While equities worldwide fell and government bond yields rose, economic news last week was positive and seemingly on track with forecasts of positive growth in the third quarter in most major economies. After a weak payroll number in the U.S. on July 10, jobless claims fell more than expected, suggesting that last week's release does not put the return to growth at risk. Ward's Automotive Group schedules are one of the best indicators of near-term motor vehicle production.
Last week, Ward's released new estimates for the next few months, and they are consistent with the view that production will surge in the third quarter of the year. Assemblies are estimated to have plunged to 3.87 million units in June, the lowest level in decades. In part, this was due to the effects of the bankruptcies of GM and Chrysler, but also to the effort by the industry as a whole to clear inventories.
This effort is working 's it was estimated that in the second quarter motor vehicle inventories fell at a record pace. With inventories plunging and the "cash for clunkers" legislation likely to provide a sales boost, motor vehicle production is set to surge. Assemblies are expected to reach a seasonally adjusted annualized pace of 6.30 million in July, a 62.7 percent increase over June and the largest month on month gain in decades.
During the past week, the eurozone finally managed to print some positive news, with May industrial production data from Germany, France and Italy all coming in stronger than the consensus forecasts. Further positives were apparent in the German new orders data and French trade figures for May this week. Nonetheless, weakness in other countries, notably Spain, is dragging down eurozone industrial production as a whole; indeed, taking into account also the weakness in April, it still seems that euro area IP will fall about 2.2 percent quarter on quarter (not annualized) for the second quarter, consistent with the expectation of -0.5 percent quarter on quarter for real GDP and following the -7.6 percent quarter on quarter in the first quarter.
Considering this, the apparent stabilization in IP in May ought to mean that, unless there are further setbacks, it should be relatively easy to achieve a positive gain in euro area IP in the third quarter, setting the stage for a positive real GDP print. Indeed, recent German data continue to suggest that German second quarter GDP will be virtually flat against the first quarter. However, eurozone real GDP was much weaker in the first quarter than it was expected in January, when analysts forecast that it would slide 0.3 percent quarter on quarter in the first quarter, followed by -0.4 percent quarter on quarter in the second. While the second quarter estimate still looks OK, it fell 2.5 percent quarter on quarter in the first quarter, much worse than should have happened according to forecasts.
Of the -2.2 percentage point shortfall in first quarter GDP, there are four factors at work: private consumption (which explains 0.4 percentage points), net exports (0.6 percentage points), investment (0.5 percentage points), and the change in inventories (0.6 percentage points).
Central and Eastern Europe
May industrial production (IP) continued to decline (Hungary -22.1 percent, Romania -9.8 percent year on year), supporting the notion of a slow recovery in emerging Europe. However, surprisingly strong German IP data for May provided a silver lining, given the region's reliance on demand from German industry. CPI inflation continues to moderate throughout the region, including the Czech Republic and Russia. Czech inflation recorded 1.2 percent year on year in May, the lowest since December 2003. Food prices continued to drive headline inflation down, but it seems that the scope for further drops is rather small.
Russian CPI inflation also continues to moderate, to 11.9 percent year on year in June from 12.3 percent year on year in May, mainly due to deceleration in fruit and vegetable prices caused by contracting private consumption, and further cuts in the refinancing rate are expected. The IMF completed its mission in Ukraine on the second review and recommended the release of the third tranche 's totaling about $3.3 billion 's of its $16.5 billion funding program.
The tranche will be released by approximately mid-August. The IMF revised its program performance criteria, increasing the budget deficit target to 6 percent of GDP from 4 percent of GDP (excluding bank recapitalization). It also downgraded Ukraine's GDP forecast to -14 percent from -8 percent for 2009. These developments suggest a high likelihood of meeting Ukrainian sovereign debt obligations in 2009.
***Written using materials from Bloomberg and Reuters Research