Economics Weekly - Developing economies lead the way out of recession; Weekly economic data preview - BoE MPC meeting and US payrolls dominate proceedings
Economics Weekly - 3 August 2009
Developing economies lead the way out of recession
Following the onset of
the global credit crisis two years ago, it was generally believed that
developing economies, particularly in Asia, would be better placed to weather
the storm than some of the more advanced economies, such as the US and UK. It
was reasoned that the export-orientated, savings-rich countries, with the
support of China, faced little prospect
of an external payments crisis and were one step removed from the bursting of
the debt bubble created in western economies. De-coupling was the buzzword at
that time. Yet, over the subsequent twelve to eighteen months, expectations
that the developing world could distance itself from the global credit crisis
faded amid a collapse in world trade.
Having risen by an
annual average of 8% between 2003 and 2007, world trade volumes dropped by over
15% in 2008 - see chart a. Within the developed world, Germany and Japan bore the brunt of the
downturn, with merchandise exports and industrial production in both countries
falling sharply in 2008. But many of the newly-industrialising and developing
economies, including China, Hong Kong, South Korea and Thailand were also badly
The correlation between developing and
advanced economy growth has risen sharply
Chart b shows the
correlation of GDP growth between developing and advanced economies over the
past two decades. Despite earlier expectations of de-coupling, their economic
performances have become increasingly intertwined. In the early 1990s, the
correlation coefficient was volatile around zero, implying little or no
relationship in the average GDP growth rates of the two economic regions. Over
the past decade, however, the correlation has risen strongly. While the high
correlation suggests the average GDP growth rates in these two economic regions
move in the same direction, it tells us nothing about the magnitude of these
movements. Since the credit crisis erupted, not only have developing economies
been dragged lower, but in many cases their over-reliance on external trade has
left them exposed to far sharper downturns in growth - see chart c. For
example, as a group, emerging market GDP dropped by 2.3 percentage points
between 2007 and 2008, compared with a drop of 1.6 percentage points for the
major advanced economies.
But developing economies have started to
outperform in recent months
Over recent months,
however, the tide appears to have turned. Just as the developing economies took
the sharpest knock following the credit crisis, these economies now appear to
be bouncing back the fastest â€“ see chart c. The bounce-back is being led by China. In the second
quarter, Chinaâ€™s annual rate of
growth rose to 7.9% from 6.1%. It was the first acceleration in Chinaâ€™s growth rate in more
than two years. Other developed economies also appear to have recovered some
poise. For example, Singaporeâ€™s GDP grew by an
annualised 20.4% in the second quarter, bringing an end to the economyâ€™s worst
recession in 45 years. South Korea also posted a robust
2.3% quarter-on-quarter increase in GDP during the second quarter.
How have developing economies managed to
bounce back so sharply over recent months?
As in the advanced
world, part of the improvement in growth in the developing economies reflects a
moderation in the pace of inventory liquidation. More fundamentally, however,
it also reflects an improvement in global trade. With the world economy over
the worst of the credit crisis, global trade flows appear to have bottomed out.
For example, the Baltic Dry Freight Index â€“ an index of shipping costs â€“ has
risen more than four-fold since the end of 2008, one of a number of key
indicators suggesting that global trade is now starting to turn higher. Since
developing economies tend to derive a disproportionate share of their national
income from exports, early signs of a recovery in world demand tend to show up
first in improvements in developing world GDP.
It is not only
inventories and the turn in the world trade cycle, however, that have boosted
developing economies in recent months. There are also signs that domestic
demand conditions in some of these economies are improving, underpinned by
government stimulus â€“ particularly in China. A 4trn yuan ($585bn)
stimulus plan is currently being implemented by the Chinese government
comprising infrastructure spending, tax cuts and various incentives to induce
consumers to buy cars and electronic goods. Apart from the stimulus, the
Chinese government is also exerting pressure on banks to lend more. The impact
of these measures is clearly evident. Over the first half of this year, Chinese
fixed investment spending surged almost 34%, the fastest growth in nearly five
years. Over the same period, the annual rate of Chinaâ€™s money supply growth
has doubled to 28%.
Recovery in developed economies raises hopes for stronger, more
balanced growth ahead
There are hopes that
the efforts taken by China, and other developing
countries, to stimulate their domestic economies will help to support growth
prospects elsewhere. If China can successfully wean
itself of its dependence on exports, and develop a more efficient, market-based
domestic economy, the prospects for Chinaâ€™s economy and, by
extension, the world economy, would be that much stronger. For this to occur,
however, Chinaâ€™s government needs to
combine domestic stimulus with further substantial currency revaluations.
