GDP Update
January 2006

INDUSTRY ANALYSIS

1. AMERICAS

U.S.

Real gross domestic product increased at an annual rate of 4.1 percent in the third quarter of 2005, according to final estimates released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 3.3 percent.

The GDP estimates released today are based on more complete source data than were available for the preliminary estimates issued last month.  In the preliminary estimates, the increase in real GDP was 4.3 percent.

The major contributors to the increase in real GDP in the third quarter were personal consumption expenditures (PCE), equipment and software, federal government spending, and residential fixed investment. The contributions of these components were partly offset by a negative contribution from private inventory investment.  Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP growth in the third quarter primarily reflected a smaller decrease in private inventory investment and accelerations in PCE and in federal government spending that were partly offset by a deceleration in exports, an upturn in imports, and decelerations in state and local government spending and in residential fixed investment

ARGENTINA

Argentina is closing 2005 with a 3.5 percent surplus above the GDP thanks to positive netting of 19.6 million pesos, near 6.6 billion dollars. The Finance Ministry said the figure totaled 861 million pesos (some 290 million dollar), a 141 percent growth with respect to Nov 2004.

BRAZIL

Falling interest rates and an improved investment environment will help Brazil's 2006 economy repeat its performance in 2004, when the country grew by 4.9%, Brazilian Finance Minister Antonio Palocci said. "The conditions for strong growth are there," Palocci said. "I believe the scenario that is being created for 2006 is very close to that seen in 2003 and 2004."

Along with low inflation and falling interest rates, Palocci cited improved sovereign debt risk, a growing foreign trade surplus, improving consumer incomes, and growing domestic credit and sales as strong indicators that the country is heading for a rebound over the next 12 months.

 Many observers revised growth estimates downward after third quarter results, when Brazil posted growth below market expectations at 1%. Economists had been projecting third-quarter growth of about 2%. According to recent Brazilian central bank surveys, the country is seen growing by only 2.5% this year and 3.5% in 2005. Palocci, however, defended a more optimistic forecast for next year, noting that the third quarter downturn was part of a cyclical process.

"If we look at what market expectations for were at the end of 2003 for the following year, we see that they are exactly the same as they are now," Palocci said.

Palocci said his optimism was also based on a positive market reception to the country's efforts to improve its investment environment. Brazilian debt spreads, as measured by the JP Morgan Emerging Markets Bond Index Plus have fallen to historically low levels of near 300 points above U.S. Treasuries.

"The level of risk we're arriving at is important and we're going to advance more," Palocci said. "It's our goal to achieve investment grade and we're moving toward this."

Brazil's debt is currently rated at BB- by Standard & Poor's and Fitch Ratings, three notches below an investment grade rating. Moody's Investors Service gives a similar rating of Ba3. While ratings agency officials say Brazil still needs improvements to reach investment grade, all agencies have assigned the country a positive outlook.

As part of its effort to improve ratings, the country this month announced it would pay off more than $18 billion in overseas debt to foreign creditors at the Paris Club and the International Monetary Fund.

 Palocci recalled that in addition to this move, the country also retired a large portion of its Brady bond debt by swapping its old Capitalization bonds, or C-bonds, for new bonds with longer maturities, and for the first time issued overseas bonds in Brazilian currency. The minister noted, meanwhile, that many of these actions were made possible with the aide of continued robust trade and current account surpluses.

According to recent government estimates, the country is seen ending 2005 with a current account surplus of near $14 billion, or approximately 1.9% of gross domestic product.

Palocci, meanwhile, said the country's trade balance would end the year with a surplus of $44 billion and that foreign reserves would end the year at $55 billion. "We've prepared the country to confront internal turbulence and external turbulence," Palocci said. "This group of measures has assured that next year will be a year of strong growth."

And despite low third-quarter growth figures, Palocci defended the central bank's tight monetary policy in the first half of the year as a necessary measure to ensure the country continues to control inflation.

"The central bank acted preventively and was successful in bringing inflation back in line with targets," he said. "This obviously has costs, but it prepared the country for long-term growth."

Brazil has set targets for its IPCA consumer price index at 5.1% for this year and 4.5% for 2006.

According to the latest market forecasts, inflation is seen ending 2005 at 5.7% and finishing 2006 at 4.5%.

Palocci Friday also stood firm in his defense of his ministry's fiscal savings policy.

Brazil has set a target for the country's public sector primary budget surplus at 4.25% of GDP, or approximately 83 billion reals ($35.42 billion), in an effort to pay down the country's debt.

"The critics of fiscal policy are wrong," he said. "Every time Brazil has loosened fiscal controls in the past it has seen increased inflation, volatility, and a negative market response."

In November, Brazilian Presidential Chief of Staff Dilma Rousseff opened an internal debate within the government after calling the administration's fiscal savings targets "rudimentary."

Friday, however, Palocci denied that he had any strong differences with Rousseff or other critics within the government such as Interior Minister Ciro Gomes. He painted a harmonious picture of relations within the government.

"Debate is necessary for the construction of a strong society," he said, adding, "I don't consider any ministers in this government as unjust critics -we are all working together like worker ants."

Brazil on Friday posted a January to November public sector surplus of BRL98.6 billion ($42.08 bln), equivalent to 5.6% of GDP.

Palocci said it was too early to know whether the government would meet the target this year because that depended on the results of state and municipal governments and state companies, as well as on the result of federal income and corporate welfare tax receipts in December.

            CHILE

Chile is forecasted to post a record GDP equivalent to 112 billion US dollars given the current rate of expansion and business growth expectations for November and December. Economists’ estimates vary from 5% to 6% for the two last months of 2005 with an annual accumulated rate growth of 5.8% - 6%.

