Global Fault Lines
Jul 17, 2006
Stephen S. Roach (New York)
It has often been said that timing is everything on Wall Street. With the benefit of hindsight, this was certainly not the best of times to have turned more constructive on the global economic outlook (see my 1 May essay, “World in the Mend”). With the Middle East in shambles, missiles flying in North Korea, and terrorist attacks in India, new fault lines have opened up in an already fractured world. Is it time to reassess my newfound optimism on the global economic outlook?
From a macro perspective, the outcome boils down to assessing the interplay between geopolitical shocks and underlying economic fundamentals. As the recent swirl of events indicates, the risks of escalating geopolitical tensions can hardly be minimized. The challenge is to figure out how precarious the situation truly is. In an effort to do so, I’ve been reading a fair amount of history lately. I am especially haunted by Niall Ferguson’s latest tome on the tragic continuum of wars in the bloodiest of all centuries - the 20th century (see Ferguson’s The War of the World: History’s Age of Hatred, Penguin, London, 2006 - not available in the US until September 2006). I find Ferguson’s framework particularly relevant in attempting to put recent geopolitical developments in context. In his view, the destructive tendencies of the last century are traceable to the confluence of three powerful forces - ethnic conflicts, declining empires, and economic volatility. Unfortunately, there are worrisome signs on all three counts today. The case for heightened ethnic conflict is painfully obvious. It’s not just the mounting tensions between the Islamic world and the West, but as the tragedy of Iraq underscores, it’s also the struggle going on inside of Islam. Terrorism has often provided an important spark for ethnic conflict - in fact, that’s what triggered the outbreak of World War I. But new IT-enabled capabilities have taken this threat to an entirely different level. Nor can the role of declining empires be minimized. The United States -- today’s sole global superpower - is stretched as never before. A zero net national saving rate, a record current-account deficit, and massive unfunded entitlement liabilities for the upcoming retirement of some 77 million aging baby boomers, all speak of a nation that may have an increasingly difficult time aligning a weakening economic base with its military and political outreach. At the same time, the ascendancy of new empires - especially China and quite possibly India -underscores the potential for a relative decline of the old ones. Today’s volatility factor does not, however, match up with that which Ferguson identifies as being a key precipitant of “the war of the world.” Since 1990, most measures of the volatility of economic growth and inflation are sharply below those of earlier periods; moreover, since 2001, financial market volatility has been reduced sharply - especially for some of the asset classes that traditionally have been the riskiest, like emerging-market and high-yield debt. By contrast, the volatility spikes in the first third of the 20th century - underscored, of course, by the Great Depression - were a very destabilizing element in the world. The current reduced state of volatility is an encouraging development - suggesting that the steady progress of global prosperity in this era of globalization may well have the potential to break the chain of a most painful history. The downside of that conclusion is that volatility in today’s world may simply be dressed up in new clothes - namely, in the form of ever-mounting global imbalances and widening income disparities between the rich and the poor. There is nothing comforting about these tough developments on the soft underbelly of globalization. Consequently, from a Ferguson perspective, at least two - probably more like two and a half - of the three pieces of this historical framework of world conflict remain very much intact. This is hardly an encouraging conclusion for global macro. But it is an important starting point as we then attempt to overlay these geopolitical characteristics of the current climate with our assessment of economic and market fundamentals. From my point of view, I stand by my basic conclusions of early May -that the stewards of globalization are now focusing a powerful policy arsenal on the rebalancing of an unbalanced world. In particular, I continue to believe that the G-7, the IMF, and the world’s major central banks are not only collectively focused on the potential perils of mounting global imbalances but that they are making good progress in addressing this serious problem. The IMF is moving forward in establishing a new multi-lateral framework of surveillance and consultation involving the US, Europe, Japan, China, and Saudi Arabia. This brings together for the first time a small group of major industrial countries together with the world’s most powerful developing country and oil producer. I am equally encouraged that major central banks seem relatively united in withdrawing excess liquidity from world financial markets - essential to temper the distortions in asset markets that have fostered destabilizing disparities between saving and trade flows. As I noted at the outset, timing may well be a key risk in all of this. The rebalancing fix I described above will take time - and, quite possibly, a good deal of it. In the meantime, a still precarious (i.e., unbalanced) global economy must come to grips with the immediacy of what could well be a very serious geopolitical shock - complete with sharply rising oil prices and related blows to consumer confidence. The best contribution the macro practitioner can offer in these circumstances is to assess