Weekly Economic Commentary – May 6, 2012

Markets
Holidays in Japan and Labor Day around the world resulted in choppy trade in most markets, then at the end of the week data on the American and European labor markets hit stocks, sending the S&P 500 to its biggest weekly retreat this year after two weeks of gains. Since the bad news came on Friday, regional markets were less affected. Gold benefited from the uncertainty, while oil retreated on renewed concerns for the global economy. The yen gained as a result of the weak data, but other main exchange rates remained broadly stable.
 Global Developments

Americas:

• US consumer spending rose 0.3% mom in Mar after a revised 0.9% in Feb, the biggest gain since August 2009.
• Beating expectations the ISM index on US manufacturing increase from 53.4 in Mar to 54.8 in Apr, providing a forward looking sign that the US recovery is on track. The breakdown adds to the positive side, as new orders and production rise mom 58.2 vs. 54.5, and 61.0 vs. 58.3, respectively.
• US construction spending in Mar remains anemic (up 0.1% mom, versus +0.5% expected) pushed down by public spending (-1.1% mom)
• US PCE Core Price inflation in Mar was 0.16% mom, a number that will not cause anxiety for Fed Directors.
• US Initial jobless claims declined to 365k, more than expected, but probably due to seasonal quirks caused by school spring breaks.
• Factory orders in the US dropped 1.5% mom in Mar (Feb: +1.1%) on the back reduced demand for aircraft that offset gains in turbines and household appliances.
• Job creation slowed for the second consecutive month as non farm payroll increased by only 115k in Apr (vs. 154k in Mar). US unemployment dropped to 8.1% (Mar: 8.2%), primarily on account of workers abandoning the labour force.

Europe:

• EU inflation remained at 2.6%yoy in Apr a tad below the 2.7% registered in Mar.
• The UK manufacturing PMI fell in Apr to 50.5 from 51.9 in Mar, hit by a sharp drop in reported export orders.
• A drop of -0.3% qoq in Spain’s GDP, the same drop as in Q4, confirms a bleak situation poised to worsen. Annual growth fell from 0.3% to -0.4%.
• EU manufacturing PMI in Apr fell again to 45.9, in line with expectations, down from 47.7 in Mar underscoring a deepening recession.
• Euro area unemployment hit record highs of 10.9%, sa, in Mar (Feb: 10.8%), led by Spain at 24.1%. The French rate was close to the Euro Area average at 10.0%, while German unemployment came in at 5.6%.

 Asia and Pacific:

• China’s manufacturing PMI rose to 53.3 in Apr, a yearly top, from 53.1 in Mar. It was the fifth straight month above the 50 level, which signals the threshold between expansion and contraction. This figure lends support to the expectations that Chinese soft patch bottomed out in Q1.
• Taiwan’s Q1 GDP rose 0.4% yoy compared to 1.9% in Q4, below expectations of  about 1%. On a seasonally-adjusted qoq annualized basis growth was 1.1%, after 1.0% drop in Q4. The drag was investment with an estimated drop of -10.6% qoq ann. (-14.5% in Q4). Exports fell 4.3% qoq, ann.
• Korea’s Apr CPI inflation was 2.5% yoy, on the lower side of the 2%-4% target range and below expectations of 2.8%. Sequentially, inflation was flat mom after a -0.1% decline in Mar. Core inflation was 1.8% yoy, down a decimal from Mar, and 0.1% mom in Apr compared with -0.4% in Mar.
• The Reserve Bank of Australia stuns markets with a 50 bps rate cut, another symptom of nervousness in policy circle over the prospects of the economy.
• South Korea posted a trade surplus of USD 2.2bn in Apr (Mar: USD 2.5bn), recording a contraction in both exports (4.7% yoy) and imports (0.2%). Industrial Production dropped 3.1% mom, sa (Feb: +0.6%), expanding 0.3% on year.
• Indonesian inflation accelerated 4.5% yoy in Apr (Mar: 3.97%), a seven month high, while Thai inflation eased for the month to 2.47% (3.4%). The Bank of Thailand left its key interest rate unchanged.

