USA
This week's economic data did little to change fundamental views on the state of the economy, although a weak retail sales report and a jump in jobless claims serve as a reminder that the economy is still contracting, but at a significantly slower pace. The retail sales report, along with weak April auto sales, led to downward revised consensus estimate of real consumer spending growth in the second quarter to 0 percent from 1 percent, although there have been enough positive surprises elsewhere that we are content keeping the real GDP estimate at -2 percent.
As if forecasting the deficit wasn't hard enough, the Treasury changed the rules this week by indicating that TARP outlays would no longer be treated as cash outlays in the budget. Instead, these items will be treated on a net-present-value basis, in which the Treasury calculates the implicit subsidy associated with TARP outlays relative to market prices and only the subsidy portion is counted as an outlay. This seems a reasonable approach, given that the government is getting assets in exchange for its outlays. However, it does make the calculation of the deficit less transparent and significantly lowers the year's deficit. For example, in just the first half of the year, the change in accounting treatment lowered the deficit by $175 billion.
In addition to the accounting change, the Treasury report was significant because April is the month in which final individual income tax payments are due. Because taxpayers who owe money often wait until the last minute to send in their payment, April is usually the largest month for payments and can provide insight into underlying trends. The news this year wasn't pretty. Tax receipts fell 34.1 percent year on year in April, the largest decline in the half century for which this data has been available.
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* The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase assets and equity from financial institutions in order to strengthen its financial sector.
Europe
Eurozone real GDP in the first quarter of the year came in substantially weaker than expected at -2.5 percent quarter on quarter. Moreover, while not yet published by Eurostat, it is likely that the GDP growth rate in the fourth quarter of 2008 will be revised down by around 0.2 percentage points, suggesting that the true rate of change versus a year ago in the first quarter will have fallen around 4 percent 's a new record in post-war economic history.
Meanwhile, estimations show that nominal GDP fell by around 2.5 percent quarter on quarter, with the GDP deflator around flat quarter on quarter (and up 1.9 percent year on year). Whereas private consumption grew slightly in Germany and France (mainly on the back of a recovery in auto registrations), on average in other countries (particularly Spain) it probably decreased 's suggesting that for the eurozone as a whole this series will have fallen slightly in first quarter. It is also clear that investment, both residential and non-residential, fell very sharply in the first quarter, by around 3 percent quarter on quarter.
Meanwhile, the monthly trade data shows that export volumes have collapsed across the eurozone in the first quarter. This reflects both a collapse in demand in many crucial export markets for the eurozone, particularly the U.K. (where real GDP fell 4.1 percent year on year) and emerging Europe (where real GDP looks to have fallen nearly 6 percent year on year). Additionally, there has been a major collapse in import volumes, particularly in countries experiencing a major internal adjustment (such as Spain, down 26 percent year on year in February). Overall, net exports in the euro area as a whole probably subtracted 0.5~1.0 percentage points from the quarter on quarter GDP contraction (-2.5 percent).
Baltic Region and CIS
Last week, Estonia and Latvia announced preliminary first quarter GDP numbers. It is hard to imagine the numbers could be worse. The decrease in Estonia was -15.6 percent year on year and -18 percent in Latvia. Both saw GDP declines in the fourth quarter of last year of 10 percent year on year. Lithuanian GDP data will be announced on May 28, and should look similar. Western analysts anticipate that all three Baltic states will see GDP contractions for the year as a whole of -10 to -12 percent, while for small economies, the combined 2008 GDP was two-thirds the size of Hungary's.
Analysts also think that in terms of identifying substantial regional risks, the Baltics will remain a focus. They find that with the Baltic states' currency boards and extremely high and well-documented leverage, the process of adjustment within the pegs involves a brutal recession and deflation. Engineering this will remain very difficult. Currency pegs don't seem to be abandoned soon, as balance sheet damage would be greater than the benefits of currency weakness at this time, but the dire situation of the economies may require this at some stage.
Trading partners, Poland and Russia, for example, have seen a large increase in exports to Lithuania, where the trade balance has indeed deteriorated recently 's unlike in many other countries in the region.
Written using materials from Bloomberg and Reuters
