PP 7767/09/2010(025354) MARKET DATELINE


Economic Highlights
9 July 2010

1 IMF Raised 2010 Economic Growth Estimate, Sees Recovery Risk 2 US Consumer Credit Fell By A Smaller Magnitude In May 3 The ECB Kept Its Key Policy Rate Unchanged At 1.0% But Is Under Pressure To Do More 4 Japan’s Core Machinery Orders Fell M-o-m In May

Tracking The World Economy...
Today’s Highlight IMF Raised 2010 Economic Growth Estimate, Sees Recovery Risk The International Monetary Fund (IMF) raised its forecast for global economic growth to 4.6% in 2010, from +4.2% projected in April and compared with -0.6% in 2009. This was the strongest growth since 2007, on account of a strongerthan-expected growth in the 1H of the year, but IMF warned that financial-market turmoil has increased the risks to the recovery. For 2011, growth is projected to be +4.3%, unchanged from the April forecast. The IMF expects advanced economies to grow 2.6% in 2010, faster than +2.3% projected in April. This is on account of an upgrade in the US real GDP growth forecast to +3.3% in 2010, from +3.1% predicted in April but growth will slow down to +2.9% in 2011. Japan’s real GDP will increase by 2.4% in 2010, more than the +1.9% forecast in April, before slowing down to +1.8% in 2011. The IMF, however, kept the Euroland’s economy forecast for 2010 unchanged at 1.0% and reduced its 2011 outlook by 0.2 percentage point to 1.3%, in tandem with austerity measures undertaken by the countries in the region. Europe’s debt crisis, which policymakers sought to contain with an emergency €750bn (US$949bn) aid programme, prompted Group of 20 (G20) leaders to commit to deficit- and debt-reduction goals over the next six years in June. As a result, advanced G20 economies will try to halve deficits by 2013 and start to stabilise their debt-to-GDP ratios by 2016. Meanwhile, faster expansions in Brazil, China and India are helping to protect the global recovery as a sovereign-debt crisis weighs on Europe. The growth forecast for emerging markets was raised to 6.8% in 2010, from +6.3% seen in April. The fastest growth rate will be China’s 10.5%, followed by India’s 9.4% and Brazil’s 7.1%. The IMF said that monetary policy in advanced economies can remain “highly accommodative for the foreseeable future,” because inflation is expected to remain “subdued”, helping mitigate the effects of fiscal consolidation on growth. If recovery risks materialised in economies with central bank policy rates close to zero, they may need to expand their balance sheets again to ease monetary conditions. The US Economy Consumer Credit Fell By A Smaller Magnitude In May ◆ US consumer credit fell by a smaller magnitude of US$9.1bn or at an annual rate of -4.5% in May, compared with a decline of US$14.9bn or -7.3% in April. This was the 11th month of decline in 13 months, suggesting that consumers are still deleveraging and a recovery in their spending will likely be gradual in the months ahead. The drop was reflected in a decline in non-revolving debt (-US$1.8bn in May versus -US$6.6bn in April),

Peck Boon Soon
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9 July 2010

which include loans for automobiles and mobile homes. Similarly, revolving debt such as credit cards fell by US$7.3bn in May versus -US$8.3bn in April. The Fed’s report does not cover borrowing secured by real estate. The Euroland Economy The ECB Kept Its Key Policy Rate Unchanged At 1.0% But Is Under Pressure To Do More ◆ The European Central Bank (ECB) left its key policy rate unchanged at a record low of 1.0%, as rising financial market uncertainties as a result of the sovereign debt crisis threaten to derail the region’s economic recovery. The Euroland’s economy is showing signs of weakening, after Greece’s fiscal crisis pushed up bond yields in debt-strapped countries and forcing governments to implement austerity measures. As it stands, the service and manufacturing industries expanded at a slower pace for the second consecutive month in June. As a result, the ECB is under pressure to do more to shore up investor confidence, as they are concerned about the impact arising from government spending cuts and the health of the banking sector. The International Monetary Fund said yesterday that the ECB may have to step up its purchases of government bonds. However, investors generally have the feeling that there is a lack of the sense that the ECB is prepared to do what is necessary, as it still seems very uncomfortable with the asset purchases. Although the ECB launched an unprecedented move to start buying government debt on the secondary market on May 10, not all policymakers are supportive of the move. Bundesbank President Axel Weber and ECB Executive Board member Juergen Stark have both criticised the bond purchases, saying they pose significant risks to the bank’s credibility. As a result, the ECB’s move has so far met with limited success. The extra yield that investors demand to hold Spanish 10-year bonds over the German equivalents was at 203 basis points on 8 July, higher than it was before the ECB started its purchase programme.

Asian Economies Japan’s Core Machinery Orders Fell M-o-m In May ◆ Japan’s core machinery orders, excluding volatile orders for ships and orders placed by electric power companies, fell by 9.1% mom in May, after moderating to 4.0% in April. This was the sharpest drop since August 2008 and the first in three months, suggesting that businesses have turned cautious and will likely slow down their spending. This was in tandem with a slowdown in exports for the third consecutive month in May, indicating that firms will likely slow down investment in plants and machinery as exports weaken. Yoy, Japan’s core machinery orders slowed down to 4.3% in May, from +9.4% in April and after returning to a growth of 1.2% for the first time in more than a year in March.

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