Daily Economic Briefing: March 8, 2010

Daily Economic Briefing: March 8, 2010

Click here for the full Research and disclosures.

• Last week’s developments reinforced our confidence that global GDP will expand at an above-trend 3.4% pace this year (4q/4q), or 4.1% on a PPP basis. Equally important, we see signs that the expansion is becoming more self-sustaining.
•
• In periods where data become hard to read, the global business surveys take on added importance. This is the case right now, when adverse weather has disrupted activity across a major portion of the globe, while the Lunar New Year holidays have clouded data from Asia. The reassuring message of last week’s February surveys was that the global expansion remains on solid footing, as seen in the resilience of the output and new orders indexes. Moreover, in a sign that the sustained rise in output is pushing businesses to be more expansionary, our global PMI employment index climbed to a level consistent with rising employment for the first time since July 2008
•
• The US is a key case in point. The payroll survey found that private-sector jobs fell by just 18,000 in February; it seems safe to say that private payrolls would have increased by a significant margin if not for the snowstorms that disrupted activity on the East Coast. Moreover, other data that can be used to track payrolls, including initial jobless claims, the ISM employment indexes, and the ADP report, each have moved into a zone consistent with modest job growth (recognizing that the latest readings for ADP and possibly jobless claims probably were affected by the weather, as well). Private employment is likely to pop in March, with weather-related payback from February adding to the underlying gain.
•
• This week the focus will shift to China, where reports are due on IP, FAI, and retail sales. Also of note will be the CPI: we see an additional rise to 2.1%oya, en route to 3%-plus readings. The combination of continued strong growth and higher inflation is expected to pave the way for modest rate hikes and CNY/USD appreciation before midyear.
•
• In today’s reports, Japan delivered two positive surprises. First, the Cabinet Office’s consumption index—which, by design, closely tracks PCE in the GDP accounts—rose an impressive 1.0% m/m in January on the heels of a 0.7% increase in December. Our forecast anticipaties a substantial slowdown in Japan’s consumption growth due to loss of fiscal stimulus, but so far this has not happened. The Economy Watchers survey leaped higher in February.
•
• Taiwan’s exports fell almost 3%m/m in February following a 12% surge in January. This pattern reflects the timing of the Lunar New Year holidays and the average gain of 4.6% per month clearly was very strong.
•

Click to enlarge

Thanks to government incentives in most major markets, global auto sales bounced back rapidly in 2009 after plummetting the previous year. As of January, our global auto sales proxy—derived from 20 countries plus the Euro area—hit an all-time high of 54.3mn units (saar). However, following this impressive recovery, the outlook for auto sales is uncertain as sales incentives in many countries are expiring. So far government incentive programs have already expired in the US, most of the Euro area, Australia, and Korea. In addition, benefits have been reduced in other countries.

It is unclear how much of an impact these incentive expirations will have on global sales. It is difficult to quantify the boost in global auto sales from government sales incentives. The incentives undoubtedly played a key role in the bounceback, but sales are also being supported by broader macroeconomic growth as well as gradual improvement in financial conditions. Besides, even if we could quantify the incentives-induced sales gains, the effect of program expirations would still be difficult to estimate.

(1) Sales could slump as incentives expire. The incentives currently in place could pull forward demand, eating into future sales.

(2) Sales could level off. The response to government auto incentives has generally been much greater than most expected, given the relatively modest benefit payments implemented in most countries. Instead of boosting auto sales for a month or two, auto sales incentives have had lasting impact once introduced. This is a sign of pent up demand. As such, with consumer sentiment rising and credit markets gradually flowing more regularly, sales may continue at or near their current pace. In this case, the sales brought forward by the incentives may just mitigate the rise that otherwise would have occurred.

(3) Sales could keep rising amid a powerful rebound in global demand. Global employment and personal income should grow healthily over the next several years as businesses shift more firmly to an expansionary phase. In addition, a further steady improvement in confidence and financial markets could continue to feed sales growth. This seems particularly relevant in the US, where car sales remain very low compared to a couple years ago. As such, it does not seem altogther unreasonable that auto sales continue to gradually improve as US sales revert to their previous pace.

So far, the evidence seems somewhere in the middle of (1) and (2). The only major country in which enough time has passed since auto scheme expiration for a post incentives-induced trend to have developed is the US. In the American case, auto sales declined considerably after “cash-for-clunkers”, though sales have remained substantially above the low level prior to the program’s introduction. However, the US pattern may not be particularly relevant for other countries. Outside of the US, incentives were generally longer lasting—continuing at least through most of 2009—and less generous, and so did not incite as sudden a pop in sales as in the US. Still, the pace of auto sales has tempered a bit in the Euro area and Korea as sales incentives have expired or been reduced. But encouragingly, auto sales have stayed well above prior lows in all countries.

China is a wildcard. China auto sales have grown at an unprecedented pace since 2008, with sales more than doubling over the period. While sales have broadly improved around the globe, China is responsible for more than half of the 2009-2010 global rebound. China auto sales incentives were extended through 2010 and so should continue to support demand. Still it is difficult to imagine that sales can continue to grow at its current breakneck pace for another year. Indeed, given the huge recent surge in sales, it certainly would not be surprising if demand was being pulled forward by incentives and sales started declining later this year or next. We will get February auto sales data for China this week.

Longer term, it is unclear whether the recession will have a sustained impact on the “potential” growth of auto sales. Prior to the recession, developed market (DM) auto sales had leveled off in the 2000s, with the EM accounting for all the growth in global sales. Is it reasonable to assume that DM sales will head back to their previous level and for EM sales to resume their prior pace of growth? In the DM, the credit boom may have pushed sales above their sustainable pace, suggesting that sales may not rebound fully to prior levels. In contrast, long-term structural developments in the EM point to continued growth of demand for autos.

Click to enlarge

Click to enlarge

Click to enlarge

Click to enlarge

ENDS

© Scoop Media