The incoming data during the last week was decisively reinforcing the view that the US recession ended in June and that the recovery began in July. These include the move up in the ISM manufacturing production index to 57.9 in July, the ongoing drop in initial jobless claims even after the noise associated with the seasonal auto shutdowns, the smallest drop in payroll employment in nearly a year in July along with a 0.4 percent rise in manufacturing hours worked 's the first gain since November 2007. In fact, last week the consensus of analysts' opinions on Q3 09 real GDP forecast was revised up to 3.5 percent, from 2.5 percent. July light vehicle sales rose 16 percent m/m, to an annualized 11.2 million, and this is likely to lead to a substantial rise in July real consumer spending.
Data published during the past week signal tentative improvement in the euro area economy and illustrate the growing "North-South" division. German manufacturing output was unchanged in June, remarkable given that in May the increase was 5.2 percent m/m. Hence, for Q2 manufacturing output was down 'just' 0.5 percent q/q (not annualized), after -13.9 percent q/q in Q1, which has led analysts to increase the German Q2 GDP estimate (due next Thursday) from -0.1 percent q/q to flat. However, Italian GDP came in at -0.5 percent q/q, with industrial output having fallen 3.9 percent q/q (after -9.7 percent q/q in Q1). Spanish Q2 GDP looks to have declined about 1.0 percent q/q, with industrial output down 2.7 percent q/q (after -6.2 percent in Q1). Putting it together, many analysts continue to look for euro area "flash" Q2 GDP (Thursday) to have declined about 0.4 percent q/q.
Central and Eastern Europe
Last week's data has further highlighted that the global turn in growth cannot entirely bypass even the battered EMEA region. July PMI data showed further improvements. While Turkey leads the pack with PMI above 50 for the third month in a row and rising (now at 54), even Hungary's PMI rose to close to neutral (48.4) and Russia and Czech also showed further improvements (at 48.4 and 43.4, respectively). Also, last week's July trade data for Czech Republic and Hungary was better than expected as was IP / industrial sales data in Hungary and Romania. However, the release of Q2 GDP data in a number of countries in emerging Europe (Latvia, Estonia, Czech Republic, Hungary, Slovakia,) will also be a reminder of how bad things were in the first two quarters. Lithuania's flash estimate for Q2 GDP growth of -22 percent, following -13 percent in Q1, was a reminder of how severe the shock is in some of the most exposed economies in the region.
This was also stressed by the Czech central bank when it revised down its annual GDP forecast for 2009 to -4.7 percent (from -3.3 percent previously): the revision reflected mainly a base effect from the weak GDP in the first half, whereas q/q growth would become positive in Q3. That said, the very open Czech economy may not be representative for other countries in the region. In the Baltics and in Hungary, higher household debt (in FX), deeper banking sector problems, pro-cyclical fiscal policies and, in the case of the Baltics, no support from currency depreciation, may likely protract a recovery.
â€¢ Written using materials from Bloomberg and Reuters Research