GDP UPDATE
December 2006
McIlvaine Company
INDUSTRY ANALYSIS
AMERICAS
U.S.
The U.S. economy grew at a 2.2 percent annual pace in the third quarter, a bit faster than the initial estimate of 1.6 percent, the Commerce Department. The revisions to gross domestic product were largely due to higher building of inventories and lower imports than originally assumed. A key measure of core inflation was revised a tenth lower to 2.2 percent. The economy has grown 3 percent in the past year. Economists expected GDP to be revised up to 1.8 percent. Corporate profits increased 4.2 percent at a quarterly rate, and are up 30.9 percent in the past year. The report also showed that wage and salary growth was much lower than expected in the second quarter. Real disposable incomes fell 1.5 percent in the second quarter, rather than rising 1.7 percent as previously reported.
BRAZIL
Brazilian economists lowered their 2006 forecast for economic growth for a fourth week after Latin America's largest economy expanded less than expected in the third quarter. Economists cut their 2006 growth forecast for gross domestic product to 2.86 percent from a previous estimate of 2.94 percent, according to the median estimate of about 100 financial institutions by the central bank. They held to their prediction for 3.5 percent growth in 2007.
The survey reflects the government's Nov. 30, 2006 report that showed Brazil's GDP expanded 3.2 percent in the third quarter from a year earlier, slower than the median 3.4 percent expansion forecast in a Bloomberg survey of 20 analysts. Economists such as Solange Srour, chief economist at Mellon Global Investment Brazil, attributed the slowdown to the appreciation of Brazil's real against the dollar.
``A stronger currency helped slow the economic growth as an increase in consumer demand was due to cheaper imports and not domestic production,'' Srour said in a phone interview from Rio de Janeiro. The rally in the real has prompted exporters to reduce staffing and delay investment plans, she said.
The Brazilian real has gained 63 percent against the dollar since President Luiz Inacio Lula da Silva took office in January 2003, the best performance among 16 most traded currencies tracked by Bloomberg. The currency may strengthen by year-end more than previously forecast, the survey showed. The economists now see the real at 2.15 per dollar at the end of 2006, compared with 2.16 per dollar, according to the survey.
The economists also raised their 12-month forecast for consumer prices to 4.18 percent, compared with an earlier estimate of 4.17, according to the weekly survey. They held their estimates for inflation in 2006 at 3.15 percent, and for 2007 at 4.1 percent. The central bank set a 4.5 percent target for inflation in 2006, 2007 and 2008.
ASIA
CHINA
JP Morgan said it has revised up its 2006 GDP growth forecast for China to 10.6 percent, as accelerating exports and strong consumption growth continue to offset a third quarter slowdown in investment. The brokerage said it expects the economy to grow at a solid, but somewhat slower pace of 9.5 percent in 2007, as fixed-asset investment (FAI) and export growth slow modestly, while consumption remains strong.
Administrative controls on land use and bank lending are likely to continue next year, while the central bank is expected to increase interest rates only slightly, with hikes in the bank reserve ratio requirement (RRR) seen as the primary means to contain liquidity, JP Morgan said in a note. It added that tightening is likely to occur via increased appreciation of the yuan, with the currency approaching 7.0 to the US dollar by the end of 2007.
JP Morgan said it does not expect investment to slump next year, despite the significant slowdown of FAI growth to 17 percent in October, compared with 30 percent in the first half.
'Further RRR hikes and faster yuan appreciation in 2007 will continue to curtail investment in real estate and sectors deemed energy-intensive or environment-damaging. But the fundamental economic drivers of the investment cycle are still largely in place,' the brokerage said.
'Overall, fixed investment growth will likely settle within the policy maker's comfort zone of 15-20 percent next year, although the risks to this forecast remain on the high side,' it added.
JP Morgan noted that the lack of consensus among the leadership on the extent and pace of currency appreciation raises the risk that a slower-than-expected rise of the yuan will cause economic growth, particularly fixed investment, to overshoot market expectations. It said it was increasingly obvious that conflicts over monetary policy goals and ineffectiveness of monetary policy will become more of a problem unless there is a more meaningful adjustment to the currency.