However the Dean of the School of Economics from the University of Chile Joseph Ramos points out that Chile’s GDP has become extremely “sensitive” to the exchange rate, given the appreciation of the Chilean currency against the US dollar, which means that if last year it reached 100 billion US dollars with a limited production expansion, “this year the physical GDP growth can be estimated in 5.8%, which plus the stronger peso will give us a GDP of 115 billion US dollars”.

Chief economist from Banchile, Raphael Bergoeing argues that if an average exchange rate of 560 pesos to the US dollar is considered, with a similar expansion in the third and fourth quarters, by the end of 2005 “the GDP will total 110 billion US dollars, equivalent to 6.800 US dollars per capita”.

Santander Investment economist Pablo Correa forecasts that strong domestic demand will keep the growth rate in the fourth quarter at 6%, adding that “I don’t believe the holiday recess in certain basic sectors like mining and fisheries will pull the index down”.

Cristina Gardeweg from Celfin, anticipates a GDP of 112 billion US dollars because there has been a “strong boost in domestic demand, consumption and investment helped by a favorable international environment”.

But some of the economists interviewed consider that although domestic demand and the job market will remain strong in 2006, “a slight decline” in investment can be expected, mainly because of the strength of the Chilean currency which revalued over 10% this year against the US dollar.

COLOMBIA

Colombia President Alvaro Uribe said the country's economy expanded 5.7% in the third quarter compared with the same period a year ago. The expansion figure is higher than the 5.1% median forecast by 10 international and local analysts polled by Dow Jones Newswires.

 Uribe said the country needs to expand at the same pace in the following quarters to effectively reduce unemployment and poverty.

Colombian Central Bank Gov. Jose Dario Uribe, who is not related to the president, said the gross domestic growth in 2005 will be the highest "in many years."

Both the government and the central bank expect the Colombian economy will expand by more than 4.5% this year

VENEZUELA

The Venezuelan Central Bank says that Venezuela's economy likely grew at 9.4% this year, according to a year-end report. Growth this year follows an economic recovery that began in late 2003, as oil -- Venezuela's major export -- skyrocketed and President Chavez spent liberally on missions focused on the poor in the lead up to a referendum on his rule.

Government spending rose 38% through October. Oil-related gross domestic product is expected to close the year up 1.2%, while the non-oil sector should see a 10.3% growth in 2005, according to the central bank report.

``For a second consecutive year, the Venezuelan economy exhibited a notable dynamism,'' Central Bank President Gaston Parra said in a statement. Venezuela's economy expanded 17.9% in 2004.

Venezuela's economy contracted 7.7% in 2003 and 8.9% in 2002.

Bank officials also expect inflation to remain below 15% this year, a goal of President Hugo Chavez's administration

2. ASIA

AUSTRALIA

With the housing sector and consumer demand well slackening , the economy is now banking on exports to maintain its momentum in 2006. But with Australia's reliance on China's ravenous appetite for raw materials, two risks remain for exporters: infrastructure bottlenecks and the threat of stalling global demand.

Gross domestic product (GDP) grew a paltry 0.2 per cent in the September quarter of 2005 as exports failed to pick up the economic slack left by a cautious consumer. Whether the economy holds up in 2006 depends on how smoothly it can shift its weight from the housing sector to resources sector. Expectations were firm that 2006 would be the year the export pistons really start firing as infrastructure investment begins to loosen up the flow of resources to their markets.

AMP Capital Markets chief economist, Shane Oliver, says, “Australia as it stands is a very dynamic economy and capable of withstanding a number of exogenous shocks be they terrorist attacks, natural disasters or influenza pandemics.”

But lurking in the shadows of economic forecasts are all sorts of nasty shocks that are beyond the market and policy makers' control, such as a potential collapse in Chinese economic growth or a property shock for the US market. The much hypothesised bird flu and its global economic ramifications is one such shock.

"If it's confined to Asia, then it would mainly be an Asian story and that would have a flow-on to us," Oliver said. "If alternatively it goes global, like the Spanish flu outbreak in 1918-19, then everywhere would be affected. I don't think anything particularly would be singled out - you would be looking at a global recession and that would be bad news for Australia."

But RBC Capital Markets senior economist Michael Every says even without such disturbances, an Australian economic slowdown is almost certainly on the cards - if not next year then 2007. He said Chinese demand was almost certain to ease once the first phase of its property construction boom was over.

Slightly more optimistic, TD Securities chief economis,t Stephen Koukoulas, said,  "Government demand is probably doing okay - all of this adds up to a picture where GDP growth is going to be 2.5 to 3.5 per cent."

            CHINA

According to forecasts by the Research Bureau of the People's Bank of China, the growth of China's gross domestic product will slow down in 2006 to 8.8 percent from 9.4 percent this year. The Bureau forecasts that consumer price index will be about 2 percent in 2006, up from 1.8 percent this year. It also said that the risk of a rebound in investment, rising pressure on the prices of natural resources and higher prices for services might be the major causes of inflation

A report published in the official Financial News newspaper, the Research Bureau of the People's Bank of China forecast consumer price inflation of about 2.0 per cent in 2006, up from 1.8 per cent this year. The research body said its forecasts did not represent the official forecasts of the bank.

The bureau said that the risk of a rebound in investment, rising pressure on the prices of natural resources and higher prices for services all served to stoke inflation. A pick-up in investment would be due in part to efforts to improve infrastructure in rural areas and a program to develop western and central regions. Loosening of government control over prices for energy and utilities could also contribute to increases in the CPI.

