The Real Economy: Output, GDP, and Inflation
Last week’s economic developments dampened confidence that recent green shoots will bloom into a full recovery anytime soon, as the global recession worsened in the Eurozone and U.S. economic reports turned dismal. 
 
U.S. retail sales disappointed in April, while the labor market remained weak. Retail sales fell by 0.4 percent in April, as rising unemployment and high household savings continued to dampen consumer demand. Initial jobless claims rose more than expected, increasing by 32,000 to 637,000 in the week ending May 9. This was largely pushed up by auto plant shutdowns related to Chrysler's bankruptcy .Other indicators and indices have seen marginal improvement. U.S. trade deficit rose to $27.7 billion in March, a slight increase from $26.1 billion in February but still an improvement from a four-year average of $60 billion. The improvement has largely been due to the sharp fall in the price of oil imports. Industrial production contracted at its slowest pace in more than six months, as output dropped by 0.5 percent (m/m) in April. Manufacturing production fell 0.3 percent, compared with a much steeper 2.1 percent decline in March. Manufacturers have been forced to reduce production as companies seek to clear stockpiles of unsold goods. The University of Michigan consumer confidence index picked up to 67.9 in May from 65.1 in April, the highest level since before the collapse of credit markets in the fall of 2008.

The economic data from Europe this week offered a solid refutation of any belief that the worst of its recession has past. The German economy fell 3.8 percent in the first quarter of 2009,  the worst contraction in economic activity since reunification. Overall eurozone GDP shrank 2.5 percent, the largest quarterly decline since comparable records began in 1970. The massive drop came as the global recession reduced the industrial exports that Europe relies on for growth and jobs. Eurozone industrial output fell 20.1 percent in March (y/y). In the UK, manufacturing output declined 0.1 percent in March (m/m) .The trade deficit in the UK narrowed to £2.5 ($3.8) billion in March, down from £2.8 ($4.2) billion in February.

The decline in China’s exports persists, while industrial production growth slowed down.  Exports declined for the sixth consecutive month in April by 22.6 percent(y/y). The decrease followed a 17.1 percent drop in March. China’s exports are likely to remain weak as demand in the United States and Europe is unlikely to recover for some time. Industrial output expanded 7.3 percent (y/y) in April, after gaining 8.3 percent in March. China’s fixed-investment surged 30.5 percent in April (y/y), supported by the 4 trillion yuan ($570 billion) stimulus plan. Meanwhile retail sales expanded 14.8 percent in April (y/y). In India, industrial output dropped 2.3 percent in March from a year earlier. In Japan, machine tool orders declined by 80.4 percent(y/y) in April, after falling by 85.2 percent (y/y) in March. 

In North Africa, Egypt’s economy expanded 4.3 percent in the first quarter of 2009 (y/y) up from 4.1 percent during the previous quarter.

Economic Policy
Russia’s central bank cut its refinancing rate by 50 basis points to 12 percent, slashing rates for the second time in less than a month while also reducing the repurchase rate charged on central bank loans to 11 percent from 11.5 percent. Ghana’s central bank kept its key interest rate unchanged at 18.5 percent, as the government is negotiating a loan with the International Monetary Fund to help support the currency and finance a budget deficit projected at 9.4 percent of GDP.

The U.S. Treasury announced that it would make $22 billion available to insurers from the Troubled Asset Relief Program (TARP), and the Obama administration sought new authority to bring transparency to the credit derivatives markets and to crack down on the credit card industry.

China’s new lending totaled 591.8 billion yuan ($86.7 billion) during April, down from a record 1.89 trillion yuan ($276.6 billion) in March. Over the first four months of 2009, new lending exceeded the government’s target for the year as a whole. Money supply (M2) increased 26 percent (y/y) in April.

Financial Markets
The two-month global stock market rally came to an end last week as investors reacted to weaker-than-expected reports on U.S. retail sales, U.S. weekly jobless claims, and Eurozone GDP.

For the week, the S&P 500 fell 5 percent, the Dow dropped 3.5 percent and the Nasdaq slipped 3.4 percent. After last week’s sell-off, the Nasdaq (+ 6.6 percent) is the only major US index still in the positive territory for the year to date.

In Europe, the FTSE100 lost 2.6 percent over the week, while Germany’s DAX fell 3.6 percent. China’s stock market outperformed, with the Shanghai Composite up 0.8 per cent last week but Hong Kong’s Hang Seng index dropped 4.5 percent and Japan’s Nikkei 225 lost 3.9 percent.

The MSCI World Index ended the week 3.4 percent lower and the MSCI Emerging Markets Index down by 2.4 percent.

In the credit market, lower interbank lending rates indicated reduced strains in the financial system. The three-month dollar LIBOR rate declined to 0.83 percent last Friday, having peaked at 4.82% on October 10.  LIBOR is now 58 basis points above the upper band of the Fed’s target range, but still high compared to an average of 12 basis points in the year before the start of the credit crisis.

The benchmark U.S. 10-year treasury yield entered the week nearing the highest levels yet seen in 2009, as it approached 3.4 percent; however, it finished 3.14 last Friday, helped by the decline in equity markets.UK 10-year treasury yields ended the week 5.1 percent lower and Japan 10-year bond yields remain unchanged from the previous week.

In the currency market, the Japanese yen strengthened against its major counterparts. It closed the week at ¥95.3 and ¥129.8 against the dollar and the euro respectively from ¥98.9 and ¥134. The dollar weakened by 0.8 percent against the euro over the weak.