Daily Economic Briefing: March 23, 2010

Daily Economic Briefing: March 23, 2010

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Page 1 of 2: Global data summary

• The first two business surveys to be released by Euro area countries for March were positive. The French INSEE survey and Belgium’s BNB survey posted solid gains that lifted their headline indexes to the highest level since August 2008. Tomorrow brings the German IFO survey, along with our preferred activity barometer, the Euro area flash PMI.
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• The politics remain very fluid in advance of the EU summit. Media accounts indicate that Germany has set three conditions for supporting EU assistance: (i) aid will be offered only as a last resort if Greece cannot raise funds on its own; (ii) the IMF must provide aid alongside EU members; (iii) enforcement of the stability and growth pact governing fiscal policy must be enhanced.
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• US existing home sales were little changed in February, which is a better outcome than the decline suggested by pending home sales data. That said, sales have fully retraced the jump triggered by last year’s tax credit and, disappointingly, have yet to show a positive response to the credit’s recent renewal.
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• Taiwan’s IP continued to surge in February, rising 2.8%m/m (sa), powered by the electronics sector (growing almost 80% on a 3m/3m, saar basis). Our initial impression is that the Lunar New Year holidays have had a less pronounced effect on EM Asian output and exports this year than usual; this certainly is true for Taiwan, where output boomed in both January (when it was expected to surge) and February (when it was expected to dip). Despite the V-shaped recovery in output, Taiwan’s manufacturing inventory is still reported to be drifting downward.
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• The latest communications from the BoJ (February minutes) and the ECB (Trichet parliamentary testimony) express confidence that inflation expectations will remain well-anchored. Our analysis indicates that inflation expectations already had fallen below zero in Japan before the recession, so it surprises us that the BoJ is not extremely worried about this possibility with the core rate (ex food and energy) having since fallen to -1.2%oya. President Trichet’s testimony did not express any concern about the prospect that inflation expectations could shift downward, even though the core rate already has fallen to 0.8%oya, the output gap is very large, and the economy is barely growing.
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Page 2 of 2: Taking stock of the recovery to date

The 2008/09 recession has left many economies in a deep hole. The accompanying tables and charts take stock of where real GDP stands relative to pre-recession levels and provides a rough estimate of the current output gap:

• Global GDP fell 4% from its peak and resumed expanding in 2Q09. Based on our forecast for continued above-trend growth, GDP would surpass its previous peak in 3Q10, though the output gap will remain considerable.
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• The decline in US GDP was surprisingly moderate considering its central role in the global downturn. US GDP fell 4% peak-to-trough, compared to 5% in the Euro area and more than 8% in Japan. The smaller fall combined with stronger recent growth means that US GDP will likely fully recover its 2008 peak by 3Q10, more than a year before either other fellow G-3 economy.
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• There is a distinct regional heirarchy in the EM economies. Asian GDP quickly recovered its losses and already is nearly 10% above its pre-recession peak. This robust bounceback is largely due to China, where GDP never even experienced a quarterly GDP decline. However, even excluding China, Asian growth has been very impressive, with output in nearly all countries in the region at new highs and at least slightly positive output gaps.
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• At the other end of the EM spectrum, it will still be another year before Emerging Europe regains its previous GDP peak. Latam lies between EM Asia and Europe, with Brazil booming and already above its previous GDP peak while Mexico won’t do the same until next year.
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ENDS

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