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PP 7767/09/2010(025354)

Economic Highlights

30 July 2010

1 The Great Divide In Price Pressure In Developed

And Developing Countries
2 The US Fed’s Beige Book Indicated That The
Economic Recovery Slowed Down And Durable
Goods New Orders Fell Mom In June
3 Euroland’s Consumer And Business Confidence
Improved In July
4 Japan’s Retail Sales Bounced Back In June

Tracking The World Economy...

Today’s Highlight

The Great Divide In Price Pressure In Developed And Developing Countries

Rapid economic expansion in Asia and the emerging economies is driving up consumer prices and asset price inflation
in China, India, Hong Kong and Singapore, to name a few. This is likely to have been made worse by inflow of capital
from the developed countries, which may further fuel inflationary pressure in these countries. By keeping US interest
rates ultra-low for more than a year, the US Fed could be feeding bubbles in emerging markets by inducing global
investors to move money out of the US and into countries that offer higher yields. As it stands, India’s inflation rate,
as measured by the wholesale price index, has been hovering at a high level of 10-11% for the last five consecutive
months. Although Chinese consumer prices only rose by 2.9% yoy in June, its property prices have been accelerating
before credit tightening measures implemented by the authorities helped to cool it down. The same also happened
in Singapore and Hong Kong. In Malaysia, although consumer prices rose by just 1.7% yoy in June, anecdotal
evidences suggest that property prices in certain locations have also risen significantly in the last 12 months. Policymakers
in these countries have been trying to cool things down. China has introduced a series of administrative measures
to cool its property market. India and Malaysia have been raising interest rates in a move to normalise their monetary
conditions. This suggests that economic activities in these countries, which have helped to lead the global economic
recovery from its worst recession since the post-World War II, are likely to slow down. Over tightening in these
countries, however, could be a risk to the global economic recovery.

Inflationary pressures in developed countries, on the other hand, are muted. In the US, the core inflation was at a
4-decade low of +0.9% yoy in June. Similarly, the core inflation in the Euroland hovered at around 0.8-0.9% in the
last few months, the lowest in nearly a decade. Japan, on the other hand, is fighting with deflation with the core inflation
rate contracting for the last 15 consecutive months. As a result, these countries are hoping to tap on exports to help
its economic recovery. Indeed, exports accounted for a little more than half of the growth the US economy managed
to generate in late 2009 and early 2010, according to data compiled by the Commerce Department. Hence, the policy
tightening undertaken by Asia and the emerging economies may not spell well for the developed countries’ economic

Meanwhile, the IMF is urging China to take steps to support domestic consumption, including letting its currency
strengthen. They are concerned that a shift toward a more sustainable pattern of global economic growth could be
stalling as the worst of the crisis recedes and countries return to business as usual. China gave domestic demand an
enormous boost with its stimulus spending to combat the effects of the financial crisis, resulting in a surge in imports
of raw materials and equipment to feed a construction boom. The move helped China to reduce its current account

Peck Boon Soon

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30 July 2010

surplus of the balance of payments, which reached 4.5% of GDP in 1Q 2010, less than half the peak level of nearly
11% recorded in 2007.

The US Economy

The US Fed’s Beige Book Indicated That The Economic Recovery Slowed Down

◆ The Federal Reserve’s Beige Book indicated that economic growth slowed in some areas over the past two
months, dragged down by commercial real estate and the expiration of a tax credit for homebuyers. As a result,
the Fed said that activity in residential real estate markets was sluggish in most districts after the expiration of
the 30 April deadline for the homebuyer tax credit, while commercial real estate markets, especially construction,
remained weak. Retail sales, however, continued to rise with necessities remaining strong sellers, while big-ticket
items moved more slowly. In fact, most districts said that auto sales fell in recent weeks. Conditions in the
services sector improved, on the back of a pick-up in transportation and tourism activities. Manufacturing activity
continued to expand but there were signs of weakness. Meanwhile, consumer prices of goods and services held
steady and wage pressures continued to be contained on the whole. Input prices were also held largely steady
during the period.

◆ The report underscored the Fed’s view that the recovery, while still moving forward, is progressing at a slower pace
than earlier in the year. The Fed said in congressional testimony last week that the central bank expects continued
moderate growth but noted that the economic outlook remains unusually uncertain. The ‘Beige Book’ is a summary
economic activity prepared for use at the central bank’s Federal Open Market Committee (FOMC) meetings. The
next meeting is on 10 August. As a whole, the assessment suggests that the Fed will likely keep its key policy
unchanged at 0-0.25% in the near term but resort to other means such as term deposits to absorb
excess liquidity from the system.

Durable Goods New Orders Fell Mom In June

◆ US durable goods new orders, items meant to last at least three years, fell by 1.0% mom in June, after
a decline of 0.8% in May. This was the second consecutive month of decline after five months of picking up,
indicating that manufacturing activities are likely to soften in the months ahead. This was on account of
declines in new orders for machinery and computers & electronic products as well as a sharper drop in new orders
for primary metals. These were, however, mitigated by a pick-up in new orders for fabricated metals, electrical
equipment and automobiles as well as a smaller drop in orders for non-defence aircraft (which is lumpy and often
volatile). Excluding transportation, durable goods new orders fell by 0.6% mom in June, compared with +1.2%
in May. Similarly, new orders for capital goods, excluding defence goods and aircraft, slowed down to 0.6%
mom in June, from +4.6% in May, suggesting that business spending will likely slow down going forward. Yoy,
total new orders for durable goods held stable at 15.9% in June, the same rate of increase as in May and compared
with +21.5% in April, indicating that manufacturing activities might have peaked and will likely soften in the months
ahead . New orders for capital goods, excluding defence goods and aircraft, however, softened to 15.2% yoy in
June, from +21.4% in May and +22.7% in April, suggesting that business spending has turned softer.

The Euroland Economy

Euroland’s Consumer And Business Confidence Improved In July

◆ Business confidence index in the Euroland improved to -4 in July, after holding stable at -6 in the previous
two months, suggesting that business confidence has improved amidst signs of a slowdown in the global economy.
This was due to a pick-up in the past and future production as well as a smaller drop in orders and exports. Selling
prices, however, eased further during the month. As a result, businesses slowed down their retrenchment during
the month. Similarly, consumer confidence index improved to -14 in July, from -17 in June 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
have become less willing 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 bounced back to 101.3 in July,
the highest in more than two years and from 99.0 in June. This suggests that the Euroland economy will likely
sustain its expansion in the months ahead, albeit at a moderate pace.

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Asian Economies

Japan’s Retail Sales Bounced Back In June

◆ Japan’s retail sales rebounded to increase by 0.4% mom in June, from -2.0% in May and compared with +0.5%
in April. Yoy, the retail sales grew at a faster pace of 3.2% in June, compared with +2.9% in May. Despite
the pick-up, retail sales might have hit a peak in April, in line with a slowdown in exports that will likely translate
into slower job growth and consumer spending. Meanwhile, growth in June’s retail sales was driven by car sales,
which advanced 12.4% on government incentives that are scheduled to expire in September. Increases in clothing
& fabric sales and fuel receipts also boosted the sales during the month.


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