However, the report said that in the longer term, consumer price inflation was on a clearly falling trend because of dropping grain prices and industrial overcapacity combined with inadequate domestic demand. It added that the prices of durable consumer goods could fall in 2006, further contributing to a drop in inflation. ''In the future, CPI will be on a slowing trend, but the pace of that drop will be relatively stable,'' the report said.

Breaking down projected GDP growth by quarter, the bureau forecast that GDP would grow by 9 per cent year-on-year in the fourth quarter of this year, and by 9 per cent, 8.8 per cent, 8.7 per cent and 8.7 per cent in the first, second, third and fourth quarters of 2006, respectively.

For CPI, the research group forecast growth of 1.3 per cent for this quarter, and of 2.1 per cent, 2.1 per cent, 2.0 per cent and 1.8 per cent for the first, second, third and fourth quarters of 2006, respectively.

            INDIA

The Indian economy is set to grow at a rate of 7.6% over fiscal year ’05-06, the latest monthly review by the Centre for Monitoring Indian Economy (CMIE) says.

CMIE has upped its growth forecast from a conservative 6.8% based on data available from the first six months of the fiscal year ’06. This revision has come about due to expectations of a good kharif crop, as well as a 10% growth in services over the same period last year.

This growth in services has offset a decline in industrial and manufacturing growth from 11.3% in the first quarter to 9.2% for the quarter-ended September ’05. Other monitoring agencies such as the National Council for Agricultural and Economic Research (NCAER) and the RBI have pegged economic growth at 7.6% and 7-7.5% respectively.

CMIE’s previously low growth forecast was based on bleak monsoon predictions by government agencies. “A good monsoon, coupled with the growth in services, has led to two upward revisions in our GDP forecasts from 6% to the current 7.6%,” said Riyaz Khan, CMIE’s macroeconomic unit head.

The robust growth in services was led by trade, hotel industry and transport segment. This segment recorded a growth of 12.1% in the second quarter and is expected to grow at 11% for the year — 2% higher than what was previously estimated by CMIE.

JAPAN

Japan joined the central bank in predicting an end to more than seven years of deflation in the 12 months starting April 1, the government said, as increased demand enables companies to raise prices.

Consumer prices will rise 0.5 percent in the year starting April 1 next year, the government said in an annual forecast used as a basis for drafting the budget. The economy will expand 1.9 percent in fiscal 2006, its fifth year of growth, after increasing 2.7 percent this year, the Cabinet Office said.

The government's prediction of an end to deflation may ease the friction between it and the Bank of Japan about the timing of a change to the central bank's deflation-fighting policy. Prime Minister Junichiro Koizumi has repeatedly said since Nov. 14 that deflation persists in Japan and that it is too early for a policy change.

``The conflict between the government and the central bank looks intense now, but once a new fiscal year starts, it will naturally calm down because core consumer prices will show stable gains and nominal growth will accelerate,'' said Tetsufumi Yamakawa, chief economist at Goldman Sachs (Japan) Ltd.

Bank of Japan Governor Fukui said the bank's Tankan survey published on Dec. 14 confirmed that Japan's economic recovery will be moderate and lasting, satisfying a condition that must be met before the bank changes its policy. Fukui said on Dec. 8 that deflation is easing and the bank is ``close'' to ending its policy.

The yen was little changed at 116.47 against the U.S. dollar  from 116.40 before the report was published.

Nominal gross domestic product, which doesn't account for price changes, will probably rise 2 percent next fiscal year, the Cabinet office said. GDP deflator, a broader price index that reflects consumer prices, capital investment and exports, will rise 0.1 percent next fiscal year, the first gain in nine years, the government said.

Ruling party legislators are urging the Bank of Japan to maintain its five-year-old policy of pumping cash into the economy and holding interest rates near zero, saying deflation persists.

MALAYSIA

A revival in private investment, which has been in the slump, is critical to push Malaysia's gross domestic product (GDP) growth above six per cent, according to an economist. Chua Hak Bin, vice president and senior regional economist of Singapore-based DBS Bank, said the share of private investment in gross domestic product (GDP) has collapsed to 11.5 per cent this year compared to above 35 per cent in 1997. "Lower taxes, liberalization of certain protected sectors particularly in services, and a revival in public infrastructure projects may be part of the solution to revive investment and elevate growth," Chua told Bernama.

He noted that the persistent surge in capital outflows was symptomatic of a lack in domestic investment opportunities. "As a result, many domestic companies, including government-linked ones, have been on the prowl for and acquiring foreign assets," he said.

The Malaysian economy, according to Chua, is likely to see only a modest improvement in 2006 and GDP growth coming in at 5.6 per cent, slightly better than the 5.4 per cent expected this year. "Firstly, exports have started to pick up  on the back of a recovery in global electronics demand. Manufacturing, particularly electronics, should do better in the fourth quarter of this year and next year," he said.

Chua cited robust consumer spending as one of the key drivers of growth this year. "But consumer spending will likely cool off next year as consumer debt levels have already risen strongly while interest rates are set to increase further," he said.

According to Chua, exports will likely step up next year to offset the moderation in consumer spending. "Electronics production and exports have been improving, given recent signs of a recovery in global tech demand," he said.
Chua said tourism, financial services and outsourcing were among segments of the services sector that showed the most potential.

NEW ZEALAND

New Zealand's economy is likely to maintain moderate growth in the next three years, but risks a hard landing if rising interest rates hinder business investment, a private research house says. Business and Economic research Ltd (BERL) has downgraded its growth forecasts in its quarterly report, but says positive factors such as business and retail spending and employment growth are offsetting negative influences. BERL forecasts economic growth, as measured by GDP, to average 2.6% in the year to March 2006, down from 3% in its September report.  This will increase to 2.8% for the year to March 2007, followed by 3.3% growth in the year to March 2008.