INDIA
Booming manufacturing powered India's economy to a faster-than-expected 9.2 percent annual growth rate in the July-September quarter, sparking fresh talk of higher interest rates for Asia's fourth-largest economy. Annual growth in India's fiscal second quarter outstripped the 8.9 percent pace seen in the first quarter, prompting some analysts to lift their full-year forecasts above the RBI's prediction of about 8 percent.
The Finance Minister said it was premature to say the economy was overheating, but he was worried about inflation. Annual growth has topped 8 percent in six of the past seven quarters. Such momentum could mean four rate increases in the RBI's overnight lending rate so far this year might not be enough to quell inflationary pressures, some analysts said.
"We expect the central bank to tighten interest rates further both to rein in inflation and keep the lid on the extended credit cycle," said Rajeev Malik, economist at JP Morgan in Singapore. He said he would raise his 2006/07 growth forecast to 8.2-8.3 percent from 8.0 percent.
Financial markets took the numbers in their stride, with the benchmark 10-year bond yield steady at 7.41 percent.
Analysts had expected gross domestic product in the third quarter to rise 8.9 percent from a year earlier. The data showed agriculture, which generates almost a quarter of economic activity, was the only laggard. The sector's annual growth in July-September slumped to just 1.7 percent from 3.4 percent in the previous quarter.
But the drag in farm output was more than offset by manufacturing output, which grew at its strongest annual pace since India began publishing quarterly growth rates in 1997. The sector, which accounts for nearly 15 percent of GDP, expanded 11.9 percent over a year earlier and followed expansion of 11.3 percent in the previous quarter's data. Services grew 10.9 percent from a year earlier, accelerating from annual growth of 10.6 percent in the previous period.
"Services and manufacturing have been robust as expected," ING Vysya Bank economist Harish Menon said. "The trend going forward is 8.5-9 percent GDP growth in the coming quarters."
Analysts said such strong growth would feed inflation, which is already running at more than 5 percent.
JAPAN
The Japanese government said that corporate investment slowed from its recent breakneck pace in the three months to September, raising fears of a downgrade in economic growth for the quarter. The data contributed to a mixed performance on the Tokyo Stock Exchange and led some analysts to believe that the Bank of Japan would become more hesitant on hiking interest rates in the near future.
The Ministry of Finance said combined corporate capital spending rose 12 percent year-on-year between July and September as big businesses continued to build and upgrade factories. The index, determined by surveying close to 25,000 big companies, was up for the 14th straight quarter but it was down from a 16.6 percent year-on-year increase in the quarter to June which was the fastest rise on record.
The government uses the quarterly corporate survey to fine-tune its Gross Domestic Product data. Revised GDP figures for the September quarter are due out soon. The preliminary estimate released last month beat expectations, showing the world’s second largest economy growing by a resilient 0.5 percent from the previous quarter or an annualized 2.0 percent.
“The preliminary GDP data showed a surprisingly strong rise in capital investment but the survey implied that the overall capex and GDP readings would come in at levels that most economists had originally thought,” said Junichi Makino, senior economist at Daiwa Institute of Research.
Analysts had been expecting third quarter growth of 0.3 percent for an annualized 1.2 percent rate. Economists stressed the latest figures still showed an underlying expansion. “Given the continued rapid pace of corporate profit growth — a key factor in deciding investment — corporate capital spending, even if it may see some moderation in the growth pace, will maintain its solid trend going forward,” Mizuho Research Institute economist Yasuo Yamamoto said.
The corporate spending data comes amid intense speculation on when the Bank of Japan will next hike interest rates. The central bank in July raised its benchmark rate of borrowing to 0.25 percent, ending an unorthodox five-year policy of zero interest rates meant to stimulate the economy and fight falling consumer prices.
The Bank of Japan has sent repeated signals it is prepared to raise its benchmark rate to 0.50 percent either this month or in early 2007, but the government reported weaker than expected inflation.
Credit Suisse economist Satoru Ogasawara predicted a likely downward revision of July-September GDP that could put additional pressure on the Bank of Japan to wait on raising interest rates.
