US corporations have been unusually aggressive in their cost cutting in this cycle, in terms of cutbacks in investment spending and employment. As the financial crisis intensified, businesses switched to survival mode, and slashed discretionary spending. The cuts in investment spending made the recession worse, but also helped generate positive profit growth, even before the recession ended. The weakness of last week's September employment report indicates that this mode of cost cutting remains in place, as employers continue to cut workers at a substantial pace even as economic growth has turned significantly positive. Analysts believe the corporate sector will restore some of this investment spending and employment as profits improve.
Last week's euro area unemployment data for August are the latest in a series of reports that show the deterioration in labor market conditions has moderated in recent months. Although the unemployment level has continued to climb, the average monthly increase in the first two months of Q3 eased to 165k, versus average (m/m) gains of 200k in Q2 and 433k in Q1. The primary source of that progressive slowdown has been in Spain, where increases in unemployment have now slowed to 57-87k m/m in the past five months, rather than the 185k m/m average monthly increase in the preceding five months. While unemployment in France has continued to increase steadily, averaging just over 50k m/m for the past year the increases in unemployment across a number of other euro area economies have been exceptionally modest. Indeed, German registered unemployment levels have actually fallen in the past three months.
Russia's manufacturing PMI came in at 52.0 in September (up from 49.6), strengthening the conviction that the recovery in Russia's industrial sector is underway and that output growth is likely to stay solid in the coming months. A small decline in IP in August seems to be a temporary setback owing to an unfavorable combination of a few one-offs. The output component of the PMI survey jumped from 51.6 to 55.2 in September, while new orders firmed from 51.4 to 53.6. The recovery in output volumes is being accompanied by slowing inventory drawdown: the stock of finished goods edged up from 42.1 to 45.4. Despite slower inventory cuts, the forward-looking orders-to-inventory ratio stayed near its long-term average, implying further healthy production gains to come. Even more impressive was a jump in the employment component of the manufacturing PMI from 45.4 to 49.3, which should have positive repercussions for the broader economy. Consistent with solid growth in output, capacity utilization in Russian industry increased from 55 percent to 57 percent in September, according to Rosstat.
Comments from IMF managing director Strauss-Kahn suggest Ukraine will need to push harder on meeting the IMF performance criteria before the next loan's disbursement. Strauss-Kahn said that IMF loans do not solve Ukraine's problems and that Ukraine's goals should be to solve fiscal problems, overcome economic imbalances, and improves management. The review for the next IMF loan is in mid-October and the risks are growing that the loan disbursement (scheduled for mid November) will be delayed.
The government of Kazakhstan is taking an encouragingly cautious approach to planning for 2010. The draft 2010-12 budget presented to the majilis (parliament) this month projects 2.4percent GDP growth next year, and is based on a benchmark Brent crude price of $50/bbl (rising to $60 in 2011-12). On this basis, the government projects a budget deficit of 4.1 percent of GDP in 2010. The National Oil Fund is scheduled to make a KZT1 trillion transfer to the budget, but to receive KZT1.371 trillion in inflows, which would take the National Oil Fund up to around US$28.5 billion.
â€¢ Written using materials from Bloomberg and Reuters Research