the pre-shock resilience - or lack thereof - in underlying economic activity. Over the years, it has been my experience that the shocks which matter the most are those that have hit an economy which has already been softened up by other factors. A good example is the US recession of 1990-91 - when an already faltering economy was hit by a brief oil shock triggered by the Iraqi invasion of Kuwait. The ensuing contraction was brief (3 quarters) and shallow (peak-to-trough decline in real GDP of 1.3%), but it was an unmistakable outgrowth of the interplay between a shock and an already weakened economy. That underscores the need to assess the pre-shock resilience of the global economy - whether, in fact, the world is tough enough to withstand the blows of a destabilizing geopolitical shock. On the surface, the answer is actually quite encouraging. By our latest estimates, world GDP growth is on track to rise 4.7% in 2006 - the fourth year in a row of growth above 4%. In fact, the 4.6% average we now estimate over the 2003-06 period would mark the strongest four years of global growth since the 5.5% average burst over the 1970-73 interval. Interestingly enough, the first oil shock of late 1973 came in a year when world GDP was booming at a 6.9% annual rate. Yet the subsequent supply disruption and a trebling of nominal crude oil prices within a year quickly turned a global boom into a bust -- culminating in what was then the world economy’s worst recession in post-World War II history. In the next two oil shocks, however, the global economy was hit when it was already softening. The second oil shock of 1979 came in a year of 3.8% growth in world GDP - far short of the 4.7% average annual pace in the pre-shock three-year period of 1976-78. The third oil shock of 1990 hit the world when it was slowing to only a 2.9% clip after three years of 4.2% average gains in 1987-89. From a macro perspective, I would attach greater significance to the two latter oil shocks than to the first one. Back in the early 1970s, the post-World War II world was largely unprepared for the lethal interplay between geopolitical and economic shocks. By contrast, in the late 1970s and again in the early 1990s, the world had accumulated some tough experience in coping with these types of disruptions. Today’s post-9/11 world certainly has even more of that very painful experience under its belt. Consequently, as seen from this historical perspective, the current vigorous pace of global activity speaks of a world with considerable pre-shock resilience. Our estimate of 4.7% world GDP growth in 2006 is about 40% faster than the 3.4% average pace in the year prior to the shocks of 1979 and 1990. The major shortcoming of this top-down analysis is that it masks the vulnerabilities of a still very unbalanced global economy. The world may not be as resilient as the aggregate global GDP growth suggests. I am certainly encouraged by the newfound vigor in Japan and even Germany, and China’s explosive growth continues to surprise on the upside. But the American consumer - long the principal engine of global demand - is becoming an increasingly worrisome source of concern, in my view. The recent two-month deceleration of job growth only underscores the ongoing lack of support from labor income generation; by our calculations, over the 54 months of the current recovery, private sector compensation was running fully $420 billion below the trajectory of the past four long business cycle expansions. Meanwhile, the asset-based underpinnings of the wealth-dependent US consumer are in even more serious trouble. By most accounts, the housing market is fading quickly and refinancing costs are rising sharply - painting a picture of a sharp moderation of home equity extraction that could prove quite problematic for income-constrained households who also must now come to grips with the added uncertainties of sharply higher oil prices. In other words, a very compelling case can be made for pre-shock vulnerability to the most important driver on the demand side of the global economy. For the rest of what is still a largely externally-dependent global economy, a consolidation of the American consumer can hardly be taken lightly. This remains the weakest link in the global growth chain, in my view. The key in all this is to relieve the geopolitical angst. While comfort can be taken from the resilience of world GDP in the aggregate, lingering imbalances in the mix of the global economy are a worrisome source of vulnerability. A shock in that context -- especially a shock that fits so closely with the continuum of the 20th century pattern of war and hatred as seen through the perspective of Niall Ferguson - is all the more disconcerting. The bad news is that the events in the Middle East now seem to be spiraling out of control. If that continues to be the case, the conclusions of global macro would be unequivocally treacherous. The good news is that a good case can still be made for the improved fundamentals of an unbalanced world. I would be the first to concede that the rebalancing fix that I found so encouraging in early May has not had any real time to be effective in tempering the risks of unbalanced world. The global economy needs time to heal and, more immediately, needs prompt relief from mounting geopolitical tensions. Inasmuch as I remain hopeful that sanity ultimately will prevail and the abyss avoided, I hold out hope for a more constructive turn of events in the global economy and world financial markets. In the parlance of market practitioners, geopolitical relief could be enough to stem the bleeding and bring an end to the functional equivalent of a cyclical correction in a bull market. Of course, it never feels that way at the point of maximum fear.