The reduced growth for 2005/06 is being caused mainly by the continuing high kiwi dollar and the impact of the monetary policy tightening, BERL says. 

The export sector is the core of current concerns, now heightened by an apparent slowing in tourism activity growth, the forecaster says. Further out over the forecast horizon, activity in the export sector is expected to gradually revive as the exchange rate corrects to a more competitive level, the report says.

"The positives continue to outweigh the negatives but we do concede that the gap between them is narrowing, says BERL senior economist Dr Ganesh Nana.
Reports of an imminent hard-landing or even recession have been widely reported recently, Nana says.

"However, the on-going strength of investment (excluding housing) spending, business and retail spending, along with strong tax revenues, imports of capital items and continuing employment expansion all point to considerable growth momentum", he says.

BERL expects inflation, as measured by the CPI, to remain within the Reserve Bank's target band of 1%-3%. The key risks here lie in inflation expectations becoming entrenched, as a flow on from recent oil price, energy and labor cost increases, it says. "This facet will, no doubt, keep the Reserve Bank on its toes over the short-to-medium term."

PHILIPPINES

The interagency Development Budget Coordination Committee (DBCC), tasked with setting the government's economic policies and targets, revised its 2007 target for gross domestic product (GDP), taking into consideration the lingering effects of the risks that are likely to have resulted in a slowdown this year and the challenges confronting 2006. The GDP growth target for 2007 was changed from the target range of 6.5 percent to 7.5 percent under the Arroyo administration's Medium-Term Philippine Development Plan (MTPDP).

The revision of the official GDP growth target for 2007 came after the National Economic and Development Authority (Neda) earlier announced that the full-year GDP growth for 2005 would likely hover between 4.8 and 5.1 percent compared with the official target of 5.3 to 6.3 percent. The lower-than-forecast GDP growth this year takes into account the decline in global demand for electronics, which has badly hurt the Philippines' export sector. Electronics account for more than 60 percent of the country's total exports. The unexpected sharp increase in oil prices to record highs this year dampened consumer demand, thus tempering GDP growth.

For 2006, the Neda said GDP expansion was likely to settle between 5.7 and 6.3 percent compared with the target of between 6.3 and 7.3 percent. The Neda earlier said risks that were seen to have adverse economic effects next year are the political instability that could arise from possible revival of the impeachment case against President Arroyo, lower consumer demand due to the scheduled increase in the value-added tax rate from 10 to 12 percent in February, and the avian flu scare, among others.

But while the 2007 GDP growth target was revised downward, the figure still reflected an improvement from the expected growth this year and in 2006. Officials believe growth drivers in 2006 will have a residual impact on 2007. These include the continued rise in foreign currency remittances from abroad, further expansion of the call center industry, and rise in private savings that provide funds for investments, and increase in portfolio investment flows.

The Bangko Sentral ng Pilipinas said its inflation target for 2007 was between 4 and 5 percent to complement the GDP growth target for that year of the DBCC, of which the BSP is consulting agency.

Members of the DBCC include the Department of Finance, the Neda and the Department of Budget and Management.

"The prevailing combination of generally favorable supply-side and demand-side factors should help stabilize inflation expectations in the near term. In particular, the recent easing of energy prices, the strengthening of the peso and the ongoing harvest season alongside normal weather conditions are likely to hold back cost-side inflationary pressures," the BSP said in a statement.

The 4- to 5-percent inflation target for 2007 is a slowdown from the 8- to 8.5-percent inflation that the Neda expects for 2006. The 2006 inflation forecast takes into consideration the increase in the VAT rate by 2 percentage points starting February 2006.

SOUTH KOREA

Korea's GDP growth next year will be the second slowest among 10 East Asian countries not including Japan, the Asian Development Bank reported The bank’s "Asia Economic Monitor” predicted the country’s GDP will grow 5 percent in 2006, a slight upward adjustment compared to 4.6 percent in a September report. Yet that falls far short of the average 7.2 percent and is ahead only of the Philippines’ 4.8 percent.

China has the highest predicted growth with 8.9 percent, followed by Laos with 8 percent, Vietnam with 7.6 percent, Cambodia with 6.1 percent, Singapore with 6 percent, Indonesia with 5.9 percent, and Malaysia with 5.3 percent. For this year, the ADB forecast Korea's GDP growth will be 4 percent, the lowest among the 10 nations and way below the average of 7.1 percent.

THAILAND

Prime Minister Thaksin Shinawatra has expressed his confidence that the Thai economy would have expanded by no less than 4.5% this year, and believes that the economic trend of the country is moving in a positive direction next year.

Prime Minister Thaksin commented about the Thailand Development and Research Institute's (TDRI) suggestion for the government to take caution in the mega-projects and its concern for the repayment of the oil fund's debts. The TDRI has expressed its concern that the repayment would affect the premier's projection in economic growth. However, the Prime Minister said the matters were different from one another.

In the meantime, the export figure is still high, with deficits projected to only attribute to 2% of GDP, and this would have mainly been caused by the importation of higher-priced oil. As for foreign reserves, Thailand now has 52 billion US dollars worth of reserves, which is historically at the highest level. Dr. Thaksin concluded after the elaboration that the GDP will grow no less than 5% next year

VIETNAM

Despite great challenges and difficulties, this year Viet Nam scored the highest economic growth in the past seven years, government officials have said. According to figures released by the Ministry of Planning and Investment during the year-end cabinet meeting in HCM City, this year Viet Nam attained GDP (gross domestic product) growth rate of 8.4 per cent, much higher than 2004’s figure – 7.79 per cent. Per capita income amounted to US$640.

