USA
After serving as a significant drag on GDP growth for the past three years and arguably igniting the crisis that harmed the US economy and financial markets last year, the housing market has started to recover. Home sales have climbed over the past few months, greatly exceeding expectations. Existing home sales have jumped to the highest level since August 2007, while new home sales have reverted to their November 2008 pace. The improvement has been particularly noteworthy in the lower-priced end of the market, where demand has started to equilibrate with supply.
The gain in home sales, coupled with lean inventories of new homes, has prompted builders to increase the pace of new construction. Starts of single-family homes have increased 37% over the past six months, and rising permits point to further gains. Some experts expect housing starts to more than double by the end of next year, to just over 1 million (annualized), but remain below the historical average of 1.5 million.
Eurozone
This week the ECB's Governing Council will publish its latest economic assessment, including staff projections. Analysts look for the staff projections for real GDP to be revised upward i.e. no longer to project further decline in euro area real GDP during H2 09. Moreover, this week concensus opinion on euro area GDP has been revised up slightly further including Q3 estimate from 0.5% q/q to 0.6%, and Q4 estimate from 0.3% to 0.5%.
However, it seems doubtful that the Governing Council will take too much comfort from this. Comments by officials suggest they envisage a "bumpy road" ahead. As well, the recent bank lending and M3 data continue to present a rather mixed bag. Overall, it seems likely that the ECB will maintain its highly accommodative monetary stance, including running the Sept. 30 one-year refinancing operation on the same terms as in June. Eurozone banks are now largely financing themselves from the ECB's longer-term refinancings, rather than through the weekly one. As a consequence, Eonia (the overnight rate) has slumped to about 0.35% since early July.
When the time eventually comes to alter the monetary stance, presumably during H1 2010, the ECB would likely first rein in the longer-term refinancings, which would cause Eonia to rise back towards the main policy rate (the weekly refinancing rate), before actually needing to raise the main policy rate (the "refi rate").
Central and Eastern Europe
While the markets in EMEA continue to move in tandem, there are clear divergences in the macroeconomic trends in the region, some predictable, others less so. Russia, for example, which arguably has some serious banking and de-leveraging challenges, has started to show some greenshoots, with the Ministry of Economy recently estimating that real GDP rose 0.5% m/m in July, taking the y/y rate of change to 'only' -9.3%.
While negative, this is still an improvement and one endorsed by the last few months' Russian industrial production data. Globally, it is becoming evident that the economies that went into the financial crisis with the greatest imbalances i.e. either private or public indebtedness) are likely those that could emerge with the weakest rebound and the data bear witness to this.
At one end of the spectrum are countries such as Poland and Israel, which have little major imbalances to deal with, and accordingly, the recent cyclical data has been very friendly. Q2 GDP in Israel rose above the consensus of 1.0% and in Poland it grew 1.1% y/y, significantly above consensus expectations for 0.5%. At the other extreme of the spectrum are Ukraine, the Baltic States, Romania, Russia and, to a lesser degree, Hungary. Here, the growth improvement has been in the second differential: a moderation in the pace of decline, echoing the nature of the recovery in other EM economies in February/March.
Written using materials from Bloomberg and Reuters Research
