Economic indicators on growth turned much more mixed last week following a spell of consistently upbeat economic reports. For example, details of the August durables report posted downside surprises for inventories and core capital goods shipments, leaving the tracking estimate of current quarter real GDP growth a little below the current 4.0 percent forecast. More generally, August reports show that the recent trends of strong increases in new and existing home sales and durable goods orders were interrupted in August. New home sales edged up only 0.7 percent following gains of 23.5 percent (not annualized) over the prior 3 months, and existing home sales declined 2.7 percent following gains of 12.5 percent over the prior 3 months. Similarly, core durable goods orders declined in August 0.3 percent following gains of 3.1 percent in the prior 3 months. The durables report, in particular, looks like a temporary pause in a sustained upturn.
The Euro area flash PMI (Purchasing Managers Index) rose only slightly in September. A strong increase in France was offset by a weaker reading in Germany, leaving the overall composite PMI up only 0.4pts. Most likely, the disappointment reflects a temporary pause after the record increases in August, especially in Germany, rather than significant concerns about the strength of the cyclical uplift in the region. Further gains in the surveys are likely in the coming months as the forward looking aspects remain firm. For example, in Germany, the new orders to inventory ratio in the PMI remains extremely high and the IFO business expectations index has almost recovered to the post-1991 average. In addition to the forward-looking aspects of the surveys, last week's rise in industrial orders is also sending a positive signal. The July level is 22 percent saar (seasonally adjusted annual rate) above the second quarter average, while the level of exports is 18 percent higher. Both developments should eventually support IP. But, it is important to recognize that at this stage, there remains downside risk to the forecast of 3 percent q/q saar growth in 3Q.
Central and Eastern Europe
Fearing a widening of the fiscal deficit to above 7 percent of GDP next year, the Czech Parliament's lower house approved a package of fiscal measures consisting of indirect tax hikes, wage cuts in the public sector, freezing of pensions, and a wide range of small spending cuts. Approval of an austerity package became possible once the idea of early elections was abandoned by politicians after the decision of the Constitutional Court earlier this month. This was good news for the Czech economy and markets'sfailure to approve a package might have resulted in a fall of the temporary government, which would have been negative for markets. The budget for next year now expects a gap of 5.2 percent of GDP.
The fiscal changes, if approved by the Senate and signed by the President, will slow the recovery next year. The upcoming week will bring three meetings of central banks following this week's decision by the Czech central bank (CNB) to keep its key rate on hold, confirming the view that the easing cycle is over. Analysts expect the National Bank of Hungary (NBH) and the National Bank of Romania (NBR) to continue to lower policy rates, cutting them by 50bp while the Polish central bank (NBP) keeps its rate unchanged. Hungary and Romania were hit harder by the global crisis than Poland or the Czech Republic, partially due to their high exposure to FX borrowing.
*** Written using materials from Bloomberg, Reuters, and Barclays Capital Economics Research