PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

4 October 2010

1 Global Economy Softened As Manufacturing Engine

Weakened Further

2 US Consumer Spending And Manufacturing Activities

Slowed Down But Construction Spending Picked Up

3 Euroland’s Manufacturing Activities Slowed Down In

September
4 Japan’s Manufacturing Activities Contracted, Headline
Inflation Rate Held Stable And Unemployment Rate
Moderated

5 China’s Manufacturing Activities Picked Up In September

6 India’s Manufacturing Activities Slowed Down But Exports

Picked Up
7 Indonesia’s Inflation Moderated But Exports Picked Up

8 Thailand’s Inflation Moderated In September

Tracking The World Economy...

Today’s Highlight

Global Economy Softened As Manufacturing Engine Weakened Further

The global Purchasing Managers Index (PMI) for the manufacturing sector, an index compiled by JP Morgan and Markit
Economics in London, eased to 52.5 in September, from 53.7 in August and the peak of 57.8 in April. Readings above
50 indicate the sector is expanding while readings below 50 denote contraction. This was the fifth straight month of easing
and the slowest pace of increase in 14 months, suggesting that global manufacturing activities are weakening, in tandem
with a slowdown in the global economy. The slowdown was on the back of a slower increase in output. Similarly, new
orders weakened to the slowest pace of growth in 15 months and since it turned around to record an expansion in July
2009, indicating that manufacturing activities are likely to continue easing in the months ahead. As a result,
manufacturers slowed down their recruitment during the month. Meanwhile, input prices picked up to the highest level
in four months in September, suggesting that price pressure is rising. In terms of countries, the slowdown in
manufacturing activities was reflected in slower increases in activities in the US, Euroland and India as well as a
contraction in activities in Japan. These were, however, mitigated by a pick-up in activities in China. As a whole, the
readings suggest that global economic activities will likely expand at a more moderate pace in the 3Q, after picking up
in the 2Q.

The US Economy

US Consumer Spending Heading South

◆ US personal consumption expenditure (PCE) held stable at +0.4% mom in August, the same rate of increase as
in July. In real terms, PCE also held stable at +0.2% mom in August, the same rate of increase as in July
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 4 October 2010

and compared with +0.1% in June. On an annualised basis, the PCE, however, moderated to 1.7% in
August, from +1.9% in July and the peak of +2.6% in April-May, suggesting that consumer spending is losing
momentum. The US uses this figure to compute its consumer spending in real GDP. However, real PCE grew
m-o-m for the fourth month in five months during the month, suggesting that consumer spending, though
moderating, is unlikely to fall off the cliff and will continue to provide support to the US economy in the months
ahead. Personal income, however, strengthened to +0.5% mom in August in nominal terms, from +0.2% in July,
propelled by the resumption of extended and emergency unemployment benefits. This was, however, offset
partially by a slowdown in wage & salary. As a result, the personal savings rate inched up to 5.8% of disposable
income in August, from 5.7% in July and a high of 6.0% in June.

◆ Separately, the headline PCE price index held stable at 0.2% mom in August, the same rate of increase as in
July. Yoy, the headline PCE price index also held stable at +1.5% in August, after rising at the same pace as
in July. Similarly, the core PCE price index remained stable at 0.1% mom for the fourth consecutive month in
August, indicating that price pressure remained stable. Yoy, the core PCE price index held stable at 1.4% for the
third consecutive month in August and compared with a high of +1.8% in March. As a whole, the readings suggest
that price pressures remained tame and it would provide more room for the US Fed to hold its key policy rate
unchanged at between 0-0.25% in the near term. Indeed, the US Federal Reserve is moving closer to
implement a new round of quantitative easing, after shifting its policy towards a loosening bias in August.

