global data watch 110311 jpm

7/27/2019 Global Data Watch 110311 JPM

1/80

Global Data Watch

Economic Research

March 11, 2011

www.morganmarkets.com

1H11 GDP growth trimmed to 3% ar in US and 3.7% worldwide as

shocks and near-term uncertainty mount

A massive earthquake in Japan adds to uncertainties even as economicdata continue to point to robust 1Q11 growth

EMU policymakers begin a two-week stretch of crucial meetings that

will unveil the latest attempt to resolve the peripheral fiscal crisis

COPOM turns dovish while Banxico notes upside inflation risks

Shaking foundations

Fridays massive earthquake in Japan added to the unusual array of shocks that are

buffeting the global economy in early 2011. The lengthy list includes the oil price

shock, surging food prices, severe winter weather in the US and Europe, Lunar

New Year holiday disruptions in China, and simmering tensions surrounding the

EMU fiscal crisis. As some drags have persisted longer than expected and newones have come on the scene, this has both raised the level of uncertainty about the

outlook and tempered our baseline for near-term growth. We lowered the US

forecast for 1H GDP Friday for the second time in two weeks, with growth now

expected to average 3% ar in the two quarters, versus the original forecast of 4%.

We made a smaller downward adjustment to the Euro area growth forecast last

Friday. These changes are likely to be followed by modest cuts elsewhere around

the globe in coming days. One candidate may be the UK, where weak construction

data have shifted the risks for 1Q growth to the downside.

As we assess the likely impact of these supply and geopolitical shocks on near-

term growth, it is important to recognize that most, if not all of them, will prove

to be temporary, and that they are occurring against a backdrop of very strong

fundamental supports for growth. Industrial production is booming and thepurchasing-power hit to consumption from higher oil prices is being cushioned by

improving labor markets, a 17% advance in global stock prices since September,

and the reduction in social security taxes in the US. Moreover, the soft spots in the

global economy, including the service sector, the Euro area outside of Germany,

and Japan, are all showing signs of improvement. Even with the cuts we have made

to the forecast so far, our call for 1H global growth still stands at 3.7%, which is

1%-pt above trend. Put differently, the shocks to date would have to magnify

considerably to push global growth below this trendline.

Our biggest immediate concern remains the oil shock and political turmoil in the

Middle East and North Africa. Oil shocks can affect the economy through two

channels: the hit to household purchasing power and a loss of confidence and riskBruce Kasman(1-212) [email protected]

J PMorgan Chase Bank NA

David Hensley(1-212) [email protected]


Joseph Lupton(1-212) 834-5735

[email protected]


-30

-15

0

15

30

45

60 -3.0

-1.5

0.0

1.5

3.0

4.5

6.0

%3m/3m chg

Oil price and retail sales vol ume, dev. mkts.

%3m/3m chg, saar

Brent oil

Retail sales

00 02 04 06 08 10

-30

-20

-10

0

10

20

05 06 07 08 09 10 11 12

50

60

70

80

90

%3m chg

Equities and consu mer expectations, US

Cons. Expect.

Index; (Michigan survey)

S&P500

Contents

Economic Research note

US data bring hints of stronger

export growth ahead 11

The role of the time horizon in

Euro area debt sustainability 13

Aussies online shopping:

under-stating retail sales, not GDP 15

Singapore: to maintain current

tightening path or go further? 17

Czech rate hikes: lagging ECB at

first, but outrunning in 2012 19

Global Economic Outlook Summary 4

Global Central Bank Watch 6

The J.P. Morgan View: Markets 7

Selected recent research from

J.P. Morgan Economics 10

Data Watches

United States 21

Euro area 29

Japan 35

Canada 39

Mexico 41

Brazil 43

Andeans 45

United Kingdom 47

Central Europe 51

Australia and New Zealand 55

China, Hong Kong, and Taiwan 59

Korea 63

ASEAN 65

Regional Data Calendars 72


2/80

2

Economic Research

Global Data Watch

March 11, 2011

JPMorgan Chase Bank NA, New York

Bruce Kasman (1-212) [email protected]

David Hensley (1-212) [email protected]

J oseph Lupton (1-212) [email protected]

appetite that undermines asset prices. To date, this shock has

proved manageable because the hit to purchasing power,

while significant, has not been big enough to stifle growth in

real income, and because it has not spilled over to confidenceand asset prices. However, the developments of the past two

weeks have begun to chip away at this more benign scenario,

as seen in the modest retreat in global stock prices and

Fridays report of a sharp drop in US consumer confidence in

early March. Our energy strategy team anticipates that al-

though there will be an unusual amount of volatility in global

oil prices in coming weeks, the level of prices will be lower by

midyear. However, we cannot rule out the possibility that the

unrest in the region will intensify and spread to additional

suppliers, critically Saudi Arabia, delivering a fresh jolt to oil

prices and geopolitical uncertainty.

Raising the bar for March data in ChinaIn addition to the issues discussed above, uncertainty about

the trajectory of Chinas economy continues to cloud the

outlook. The latest reports show that the growth of retail sales

has slowed, led by car sales, as has the growth of exports and

IP. Chinas all-industry PMI has fallen to the lowest level

since March 2009. With the Lunar New Year holidays dis-

rupting activity in January and February, it is hazardous to

draw firm conclusions from these early-year data. Our fore-

cast calls for growth to moderate to a still-solid 9%-9.5%

annual rate in 1H11 compared with the robust 12.7% gain

recorded in 4Q10. To validate this call, we need to see a

rebound in these key indicators in March. Chinas inflationrate held steady at 4.9%oya in February as higher food

inflation offset a decline in nonfood inflation. We look for

inflation to rise to an expansion-high 5.3%oya this month. If

our growth call is correct, the continued rise in inflation will

keep policymakers on a gradual tightening path.

Protests reach Saudi Arabia

Following an escalation of tensions Thursday in which Saudi

police discharged their weapons to disperse a protest, Fridays

more widely anticipated protest was less well-attended amid

a heavy security presence. Although more protests this month

will continue to test authorities, policy actions aimed at

appeasing at least some of the protestors demands will likely

damp tensions. These measures could entail the inclusion of

younger figures in the government, the introduction of a set of

mortgage laws, and education reforms. In addition, GCC

countries have announced a US$20 billion support fund to

help Bahrain and Oman, both of which have been affected by

the spread of popular protests. This impressive plan repre-

sents more than 26% of Bahrain and Omans GDP.

Earthquake rattles strengthening Japan

A magnitude 8.9 earthquake, the fifth largest in the world

since WWII, struck the east coast of Japan Friday morning,

373 kilometers northeast of Tokyo. While the seriousness of

this tragic disaster should not be underestimated in terms of itsbroader impacts, it is premature to gauge the economic fall-

out. Undoubtedly, economic activity will be disrupted in the

very near term, at least in the most affected areas. This will be

followed by an increase in public works spending. On net, it

is worth noting that GDP grew more than 3% annualized in the

first three quarters of 1995 following the devastating 7.2-

magnitude Kobe earthquake.

The BoJ announced it would provide for any needed addi-

tional liquidity in the aftermath of the earthquake. Also, next

weeks two-day board meeting has been shortened to just one

day, Monday, to allow for prompt action if necessary. Should

the yen strengthen significantly and the Nikkei sell off, as

occurred following the 1995 Kobe earthquake, the BoJ may

step in to ease policy further by expanding its QE operations

via accelerating the purchase of JGBs.

The earthquake comes at a time when the macroeconomy

appears to be accelerating sharply from a temporary contrac-

tion last quarter. The string of strong data was continued this

week. Total machinery orders in January jumped close to

20%m/m sa, the biggest gain since 1988, led by orders from

overseas. Also, the Economy Watchers survey headline index

rose 4pts in February to the second highest level of the cycle.

In addition, the Cabinet Offices real private consumptionindex advanced in January. In whole, our current forecast

looks for 2.2% real GDP growth in both this and next quarter,

but the recent data flow points to upside risks while the impact

of the earthquake raises more uncertainty.

EMU policy needs to deliver

Financial market stress has returned to the Euro area periph-

ery as policymakers enter the final stretch before next weeks

Eurogroup/EcoFin meeting on March 14-15 and the an-

nouncement of the comprehensive policy package on March

46

50

54

58

62

2

6

10

14

18

DI, sa

China all-industry PMI and real GDP

2006 2007 2008 2009 2010 2011

%q/q, saar

GDP

PMI


3/80

Economic Research

Global Data Watch

March 11, 2011

3





Editor

Sandy Batten (1-212) 834-9645 [email protected]

24-25. There is no single reason behind the renewed decline

in bond prices around the periphery. Rather, a confluence of

events has led to a deterioration in sentiment: a shift toward

policy tightening by the ECB; a downgrade of Greece andSpain by Moodys; a lack of clarity on the policy package to

be announced soon; and unhappiness with fiscal austerity in

the periphery.

Regardless of the source of the market stress, policymakers

are under huge pressure to deliver. One critical issue to be

decided is whether the transition from the current liquidity

hospital (the EFSF) to the new liquidity hospital (the ESM) in

the middle of 2013 will trigger debt restructuring. Uncertainty

about this process was one of the factors mentioned by

Moodys in its downgrading of Greece. Even if restructuring

is imbedded as an option for the fiscal end game, a reduced

borrowing rate on liquidity support is the single most impor-

tant thing that policymakers could decide, as it has the poten-

tial to dramatically change the likelihood of default. By

contrast, the markets focus on the size of the EFSF is

misplaced. No matter how large the vehicle is it will not help

sovereigns to exit the current crisis without a debt restructur-

ing at the current borrowing rate.

With regard to implementation risk surrounding fiscal auster-

ity, there is little that can be done. Sovereigns around the

periphery have an income problemlarge primary deficits

as well as a balance sheet problemlarge amounts of out-

standing debt. There is no alternative to fiscal consolidationaimed at closing the primary deficits. This was recognized by

the new Irish government in its decision to stick to the

previous administrations fiscal plans for the next two years.

And it is evident in the Portuguese governments decision to

make additional commitments this week to ensure that its

ambitious deficit objective of 4.6% of GDP this year is met.

