PP 7767/09/2010(025354)

Economic Highlights
Global
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MARKET DATELINE

1 September 2010

1 US Consumer Spending Experiencing Slowing Growth

2 Euroland’s Inflation Moderated And Unemployment Rate

Held Stable At A high Level; Consumer Confidence
Improved And Business Confidence Held Stable In August

3 India’s Economy Strengthened To 8.8% Yoy In the 2Q

4 Thailand’s Economic Activities Moderated In July

5 Singapore Tightened Mortgages To Cool Property Market

6 Japan Expanded Loan Programme To Ease Its Policy

Tracking The World Economy...

Today’s Highlight

US Consumer Spending Experiencing Slowing Growth

US personal consumption expenditure (PCE) rebounded to increase by 0.4% mom in July, after remaining unchanged in
June and compared with +0.1% in May. In real terms, PCE grew at a slightly faster pace of 0.2% mom in July, compared
with +0.1% in June. On an annualised basis, the PCE, however, slowed down to 1.7% in July, from +2.0% in June and
the peak of +2.5% in April-May, suggesting that consumer spending is losing momentum. The US uses this figure to
compute its consumer spending in real GDP. However, judging from the m-o-m increase in real consumer spending, the
third month of increase in four months in July, consumer spending is likely to remain resilient in the months ahead in
supporting the US economy. As a result, we do not expect the US economy to fall back into a recession despite slowing
growth. As it stands, the US economy slowed down to an annualised rate of 1.6% in the 2Q, the second consecutive
quarter of easing and after reaching the peak of +5.0% in the 4Q of last year.

Similarly, income rebounded to increase by 0.2% mom in July, after remaining unchanged in June, due mainly to a pick-
up in wage & salary. A sustained increase in income will help to support consumer spending in the country. A faster
increase in consumer spending than that of income, however, led to a slowdown in the personal savings rate to 5.9%
of disposable income in July, from 6.2% in June.

Separately, the headline PCE price index rose by 0.2% mom in July, a rebound from -0.1% in May-June. Yoy, the headline
PCE price index inched up to 1.5% in July, from 1.4% in June but off a high of +2.5% in March. Similarly, the core
PCE price index inched up by 0.1% mom in July, after remaining unchanged in June. Yoy, the core PCE price index held
stable at 1.4% in July, the same rate of increase as in June and compared with a high of +1.8% in March. As a whole,
the readings suggest that price pressures remained tame and it would provide more room for the US Fed to hold its key
policy rate unchanged at between 0-0.25% in the near term. Indeed, the US Federal Reserve has acted on 10 August
by shifting its policy slightly towards a loosening bias, whereby it pledged to keep its holdings of securities and prevent
money from draining out of the banking system.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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The Euroland Economy

Euroland’s Inflation Moderated And Unemployment Rate Held Stable At A high Level

◆ Euroland’s preliminary headline inflation rate moderated to 1.6% yoy in August, from a 20-month high
of +1.7% in July and compared with +1.4% in June. This suggests that price pressure has eased somewhat as
energy prices softened. Although inflation in the region is trending up, it remains gradual and will likely be
manageable. This, coupled with the sovereign debt problem in the region, suggests that the European Central Bank
(ECB) will likely keep its key policy rate unchanged in the near term. Indeed, the ECB relaxed its policy
following the deepening of the sovereign debt problem in the region.

◆ Euroland’s unemployment rate held stable at a high level of 10.0% of total labour force in July, the
same level as in June. This was the fifth consecutive month the unemployment rate held stable at this level and
the highest since the introduction of the single currency more than a decade ago, indicating that the job market
might have stabilised but remained weak. In fact, unemployment rates in countries like Belgium, Ireland and Spain
continued to inch up, while Greece’s unemployment data was not made available since reaching a high of 11.0%
in March. These were, however, mitigated by an improvement in Italy’s unemployment rate, which eased to 8.4%
in July, the second straight month of easing and from 8.5% in June. Unemployment rate in Germany and France,
on the other hand, remained stable at 6.9% and 10.0% respectively in July, the same levels as in June. The high
level of unemployment rate suggests that the recovery in consumer spending and the Euroland economy
will likely be slow.

Consumer Confidence Improved And Business Confidence Held Stable In August

◆ Business confidence index in the Euroland held stable at -4 in August, the same level as in July,
suggesting that business confidence remained relatively stable despite signs of a slowdown in the global economy.
A slowdown in future production was mitigated by a smaller drop in orders and exports as well as a pick-up in
inventory. The past production and retrenchment, on the other hand, held stable during the month. Consumer
confidence index, however, improved to -11 in August, from -14 in July and -18 in May. The improvement
suggests that consumers have turned slightly more upbeat, as they expect economic activities and job prospects
to improve. This will translate into an improvement in their income. Nonetheless, consumers remained unwilling
to increase major purchases going forward, suggesting that consumer spending will remain weak in the near term.
As a whole, the region’s overall sentiment index inched up to 101.8 in August, the highest in more than two years
and from 101.3 in July. This suggests that the Euroland economy will likely sustain its expansion in the
months ahead, albeit at a more moderate pace.

