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United States The US economy is preparing to post strong growth in 2010. Following the recovery of industrial activity, the revival of consumption and the turnaround on the labor market, it is now the turn of the residential real-estate market - which was behind the last recession - to show some signs of recovery. The last few months have been marked by a significant acceleration of the statistics for house sales and house starts. Thus in April sales of new houses reached their highest level in two years following a 50% increase since their February low. Sales of existing houses also increased in April and stand at about 30% above their low. Finally, house starts have also increased and are 40% up on the low they hit one year ago. Residential real-estate activity has clearly benefited from the support provided by the government to first-time buyers (amounting to $8,000 for contracts signed before the end of the month of April). The acceleration of sales during this month (+15% for sales of new houses, +8% for existing houses, +6% for housing starts) results partly from purchases brought forward to benefit from the bonus, and consequently should be followed by a decrease over the following months. However, this movement will have a positive impact on the housing market in the longer term, since it has helped to straighten out the level of inventories of houses for sale. In this regard, the statistics for the month of April are revealing since the strong increase in sales of new houses has been accompanied by a sharp drop in prices (-10% on average), which suggests that property developers have granted discounts in order to boost sales and thus dispose of the surplus unsold houses. Consequently the level of inventories has been reduced to the equivalent of five months’ sales, its lowest level since the end of 2005, and well below the figure of 12 months reached at the height of the crisis. The decrease in stocks of existing houses available for sale is less spectacular (from 11 months to about eight today) owing to the continued increase in real-estate seizures (4.6% of mortgaged housing units in the first quarter of 2010) and payment defaults (10% of mortgage loans). The repercussions of the bursting of the real-estate bubble therefore continue to weigh on the sector, but a substantial proportion of the excesses has been disposed of, which paves the way for a gradual recovery of activity in parallel with the improvement in the level of economic activity. The low level of interest rates and the drop in selling prices continue to make a house purchase affordable from an historical point of view, as has been the case since the beginning of 2009. This criterion is not sufficient to cause sales to increase, as the statistics for the last few months have shown, since even at an affordable price a house purchase requires an income to finance it… The difference between 2000 and 2010 lies in the recovery of employment which will at last enable a growing number of households to take advantage of these appealing conditions. This should fuel a gradual recovery of demand for housing and of activity in the construction sector. This recovery of employment is in fact also behind the improvement in consumer confidence, which reached its highest level in more than two years in May, thanks in particular to the significant increase in expectations regarding the outlook for recruitment. The environment is thus becoming increasingly favourable for consumption, with the drop in gasoline prices and the low level of inflation (2.0% in April), which is less than the increase in income (2.5% in one year). Europe The coordinated plan of the European Union and the IMF has eased the fears over the short-term financing of the southern European States. However, these measures do not solve at all the causes of the crisis. They simply make it possible to "buy" time in order to carry out the necessary restructuring of public finances in the States in difficulty. Thus after Ireland, Portugal and Greece, Spain in turn has presented its austerity plan - expected to save €15 billion in 2011 (1.5% of GDP, about 15% of the estimated budget deficit) - which was narrowly adopted by Parliament. Italy has presented an economy plan to save €25 billion over three years (1.5% of GDP). At the same time France is embarking on a reform of its pension system. Even Germany has announced that it is foregoing tax cuts that were planned for next year. The obligation to restore order to public finances is resulting in some drastic measures such as salary cuts for civil servants, the abolition of a number of forms of public assistance and a tax increase (a VAT hike is planned in Spain but also an increase in the rate of taxation on high incomes). This budgetary austerity, which will have to last for several years in order to reduce the deficits to bearable levels, has therefore led to a downward revision of the growth prospects for the countries concerned and the Euro zone as a whole. While domestic demand will certainly be affected by these austerity plans, this does not mean that everything is negative in the Euro zone. First of all, this weakness of domestic demand will prevent inflation from getting out of control. Inflation is in fact lower than the European Central Bank’s 2% target and core inflation (excluding food and energy prices) even fell in April to its lowest level since the Euro zone was created, to 0.8%. The ECB will therefore not be torn between its price stability objective and the support that it has had to provide to the financial system and even the bond market recently. It will be able to continue to buy bonds issued by the southern European countries (its total purchases amounted to €26.5 billion on May 25). Furthermore the depreciation of the euro will continue to support industrial activity by enhancing the competitiveness of European exports to the strongly-growing areas (Asia and the United States). The latest indicators show growth in the sector is still strong. The moderate decline in the purchasing managers’ index for manufacturing industry observed in May actually comes after 14 consecutive months of increases but leaves the index very clearly in the growth zone (above 50). The IFO German business confidence index and the economic sentiment index of the Euro zone, which was also slightly down in May, also remain at high levels. Thus the European growth dynamic will clearly come from the industrial sectors exposed to global growth, which should attenuate the impact of the expected slowdown of domestic demand. Naturally, the Euro-zone countries that export heavily to Asia and United States (led by Germany) will benefit much more from this environment than those whose foreign trade is done mainly with the rest of the Euro zone (such as Greece or Spain). Austerity is also on the agenda in the United Kingdom, where