This week we look at the GDP numbers for Q2 from the US and South Korea. Then we look at the US consumer confidence and Case Shiller housing market data, and finish up with a look at inflation and unemployment in Japan, and New Zealand monetary policy.1. US GDP
The US economy grew 2.4% SAAR in the second quarter (0.6% in normal terms), slightly below consensus 2.5%, and slower than the revised 3.7% in Q1. On an annual basis GDP is up 3.2% vs 2.4% in Q1. The main drivers of growth were residential investment, investment in equipment & software, and inventories; the main detractor was (surprise, surprise) a shrinking of net exports. So overall not a bad result, but probably as good as it gets for now, especially given where much of the US data points are at, there are several indicators (as well as underlying fundamentals e.g. weak housing market) that will make the second half a lot harder. So rumors about the potential for more easing both on the fiscal and monetary policy fronts may end up validated in the second half of this year… watch this space.
The US economy grew 2.4% SAAR in the second quarter (0.6% in normal terms), slightly below consensus 2.5%, and slower than the revised 3.7% in Q1. On an annual basis GDP is up 3.2% vs 2.4% in Q1. The main drivers of growth were residential investment, investment in equipment & software, and inventories; the main detractor was (surprise, surprise) a shrinking of net exports. So overall not a bad result, but probably as good as it gets for now, especially given where much of the US data points are at, there are several indicators (as well as underlying fundamentals e.g. weak housing market) that will make the second half a lot harder. So rumors about the potential for more easing both on the fiscal and monetary policy fronts may end up validated in the second half of this year… watch this space.
2. South Korea GDP
The South Korean economy grew 1.5% in the second quarter, slower than the 2.1% recorded in Q1, but above consensus of 1.1%. On an annual basis GDP was up 7.2%, off slightly from 8.1% in Q1, but also above consensus 6.6%. The expansion was driven by strong export-led manufacturing activity and facility investment, but the construction sector was a detractor (driven by a sluggish domestic real estate market). The continued expansion will likely spur the Bank of Korea to raise interest rates again (having increased 25bps to 2.25% early this month). But like all trade driven economies, the Republic of Korea will be closely exposed to the fortunes of the global economy in the second half.
The South Korean economy grew 1.5% in the second quarter, slower than the 2.1% recorded in Q1, but above consensus of 1.1%. On an annual basis GDP was up 7.2%, off slightly from 8.1% in Q1, but also above consensus 6.6%. The expansion was driven by strong export-led manufacturing activity and facility investment, but the construction sector was a detractor (driven by a sluggish domestic real estate market). The continued expansion will likely spur the Bank of Korea to raise interest rates again (having increased 25bps to 2.25% early this month). But like all trade driven economies, the Republic of Korea will be closely exposed to the fortunes of the global economy in the second half.
3. US Housing market and Consumer Confidence
US consumer confidence fell again in July to 50.4 vs consensus 51.0 and previous 52.9. The drop was led by a fall in the expectations component. On the housing front, the May reading of the S&P Case-Shiller 20-city home price index showed a 3.9% rise year on year (vs 4.1% in April), and a 0.5% monthly gain (vs 0.6% in April). The residual impact of the tax credits continued to underpin house prices. But going into the second half of 2010, the theme of ‘this is as good as it gets’ will likely ring true in the housing market space also. The fundamentals point to sideways movement at best, and a fall at worst. Unemployment is still high, debt levels compared to house prices are still too high, consumers are still hurting, and interest rates are probably - if anything - going to rise, so this bit remains a key vulnerability for the US economic recovery.
US consumer confidence fell again in July to 50.4 vs consensus 51.0 and previous 52.9. The drop was led by a fall in the expectations component. On the housing front, the May reading of the S&P Case-Shiller 20-city home price index showed a 3.9% rise year on year (vs 4.1% in April), and a 0.5% monthly gain (vs 0.6% in April). The residual impact of the tax credits continued to underpin house prices. But going into the second half of 2010, the theme of ‘this is as good as it gets’ will likely ring true in the housing market space also. The fundamentals point to sideways movement at best, and a fall at worst. Unemployment is still high, debt levels compared to house prices are still too high, consumers are still hurting, and interest rates are probably - if anything - going to rise, so this bit remains a key vulnerability for the US economic recovery.
