The weak September employment report followed a string of relatively disappointing data releases, prompting many to question the feasibility of strong growth over the next few quarters. While these data imply slightly softer growth in Q3, they certainly do not negate the outlook for a strong cyclical bounce in activity. The common argument from the bearish camp is that the July and August data were temporarily boosted by the Cash-for-Clunkers program, making it difficult to assess the true trend in activity.
However, a bullish party of analysts argue against this premise since industrial production and retail sales increased, even after netting out autos. Manufacturing production ex-autos rose by 0.6 percent in July and 0.4 percent in August. The September report, released on Friday, should show a small gain in manufacturing output ex-autos, which will still leave the data up 2.3 percent q/q saar in Q3, a notable shift from the 8.6 percent decline in Q2.
Recent industrial output data for the euro area have surprised significantly on the upside of the consensus. For July and August, they have risen strongly in the big three countries, which paves the way for strong real GDP expansion in the euro area. In particular, analysts continue to look for German GDP to have risen 0.9 percent q/q, France to have risen 0.7 percent and Spain to be about flat. Moreover, the big upside news for Italian industrial output in August, even though due to idiosyncratic seasonal adjustment, nonetheless implies that Italian Q3 GDP estimate will also be revised up significantly (from 0.2 percent q/q currently).
While the industrial output data are very encouraging, they may be somewhat overstating the recent improvement. They go further than the survey data are implying, and the trade data (including the latest French August data) suggest that activity may not be improving quite so fast on an underlying basis. While euro area exports to Asia have rebounded the most quickly, and in July were approaching the 2008 average, exports to other regions have overall been stagnant, particularly within Europe.
With growth recovery still in the nascent stage, there is little evidence of an inflationary impact yet. Last week's data indicates that inflation is still declining in Russia and Ukraine. Russian CPI inflation eased to 10.7 percent y/y on weak consumer demand. Given this trend, analysts expect the CBR to cut another 75bp this year and an additional 125bp next year (taking the policy rate from 10.0 percent to 8.0 percent). Inflation also eased in Ukraine (to 15 percent y/y from 15.3 percent y/y last month). Russian Finance minister Kudrin indicated over the weekend that Russia is in discussions with the World Bank (WB) over a loan of between USD2 - 4bn.
Analysts believe that a large WB loan would mean a smaller-than-planned drain on the reserves fund. This news together with the fact that oil continues to rise and global sentiment continues to improve signifies a beneficial positioning of Russian economy for the quarters to come. Unfortunately, this cannot be spread to Ukraine. 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.
Written using materials from Bloomberg and Reuters Research