This week we look at the Q2 GDP results for Japan and Taiwan, getting a gauge on how these two key Asian economies are tracking in their recoveries. Then onto the US where we look first at the industrial production results, which are a tad paradoxical, and then at the PPI stats which may be pointing to margin compression. Then we wrap-up with a view on Eurozone inflation.
1. Japan GDP
Japan's economy grew at an annualized rate of 0.4% (basically flat), well below median forecasts for about 2.3%, and Q1 revised rate of 4.4%. The Japanese economy was also reported as dropping behind China to the world's 3rd largest economy (which is pretty much just a technicality in confirming a foregone conclusion). The Japanese economy was held back by slowing export growth and subdued consumption, as phase 2 of the recovery sets in (i.e. the muddle ages). So Japan will keep muddling on, the key sensitivities for Japan continue to be international trade (and therefore the currency), and on a related note; the resilience of the Chinese economy.
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2. Taiwan GDP
Taiwan's economy grew 12.53% year on year in the June quarter, slower than 13.71% in Q1 but higher than consensus estimates for 10.5%. The great rebound is just about run its course in Taiwan. The Taiwanese economy, which is also closely linked to the fortunes of global trade, and its neighbor to the north (Zhong Guo); which is currently undergoing a managed slowdown. The policy factors are also playing into the picture as the central bank in Taiwan normalises monetary policy (with a few small hikes expected into the second half of 2010), as well as fiscal policy normalisation, with the authorities keen to keep government debt below the 40% debt to GNP ceiling.
3. Industrial Production
The US released its industrial production figures for July this week, with production rising 1.0% month on month ahead of consensus 0.6%, and previous 0.1%. On an annual basis industrial production rose 7.7% off of the lows of the earlier stages of the recession, decelerating slightly off 8.2% in June. Capacity utilisation also climbed to 74.8% from 74.1% in June. Looking at the chart below you can see the path of some of the other major economies; China's trucking along, Japan's super-volatile, and the EU/US are playing catch-up since the depths of the recession. The trend marks a dissonance in the US economic scene, as business investment and manufacturing is a bright spot, whereas the consumer is a dark spot; if the US can build up exports it may lead to a happier ending...
4. US PPI
US Headline PPI rose 4.1% year on year, and core (taking off the more volatile food & energy components) rose 1.5%. The movements in prices here reflect some of the signals from the PMI prices sub-index which has been riding relatively high for a few months; however as is notable from the relatively more static and subdued CPI inflation metrics, the price increases aren't getting passed through to the consumer (which makes sense given the competitive environment, and economic environment), so this may mean a bit of margin compression... especially as capacity utilization (normalization) results in eventual reversals of the purge of labor costs during the recession. So this recent positive bout of corporate earnings could be somewhat short-lived as demand is relatively lackluster and potential pressure on the cost side also puts a double hit on margins.
5. EU CPI
Eurozone inflation increased in July to 1.7% from 1.4% in June on an annual basis for the Euro area, and 2.1% from 1.9% for the EU. However in the month of July inflation was actually negative compared to the previous month. The results tentatively point to a stabilisation or even turning of inflation, but as the ECB noted in its recent statement, "inflation rates should remain moderate overall, benefiting from low domestic price pressures". And so, the EU will likely also just keep muddling along, with no significant price inflation; but... remember the EU is actually a collection of economies, which will all be tracking along at their own unique pace e.g. the powerhouse Germany vs the others like Greece.
So we saw a tapering off of growth in both Japan and Taiwan, two key Asian economies that saw a strong bounce back in GDP following their emergence from the depths of the crisis. And looking forward, the risks are similar for them both; they are both very sensitive to the course of the global economy due to their dependence on international trade, but of the two, Taiwan has less problems and seemingly a better policy position.
Then onto the US; we saw industrial production tracking along well, providing some positive (albeit dichotomous) signs as the consumption paradox unwinds. There was also the potential early warning in PPI that margin pressure may increase for US corporates in the medium term. Keeping with large developed economies and inflation; the EU inflation picture is unfolding much as the growth picture is; just muddling along.
1. OECD Statistics Database stats.oecd.org
2. Taiwan Statistics eng.stat.gov.tw
3. Trading Economics www.tradingeconomics.com
4. US Bureau of Labor Statistics www.bls.gov
5. Eurostat epp.eurostat.ec.europa.eu
Disclosure: No positions