USA
As reported last week by the U.S. Fed Reserve, the net wealth of U.S. residents (i.e. assets like houses, financial securities, etc.) in the Q4 2008 fell by 9 percent compared to Q3 2008. All in all, since the second quarter of 2007, U.S. households have seen $4.7 trillion in housing wealth and $11.7 trillion in stock market wealth evaporate. Allowing for lags, and assuming people spend four cents on the dollar of their housing and stock market wealth, this lowers the level of consumption by $650 billion. However, the latest retail sales report sees a somewhat better situation. What's more, some long awaited signs of recovery can be observed. Core retail sales (excluding autos, gasoline and building materials) jumped a revised 1.7 percent in January, reversing an identical drop in December. Even more impressive, core sales continued to rise 0.5 percent in February, suggesting that the December- January pattern was not just a seasonal distortion. Many analysts now consider that Q1 2009 consumption looks like it will increase by 1 percent. Unfortunately, the leveling off of consumption will not translate into a broader recovery, at least not for a while. The labor market has gone from a slow depression that lasted from January through July 2008, followed by faster cuts in August to November of the same year, to a sharp decrease during the last three months. This past week, after looking at the data more closely, some analysts penciled in a larger labor market recession with the unemployment rate peaking at 9.5 percent, rather than at 9.0 percent.
Europe
Last week the European Central Bank surprised the public by lowering projections for euro area GDP in 2009 and 2010 (based on the midpoints, these predicted a contraction of 2.7 percent for 2009 and zero growth in 2010). This news was followed by some pessimistic economic data from EU member states, like the report that in the past three months German new orders for manufacturing have fallen 31 percent versus a year ago. Italian GDP dropped by 1 percent during 2008 (the worst fall since 1975). However, this was not the worst news for Europe. Some of the problems of Central and Eastern Europe (CEE) are spreading out to the rest of Europe, turning into a true pan-European threat. In CEE economic news is all bad, even compared to the "old" EU member states. The Baltic countries are still leading EU economic development but now with negative signs. Latvia, as the most prominent former economic tiger, is kept safe from bankruptcy only as long as further donations from EU and IMF come in a timely manner. Poland's unemployment rate has grown 150 basis points in two months (to 10.9 percent). Hungary has further revised its GDP downwards to more than -5 percent. EU politicians (especially from the Eastern EU member states) are intensively discussing the possible economic bailout of Eastern Europe. Western colleagues are asked for billion euro inflows but the latter faced with their own problems haven't expressed much willingness to share German and French taxes with ailing Eastern Europe economies.
Russia and CIS
The Russian government adopted amendments to the 2009 Budget Code this week, financing this year's budget deficit at 7.4-8.0 percent of GDP out of the Reserve Fund. The amendments introduced a temporary suspension of the provision that limits the budget deficit to 1 percent of GDP and broadened the usage of Reserve Fund resources to cover the budget deficit. Many analysts consider that the amendment will help the government cope with the economic crisis and introduce a fiscal stimulus package in the 2009 budget. Another measure to be put in place 's and the new potential political idol 's could be the anti-crisis plan for 2009. The plan has already been passed by the government for approval from the Parliament and there is no doubt that it will pass through. The content of the document is not yet clear, but according to Vladimir Putin it should include all former revised anti-crisis steps and it should be able to accommodate new ideas that could emerge during the year. The total price of the anti-crisis plan is approximately 34 billion euros.
*** Written using materials from Bloomberg and Reuters