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Tipping Point?
Jul 17, 2006
Richard Berner (New York)
Flaring geopolitical tensions represent a ‘supply shock’ for financial markets and economies. The combination of the fresh outbreak of hostilities between Israel and militants in Lebanon and Gaza, the bombings in Mumbai, the launch of missiles by North Korea, the ongoing nuclear threats from Iran. and the apparent deteriorating circumstances in Iraq threaten to escalate local brushfires into a different and broader conflagration. Commodity and financial markets have responded quickly to the fear of supply disruption: Crude and refined product quotes have jumped 10-15% over the past month, or $7/bbl for crude and 30 cents/gallon for gasoline futures. Moreover, these tensions are elevating uncertainty and depressing risky asset prices. There’s little doubt that this vicious circle for now is bad news for investors and a threat to US and global growth. And it appears to come at an especially critical time for the US economy, which has slowed considerably in the spring under the weight of higher energy quotes, more restrictive financial conditions, and deteriorating housing markets, and thus may appear more vulnerable to shocks than in the past few years. But it is less likely to be a recessionary tipping point with all the collateral damage that implies, and it’s probable that a persistently resilient economy and markets will create opportunities for investors Here’s why. As I see it, this shock certainly menaces our above-consensus second-half outlook for trend growth, still-elevated inflation risks, and additional Fed tightening. Whether it proves to be a tipping point or not hinges critically on the sources and the magnitude of the shock, how long it lasts, and how vulnerable the economy is to shocks (see similar pieces on this issue from the past, e.g., “How Much do Shocks Matter?” Global Economic Forum, February 28, 2003). In my judgment, the US economy will dodge this bullet. The economy is less sensitive to energy shocks than in the past, and its resilience in the face of other shocks is impressive. Yet I will concede that while the odds of recession are low, a big, drawn-out energy shock would increase them. That this is a supply shock rather than one to demand makes it potentially more corrosive for growth for two reasons. First, real or imagined disruptions to supply that drive up energy prices act like a tax hike on consumers and merely divert income to energy producers with no offset from stronger global growth. Such an event would contrast sharply with the global backdrop of the past five years, in which the combination of strong global growth in energy demand and more limited growth in supply raised energy prices. Second, such supply shocks create uncertainty, in this case both about escalating military conflict as well as about the extent and duration of any potential disruption to energy supply that could result. In that sense, the current circumstances are different from the post-Katrina and Rita backdrop last September, because the then immediate source of the shocks ended when the hurricanes passed. Today, no one knows how long these elevated tensions will last or the extent to which they will create real supply disruptions. And while we understand that uncertainty is the enemy of growth, gauging the impact on economic decision making is anyone’s guess (for an effort in the throes of the early 2003 energy shock, see “The Metrics of Uncertainty,” Global Economic Forum, February 21, 2003). Indeed, at this juncture we are forced to guess at what energy price scenarios could evolve in the wake of potential supply disruptions and compare them with our baseline as a first cut at figuring the downside risk to US and global growth. It’s important to note that in our baseline energy price forecast, we have long assumed that the 2006 hurricane season would raise WTI or Brent crude quotes to $80/bbl. Thus, on top of the $39 billion (annual rate) that we estimate this spring’s runup in gasoline quotes cost US consumers, in our baseline we figure they will lose another $16 billion to higher prices in the June-September period. Under current circumstances, crude prices could easily jump to $90, raising US gasoline quotes to $3.15/gallon and costing consumers another $18 billion. A full-blown supply disruption — for example, one that cut 2-3 mbd from global oil supply and escalated crude prices to $110/bbl — could take gasoline prices to $3.60/gallon and the additional summer hit to discretionary spending power to $86 billion, or 0.9% of disposable income. That would be almost exactly the same drain as in the three months following Hurricanes Katrina and Rita. However, an external supply shock likely would promote a smaller contraction in consumer spending than the one following the hurricanes (a 5.3% annualized decline in the 3 months ended in October, 2005), because in addition to spiking gasoline quotes, those monster storms created unprecedented destruction to the lives, jobs and homes of millions in the Gulf Coast region. Of course, no one knows how long any such disruptions, if they occurred, would last. Were they to dissipate quickly like last year’s hurricane-induced supply shocks, they would likely deal only a glancing blow to economic activity. Contrariwise, if the shocks and uncertainty persisted, the impact could be far greater, increasing the odds of economic weakness or even recession. The good news, in my view, is that the economy is more resilient today than commonly appreciated. First, I still