Judging by the limited progress that has been made on this front over the past
year, it remains to be seen whether the Chinese government has the political
will to do so. Nonetheless, the recent signs of improvement in China and other developing
economies provide cautious grounds for optimism that these countries may lead
the world out of recession over the coming year.
Adam Chester, Senior UK Macroeconomist, Corporate Markets
Weekly economic data
preview - 3 August 2009
BoE MPC meeting and US
payrolls dominate proceedings
The key data releases
and events this week are the monetary policy decisions by the BoE and ECB on
Thursday and the US official employment
report on Friday. Both the BoE and ECB are expected to keep interest rates on
hold, but markets will be looking closely to see if the BoE decides to use the
remaining Â£25bn of the potential Â£150bn of asset purchases currently authorised
by the Treasury. The Reserve Bank of Australia is also expected to
leave rates unchanged at 3% on Tuesday. All eyes will be on Fridayâ€™s US
non-farm payrolls which is expected to show a less severe pace of decline in
employment of around 370,000 versus 467,000 in June, while the jobless rate is
forecast to increase. US ISM purchasing
managersâ€™ surveys and the ADP employment report in the first part of the week
will give markets the opportunity to hone forecasts for Fridayâ€™s numbers. UK
industrial production, producer prices and PMI surveys are also due, while
German manufacturing orders and industrial output will also receive attention.
ô€‚„ We expect the Bank of England MPC to keep interest rates on hold
at 1% and vote to use the remaining Â£25bn of the Â£150bn asset purchase facility
(APF), having already purchased Â£125bn of assets, mainly gilts. It is possible
that the MPC could ask the Chancellor to increase the APF beyond Â£150bn
currently authorised, but there is also an outside chance that it decides to
stop asset purchases, at least for now. Much will depend on the Bankâ€™s new
quarterly inflation forecasts which will be available to the MPC. Although Q2
GDP was weaker than expected, falling 0.8% on the quarter, recent business
surveys suggest that modest growth could return in the second half of this
year. In particular, the services sector, which is less susceptible to the
stock cycle, has seen some more positive signs with the services PMI above the
â€˜neutralâ€™ 50 level in May and June. We expect the services PMI to rise slightly
to 51.7 in July from 51.6, while the manufacturing PMI is forecast to rise to 47.5
from 47.0. Nevertheless, these surveys do not tell us about the durability of
any upturn, as rising unemployment and constrained credit growth are likely to
cap growth and may even lead to a renewed downturn. Hence, the MPC may yet ask
the Treasury to increase the current Â£150bn limit on asset purchases, if it
does not do so next week. Moreover, producer price figures on Friday are
forecast to show further falls on an annual basis, highlighting weak pipeline
ô€‚„ US non-farm payrolls on
Friday are expected to show a fall of around 370,000 in July, while the jobless
rate is anticipated to rise to 9.6% from 9.5%. Such an outturn would indicate a
relative slowdown in the pace of deterioration in the labour market.
Nevertheless, the pace of contraction in employment is still significant, which
will weigh on prospects for consumer spending. Indeed, last weekâ€™s advance Q2
GDP release showed that personal consumption fell by more than expected by
1.2%(annualised). Ahead of the official
employment figures, markets will analyse the ISM purchasing managersâ€™ surveys
and the ADP employment for clues on upside or downside risks. Further, the ISM
surveys will provide indications of whether GDP growth will return in
the current quarter. We expect the manufacturing ISM to rise to 46.0 from 44.8
and the non-manufacturing ISM to rise to 48.0 from 47.0.
ô€‚„ The ECB is expected to keep benchmark interest rates unchanged
at 1%. We expect it to leave the door open for further reductions, if economic
circumstances warrant it, though our central view is for rates to remain at the
current level until the second half of next year (when policy may start to be
tightened). The ECBâ€™s covered bond purchase programme only started in July, so
we are not likely to see any major adjustments there. Last week saw further
improvements in the advance releases of the eurozone PMI surveys, though they
still signal contraction in overall GDP, albeit at a slower rate than in
previous quarters. Final releases of the PMI surveys are due this week. We also
saw the flash estimate of annual CPI inflation fall more than expected to -0.6%
in July, indicating that inflationary pressures remain weak. Euro zone producer
price inflation, due on Tuesday, is expected to show a fall to -6.6% on the
year. German industrial orders on Thursday and industrial production and trade
data on Friday will receive attention. Orders could record a fourth consecutive
monthly rise in June, though they are still expected to be down sharply by
about 26% compared with a year ago.
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