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Weekly Economic Commentary

 
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Brazil, India, China and Eurozone - Headwinds to Heed in 2012

December 6, 2011

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There has been a string of positive news about the U.S. economy in the past few days – auto sales rose, jobless rate fell, the ISM manufacturing survey points to an increase in new orders and production, private sector construction outlays advanced. But, news from abroad is disappointing and could translate into more than a temporary dip in exports. The important question is if the tailwinds can offset the headwinds blowing through the United States.

Real GDP of Brazil contracted in third quarter (-0.2%, see Chart 1), a stunning drop which is bothersome on several fronts. The Purchasing Managers’ Index stood at 48.7 in November denoting a contraction in factory activity.

dec 1206 1aOn the Asian front, India’s real GDP growth slowed in the third quarter to a paltry 2.5% after recording 10% growth in 2010 (see Chart 2). The specter of inflation has led the central bank to raise the policy rate rapidly in 2010 and 2011 (see Chart 3), which bodes poorly for economic growth in the near term. The Purchasing Managers’ Index of November dipped to 51.0 in November from 52.0 in the prior month.

dec 1206 2adec 1206 3aThe Purchasing Managers’ Index of China fell to 49.0 in November, the first below 50.0 reading since February 2009 (see Chart 4), suggesting weakening factory conditions. China’s policy makers have stepped in and eased reserve requirements in response to signs of business deceleration.

dec 1206 4aChina’s GDP growth is holding slightly above 9.0 in the third quarter, but the pace of growth is showing a small slowing trend since the early part of 2010 (see Chart 5).

dec 1206 5a

Pulling these strands of information about Brazil, India, China together, the key message is that as their respective economies experience a slowing of business conditions, it should translate into a smaller gain in US exports to these countries in the months ahead. Exports of the U.S to Brazil, India, and China averaged 11% during 2009-10 (see Chart 6).

dec 1206 6aAt the same time, the eurozone is nearly certain to experience a recession, given the current status of the sovereign debt crisis. Exports to the European Union (EU) account for roughly 20% of exports of the U.S; this share already shows a decline (Chart 7), with a further drop in 2012. In sum, the global economy will ring in the new year with strains of all sorts across most of the emerging and advanced nations. The BIC bloc (Brazil, India, and China) may not be the strong engines of growth and a decoupling of the emerging markets from the advanced nations looks unrealistic in 2012.

dec 1206 7aHome Prices Show a Small Improvement in October

The CoreLogic House Price Index fell 3.9% from a year ago in October; excluding distressed homes, home prices dropped 0.5%. The CoreLogic Home Price Index of non-distressed properties rose 0.9% in October vs. September. The good news is that the pace of decline has slowed and the price index of non-distressed homes is almost stabilizing on a year-to-year basis (see Chart 8).

dec 1206 8a

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The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
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