4. Japan unemployment and deflation
Japan saw a slight easing of deflation on a headline CPI basis, with the annual rate at -0.7% in June vs -0.9% in May, on a core basis the rate also reduced slightly to -1.0% vs -1.2% in May and consensus for -1.1%. So on the deflation front there has been cause for at least a bit of hope with recent trends. On the unemployment side though, the jobless rate rose to 5.3% from 5.2% in May, but there were some positives in the data with payrolls rising 40k in June, vs a fall of -240k in May. The job offer to job seeker ration rose slightly to 0.52 in June from 0.50 in May. So signs are tentatively that inflation and employment are gradually starting to catch up with the trade-driven rebound of economic activity in Japan, but the serious deflation and government debt problems still remain, as do the global vulnerabilities.
Japan saw a slight easing of deflation on a headline CPI basis, with the annual rate at -0.7% in June vs -0.9% in May, on a core basis the rate also reduced slightly to -1.0% vs -1.2% in May and consensus for -1.1%. So on the deflation front there has been cause for at least a bit of hope with recent trends. On the unemployment side though, the jobless rate rose to 5.3% from 5.2% in May, but there were some positives in the data with payrolls rising 40k in June, vs a fall of -240k in May. The job offer to job seeker ration rose slightly to 0.52 in June from 0.50 in May. So signs are tentatively that inflation and employment are gradually starting to catch up with the trade-driven rebound of economic activity in Japan, but the serious deflation and government debt problems still remain, as do the global vulnerabilities.
5. New Zealand monetary policy
The RBNZ (Reserve Bank of New Zealand) increased the official cash rate at its July meeting 25bps to 3.00%, and signaled that further rate rises will likely be on the go-slow. The bank noted that policy normalization may be more moderate going forward, but of course with the caveat of monitoring the economic environment and financial market developments. The New Zealand economy is in recovery mode and is growing, but is still dealing with the damage from the global financial crisis and the deep recession; as well as a spate of finance company collapses, beginning prior to the crisis and still continuing (the banking system remains firmly intact though, as none of the finance companies were particularly systemically important - but a lot of investors got burned). So, in spite of a projected short term (mainly artificial) spike in inflation, the outlook is for a few more interest rate rises this year, as appropriate.
The RBNZ (Reserve Bank of New Zealand) increased the official cash rate at its July meeting 25bps to 3.00%, and signaled that further rate rises will likely be on the go-slow. The bank noted that policy normalization may be more moderate going forward, but of course with the caveat of monitoring the economic environment and financial market developments. The New Zealand economy is in recovery mode and is growing, but is still dealing with the damage from the global financial crisis and the deep recession; as well as a spate of finance company collapses, beginning prior to the crisis and still continuing (the banking system remains firmly intact though, as none of the finance companies were particularly systemically important - but a lot of investors got burned). So, in spite of a projected short term (mainly artificial) spike in inflation, the outlook is for a few more interest rate rises this year, as appropriate.
Summary
So we’ve got the US economy showing another quarter of growth, but a little slower, and the potential to slow even further in the second half. There’s also the key vulnerability of the US housing market, and the lingering damage of the crisis on the US consumer.
In Korea, the economy is still going strong, albeit a little slower, and this is likely to result in a couple more interest rate rises. But the Korean economic recovery has been driven exports, thus the recovery remains exposed to trends in international trade. Likewise Japan is starting to see improvements in its employment and deflation situation as the economy recovers with the help of rising trade.
In New Zealand the same theme of global vulnerabilities shows through, but for the most part on the domestic front the recovery is reasonably in tact and both GDP, inflation and monetary policy look fairly predictable in the second half of this year - holding all else constant.
Sources
1. US Bureau of Economic Analysis www.bea.gov
2. OECD Statistics stats.oecd.org/index.aspx
3. Standard & Poors www.standardandpoors.com & Conference Board www.conference-board.org
4. Trading Economics www.tradingeconomics.com
5. Reserve Bank of New Zealand www.rbnz.govt.nz
1. US Bureau of Economic Analysis www.bea.gov
2. OECD Statistics stats.oecd.org/index.aspx
3. Standard & Poors www.standardandpoors.com & Conference Board www.conference-board.org
4. Trading Economics www.tradingeconomics.com
5. Reserve Bank of New Zealand www.rbnz.govt.nz
