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Global Data Watch
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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]
J PMorgan Chase Bank NA
Joseph Lupton(1-212) 834-5735
J PMorgan Chase Bank NA
-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
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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
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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]
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
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Global Data Watch
March 11, 2011
JPMorgan Chase Bank, New York
David Hensley (1-212) [email protected]
Carlton Strong (1-212) [email protected]
J oseph Lupton (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
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JPMorgan Chase Bank, New York
David Hensley (1-212) [email protected]
Carlton Strong (1-212) [email protected]
J oseph Lupton (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
Unemployment rate (%) 10.0 9.9 9.3 10.0 10.0 9.9 9.8 9.7 9.6 9.4 9.2
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
Unemployment rate (%) 5.1 4.7 4.3 5.0 4.9 4.8 4.6 4.5 4.4 4.3 4.3
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
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JPMorgan Chase Bank N.A., New York
David Hensley (1-212) [email protected]
Michael Mulhall (1-212) [email protected]
J oseph Lupton (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.
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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-
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The J .P. Morgan View: MarketsMarch 11, 2011
JPMorgan Chase Bank, London
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
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JPMorgan Chase Bank, London
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%
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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]
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
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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
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Economic Research
US data bring hints of stronger export growthaheadMarch 11, 2011
JPMorgan Chase Bank NA, New York
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
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March 11, 2011
13
JPMorgan Chase Bank, London
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
Economic Research Note
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
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Economic Research
The role of the time horizon in Euro area debtsustainabilityMarch 11, 2011
JPMorgan Chase Bank, London
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.
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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)
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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
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March 11, 2011
17
JPMorgan Chase Bank, Singapore
Matt Hildebrandt (65) [email protected]
Economic Research Note
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
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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