This year’s total export exceeded $32.2 billion while import amounted to $36.8 billion. Foreign direct investment amounted to $5.85 billion while consumption index rose by 8.4 per cent compared with 2004.

In the first quarter of 2006, according to the meeting, the GDP growth rate is expected to reach 7.5 per cent, export value will reach US$9 billion, and the Consumer Price Index is 3.5%.

To reach the targets, the Government will try its best to facilitate business development and to boost exports while ensuring a stable domestic market price, according to Nguyen Kinh Quoc, a spokesman for the Prime Minister.

Irrational documents and regulation that could hinder the development of business and investment would be adjusted or removed, said Quoc at a press briefing after the Government meeting.

Quoc said the Government would soon issue instructions for the implementation of the common Investment Law, the unified Enterprise Law, Bidding Law, Law on combating waste and Practicing Thrift and the Anti-Corruption Law.

The Government would also submit to the National Assembly a number of laws and ordinances to help ensure the smooth run of the socialist-oriented market economy and to meet the demands of the country’s WTO accession and the global integration process. Greater efforts would be made to mobilize capital for development, make better use of it and prevent losses and waste in construction, he said.

In 2005, the Government also adopted important measures to stabilize the macro-economy, manage the market, control corporate monopoly, strengthened mechanisms for controlling the prices of essential goods and raised capital for major projects by issuing State and project bonds.

The national programs on hunger eradication and poverty alleviation, and employment generation for the 2006-2010 period were also approved by the Government in 2005.

The Government took measures to put prices of a number of goods and services including electricity, coal, cement and transport fees under control while enhanced campaigns to fight smuggling and speculation with attempt to raise prices of goods, especially essential goods.

Despite the Government’s efforts, the Consumer Price Index still exceeded the rate approved by the National Assembly and equaled the GDP growth rate.

3. EUROPE / AFRICA / MIDDLE EAST

 FINLAND

Finnish Ministry of Finance left its Finnish gross domestic product (GDP) growth forecasts unchanged at 2.1%for this year and 3.2%for 2006.

"GDP growth is gathering steam and there is no need to amend the two per cent forecast for the present year, even though growth in the first three quarters remained at 1.5%," the December issue of the ministry's Economic Bulletin reads.

"In addition to employment and both domestic and foreign trade, most other indicators also point to stronger growth, with the exception of industrial output. Growth in the surplus of the current account balance will exceed the forecast. The rise in tax revenues and the continuing moderate trend in expenditure improve the financial position of the central government."

The ministry expects the average growth in consumer prices to remain below 1% in 2005.

             FRANCE

According to the preliminary figures from the National Institute for Statistics and Economic Studies (INSEE), French GDP expanded an unexpected 0.7% quarter-on-quarter (q/q) in the third quarter of 2005, up from gains of 0.1% in the second quarter and 0.3% in the first. If there were no growth in the fourth quarter of this year, the economy's expansion would now amount to 1.4% in 2005, down from 2.1% in 2004.

As we anticipated, though, domestic demand remained the main growth driver in the third quarter, as it has been since 2004. Domestic demand contributed 0.9 percentage points to third-quarter GDP growth, up from a negative 0.1 percentage point in the second quarter. Consumer spending growth reached 0.7% q/q in the third quarter of the year, compared with a 0.1% drop in the second and a 1.2% rise in the first. Total investment rose by 0.9% q/q, after it had fallen by 0.1% in the second quarter of the year. Business investment held up well in July-September, despite the poor message revealed by surveys this year and the fact that companies' margins have been significantly squeezed. Indeed, business investment rose by 1.1% q/q, up from a 0.1% fall in the second quarter, but still down from the 1.7% q/q increase in the first quarter. Net trade made a positive, albeit modest, contribution to GDP growth for the first time since the third quarter of 2003. Government consumption rose a robust 1.2% q/q in the third quarter of the year, its highest rate since the first quarter of 2002, becoming one of the key contributors to growth. All in all, growth in the third quarter was well-balanced.

Despite the encouraging news, France still faces a number of handicaps, most of which should persist. Strong oil prices are likely to remain a threat to growth for some time, as we expect them to average US$55.2/barrel in 2005 and US$57.0/barrel in 2006. Pressures remain to tighten fiscal policy so as to improve weakened public finances. Judging by the performance of French public finances in the first nine months of 2005, France is set to suffer an "excessive" budget deficit for a fourth successive year. More worryingly, the labor market seems unlikely to improve significantly. Recent unemployment data have been more encouraging, but optimism should not be overstated. True, the latest labor-market measures implemented by the government are likely to bring more good news in the short term, but these measures continue to ignore most of the structural problems constraining job growth. Consequently, we are very reluctant to call the improvement significant and sustainable. In fact, non-farm payrolls rose just 0.1% q/q in the third quarter, and were up only 0.3% year-on-year, according to preliminary figures released by INSEE. This modest increase confirms that the drop in the unemployment rate seen in recent months has mainly resulted from the government's subsidized job plan, rather than to actual job creations. With a weak labor market and subdued consumer confidence, some correction to household consumer expenditure should therefore be expected in the fourth quarter, more in line with real disposable income developments.

