USA
Data from the sectors leading the recovery, manufacturing and housing, continue to come in strong. Manufacturing production is up at a 6.9 percent annualized pace in the three months ending August, and not just because of motor vehicles; manufacturing production ex-motor vehicles is also up at a healthy pace. While single-family housing starts and permits paused in August, on a 3m/3m annualized basis they are rising at the fastest pace since the early 1980s. Recent data have led analysts to raise the forecast of annualized residential investment spending growth to 20.0 percent in Q3 09. More generally, the incoming data suggest a firmer path of final sales and greater inventory liquidation in Q3 09, suggesting more of a production rebound over the next few quarters. Some investment banks are revising their U.S. GDP again and expect growth to pick up to 5.0 percent in Q1 10 before settling in to a more sustainable, but still above-trend, pace.
Euro zone
During the past week there have been a number of encouraging signs that the euro area growth recovery remains on track. Most significantly, the euro area trade surplus (sa) in July widened to its highest level since May 2004, spurred by a 4.1 percent m/m increase in exports. With this, the net export contribution to Q3 q/q GDP could conceivably double the 0.3pp. This upside risk from net exports more than counterbalances the downside news from this week's euro area July construction data, which is consistent with a slightly larger contraction in Q3. Meanwhile, the July euro area industrial production (IP) data might appear more ambiguous, with the July level 0.2 percent below the Q2 average. Last week also brought confirmation that a progressive normalization in euro area inflation is underway. After a trough of -0.7 percent y/y in July, last week's unrevised August outturn of -0.2 percent y/y represents the first uptick in inflation since February. Despite the potential for a modest downward movement in September, analysts expect the nascent upwards trend to continue until Q2 next year, primarily led by an increase in energy price inflation.
Central and Eastern Europe
The past week saw Russia cut its key interest rate, but taking into account the divergence in the strength of the economic upturn and inflation risks this move was more cautious than that of other EMEA countries. The central bank cut the refinancing rate to 10.50 percent, from 10.75 percent, and further rate cuts cannot be ruled out on the back of expectation for a gradual disinflationary trend. Some analysts in Russia think that the central bank could cut the refinancing rate a cumulative 100bp this year, taking the policy rate to a terminal 9.5 percent by year-end. The Czech Republic, like some other countries in Eastern Europe, is going through quite a moderate recovery. Recent cyclical data have been weak, and the leading indicators suggest more caution. This could be due to the reliance on the euro area and the flagging support from the German car subsidy plan. Either way, the rate policy meeting this Thursday is likely to leave rates on hold (at 1.25 percent) with a small risk of a final cut. Fiscal slippage and political uncertainty are probably, at this juncture, factors arguing for the rate to be kept intact.
Written using materials from Bloomberg and Reuters Research
