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By HaleStewart May 29, 2015 2:21 pm
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International Economic Week in Review: The Flood Waters, Edition

     Due to the severe weather in Houston, Texas, this version is somewhat truncated.

     There were two important indicators from Canada.  The first was the Bank of Canada’s rate decision, where they kept rates at 75 basis points.  The release noted low inflation was transitory and largely caused by oil prices.  The bank went on to note the weak 1Q GDP number was caused by a slow US 1Q; they are fully expecting a second quarter rebound.  Second, Canadian GDP contracted .1% in the 1Q:

There were several underlying causes with a 2.5% drop in business investment and .3% decrease in exports standing out.  But the biggest issue is the 30% drop in oil and gas investment, caused by weak oil prices.  This contraction in activity was the underlying reason for the Bank of Canada’s pre-emptive 25 basis point rate cut earlier this year.    

     News from Japan was mixed.  The BOJ released their latest meeting minutes, which generally noted the economy was growing moderately.  Exports increased slightly in the first quarter as did business investment.  They characterized consumer purchases as “resilient.”  Unemployment is now 3.3%, which is the lowest reading since the 1990s.  Adding to the bullish tone was the 5% Y/Y increase in retail sales along with 1% rise in industrial production.  But the retail sales number was been weak for the last three months, while overall industrial production has been lackluster for the last few years:

Adding to the concern was inflation’s move lower; total CPI increased only .6% Y/Y while the core was up a paltry .3%.  Some of the weakness is due to oil’s price drop and the dis-advantageous comparison to last year’s sales tax increase.  However, because deflation has been Japan’s primary problem for the last few decades, weak CPI readings naturally create concern.

     Like Japan, US numbers were mixed.  Housing continues to print good numbers: new home sales were up 6.8% while the Case Shiller index increased 5%.  And while durable goods decreased -.5%, non-defense capital goods were up 1%.  The worst news of the week as the 1Q GDP revision, which showed a contraction of .7%.  The BEA released contained the following breakdown of components:

     Real personal consumption expenditures increased 1.8 percent in the first quarter, compared with an increase of 4.4 percent in the fourth.  Durable goods increased 1.1 percent, compared with an increase of 6.2 percent.  Nondurable goods increased 0.1 percent, compared with an increase of 4.1 percent. Services increased 2.5 percent, compared with an increase of 4.3 percent.

      Real nonresidential fixed investment decreased 2.8 percent in the first quarter, in contrast to an increase of 4.7 percent in the fourth.  Investment in nonresidential structures decreased 20.8 percent, in contrast to an increase of 5.9 percent.  Investment in equipment increased 2.7 percent, compared with an increase of 0.6 percent.  Investment in intellectual property products increased 3.6 percent, compared with an increase of 10.3 percent.  Real residential fixed investment increased 5.0 percent, compared with an increase of 3.8 percent.

      Real exports of goods and services decreased 7.6 percent in the first quarter, in contrast to an increase of 4.5 percent in the fourth.  Real imports of goods and services increased 5.6 percent, compared with an increase of 10.4 percent.

The numbers show a broad based decline in both PCEs, business investment and exports.  Oil’s price drop caused the drop in business investment while the strong dollar is responsible for the drop in exports.  A bit more perplexing is the drop in PCEs; with oil’s price drop many people predicted an increase in spending.  Instead, it looks like consumers are pocketing the savings.

     The only news from the UK was the second estimate of 1Q GDP, which was unchanged:

•UK GDP in volume terms was estimated to have increased by 0.3% between Quarter 4 (Oct to Dec) 2014 and Quarter 1 (Jan to Mar) 2015, unrevised from the previous estimate of GDP published 28 April 2015.

•GDP was estimated to have increased by 2.8% in 2014, compared with 2013, unrevised from the previously published estimate.

Here is a chart from the release:

     Finally we have information from the EU, which consisted solely of sentiment indicators. Although still positive, the business decreased somewhat while the economic sentiment readings increased:

This was expected due to the improving economic climate.

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