But Yamamoto of the Mizuho Research Institute cautioned that the corporate spending figures were for the past and did not “provide any insight into the future. “Rather, the confirmation of solid corporate activity could allow the BoJ to move to hike rates before the end of this year,” Yamamoto said.
MALAYSIA
The Malaysian Institute of Economic Research (Mier) has revised its 2007 gross domestic product (GDP) growth forecast upwards to 5.2 percent from 4.8 percent earlier, given that Malaysia is less sensitive to the US economy and more sensitive to that of East Asia, especially China.
Executive director Prof Dr Mohamed Ariff said there were signs that the US and European economies were on a slow growth mode, but Malaysia had shown resilience and would also benefit from expenditure boost in the Ninth Malaysia Plan (9MP) projects.
"What is becoming more important is East Asia, especially China. Intra-trade with East Asian economies accounts for more than 50 percent of total trade in the region; Malaysia can ride on East Asian growth," he told reporters after the opening of the National Economic Outlook Conference 2007-2008 on Tuesday.
He said that compared with Thailand, Singapore and the Philippines, Malaysia would have a better growth rate as this economy was more diversified. However, Ariff cautioned that Mier expected uncertainties to increase in 2008, which might result in a recession in a worst-case scenario.
"It depends on how the global imbalances are addressed. If the US dollar does not make adjustments and the US economy goes on a spending spree due to its elections, it may lead to that kind of a crunch," he said.
Ariff said he hoped the US dollar would take a softer landing and the U.S. economy experience a slower growth now to avoid a crisis of global proportions.
"We can't completely rule out the possibility of a recession but the chances are slim. "Also, the adjustments will have to not only come from the U.S. economy but also East Asian economies, and there are signs of this taking place," he said.
He also said that assuming the U.S. dollar underwent an orderly correction and that oil prices remained largely stable if not lower, Malaysia could record a 5.5 percent growth in 2008. Ariff added that Mier expected adjustments to be made in 2007 to allow the Malaysian economy to be on an expansionary path in 2008.
For this year, Mier revised the GDP growth upwards to 5.9 percent from 5.6 percent on account of better business and consumer confidence. The think tank's surveys found that this was possibly buoyed by goodies and incentives offered in Budget 2007 and the 9MP projects, while consumer confidence was boosted due to news of bonuses for the civil services and a stable job market.
PAKISTAN
Pakistan has achieved rapid growth, which produced a sharp fall in poverty of 5 to 10 percent, an increase in investment from 18 percent to over 20 percent of GDP, a great acceleration in foreign trade and reduction in public debt from 85 percent of GDP in 1999-2000 to 55 percent at the start of 2006-07. Praising economic performance of Pakistan, the Country Director of World Bank for Pakistan, John W Wall, said "Pakistan's economy has built up a strong momentum of growth."
"Pakistan's economy will add another year of over 6 percent growth for the fourth year in a row. This is a remarkable achievement particularly given the major shocks of a big oil price hike and the October 2005 earthquake," he added. He said Pakistan Government has put in place a sound framework for fiscal management, the "Fiscal Responsibility and Debt Limitation Bill and" Pakistan's credit ratings have steadily improved, allowing the Government to return to the capital markets to raise resources.
John W Wall said investor confidence has been restored resulting in private capital inflows through remittances, privatization proceeds and portfolio investment. These have allowed private foreign saving to grow by six percentage points of GDP over the last four years. Official transfers have also increased as The World Bank, Asian Development Bank, and Islamic Development Bank and Japan, UK, US and others countries, all have made available dramatically larger financial assistance to Pakistan for its long-term development.
Wall said managing this faster growth has given Pakistan very different and much better quality problems than at the beginning of this decade. Then the problems were low growth, high poverty, high debt and stagnant foreign trade, now the problems are those of keeping the monetary fiscal and foreign payment accounts in balance while all the former problems are rapidly improving.
Inflation is in single digits and falling, from a spike of over 10 percent to 7.5 percent or less, World Bank Country Director said, interest rates have risen and the growth of credit to the private sector is moderating, indicating tighter monetary policies. Further reductions in inflation may require even tighter credit policies.
