Economics Weekly - Review of 2009: Back from the brink, Weekly economic data preview
Economics Weekly - 11 January 2010
Review of 2009: Back from the brink
2009 is likely to go down in the
annals of historyas the year in which policy makers
successfullyaverted a global economic catastrophe.
It nowseems difficult to believe that it was
just over ayear ago that the world economy was
lookinginto the abyss. The contagion
resulting from theearlier collapse of Lehman Brothers
was castinga dark cloud, equities were hitting
new multi-yearlows and a tightening in global
liquidity wasthreatening to send what was already a
globaldownturn into a depression.
Yet twelve months on, the outlook has
improved markedly. Courtesy of the aggressive actions of
the major governments and central banks,
and the resilience of some of the emerging
economies, an ongoing downward spiral in
global economic activity has been prevented. As we enter 2010, global GDP is
again expanding, the major equity markets have posted impressive bounce-backs,
and the provision of global credit, while still hampered, has undoubtedly
Consensus proves too optimistic...
Given the turnaround, it is perhaps
surprising that the official outturns for growth for last year
generally proved far weaker than the
consensus estimates taken at the end of 2008 (see chart a). What almost all
economists clearly (and perhaps not surprisingly) missed was the magnitude of the
unprecedented downturn in the first three months of 2009. In the first quarter
alone, the level of GDP dropped by 3.5% in Germany, 3.0% in Japan, 2.5% in the UK and by 1.6% in the US. The quarterly falls effectively wiped
out the equivalent of a whole year of trend growth, if not more, for most of
But it was a year of two halves, with a
massive fall in global output in Q1 nipped in the bud by unprecedented policy
stimulus Credit for the recovery must go to globalpolicy makers for their swift and aggressive actionBut it remains to beseen whether they
willbe quite so successfulin withdrawing thestimulus
...but conditions have improved
Since the second quarter, however,
conditions have clearly improved. The decision of the major central banks to
embrace unconventional policy measures â€“ such as quantitative easing â€“ from the
end of March marked a major turning point. While consensus GDP forecasts were
sharply lower in response to weaker
economic data in the early part of last year, they subsequently bottomed out as
the stimulus measures began to take effect. Japan, Germany and France all returned to positive growth in Q2,
and the US and euro zone in Q3. The laggard was
the UK, where growth forecasts were revised
steadily lower for most of last year. Over the past quarter, however, it too
appears to have emerged from recession.
While the turnaround in the fortunes of
the global economy has been impressive, the performance of global asset
markets, particularly equity markets, has been even more striking. The
improvement in economic confidence and the flood of global liquidity unleashed
by the unconventional monetary policy measures precipitated a marked turnaround
in global equities. By the end of 2009, the US S&P500 had risen by 23%, the
FTSE Eurofirst 300 by 26% and the UK FTSE 100 index by 21%. From their early
March lows, the gains were closer to 60-70%.
Inflation drops sharply
As with the GDP forecasts, the consensus
expectation for CPI inflation for most of the major
economies in 2009 also proved far too
high (chart b). Last year saw the US and euro zone
experiencing record price falls and Japan reAny entering deflation. A notable exception was the UK., where the
headline rate of UK CPI bottomedat a five-year low
of 1.1% in September. However, the annual RPI, which captures house price depreciation,
fell to a record low of -1.6%. As we move through 2010, economistsâ€™ opinions
over the global inflation outlook differ between those that believe that spare
capacity and weak growth will keep inflation pressures at bay, and those that
think rising commodity prices, economic recovery and the flood of global
liquidity will unleash a global inflation shock.
10-yr government yields rise, as expected
Although both GDP growth and inflation
proved weaker than expected in 2009, the consensusestimates for 10-yr government bond yields proved
remarkably accurate (chart c). Over the
year, 10-yr government yields were
pushed higher by signs of economic recovery and rising
government bond issuance to finance
increasing fiscal deficits. In the UK, 10-yr gilt yields ended the year
around 100bp higher at 4.0%. The rise occurred despite the Â£175bn+ of gilt
by the Bank of England as part of its
Quantitative Easing programme. The fact that gilt yields still
rose highlights the vulnerability of the
gilt market (and other government bond markets) once policy makers start to
reverse the policy stimulus.
Fall in the US$ imparts additional stimulus
In the currency markets, 2009 saw a
renewed weakening of the US dollar versus the majors â€“ except against the yen,
where a late US dollar rally pushed the currency pair back above its value at
the start of the year (chart d). The fall in the US dollar imparted additional
stimulus to the US and those countries with dollar-linked
currencies by boosting their competitiveness. In line with other asset markets,
currency volatility dropped back from its earlier peaks â€“ a further reflection
of the improvement in risk appetite. More generally, sterling was a noticeable
underperformer over the second half of the year. Sterling weakness was a key
theme for the UK in 2009 and is likely to
remain so over the coming years, as the UK seeks to rebalance its economy away
from domestic demand towards net exports.
