MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
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and property tax payments, dropped to levels last<br />
seen in 2000. In the meantime, the ratio of total<br />
household debt to annual disposable personal<br />
income declined in Q2 to 1.2, below its peak of<br />
above 1.3 at the beginning of the last recession<br />
(Chart 3). Both measures suggest consumers<br />
improved their balance sheets and could be closer to<br />
returning to their previous spending habits. However,<br />
the Financial Obligation Ratio probably overstates<br />
the improvement as it assumes consumers can<br />
refinance all their debt at current low rates, which we<br />
know is not the case owing to tight credit and<br />
underwater mortgages. Indeed, recent surveys<br />
indicate consumer optimism remains at levels<br />
historically associated with recession (Chart 4).<br />
According to the latest Beige Book report,<br />
consumers’ “emphasis [is] on necessities and lowerpriced<br />
goods”. Given that equity and house prices<br />
are unlikely to appreciate much in the near term<br />
(indeed, we expect house prices to decline at least<br />
5% from current levels), we expect US consumers’<br />
cautious stance to continue until at least the end of<br />
2012. At that point, the deleveraging that has been<br />
weighing so heavily on growth will have progressed<br />
significantly further.<br />
The Flow of Funds data in Q2 for the nonfinancial<br />
corporate business sector show companies’<br />
persistent caution with regard to investing in<br />
expansion or hiring more workers<br />
Recent incoming data have confirmed that the<br />
recovery continues, although at a very moderate<br />
pace. Apart from consumers’ reluctance to spend,<br />
economic growth has been dampened by<br />
businesses’ reluctance to reinvest their fast-growing<br />
profits. The Q2 Flow of Funds data for the<br />
nonfinancial corporate business sector indicate that<br />
the ratio of liquid assets to short-term liabilities is little<br />
changed at 49.8%, down only slightly from 50.8% at<br />
the end of last year. Meanwhile, employment growth<br />
has slowed to a pace below that required to absorb<br />
population growth, also a reflection that businesses<br />
are loath to expand. In addition, the latest Beige<br />
Book report indicated that capacity utilisation remains<br />
below pre-recession levels. While we saw doubledigit<br />
growth in equipment and software investment<br />
earlier this year, “capital spending plans for<br />
manufacturers and firms in other industries generally<br />
indicate little change or modest increases in coming<br />
months”. While the longest recession since the Great<br />
Depression officially ended in June 2009 according<br />
to the National Bureau of Economic Research, the<br />
latest Flow of Funds accounts suggest businesses<br />
and consumers have yet to regain their confidence.<br />
We therefore see below-trend growth for another<br />
Chart 3: Debt Ratios Continued to Fall<br />
Source: Reuters EcoWin Pro<br />
The FOR includes automobile lease payments, rental payments on tenantoccupied<br />
property, homeowners' insurance and property tax payments.<br />
Chart 4: Consumers Remain Cautious<br />
Source: Reuters EcoWin Pro<br />
Chart 5: Companies Cautious to Invest<br />
Source: Reuters EcoWin Pro<br />
year as the most likely outcome even factoring in<br />
significant monetary stimulus. Monetary easing is<br />
expected to largely offset the drag on growth from<br />
fiscal tightening over the next two years and the pace<br />
of any acceleration in growth will be driven in large<br />
part by the state of the deleveraging cycle.<br />
Yelena Shulyatyeva 23 September 2010<br />
Market Mover<br />
7<br />
www.GlobalMarkets.bnpparibas.com