Top 5 Graphs of the week - 10 July 2010

This week we look at the languishing US consumer credit figures, and the slowing non-manufacturing PMI, then examine the continued string of strong jobs growth in Australia, followed by a wrap-up of some of the key monetary policy decisions this week, and a review of the IMF World Economic Outlook update.

1. US Consumer Credit
Unsurprisingly, given the way much of the US data is pointing lately, the consumer credit figures dropped-off further in May, as deleveraging continued and consumer appetites for new lending remained cool. Consumer credit fell -$9.1 billion in May, vs expected -$2.0 billion, and a revised (down from positive $1 billion) -$14.9 billion. But in some ways a negative is a positive, sure in the short term it's not great, but it's a process that needs to continue, the US consumer needs to continue recovering; pay down debt after excessive borrowing, re-build balance sheets, and generally live within their means (which will be made even more difficult by potentially more constrained means in which to live!).

2. US Non-manufacturing PMI
Sticking with the theme of growing pessimism in the US (have you noticed all the articles being churned out on the next depression, the double dip, etc etc?) - whether it is warranted or not... The ISM non-manufacturing PMI or NMI, disappointed as well; falling to 53.9 from 55.4 (consensus 55). The employment sub-index fell back below 50 to 49.7, new orders slipped again to 54.4, and prices (similar to the manufacturing index) fell -6.8 to 53.8 - signaling a potential mismatch between supply and demand, and pointing to further slowing of inflation in the short term. The first half of this year has been easy for the US, the second half will be a little bit more difficult, and it's likely the W-shaped recovery will start seem more and more likely. But as noted in the previous chart; this has to be a structural recovery - not a cyclical one, and it's going to be hard.

3. Australian employment
Australia saw further jobs growth in June, adding 45.9k jobs vs an expected 15k, and building on the 22.8 added in May. This brings the total to 185k YTD, and 105k for the June quarter (-22.8k in Q2 2009). So overall a good outcome for the Australian economy, the strong labour market will likely underpin the economy as some of the stimulus measures start to run out (e.g. monetary policy tightening). It will also increase the case for further hikes of the interest rate as employment growth sees increasing rates of capacity utilisation. But as noted by the RBA in its recent monetary policy announcement, the Australian economy is basically fine at the moment - it's the global economy that will make or break the recovery from here.

4. Monetary Policy review
The week saw a few non-events on the monetary policy front with the BOE (Bank of England), ECB (European Central Bank), and RBA (Reserve Bank of Australia) holding each of their respective policy rates steady - as expected. But there was a couple of interesting moves in Asia; BNM (Bank Negara Malaysia) increased rates 25bps again to 2.75% as growth continued to surge. Likewise the BOK (Bank of Korea) increased rates for the first time in in 2 years, lifting the rate 25bps to 2.25%, having held at 2% for about 17 months. The actions are consistent with the view of a 3-tiered economic recovery; the fast growing emerging markets, the selected developed economies, and the languishing advanced economies.

5. IMF World Economic Outlook
Another key update out this week was the IMF's periodic update to its World Economic Outlook. The IMF updated its global growth forecasts, projecting the global economy to growth 4.5% in 2010, and 4.25% in 2011; representing an increase of about 0.50% in 2010 - reflecting stronger activity in the first half of the year. They rightly pointed out however that risks to the recovery "have risen sharply amid renewed financial turbulence", and that one of the key risks to the economic recovery - and to a more sustainable recovery is policy reform; the growth forecasts "hinge on implementation of policies to rebuild confidence and stability".

Summary

To provide a brief summary; US consumer confidence disappointed in May, adding to a string of disappointing US data, and adding to the case of further slowing. The non-manufacturing PMI did nothing to improve the outlook. And as noted the US economic recovery will need to be structural (because there just isn't the capacity for a cyclical recovery at the moment), so there will be a recovery - but it's going to be hard.