Meanwhile, net exports should make another positive contribution to growth in the fourth quarter, although this will be modest. The recent depreciation of the euro against the U.S. dollar might ease some competitiveness pressures on the exporting sectors, but this benefit will be limited. France has progressively accumulated trade deficits since 2000, increasing the divergence with both the Eurozone and Germany. French exports grew by around 12% in volume terms between the first quarter of 2000 and the second quarter of 2005, compared with 36% in Germany over the same period. (Germany's third-quarter national account data are not yet available.) This suggests that movements in the euro alone cannot be held responsible for developments in France's trade performance. French companies appear to have considerable lost-market share. The geographical specialization of French exports is disadvantageous, as the country is not well established on rapid growth markets. Moreover, while other countries, including Germany, are taking full advantage of off-shoring to obtain cost savings, France lags behind in this respect. Furthermore, the relative robustness of French domestic demand is expected to result in spill-over effects on imports.

France's public debt is spiraling out of control, according to a report commissioned by the French government from the chairman of BNP Paribas bank.

Michel Pébereau's report shows that the debt stands at €1,117 billion, representing 66 per cent of France's GDP or €18,000 per citizen.

The staggering figure encompasses the debt accumulated by the state and local authorities, as well as social and health insurance bodies, over the past few decades.

However, it does not include the upcoming time bomb of civil servants' pensions. Depending on whom you agree with, this could add between €450 billion and €900 billion to the country's arrears

GERMANY

Two of Germany's six leading economic institutes, the Hamburg-based HWWI and the Halle-based IWH, increased their forecasts for growth in Europe's largest economy next year, saying export-led expansion may spur companies to increase domestic spending.

The HWWI raised its growth forecast to 1.4 percent from the 1 percent it predicted Sept. 19. It also lifted its prediction for growth in 2005 to 0.8 percent from 0.6 percent. The IWH left its outlook for this year unchanged at 0.9 percent and raised its forecast for next year to 1.7 percent from 1.5 percent. Five of the six state-funded research institutes have issued a more optimistic outlook for the German economy this month.

The improved forecasts add to signs Europe has recovered from a slowdown in the second quarter. Faster growth gave the European Central Bank room to raise interest rates this month for the first time in five years to keep a lid on inflation.

``The world economy will continue to expand strongly despite a certain slowdown, so that significant impetus in demand is to be expected from abroad,'' Eckhardt Wohlers, the institute's chief economist, told reporters in Hamburg today.

The HWWI said it expects German exports to increase 7.1 percent next year after growth of 6.5 percent in 2005.

Exports, which account for a third of the German economy, are bolstering sales at companies including Bayerische Motoren Werke AG as a weaker euro makes European goods more competitive.

The export growth will help boost capital spending by 2.2 percent next year, the HWWI said. Capital spending is forecast to fall 0.2 percent this year.

``After several attempts, Germany has found its way to a cyclical recovery,'' the IWH said in an e-mailed statement today. ``That leads -- as has been predicted for a while -- from exports to a stimulation of investment activity to an acceleration of production in the economy as a whole.''

German business confidence reached a five-year high in December and investor confidence rose the most in more than 12 years this month.

Still, the HWWI's forecast for next year is the least optimistic of any of the institutes that have raised their forecasts this month. Like the IWH, the Munich-based Ifo institute predicted two days ago that the economy will expand 1.7 percent in 2006.

Germany Deputy Economy Minister Hartmut Schauerte also said in an interview that gross domestic product may expand as much as 1.7 percent next year, more than the 1.2 percent the previous government predicted Oct. 21. The government will issue a new forecast Jan. 25.

IRELAND

The CSO reported today that Gross Domestic Product (GDP) at constant prices was 4.8 per cent higher in the third quarter of 2005 compared with the same quarter of 2004. The growth in Gross National Product (GNP) for the same period was 7.0 per cent. In the first nine months of 2005 GDP was 4.0% higher in constant prices than the corresponding period of last year while the growth in GNP was 4.9% for this period.

The profits of foreign owned enterprises are excluded from GNP. GNP is also affected by other income flows between residents and non-residents the timing of which can be very variable on a quarterly basis. GNP is therefore more volatile on a quarterly basis than GDP.

ITALY

Italy's weak economy - GDP is expected to remain broadly flat this year after growing 1.2% in 2004 and 0.3% in 2003 - is seen hurting Premier Silvio Berlusconi's chances at elections in April.

"Our forecasts for GDP growth in 2006 and 2007 indicate that, irrespective of the election outcome, Italy will struggle to rein in its budget deficit to 3% of GDP by 2007 without further fiscal tightening," Lehman Brothers said in a note on Italy's budget.

Italy's economy will grow by just 0.8% in 2006 and will stall in 2007, Lehman predicted.

SPAIN

Economic growth in the fourth quarter is expected to be 'in line' with the trend registered in the third quarter, when GDP expanded 3.5% from a year earlier, the Bank of Spain said. In its December economic bulletin, the central bank said the 'still very scanty' information regarding economic growth in the last few months of 2005 shows a continued robust trend, driven by domestic demand and construction.

But it warned against the negative impact of the October transport strike on the external sector and industry.

Spanish Prime Minister Jose Luis Rodriguez Zapatero said the economy is expected to grow 3.5% in 2005 from a year earlier, and compared it with the government's revised 3.3% target.

 UNITED KINGDOM

UK economic growth was left unrevised in the third quarter of 2005, cementing expectations that the economy will grow by its lowest rate for 13 years this year.
The office for National Statistics confirmed its previous estimate that GDP grew by 0.4% in the third quarter from the previous quarter, and the year-on-year rate by 1.7%. However, it said the economy would have grown by 0.6% during the quarter if oil production had not been so badly affected by increased maintenance work as well as a fire at two oil fields. Analysts had not been expecting any changes to the previous estimates.