The only possible alternative for these economies is to per-

haps slow the pace of fiscal consolidation, but this would

come at the cost of riling already skeptical creditors.

UK output data create room for doubt

The UK MPC left rates unchanged this week, awaiting confir-

mation that at least a tepid pace of growth has been sustainedthrough early 2011 before inflation concerns trigger an increase

in rates. Unfortunately, indicators of UK growth are unusually

dispersed. Readings on consumer spending and confidence

remain weak. But business survey indicators suggest near trend

output growth, with exports and the manufacturing sector

growing strongly. Official data this week showed a large fall in

construction output in January after a snow-impacted Decem-

ber, shifting risks to our forecast for 1Q GDP to the downside.

Although labor market data are soft, we expect next weeks data

will not demonstrate the magnitude of weakness we would

associate with an economy that was stagnating. Still, although

the bar for the MPC to raise rates is not high, the data are

creating enough doubt to keep debate alive.

COPOM and Banxico role reversal

The impact of the spike in commodity prices on Latin American

policymakers is playing out differently among the regional

heavyweights. Finding itself increasingly behind the curve,

Brazils central bank has hiked rates 100bp over the last two

meetings. However, the COPOM suddenly shifted to a more

dovish tone in its minutes published this week. The committee

explicitly highlighted signs of deceleration in economic activ-

ity as well as a resulting lower inflation projection. The risk is

now of a shorter rate-hiking cycle than what we have penciled

inwhich calls for an additional 50bp hike in April and a finalincrease of 25bp in June, lifting the Selic rate to 12.5%

particularly if new macroprudential measures are announced.

In contrast to the COPOM, the central bank of Mexico has been

one of the more dovish Latin American central banks given its

closer ties to the US and the Fed. However, Banxico high-

lighted last week that the global and domestic food price

shocks, as well as the potential consequences of higher oil

prices, have shifted the balance of risks for inflation, apparently

opening the door for potential rate hikes later this year. Indeed,

higher oil prices are increasing the possibility that Mexicos

Ministry of Finance decides to step up the monthly gasoline

price increase, which would have a direct impact on inflationand potentially medium-term inflation expectations. Although

we are keeping our call that Banxico will leave rates unchanged

until 2Q12, we acknowledge the possibility that higher oil

prices could prompt more front-loaded action. Next Fridays

publication of the minutes from Banxicos latest meeting

should shed more light on the boards reassessment of the

balance of risks, which we may use to fine-tune our rate call.

3.3

3.4

3.5

3.6

3.7

3.8

3.9

4.04.1

Jan 08 Aug 08 Feb 09 Sep 09 Mar 10 Oct 10

0

2

4

6

8

10

12

14

Medium-term in flation expectations and gasoline prices, Mexico

Inflation expectations Gasoline

%oya, both axes


4/80

4

Economic Research

Global Data Watch

March 11, 2011

JPMorgan Chase Bank, New York


Carlton Strong (1-212) [email protected]


Global economic outlook summary

Note: For some emerging economies, 2010-2012 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J .P. Morgan.

Bold denotes changes from last edition of Global Data Watch, with arrows showi ng the direction of changes. Underline indicates beginning of J.P. Morgan forecasts.

2010 2011 2012 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 4Q10 2Q11 4Q11 2Q12

The Americas

United States 2.8 2.9 2.9 2.6 2.8 2.5 3.5 3.5 3.0 2.0 1.2 2.5 2.1 1.4Canada 3.1 3.3 3.0 1.8 3.3 4.0 3.6 3.5 3.3 2.7 2.3 2.4 1.9 2.0

Latin America 6.0 4.3 3.8 2.5 3.6 3.7 5.8 4.2 4.3 3.2 6.7 7.0 7.6 7.6

Argentina 8.5 5.5 5.0 1.6 2.0 6.0 8.0 8.0 6.0 3.0 10.5 11.0 12.0 12.0

Brazil 7.5 4.0 3.8 1.6 3.0 3.9 4.8 4.9 4.6 4.0 5.6 6.0 6.1 6.2

Chile 5.3 6.0 4.5 8.1 4.0 5.0 5.0 5.0 4.5 4.5 2.5 4.2 5.5 5.0

Colombia 4.0 4.5 4.0 0.9 5.0 6.0 5.0 4.5 4.7 4.0 2.7 3.6 4.0 3.4 Ecuador 3.0 3.5 3.0 6.5 3.0 3.0 2.5 2.5 2.0 3.5 3.3 3.5 3.8 3.6

Mexico 5.5 4.5 3.5 3.2 5.1 2.0 8.0 2.5 3.6 1.5 4.2 3.6 3.7 3.6

Peru 8.8 7.3 6.0 7.2 8.6 6.8 7.0 4.5 6.7 6.5 2.1 2.9 2.8 2.8

Venezuela -1.4 1.5 3.0 0.6 -1.8 2.5 1.5 2.0 2.5 3.0 27.3 29.0 33.8 34.6

As ia/Pac if ic

Japan 4.0 1.7 1.8 3.3 -1.3 2.2 2.2 2.5 2.0 1.8 0.1 0.5 0.4 0.3Australia 2.7 2.8 4.2 0.5 3.0 0.0 5.8 4.2 4.4 4.7 2.7 3.4 3.6 3.2

New Zealand 1.5 1.6 3.9 -0.6 2.1 -0.6 2.3 5.0 5.0 2.7 4.0 5.4 3.8 2.9

Asia ex Japan 9.1 7.7 7.5 7.4 7.9 8.1 7.8 8.1 7.1 7.1 4.9 5.4 4.4 3.9

China 10.3 9.6 9.0 9.9 12.7 9.5 9.0 8.7 8.7 9.3 4.7 5.1 3.3 3.0

Hong Kong 6.8 4.8 4.7 3.6 6.1 4.2 4.3 4.7 5.0 4.8 2.8 3.9 4.2 3.7

India 8.5 8.8 8.4 13.5 0.9 8.0 10.0 14.0 6.0 5.0 9.2 8.1 8.7 8.3

Indonesia 6.1 5.4 6.7 6.7 7.5 5.3 5.2 4.5 5.0 7.0 6.3 7.2 6.3 5.5

Korea 6.1 4.2 4.5 3.0 2.2 5.5 4.0 4.5 5.5 4.0 3.6 4.5 3.2 2.5

Malaysia 7.2 5.2 4.4 -0.6 8.9 5.5 5.3 5.0 4.5 5.5 2.0 3.4 3.7 3.0

Philippines 7.3 5.3 5.0 -3.1 12.7 4.9 6.1 4.1 4.1 5.3 2.9 5.6 5.1 3.9

Singapore 14.5 5.0 5.6 -16.7 3.9 8.7 7.8 7.0 6.6 4.9 4.0 6.0 4.8 2.3

Taiwan 10.8 5.0 5.4 3.2 0.0 9.0 6.5 5.8 6.0 5.5 1.1 1.8 2.9 2.1

Thailand 7.8 5.0 4.8 -1.3 4.8 7.5 6.0 5.5 5.5 4.5 2.9 4.4 4.3 4.5

Af rica/Mid dle East

Israel 4.6 4.5 4.0 4.6 7.7 4.5 4.5 4.5 4.5 4.5 2.5 3.5 3.5 3.2South Africa 2.7 3.7 3.8 2.7 4.4 3.6 3.7 4.0 4.1 3.0 3.5 4.2 5.9 5.8

Europe

Euro area 1.7 2.2 2.2 1.4 1.1 3.0 2.0 2.0 2.5 2.3 2.0 2.0 1.9 1.6

Germany 3.5 3.3 2.2 2.8 1.5 4.5 2.5 2.5 2.5 2.0 1.6 2.0 2.0 1.6

France 1.5 2.3 2.4 1.0 1.4 3.5 2.0 2.5 3.0 2.3 1.9 2.1 2.1 1.6

Italy 1.1 1.4 2.1 1.1 0.2 1.5 1.5 2.0 2.5 2.5 2.0 1.9 1.7 1.8

Norway 2.2 3.0 3.0 4.4 1.3 3.5 3.5 3.3 3.0 3.0 2.2 1.1 0.9 0.9

Sweden 5.3 4.8 3.0 8.7 5.1 4.0 3.5 3.5 3.0 3.0 1.9 3.1 2.9 2.4

United Kingdom 1.3 1.7 2.7 2.8 -2.3 2.8 2.0 2.5 3.0 2.5 3.4 4.0 3.8 2.4

Emerging Europe 4.3 4.1 4.6 -1.0 9.3 3.2 3.2 3.7 5.0 5.2 6.6 7.7 6.9 6.0

Bulgaria 0.1 3.5 4.0

Czech Republic 2.3 3.0 3.5 3.6 1.4 1.5 3.0 3.5 4.0 3.5 2.1 2.2 2.9 2.7Hungary 1.2 2.8 3.5 2.2 0.8 2.5 3.0 3.5 3.5 3.5 4.4 4.0 4.2 3.8Poland 3.8 4.0 4.2 4.9 3.2 3.5 4.0 4.5 4.5 4.2 2.9 4.0 2.9 2.7

Romania -1.3 2.0 4.0 7.9 7.2 4.5 4.8

Russia 4.0 4.5 5.0 -3.8 14.5 3.5 3.0 3.5 5.5 6.0 8.2 10.9 9.7 7.9

Turkey 8.3 4.5 5.0 7.4 6.3 6.5 6.2

Global 3.8 3.4 3.5 2.9 2.9 3.6 3.8 3.8 3.6 3.1 2.7 3.3 3.0 2.5Developed markets 2.5 2.4 2.6 2.3 1.4 2.7 2.8 2.8 2.8 2.2 1.6 2.2 2.0 1.5Emerging markets 7.2 6.1 6.0 4.7 7.0 6.1 6.4 6.3 6.0 5.7 5.6 6.2 5.7 5.2

Memo:

Global PPP weighted 4.8 4.3 4.3 3.8 4.0 4.4 4.6 4.7 4.3 4.3 3.4 4.0 3.6 3.1

% over a year ago

Consumer prices

% over previous period, saar

Real GDP

% over a year ago

Real GDP


5/80

Economic Research

Global Data Watch

March 11, 2011

5

JPMorgan Chase Bank, New York


Carlton Strong (1-212) [email protected]


G-3 economic outlook detailPercent change over previous period; seasonally adjusted annual rate unless noted

Note: More forecast details for the G-3 and other countries can be found on J .P. Morgans Morgan Markets client web site.