the government has presented a first set of economy measures amounting to £6.2 billion in order to mark its commitment to reduce the budget deficit, which at that point was estimated at more than 10% of GDP for 2010. Other more drastic measures will follow, with a new budget due to be announced on June 22 and a longer-term plan expected in the autumn. The second estimation of British GDP produced a slight upward revision of growth in Q1 2010, from +0.2% to +0.3%. Confirming the statistics published until then, the breakdown of growth reveals the clear dynamism of investment and industrial activity, while consumption and services are only increasing weakly. The reduction of State involvement may well strengthen this trend in the short term, while the pound’s weakness and Asian and US growth will continue to support industry. The Swiss economy, for its part, is maintaining its dynamism. The KOF leading indicator increased again in May to reach its highest level since August 2006. Employment rose during the first quarter. Growth is based both on dynamic exports and on sustained domestic demand. An island of balanced growth in the middle of a Europe afflicted by many imbalances… Although the Japanese economy is still confronted with deflation, characterized by a drop in the price level, it again recorded steady growth in Q1 2010, thanks mainly to exports from the industrial sector. Thus GDP rose by 1.2% during the first three months of the year, following +1.0% in Q4 2009. While more than half of this growth derives from foreign trade, household consumption also posted an increase, as did corporate investment. These statistics illustrate the very cyclical nature of the Japanese economy, which posts some very good performances in phases of strong global growth and in particular of recovery of investment, as is the case at the moment. On the other hand, for the last two decades its economy has not developed its own internal dynamic of demand growth, which limits the growth potential in the medium term. The ageing of the population and, more generally, the demographic dynamic, a high savings rate and the labour market rigidities prevent any return to a sustainable and, above all, endogenous growth dynamic. Japan remains caught in the liquidity trap of deflation, which will lead the Bank of Japan to retain its zero-interest-rate policy for a long time to come. Emerging economies The publication of Gross Domestic Product in several Asian economies has confirmed the strong expansion of the emerging world, the number one contributor to global growth. Thus Indian GDP was up by 8.6% in the first quarter of 2010 compared with the same quarter of the previous year. As for Thai GDP, it recorded a 12% increase over the last twelve months, its highest growth rate in fifteen years. Other emerging economies are also displaying their dynamism such as Mexico (+4.3% in Q1), which has regained the growth rate it had enjoyed in the first half of the decade, South Africa (+1.2% in the first quarter, +1.6% over the last 12 months) or Russia (+2.9% in one year, but still below expectations). According to the OECD, the growth of the Organization’s non-member economies (which encompass all of the emerging world) should account for more than two thirds of global growth in 2010 and 2011. Markets Equities The trend on the stock markets has remained closely linked to the perception of the Old Continent's state of health. After having rebounded strongly upon the announcement of the €750 billion European rescue plan, the international stock markets again moved downwards over the ensuing three weeks, with investors fearing that these measures may be insufficient to prevent contagion of the crisis. These fears were compounded by the worries over the "sustainability" of the global economic recovery in an environment marked by an increasing number of austerity plans. The denied rumours of a possible calling into question of China's bond investment policy towards the European Union countries allowed the market to recover in the wake of a series of good economic figures, in particular about real estate in the United States. The period under review was divided into two phases. The first, which was characterized by risk aversion, continued to support defensive stocks. In the rebound phase, it was higher-beta shares, in particular mining or automotive-sector shares, that stood out. The great difference in performance between shares in the north and centre of Europe on the one hand and those in the Mediterranean basin on the other was maintained. The operators remain mistrustful of the implementation of the government spending reduction programmes and continue to favour countries that are perceived to be relatively sounder, like Germany, Switzerland or France. The coming weeks will be punctuated by the publication of economic data on both sides of the Atlantic. They will be all the more carefully scrutinized in that the operators are seeking reassurance about the soundness of the ongoing recovery. Bonds The flight-to-quality movement that had begun in April at the time of the Greek debt crisis continued after the announcement of the joint plan by the European Union and International Monetary Fund. The worries about the growth prospects of the European countries compounded those over the ability of certain States to refinance their debt, at a time when the governments were announcing their public finances restructuring plans. Despite the indebtedness and sizeable budget deficit of the United States and Great Britain, the Treasury bonds of those two countries have also been regarded as safe havens, with the sovereign interest rates on their bond issues falling to 3.16% and 3.47% respectively. Exchange rates The worries about the Euro zone’s growth prospects continued to weigh on the single European currency over the last few weeks, even though the very swift movement seen at the beginning of May has given way more recently to a consolidation at around the level of €1.23 EUR/USD. Against the Swiss franc, the European currency also stabilized at a low level at the end of May, at around 1.42 EUR/CHF. More generally, the flight-to-quality movement has also impacted the foreign-exchange market, on which the currencies heavily dependent on global growth marked time. Thus the Canadian dollar fell by 7% against the US dollar before stabilizing at around 1.05 USD/CAD. The Australian dollar, for its part, lost 10% against the US dollar and the Brazilian real 7%, as did the South African rand and the New Zealand dollar. In addition to being a victim of the flight to quality, the Korean won was also affected by the official implication of North Korea in the destruction of a South Korean warship that caused the death of 46 sailors and revived the fears of destabilization of this crucial region for global growth. The Korean currency lost 12% in less than two weeks against the US dollar. |
june 2010
