USA
Despite a sharp weakening in the labor market, real consumer spending has stabilized over the past three months. All signs point to another large contraction in real GDP growth in Q1 09, and many analysts continue to forecast a 5.5 percent annualized decline. Business and residential investment spending, inventories, and real exports all look to be contracting at a rapid pace. Data that came out last week revealed that this weakness continues to show through to the labor market, with a February payroll decline of 651,000 and the unemployment rate rising to 8.1 percent. Yet, one ray of light stands out in this dark picture: the trend in consumption has improved, with the 3-month annualized percent change in real consumer spending moving up to 0.7 percent from a trough of -5.4 percent in October. Many investors found this move inexplicable, given the significant deterioration in labor market conditions and consumer confidence. However, to a certain extent this could be explained by the collapse in gasoline prices and the sharp decrease in inflation. Researchers note that real consumer spending has been highly correlated with inflation in recent years. The intuition is straightforward 's surging energy prices push up inflation and leave consumers with less money to spend on other goods, while falling energy prices do the opposite. Although there was a gap in the regular relationship between these series as the financial shock led consumers to defer purchases, the trend in real spending has firmed as inflation continues to drop. Along these lines, a Wal-Mart executive explained the large February sales by noting: "We believe falling gas prices significantly boosted household disposable income in February and therefore allowed for both more trips and more spending toward discretionary categories."
Europe
The ECB this week made extraordinarily large cuts to its projections for euro area real GDP growth and inflation. In particular, it lowered the midpoint for real GDP growth in 2009 to -2.7 percent from -0.5 percent in December, and from 1 percent to 0 for 2010. Meanwhile, it cut the midpoint projection for inflation from 1.4 percent to 0.4 percent for 2009, and from 1.8 percent to 1 percent for 2010. Part of the explanation for such extraordinary changes comes from a radical shift in the ECB projection for global changes to GDP outside of the euro area, from 2.4 percent for 2009 in December to 0.2 percent. But a major part is also domestic in nature, with business investment projected to contract 7.2 percent this year and a further 2.3 percent in 2010. At the same time, after car production in the euro area contracted at a staggering 43.5 percent (annualized) in Q4 08 's following auto plant closures as demand decreased sharply 's the latest car sales data for February suggests fiscal incentives undertaken by EU member states are working effectively to boost auto registrations for the euro area as a whole. In particular, German new car registrations surged dramatically in February (21 percent year on year), as the government's incentive plan to pay consumers €2,500 to scrap old cars for new ones boosted demand for small cars. The German car association (VDA) cited a 63 percent increase in domestic orders to 482,000 (the highest level since 2001). This is seen as a very good sign of possible economic recovery in the bloc.
Russia and CIS
The week brought some signs of stability in Russia's external balances. Bank of Russia data showed private capital outflows to have moderated to $4.5 billion in February, down from $29 billion in January, and the trade and the current account surplus to have held up slightly better than expected in the first two months of 2009. On the back of this, FX reserves grew $2.4 billion to $384.3 billion, implying a lack of significant intervention in February. This is expected to help the rouble stay stable in the short term. Kazakhstan's official FX reserves have similarly increased by $1.5 billion in February, to $19.8 billion. In parallel, however, the government is also preparing for a potential emergency with a draft law on the introduction of capital controls. The law would allow the central bank to introduce the mandatory sale of export revenues and bar companies from transferring money abroad 's measures also put in place during the 1998 Russian crisis.
*** Written using materials from Bloomberg and Reuters
