Top 5 Economics Graphs of the Week - 4 Sep 2010

This week we look at some particularly strong second quarter GDP numbers out from emerging markets Brazil and India, as well as one lucky developed market, Australia. Then we review the PMI results from the two biggest economies; China and the US.

1. Brazil GDP
The Brazilian economy saw further signs of strength in Q2, reporting 8.8% growth year on year, compared to estimates of 7.9% and a similarly strong 9% in Q1. But with unemployment at record lows, there have been increasing concerns about overheating; especially going into next year. The Banco Central do Brasil has already increased the selic rate a few times this year to 10.75% as well as raising the required reserve ratios. The government expects the economy to grow at least 7% this year. Asset bubbles and overheating aside; it's clear where the growth is coming from in the recovery from the post GFC recession.


2. India GDP
Another one of the BRIC economies to report on Q2 GDP this week was India, who also reported 8.8% growth year on year; compared to 8.6% in Q1. In spite of concerns about data integrity around a revision of the demand component to 10% from 3.7% (with no change in the headline 8.8% figure). The strong points were manufacturing (up 12.4%), services (up 9.7%) and construction (up 8.9%). In terms of the outlook, the monsoon season has been relatively normal so far (a key determinant of output from the agricultural sector - and of course food prices), there may also be potential benefits from helping Pakistan rebuild after the floods. But as with Brazil, with great growth comes the potential for great inflation; and the RBI has already lifted rates and reserve ratios this year.


3. Australia GDP
Australia saw further strength in its economy in Q2 this year, with the economy growing 1.2% q/q vs consensus 0.9% and 3.3% y/y vs consensus estimates for 2.8% growth. The pick up in growth was driven by a 5.6% rise in export volumes, largely due to mining exports. The consensus view on the outlook for the Australian economy is increasingly for an investment boom, with the RBA being the most aggressive of the G20 nations in raising interest rates (which now sit at 4.50%). But of course the outlook for interest rates and the Australian economy will be very much dependent on the global economy; particularly the EU and US, where concerns peaked around the Greek debt situation and potential for a US economic double-dip.


4. China PMI
China reported improvement in the manufacturing sector during August, with the official CFLP PMI rising to 51.7 from 51.2 (consensus 51.5), and the HSBC/Markit PMI rising to 51.9 from 49.4. The data point to the possibility that the recent slowdown is only a temporary one, and with the government having recently tightening lending conditions, there is plenty of room to maneuver if additional stimulus is required. Also out this week was the HSBC/Markit services sector PMI, which rose to 57.6 from 56.3 (the services sector accounted for 43.4% of China's output last year). So for now it seems the outlook is relatively positive; confirming the growing economic clout of the so-called BRIC economies. But as with the results we saw earlier (Brazil, and India) the threat of a resurgence in inflation is still a credible threat in spite of policy tightening.


5. US PMI
The PMI results for the US were also out this week and also showed an upwards blip; rising to 56.3 from 55.5, against consensus 53. However much of the lift in the main index was due to more lagging indicators such as production and employment; new orders dropped slightly, and prices rose, with exports falling and imports rising. The non-manufacturing index was also out, which fell to 51.5 from 54.3 in July, below consensus 53. The new orders index fell 4.3 points, as did export orders, production, and employment. So not such a great outcome. Also out this week was the payrolls data, showing an expansion in private payrolls, but a contraction in overall nonfarm payrolls, wages rose slightly. The strength in private payrolls is promising, but the numbers are still not great, so again, for the US it's the muddle ages.



Summary

We saw a continuation of the strengthening rebound of the Brazilian and Indian economies, confirming views on the global economy being driven by strength in emerging markets. We also saw continued strength in the Australian economy, which is set to continue its mining boom driven surge; but as with the strong emerging markets, inflation is a growing threat. The results are largely consistent with the idea of a 3-tiered economic recovery.

In China we saw improvement in both of the manufacturing PMI data, with some strength in new orders, and strength also showing through in the non-manufacturing sector. The data point to the possibility of the recent slowdown being temporary, and lines up with the results from the other big emerging markets, with the theme being strong growth - but potential for overheating.