2010

2010 2011 2012 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

United States

Real GDP 2.8 2.9 2.9 2.8 2.5 3.5 3.5 3.0 2.0 3.0 3.5

Private consumption 1.8 3.1 2.7 4.1 2.1 3.5 4.0 3.0 1.5 2.5 3.0

Equipment investment 15.1 10.8 9.6 5.5 8.0 12.0 12.0 10.0 10.0 8.0 8.0

Non-residential construction -13.8 3.5 9.6 4.5 2.0 5.0 9.0 10.0 10.0 10.0 10.0

Residential construction -3.0 5.5 12.8 2.7 10.0 15.0 15.0 10.0 10.0 15.0 15.0

Inventory change ($ bn saar) 60.3 56.7 67.1 7.1 57.8 55.8 53.9 59.2 62.2 67.4 71.0

Government spending 1.0 -0.2 -0.6 -1.5 -0.9 -1.3 -1.3 -0.1 -0.4 -0.6 -0.6

Exports of goods and services 11.8 9.9 8.4 9.6 15.0 8.0 8.0 8.0 8.0 9.0 9.0

Imports of goods and services 12.7 9.5 8.6 -12.4 21.0 7.0 10.0 10.0 9.0 8.0 7.0

Domestic final sales contribution 1.9 3.1 3.1 3.1 2.2 3.6 4.0 3.3 2.3 2.9 3.3

Inventories contribution 1.4 -0.1 0.1 -3.7 1.5 -0.1 -0.1 0.1 0.1 0.1 0.1

Net trade contribution -0.4 -0.1 -0.2 3.4 -1.2 0.0 -0.5 -0.5 -0.4 0.0 0.1Consumer prices (%oya) 1.6 2.2 1.3 1.2 1.9 2.5 2.5 2.1 1.4 1.3 1.2

Excluding food and energy (%oya) 1.0 1.0 0.9 0.6 1.0 1.0 0.9 0.9 0.8 0.9 1.0

Federal budget balance (% of GDP, FY) -8.8 -9.8 -6.9

Personal saving rate (%) 5.8 5.0 4.6 5.4 5.1 5.0 4.8 4.9 4.5 4.6 4.6

Unemployment rate (%) 9.6 8.8 8.4 9.6 8.9 8.8 8.7 8.6 8.5 8.5 8.4

Industrial production, manufacturing 6.0 4.7 3.7 4.0 4.5 5.0 4.5 3.5 3.5 3.0 3.5

Euro area

Real GDP 1.7 2.2 2.2 1.1 3.0 2.0 2.0 2.5 2.3 2.0 2.0

Private consumption 0.7 1.2 1.8 1.7 1.0 1.0 1.5 1.5 2.0 2.0 2.0

Capital investment -0.8 3.3 4.5 -2.4 7.0 4.0 4.0 5.0 4.5 4.5 4.5

Government consumption 0.7 0.1 -0.3 0.4 0.0 -0.5 -0.5 -0.5 -0.3 -0.3 0.0

Exports of goods and services 10.6 8.3 7.0 7.5 8.0 7.0 7.0 7.0 7.0 7.0 7.0

Imports of goods and services 8.7 6.8 6.8 4.4 7.0 6.5 7.0 6.5 7.0 6.5 7.0

Domestic final sales contribution 0.4 1.3 1.8 0.6 1.9 1.3 1.5 1.7 2.0 2.0 2.0

Inventories contribution 0.4 0.1 0.1 -0.9 0.5 0.4 0.3 0.4 0.1 -0.4 -0.2Net trade contribution 0.9 0.7 0.3 1.4 0.6 0.4 0.2 0.4 0.2 0.4 0.2

Consumer prices (HICP, %oya) 1.6 2.0 1.4 2.0 2.3 2.0 2.0 1.9 1.6 1.4 1.4

ex unprocessed food and energy 1.0 1.3 1.4 1.1 1.2 1.2 1.3 1.4 1.6 1.4 1.4

General govt. budget balance (% of GDP, FY) -6.3 -4.6 -3.9


Industrial production 7.1 6.0 4.6 6.9 7.0 5.0 5.0 4.5 4.5 4.5 4.5

Japan

Real GDP 4.0 1.7 1.8 -1.3 2.2 2.2 2.5 2.0 1.8 1.5 1.5

Private consumption 1.9 0.3 1.2 -3.2 0.8 0.5 1.2 1.2 1.5 1.0 1.3

Business investment 2.4 4.6 5.1 2.0 3.0 5.0 6.0 6.0 5.0 5.0 4.0

Residential construction -6.5 7.0 4.3 12.3 6.0 8.0 5.0 5.0 4.0 4.0 3.0

Public investment -3.3 -10.6 -8.2 -20.5 -10.0 -5.0 -5.0 -8.0 -8.0 -10.0 -10.0

Government consumption 2.3 1.2 1.0 1.2 0.8 0.8 1.0 1.0 1.0 1.0 1.0

Exports of goods and services 24.2 7.8 5.9 -3.0 12.0 10.0 8.5 6.0 5.0 5.0 5.0

Imports of goods and services 9.8 5.6 6.3 -0.5 4.5 5.0 6.0 6.5 7.0 6.0 6.0Domestic final sales contribution 1.5 0.8 1.4 -2.8 1.5 1.3 1.5 1.1 1.1 1.0 1.2

Inventories contribution 0.3 0.3 0.1 0.7 0.2 0.5 0.3 0.1 0.1 0.2 0.1

Net trade contribution 2.2 0.6 0.3 0.9 0.5 0.4 0.7 0.8 0.5 0.3 0.2

Consumer prices (%oya) -0.7 0.4 0.1 0.1 0.0 0.5 0.7 0.4 0.3 0.1 0.1

General govt. net lending (% of GDP, CY) -7.9 -7.7 -7.4


Industrial production 16.0 5.6 5.7 -6.1 28.0 3.0 1.0 6.0 15.0 1.0 2.0

Memo: Global industrial production 9.3 6.3 5.9 5.5 8.2 6.3 6.2 6.3 6.8 4.9 4.9

%oya 7.2 6.5 5.7 6.5 6.7 6.4 6.0 5.7

2011 2012


6/80

6

Economic Research

Global Data Watch

March 11, 2011

JPMorgan Chase Bank N.A., New York


Michael Mulhall (1-212) [email protected]


Central Bank WatchChange from Forecast

Official interest rate Current Aug '07 (bp) Last change Next meeting next change Mar 11 Jun 11 Sep 11 Dec 11 Mar 12

Global GDP-weighted average 1.91 -307 1.92 2.09 2.24 2.37 2.47

excluding US GDP-weighted average 2.60 -223 2.62 2.85 3.07 3.24 3.39

Developed GDP-weighted average 0.62 -358 0.62 0.74 0.88 1.00 1.12

Emerging GDP-weighted average 5.45 -165 5.51 5.79 6.01 6.14 6.23

Latin America GDP-weighted average 7.81 -160 7.84 8.33 8.46 8.49 8.49

CEEMEA GDP-weighted average 4.08 -294 4.18 4.38 4.68 5.12 5.47

EM Asia GDP-weighted average 5.14 -111 5.19 5.44 5.64 5.69 5.69

The Americas GDP-weighted average 1.37 -444 1.37 1.47 1.53 1.55 1.57

United States Federal funds rate 0.125 -512.5 16 Dec 08 (-87.5bp) 15 Mar 11 On hold 0.125 0.125 0.125 0.125 0.125

Canada Overnight funding rate 1.00 -325 8 Sep 10 (+25bp) 12 Apr 11 31 May 11 (+25bp) 1.00 1.25 1.75 2.00 2.25

Brazil SELIC overnight rate 11.75 -25 2 Mar 11 (+50bp) 20 Apr 11 20 Apr 11 (+50bp) 11.75 12.50 12.50 12.50 12.50

Mexico Repo rate 4.50 -270 17 Jul 09 (-25bp) 15 Apr 11 2Q 12 (+25bp) 4.50 4.50 4.50 4.50 4.50

Chile Discount rate 3.50 -150 17 Feb 11 (+25bp) 17 Mar 11 17 Mar 11 (+25bp) 3.75 4.50 6.00 6.50 6.50

Colombia Repo rate 3.25 -575 25 Feb 11 (+25bp) 18 Mar 11 18 Mar 11 (+25bp) 3.50 4.25 5.00 5.00 5.00

Peru Reference rate 3.75 -75 10 Mar 11 (+25bp) 7 Apr 11 7 Apr 11 (+25bp) 3.75 4.50 4.50 4.50 4.50

Europe/Africa GDP-weighted average 1.49 -323 1.50 1.74 2.01 2.30 2.56

Euro area Refi rate 1.00 -300 7 May 09 (-25bp) 7 Apr 11 7 Apr 11 (+25bp) 1.00 1.25 1.50 1.75 2.00

United Kingdom Bank rate 0.50 -500 5 Mar 09 (-50bp) 7 Apr 11 May 11 (+25bp) 0.50 0.75 1.00 1.25 1.50

Sweden Repo rate 1.50 -200 15 Feb 11 (+25bp) 20 Apr 11 20 Apr 11 (+25bp) 1.50 1.75 2.25 2.75 3.00

Norway Deposit rate 2.00 -250 5 May 10 (+25bp) 16 Mar 11 12 May 11 (+25bp) 2.00 2.25 2.50 2.75 3.00

Czech Republic 2-week repo rate 0.75 -200 6 May 10 (-25bp) 24 Mar 11 23 Jun 11 (+25bp) 0.75 1.00 1.25 1.75 2.25

Hungary 2-week deposit rate 6.00 -175 24 Jan 11 (+25bp) 28 Mar 11 4Q 11 (+25bp) 6.00 6.00 6.00 6.25 6.50

