The Week That Was: August 17-August 21, 2009

On the back of real GDP growth pick up in Germany and France, last week began with positive real GDP growth data from Japan. But it failed to enthuse markets, as economic growth was pushed by massive Government stimulus and investment spending rather than by private demand, which is still struggling. Disaggregated data gave an indication of the poor state of the Japanese consumer as overall domestic demand has yet to pull up and falling import demand only went on to confirm the underlying concern. Perhaps the pick up in exports was one soothing factor - reflection of a global economy that has now begun to trade a little more. The global economic mood through the week was upbeat with both the US and European data having delighted analysts despite hiccups in the Chinese equity markets on concerns of a drop in foreign direct investments and the sustainability of the “Chinese Metals Appetite”. The US housing market data couldn’t have asked for a better week and hasn’t perhaps seen a better quarter in recent memory as housing confidence rose higher, single unit housing starts picked up pace and existing home sales surged to record highs, though largely on price declines. Nonetheless, housing data pointed to a firm bottom in place in the sector and the focus now shifts to this week’s S&P Case-Schiller Index. It will indeed be watched closely with an expectation of price pickup. In the European markets, the German ZEW confirmed the GDP growth pick up in Germany and that going forward, the preliminary manufacturing PMIs also came in positive and revealed output expansion, though the plunge in German producer prices put up the red flag and our sense is that deflationary risks are likely to continue till job losses not simply stabilise but see a pick up for consumers to become relevant in economic activity once again. In the United Kingdom however, the economy seems to be struggling to register a consistent flow of good economic news. Housing prices went south with availability of home loans continuing to be a difficult proposition and more so for those wanting to re-negotiate and renew existing loans as lenders have become more cautious vis-a-vis mortgages. Consequently, the stickiness in the housing market is expected to continue. Add to that the deteriorating fiscal situation which is putting pressure on the Gilts and consequently on the policy rate in a direction that is undesirable in the middle of a protracted recession, and Britain you know then, is staring at serious economic consequences of lesser quantitative easing and a milder monetary stance. With the IMF’s assertion that the global recession is coming to an end, there is one question still on the minds of the analyst community - is this V-shaped to stay V-shaped or would this end up as what Paul Krugman has been contending for a while - a W-shaped recovery with another down leg yet to come before a sustained recovery. That could be a serious possibility if the consumer and job creation both remain subdued, and stimulus spending starts to fade.