Thursday, April 23, 2009

World economic reports (April 16-23): expected to slide through 2009

Today's weekly reports are slightly more positive than last week. However, I avoided the trade reports all together, which undoubtedly would have dragged down the sentiment. Although there are a growing number of positive reports out there, global economies are still very much in the red zone, -1.3% in 2009 according to the IMF.

China's retail sales rebound in March

China's retail sales grew 14.7% in March 2009. Much of the draw on retail sales, measured in current prices, has been driven down by the slowing - now negative - rate of inflation (see next chart); however, weak demand surely played its part as well. The March rebound is one of the numerous pointing to a bottom in the Chinese recession.

Inflation continues to fall; some areas go negative


Inflation around the world is low and going negative in some areas (China). This is primarily an energy story, since core inflation, growth in all prices except food and energy, in Canada and the Eurozone are still rising at a 2% and 1.5%, respectively. However, prices move at a lag, and eventually weak demand will drag down core inflation as well.

According to some measures, home value in the UK and US are stabilizing

In April, UK home values grew for the third consecutive month, slowing the annual rate of decline to -7.3%. In another report across the Atlantic, February US home values grew for the second consecutive month, slowing the annual decline to -6.5%. Amazingly, this gain in US home prices was not widely reported in the media. I'll take this as good news, but this is just two data points; and there are lots of reasons to think that home values will fall further (like the inventory of existing homes is still very elevated).

The FHFA index (this week's report) shows price movements on homes tied to conforming loans guaranteed by Fannie Mae and Freddie Mac. Therefore, it is missing much of the market tied to non-conforming loans; the S&P Case-Shiller index is thought to capture better the housing market as a whole since it includes homes tied to non-conforming loans. See this WSJ article for a broad description of the two indices. I imagine the true price is somewhere in betweeen the two.

The Bank of Canada reaches its "effective" lower bound

The Bank of Canada lowered its policy rate (the overnight rate) to just 0.25%, joining the near-zero lower bound club. The policy announcement reported that "the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual." The Wall Street Journal discusses the Bank of Canada's unprecedented statement that "the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."

Policy, Policy, Policy. That is what this cycle is all about. From China to the U.S., and everywhere in between, central banks are pushing hard and governments are spending. However, in spite of the positive policy shifts, the IMF released this week its World Economic Outlook, where world growth, measured using purchasing-power parity (PPP) weights, is expected to contract 1.3% in 2009. If I had to choose, I'd go with the World Bank's forecast, which is -0.6% in 2009 on a PPP basis.

Rebecca Wilder

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