Israel Base rate 2.50 -150 21 Feb 11 (+25bp) 28 Mar 11 2Q 11 (+25bp) 2.50 3.00 3.50 4.00 4.50

Poland 7-day intervention rate 3.75 -75 19 Jan 11 (+25bp) 5 Apr 11 5 Apr 11 (+25bp) 3.75 4.25 4.25 4.50 4.75

Romania Base rate 6.25 -75 4 May 10 (-25bp) 29 Mar 11 3Q 11 (+25bp) 6.25 6.25 6.50 6.75 7.00

Russia 1-week deposit rate 3.00 0 24 Dec 10 (+25bp) Mar 11 Mar 11 (+25bp) 3.25 3.50 3.75 4.00 4.25

South Africa Repo rate 5.50 -400 18 Nov 10 (-50bp) 24 Mar 11 Nov 11 (+50bp) 5.50 5.50 5.50 6.00 6.50

Turkey 1-week repo rate 6.25 -1125 20 Jan 11 (-25bp) 23 Mar 11 Aug 11 (+50bp) 6.25 6.25 7.00 8.00 8.50

Asi a/Pacif ic GDP-weighted average 3.25 -94 3.27 3.43 3.56 3.60 3.60

Australia Cash rate 4.75 -150 2 Nov 10 (+25bp) 5 Apr 11 May 11 (+25bp) 4.75 5.00 5.25 5.50 5.50

New Zealand Cash rate 2.50 -550 10 Mar 11 (-50bp ) 28 Apr 11 2Q 12 (+25bp) 2.50 2.50 2.50 2.50 2.50

Japan Overnight call rate 0.05 -45 5 Oct 10 (-5bp) 14 Mar 11 On hold 0.05 0.05 0.05 0.05 0.05

Hong Kong Discount window base 0.50 -625 17 Dec 08 (-100bp) 16 Mar 11 On hold 0.50 0.50 0.50 0.50 0.50

China 1-year working capital 6.06 -51 9 Feb 11 (+25bp) - 2Q 11 (+25bp) 6.06 6.31 6.56 6.56 6.56

Korea Base rate 3.00 -150 10 Mar 11 (+25bp) 12 Apr 11 2Q 11 (+25bp) 3.00 3.25 3.50 3.50 3.50

Indonesia BI rate 6.75 -175 4 Feb 11 (+25bp) 12 Apr 11 12 Apr 11 (+25bp) 6.75 7.00 7.00 7.00 7.00

India Repo rate 6.50 -125 25 Jan 11 (+25bp) 17 Mar 11 17 Mar 11 (+25bp) 6.75 7.00 7.25 7.50 7.50

Malaysia Overnight policy rate 2.75 -75 8 Jul 10 (+25bp) 5 May 11 5 May 11 (+25bp) 2.75 3.00 3.00 3.00 3.00

Philippines Reverse repo rate 4.00 -350 9 Jul 09 (-25bp) 24 Mar 11 24 Mar 11 (+25bp) 4.25 4.50 4.50 4.50 4.50

Thailand 1-day repo rate 2.50 -75 9 Mar 11 (+25bp) 20 Apr 11 20 Apr 11 (+25bp) 2.50 3.00 3.00 3.00 3.00

Taiwan Official discount rate 1.625 -150 30 Dec 10 (+12.5bp) 31 Mar 11 Mar 11 (+12.5bp) 1.75 1.875 2.00 2.125 2.25

Bold denotes move since last GDW and forecast changes. Underline denotes policy meeting during upcoming week.


7/80

Economic Research

Global Data Watch

March 11, 2011

7

JPMorgan Chase Bank, London

J an Loeys (1-212) [email protected]

The J.P. Morgan View: Markets

A slippery slope Economics: 2011 global growth cut again by 0.1%-pt to

3.4% due to downward revisions in the US for 1Q and 2Q.

Asset allocation: March seems set to become a

correction month, on growth downgrades and political

risk. We stay positive risky assets on a 3-month horizon.

Fixed income: Hold swap spread wideners in dollars,

sterling, and euros, as they are more carry efficient than

flatteners or being outright short duration.

Equities: Fading US economic surprises raise downside

risks for near term. Weaker economic data in DM could

make EM outperform further. Credit: Senior debt of Portuguese banks has been

upgraded to overweight.

FX: USD is rallying on position squaring. We stay

bearish.

Commodities: Positions leave commodities vulnerable to

a correction near term but we remain positive over the

next six to 12 months.

Another week of turmoil in the MENA region was joined

by a set of weaker economic data and an earthquake in Ja-

pan to push riskier asset classes down, and major govern-

ment bonds up. Equities are now down over 3% over the

past three weeks, and are thus in standard correction mode.

The question is now how long and how deep this correc-

tion will turn out to be and whether it presages the end of

the bull market in stocks, just as it was celebrating its sec-

ond anniversary. The answers will depend on any over-

valuation, excessively long positions, news flow, and the

sensitivity of the assets to this news.

Ranking the three major riskier asset classes on value

and positions, we would rank equities as least vulner-

able, credit in the middle, and commodities most. Ourmeasures still signal that both equity holdings and mul-

tiples are near historical means. Credit surveys show that

most managers remain significantly long corporate credit,

while more anecdotal evidence suggests that end investors

have focused on credit first as the best way to position for

economic recovery and have only recently started to move

more into equities. Position data show very elevated long

positions in commodities while the rally has brought many

to record highs.

The news flow will likely remain quite noisy, and should

keep risk takers on the sidelines. The civil war in Libya

continues to rage, but contagion to the Middle East seems

contained. The Japanese earthquake is a human disaster,

and will disrupt economic activity, but should not make one

bearish on future growth (on the contrary). The debate on

EMU fiscal reform will escalate as we approach the EMU

Council Summit in two weeks. Our view is that the EU has

the ability and resources to redress its fiscal crises, but in-

ternal disagreements will likely keep it short of the prom-

ised comprehensive solution this month. It is hard to say

how the market will react to the Council, as most investors

do not have a strong view of what to expect and are posi-

tioned neutrally.

The political news flow this month does not seem as mucha threat as the economic one. Going into the current correc-

tion, economic data were running ahead of forecasts, creating

clear upside risk on our forecasts. That has changed with the

spike in oil prices and this weeks setbacks in data. We cut

2011 growth forecasts for the US, EU, and Japan over the

past few weeks. And today, we cut the US again to 2.5% in

1Q and 3.5 in 2Q on weaker consumption and more fiscal

tightening than we had thought. None of these changes is

recovery threatening, but they have a dangerous track

record of accumulating over time.

Over the past two years, single-digit equity corrections

were minor because they did not coincide with growthdowngrades and were thus over after a few weeks of mere

profit taking. The one correction whereby equities fell by

double-digits (15%) was fueled by a four-month period of

growth forecast downgrades. Over the past few weeks, we

pushed our global growth forecast down twice by 0.1%-pt

(chart). Hence, we must accept the risk of continued slides

in risk assets in coming weeks. On a three-to-six-month

horizon, though, we remain positive on equities, credit, and

commodities on renewed growth and value.

Fixed income

Bonds rallied, as Euro area sovereign downgrades andthe earthquake in Japan fueled a flight to quality. The

downturn in activity data also challenges our somewhat

bearish outlook on duration. We hold shorts only in EM

and remain sidelined on duration in DM.

We stick with cyclical trades in Europe, however, including

flatteners and swap spread wideners in the UK and Euro

area (see GFIMS). Swap spreads tend to widen during

hiking cycles, reflecting tighter liquidity conditions. And

importantly, spread wideners do not have the onerous nega-


8/80

8

Economic Research

The J .P. Morgan View: MarketsMarch 11, 2011


Nikolaos Panigirtzoglou (44-20) [email protected]

tive carry of being short duration or flatteners. We also

look for 30-year spreads to widen in the US, partly because

we expect the long end of the curve to flatten.

Euro area peripherals underperformed in the face of

supply and ratings downgrades. In downgrading Greece,

Moodys cited the risk of a restructuring or distressed ex-

change. Though market pricing has moved sharply in this

direction, with Greek 1-year yields 4%-pt higher this month,

we still think a near-term restructuring is improbable. How-

ever, the most recent political rhetoric suggests that EU lead-

ers are still some way from agreeing on sufficiently decisive

steps to stabilize peripheral spreads this month.

Equities

Equities fell this week bringing the cumulative declinesince the Feb18 high to 3.5%.This is below the typical 5%-

10% correction seen during equity bull markets. Risks are

skewed to the downside near term as it is becoming harder

for economic data to beat elevated consensus expectations

especially as news flow from the MENA region and the

Euro periphery remains volatile.

As we have highlighted in the past, an exceptional 6-month

run of positive economic surprises has been a major driver

of the rally that began last summer. Todays rather soft US

retail sales suggest that we are getting closer to the US

Economic Activity Surprise Index falling into negative

territory.

Cyclical sectors are more vulnerable to a further cor-

rection near term. Small caps are instead less vulnerable.

Their lower liquidity cushions them during modest correc-

tions as investors tend to sell their more liquid large caps.

Worse news on DM economic data is good news for

EM equities. One of the drivers of EM underperformance

from October to February was a narrowing growth differ-

ential vs DM. Our EM-DM IP oya growth differential sig-

nal, which is a useful indicator for trading the MSCI EM

vs. MSCI World, has spent most of the past six months innegative territory. With growth indicators softening in DM

this signal will likely turn supportive of EM equities, add-

ing fuel to the gradual EM vs. DM equity outperformance

currently under way.

With the ECB set to hike next month, monetary tight-

ening is becoming a worry among equity investors. Is

prospective monetary tightening a threat to the bull equity

market trend for the medium term? Not in our view. Mon-

etary tightening tends to happen when growth is strong,

and in such an environment equities tend to rise. The

uptrend in the S&P500 was intact around the beginning of

monetary tightening by the Fed over the past 10 tightening

cycles. But we do acknowledge that monetary tightening

poses a threat to interest-sensitive sectors in Europe, suchas Property and Utilities. In fact, our European Equity strat-

egist Mislav Matejka has initiateda tactical UW in

Eurozone vs. US equities given the earlier start of ECB vs.