Manufacturing Activities Slowed Down In September

◆ The US Purchasing Managers Index (PMI) of the Institute for Supply and Management (ISM) for the
manufacturing sector eased to 54.4 in September, from 56.3 in August and the peak of 60.4 in April.
Readings above 50 indicate the sector is expanding while readings below 50 denote contraction. This was the
slowest pace of increase in 10 months, suggesting that manufacturing activities are losing momentum. The weaker
growth was on account of a slowdown in production, new orders, new export orders and supplier deliveries as
well as a contraction in backlog of orders. As a result, inventory picked up and manufacturers slowed down their
recruitment during the month. Meanwhile, input costs picked up for the fourth straight month and to the highest
level in five months in September, pointing to an upward price pressure. As a whole, the readings suggest that
the US economy will likely moderate in the 3Q, after slowing down to an annualised rate of 1.7% in the
2Q.

Construction Spending Picked Up In August

◆ US construction spending rebounded to increase by 0.4% mom in August, from -1.4% in July. This
suggests that construction activities are improving, albeit uneven. The pick-up was due to a rebound in non-
residential construction spending, which grew by 0.6% mom in August, compared with -0.5% in July. Residential
construction spending, on the other hand, stagnated in August, after falling for the third consecutive month and
by -3.4% mom in July. As a whole, this suggests that construction activities will likely remain weak in
the near term. Yoy, construction spending fell by a smaller magnitude of 8.8% in August, compared with -10.8%
in July, indicating that construction activities remained sluggish in the US.

The Euroland Economy

Euroland’s Manufacturing Activities Slowed Down In September

◆ Euroland’s Purchasing Manager Index (PMI) for manufacturing sector eased to 53.7 in September, from
55.1 in August and the peak of 57.6 in April. This was the slowest increase in eight months, suggesting that
manufacturing activities in the region grew at a slower pace during the month. The slowdown was due to slower
increases in orders, while output slowed down to the slowest pace since October last year. As a whole, the
moderation in PMI manufacturing index suggests that the Euroland’s economy is likely to moderate in the 3Q, after
recording a stronger growth of +1.0% qoq in the 2Q.

Asian Economies

Japan’s Manufacturing Activities Contracted, Headline Inflation Rate Held Stable And Unemployment Rate
Moderated

◆ Japan’s Purchasing Managers Index (PMI) for the manufacturing sector fell to 49.5 in September, from
50.1 in August and a high of 54.7 in May. This suggests that manufacturing activities contracted in September
and it was the first contraction in more than a year after the sector returned to growth in July 2009, on account
of a slowdown in exports. As it stands, Japan’s exports slowed down for the sixth straight month to 15.8% yoy

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 4 October 2010

in August, from +23.5% in July. Similarly, Japan’s industrial output fell m-o-m for the third consecutive month
in August. As a whole, in line with weakening manufacturing activities, the Japanese economy is likely to
grow at a more moderate pace in the 3Q.

◆ Japan’s continued to mire in deflation with inflation rate holding stable at -0.9% yoy in August, the
same rate of decline as in July. This was the 19th straight month of decline, as a sharper drop in food prices
was mitigated by a smaller decline in the core inflation rate (which excludes fresh fruit, fish and vegetables). Food
prices fell by a larger magnitude of 0.7% yoy in August, compared with -0.5% in July and -0.1% in June. Similarly,
the core inflation fell by 1.0% yoy in August, albeit by a smaller magnitude compared with -1.1% in July. This
was due mainly to a pick-up in the costs of utilities. As a result, the Bank of Japan has eased its policy and
intervened in the foreign exchange market to cap the surge in yen. Separately, Japan’s unemployment rate
eased to 5.1% of total labour force in August, from 5.2% in July and a recent high of 5.3% in June, as
more workers left the labour force. This suggests that the job market remains tough in a slowing economy.
Meanwhile, Japan’s real household spending rose by 0.7% mom in August, a rebound from -0.4% in July. Yoy,
real household spending inched up to 1.7% in August, from +1.1% in July and +0.5% in June, pointing to an
improvement in household spending.