maintain that pent-up demand for capital spending and hiring, evidenced by low ratios of capex/depreciation and by still-high job opening rates, add to economic resilience. Second, booming tax receipts suggest that income growth is stronger than officially-published data indicate. Third, strong global growth finally is providing a lift to US growth through improving net exports — by an estimated ½% in the second quarter — and possibly on a sustained basis for the first time in two decades. Fourth, the economy has yet to decelerate below trend. To be sure, second quarter growth will slow from the 5.6% pace of the first quarter — a pace that reflected both a bounceback from the hurricanes’ shocks and exceptionally warm January weather. But stronger-than-expected incoming data for net exports, retailing, and inventories now suggest that the economy merely slowed in the spring back to its 3½% trend. In the face of yet another energy price spike and given the “payback” from the first-quarter surge, that’s hardly a sign of weakness. If that’s the case, our baseline will no longer include an economic acceleration in the second half of 2006 — instead, merely above-consensus growth. Yet in both investing and economic forecasting, past performance is no guarantee of future results. Growth is going to slow: Weakening housing activity will powerfully offset the new benefits from net exports. If overall demand does weaken appreciably, that will eventually translate into production cuts. But we still think that’s a story for 2007. Based on the flattening yield curve, however, some believe that the economy is already weaker than official data suggest. A new model by Fed economist Jonathan Wright does imply that the combination of the flatter curve and higher short-term rates has recently increased the odds of recession over the next year (Jonathan H. Wright, “The Yield Curve and Predicting Recessions,” FEDS Discussion Paper 2006-07, February 2006). One variant of the model suggests that the odds have gone from near zero last year to 34%. However, allowing for the effects of changes in term premiums on the shape of the curve reduces those current odds to about one in five. For Fed officials still concerned about inflation, those are tougher odds than a year ago, but they don’t seem high enough to rule out additional tightening (see “The Term-Premium Case for Higher Yields,” Global Economic Forum, January 20, 2006 for more discussion of term premiums and monetary policy). I like the ‘buy on the cannons’ trade, but for now, risky asset markets, especially for equities, are still likely more vulnerable than is the economy. Cash and sovereign bonds may thus outperform riskier assets until the size and duration of the shock are clearer. If the shock persists or intensifies it could change perceptions about the economic outlook for the Fed as well as for market participants. At this stage, however, even modest relief from geopolitical turmoil could promote healthy rallies. The current backdrop poses two polar sets of risks: On the negative side, deteriorating equity markets could make financial conditions more restrictive, magnifying the depressing effects of rising energy prices and increased uncertainty on the economy. And investors still must face the twin risks of flattening profit margins and an eventual deterioration in credit quality. Contrariwise, this shock could be a false alarm, and the strength of the economy may once again surprise investors.
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Cutting Corporate Taxes
Jul 17, 2006
Elga Bartsch (London)
A lower corporate tax rate …
This past week, the cabinet approved the key points of a yet-to-be-drafted corporate tax reform. The reform aims at cutting the corporate tax rate from 25% to 12.5% in 2008. This would lower the total corporate tax burden, including the trade tax levied by local municipalities, to slightly less than 30%, compared to 38.9% today. As a result, the total corporate tax burden would move from the highest in the European Union to a ‘midfield’ position. However, at EUR 5 billion (equivalent to 0.25% of GDP), the net tax relief will be lower than what the reduction in the tax rate would imply. This is because — in addition to unifying the tax base of the corporate and the trade tax — the government aims to broaden the tax base. … in exchange for taxing interest payments …
Finance Minister Peer Steinbrueck, SPD, proposed to extend the tax base to half of all interest rents, leasing rates and licence fees paid by a company by no longer allowing these items to count as tax-deductible business expenses. Such an elementary change would have meaningful repercussions on post-tax corporate profitability, we think. In essence, the proposed change would transform German corporate taxation from being a pure profit tax to, at least partially, taxing company capital. By taxing company capital, the tax revenue stream should become steadier over the course of the business cycle — a key concern for the local municipalities. In isolation, however, the opposite would be true for post-tax corporate earnings, which would likely become more volatile over time. In addition, post-tax earnings dispersion across different companies would likely rise too. … benefits highly profitable companies, hits highly leveraged ones
