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Prospects daily: Mixed indicators for big-3 economies

Global Macroeconomics Team's picture

 Important developments today:

1.  U.S. initial claims decrease in latest week

2.  German industrial production remains strong in May

3.  Japanese machinery orders plummet in May



ECB leaves rates unchanged against background of budget cuts. European Central Bank (ECB) President Jean-Claude Trichet noted that the current level of policy interest rates (1%) is appropriate for the Euro Area, against the background of multiple member states implementing budget reduction measures; financial markets remaining leery of the state of the economy, and stress tests about to be conducted on commercial banks across the Zone. Interbank interest rates (EURIBOR) ratcheted higher in the last weeks, as banks repaid a record €442 billion ECB loan on July-1. EURIBOR remains elevated at 0.8%, up from 0.63% at the end of March, indicating that the level of mutual confidence among banks remains strained.


International Industrial Bank (IIB)…first Russian bank to default on foreign debt since 1999. IIB did not repay €200 million ($253 million) of 9% notes due on Tuesday, and sent a default notice on $200 million in bonds maturing in 2013, according to a statement Wednesday. The bank asked bond holders to accept a new maturity date of July 6, 2011. According to Moody’s, the default by IIB may have a short-term negative effect on investor confidence in Russian bank debt, but this is not considered as indicative of the wider financial system. Markets reacted little to the default, but the government announced plans to introduce a tax-break on ruble borrowing for Russian companies to reduce foreign-currency debt to 20% of total corporate borrowing from 42%.


U.S. initial claims decrease in latest week. New claims for unemployment insurance decreased by 21,000 to 454,000 in the week ending July 9, performing better than market expectations of a decline of 12,000. At the same time, the 4-week moving average of claims dropped by a modest 1,250 to 466,000. The Labor Department’s claims data released over the past few months have indicated that layoffs continue to persist at high levels, despite growth in non-farm payrolls, and that improvements in labor markets will be slow to develop.



Source: Eurostat



German industrial production remains strong in May. Industrial output in Germany recorded growth of 2.6% (m/m) in May, despite concerns that the unfolding Euro Area debt crisis would derail manufacturing growth in the country. Production of investment goods was up 4.6% (m/m), as a weaker euro helped sustain demand from Asia and other emerging regions. Indeed, yesterday’s report on new orders for factory goods showed a 1.8% (m/m) increase in export orders (excluding Europe).

While industrial production remains about 10% below pre-crisis levels, in momentum terms (3m/3m, saar) industrial output growth doubled from 12.5% in April to 24% in May, the strongest rate seen since the onset of the crisis. Production in the Euro Zone is expected to decelerate in the third quarter as the implementation of austerity measures across the region dampens domestic demand. However production in Germany may sustain growth, albeit at a slower pace, if external demand for German factory goods remains resilient.

In other German economic news…after a slow start to 2010 (by German standards) with export volumes advancing just 11% over January to April (y/y), and a sharp 12.4% decline in the latter month (m/m), hopes for an upturn in exports were pinned on the 12% decline of the euro/dollar exchange rate since the turn of the year. In the event, exports in euro terms picked up a strong 3.3% in May (m/m) and together with a moderation in export prices, carried volumes to a stratospheric 75% annualized gain (saar) in the three months to May. Imports moved higher as well, by a full 9.4% in the month, carrying volumes to a 60% gain compared to 33% in the month preceding (saar). This development should help to solidify GDP growth for the second quarter, though indicators for domestic demand remain sluggish.


Japanese machinery orders plummet in May. Echoing the sharp decline experienced by German manufacturers in the month, and a note of concern for the robustness of global trade-private machinery orders received by Japanese factories fell by 10.8% in May (m/m), for a second decline running, and the deepest one-month contraction since 2008. Developments in the month carried the momentum of orders growth to negative territory (-3.8%) in the 3 months through May from a 30% gain in April (saar). The report prompted a Cabinet Office statement saying the outlook is less certain; notably with a slowing of export growth to an 8% pace in May from 70% at the turn of the year (saar).


Among emerging markets:

In East Asia and the Pacific, Malaysia’s central bank raised its overnight policy rate by 25 basis points to 2.75%, the third increase this year, assessing that the economy is on a sufficiently strong growth path to withstand higher borrowing costs.

In South Asia, India’s economy may expand at the fastest rate in 4 years according to the International Monetary Fund, which revised up its growth projection for the fiscal year ending March 2011 to 9.4% from 8.8% previously, underpinned by strong domestic demand.

In Latin America and the Caribbean, Brazil’s use of installed capacity in manufacturing declined to 82.3% in May, from a revised 82.8% in April. Chile’s consumer prices increased 1.2% from a year earlier while monthly underlying inflation, which excludes food and fuel, was up 0.3%.

In Sub-Saharan Africa, South Africa’s manufacturing growth slowed to an annual 7.9% in May, after a revised 8.6% expansion in April, as the European debt crisis threatens to slow demand in the region that buys a third of South African exports.

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