July 22, 2010
1. This note reports on information that has become available since the staff report (SM/10/189) was issued and does not alter the thrust of the staff appraisal.
2. Incoming data since the completion of the Article IV consultation in mid-June point to a continued but subpar recovery, with further downside risks to the staff’s forecast. First-quarter GDP growth was revised down by 0.5 percent (saar), mainly owing to weaker final demand. Recent data also indicate softening consumer confidence, dwindling tailwinds from the inventory cycle, weak private sector employment growth, and reduced housing activity on the expiry of the homebuyer tax credit. In addition, imports picked up strongly relative to exports in June, although this could partly be attributable to temporary factors such as the expiry of an export VAT rebate in China. All told, activity in the second quarter has been weaker than expected, with GDP growth in the second quarter of 2010 tracking below the WEO estimate. On fiscal policy, the Senate has approved another temporary extension of unemployment benefits, and the authorities plan to unveil their mid-session budget update on Friday, July 23.
3. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was cleared to be signed into law by President Obama. Most major provisions of the Dodd- Frank Act—the new inter-agency Council, the resolution mechanism for systemic financial firms, the wider regulatory perimeter and stronger consolidated supervision, and the new regulatory framework for derivatives market—are in line with U.S. FSAP recommendations, which was conducted as this law took shape. That said, as flagged in the FSAP, the U.S. regulatory system remains complex, and the effectiveness of the reform will hinge on its implementation.
4. Risk aversion continues to drive financial conditions. Stock prices have fallen below end-2009 levels, the dollar remains elevated relative to the start of the year, and Treasury yields have declined on flight to quality. Consumer credit fell in June and a Fed survey recorded easier credit terms, although terms remained tighter than at end-2006. Second-quarter earnings for financial institutions were largely disappointing, with meager trading revenues, and continued high (albeit easing) credit costs.