Chancellor of the Exchequer Gordon Brown conceded that he got his forecasts badly wrong. In his pre-budget report, Brown said the UK economy will only grow by 1.75% this year, the lowest increase since 1992.

Current data show that the UK economy has grown below its so-called long-term trend rate of growth of a quarterly 0.6% for three consecutive quarters. Previously it was five, but growth in the fourth quarter of 2004 was revised up to the assumed trend rate of 0.6%. Nevertheless, the period represents the longest run of sub-trend growth since the second quarter of 2002.

Though there were no revisions in the third quarter, the statistics office tweaked growth levels between the first quarter of 2004 and the first quarter of 2005. The annual growth level for 2004 was left unchanged though at 3.2%.

A more detailed look at the output side of the accounts shows that industrial production, which accounts for around 20% of GDP, fell an unrevised 0.6% during the quarter largely because of a sharp drop in mining and quarrying. Some of that was offset though by a 0.3% improvement in manufacturing output. The previous estimate suggested manufacturing had improved by 0.4%.

Output of the services sector, which accounts for around 73% of UK GDP, increased by 0.7%, up 0.1 percentage point on the previous estimate, mainly because of an upward revision to business services, housing and recreation.

The statistics office said government and other services rose by an unrevised 0.8%, reflecting strength in recreation and culture. Transport and communications also rose by 0.7%, down 0.1 percentage point on the previous estimate.

The overall sector was driven by a 1.6% improvement in post and telecommunications, while business services and finance rose by 0.8%, up 0.1 percentage point on the previous estimate.

Construction output, which accounts for around 6% of GDP, grew by an unrevised 0.5% during the quarter from the previous quarter. Agriculture, which accounts for the remaining 1% of GDP, saw output fall 0.6% during the quarter, bigger than the original estimate of a 0.5% decline.

On the expenditure side of the accounts, the statistics office said household expenditure rose by an unrevised 0.5% during the quarter, up on the 0.2% recorded in the second quarter. Growth was driven largely by expenditure on semi-durable goods.

Government expenditure was unchanged from the previous quarter but is now 0.6% up on a year-on-year basis. Meanwhile gross fixed capital formation, a measure of business investment, rose by 2.2% in the latest quarter driven by a 16.5% increase in general government investment.

The statistics office said increased investment in buildings and structures and transport equipment was partially offset by a decrease in other machinery and equipment.

Elsewhere, net trade knocked some 0.7 percentage points off GDP, up on the 0.4% decline previously estimated.

RUSSIA

The GDP will grow 6.4 percent in Russia this year, Economic Development and Trade Minister German Gref said at a meeting between the President and cabinet members. Previously, Finance Minister Alexei Kudrin forecast that the GDP would increase by 6.2 percent in 2005. The Federal Statistics Service reported a GDP advance of 6.2 percent in the first nine months of this year since the same period in 2004.

 BULGARIA

BULGARIA’S gross domestic product (GDP) grew by 5.6 per cent year-on-year in the first nine months of 2005, the National Statistical Institute (NSI) said on December 19. The private sector created 79.5 per cent of the value added in the economy in the first nine months of 2005, representing significant growth of 8.7 per cent compared to the same nine-month period in 2004. State-owned companies and institutions contributed 20.5 per cent of the value added.

In their forecasts, made public just a few days before the NSI data, several think tanks said that they expected Bulgaria’s economic growth to slow in the third quarter of 2005 because of the increases in global oil prices, the drop in the country’s exports and the floods that damaged agriculture this summer. On December 16, news service SEE News quoted five Bulgarian and foreign analysts forecasting GDP growth in the third quarter of 5 to 6.2 per cent year-on-year.

GDP growth accelerated to 6.4 per cent year-on-year in the second quarter from six per cent in the first quarter, bringing cumulative GDP growth for the first half of 2005 to 6.2 per cent. Now that the NSI figures are out, it is obvious that growth has indeed slowed as a cumulative figure after the third quarter.

HUNGARY

Compared with its latest forecast a month ago, research institute GKI indicated two new macroeconomic trends in its late December overview, prepared in cooperation with Erste Bank. On the one hand, the GDP growth forecast has been modified from the previous 4% to 4.2%, while GKI's expectations of cash-flow budget deficit decreased from HUF 1,100 billion-HUF 1,400 billion to Ft 1,000 billion. Assuming that the budget gap remains within this limit, this will be the first year in a long time that the Finance Ministry meets its end-of-year deficit target, which is HUF 1,022.6 billion. More importantly, however, it is already a fact that the national financing gap will considerably exceed the 2005 target if calculated in accordance with EU standards.

GKI is predicting the growth trajectory that started in Q2 2005 following an economic upswing in the EU to continue, with improving external balances and a steady influx of FDI coupled with a high budget deficit. The research institute does not expect the Hungarian currency to weaken significantly, however no interest rate cut will take place until the 2006 elections, it predicted.

Industrial production remained high in October, growing at a 10% rate as in Q2 and Q3, which compares with only 2% in Q1. In the first 10 months of the year, exports increased by 11.3%, while domestic sales rose 4.4%. The latter is considerably higher than in recent years. In the meantime, per capita industrial production grew by 10.5% while employment figures decreased by nearly 3%. The construction industry remained a fast-growth sector of the national economy.

GKI forecasts 6.2% increase in real income in 2005, boosting both consumption and savings. However, the overall annual growth rate of domestic consumption is unlikely to exceed 3%, considering that Q1-Q3 saw 2.3% growth. New investment is predicted to increase by approximately 10% as a result of spectacular growth in Q4.

 Between January and October, Hungary's foreign trade gap decreased from EUR 3.5 billion to EUR 2.4 billion year-on-year. In October, exports continued to grow faster than imports.

