After a long run of positive surprises, data in the last several weeks has been disappointing. Regional purchasing managers' indexes continue to improve, but the latest readings on retail sales, housing starts, and jobless claims have all been unexpectedly weak. Even the seeming improvement in payrolls was less than meets the eye: they fell "only" 539,000 in April, but about 60,000 of the jobs were temporary government hires for the decennial census. The deepest phase of the recession is over, but the economy is still contracting.
The housing data have shifted from painting a picture of freefall to showing rays of hope. Indeed, it seems that an inflection point has been reached in the housing recession that is the start of a multi-stage turn in different parts of the market. If the historic sequence preserves, first, home sales will stabilize; second, construction will level off; and third, home prices will bottom. The drop in housing demand is starting to slow and that home sales are at or very close to a bottom. However, the lowest point in home prices is not foreseeable until the second half of next year. The bankruptcy of Chrysler and restructuring of GM should generate weak macro data over the next two months.
This should obscure an otherwise improving trend. The recent string of disappointing data has prompted skepticism about the strength of the potential recovery in the US economy. The forthcoming data may add to these concerns as the disruptions in the auto sector depress production and boost unemployment.
The latest 'flash' PMI (Purchasing Managers' Index) data provides some further evidence that the euro area economy is gradually moving out of severe recession. That said, it is still too early to proclaim that the recovery has started here. However, there are several factors that lead to have somewhat more confidence that the euro area economy ought to witness some recovery during 2010, and possibly during H2 09. In particular, the 'flash' composite PMI reading continues to move higher, rising from 41.1 in April to 43.9 in the 'flash' May reading. While the trend is encouraging, it is still a long way below 49.0, the level considered consistent with flat GDP.
As a consequence, euro area real GDP in Q2 seems to show some contraction, with Germany about flat. Based on industry-level data from Germany, it is possible to estimate that output of road vehicles (which have a 10.1 percent weight in German IP) rose around 4 percent month on month in April, although steel production (which has a 1.7 percent weight) looks to have been roughly flat (after workday adjustment), while various other industrial sectors probably contracted. However, the euro area economy still faces several challenges. First, the adjustment in construction investment is far from over. For example, Spanish Q1 GDP data released last week showed that the ratio of construction investment to GDP had remained elevated at 15.5 percent.
While down from the peak of 18.2 percent recorded in 2007, this ratio is still well above the level of around 10 percent that is common in most advanced economies (and in the US the ratio, by comparison was 8.4 percent in Q1). Ireland is also a country needing substantial further domestic adjustment. Second, there is the risk that the improvement in sentiment does not come quickly enough to stave off a major labor force shake-out later this year. In Germany and France companies have tended to hoard labor, helped by government support. Given the severe contraction in real GDP, this has led to ultra-negative rates of labor productivity: for example, French GDP divided by employment fell by a record 2.5 percent year on year in Q1 09, while German productivity fell by 7.0 percent year on year.
Baltic Region and CIS
Russia's Gold and FX reserves grew by $6.1 billion during the last week and amounted to $391.3 billion. Well actually this happened: CBR bought around $7 billlon in interventions preventing the ruble from sharper strengthening, $4 billion came from revaluation of exchange rates (growth of EUR and GBP versus USD) on the global currency market, but currency denominated C/As in Russian Central Bank(RCB) (fell to around $18 billion by mid-May, according to Ulyukaev (Head of RCB)) decreased which resulted in more moderate increase of reserves. In addition, Ulyukaev said on new measures to support banks. It is supposed to allow banks to get refinancing from the RCB collateralized by mortgages and gold.
Details on types and quality of mortgage portfolios will be disclosed later. As for the gold, this will support primarily state-owned banks, Sberbank and VTB that are the biggest players in Russia on this instrument. The State also plans to issue 30 billion rubles loan to Russian Development Bank, from which 20 billion rubles will go to refinance loans issued to small and medium businesses, and 10 billion rubles will go to capital.
Written using materials from Bloomberg and Reuters Research