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20100613130242eGCC Economic Monthly Bulletin_June10

20100613130242eGCC Economic Monthly Bulletin_June10

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Published by: ABSAFO on Jul 03, 2010
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Chief Economist
Dr Jarmo T. Kotilaine
Please refer to the lastpage for importantinformation
GCC Economic Monthly
June 2010
Renewed turbulence
The strength of the ongoing economic recovery is in renewed doubtfollowing the growing intensity of the sovereign debt crisis in Europe.While this is undermining sentiment globally in its own right, it has alsohighlighted the limitations of government stimulus spending and forced asignificant number of countries to embark on fiscal consolidation at avulnerable time. For the GCC, the crisis injects another dose of uncertaintyfollowing a fairly lackluster recovery to date.
The relapse in the global economy underscores the excessive relianceon anti-cyclical measures to address a structural crisis.
Althoughgovernment stimulus measures were highly effective in containing thedownturn, frustratingly little progress has been made in addressing theunderlying structural problems: high leverage levels, global imbalances, andineffective bank intermediation.
The Euro-zone risks repeating the Japanese scenario unless timelyefforts are undertaken to revive the structural drivers of growth.
Thegreatest risk under the circumstances would be a persistent addiction togovernment spending. While this can help support economic activity to anextent, major supply-side reforms are needed to prepare Europe for itspending demographic transition.
The GCC region remains vulnerable in the face of the troubles in theWest.
The EU is not only a large trading partner for the Gulf countries, butalso responsible for large proportion of foreign capital inflows into the GCCeconomies. Further, a renewed slowdown in the West would adversely affectthe oil prices and broader sentiment, thereby weakening the growth prospectsof the Gulf countries. Under the circumstances, we reduce our Saudi headlineGDP forecast for 2010e from 4.0% to 3.8%.
Nonetheless, the region remains resilient and well positioned even fora protracted downturn.
In spite of increased government activism, GCCgovernment debt levels remains internationally low. Further, higher oil priceshave left the GCC governments flush with large reserves which they caneffectively utilize in supporting aggregate demand.
Exhibit 1: Saudi Arabia macroeconomic indicators
Indicator 2007200820092010F2011F2012F
Real GDP (%) (%) 0.55.0- (%) GDP (%) 7.121.9- (%) account balance (% of GDP) 24.929. balance (% of GDP) 12.434.1-
Source: SAMA, NCBC Research
June 2010 2
Global economic overview
What the latest data tell us…
The US recovery remains on track
After robust 5.6% growth in 4Q09, the US economy expanded by 3.0% in 1Q10.Consumer spending grew by 3.5%, the highest increase since 1Q07. Manufacturingas measured by the Institute of Supply Management’s PMI rose by 1% in AprilMoM. New orders for manufactured goods grew by 1.3% to USD391.5bn whileshipments were up 2.2% in March.Also the housing market seems to have entered a phase of stabilization as housingstarts pick up while prices appear to have bottomed out. Privately owned housingstarts in April grew by 5.9% MoM and 40.9% YoY. Home sales have been bolsteredby low mortgage rates and government tax credit. The S&P/Case Shiller home priceindex for 20 cities rose by 2.3% YoY in March.
Austerity challenges in the EU
By contrast to the US, the mounting European crisis has forced a growing numberof governments to embark on fiscal consolidation as a way of shoring up investorconfidence. The Spanish government plan to bring down its budget deficit this yearto 9.3% of GDP from previously announced 9.8%, while Portugal will seek toreduce its shortfall to 7.3% from an earlier target of 8.3%. Even the Italiangovernment announced EUR24bn (1.6% of GDP) of budget cuts for the next twoyears in the form of wage freezes for civil servants, reduced health spending and acampaign against tax evasion. In 2009, Italy’s budget deficit was 5.3% while publicdebt stood at 115.8% of GDP. The government now expects to trim its deficit to3.9% in 2011 and 2.7% in 2012.According to the European Commission, following a 4.1% contraction in 2009, theEuro-zone economy is estimated to grow by 0.9% in 2010, higher than the earlierestimate of 0.7%. Growth is set to accelerate to 1.5% in 2011. Euro-areagovernment debt will likely average 84.7% of GDP in 2010 and 88.5% in 2011while budget deficit would average 6.6% and 6.1%, respectively.
Exhibit 2: US real GDP growth rate(1Q08 – 1Q10)Exhibit 3: Projected budget deficit in select EUcountries
-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10US real GDP growth
-14.0%-12.0%-10.0%-8.0%-6.0%-4.0%-2.0%0.0%2009 2010 2011Greece Ireland Italy Portugal Spain
Source: US Bureau of Economic Analysis (BEA), NCBC Research Source: Eurostat, NCBC Research
The US economy grew by3.0% in 1Q10 as consumerspending acceleated
Japanese growth accelerates
Japanese growth accelerated from 1.0% in 4Q09 to 1.2% in 1Q10, which translatesto 4.9% YoY. Private consumption grew by 0.3% while exports rose by 6.3%. In itssemi-annual outlook on the economy, the Bank of Japan (BoJ) projects GDP growthof 1.8% in 2010, higher than the earlier forecast of 1.3% due the rising demand forthe country’s products and services from the fast growing Asian emerging markets.
China returns to a trade surplus
After recording a trade deficit for the first time in six years in March, China onceagain reported a surplus of USD1.7bn in April. Exports rose by 30.5% YoY toUSD119.9bn while imports advanced by 49.7% to USD118.2bn on the back of rising soybean and iron-ore prices. However, consumer prices grew by 2.8% YoYand property prices rose by 12.8% YoY, further fueling overheating worries. Bycontrast, China’s purchasing managers’ index fell to a six month low of 55.5 from57.0 in March.
Indian optimism
According to a Nielsen Group survey, global confidence returned to its pre-recessionlevels in 1Q10 with the highest figure recorded in India. The country’s economygrew by a robust 8.6% in Q1, thereby taking the FY2010 overall growth to 7.4%.Industrial output grew by 13.5% YoY in March while exports grew by 54% YoY toUSD19.9bn. India’s oil imports almost doubled to USD8.1bn against USD4.7bn inApril last year while the country’s trade deficit now stands at USD10.4bn ascompared to USD6.6bn a year earlier.
Selling in May
Global equity markets suffered heavy losses in May after robust gains in April. TheEuropean sovereign debt woes, along with efforts by the German financial regulatorto ban naked short selling, contributed to investor anxiety. Japan ended the monthas the worst performing G7 market, down 12% from the previous month as the Yen
The Japanese economygrew 1.2% in 1Q10 drivenby increasing exports tothe emerging economies of China and IndiaInflationary pressures arecontinuing to build up inChina even thoughmanufacturing activity hasslowed downExhibit 4: China exports and imports (USD bn)
020406080100120140Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10Imports Exports
Source: Chinese Ministry of Commerce, NCBC Research
Indian optimism isunderpinned by robust8.6% in Q1The global equitiescontinued their freefall inMay reversing earlier gainsfor the year

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