According to GKI, the inflation rate will stand at 3.2% at the end of 2005 and average 3.6% for the entire year.

ROMANIA

Year 2006, which will decide the fate of Romania's accession to the European Union will register a general economic growth worth 5.3 percent, according to the estimates of the European Bank for Reconstruction and Development (EBRD).
The fields which are expected to develop most are constructions and the real estate sector, where important projects have already started at residential level, but also in infrastructure, trade, communications and information technology.

After the extraordinary growth registered in the car market, particularly in the first half of this year, importers say it is very hard for the performance repeat in 2006 and a slight increase of only 10 percent is expected.

Increases are also expected next year in two sectors with huge potential: agriculture and food industry and tourism, fields which have been promising several years now but where development is sluggish. When it comes to agriculture, 2006 could bring the introduction of the tax on farm land, which will prompt its efficient use in big farm holdings to the detriment of its use for the production bound for home consumption. 2006 will be an interesting year for the market of capital.

The big battle will be fought in communications in 2006 on two fronts: business customers and those from the big cities, for the services with VAT, and the digitalization of villages and small towns in order to win a market share.

In constructions and real estate, at least two big projects - Esplanada and Baneasa Investment, one billion each, are to start in Bucharest. The investments will be redirected to the residential sector and to the field of buildings, offices and commercial spaces. Investments will also be made in housing compounds of over 1,000 flats, which have recently started. At the same time, the change to the law on direct investments and the creation of a legislative framework for investors to obtain certain facilities will bring important foreign investors.

BELARUS

The Belarusian government wants to triple GDP by 2010 against 1996. GDP has increased 42% from 2001 to 2005 and almost doubled since 1996. Belarus is producing more high-technology products and 38% of the industry's volume is exported to the European Union. Belarusian export deliveries have increased by 250% in the last five years. Belarus has one of the lowest inflation rates at just more than 6% this year and salaries increased to $250 against $70-80 in 2000

KAZAKSTAN

By the results of 2005, rate of GDP growth in Kazakhstan will exceed 9%. The first deputy chairman of Kazakhstan Statistics agency, Yuriy Shokamanov, gave the forecast at the press conference in Almaty.

Y. Shokamanov also states the forecast of inflation rate in 2006 will not considerably exceed the inflation rate of the one this year. "It will remain 7-7.5%. The official forecast will be announced by the National Bank," he added.

SOUTH AFRICA

South Africa’s gross domestic product (GDP) growth is expected to ease to just below five percent in 2006 from just above five percent this year, as consumer demand wanes. The median forecast for next year is 4.9 percent with a range of 4.5 percent to 5.3 percent.

In the first three quarters of 2005, the official real GDP, as measured from the production side, grew by 5.1 percent year-on-year after a 4.5 percent rise in 2004. When estimated from the demand side, which is how most economists compile their forecasts, real GDP growth in the first three quarters of 2005 grew by 6.3 percent year-on-year from 4.4 percent in 2004.

Household consumption expenditure is forecast to slow to the 5.5 percent level next year from 6.9 percent in the first three quarters this year and 6.5 percent in 2004 and 3.5 percent in 2003. The easing in growth is likely due to the waning of the easier monetary policy stimulus

             ISRAEL

Gross domestic product climbed at an impressive 5 percent, easily beating the Bank of Israel's initial expectations of 3.2% and former finance minister Binyamin Netanyahu's more optimistic forecast of 4.5%. Among policy makers, only Shimon Peres appears to have been over-exuberant about growth prospects, saying in February that the Disengagement Process could lead to GDP growth of 6%.

The Palestinians are also getting in on the act, with the World Bank saying that their economy is expected to expand by at least 8% this year and that unemployment is expected to fall sharply.

Speaking of unemployment, it's not just economic growth that warms the cockles as the driving rain and biting wind of the cold winter set in. The number of jobless has fallen to a four-year low of 8.9% from 10% at the end of last year and the number of workers increased to 2.5 million from 2.41 million. This reflected a rise in work force participation - which includes the employed and the unemployed - to 55.2% from 54.5%.

The increase in jobs has meant that more people paid tax, helping total revenues climb to NIS 122.9b. in the first nine months of the year from NIS 113.3b. in the same period of 2004. The rise was also helped by the government's "Mas Vehalila" tax collection campaign at the start of the year and occurred despite the government's tax cuts, which are set to continue for another five years, assuming Finance Minister Ehud Olmert or Binyamin Netanyahu will continue setting economic policy after the March elections.

The increase in tax revenue has helped the budget deficit to almost halve to about 2% of GDP this year from 3.9% last year, well within the Treasury's target of 3.4%. In addition, the national debt has fallen from 105.6% of GDP in 2004, but still rather scarily hovers around 100% and costs up to $12b. a year to pay off.

UAE

The UAE's gross domestic product grew in 2005 to Dh424 billion, up nearly 12% from Dh379 billion in 2004. If a similar growth rate is maintained, the country's per capita gross domestic product (GDP) is expected to exceed Dh87,000 in 2005, according to a report of  the Ministry of Economy and Planning.

The value of the UAE's trade reached Dh530 billion in 2004, with its energy sector representing 27%, and manufacturing contributing 13% to the GDP. Strong success of the country's macro-economic policies is thought to be behind such growth.

Meanwhile, the UAE's workforce stood at 57% of its population of 4.32 million, reaching 2.5 million. The nation's construction industry leads in private sector employment with 20.3% of the workforce, followed by trade and services with 19.5%, and manufacturing accounting for 13% of the workforce, according to Khaleej Times.