Incoming data have generally been in line with the view that economic growth is turning positive in Q3 09. Last week's data showed a jump in new home sales in June and a smaller than-expected 1.0 percent decline in real GDP in Q2 09. Although consumer spending fell a bit more than expected, a record decline in inventories, together with a notable improvement in overall final sales compared with the past few quarters, sets the stage for the rebound in production that is expected in Q3 09. One of the trickier series to interpret of late has been initial jobless claims.
The 4-week average of initial claims has fallen about 100k since its peak in early April. However, the significance of the very recent move lower is difficult to judge, because it has coincided with the annual auto plant shutdowns at unionized factories (which are those operated by GM, Ford, and Chrysler). These shutdowns have not been happening in the weeks that the seasonal factors have expected, leading to noisy data from week to week.
The ongoing drop in claims is important because it is the pattern that occurs as the economy shifts from contraction to growth, a transition that is believed to be happening now. Many analysts think that this pattern of marked improvement will show through in a number of July data releases. Analysts also expect a surge in motor vehicle production to help lead to a strong gain in industrial production, a series that has fallen throughout the recession.
Data published during the past week point to a significant improvement in confidence within the euro area banking sector. The June M3 release revealed a sharp jump (132 billion euros, seasonally adjusted) in euro area MFI's (Monitory Financial Institutions) holdings of domestic assets. Admittedly, the bulk of this resulted from a significant expansion in government bonds (up 53 billion euros) and loans to government (19 billion euros), but the data also showed an increase (26 billion euros) in loans to the private sector, of 13 billion euros in corporate bonds and of 27 billion in equities.
The June M3 release therefore signals that banks are utilizing the exceptionally generous liquidity on offer from the ECB. The data provide evidence that, via the public and private sectors, the various support measures in place at government and central bank levels are helping to support economic stabilization. This is also borne out by the latest survey of euro area bank loan officers. While the July survey reveals that banks have continued to tighten credit, it also suggests that the pace of tightening has moderated substantially further, and is expected to continue to moderate. The survey also recorded signs of a less-negative trend in bank loan demand, especially in Germany and France, and evidence that banks are feeling less constrained by financial market conditions.
Central and Eastern Europe
The start of the month brings the next set of PMI (Purchasing Managers Index) data for countries in the euro area and EMEA (Czech Republic, Hungary, Turkey, Russia). The region's PMI has been trending higher in tandem with the international trend, supported by rising global equity prices and increased access to international capital markets. However, the pickup in PMI marks a moderation in the pace of industrial production and GDP deterioration rather than a return to growth. Moreover, as the PMI moves towards the threshold of expansion (50), it will be marked by increasing differentiation. Within EMEA, Israel and Turkey probably have the greatest prospects for recovery; their PMI 's unique in the region 's have already moved above 50 in recent months.
Elsewhere, the recovery is likely to remain difficult, with the private sector debt overhang, banking sector problems and, in some countries, fiscal financing challenges continuing to weigh. The past few weeks has seen evidence of this in some very weak macroeconomic numbers. Lithuanian Q2 GDP contracted 22 percent y/y, and the flash estimates of Q2 GDP for Estonia, Latvia and Hungary (which echoes some of the leverage problems of the Baltic States) are expected to be at least as weak as Q1 GDP results. Hungarian, Romanian and Kazakh industrial production data will also be released this week and only Kazakhstan is likely to deliver the lone positive y/y result.
The trends on the foreign trade balances suggest that despite the PMI rebound, external demand is not providing a big pull for recovery. In May, on average, exports and imports (Central Europe, Russia) were still contracting about 33 percent y/y, and the evidence for June of a recovery is at best mixed.
â€¢ Written using materials from Bloomberg and Reuters Research