Daily Economic Briefing: April 12, 2010

Daily Economic Briefing: April 12, 2010

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• Euro area finance ministers agreed on an initial support package for Greece totaling €30 billion at a below-market rate that would have been about 5% as of Friday. These funds would give Greece an opportunity to achieve debt sustainability away from the recent stress of financial markets, but this will require turning a primary deficit of nearly 8% of GDP into a surplus. Other Euro area countries that need to undergo very large fiscal adjustments in order to achieve debt sustainability include Spain (whose primary deficit was 9.5% of GDP in 2009), Portugal (6.4% deficit) and Ireland (9.6% deficit).

• Minutes from the BoJ’s March 16/17 meeting reveal a change in the MPC’s reaction function. In the past, members decided to ease policy only when they judged that economic or deflationary conditions had worsened. They changed tack in March, deciding that it would be advantageous to ease policy even though they thought conditions were improving. With the political pressure on the BoJ to do more to fight deflation remaining very high—witness the unplanned meeting between PM Hatoyama and the BoJ’s Shirakawa last Friday—it seems increasingly likely that the BoJ will announce new unconventional easing measures in the next few months.

• China confirmed that its trade balance temporarily dipped into deficit in March. Huge swings in the trade balance are common in the early part of the year, reflecting disruptions in trade flows related to the Lunar New Year holidays. That said, there is more at work here than volatility. China’s surplus is roughly one-half what it used to be prior to the recession, which is what allowed a big monthly swing to produce a deficit. The halving of China’s trade surplus since 2008 is an extreme example of large shifts in trade positions across the globe in the past few years, in which countries that were running surpluses (e.g., China, Japan, Germany) saw them fall during the recession, and vice versa (e.g. US, UK). This cyclical rebalancing served as a stabilizing force.

• Today’s reports also show that the growth of China’s money supply and bank lending is slowing. None theless, the value of new loans extended in 1Q (i.e, the flow of lending vs the stock) was about one-third of the government’s target for 2010. All told, these data suggest that although official efforts to temper loan growth are having some effect, there is a need for more action. To this end, we look for the authorities to begin hiking interest rates this month (or May, at the latest), combined with additional increases in banks’ RRR and further restrictions on bank lending.
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Global auto sales hit a new all-time high in March, based on our global proxy derived from 20 countries plus the Euro area. After collapsing in 2008 and hitting bottom around the turn into 2009, auto sales zoomed in the 1H09, helped by auto incentives in many of the major markets around the globe. Global auto sales regained their pre-recession peak last year and have settled into a pace of about 53-54mn units saar since October, posting 54.3 mn units in March—3mn units above the pre-recession 2007 average pace.

In recent months, we have warned against reading too much into the elevated auto sales pace, highlighting the risk that the pending expiry of sales incentives may have temporarily pulled demand forward. While incentives are still in place in several countries, with each month that passes without a relapse, we gain confidence that global auto sales have settled back into their pre-recession trend pace, or perhaps higher.

In March, the US market posted a healthy month-on-month gain, adding 1.5 million units to February’s pace to hit 11.8 million. This is the highest monthly total since September 2008, excluding August 2009’s CARS-driven surge. However, US sales are still well below their pre-recession pace of 16mn units in 2007. Euro area auto sales also rose in March, up 0.4 million more units to 10.7 million. Growth was strongest in France and Spain, while German sales fell for the ninth straight month. Meanwhile sales contracted slightly in Japan and the UK, slipping 0.1 million units in both countries.

In the EM, China’s explosive growth is the biggest factor behind the group’s 45% year-on-year gain. But other countries’ sales also continue to rise briskly. The large increase seen in Brazil this month can be explained mostly by the expiration of auto incentive programs. Still, even ignoring the one month pop, the swifter underlying sales pace there is clear, as it is in the EM more broadly. Even excluding China, EM sales in March were 35% higher than their level at the start of 2007. For comparison, US sales are 28% lower over the same time period. The rest of the DM has fared better than the US, though sales there still remain 7% lower than their pace in January 2007. This context makes China’s expansion seem all the more impressive.

ENDS

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