To what extent individual companies would mostly benefit from the lower tax rate or be hurt by the broader tax base depends on their profitability and financial structure. The more profitable a company is, the more it is likely to benefit; the more geared a company is, the more it is likely be hit. On balance, highly profitable companies will benefit more from the proposed reforms than less profitable ones. The IW Institute, an economic think tank, calculates that companies with a return on equity below 9% would lose out under the proposed reform. The reform would also make debt financing less attractive for companies than it is now. Morgan Stanley’s proprietary ModelWare metrics suggest that return on equity in Germany seems to benefit from companies being more highly geared. Alternatives include a higher property tax and new payroll tax The proposal to tax interest payments is highly controversial — even though they are already subject to a 12.3% trade tax. Therefore, the finance ministry will also explore other options, including a new payroll tax and a higher property tax on corporate real estate. From a public finance point of view, taxing property would be preferable because it would likely cause the least distortions to companies’ decisions. A payroll tax, by contrast, would cause the gap between what companies calculate as all-in costs of an employee and what the employees take home as pay to widen. As a result, job losses would loom large and we could see a replay of what happened in the course of the 1990s when first wages and then non-wage labour costs soared. Trying (again) to tax investors at the source
Next to the reform of the corporate taxation, the government also plans to reform the taxation of investment income. At present, investment income is taxed at the personal income tax rate, which ranges from 15% to 42% (to be raised to 45% next year). The exceptions are dividends, which are taxed at half the personal income tax rate, and capital gains, which are tax-free if the security has been held for more than a year (in the case of real estate, if it has been owned for more than decade). Going forward, the government proposes to introduce a definite withholding tax of 30% initially and 25% from 2010 onwards deducted at the source. Contrary to the current legislation, dividends and capital gains would be fully taxed. Despite the lower tax rate (at least for high income earners), this would likely make direct equity holdings less attractive compared to fixed income investments (where interest received is already fully taxed at present and where capital gains play less of a role). Controversial proposals still need to be finalised and passed
Both proposals — the corporate tax reform and taxation of investment income — are not only controversial within the grand coalition. They also caused a public outcry from business lobbies and investor associations. While the Social Democrats, SPD, insist that there should not be further tax relief for companies (especially not in the face of a major VAT hike hitting households), their Christian Democratic Partners, the CDU and the CSU, think that exactly such a tax relief is what’s needed. The left wing of the SPD also views the reduction in taxes paid on investment income as going too far and insists that taxpayers with a lower tax rate than the withholding tax can get a tax rebate. Hence, changes to the yet-to-be-draft legislation in the political process seem likely. Bottom line Some aspects of the proposed reforms — lowering the corporate tax rate, providing a net relief to the corporate sector and unifying the tax base of federal and local corporate taxes — are good news. Others are not. My main concern is that the cost of capital would likely rise if interest payments were to be taxed. How individual companies would fare depends on the details of the reform and the characteristics of the company. Raising equity capital would likely become more attractive relative to raising debt capital. Longer term, leverage ratios would likely come down and multinational companies should find it less attractive to raise funds in Germany to finance foreign operations.
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Marx's Ghost
Jul 17, 2006
Serhan Cevik (from Dubai)
Beyond supply-side shocks, economic fundamentals will determine the path of inflation. Inflation is a result of numerous interdependent real variables, expectations about the future trajectory of those factors and structural features of an economy. Though endogenous factors driving inflation dynamics are already complicated enough, we also need to take into account exogenous developments that may influence domestic prices. For example, the overwhelming increase in commodity prices has led to a wave of inflationary pressures across the globe. Higher energy quotes have especially been a significant shock for oil-dependent countries like Turkey. After achieving secular disinflation from an average of 77.5% in the 1990s down to the single-digit territory, the Turkish economy is now struggling with the global commodity bubble and financial risk reduction. Inflation, measured by the consumer price index, increased from 7.7% at the end of 2005 to 10.1% last month. Although structural changes and financial de-dollarisation have reduced the pass-through effect on consumer prices, we are likely to see further increases in the coming months. However, after a period of volatility, economic fundamentals will become, once again, more influential over the path of inflation, in our view. Our ‘output gap’ estimates continue to point to ample slack in the economy. There is no single variable that could explain Turkey’s impressive economic performance in recent years, given that a variety of factors — ranging from fiscal consolidation and central bank independence to the advent of greater