Daily Economic Briefing: May 24, 2010

Daily Economic Briefing: May 24, 2010

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• In this week’s Global Data Watch cover essay, we discuss the likelihood that global policy interest rates are likely to remain lower for longer in light of recent developments. For the G-3 economies, record low core inflation, combined with the increased uncertainty and downside risk introduced by the sovereign debt turmoil in Europe, points to steady, near-zero policy rates, even as the BoJ and the ECB ratchet up unconventional easing. This same uncertainty, and the lower for long stance in the G-3, is likely to temper rate increases elsewhere as well. Today’s no-change decision by the Bank of Israel, in which the Bank touched on both these factors, is a case in point. Today’s email commentary from our economists covering Brazil and Turkey is making similar points.

• Taiwan’s economy appears to be slowing. Today’s IP report showed that manufacturing output rose just 0.4%m/m in April following no change in March. Although exports rose solidly in these months, back-to-back declines in export orders suggest a downshift is coming. The recent moderation in IP/export order growth spans tech and non-tech. Taiwan’s manufacturing PMI, while still quite elevated, retreated somewhat in April as well.

• EM Asia is an important bellwether for global demand and global manufacturing activity. Thus, we need to watch to see if the recent signs of moderation in Taiwan—which has a very high-beta IP cycle within EM Asia (see the accompanying chart, which is ends in 2007 to keep the chart scale manageable)—are reflected more broadly in regional data. On the calendar this week is Singapore IP in April, which will be out Wednesday. Next week brings a lot more information, including Korea’s and Thailand’s IP for April, Korea’s exports for May, and the EM Asian manufacturing PMIs for May.

• Whatever slowing might be taking place in EM Asia is coming on the heels of blockbuster growth. We estimate that regional GDP rose 10% over the 4 quarters ended 1Q10, and growth in the latest quarter was very strong, at 13% annualized regionwide and 10% excluding China and India. Just in the past few days, we received notice that Taiwan’s GDP rose 11% annualized in 1Q and that Thailand’s GDP rose 16% annualized in 1Q.

• US existing-home sales surged for a second straight month in April, posting an 14.6% increase in the two months combined. Although the fundamental supports for housing demand are improving, the surge appears to be driven largely by the expiration of the homebuyer tax credit. Mortgage purchase applications plunged in early May.

There are a number of channels through which trouble in the peripheral Euro area sovereigns might be transmitted to other countries. One is related to cross-border debt holdings and the stress this is creating in the banking sector. A second is through a rise in uncertainty about the economic outlook and the tightening in financial-market conditions that might result. A third is through international trade linkages, which is the focus of today’s page 2.

If one assumes that the additional hit to economic growth from the sovereign turmoil is limited to the smaller peripheral countries of Greece, Portugal, and Ireland, then the trade impact on most other countries would be small. Even within the Euro area, the direct exposure of the core countries of Germany and France to this group is limited (for Germany, the group received 2.2% of exports equaling 0.8% of Germany’s GDP in 2008). The stakes would rise if the economies of Spain or Italy were to stumble (relative to a slow growth baseline), consistent with the much larger size of their economies. The fallout is bigger both for the core Euro area economies and also for central Europe. In turn, as the direct fallout grows inside of Europe, the second-round effects become more significant for countries in other regions.

The direct and second-round effects would be much more important, of course, if contagion were to spread in a very damaging way throughout the Euro area, delivering a major blow to the regional economy (vs our baseline for 1.5% to 2% Euro area GDP growth). Emerging Europe would be hardest hit. The Czech Republic and Hungary export about 20% of their GDP to Germany alone. Over 50% of UK exports go to the Euro area, accounting for nearly 9% of its GDP. Outside of Europe, the big exporting nations would feel the hit but in more modest fashion. The Euro area received 15.6%, 10.3% and 15.0% of total exports from the US, Japan, and China, equal to 1.4%, 1.6% and 5.1% of their GDP, in 2008.

ENDS

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