German Recession Confirmed and Interest Rate Decisions in South Korea, Turkey and Indonesia

May 25, 2023

U.S. GDP data will be released shortly. In the meantime,

German GDP growth last quarter was revised to -0.3% (not annualized) from zero percent reported originally. That’s the second negative quarter in a row and the third drop in the past four quarter, resulting in a negative year-on-year growth rate of -0.5% as well. The last on-year contraction was recorded in 1Q 2021. Germany’s recession is projected to be comparatively brief in mild. Although consumer spending dropped over 1% last quarter, consumer confidence is at a 14-month high, and business investment and net foreign demand made positive contributions to GDP growth last quarter.

Three central banks reported the results of scheduled monetary policy reviews. In each case, interest rates were not changed.

  • South Korea‘s policy rate has been at 3.5% since a 25-basis point hike in January. It’s pandemic low until August 2021 had been just 0.50%. Interest rate hikes in 2022 had totaled 225 basis points. South Korean consumer price data also reported today showed a monthly dip of 0.1% in April and a halving of year-on-year inflation to 1.6% from 3.3% in theĀ  prior month and a peak of 10.0% last June.
  • The Central Bank of Turkey‘s policy rate was left unchanged at 8.5% as analysts were expecting. A 50-basis point drop to that level in February culminated 500 basis points of reduction in August-November of 2022 and a similar total 500 basis points of reduction in the final four months of 2021. CPI inflation in Turkey has subsided from 85.5% last October to 43.7% last month. A released statement calls current policy appropriate but shows reluctance to lower the interest rate further until officials see more sustained declines in inflationary pressure. Promoting recovery from Turkey’s “disaster of the century” is a high priority, too.
  • At Bank Indonesia, the 7-day reverse repo rate was retained at 5.75%, its level since a 25-basis point increase in January that followed two percentage points of tightening during the final five months of last year. Core CPI inflation in Indonesia of 2.83% last month was at a 10-month low and within its 2-4% target, and overall inflation of 4.3% is projected to settle below 4.0% as well.

In financial markets prior to the U.S. GDP report, the dollar firmed 0.1% on a weighted basis, with gains of 0.6% against the New Zealand currency following yesterday’s signal from the Reserve Bank of New Zealand that its interest rate will not likely be raised further. The dollar also has risen 0.2% versus the Chinese yuan and Australian dollar and 0.1% relative to the euro, but was 0.1% softer against the yen.

The ten-year U.S. Treasury yield was steady. The 10-year British gilt yield climbed 9 basis points, but the 10-year German bund yield softened a basis point from Wednesday’s close. WTI oil fell 1.9%. Equity markets were down slightly in Europe after closing mixed in the Pacific Rim where Australia’s market dropped 1.1% while Hong Kong’s rallied 1.9%.

France, like Germany, had a weak piece of economic news today. Business confidence dropped 2.2 points to a 25-month low, drawing even with its long-term average level.

Great Britain’s distributive trades survey index weakened fifteen points to a four month low of negative 10.

Producer price figures were reported by South Africa, Spain, and Iceland. South African PPI inflation slowed two percentage points in April to an 18-month low of 8.6% versus last July’s record peak of 18.0%. Spanish PPI inflation, which crested last June at 43.6%, was 4.5% below its year-earlier level, marking the largest on-year drop in 33 months. Iceland also had negative PPI inflation in April (-7.0%), a remarkable turnaround from +43.6% in April 2022.

U.S. real GDP growth last quarter has been revised slightly higher to 1.3% (annualized) from 1.1% reported initially. The growth rate was dampened significantly (2.1 percentage points to be exact) by a rundown of inventories. Residential investment contracted for an eighth straight quarter, but personal consumption advanced 3.8%, enhancing GDP growth by 2.3 percentage points. The personal consumption price deflator posted a bigger quarter-on-quarter increase thanĀ  in the final quarter of 2022, but its year-on-year change of +4.9% was down from 5.7% in 4Q 2022 and 6.4% in the first quarter of last year. Inflation of 4.7% according to the core PCE price deflator remains well above the Fed’s 2% preferred pace.

Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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