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Prospects Weekly: Leading indicators point to slower growth in the third quarter

Global Macroeconomics Team's picture
Leading indicators point to slower growth in the third quarter. Retail sales volumes have begun to moderate in a number of countries, undermined by a jobless recovery in high-income countries and the gradual withdrawal of stimulus measures that have spurred household consumption. On the production side, developing countries have surpassed pre-crisis output levels, but the United States and Europe do not appear to be on track to regain pre-crisis growth paths. Although consumer confidence and purchasing manager readings point to slower growth in June, the outlook remains positive. Short-term funding pressures appear to still be an issue in European banking markets, but bank-to-bank counterparty risk assessments may have eased, even as other financial markets remain concerned about the solvency of European bank debt.
Global retail sales volumes slowed in April, stagnating in high-income countries but still rising a robust 8.2 percent in developing countries. High-income retail sales were undermined by weak job creation and the expiry of fiscal stimulus measures. Compared with a year ago consumer demand fell 0.4 percent in Japan, following the scaling back of the government’s “eco-points” system that led consumers to buy eco-friendly durable goods. Real consumer spending increased only 0.3 percent in the United States from a year ago, partly because weak labor market conditions saw personal income grow only 0.4 percent. A 10 point plunge in the Conference Board’s consumer confidence index to a still positive 52.9 suggests that consumer demand growth in the U.S. may weaken further in June.  
The recovery in industrial production continued through April / May with developing countries having regained precrisis output levels. The recovery in Europe and the United States continues to lag and does not appear to be on track to close with pre-crisis growth trends. In contrast, Japanese activity continues to expand rapidly. Recent purchasing manager surveys and weak employment data in the U.S.A. suggest a slowing in growth rates may be in store. While worrisome, especially in the context of the debt situation in Europe – which has yet to show up in IP data – such a slowing has been expected as bounce back factors that have driven growth fade. Indeed, PMI indicators remain in positive territory – suggesting continued growth – and are higher than the average levels observed during the past two recoveries (2002-03 and 2004-07). 
Euro interbank offer rates (Euribor) continue to rise even after last week's repayment of €442bn of ECB loans. Although the immediate challenge of paying the initial 1-year loans has passed, funding pressures remain high–perhaps because banks continue to seek private-sector financing to repay the €110bn in 6-day ECB debt that was taken on. Indeed, higher Euribor rates do not seem to reflect increased counter-party risk assessments as the spread between the 3-month Euribor and overnight (Eonia) rates has been stable since May. Nonbank investors remain skittish however. Credit default swaps on the debt of European banks have risen by 100 basis points since April and continued to rise in recent weeks.  

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