China’s Manufacturing Activities Picked Up In September

◆ China’s Purchasing Managers Index (PMI) for the manufacturing sector rose to 53.8 in September,
from 51.7 in August and a 17-month low of 51.2 in July. This was the third straight month of picking up, suggesting
that manufacturing activities expanded at a faster pace during the month. The pick-up was on account
of a faster increase in production, new orders, new export orders and backlogs of work. As a result, manufacturers
recruited more workers. These were, however, offset partially by a slowdown in supplier delivery times and a
sharper drop in inventories during the month. Input prices, however, picked up to the highest level in five months
in September, pointing to an upward price pressure. As a whole, the readings suggest that economic activities
in China have stabilised somewhat in the 3Q, after easing to +10.3% yoy in the 2Q.

India’s Manufacturing Activities But Exports Picked Up

◆ India’s Purchasing Managers Index (PMI) for the manufacturing sector slowed down to 55.1 in September,
from 57.2 in August and a high of 59.0 in May. This was the slowest increase in 10 months, suggesting that
manufacturing activities in India continued to ease. As a whole, the readings suggest that the country’s
economy is likely to turn softer in the 3Q, after strengthening to +8.8% in the 2Q. This suggests that the Reserve
Bank of India might be approaching the end of its interest rate hike given that economic activities are easing and
inflation shows signs of moderation.

◆ India’s exports bounced back to +22.5% yoy in August, from +13.2% in July but off the peak of +54.1%
in March. This suggests that India’s exports are moderating but remain resilient. This will likely provide some
cushion to India’s economy even though exports account for less than a fifth of its GDP.

Indonesia’s Inflation Moderated But Exports Picked Up

◆ Indonesia’s inflation rate moderated to 5.8% yoy in September, from +6.4% in August. This was the first
slowdown in six months, pointing to easing price pressure as economic activities slow. This was reflected in a
slowdown in prices of food, processed food and clothing as well as the costs of transport, healthcare and education.
The moderation in inflation will provide more room for Bank Indonesia to keep its key policy rate unchanged. The
central bank has refrained from raising its key policy rate in the last few months, as it believes the country’s faster
inflation in recent months was temporary and an appreciating currency could help to temper it.

◆ Separately, Indonesia’s exports, which account for about 29% of GDP, rebounded to +30.0% yoy in August,
from +28.9% in July but off the peak of +59.3% in January. This suggests that exports, though slowing, remain
resilient, underpinned by a pick-up in the exports of non-oil & gas products, which expanded by 32.3% yoy in
August, compared with +29.4% in July. A slowdown in the exports of oil & gas, which eased to 17.3% yoy in
August, from +26.4% in July, offset part of the gain. Similarly, imports slowed down to 25.9% yoy in August,
from +45.4% in July, mainly on account of a slowdown in the imports of non-oil & gas products, pointing to a
resilient domestic demand. This was, however, mitigated by a pick-up in the imports of oil & gas products. As
a whole, Indonesia’s economy will likely expand at a more moderate pace in the 3Q, after strengthening
to +6.2% yoy in the 2Q.

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 4 October 2010

Thailand’s Inflation Moderated In September

◆ Thailand’s inflation rate moderated to 3.0% yoy in September, from +3.3% in August. This was the
second month of easing and the lowest in five months, suggesting that price pressure is moderating, on the back
of a slowing economy. The moderation was due to a slowdown in prices of food and non-food items. Food prices
slowed down to 6.6% yoy in September, after accelerating to 7.5% in August. Similarly, non-food prices eased
to 0.9% yoy in September, from +1.0% in August and a high of +4.7% in January. The easing price pressure
will provide more room for the Bank of Thailand, which has started to normalise its monetary conditions. As it
stands, it raised its key policy rate for the second time and by 25 basis points to 1.75% in August. This suggests
that the central bank will likely raise its key policy rate further, albeit at a measured pace, as interest
rates in Thailand have been at too low a level for comfort.

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