 Bottom line:
After the gloomy figure on US GDP last week, more cheerful data from the US and China manufacturing seemed to improve the outlook. But the weal US payroll data, probably the most important indicator of economic conditions, reminded that the recovery remains a chimerical wish for the time being. The only uplifting data came from the inflation front, both in Asia and in the US. In Europe (including the UK) on the contrary despite the double dip, inflation continues to be stubbornly high. Starting from next week markets will be affected by the electoral results in France and Greece. A victory by Hollande will open a Pandora box in Euroland reopening the discussion on the fiscal compact and the ESM with unpredictable outcomes on the stability of the euro.
 Regional Developments

• An S&P report stated that the GCC economies are pulling ahead on account of high oil prices, supporting ratings across the corporate and infrastructure sectors. The ratings agency, in addition, sees rising confidence in the Dubai government’s ability to support government related entities in need.
• Royal Bank of Scotland has assessed that debt requiring refinancing in the GCC states amounts to USD 60bn for the remainder of 2012, although no issues in refinancing are foreseen.
• Turkey saw a surge in tourists originating from the GCC in 2011, led by Qatar (102.3%), UAE (86.8%) and Bahrain (54.4%), as reported by the Turkish Tourism and Culture Office. 
• New railways, air and see ports are some of the largest infrastructure projects in the Oman’s new five-year development plan for 2011-2015, with the total construction cost of USD 78 bn. Total infrastructure expenditure is expected to increase by 113% over five years.
• According to the Central Bank of Bahrain, in Mar 2012 deposits with the local retail banks grew at a slower pace +7.7% yoy than the credits provided to corporates and individuals (+15.9%), however the total volume of deposits (BD 9719.8 mn) exceeded credit portfolio (BD 6585.9 mn) by 47.6%.
• According to SAMA M3 growth was 10.5% yoy in Mar 2012, vs 13.8% in the previous month; central bank’s net foreign assets increased by 21.6% yoy to reach USD 561 bn at the end of Mar.
• While public expenditure on education in Saudi Arabia increased from SAR 13.4 bn in 2004 to SAR 46.9 bn nowadays, the country’s authorities plan to spend another SAR 81.5 bn on university projects in the coming years to develop campuses in the different regions of the country, according to the Saudi Minister of Higher Education.
• According to the IMF’s FSAP report on Saudi Arabia, authorities managed to cushion the impact of the financial crisis. However, the legal framework needs to be strengthened to provide SAMA with greater operational independence, in compliance with recognized international standards.
• The number of tourists visiting Egypt reached 2.5 mn in Q1 2012, rising by 32% when compared to the same period of the last year. Country’s Minister of Tourism expects tourist inflows for the whole 2012 to exceed the level of pre-revolutionary 2010.
• Turkey officials criticized S&P for its decision to revise country’s foreign and local currency sovereign credit ratings from positive to stable, arguing that this decision was biased, despite the outstanding economic performance of Turkey in the last years. The agency backed its decision by referring to the concerns over the risks for Turkey’s external sustainability arising from dependence on short-term financing from foreign sources.
• FDI inflows in Turkey for the first two months of 2012 increased by 25%, when compared to the same period of the previous year, and reached USD 1.7 bn, according to the Minister of Economy.
• Due to electricity and natural gas prices hikes, inflation in Turkey jumped to 11.1% yoy in Apr, after remaining stable at 10.4% during the previous two months. Inflation in Turkey remained below 11% yoy during the last 42 months.
• According to the Minister of Finance of Lebanon, the country’s gross public debt is expected to increase to USD 60 bn by the end of 2012 from  USD 53.9 bn in Feb 2012 (138% of GDP). The country’s foreign currency reserves amounted USD 30.7 bn in Feb 2012.

 UAE Focus

• HSBC UAE Purchasing Managers Index (PMI) recorded a 10-month high in Apr  at 53.5 (Mar: 52.3) as new business orders and hiring rose during the month.
• The Minister of Foreign Trade Sheikha Lubna Al Qasimi expressed plans to increase Emarati export penetration into Arab markets, increasing intra-Arab trade.
• FDI in the UAE reached USD 60 bn over the past five years, while UAE investments abroad amounted to USD 327 bn.
• The UAE Energy Minister has announced the completion of the Fujairah oil pipeline, built to bypass the Strait of Hormuz through which one-fifth of the world’s oil is shipped.
• Istithmar World confirmed the purchase of Kerzner International Holdings Limited’s 50% interest in The Atlantis for USD 250mn, thus becoming the sole owner. 
• Cargo volumes at Dubai World Central surged 382% yoy in Q1 2012, according to the Dubai Airports quarterly traffic report. The airport is in its second year of operations. DP World’s flagship Jebel Ali Port was awarded Shipping Port of the Year at the annual Supply Chain and Transport Awards 2012.
• A seven-member European Union delegation visited the UAE to bridge religious and cultural differences, and strengthen EU-UAE ties. Arrangements for a free trade agreement between Pakistan and the GCC states are also in the pipeline, with UAE being the single largest investor in the country.
• The National Council for Tourism and Antiquities has reported that tourism in the UAE generated AED 22 bn in 2011, with hotel and hotel apartments receiving 14.5 mn guests.
• Actions to speed up the transit of goods through Dubai ports, reduced the number of days required to process imported and exported goods from 12 to 7, with an estimated total savings equivalent to AED 148 bn for the period 2007-2011, according to a study by the Emirates Competitiveness Council.