Asian Economies

India’s Economy Strengthened To 8.8% Yoy In the 2Q

◆ India’s economy grew at a faster pace of 8.8% yoy in the 2Q, compared with +8.6% in the 1Q. This was
the fastest pace of growth in 2 1/2 years, underpinned by a pick-up in agriculture, forestry and fishing output, which
strengthened to 2.8% yoy in the 2Q, from +0.7% in the 1Q and -1.8% in the 4Q of last year. This was aided by
a pick-up in finance, insurance & real estate and community & social services activities during the quarter. These
were, however, offset partially by a slowdown in manufacturing production and construction activities, which weakened
to 12.4% and 7.5% yoy respectively in the 2Q, from the corresponding rates of +16.3% and +8.7% in the 1Q.
Similarly, output of mining and utilities as well as activities in trade, hotel, transport & communication sectors slowed
down during the quarter. Stronger economic growth in the 2Q suggests that India has yet to feel the pinch of a
slowing global demand, as exports account for less than a fifth of its GDP, and rising wages and consumer spending
are helping to sustain its growth. As a result, India may be forced to raise interest rates to cool inflation even
as Japan steps up its monetary stimulus and the US signals it may take more steps if needed to avert another
recession. The Reserve Bank of India has raised its key policy rate for the fourth time since March, the most
number of times among Asian central banks this year.

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Thailand’s Economic Activities Moderated In July

◆ Thailand’s manufacturing production slowed down to 16.3% yoy in July, after a rebound to +21.9% in June and
compared with a high of +33.6% in March, indicating that manufacturing activities are slowing down. This was due
to a decline in the production of food, pulp & paper products, petroleum products and chemical products. These
were made worse by a slowdown in the production of beverages & tobacco, textiles, leather products, rubber &
rubber products, vehicle & equipment, electronic products and electrical appliances. These were, however, mitigated
by a pick-up in the production of construction materials, iron & steel and furniture & fixtures. The slowdown in
industrial output was in line with a softer increase in exports, which weakened to 21.2% yoy in July, from +47.1%
in June. This was the slowest growth in eight months, suggesting that the exceptionally strong growth in exports
due to the low base effect is beginning to normalise. Similarly, private consumption indicator slowed down to 5.1%
yoy in July, the slowest pace of increase in six months and from +8.3% in June, indicating that consumer spending
will likely slow down going forward. Although private business investment indicator grew at a faster pace of 22.1%
yoy in July, compared with +21.8% yoy in June, businesses are likely to turn cautious in spending in the months
ahead given that their confidence has eased during the month. As a whole, the major economic indicators
suggest that Thailand’s economy is likely to slow down further in the 3Q, after slackening to 9.1% yoy
in the 2Q.

Singapore Tightened Mortgages To Cool Property Market

◆ Singapore tightened its mortgage policy on 30 August by increasing down payments for second mortgages
and imposing a stamp duty on property held for less than three years to curb speculation, after home prices surged
38% yoy in the 2Q. The Government said that buyers who hold more than one mortgage can only borrow up to
70% of a property’s value (versus 80% previously) and must pay 10% in cash (up from 5% previously). The curbs
marked the third set of major measures Singapore has taken in 12 months to cool the property market. Singapore
has been attempting to rein in home prices since last year when the government barred interest-only loans for some
housing projects and stopped allowing developers to absorb interest payments for apartments still being built. In
February, the government said it will levy a seller’s stamp duty on all residential properties and land that are sold
within one year from the date of purchase. At the same time, it also lowered the loan-to-value limit to 80% from
90% for all housing loans provided by financial institutions regulated by the Monetary Authority of Singapore.

Japan Expanded Loan Programme To Ease Its Policy

◆ The Bank of Japan (BOJ) stepped up its monetary stimulus for the first time since March by expanding
a bank-loan programme by 10 trillion yen (US$116bn) to a total of 30 trillion, after the economy’s recovery
weakened and the government pressured the central bank to act. The BOJ doubled the size of the bank-loan fund
to 20 trillion yen in March, following a political pressure to ease policy to fight deflation. Meanwhile, the central
bank kept its benchmark overnight lending rate unchanged at 0.1%, and refrained from changing its monthly total
of 1.8 trillion yen of government-bond purchases. Also absent from the BOJ’s statement was any specific reference
to intervention in the currency market to stem gains in the yen, which has surged to a 15-year high.

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