Important developments today:
U.S. GDP posts surprisingly strong fourth quarter GDP growth.
European unemployment increases to 10% rate.
Industrial production in Japan posts positive year-on-year growth.
EM equity funds suffer outflows. Emerging market stock funds posted their first week of net outflows in 3 months, as concern about China’s monetary tightening, and deteriorating public finances of countries ranging from Greece to Japan triggered a sell-off in equities globally. Developing country equity funds lost about $610 million in the week ended January 27, according to fund tracker EPFR Global. And equity funds tied to the so-called BRIC countries (Brazil, Russia, India and China) saw net redemptions for the first time since early September. In contrast, emerging market bond funds received inflows of $522 million during the fourth week of January. EM local currency-denominated funds posted all-time record inflows of $515 million during the week.
U.S. GDP jumps 5.7% in fourth quarter on stocks and the consumer.After a disappointing run of growth through the third quarter of 2009 (GDP at 2.2% gains in that period), a combination of positive factors aligned to boost growth to 5.7% in the fourth quarter (saar), the fastest pace in some six years. A sharp slowing of inventory liquidation by business, from -$139 billion in the third quarter to -$33.5 billion in the fourth (indeed net additions to stocks characterized November and December), added a full 3.3 percentage points to GDP growth in the quarter. And consumer spending continued to record gains, though at a slower 2% pace contrasted with 2.8% in the preceding period, when “cash for clunkers” and other incentives tended to loft outlays.
Three developments of encouragement are the emergence of business investment to positive ground for the first time since the second quarter of 2008 (2.9% total, and 13.3% advances in equipment (saar)); a similar turnaround for residential investment (homebuilding) up 18.9%-and 5.7% in the third and fourth quarters respectively, and positive contributions from net exports in the quarter of 0.6 points. Exports escalated to growth of 18%, imports up 10.5% (saar).
For full-year 2009, GDP declined 2.4% (the worst performance since 1946), private consumption fell 0.6% (steepest since 1974), and fixed investment contracted 18.5%; exports dropped 10% and imports 14%. Carryover effects into the first months of 2010 will be robust, helping to build underlying momentum, especially for the elements of domestic demand.
U.S. consumer sentiment up in January. The Consumer Confidence Index compiled by the University of Michigan and Reuters increased in January to a reading of 74.4 from 72.2 a month ago, the highest level seen in two years. Steady improvements in consumer sentiment appear to echo households’ view that the worst of the economic crisis is past, though declining wages and weak job growth are likely to cloud the horizon into 2010.
Euro Area unemployment hits 10%; inflation accelerates in December. According to the latest report from Eurostat, unemployment in the Euro Zone increased to 10% of the labor force in December, up from a revised 9.9% in the previous month, highlighting concerns that economic recovery in the region is not yet translating into job growth. Among the major economies, Spain continues to suffer the worst unemployment levels, with 19.5% of the labor force unemployed; in Germany and France the unemployment rate remained steady at 7.5% and 10% respectively. The 10% unemployment rate translates into 15.7 million unemployed persons across the region
In other news, consumer prices in the 16-nation euro region accelerated to 1% (y/y) after increasing 0.9% (y/y) in December. In large part this was due to higher spending on fuel and energy, reflecting a 76% increase in the prices of crude oil over the past year. However rising unemployment is likely to restrain domestic demand in the coming months, and keep inflationary pressures in check.
Source: Ministry of Economy, Trade and Industry
In Japan industrial output rises, unemployment falls… Factory output in Japan rose 2.2% (m/m) in December, propelling the year-on-year growth from a 5.5% decrease in November to positive growth of 5.4% by the end of the year. Industrial output in Japan has been rising for 10 straight months, led by demand for exports from China and other regional emerging markets. However momentum growth in industrial output (3 month moving average, saar) has been decreasing steadily, down to 20% in December from 61% in July, a sign of future weakening in the pace of the recovery as effects of the government stimulus wane and consumer spending remains constrained. Indeed the Ministry of Economy, Trade and Industry today projected the month-on-month growth in output to slow to 0.7% in the first quarter from 1.6% in the fourth quarter of 2009.
At the same time, unemployment dropped to a rate of 5.1% in December from 5.2% in November, while the number of job offers to applicants rose slightly to 0.46 (representing 46 offers per 100 applicants). Despite this moderate improvement, the unemployment rate remains high according to Japanese standards; the pre-crisis unemployment rate averaged closer to 3% of the labor force.
However, deflationary pressures are steadily mounting in the Japanese economy, forcing policy makers to maintain the central bank’s record low interest rate. Consumer prices nationwide were down 1.7% (y/y), logging a 2% (y/y) decrease in Tokyo, the sharpest drops in inflation since comparable data records began in 1971. Consumer price readings reveal the continuing weakness in private demand, which has been sapped by declining wages and could undermine the shaky recovery, particularly as the export-driven progress in the industrial sector may not necessarily last.
Among emerging markets:
In South Asia, India’s central bank asked banks to increase their cash reserves to 5.75 percent from 5 percent, as economic growth is gaining momentum and the risk of inflationary pressures are higher. The central bank kept its key interest unchanged.
In Latin America and the Caribbean, Brazil posted a budget deficit for the 14th straight month in December, the longest streak since 2003, on account of lower tax collections and higher spending. The finance Minister said recently that the government will not extend the tax cuts on purchases of cars and household appliances as the fiscal stimulus is no longer needed.
In Central and Eastern Europe, Czech Republic’s industrial production rose a preliminary 2.1 percent year-on-year in December, the first gain in 15 months, on stronger external demand in key markets. Total new orders rose 12.5 percent in December, with foreign orders up an annual 16.9 percent. Hungary’s government said that the budget deficit could fall within the Euro limit of 3 percent of GDP by 2011, and to 2.5 percent of GDP by 2012, compared to a target of 3.8 percent for 2010. GDP is projected to contract 0.3 percent in 2010, after plunging 6.7 percent in 2009, after which it should grow 3.7 percent in 2011 and 3.8 percent in 2012.
In Sub-Saharan Africa, South Africa’s consumer spending remains weak although the economy exited the recession in the third quarter, as indicated by the third consecutive month of contraction in credit to household and businesses. Credit contracted an annual 0.8 percent in December after falling 1.6 percent in November. Kenya’s economy could grow as much as 5 percent in 2010, according to the survey conducted by the central bank, led by exports and tourism. Growth stalled in the third quarter on account of drought and higher electricity prices.