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Developments in the Global Economy, June, 1, 2009

Vital signs in key developed economies strengthened this week. However, improvements remain inconsistent, shedding doubt on whether hopes of an imminent and sustained recovery are well-founded.

Published on June 1, 2009

Vital signs in key developed economies strengthened this week.  However, improvements remain inconsistent, shedding doubt on whether hopes of an imminent and sustained recovery are well-founded.

The Real Economy: Output, GDP, and Inflation
A sustained rise in consumer confidence and early signs of stabilization in the housing market added to hopes that the U.S. economy will recover later this year. The Conference Board’s consumer confidence index climbed to an eight-month high of 54.9, up from just 26.9 in March. Existing and new home sales posted modest rises in April. New home sales increased by 0.3 percent to an annual rate of 352 000, after falling by 3 percent in March (m/m).  Purchases of existing homes rose by 2.9 percent.  Near record-low mortgage rates, combined with tax credits for first-time buyers and significantly lower prices, has helped to stabilize conditions in the housing market.  Durable goods orders rose by 1.9 percent in April, but still remained near a thirteen-year low. The second estimate of U.S. first quarter GDP showed a contraction of an annualized 5.7 percent, smaller than the 6.1 percent fall initially estimated. The improvement was driven by a narrower trade deficit and a smaller reduction in stockpiles than previously estimated. First-time unemployment claims for the week ending May 22 fell by 13,000 to 623,000, marking a second consecutive weekly decline.

Gains in business climate and consumer confidence indices strengthened the optimism for economic recovery in eurozone. The German IFO institute’s business climate index increased to 84.2 from 83.7 in April, as interest-rate cuts and government stimulus packages boosted expectations that the worst of the recession is over. Eurozone economic sentiment index rose to a six-month high of 69.3 in May from 67.2 in April.

U.K. house prices rebounded in May, in a sign the housing market slump is easing. The average cost of a home jumped 1.2 percent to 154,016 pounds ($245,701), the biggest gain since 2006.

Indian economic growth gained momentum, while industrial activity is in a recovery mode in Japan and Korea. Indian first-quarter GDP grew by 5.8 percent (y/y), with strength in services and construction outstripping a decline in manufacturing. Japan’s industrial production jumped the most in 56 years in April as output surged 5.2 percent from March. In Korea, industrial output increased for a fourth consecutive month in April. Output rose by 2.6 percent from March, when it increased 4.9 percent. However, not all of Asia’s economic data was encouraging. Thailand’s first-quarter real GDP plunged 7.1 percent(y/y), the worst since the 1997-98 Asian financial crisis.

 In Sub-Saharan Africa, the South African economy slide into its fist recession in 17 years. GDP contracted an annualized 6.4 percent in the first-quarter after falling at an annualized 1.8 percent in the last quarter of 2008.


Economic Policy
Central banks around the world kept their interest rates unchanged on hopes of economic recovery. Hungarian central bank kept rates on hold at 9.5 percent in May, while Malaysia's central bank kept interest rate unchanged at 2 percent after cutting rates by 150 basis points from November 2008 to March 2009. The Bank of Israel announced that the interest rate for June 2009 will remain unchanged at 0.5 percent.

Organization of Petroleum Exporting Countries (OPEC) members, who account for 40 percent of global oil production, decided to leave production quotas unchanged at 25 million barrels per day. OPEC had announced reductions of 4.2 million barrels a day starting in late 2008.
Hong Kong announced additional fiscal stimulus measures valued at HK16.8 billion ($2.2 billion) to stem the economic downturn. The initiatives include tax cuts and further relief from a variety of government fees, along with additional direct spending.
 
Financial Markets
Major global equity markets ended higher for the third consecutive month in May. U.S. indices gained last week with the help of rising commodity prices and economic reports that the pace of contraction has begun to ease. The Dow, the S&P 500 and the Nasdaq gained 2.7 percent, 3.6 percent, and 4 percent for the week; and jumped 3.8 percent, 5.2 percent and 3.6 percent for the month, respectively.

European equity markets rose modestly last week. The UK FTSE 100, the German DAX and the French CAC rose by 1.2 percent, 0.4 percent and 1.9 percent, respectively. In Japan, the Nikkei 225 closed up by 3.2 percent.

The MSCI World Index and the MSCI Emerging Markets Index last week added to the previous week’s gains to take the year-to-date returns to 5.4 percent and a massive 36.3 percent, respectively.

U.S. 10-year treasury yields hit a six-month high of 3.75 percent, while 30-year treasury yields rose to a nine-month high of 4.65 percent, raising concerns about the impact of higher mortgage rates on any potential recovery in the housing market. German 10-year bond yields rose to a six-month high of 3.69 percent.

In the currency market, the U.S. dollar remained weakened against the euro and British pound last week, with the pound breaking above 1.61 against U.S. dollar. The euro ended the week 0.9 percent higher against the dollar. The Japanese yen suffered as investors opted for higher-yielding currencies.  The dollar rose to ¥95.3 from ¥94.8.  The yen and Swedish krona were the only G10 currencies to close lower against the dollar last week.

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