on the other hand, held stable at +0.9%
yoy for the fourth consecutive month in July and compared with the peak of +1.8% in December, suggesting
that price pressures remain benign in the US. This was in tandem with the US Federal Reserve’s assessment that
substantial resource slack would continue to restrain cost pressures and inflation is likely to be subdued for some
time.

◆ Indeed, the Fed has kept its key policy rate unchanged at 0-0.25% on 10 August and made a slight policy shift
on its asset holdings by saying that it would roll over Treasury securities and reinvest proceeds from mortgage-
related securities it bought during the quantitative easing as they mature. The move is aimed at stopping money
from draining out of the financial system when the securities matured in an attempt to bolster the economy as the
recovery is losing momentum. While the direct effect of the Fed’s move is not significant, the more significant impact
of the decision is that it signals its willingness and ability to go further if economic conditions worsen. As a result,
investors do not expect the Fed to raise the Federal funds rate until late 2011.

Retail Sales Picked Up M-o-m In July

◆ US retail sales rebounded to increase by 0.4% mom in July, from -0.3% in June. Although this was the
first increase in three months, it was mainly driven by a pick-up in auto sales and higher gasoline prices. Auto
sales rebounded to increase by 1.6% mom in July, from -1.3% in June. Excluding auto sales, retail sales grew by
0.2% mom in July, compared with -0.1% in June. Excluding auto and gasoline sales, retail sales fell by 0.1% mom
in July, compared with +0.2% in June and -1.1% in May. This was due to declines in sales of electronic goods,
clothing, sporting goods and general merchandise as well as a weakening in sales at non-store retailers and
healthcare products. These were, however, mitigated by a pick-up in sales at eating & drinking places and smaller
declines in sales of furniture, building materials and food & beverages. Yoy, retail sales rebounded to 5.4% in July,
from +4.9% in June but off the high of +10.8% recorded in March, suggesting that consumer spending, though is
losing momentum, remains resilient. As a whole, the readings suggest that the US economy will likely continue
to expand in the 3Q, after recording a slower growth in the 2Q.

The Euroland Economy

Exports Picked Up In June

◆ Euroland’s exports strengthened to +28.2% yoy in June, from +24.2% yoy in May. This was the sixth
straight month of growth and the strongest since exports returned to growth in January, indicating that the region’s
exports held up relatively well amidst signs of a slowdown in global demand. The near 15.0% decline in the euro
against the US dollar in 1H 2010 might have helped to sustain the region’s exports. In the first five months of 2010,
the export growth was driven mainly by a pick-up in exports to the US and UK, which grew by 10% and 11% yoy
respectively, compared with -21% and -27% in the corresponding period of 2009. Similarly, exports to China and
Russia rebounded strongly to 43% and 15% yoy respectively, from the corresponding rates of -6% and -38% in
2009. In the same vein, the region’s imports grew at a faster pace of 32.9% yoy in June, compared with +30.0%
in May. This was the fastest growth thus far this year, in tandem with a pick-up in exports. As a whole, stronger
growth in exports boosted the region’s economic activities in the 2Q, after growing at a slightly faster pace of +0.2%
qoq in the 1Q.

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