Finally we saw some positives, but nothing particularly great in the US data this week. Aside from the promise of further stimulus measures coming next week, the scenario seems to be the muddle ages of the recovery. But one question on the US economic outlook front will be to what extent it may eventually gain from the growing strength in the large emerging market economies like India, China, and Brazil?

Sources
1. Trading Economics www.tradingeconomics.com
2. Trading Economics www.tradingeconomics.com
3. Australian Bureau of Statistics www.abs.gov.au
4. Yahoo Finance finance.yahoo.com & CFLP www.chinawuliu.com.cn & Markit/HSBC www.markiteconomics.com
5. Yahoo Finance finance.yahoo.com & Institute for Supply Management www.ism.ws

Article Source: http://www.econgrapher.com/top5graphs4sep.html

3 Tiered Economic Recovery: a Stock Index Survey

Is there a 3 tiered global economic recovery under way? And how might stock market performance look?

The other day I noted in a comment on seeking alpha (an extension of ideas in the latest top 5 graphs article) the possibility for the existence of a 3-tiered global economic recovery. The basic idea is that there are 3 tiers in this recovery, with emerging markets leading (and developing economies following):

1. Emerging Markets
2. Lucky Developed Economies
3. Unlucky Developed Economies

Basically this is simplifying the notion of an uneven recovery down to 3 categories (also could be called fast, medium, and slow). The lucky/unlucky comment is a bit facetious, but it refers to the divergence in prospects between developed economies such as Australia, South Korea, Poland, Canada, and New Zealand; and the older developed economies such as most of Europe, the UK, US, and Japan. While the first tier contains most emerging markets.

This divergence is driven by a number of factors such as existing and new vulnerabilities created by fiscal positions and government borrowing. But it also refers to factors (the lucky part) such as a fundamentally strong economy, and benefit from recovering commodity prices, and to a lesser extent global trade volumes.

Of course there are risks to all 3 tiers, and you only need to look at 2008 to see how correlated things can get, but I reckon the 3 tiers accurately captures the way the recovery will unfold for the various economies: fast growth, average growth, and low growth (or stagnation).

Stock Market Returns
So enough hypothesizing and proselytizing, let's do as the article title suggested; survey the stock market returns of the supposed 3-tiers. First up is Tier 1 - Emerging Markets; the category which is mostly to see the highest growth rate... The Chart below shows (with ETFs used as proxies where I couldn't find index data) tier 1 has been clocking up some pretty high annual returns (chart shows year on year % change on a weekly basis). But of course it's matched with higher volatility. Note the correlations in the past 2 years.


Next up is tier 2. The first thing to note is that returns are generally lower over the past 5 years than tier 1, another notable point is the higher correlation across the period vs tier 1. The generally lower returns relative to tier 1 will in part reflect the dichotomy of growth prospects (or potential growth rate).


Last but not least is the tier 3 economies, the unlucky ones. The bounce back has been and gone by a quick glimpse at the chart below, and the fundamentals tend to support that notion. Within this group there are those such as Japan and the EU, who may be more vulnerable with greater structural issues to deal with; especially in terms of fiscal positions. Also note that returns are generally lower than both tier 1 and 2; reflecting lower yet potential growth rates.


So what? So we can make a few generalizations like tier 1 generally had higher returns and higher volatility, and generally lower correlations prior to the crisis. But once the crisis hit all markets started behaving pretty similarly (to state the obvious). But there are some clues emerging e.g. looking at the tier 1 and 2 charts you can see the beginnings of a decline in correlations, with each market starting to move slightly different to the rest (in contrast to tier3).

So if I were to pick where things might go, I'd say tier 3 markets will generally show low performance in line with low growth prospects, and possibly lower correlations. Tier 1 will likely show the highest returns, but retain its characteristic volatility; and the past will probably look somewhat like the future in that respect. Tier 2, though, may present a more balanced mix of volatility and returns, tier 2 has reasonable growth prospects, and most tier 2 markets possess the desirable traits of developed economies i.e. good legal system, rule of law, democracy, stability, investor protections, etc. In any event this supposed 3-tier recovery concept will be an interesting one to think about as the fragile, gradual, and uneven global recovery unfolds...

Sources
Econ Grapher Analytics www.econgrapher.com
Yahoo Finance (Historical Index Levels) finance.yahoo.com

Article Source: http://www.econgrapher.com/7june-3tieredrecovery.html