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PP 7767/09/2010(025354)

Economic Highlights


7 July 2010

1 Rising Price Pressure In Developing Economies, While

Developed Countries Are Facing With Rising Risk Of

2 Global Services Slowed Down In June

3 US Services Activities Slowed Down In June

4 Japan’s Economic Growth Is Losing Momentum

Tracking The World Economy...

Today’s Highlight

Rising Price Pressure In Developing Economies, While Developed Countries Are Facing With Rising Risk Of

Inflation from China to India and Indonesia as well as some other emerging economies are heading up in recent months.
Consumer prices in India, in particular, are rising at least twice as fast compared with inflation rates in Brazil, Russia
and China, the other three nations that make up the BRIC economies. As it stands, India’s inflation rebounded to 10.2%
yoy in May, after easing to +9.6% in April and from a high of +11.0% in March. Despite off its high, the former Governor
of the Reserve Bank of India is concerned that India may need a “contingency plan” by September to control inflation,
as prices are showing few signs of easing. Inflation in India started picking up after a drought last year that created
shortages in rice, wheat and sugar. It accelerated as consumer demand for manufactured goods and services strengthened.
The situation will likely be made worse by an increase in gasoline and diesel prices in June by the government in a move
to cut its US$5.5bn fuel subsidy bill. Rising inflationary pressure has prompted the Reserve Bank of India to increase
its key policy rate for the third time on 2 July, an unscheduled 25 basis points increase. Indeed, the central bank could
be under pressure to raise interest rates again in the monetary policy meeting on 27 July.

In China, although inflation rate accelerated to 3.1% yoy in May, the highest in 19 months and from +2.8% in April, it
was not as bad as in India. Instead, China is more concerned about asset price inflation with its property prices rising
by a record high of 12.8% yoy in April, before easing to +12.4% in May. Similarly, Brazil’s inflation rate inched up to
+5.3% yoy in April, before easing to +5.2% in May, while inflation rate in Russia has been trending down in recent

In contrast, consumer prices excluding fresh food in Japan have fallen even as the central bank’s bond holdings rose
to a four-year high in February. This suggests that the Bank of Japan’s attempts to spur growth have rewarded bond
investors without defeating deflation, which can derail economic growth by encouraging consumers to delay purchases
to wait until goods become cheaper. In the same vein, US consumer prices, excluding food and fuel, rose by 0.9% yoy
in May, near the slowest pace in more than 40 years and the core inflation rate will likely head toward zero in the months
ahead. Similarly, the Euroland’s prices climbed the least since 1991. The region’s core inflation held stable at 0.8% yoy
in May, the same rate of increase as in April and compared with +1.0% in March. Interestingly, while inflation rate is
easing, the US Federal Reserve’s government bond holdings rose to about 16.1% of GDP in June, from 6% before the
global financial crisis. Similarly, the European Central Bank boosted its portfolio to 24% of GDP, from 16% previously.
As a whole, this suggests that the developed economies are facing with a higher risk of deflation and their central banks
have been flooding the financial system with cash to fight it.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.

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7 July 2010

Global Services Slowed Down In June

◆ The global Purchasing Manager Index (PMI) for services sector, based on a survey conducted by JP Morgan
and Markit Economics in London, fell to 54.9 in June, from 56.3 in May. This was the second straight month
of easing, indicating that global services activities have weakened, on the back of a slowdown in trade
activities and consumer spending. The weakness was reflected in a slowdown in new business activities and
backlogs of work during the month. As a result, businesses slowed down their labour force in-take in June, after
starting to recruit workers for the first time in more than two years in May. Input costs, on the other hand,
continued to ease during the month, pointing to easing price pressures. In terms of countries, the slowdown was
reflected in slower increases in services activities in the US, Euroland, Japan and China. As a result, the global
composite index for both the manufacturing and services sectors weakened to 55.4 in June, from 57.0 in May and
a high of 57.7 in April. This was the second consecutive month of slowing down, suggesting that global economic
recovery from the worst recession since World War II is losing momentum. Indeed, we expect the global
economy to expand at a more moderate pace in the 2H of the year, on the back of dissipating fiscal
stimulus, the introduction of austerity measures in Europe and policy tightening in Asia.

The US Economy

Services Activities Slowed Down In June

◆ The US Purchasing Managers Index (PMI) of the Institute for Supply and Management (ISM) for non-
manufacturing activity fell to 53.8 in June, after remaining unchanged for three consecutive months at 55.4
in May. The non-manufacturing index comprised mainly services. A reading above 50 indicates expansion of
activity and prices in the non-manufacturing sector, while a reading below 50 signals contraction. This was the
slowest pace of increase in four months, suggesting that services activities have turned weaker during the
month. The slowdown was reflected in slower increases in business activities, new orders, backlog of orders and
inventory. These were made worse by a contraction in new export orders, indicating that the country’s exports
are likely to ease in the months ahead. As a result, services providers returned to reducing workers, after starting
to recruit workers for the first time in 28 months in May. Input costs, on the other hand, continued to ease in
June, pointing to easing price pressure. Despite the easing, the reading suggests that the US economy will likely
continue to expand and at a faster pace in the 2Q, after slowing down to an annualised rate of 2.7% in the 1Q.
Growth, however, will likely moderate in the 2H of the year.

Asian Economies

Japan’s Economic Growth Is Losing Momentum

◆ Japan’s broadest indicator of economic growth dropped for the first time in 14 months, signaling that its economic
recovery from the worst postwar recession is losing momentum. As it stands, the coincident index, a
composite of 11 indicators including factory production and retail sales, fell to 101.2 in May from 101.3 in April.
In the same vein, Japan’s Purchasing Manager Indices for manufacturing and service sectors weakened in June,
indicating that economic activities have softened. This was in line with a slowdown in the country’s exports, which
weakened for the third consecutive month in May. As a result, the Japanese economy will likely expand at a slower
pace in the 2H of the year, after growing at an annualised rate of 5.0% in the 1Q.

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7 July 2010


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