Expenditure pressures, including coping with the earthquake reconstruction of over half a million houses and much higher development expenditures on much needed infrastructure, have increased. Tax revenues have grown faster than GPD over the past two years, although they are still low compared to the economy's expenditure needs. Nevertheless, the overall fiscal stance also has been tight and the deficits so far are close to their targets.
Wall said the rapid economic growth led to a very healthy growth in foreign trade, resulting in large trade and current account deficits. These have been financed with mostly non-debt creating capital inflows’ official transfers, privatization and foreign investment. Foreign debt, as a percent of GDP, is falling rapidly. Foreign reserves have not fallen; they have even risen a bit.
THAILAND
Thailand's economy grew at its fastest pace in a year in the third quarter, although momentum is expected to slow in 2007 as global demand falters, data shows. Analysts said the stronger-than-expected quarterly growth of 1.5 percent, adjusted for seasonal patterns, and annual expansion of 4.7 percent would persuade the central bank against cutting interest rates when it reviews policy on Dec. 13.
"Even though the pressure on the strong baht would support arguments for easing, the GDP numbers would allow the central bank to be patient and to delay cutting rates," said David Cohen of Action Economics.
Third-quarter economic growth picked up from 1.1 percent in the second quarter and was the strongest pace a rate of 1.9 percent in the third quarter of 2005. Growth accelerated despite a bloodless coup in September, when the military ended months of paralysis in policy decision making that had sapped consumer and investment sentiment.
The figures from the National Economic and Social Development Board (NESDB), a state planning agency, showed that agricultural and services supply growth accelerated in the third quarter from the second quarter, but that the pace of private consumption more than halved.
"The economy performed well in third quarter, boosted by exports, even though domestic demand and investment slowed," Ampon Kittiampon, head of the NESDB told reporters.
The GDP data prompted the government to raise its 2006 growth forecast to 5.0 percent from a September projection of 4.2-4.7 percent. Growth in 2005 was 4.5 percent.
"I agree that for this year they have a reasonably good chance to make it to 5 percent," Cohen said.
But the planning agency forecasts economic growth will ease to 4.5 percent in 2007 as the pace of global demand weakens. Exports growth will see a sharp slowdown to 9.0 percent in 2007 from a projected 16.8 percent in 2006, the NESDB says.
"The risk of slowdown remains intact. I believe the economy will face more pain than the government expects," economist Leslie Khoo of Forecast in Singapore said.
The Organization for Economic Co-operation and Development has forecast that growth among its members, which include key importers of Asian goods such as the United States, Japan and European countries, will slow in 2007 to 2.5 percent from 3.2 percent this year.
"Export growth would probably fall a little bit due to what is likely to be less supportive export demand," Cohen said.
Analysts said the healthy GDP figures will keep the central bank cautious about lowering rates for now even though inflation has generally been easing in the second half of the year.
"The Q3 GDP at 4.7 percent should ensure the expectations that the Bank of Thailand will hold rates unchanged at 5 percent at the next meeting,” said Standard Chartered Bank economist Usara Wilaipich.
Concern about a slowdown in exports and expectations for a rate cut have been fuelled by the strength of the Thai baht, which has risen more than 14 percent so far this year against the dollar.
SOUTH KOREA
South Korea's economy will slow next year as demand cools in the nation's biggest export markets and consumer spending slackens at home, the central bank said. Asia's third-largest economy will expand 4.4 percent in 2007, down from 5 percent this year, the Bank of Korea said in its semi-annual forecasts. Inflation ``won't be a big difficulty'' unless oil prices surge, it said.
Slowing consumer spending in the U.S., the nation's second- largest market, and the won's rise to a nine-year high is threatening demand for South Korean chips, mobile phones and autos. Central bank Governor Lee Seong Tae may refrain from cutting interest rates to weaken the currency because of concerns that lower borrowing costs may stoke gains in property prices, which are rising at the fastest pace in three years.
``The central bank seems to have priced in the external risk from a U.S. slowdown, along with weak domestic consumption,'' said Kim Jae Eun, an economist at SK Securities Co. in Seoul. It ``will keep its monetary policy ambiguous for a while, leaving the door open for further rate hikes to cope with the surging property prices.''