Fed tightening (seeEuropean Equity Strategy: March

Chartbook, Mar 7).

Credit

Credit spreads widened this week as a severe earthquake

hit Japan, the Middle East crisis escalated, and concerns on

peripheral European sovereigns were reignited. With these

headwinds likely to linger in the near term, credit spreads

will likely widen further as risky markets correct. However,we view this correction as temporary within a multi-year bull

market. Thus, instead of turning underweight credit, we fo-

cus on higher-yielding assets, and we recommend investors

to take the opportunity to add risk in a few weeks time.

One of the most vulnerable credit sectors is high yield

given its high beta with the market. A typical bull market

correction results in a 5%-8% fall in the S&P500. This

would translate into 55-88bp of widening in US HY

spreads based on the historical relationship between equi-

ties and HY credit. With spreads already 28bp wider than

the recent cycle low in early February, US HY spreads

could widen another 20-60bp. However, this does not alterour medium-term positive view on HY credit as the funda-

mentals of HY companies are strong and the 2011 default

outlook remains benign.

Although the recent rating downgrades of peripheral Euro-

pean sovereigns are hurting investor confidence, we are

upgrading Portuguese bank senior debt to overweight given

its attractive valuation versus other peripheral bank debt,

especially that of Spanish banks. We recommend to sell

senior CDS protection on Portuguese banks and buy

subordinatedCDS protection on Spanish banks. Despite

2.8

3.0

3.2

3.4

3.6

3.8

Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11

2011 global GDP growth forecasts: J.P. Morgan versus consensus

%

J.P. Morgan

Consensus


9/80

Economic Research

Global Data Watch

March 11, 2011

9


J an Loeys (1-212) [email protected]

the difference in subordination, the two are currently trad-

ing at similar spread levels. Fundamentally, we believe se-

nior debt is unlikely to be impaired for systemically impor-

tant institutions. Moreover, Spanish banks have been very

active in accessing the covered bond market in recent

months. This further reduces the recovery value of subordi-

nated Spanish bank debt in the event of a default (see Por-

tuguese Banks: Stemming the tide, R. Henriques, Mar 9).

Foreign exchange

March is providing more than its usual madness. The

MENA crisis is intensifying to the point where the oil price

drives rather than reflects growth expectations; Europe has

initiated the first of four sovereign summits with the poten-

tial to resolve everything or nothing by March 25; and the

US budget showdown threatens a government shutdown onMarch 18. Our view has beenand remainsthat none of

these events would be a trend-changer for the dollar in

2011. The world needs a recession or an activist Fed to ac-

complish that. But the deleveraging bid for dollars this week

cant be dismissed. More interesting is how much currencies

and currency vols have lagged the weakness in core asset

markets this month. Even though equities are down 3%

month-to-date, equity vol is up 3.5pts and spread markets are

10-40bp wider, the dollar is flat month-to-date, and FX vols

have sold off. This pattern is obviously atypical.

Admittedly the technical backdrop is poor if we are

wrong on how these issues play out this month. On valua-

tion, a simple cyclical model relating the trade-weighted dol-

lar to trade-weighted rate spreads and equity vol puts the

dollar about 1.5% too cheap, a misalignment that makes it

vulnerable to a bounce rather than a rally. Positions are well-

known to be record short by some measures like the IMM,

but very large shorts have precedent when the dollar is the

global low yielder. Vol curves are near record steep, a term

structure that would mean revert through higher front-end

vols if event risks are realized. Technicals are also favoring

slightly more USD strength given supports that held this

week in DXY. We holdlimited USD exposureonly short

USD/CHF ahead of Thursdays SNB meetingand see noreason to adjust in this environment. Cross-rates are more

insulated from these global hotspots. Also stay long EUR/

GBP, short EUR/CHF, and short AUD/CAD.

Commodities

Commodities sold off sharply this week, down 4%. Spec

positions across most commodities had moved to histori-

cally very high levels and this week, continued uncertainty

in MENA, weaker-than-expected Chinese trade data, and

now, the earthquake in Japan have resulted in some posi-

tion squaring. It is too early to gauge the economic impact

of the earthquake but we view both the uncertainty in the

Middle East and the weaker Chinese data as temporary

risks that will eventually subside.

OPEC has already increased production enough to mitigate

lost Libyan supplies, and we assign a very low 5% prob-

ability to any further disruptions in major oil-producing

nations. The Chinese data were likely affected by the Lunar

New Year holiday, and we remain convinced that

policymakers there will succeed in managing inflation

without adversely affecting growth. We thus stay bullish

commodities on a medium-term view but we do expect

the correction to continue until the uncertainty around the

above risks begins to subside.

Our preferred commodities are Gold, Corn, Wheat, and

Copper. Gold should benefit from the increased uncer-

tainty around growth, and Copper, Wheat, and Corn are

supported by very tight supply conditions. We remain bull-

ish on a six-month basis but expect the current correction

to continue in the short run.

Ten-year Government bond yields

Current Jun 11 Sep 11 Dec 11 Mar 12

United States 3.40 3.60 3.65 3.70 3.90Euro area 3.21 3.45 3.55 3.65 3.75

United Kingdom 3.55 3.70 3.90 4.05 4.10

Japan 1.27 1.25 1.30 1.35 1.40

GBI-EM 7.06 7.30

Current

US high grade (bp over UST) 135

Euro high grade (bp over Euro gov) 160

USD high yield (bp vs. UST) 526

Euro high yield (bp over Euro gov) 514

EMBIG (bp vs. UST) 294

EM Corporates (bp vs. UST) 283

Current Mar 11 Jun 11 Sep 11 Dec 11

EUR/USD 1.39 1.40 1.43 1.45 1.48

USD/JPY 81.9 81 80 79 78

GBP/USD 1.61 1.61 1.61 1.63 1.68

Current 11Q2 11Q3 11Q4 12Q1

Brent ($/bbl) 114 105 102 102 110

Gold ($/oz) 1420 1450 1475 1500 1500

Copper($/m ton) 9173 9450 9750 10000 9750

Corn ($/Bu) 6.68 7.00 6.75 6.10 6.20

Credit marketsYTD Return

0.9%

3.8%

-0.7%

Commodities - quarterly average

Foreign exchange

Source: J.P. Morgan, Bloomberg, Datastream

3.5%

0.6%

1.3%


10/80

10

Economic Research

Global Data Watch

March 11, 2011





Selected recent research1 from J .P. Morgan EconomicsGlobal

Developed world capex poised to accelerate once again, Mar 4, 2011

Oil prices will take some steam out of near-term growth, Feb 25, 2011Easing G-4 bank lending standards reinforcing recovery, Feb 11, 2011

Surveys signal second wind for global recovery, Feb 4, 2011

Rising service sector will bolster DM economies, Jan 28, 2011

Return to sender: global recycling of Fed QE, Nov 26, 2010

Global IP slowdown appears to have reached bottom, Nov 5, 2010

Fault lines emerge amid global growth slowdown, Sept 10, 2010

G-4 banks begin to open the lending spigot, Aug 20, 2010

Global potential growth slows, but much slack remains, Aug 6, 2010

Euro FX depreciation widely spread but narrowly felt, Jul 9, 2010

Developed market consumer spending to keep expanding, Jul 2, 2010

DM policy stances move to extremes, Jun 25, 2010

United States and CanadaCommodities will give only temporary lift to core inflation, Mar 4, 2011

US GDW growth slips on oil in 1Q, Feb 25, 2011

Showdown at the not-OK Corral: battle over the US debt ceiling, Feb 25, 2011

US: one cheer for the fall in the unemploymen t rate, Feb 11, 2011

It doesnt take much to get a 25% rise in US housing starts, Jan 28, 2011

US: one gathers what another man spills, Jan 28, 2011

More austerity ahead for US state and local governments, Jan 21, 2011

US: turn on, tune in, drop out of the labor force, Jan 14, 2011

US: mind the gap or obey the speed limit?, Jan 7, 2011

Stronger US job growth would help clear the housing market, Jan 7, 2011

Canada: sluggish 2011 despite brighter US outlook, Jan 7, 2011

US: blame the textbook, not the TA, for money multiplier confusion, Dec 17, 2010US tax compromise: more growth, higher deficit, less QE, Dec 10, 2010

Strong and broad US business expansion, with tepid job growth, Dec 3, 2010

A V-shaped recovery for US profits, Nov 26, 2010

US: the fiscal cost of central bank interventions, Nov 19, 2010

Looming fiscal issues include more than just Bush tax cuts, Nov 5, 2010

Impact of US QE2 on Canada, Nov 5, 2010

Equipment spending stands out in a lackluster US recovery, Oct 29, 2010

Monetary and fiscal routes to reducing US real interest rates, Oct 22, 2010

Western Europe

ECB about to begin a rate normalization cycle, Mar 4, 2011

The Euro areas journey to a comprehensive policy package, Feb 25, 2011

The not-so-small role of the output gap at the ECB, Feb 25, 2011

UK: quantifying MPC credibility, Feb 25, 2011

Euro area: more growth, more inflation, and higher rates, Feb 11, 2011

Uncertainty to persist beyond Euro area policy changes, Feb 4, 2011

Euro area: closing fiscal books on 2010 and opening for 2011, Feb 4, 2011

UK: a hawkish shift at the MPC, Feb 4, 2011

Agricultural commodity prices to push up Euro area inflation, Jan 21, 2011

Another busy year for Euro area policymakers, Jan 7, 2011

The three-speed Euro area recovery to continue in 2011, Dec 30, 2010

The UK in 2011: where recovery isnt much fun, Dec 30, 2010

1. Research notes listed have been published in GDW; Special Reportsand Global Issues are stand-alone features, but may also have appeared in some form in GDW.

