Thursday, August 28, 2008

When the U.S. sneezes who catches a cold?

U.S. GDP for the second quarter was revised higher to 3.4 percent today. The most remarkable aspect of the components within GDP was that trade added 3.1 percentage points. Exports grew by 13.2 percent and imports fell by 7.6 percent. The U.S. economy has shifted from supply side to demand side that is it is exporting more than it is importing. This must have severe implications for trading partners and their economies.

The post-olympic slowdown in China is becoming evident but that is not all. The Euro Area economy is expecting another sluggish quarter after the second quarter turned negative. In Germany the situation is similar. Second quarter GDP was negative, albeit coming off of a very strong first quarter, and a number of leading indicators point to further problems ahead. The Ifo business climate index for August dropped to 94.8 from 97.5 in July.

According to
Northern Trust's Asha Bangalore:
"While this is still well above the lows recorded in late 2002, the last time Germany was headed into recession, the speed of the recent fall is disconcerting. Coming hard on the heels of last month’s plunge, the August fall brings the two-month decline to 7.5 points, the sharpest since reunification in 1990."

click to enlarge

Another closely followed forward looking indicator of EA economic growth is the Belgian National Bank business confidence index. The Belgian economy is with 75 percent of its Gross National Product in the form of exports the most open economy in the world, and therefore an excellent gauge for the EA economy as a whole. As a small ray of hope in August the confidence index nudged up to -5.9 from -7.6 in July, the manufactoring sub-component also improved slightly to -8.1. This index posted its largest ever monthly decline from 1.2 in March to -7.9 in April, and stayed negative ever since.

source: Daily Global Commentary
Asha G. Bangalore, Aug. 26

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