PP 7767/09/2010(025354)

Economic Highlights
Global
•MARKET DATELINE

17 August 2010

1 Japan’s Economy Slowed Down Sharply In The 2Q, Adding

Signs To A Slowing Global Growth

2 Investment In The US Financial Assets Picked Up In

June

3 Euroland’s Inflation Accelerated In July

4 India’s Inflation Moderated In July

5 Indonesia Proposed A Larger Budget Deficit Of 1.7% of

GDP For 2011

Tracking The World Economy...

Today’s Highlight

Japan’s Economy Slowed Down Sharply In The 2Q, Adding Signs To A Slowing Global Growth

Japan’s economy grew at an annualised rate of 0.4% in the 2Q, compared with +4.4% in the 1Q. This was the slowest
pace of growth in three quarters and less than a fifth of the pace economists estimated. The slowdown was due to a
sharp slowdown in household spending, which weakened to 0.1% in the 2Q, from +2.2% in the 1Q and +2.8% in the
4Q of last year. This was made worse by a softer growth in exports, which slackened to 25.9% in the 2Q, from +31.0%
in the 1Q. Similarly, investment in housing slipped into a contraction (-5.0% in the 2Q versus +1.2% in the 1Q), while
business spending on plant & machinery weakened during the quarter (+1.9% in the 2Q versus +2.2% in the 1Q). A
slowdown in government consumption (+1.0% in the 2Q versus +2.2% in the 1Q) and a sharper decline in public
investment (-12.9% in the 2Q versus -4.7% in the 1Q) also contributed to the slower GDP growth. Yoy, real GDP growth
slowed down to 2.0% in the 2Q, from +4.7% in the 1Q.

The slowdown in the economic growth may put pressure on the Bank of Japan (BOJ) to expand monetary stimulus as
the nation’s record debt makes it difficult for the government to do more pump priming. The BOJ, which kept policy
unchanged last week, introduced a bank-loan programme in December. The central bank has kept the benchmark interest
rate at 0.1% since December 2008. Meanwhile, companies’ executives and politicians in the past week have voiced
concern about the strong yen. They are concerned that Japan’s economic recovery from its worst postwar recession could
be threatened by the surge in yen, which appreciated to a 15-year high against the US dollar lately.

Separately, the slowdown in Japanese economy pushed the country into third place behind the US and China in terms
of the size of the economy. Today’s milestone reflects Japan’s two decades of economic stagnation during which the
government racked up the world’s biggest public debt and the Nikkei 225 Stock Average lost three quarters of its value.
China, on the other hand, under the leadership of Deng Xiaoping more than 30 years ago has been transformed from
an agrarian state into the world’s fastest-growing major economy. The data reinforce International Monetary Fund’s
predictions that China will become the second largest economy by the end of 2010.

Peck Boon Soon

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

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The US Economy

Investment In The US Financial Assets Picked Up In June

◆ Purchases of US dollar-denominated financial assets such as equities, notes and bonds by foreign investors
increased to US$44.4bn in June, from US$35.3bn in May and compared with a record high of US$141.4bn in
March. This was reflected in an increase in net purchases by central banks around the globe, which rose to
US$17.3bn in June, from US$9.2bn in May, due mainly to higher net purchases of US Treasury notes & bonds and
government agency bonds. A slowdown in net purchases by foreign private investors, which eased to US$16.6bn
in June, from US$23.7bn in May and the peak of US$126.1bn in March, however, offset part of the gain. This was
because they net sold more corporate bonds and turned into net sellers of equity as well as reduced net purchases
of agency debt. These were, however, mitigated by a pick-up in net purchases of US Treasury notes & bonds during
the month. Higher net purchases of US dollar-denominated financial assets would provide a support to the US
dollar amidst a widening US trade deficit.

The Euroland Economy

Euroland’s Inflation Accelerated In July

◆ Euroland’s inflation rate accelerated to 1.7% yoy in July, after easing to +1.4% in June. This was the fastest
pace in 20 months due partly to a lower base effect and partly to rising food and energy prices. Food prices picked
up to 0.8% yoy in July (from +0.2% in June), while energy prices rebounded to 8.1% yoy, from +6.2% during
the same period. The core inflation rate, which excludes energy, food, alcohol & tobacco, inched up to 1.0% yoy
in July, from +0.9% in June. This was mainly on account of a slight pick-up in the prices of clothing and the costs
of housing and hotels & restaurants as well as a smaller decline in the costs of communications. Despite a pick-
up in inflation, the European central Bank will likely continue holding its key policy rate stable at 1.0%, after
relaxing its policy following the deepening of the sovereign debt problem in the region.

Asian Economies

India’s Inflation Moderated In July

◆ India’s inflation moderated to 9.97% yoy in July, from +10.55% in June. This was the slowest pace in three
months, mainly on account of a slowdown in prices of primary articles and manufactured products, while fuel,
power & light held stable during the month. The slowdown in the prices of primary articles was due to a moderation
in food prices, which was offset partially by a pick-up in prices of non-food articles and minerals. Food prices have
been easing as the country received more rainfall than forecast, aiding sowing of lentils and rice. Prospect of a
decline in food costs provides the Reserve Bank of India more room to take a pause in its interest rate hike to
assess the implications on growth in India given that the economy is showing signs of easing. Earlier, the central
bank raised its key policy rate for the fourth time this year in a move to control inflation in the country. India’s
industrial output, on the other hand, expanded at the weakest pace in 13 months in June, suggesting that economic
growth is slowing down.

Indonesia Proposed A Larger Budget Deficit Of 1.7% of GDP For 2011

◆ The Indonesian government proposed a slightly larger budget deficit of 1.7% of GDP for 2011 on 16
August, compared with the 1.5% gap expected for this year. The wider budget deficit is due the proposed increase
in capital spending by 28% to IDR121.7 trn (US$13.5bn) from the amount allocated for 2010, mainly to finance
infrastructure development. The Indonesian government plans to spend US$161bn in total infrastructure investment
between 2010 and 2014 to boost annual economic growth to around 7.7%. Indonesia’s infrastructure suffers from
years of neglect and has proven to be an obstacle to further economic growth. The lack of legal clarity and
difficulties in land clearing continue to be the main hindrances for infrastructure investment in the country. Indeed,
the actual deficit in the government budget could be less than 1.7%, if the government under spend its allocation
or manages to increase tax collection. The government has in recent years spent less than its target due to slow
execution of development projects given that several projects have not materialised. Indeed, the budget deficit
of 1.5% of GDP estimated for 2010 is smaller than the gap of 2.1% of GDP projected in the 2010 Budget. In
addition, the government proposed to increase civil servant salaries by 10% on average next year. The move
will likely help support private spending, a key driver of Indonesia’s economic growth. Meanwhile, the government
expects the economy to grow by 6.3% 2011, faster than +6% estimated for 2010. Inflation is expected to be
contained at 5.3% in 2011, while the rupiah is expected to average IDR9,300/US$ in 2011, weaker than the
IDR9,200/US$ predicted for this year.

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 17 August 2010

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