Central Europe, Middle East, and Africa

Turkey: CBRTs new policy mix slow to combat loan growth, Feb 25, 2011

Taking stock of Russian inflation expectations, Feb 25, 2011Romania is ready for a long-awaited cyclical upswing, Feb 18, 2011

MENA region: 2011 a year of political turmoil, Feb 18, 2011

South Africa: SARB faces delicate balancing act, Feb 4, 2011

Russia: stronger economy and still elevated inflation in 2011, Jan 28, 2011

Food inflation to climb higher in CIS countries in 1H11, Jan 28, 2011

Tunisia: after the revolution, growth to take a hit in 2011, Jan 21, 2011

Japan

Japan: core CPI deflation set to end in April, but temporarily, Mar 4, 2011

Japan: private sector spending to get boost from confidence, Feb 18, 2011

Japan: service sector capex likely to expand in 2011, Jan 21, 2011

Japan 2011 outlook: toward growth with modest deflation, Jan 7, 2011

Japan: no deficit reduction despite continued rise in debt, Dec 17, 2010

Japan: 4Q GDP contraction likely to be temporary, Nov 19, 2010

Non-Japan Asia and Pacifi c

Chinas export sector copes with rising wages, Mar 4, 2011

Figuring the drivers of Thailands inflation trajectory, Mar 4, 2011

Vietnam: navigating the monetary maze, Mar 4, 2011

Australias virtuous cycle of a rising terms of trade, Feb 25, 2011

Another earthquake in NZ puts rate hikes off agenda, Feb 25, 2011

Australias GDP/employment mix inflationary, Feb 18, 2011

Rising food prices: putting Australia in the EM Asia basket, Feb 11, 2011

China: tracking inflation in 2011, Feb 4, 2011

Australia: household incomes stretched as living costs rise, Feb 4, 2011Severe floods depress Aussie GDP growth, lift inflation, Jan 7, 2011

Aussie 2011 outlook: making room for the mining boom, Dec 30, 2010

Return to trend growth in NZ slowed by deleveraging, Dec 30, 2010

Even Stevens: a balancing act in Aussie inflation pressures, Dec 10, 2010

RBA forging on gradually with unconventional hiking cycle, Dec 3, 2010

Latin America

Fiscal policy back in the spotlight in Brazil, Mar 4, 2011

Latin America: policymakers in need of tightening will innovate, Jan 28, 2011

Chile: unpleasant CPI math, Jan 21, 2011

Brazil: BRL cyclically strong despite pricey valuation, Oct 1, 2010

Special Reports and Global Issues

UK: why inflation is so high, and why it will come back down, Feb 11, 2011

Strong global growth ahead: eleven themes for 2011, Jan 7, 2011

US 2011 economic outlook: strength, breadth, jobs, and a rising fiscal

deficit, Dec 30, 2010

A way out of the EMU fiscal crisis, Dec 16, 2010

Jobs vs. income smoothing: a comparison of US and German labor

markets, Nov 15, 2010

Stuck in a low inflation rut, Oct 27, 2010


11/80

Economic Research

Global Data Watch

March 11, 2011

11


Robert Mellman (1-212) [email protected]

US data bring hints of strongerexport growth ahead Forecast looks for exports in 1H11 to continue at

their 2H10 growth pace, but risks are now tilted up

Export orders are soaring, foreign growth has turned

stronger, and the weaker dollar should also help

Upside risks to growth from exports should help offset

downside risks from higher fuel prices, fiscal policy

The current economic forecast looks for export volumes

over the next couple of quarters to grow at about the 8%

pace that prevailed in 2H10. But risks look increasinglytilted toward the upside. Real export volumes surged in De-

cember and January. And the ISM measure of export or-

ders points to an accelerating trend ahead. Moreover, the

combination of a forecasted upturn in growth in foreign

markets and weaker dollar provides a ready explanation of

why export orders have strengthened.

To be sure, import volumes have also surged in the last two

months, presumably reflecting the upward turn in the in-

ventory cycle this quarter. But the ISM survey measures for

imports, in both manufacturing and nonmanufacturing, are

running appreciably below the readings for export orders.

And the surge in imports is more likely to settle down be-

fore long.

Upside risks to the overall growth forecast from a potential

surge in exports would help to offset increasingly visible

downside risks to the forecast associated with the squeeze

on household purchasing power from higher fuel and food

prices and with the possibility of deeper federal spending

cuts than are now incorporated in the forecast.

Export growth has been strong

The government reported that the US trade balance wid-

ened to -$46.3 billion in January from a 4Q10 average of-$38.9 billion. Part of the widening reflects the higher price

of imported oil. But the real goods balance also deterio-

rated substantially, and very early in the quarter the trade

data are pointing to a drag on annualized real GDP growth

in 1Q11 from net exports of about 1.0%-pt.

Looked at another way, however, January trade results can

be viewed as a symptom of strong global and US demand

growth around the turn of the year. Merchandise export

volumes and import volumes surged in December and then

Economic Research Note

again in January, and January levels of both export and im-

port volumes are running more than 30% saar above their

4Q10 average.

Export volumes rose 2.1% in December and another 2.5%

in January. While these back-to-back gains are unusually

large, the export trend through the expansion has been

strong, and export volume growth is up 12.8% over the

past year, a multiple of 2.7%oya growth of overall real

GDP or 5.5%oya growth of manufacturing output.

The strength in export volumes has been accompanied by

strong pricing as well. Much higher prices for imported oil

0

8

16

24

32

Jan 10 Apr 10 Jul 10 Oct 10 Jan 11

%ch saar, over 6 months

US merchandise expor ts

Volumes

Values

35

40

45

50

55

60

6570

Sa, quarterly avg and Jan and Feb 2011 monthly readings

New export orders, ISM manufacturing survey

88 93 98 03 08

Latest = 62.5

20

30

40

50

60

70

$ bn, nsa mr, 3mma

US nominal exports to developed and emerging markets

04 05 06 07 08 09 10 11

Developed markets

Emerging markets


12/80

12

Economic Research

US data bring hints of stronger export growthaheadMarch 11, 2011


Robert Mellman (1-212) [email protected]

have boosted import prices substantially, but, the terms of

trade has actually moved in favor of the US over the past

year. January figures show export prices running 6.8%oya

and import prices 5.3%oya. With rapid price increases rein-

forcing gains in volumes, nominal exports have increased

nearly 20% in both the year ending January 2011 and in the

year ended January 2010.

Data on trade flows by trading partner are only available in

nominal terms, but these data indicate that the strong export

growth so far in this recovery largely reflects rapid demand

growth from emerging markets. As recently as 2006, a ma-

jority of exports went to the developed economies of

Canada, Western Europe, Japan, and Australia. Emerging

markets now account for a sizable majority of exports and

more than two-thirds of the export growth since the end ofthe recession.

Export orders are way up

Monthly figures on trade flows tend to be volatile, and

large gains for two consecutive months would usually be

followed by a month or two of retrenchment. But there is

very good reason to expect that export growth will remain

very strong over the next few months. In particular, the

ISM manufacturing measure of new export orders in-

creased to readings of 62.0 in January and 62.5 in February

of this year, up substantially from an average 56.4 reading

in the second half of last year and the highest levels since

the late 1980s. The ISM measure is a diffusion index and,

strictly speaking, measures the breadth of export orders

across industries rather than export growth. But this index

has historically had a reasonably close relationship with the

trend in export volumes and a somewhat closer relationship

with nominal exports. Based on historical relationships, the

February reading of 62.5 is consistent with 18% growth in

merchandise export volumes and 21% growth in nominal

exports. It is probably unrealistic to expect export volume

growth this strong. But the clear message is that, barring an

unanticipated hit to foreign demand from higher energy

prices or some other shock, export growth can be expected

to accelerate noticeably from the already good growth overthe past six months.

Orders are up for a reason

It is not hard to see why export orders might be accelerat-

ing in the first half of this year. Export growth is mainly

determined by economic growth in US trading partners and

by US price competitiveness as measured, for example, by

the real broad trade-weighted dollar. Economic growth out-

side the US appears to be accelerating in the first half of

this year; the current J.P. Morgan forecast looks for real

GDP growth outside the US to accelerate noticeably, from

3.0% growth in 2H10 to 4.0% growth in 1H11. Strongerglobal growth should be giving a meaningful lift to US ex-

port growth.

In addition, the dollar has continued to trend lower on for-

eign exchange markets. The weaker real value of the dollar,

reflecting increasing price competitiveness of US produc-

ers, should be helping US producers gain share in world

markets. The econometric evidence indicates that changes

in the dollar boost exports more than activity in import-

competing industries. Both recent declines in the value of

the dollar and the relatively low level of the dollar on for-

eign exchange markets should contribute to US export per-

formance. The real trade-weighted value of the dollar so far

in 1Q11 has averaged nearly 6% below year-ago levels,

and the dollar is 13.7% below its longer-term average from

the years 2000-2010.

The obvious potential negative for exports would be a re-

duction in global growth expectations as effects of higher

oil prices start to bite. So far, the global growth forecast

seems to be tracking. But the next ISM manufacturing sur-

vey, April 1, will provide a timely update of this view.

70

78

86

94

102

110

Real broad index, 2000=1.00, monthly plots and latest daily

Value of the dollar on for eign exchange markets

95 97 99 01 03 05 07 09 11

Latest daily value reading

-40

-30

-20

-10

0

10

2030

35

40

45

50

55

6065

%ch saar over 2 quarters

Merchandise export vo lumes and ISM export o rders

Sa

00 02 04 06 08 10

Exports ISM export orders


13/80

Economic Research

Global Data Watch

March 11, 2011

13


David Mackie (44-20) [email protected]

The role of the time horizon inEuro area debt sustainability Debt sustainability assessments to be conducted from

mid-2013

Huge uncertainty about how these will be done

The time horizon is as critical as the judgements about

growth, borrowing costs, and fiscal performance

The picture painted by Euro area leaders at the end of last

year about liquidity provision beyond 2013 seems pretty

clear. Any sovereign that is a patient in the current liquidity

hospital (the EFSF) when it closes in the middle of 2013will be put on a trolley and wheeled across the road to the

new liquidity hospital (the ESM), which will open at the

same time. The ESM will provide liquidity support in the

same way that the EFSF does. However, before that liquid-

ity support can be accessed, a debt sustainability assess-

ment will be conducted by the European Commission, the

IMF, and the ECB. If this assessment concludes that a sov-

ereign is insolvent, it will have to restructure its debt as

part of the process of returning to debt sustainability.