A sigh of relief that it wasnâ€™t a lot
In sum, last year was an exceptionally
weak year for the world economy, with the full-year outturns for GDP growth
dropping to multi-decade lows. That said, most can breathe a sigh of relief
that it was not much worse. Courtesy of the aggressive actions of policy
makers, financial market confidence and, to a lesser extent, economic confidence
have bounced back. While policy
makers can be applauded for their swift
and coordinated response, it is too early to be confident that we are out of
the woods. It remains to be seen whether policy makers can manage an orderly
withdrawal of the unprecedented stimulus without tipping the world back into
unleashing an inflation shock. This,
perhaps, is the single biggest uncertainty facing the global economic outlook
as we head through 2010.
Adam Chester, Senior UK
Macroeconomist, Corporate Markets
Editorial comments to:
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Weekly economic data preview -11 January 2010
Industrial production data to underscore
ô€‚„ The UK data calendar kicks off early on Tuesday morning with the
release of the December BRC retail sales monitor and the RICS housing market
report. November retail sales were surprisingly weak since there was an expectation
for consumers to bring forward expenditure ahead of the rise in VAT on 1
January. But the issue may have been more relevant for the December trading
period, with retailers campaigning hard to boost sales ahead of the VAT rise.
We forecast a rise in the BRCâ€™s rate of annual sales growth, to 5% from 4.1% in
November. Turning to the RICS survey, we look for the headline house price
balance to be unchanged at +35 in December (after rising for nine straight
months), though the fall in the price expectations balance in the previous
report presents some downside risks. For Tuesdayâ€™s trade data we expect a small
(Â£0.4bn) narrowing in the headline deficit to Â£6.7bn in November and for
inflation-watchers, the detail on import price developments will be of
interest. We expect Wednesdayâ€™s industrial production data to show a 0.2% monthly
gain in output during November, broadly in line with PMI developments. However,
that would still leave the three-month-on-three-month rate in negative
territory in November (at -0.3%), so a strong monthly gain will be needed to
have been registered on the official data for December to ensure that
industrial production makes a positive contribution to GDP during Q4 as a
ô€‚„ In the US, the week begins on a quiet note, with no significant
data or events scheduled until Wednesday, when the Federal Reserve releases its
latest Beige book. The content - which details current economic conditions by sector
- will be used as the basis of discussion for the FOMC meeting on 27 January.
On Thursday, the December retail sales report is published. The much
stronger-than-expected gain of 1.3% in November was interpreted as a signal
that consumer confidence may have improved on signs of a recovering labour
market and some stabilization in the housing market. We expect this trend to
persist and have pencilled in a 0.6% monthly gain for December. CPI data for
the same month (Friday) are forecast to show a 0.2% gain at the headline level,
pushing the annual rate of inflation up one percentage point to 2.8%. But, with
unfavourable energy price base effects working through the data, the rise in
core inflation is expected to be far less pronounced, at 1.9% from 1.7%. Also
on Friday, a 0.7% m/m rise in December industrial production should ensure that
the sector made a positive contribution to Q4 GDP growth, while January
readings for the Empire Manufacturing and the Michigan confidence reports are expected to
show that the US recovery continued to gain traction
into the New Year.
ô€‚„ We look for an
unchanged refinancing rate of 1% at Thursdayâ€™s ECB meeting. In the press
conference, President Trichet is expected to repeat the view of the Governing
Council that the economic recovery path going forward will be â€˜unevenâ€™. To
date, the ECB has been at pains to stress that the measures taken to start
unwinding its â€˜unconventionalâ€™ policy measures do not represent an attempt to
influence money market rates such as EONIA
(which would send a message of
imminent tightening to financial markets). The latter looks set to occur during
the course of this year, but not as early as Januaryâ€™s meeting. On the data
front, Eurozone industrial production (Wednesday) is forecast to post a 0.4%
rise in November, though that would leave the three-month-on-three-month rate
of growth at -1% (down a touch from -0.9% in Q3). In fact, assuming our
forecast for November is realised, output would have to grow by a fairly chunky
1.7% in December alone to avoid detracting from GDP growth in the fourth
quarter. At the end of the week, the final estimate of December CPI is expected
to be confirmed at 0.9% on an annual rate, up from 0.5%, with the core rate of
inflation broadly unchanged at 0.9%.
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