This week we look at UK GDP, Canada monetary policy and inflation and review some of the monetary policy decisions of the week just gone. We will also assess some of the housing data on the US real estate market.
1. UK GDP
The UK surprised in the second quarter of 2010, recording growth of 1.1% q/q vs expectations of a 0.6% increase, and accelerating since the previous quarters' much milder growth. However, the growth spurt is widely expected to be short lived amid requisite government cuts in public spending. On an annual basis the UK economy grew 1.6%. But as with most advanced economies the bounce-back in late 2009 and early 2010 is likely to taper off into the 2nd half of 2010, potentially realising fears of a double dip recession, or at least proving true predictions of a stop-start, subdued recovery.
2. Canada Inflation and Monetary Policy
Canada (the first G-7 country to raise rates) again hiked its interest rate from 0.50% to 0.75% this week, while at the same time reporting inflation of 1% in June (down from 1.4% in May). The move was widely expected as the Bank of Canada looks to normalise monetary policy as the recovery becomes gradually more entrenched. Indeed, Canada is one of the luckier developed economies; finding peers in the likes of Australia and New Zealand as countries that are raising rates to ensure the sustainability of their relatively stronger recoveries. But the outlook for the Canadian economy, and the course of its monetary policy will probably depend as much on international events as domestic developments.
3. Monetary Policy Review
Along with the Bank of Canada raising its rate to 0.75% from 0.50%, the South African Reserve Bank left its rate at 6.50%, while Banco Central do Brasil increased its rate to 10.75% from 10.25% - a move that was less expected vs the consensus for a 75bps increase. The decisions show some of the spectrum of activity going on in monetary policy at the moment. There are countries like Brazil with surging economic growth that are now switching the focus from growth to controlling inflation. While countries like South Africa are still trying to promote economic growth and recovery; and yet others like Canada are beginning the process of normalisation. It just goes to show that while during the crisis the policy easing was synchronised, the path to normalisation will be anything but.
4. US Housing Starts
US housing starts in June fell to 0.549m on a seasonally adjusted annual basis, this was down both on May (0.593m) and consensus (0.58m). The lackluster results show that housing is still suffering from poor economic conditions, and a lack of tax credits. And while conditions remain significantly lower than pre-crisis levels, one positive was a slight improvement in permits. But it will take some time for the drop off in inventory building in the housing market to translate through to higher prices - which may be the thing needed to restart activity in this space; don't hold your breath though.
5. US Existing Home Sales
Another key US housing data point out this week was US existing home sales. The data reflected what is obvious - a generally weak housing market. The number of existing homes sold on a seasonally adjusted annualised rate was 5.37m for June, versus the May figure of 5.66m, and up slightly versus consensus of 5.26m. The only positive in the report was the short term rise in prices, but this is likely to be largely temporary as the stubbornly high unemployment rate caps any further rises in prices, and housing inventories rise further to about 10 months. So again, surprise, surprise, the US housing market is still not well!
So we looked at UK GDP and saw that the recovery is chugging along, but that despite the spike up in Q2, it will be a long slow recovery, especially as the UK government looks to get its financial affairs in order.
On the monetary policy front we saw further normalisation from Canada, attempts at stimulating growth by South Africa, and further moves to hold off over-heating in Brazil. The conclusion remains, that while we saw a synchronised loosening of monetary policy during the crisis, the recovery will see a much less synchronised normalisation of monetary policy.
And last but not least, we reviewed some of the data that came out over the week on the US housing market; seeing that housing starts displayed continued weakness, and that existing home sales were still in poor shape. So aside from a likely temporary increase in prices in the existing home sales report, the US housing market is still in poor shape, and is unlikely to really gain wind until the rest of the economy goes through the recovery process.
1. UK National Statistics
2. Bank of Canada
3. Banco Central do Brasil & South African Reserve Bank & Bank of Canada
4. US Census Bureau
5. National Association of Realtors
Disclosure: No positions