There is a huge amount of uncertainty about how these debt

sustainability assessments will be conducted, and this is al-

ready being reflected in the way that the credit rating agen-

cies are viewing peripheral government debt. At first blush it

is hard to see how countries like Greece and Ireland can

avoid being deemed insolvent in the middle of 2013. Ac-

cording to the IMF, in 2013 Greece will have a debt-to-GDP

ratio of 158% of GDP and an overall fiscal deficit of 4.8% of

GDP. Meanwhile, Ireland will have a debt-to-GDP ratio of

125% of GDP and an overall fiscal deficit of 7.5% of GDP.

And the situation could be worse, either if growth falls short

of the IMFs assumptions or if there is slippage in the imple-

mentation of the fiscal consolidations.

It would be easy to conclude that debt restructuring forGreece is almost certain, and that there is a reasonable like-

lihood that there will be a debt restructuring in Ireland.

However, we are not persuaded that the likelihood is as

high as most assume. Our view is that provided debtor sov-

ereigns put in a good faith effort, the rest of the region will

help the sovereign return to debt sustainability without a

disruptive debt restructuring. This could be achieved by

low borrowing costs on liquidity support and loans made

for liability management exercises. The critical point to

note is that there are a lot of judgements that need to be


made in any debt sustainability assessment. Different judge-

ments about nominal growth, borrowing costs, and fiscal

positions can make a huge difference to medium-term debt

dynamics. Also of critical importance is the time horizon that

is assumed in the assessment. It is noteworthy that in the Eu-

ropean Commissions assessments of both Greece and Ire-

land, it evaluates debt sustainability over a very long hori-

zon: 15 years for Greece and 20 years for Ireland. A lot can

be achieved over such a period of time.

Debt sustainability calculations

Debt sustainability assessments depend on forecasts made

for real growth, inflation, borrowing costs, and the primary

fiscal position. The stronger the real growth rate, the higher

the inflation rate, the lower the borrowing cost, and the

larger the primary surplus, the greater the likelihood that a

sovereign will be deemed to be solvent. But, also of critical

importance is the time horizon over which solvency is as-

sessed. Solvency is essentially a forward-looking concept

for a sovereign so the key question is whether a sovereign

can improve its debt dynamics over a certain horizon.

The IMF provides the most extensive debt sustainability

analysis. In its second review of the Greek Stand-By Ar-

rangementpublished last Decemberit provided a

baseline projection of Greek government debt through 2020.

After peaking at 158% of GDP in 2013, the IMF projected

debt at 131% of GDP in 2020. The sensitivity analysis

around this baseline showed the importance of growth, infla-

tion, the borrowing cost, and the primary fiscal position.

Meanwhile, in its staff report on Irelands request for an Ex-

tended Arrangementalso published last Decemberthe

IMF debt sustainability: Greece

2011 2012 2013 2014 2015 2020

Real GDP (%oya) -3.0 1.1 2.1 2.1 2.6 2.7

Avg borrowing cost (%) 4.6 5.0 5.4 5.7 5.7 5.7Inflation (%oya) 1.5 0.4 0.8 1.2 1.3 1.8

Primary position (%GDP) -0.8 1.1 3.5 6.0 6.0 6.0

Government debt (%GDP) 152 158 158 154 150 131

Source: IMF December 2010

IMF debt sustainability: Ireland

2011 2012 2013 2014 2015

Real GDP (%oya) 0.9 1.9 2.4 3.0 3.4

Avg borrowing cost (%) 3.9 4.0 5.3 5.3 5.4

Inflation (%oya) 0.4 0.8 1.4 1.6 1.6

Primary position (%GDP) -6.7 -4.1 -1.4 1.2 1.5

Government debt (%GDP) 112.8 120.0 124.5 124.1 123.0Source: IMF December 2010


14/80

14

Economic Research

The role of the time horizon in Euro area debtsustainabilityMarch 11, 2011


David Mackie (44-20) [email protected]

IMF provided a baseline projection for Irish government

debt through 2015. After peaking at 124.5% of GDP in

2013, the IMF projected debt at 123% of GDP in 2015.

The European Commission provides less information on

debt sustainability than the IMF, but there is one critical

difference: the horizon over which the analysis is con-

ducted. In the third review of the Greek adjustment pro-

grampublished in February this yearthe European

Commission provides projections for Greek government

debt through 2025, and in the review of the adjustment pro-

gram for Irelandalso published in February this year

the European Commission provides projections for Irish

government debt through 2030.

The longer horizon in the European Commissions debtsustainability assessments is of critical importance in trying

to gauge whether Greece and Ireland will be deemed insol-

vent in mid-2013. In its analysis of Greece, the European

Commission presents three scenarios. The first scenario

assumes anemic nominal growth of less than 2% and a pri-

mary surplus that fails to move above 3.25% of GDP. In

this scenario the Commission argues that debt develop-

ments are not sustainable: even with low borrowing costs,

the debt-to-GDP ratio is merely stabilized at close to the

peak, otherwise it continues to climb. The second scenario

assumes that nominal growth improves to 3.5% and the

primary surplus moves up to 5.5% of GDP. In this sce-

nario, the debt-to-GDP ratio in 2025 is estimated to be be-tween 105% and 130% depending on the borrowing cost,

and this is described as sustainable. The third scenario is

the same as the second but it includes 50 billion of asset

sales between 2011 and 2015. In this scenario the debt-to-

GDP ratio in 2025 is estimated to be between 80% and

105%, depending on the borrowing cost.

More striking is the European Commissions debt

sustainability analysis for Ireland. Here, the central sce-

nario has the debt-to-GDP ratio peaking at 120.5% of GDP

in 2013 and then declining steadily to reach close to 70%

of GDP in 2030. This is close to the Maastricht debt objec-

tive of 60%. The Commission assumes that beyond 2015nominal GDP growth averages 4.8%, the average borrow-

ing cost is 5%, and the primary surplus is 3.2% of GDP.

If the longer time horizon in the European Commissions

analysis is applied to the IMFs projections, then both

Greece and Ireland could be described as solvent. In the

IMFs projections for Greece, nominal GDP growth in

2020 is assumed to be 4.5%, the average borrowing cost is

assumed to be 5.7%, and the primary surplus is assumed to

be 6% of GDP. If growth, borrowing costs, and the primary

surplus were to remain at these levels, then by 2030 the

Greek debt-to-GDP ratio would be around 85% of GDP.Meanwhile, in the IMFs projections for Ireland, growth,

borrowing costs, and the primary surplus are put at 5%,

5.4%, and 1.5% of GDP, respectively, in 2015. If these vari-

ables were to remain steady, then in 2030 the Irish debt-to-

GDP ratio would be around 107% of GDP. However, it is

noteworthy that the European Commission assumes a larger

primary surplus in 2015, of 3.2% of GDP. A primary surplus

of this magnitude would push the debt-to-GDP ratio down to

81% in 2030. Surely if these projections were viewed as

credible, Greece and Ireland would be described as solvent.

Clarification from the policy packageWhat happens in the middle of 2013 is of huge importance

in valuing peripheral sovereign debt. Indeed, as one of the

reasons behind its downgrade of Greece this week,

Moodys referred to the issue of whether Greece will sat-

isfy the solvency criteria introduced in mid-2013. And in

its discussion of Portugal last week, Standard & Poors also

referred to the issue of the ESM possibly requiring a sover-

eign to restructure its debt.

According to the announcement in January, the compre-

hensive policy package to be unveiled this month should

provide more details on how the ESM will work. The

Council document of last November stated that rules willbe adopted to provide for case-by-case participation of pri-

vate sector creditors. The comprehensive policy package

could reveal these rules. But, given that nothing will be de-

cided automatically, much will depend on the fiscal effort

of the debtor sovereign and the judgements made about the

macroeconomic outlook. Moreover, the rules of the ESM

can be changed in the future, given that it is an inter-gov-

ernmental agreement of Euro area countries. Thus, the

question of debt restructuring for sovereigns like Greece

and Ireland will remain unclear for a while.

80

100

120

140

160

% of GDP

Government debt

10 15 20 25 30

Greece

Ireland (1)

Ireland (2)

Note: This chart shows debt trajectories through 2030, extending the IMF assumptions. The

second trajectory for Ireland assumes a primary surplus beyond 2015 in line with the Euro-

pean Commissions forecast.


15/80

Economic Research

Global Data Watch

March 11, 2011

15

JPMorgan Australia Ltd., Sydney

Ben J arman (61-2) [email protected]

Aussies online shopping: under-stating retail sales, not GDP Evolving consumer preferences, new technology, and

strong AUD are boosting Aussies online purchases

This shift toward foreign purchases is not being rec-

ognized in the official retail sales data

But these sales are also not captured in imports, so

GDP should not be affected

One question being posed of the high-frequency data of

late is why consumer spending has been so soft. Anecdotal

evidence suggests that households are redirecting theirspending toward online shopping through overseas ven-

dors, particularly with AUD elevated. Since the Australian

Bureau of Statistics (ABS) retail sales numbers capture

only domestic online vendors, the argument is that incom-

plete data coverage in this growing sector is understating

the true consumption trend.

We agree there are coverage shortfalls in the retail data,

which will detract from the level of measured consumer

expenditure over time given that online shopping is on a

secular uptrend. Technological developments are reducing

search costs and improving access to alternative markets.

Moreover, to the extent that we can expect AUD to remain

above long-run norms, overseas goods will remain rela-

tively cheap. But, for the purposes of calculating GDP, the

omission of these sales subtracts not only from consump-

tion but from imports as well, meaning estimates of total

economic activity should not be affected. Even incorporat-

ing multipliers, the economy-wide impact on GDP from

this leakage appears modest. Further, in terms of the path

of consumption and GDP growth from here, the relevant

issue is impulses to existing trends, rather than the trends

themselves. On these grounds, the continued rise in online

shopping is less important than the fact that the steady as-

cent of the saving rate seems to be ending.

Online sales: rising, but small at present

The ABS retail sales series is a valuable high-frequency in-

dicator but, as a measure of how the economy is tracking, it

largely is a means to an end in estimating the consumption

component of GDP. The ABS measure of consumption, as it

appears in GDP, is put together using a range of sources.

