PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

25 June 2010

1 Fiscal Austerity Versus Stimulus In The G-20 Summit

2 US Durable Goods New Orders Fell Mom In May

3 Euroland’s Industrial Orders Slowed Down M-o-M In April

4 Japan’s Exports Slowed Down In May

Tracking The World Economy...

Today’s Highlight

Fiscal Austerity Versus Stimulus In The G-20 Summit

UK’s fiscal austerity will probably dominate the Group of 20 (G-20) summit’s discussion in Canada this week. UK’s six-
week old government this week proposed the country’s biggest round of budget cuts since World War II in a move to
reduce its budget deficit of as high as 11% of GDP, the largest in the G-20. Chancellor of the Exchequer, George Osborne,
on 22 June proposed an emergency budget that imposed a levy on banks, raised the sales tax and slashed spending.
The plan, alongside measures proposed by the prior government, will generate £113bn (US$168bn) of deficit cuts, 15%
of the £737bn budget foreseen for 2015. UK joined its counterparts in Europe to reduce its budget deficit, six weeks
after the Euroland’s governments united to save Greece from default. As it stands, German on 8 June proposed to cut
its budget worth more than €80bn (US$98bn) through 2014. Countries including Greece, Spain, Portugal and Italy are
already introducing austerity plans as well. European policymakers were concerned that failure to address public finances
now risks reviving a bond market selloff that required a bailout for Greece in May. The UK’s proposals presents a test
case for G-20 policymakers, as they argue how quickly to act.

Just as they split on how much to spend fighting the global credit crisis, governments are now at odds over when to start
trimming a G-20 debt load that the International Monetary Fund estimates will average 110% of GDP in 2015. The US
President, Barack Obama said that deficit reduction at this juncture could hurt economic growth and employment. The
US is urging G-20 nations to support the global economic recovery by focusing on growth, which is seen at odds with
Germany and the UK, as these countries are focusing on reducing budget deficits. Economists are also having different
views as well. Nobel laureate Paul Krugman sides with the US President, arguing that with central bank interest rates
so low fiscal policy needs to remain stimulative and markets are not signaling an immediate need to repair state balance
sheets. Economist John B. Taylor, the Stanford University professor who created a rule to guide monetary policy, on the
other hand, said that Europe should ignore US calls for continued stimulus and stick to austerity plans because budget
cuts are not likely to trigger a new recession. The so-called Taylor Rule uses the divergence between optimal levels of
inflation and unemployment to estimate where the benchmark interest rate should be. The rule suggests the US federal
funds target rate should have been higher than it actually was from 2001 to 2009.

The nightmare scenario for the G-20 leaders is a repeat of the US’s woes in 1937 and Japan’s six decades later when
governments tipped their economies into renewed recessions by cutting support. In the mid-1930s, then US President
Franklin Roosevelt began chopping spending and raising taxes after an initial rebound only to lengthen the Great
Depression. Japan’s government helped trigger another 20-month recession when it raised its sales tax in 1997 to 5%
from 3%.
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 25 June 2010

The US Economy

Durable Goods New Orders Fell Mom In May

◆ US durable goods new orders, items meant to last at least three years, fell by 1.1% mom in May, after
rising by 3.0% in April, mainly dragged down by a decline in orders for non-defence aircraft (which is lumpy and
often volatile). Excluding transportation, durable goods new orders bounced back to increase by 0.9% mom in
May, from -0.8% in April. This was attributed to a rebound in new orders for primary metals and machinery as
well as a smaller decline in new orders for electrical equipment. These were, however, offset partially by a decline
in new orders for fabricated metals and a slowdown in new orders for computers & electronic products. Similarly,
new orders for capital goods, excluding defence goods and aircraft, rebounded to increase by 2.1% mom in
May, from -2.7% in April, suggesting that business spending remained resilient. Yoy, total new orders for
durable goods slowed down to 15.3% in May, from +21.5% in April. New orders for capital goods, excluding
defence goods and aircraft also softened to 18.4% yoy in May, from +22.7% in April, suggesting that business
spending has turned softer. As a whole, the drop in durable goods new orders suggests that manufacturing
activities are likely to soften in the months ahead.

The Euroland Economy

Industrial Orders Slowed Down M-o-M In April

◆ Euroland’s industrial orders slowed down to 0.9% mom in April, from +5.1% in March. Despite the
slowdown, this was the third consecutive month of increase, indicating that industrial activities are likely to remain
resilient in the months ahead. The slowdown was due to a slower increase in orders for intermediate goods,
pointing to a slower growth in exports in the months head. A drop in orders for capital and durable & non-durable
consumer goods worsened the situation. This suggests that businesses and consumers may cut spending going
forward. Slower growth was reflected in a slowdown in industrial orders in Germany, the largest economy in the
Euroland, and a decline in new orders in France. Despite a slowdown, Germany recorded the fourth consecutive
month of increase in new orders, indicating that a weakening euro might have helped the country in securing
more exports. These were, however, mitigated by a pick-up in new orders in Italy. Yoy, industrial orders grew
at a stronger pace of 22.1% in April, compared with +20.3% in March, due partly to a low base effect.

Asian Economies

Japan’s Exports Slowed Down In May

◆ Japan’s exports fell by 9.8% mom in May, the second consecutive month of decline and compared with -1.9% in
April. Yoy, the exports slowed down to 32.1% in May, from +40.4% in April. This was the third month of
slower growth and the slowest pace in five months, indicating that global demand for Japan’s exports have turned
weaker. The slowdown was due to slower increases in exports to the US, which eased to 17.7% yoy in May, from
+34.4% in April. Similarly, exports to Europe slowed down to 17.4%, from +19.9% during the same period. These
were made worse by a slowdown in exports to Asia, which eased to 34.4% yoy in May, the fourth straight month
of slowing down and from +45.2% in April. In particular, exports to China weakened to 25.3% yoy in May, from
+41.3% in April. Imports, however, strengthened to 33.4% yoy in May, from +24.2% in April. As a whole, a
slowdown in exports highlights the vulnerability of the Japanese economy to a slowdown in global trade,
after exports drove the economy to expand by an annualised rate of 5.0% in 1Q 2010.

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