Lee and his board will leave the overnight call rate unchanged at 4.5 percent for a fourth month on Dec. 7, according to all 12 economists surveyed by Bloomberg News. The bank raised rates three times in 2006 to a five-year high to quell inflation and rein in surging mortgage lending.
There are signs global growth is cooling. The U.S. economy grew at a 2.2 percent pace in the third quarter, pulled down by the biggest decline in 15 years in residential construction. In Japan, the government downgraded its evaluation of the economy last month for the first time in almost two years, citing sluggish consumer spending.
South Korea's exports to the U.S. fell 0.8 percent in the first 20 days of November from a year earlier, the commerce ministry reported last week. The economy faces ``downward risks like a hard-landing of the U.S. economy, a resurgence in oil prices and a possible deterioration of the North Korea nuclear situation,'' the bank said today. The Bank of Korea also said house prices have steadied after the government announced last month plans to build more apartments and tighten lending restrictions.
The Organization for Economic Cooperation and Development cut its prediction for South Korea's growth next year to 4.4 percent from a previous estimate of 5.3 percent, citing slowing export growth and cooling consumer spending.
VIETNAM
Ha Noi has maintained a high economic growth, with the GDP to grow an estimated 11.5 percent this year, and is aiming for at least 12 percent next year. The figure was reported at the 8th meeting of the Ha Noi People's Council to review the implementation of socio-economic and defense tasks in 2006.
EUROPE / AFRICA / MIDDLE EAST
DENMARK
The Economic Council raised its GDP growth forecasts for 2006 and 2007 as it now sees growth in private consumption of as much as 4.5 percent for this year and 3.1 percent for next year. The council had previously forecast growth in private consumption of 3.1 percent for 2006 and 2.8 percent for 2007.
In its half-yearly report on the Danish economy, the council said the growth in private consumption is supported by increasing housing prices and high levels of employment. But because housing prices and employment are not expected to grow by the same degree in the years to come, growth in private consumption is expected to slow down somewhat in 2008-2009, it added.
For 2008, growth in private consumption is now seen at 2.4 percent against the previous forecast of 2.6 percent, falling to 2.3 percent in 2009.
The GDP growth forecast was raised to 3.3 percent for 2006 from 2.7 percent previously, and to 2.1 percent for 2007 from 1.9 percent previously. These numbers compare with the GDP growth of 3.0 percent seen in 2005. GDP growth is forecast at 1.6 percent for both 2008 and 2009. The council had previously seen 2008 GDP growing by 1.7 percent.
The slow-down in economic growth in the coming years should be seen in light of a shortage of manpower, it said. The numbers of unemployed is now forecast at 125,000 for 2006, 114,000 in 2007, 117,000 in 2008 and 119,000 in 2009. The council previously expected unemployment of 131,000 for 2006, 128,000 for 2007 and 129,000 for 2008. In 2005, the level of unemployed was 157,000.
HUNGARY
Hungary's GDP grew 1.0 percent in the third quarter from the second, and was up 3.9 percent year-on-year, according to final figures from the Hungarian Statistics Office (KSH). Over the first nine months of 2006, GDP grew by 4.2 percent.
The government is forecasting 4.1 percent growth this year, followed by a slowdown to 2.2 percent growth in 2007 because of austerity measures, then a slight rebound to 2.6 percent in 2008, and then 4.1 percent in 2009, under a revised convergence plan approved by the EU Commission in September.
In 2005, the economy grew by 4.1 percent, compared to an average 1.6 percent among all 25 EU member states.
IRELAND
Ireland's GDP growth will peak at 5.6 percent next year, according to a new report from Goodbody Stockbrokers. Chief economist at Goodbody, Dermot O'Leary, predicted that Ireland's GDP growth will remain strong into 2008. He said that he expected growth of about 3.5 percent in 2008.
According to the report, inflation will fall back to about 3.3 percent in 2007. Goodbody also said that it expected interest rates to peak in early 2007.
NETHERLANDS
The Dutch economy will grow by 3 percent both in 2006 and 2007, the Central Planning Bureau (CPB) recently forecast. The forecast growth in Gross Domestic Product (GDP) in 2007 is down from the 3.25 percent the CPB forecast earlier in the year.