globalisation and productivity growth — have all contributed to the upward shift of the supply curve and to disinflation. Nevertheless, we have long highlighted the state of the economy and particularly of the labour market as the ultimate determinant of inflation dynamics. It is no surprise that when the economy experiences a period in which resources are under-utilised, there tends to be more disinflation pressure than inflation pressure. Further, this was not just an output recovery process, since prudent policies and structural reforms have pushed both labour and total factor productivity growth to above-trend pace and allowed non-inflationary growth. Indeed, even after the longest stretch of economic expansion in Turkey’s history, our estimates for the output gap — the difference between actual and potential level of output — continue to point to ample slack in the economy. Even though the output gap is a conceptually useful way of thinking about inflationary pressures, it may not be enough to capture the true state of the domestic economy. In other words, effective economic slack could be greater than what output gap estimates suggest. This is why we have also looked into the labour share of national income that might be a much better measure of the true output gap, at least for the purpose of explaining the pace of disinflation (see Marx’s Revenge, January 8, 2004). The labour share of national income is a better gauge of the ‘demand’ gap. Although the Turkish economy expanded at an annual rate of 7.4% in the last 17 quarters, the rise in domestic demand was not fast enough to eliminate the output gap. Baffling? Not really. In real business cycle models, the labour share of national income is usually assumed to be constant and therefore ignored as an important factor in explaining economic fluctuations. However, this is certainly not true in the case of Turkey where the labour share has been on a downward-sloping trend. As labour productivity has risen much faster than real wages, the share of value added (net of indirect taxes) that accrues to workers declined from 30.7% of GDP in 1999 to 26.1% in 2003 and remained almost unchanged, at 26.3%, in 2004. And it merely showed an improvement to 26.6% last year — still 4.1 percentage points of GDP lower than the 1999 level. This is no doubt a key factor behind the ‘demand’ gap and the pace of disinflation in the last four years, and confirms our view that the recent increase in inflation is a result of supply-side shocks, not a ‘demand bubble’ in the domestic economy. The slowdown in consumer spending limits the room for price increases. In previous reports, we showed that the major components of consumer spending give no sign of demand-driven inflation. The annual rate of change in clothing and footwear prices, for example, declined from 7.7% at the end of 2004 to 0% last month. Likewise, the food component of the CPI basket excluding unprocessed food prices (which moved beyond seasonal patterns because of supply constraints) posted a year-on-year increase of 4.4% in June, down from 9.3% in 2004 (see The Mysterious Vegetarian Demand Bubble, June 19, 2006). Although soaring energy costs and steep increases in import prices remain challenging, the state of the labour market leaves little room for second-round effects that could lead to a wage-price spiral. The unemployment rate including those who are ready to join the labour force increased from 18.3% in the first quarter of 2005 to 20.4% this year. And now the global volatility shock and restrictive financial conditions will lead to a slowdown in employment growth and create even more slack in the labour market. Of course, that means no increase in the labour share of national income and a drop in consumer spending, especially after the household sector’s debt servicing burden increased from 1.7% of disposable income in 2002 to 4.1% last year
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2Q Momentum Came Off Slightly
Jul 17, 2006
Deyi Tan (Singapore)
Quick comment: While export momentum accelerated to 21.6% YoY in June (versus +17.7% YoY in May), imports and NODX momentum decelerated to 20.8% YoY and 16.9%, respectively (versus +24.3% YoY and +18.1% in May). On a quarterly basis, trade momentum peaked in 1Q, with 2Q momentum coming off slightly. 2Q exports, imports and NODX expanded 17.3%YoY, 18.4% and 15.0%, respectively (versus +22.4%YoY, 19.2% and 16.8% in 1Q). Meanwhile, the June trade balance stood at S$4.1 billion (versus +S$3.4 billion in May). Electronics NODX decelerated and non-electronics surged: In terms of NODX breakdown, electronic NODX momentum showed a broad-based deceleration to 9.1% from 18.3% in May. Meanwhile, non-electronic NODX surged to 24.3% YoY (versus +18.0% YoY in May) on the back of strong momentum in both petrochemicals (+32.3%) and pharmaceuticals (+24.9%). Anomalous reversion in China and EU demand; US demand continues to be strong: In terms of market breakdown, NODX demand to US continued on a trend of particularly strong acceleration at 20.5% YoY and 26.4% for 2Q (vs +4.0% YoY in 1Q), despite the 2Q GDP growth deceleration that our US economist is expecting. This acceleration could be attributed to weak base effects. On the other hand, June non-oil domestic exports to China showed a 31.9% YoY spike in what was a general deceleration path so far. This is due to increased intake of petrochemicals and heating equipment. NODX to EU contracted 6.1% due to weaker electronics demand after strong double-digit growth in April and May.
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