Meanwhile, Australia is cruising along (one of the tier-2 economies), adding jobs left right and center, and possibly adding to the case for a further increase or two of the interest rate. But as the RBA noted, while the economic recovery in Australia is relatively entrenched, it is very much exposed to the course of the global economy.

On the monetary policy front, the developed economies held as expected, but the faster growing Asian economies hiked rates, as the risks shifted to containing inflation over stimulating growth. And on that note, the IMF slightly lifted its global growth forecasts for 2010 in its update to the world economic outlook, but noted significant risks to the recovery.

Sources
1. US Federal Reserve www.federalreserve.gov
2. US Institute for Supply Management www.ism.ws
3. Australian Bureau of Statistics www.abs.gov.au
4. Bank of England www.bankofengland.co.uk ECB www.ecb.int Reserve Bank of Australia www.rba.gov.au Bank Negara Malaysia www.bnm.gov.my Bank of Korea www.bok.or.kr
5. International Monetary Fund www.imf.org

Article Source: http://www.econgrapher.com/top5graphs10jul.html

IMF: Recovery Is Stronger than Expected, but Speed Varies

The IMF just released its April 2010 World Economic Outlook; upgrading world output growth projections for 2010 to 4.2% and 4.3% for 2011 (up by about 1% since the 2009 report). The split shows emerging markets very much as the drivers of global growth with forecasts for 6.3% in 2010 and 6.5% in 2011; while the comparable figures for Advanced economies are 2.3% and 2.4% respectively:

"The global recovery has evolved better than expected, but in many economies the strength of the rebound has been moderate given the severity of the recession."

The IMF noted the great rebound in activity indicators; notably in accelerating world trade (a critical aspect for a sustainable recovery - but a risk area as protectionism rhetoric grows). The IMF has picked world trade to grow at 7% in 2010 and 6.1% in 2011 (having contracted -10.7% in 2009):

"Global activity has rebounded, as evidenced by accelerating world trade, industrial production, and retail sales. Employment continues to contract in advanced economies but is expanding again in emerging economies, helped by strong potential growth. Industrial confidence has returned to precrisis levels, but household confidence in advanced economies continues to lag, reflecting subdued employment."

The IMF is reasonably relaxed about inflationary pressures, noting that it sees low levels of capacity utilisation, and well-anchored inflation expectations. That said the IMF view was that inflation in developed economies did not drop-off as drastically as growth did. It also pointed to higher inflation risks in emerging economies (6.2% in 2010 vs 1.5% for advanced economies):

"Inflation pressures are projected to remain low, held down by high unemployment rates and excess capacity. Inflation has been higher and more volatile in emerging economies, and inflation pressures could resurface more easily there than in advanced economies."

The IMF also cited repeatedly throughout the report that high unemployment remains a significant risk to a recovery in global demand, and broader economic growth, and noted it expected unemployment (which it also noted could actually be worse than expected) to remain high in advanced economies:

"High unemployment poses major social problems. In advanced economies, unemployment is projected to stay close to 8.5% through 2011 and then to decline only slowly. Moreover, the problem is even larger than the statistics suggest. Many of the employed are working shortened hours or in temporary jobs with few benefi ts. Others would like to find work but have given up searching and are thus no longer recorded as unemployed in the statistics. There is no single measure for broader unemployment or underemployment, but available data suggest that it can often be higher by 25-50% than headline unemployment rates."

Thus the overall message is that the recovery is indeed underway, albeit uneven. However "activity remains dependent on highly accommodative macroeconomic policies and is subject to downside risks, as room for countercyclical policy maneuvers has sharply diminished and fiscal fragilities have come to the fore." Thus the same challenges remain in macroeconomic policy exit strategies (not least of all sustaining the recovery), and the example of Greece shows on the fiscal front that a clear and credible plan for fiscal sustainability is not just 'nice', but necessary.

Sources:
Econ Grapher Analytics www.econgrapher.com
International Monetary Fund www.imf.org

Article source: http://www.econgrapher.com/april2010-imfweo.html