Around 35% of the source input comes from the retail sales

data, with the remainder made up of spending on services

like rent, financial and transport services, health, and educa-

Economic Research Note tion, as well as vehicle and related sales. So, even withoutgoing further, it is clear that online shopping with overseas

retailers, equivalent to a small fraction of total retail expendi-

ture, which itself is only a third of total consumption, should

not matter too much at present levels.

The analysis needs to be taken further, however, because

strong growth in web-based spending could see online

sales achieve a meaningful share of households total

spending before too long. Unfortunately, as the dearth of

information on this phenomenon shows, the statistical

framework currently is ill-equipped to capture such flows.

Online shopping is a highly decentralized activityindeed,

this is its main virtuethat allows individual consumers to

bypass domestic retailers and importers. This makes spe-

cific data on online sales scarce, but also hints that distor-tions to the GDP data should not be too severe, since the

omission of consumption flows should be counterbalanced

by an omission in imports.

It all evens out through imports

Consider the expenditure side of GDP:

GDP = Consumption (C) + Private Investment (I) + Gov-

ernment Spending (G) + Exports (X) Imports (M)

Holding the other components of GDP constant, excluding

foreign online sales from consumption reduces measured

GDP. But, individual purchases of less than A$1,000 are

similarly not included in the imports data. Whatever sales

are absent from consumption will also be missing from

imports, leaving GDP unchanged in level terms.

How will GDP be affected over time?

The above point addresses the measurementof GDP ex

post, and so looks at the data in a static, mechanical way

(i.e., holding other components constant). Thinking about

what substitution to overseas merchants means for the

economy, it is clear that a dollar spent overseas, rather than

domestically, is a dollar that will not contribute to further

domestic income, consumption, and so on. To estimate the

economic impact on GDP as consumers switch to overseas

online vendorsas opposed to measuring ex post how this

will distort particular components of GDPmultipliers

need to be employed. We now pursue an admittedly

simple, but instructive, exercise to this end. First, we sepa-

rate both consumption and imports into the part dependent

on income and the remainder, yielding the following:

GDP = (C0+I+G+X-M

0)/(1+MPM-MPC)


16/80

16

Economic Research

Aussies online shopping: understating retailsales, not GDPMarch 11, 2011

JPMorgan Australia Ltd., Sydney

Ben J arman (61-2) [email protected]

C0

and M0

are the components of consumption and imports

that are independent of income. The initial shift in con-

sumer preferences toward online sales is captured through

reductions in these variables. MPM is the share of imports

in GDP, and MPC is the share of consumption in GDP. 1

The equation shows how shocks to C0

and M0

transmit

through the economy. The multiplier determines the

strength of the transmission: a positive shock boosts in-

come, which flows through to more imports and consump-

tion, into more income, etc. A higher MPM means more

leakage through imports and a lower multiplier. A higher

MPC means less leakage through saving and a higher mul-

tiplier. Currently, MPC is about 0.54 and MPM about 0.24.

So, imports are quite significant relative to consumption,

meaning any reduction in consumption as a result of higher

overseas online purchases should be tempered by a fairlysubstantial fall in conventional imports.

Drag is modest, even with mul tipl iers

Consider the following hypothetical. Online purchases in-

crease from their estimated 2009 value2 of around A$21

billion (equivalent to 3.1% of consumption, or 9% of retail

sales, the midpoint of estimates collected by AE), by a sub-

stantial 10%y/y. Also, assume that the share of overseas

purchases within online sales rises from an estimated 30%

(again, AEs midpoint) to 50%. This is equivalent to a rise

of A$6.5 billion in overseas online sales between 2009 and

2011. Estimating the impact on GDP requires two steps,

each of which is heavily influenced by the relative sizes of

MPM and MPC.

First, we assume that this rise in online sales is paid for

with an initial reduction in both consumption and imports,

reflecting the relativities of MPM and MPC. In this case,

the consumption drag is A$6.5 billion times MPC/

(MPM+MPC) = A$4.5 billion, while the imports drag is

A$2 billion. This means a net shock to C0-M

0of about

-A$2.5 billion. We then apply the multiplier, equal to ap-

proximately 1.4, and smooth the result over two years. The

conclusion is that output is reduced by around 0.15%-pt

over 2011 (and similarly for 2010) as a result of the shift togreater overseas online sales. Thus, even under generous

assumptions on the growth in overseas online sales, the es-

timated effect on GDP is not large, since the leakage from

imports will bear some of the burden. A share of online

sales will be paid for with lower imports of conventional

items, and this shock transmits with a modest multiplier,

again because of the already substantial share of imports

relative to consumption. Of course, individual sectors

retail, obviouslywill bear a disproportionate share of this

reduction in output relative to the baseline. As noted by

RBA Deputy Governor Lowe this week, the adjustment in

relative performance across sectors is a natural conse-

quence of persistently elevated terms of trade and AUD.

Saving rate is worthy of greater attention

The shocks to the levels of consumption and GDP occur

relative to some counterfactual. But online sales have been

rising as a proportion of consumption for several years. So,

while the above exercise assumes a sharp rise relative to

2009 online sales, which pulls down 2010 and 2011 con-

sumption and output, this drag largely cancels out in the

forecasts for growth rates this year and beyond. In other

words, a continuing trend imposes little impulse on the

growth outlook. The saving rate, on the other hand, loomsas a more important swing factor. Judging by last weeks

national accounts release, the saving rate now seems to be

stabilizing, having risen for more than five years. From this

point, nominal income growth should transmit with much

greater intensity into consumption growth. This fact, com-

bined with the realization that national income is growing

near 10% following the terms of trade boost of the last

year, leaves the consumer poised for a rebound by year-

end. We will address the issue of saving and consumption

behavior in greater detail in a forthcoming note.

1. We use the consumption and imports shares as proxies for the marginal propensity to

consume and import. This assumption will likely lead us to overstate the true MPC and

MPM, though this should not distort the multiplier if the true imports and consumption func-

tions have similar shapes.

2. Access Economics (AE): Household E-Commerce Activity and Trends in Australia, 2010.

51.5

52.5

53.5

54.5

55.5

14

18

22

26

% of GDP

Real consumpt ion and import s relative to GDP

% of GDP

02 04 06 08 10

Consumption

Imports

-5

0

5

10

15

%

Household saving rate

90 95 00 05 10


17/80

Economic Research

Global Data Watch

March 11, 2011

17

JPMorgan Chase Bank, Singapore

Matt Hildebrandt (65) [email protected]


Singapore: to maintain currenttightening path or go further? Slowing CPI inflation trajectory, tame core prices, and

already tight policy path to keep MAS on hold in April

Decision a close call but the current policy stance is

appropriate with respect to the economic outlook

High oil prices and a tight labor market pose risks to

our call; band could be narrowed and recentered

Consumer prices have risen rapidly in recent months. Price

pressures primarily have stemmed from housing and private

transportation costs, the latter of which reflects rising fueland certificate of entitlement (COE) costs. Core inflation in

Singapore excludes private transportation and accommoda-

tion. As a result, core inflation has been much tamer than

CPI inflation, leading to a large divergence between the two.

The MAS has been at the forefront of the regional tighten-

ing cycle, surprising the market on the upside at each of its

last two meetings. The market expects another tightening

move in April, but we think the MAS will surprise again by

leaving its stance unchanged this time. This would still

leave the policy stance on a historically aggressive tighten-

ing path, which we think is sufficient given subdued core

inflation, a likely slowdown in CPI inflation, and strong

regulatory measures in January to cool the housing market.

We acknowledge that the decision will be a close call. The

recent rise in global oil prices, especially considering tight

domestic labor market conditions, poses upside risk to infla-

tion and our policy call. Moreover, the MAS will likely take

back at some point its band widening from the last meeting.

Potentially, the MAS could narrow its band, which would

also require an upward shift in the SGD NEER midpoint to

avoid an effective easing of its policy stance.

Inflation less scary than at first glanceInflation has risen quickly. In January, inflation hit 5.5%oya

from 3.5% in October while the annualized rate was up 6.7%

from 3.0%. The increase partly reflects higher property

costs, which have been a concern for a few years now as

government efforts to cool the sector have had only limited

success. However, in January, strong measures were imple-

mented that reportedly have cooled the property market.

Private transport costs have also risen from higher oil prices

and the governments deliberate intent to reduce the supply

of COEs. This alone accounted for 50% of the 5.5% January

inflation print while accommodation accounted for an

additional 25%.

Singapores core inflation (ex. private transport and accom-

modation) has been much more muted. Core prices rose

-2

0

2

4

6

%-pt contribution to %oya inflation

Singapore: contributions to inflation

CPIPrivate transport, accommodation , and energy

Other

2009 2010 2011

-2

0

2

4

6

8

2005 2006 2007 2008 2009 2010 2011

%oya

Singapore: CPI inflation and forecast

ForecastsCPI

Core

-2

0

2

4

6

Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10

%-pt contribution to %oya inflation

Singapore: contributions to inflation

Housing

Food

Other

Transport

-8

-4

0

4

8

12

%3m/3m saar

Singapore: consumer price inflation

CPI

Core

04 06 08 10


18/80

18

Economic Research

Singapore: to maintain current tightening pathor go further?March 11, 2011

JJPMorgan Chase Bank, Singapore

Matt Hildebrandt (65) [email protected]

-10

-5

0

5

10

151

2

3

4

5

98 99 00 01 02 03 04 05 06 07 08 09 10

%, sa, p.a., inverted

Singapore: unempl oyment rate and wage growth

%oyaWage gr owth (inverted)Unemployment rate

2.0%oya in January, lower than the 2.2% print a few months

earlier, while core prices fell 0.3%3m/3m saar for a second

straight month. The extreme divergence between core and

CPI inflation trends of late (both %oya and %3m/3m saar) is

highly unusual, and it attests to the major roles that housing,

COE, and oil prices have played in driving inflation recently.

No change still means tightening

Core inflation is expected to stay well-behaved and could

even slow in coming months while headline inflation should

moderate gradually after peaking at the end of 1Q. This view

primarily reflects base effects from COE prices that will

global data watch 110311 jpm

Documents