The economic growth is based on improved consumer spending, corporate investments and a strong rise in exports and investments in housing. Tensions on the labor market will increase, but inflation and contract pay rises will remain limited. An inflation rate of just 1 percent is expected this year and 1.25 percent in 2007.
The government expects a budget surplus of 0.1 percent GDP this year. A budget deficit of 0.2 percent is forecast for 2007, down from an earlier forecast of a 0.2 percent budget surplus.
RUSSIA
Russia's gross domestic product will grow 6.8 percent in 2006 and inflation will hit 9 percent, according to the economics ministry. The Economic Development and Trade Ministry has submitted its updated forecast to the Finance Ministry, based on a lower oil price.
According to the forecast, in 2007 GDP will grow 6 percent and inflation will be 6.5-8 percent. The national currency's rate will be 26.4 rubles to the dollar in 2006, and 26.2 rubles to the dollar in 2007. At the same time, the economics ministry lowered its original forecast for 2006 industrial output growth by 0.1 percentage point.
"The updated forecast for 2006 is 4.6 percent, compared to the original estimate of 4.7 percent," the ministry said. The ministry said its updated forecast for the country's major macro-economic indices in 2006 was based on a lower price for the Urals crude blend.
"In January-November, the average price of Urals crude was $61.3 per barrel, and is expected at a level close to $60 per barrel," the ministry said.
SLOVAKIA
The Slovak Statistical Office confirmed its 3Q real GDP growth estimate at 9.8 percent y/y (as compared to 6.7 percent in 1H06). Structure of the growth basically met expectations: main drivers were inventories and personal consumption. As for later, growth of household consumption slightly accelerated to 6.5 percent y/y from 5.9 percent seen in the second quarter, which will likely keep the central bank in its ongoing cautious stance. Real wage growth was slightly lower than expected (3.1 percent); however 4 percent real wage growth in the next years should be sustainable. Labor market continued to evolve very favorably - employment growth reached a strong 3.8 percent while the unemployment rate declined to 12.8 percent, 2.8 percent pp less than in the year ago.
Growth of gross fixed investments almost doubled to 6.7 percent, up from 3.6 percent seen in 2Q. Investments placed mainly in the automotive sector will enhance production (and export) capacities, and are cornerstones of future growth. Inventories depletion will likely negatively affect growth in the final quarter of 2006; however, this should be offset with higher exports. For the year real GDP growth is anticipated at 7.9 percent, while next-year growth could reach similar 8.2 percent. In the third quarter, exports growth accelerated to 24 percent (up from 18 percent in 2Q06), but imports growth accelerated as well (to 23 percent, up from 14 percent in 2Q), making contribution of net exports to the GDP growth only marginal (stronger imports was probably due to investment units, imports and inventories build-up ahead of the production launch at newly built car factories).
SLOVENIA
Slovenia's gross domestic product (GDP) in the third quarter of the year grew by 5.6 percent compared to the same period in the previous year, Slovenia's statistics office reported.
"Growth in the third quarter was mainly fueled by domestic consumption that increased by 6.5 percent compared to the third quarter of 2005," the office reported.
"We are most probably reaching the peak of an economic cycle," statistics office spokeswoman Karmen Hren said, adding that more moderate growth in the future was expected.
In 2006’s second quarter Slovenian growth had increased by 4.8 percent. The Slovenian government has forecast, due to a favorable economic environment in Europe, economic growth this year would increase to 4.7 percent GDP growth compared to the 3.9 percent growth registered in 2005.
UNITED KINGDOM
UK GDP growth slowed slightly in the three months to November compared with the pace seen earlier in the year, the National Institute of Economic and Social Research said. It predicts that GDP rose by 0.6 percent in the 3-months to November from the previous three months. Meanwhile, NIESR shaved growth in the 3-months to October to 0.6 percent from 0.7 percent previously.
'These estimates point to growth being slightly slower than in the spring and summer. With growth now probably slightly below trend the need for an interest rate increase early next year is not as strong as had seemed to be the case,' it added. The forecasts came even as Chancellor of the Exchequer Gordon Brown upgraded his 2006 GDP estimate to 2.75 percent from the 2.0-2.5 percent range previously.