GDP UPDATE
July 2006
McIlvaine Company
INDUSTRY ANALYSIS
1. AMERICAS
U.S.
The economy grew at its hottest pace in 2 1/2 years in the opening quarter of 2006, but signs suggest it has cooled since then. The Commerce Department reported that economic activity expanded at a 5.6% annual rate in the January-to-March period. The revised reading on gross domestic product was an even stronger showing than the 5.3% pace estimated for the quarter a month ago. The new estimate - based on more complete information - matched economists' forecasts.
The stronger GDP figure mostly reflected an improvement in the country's trade deficit, which was much less of a drag than previously estimated.
CANADA
Canada's economy, the world's eighth-largest, expanded a less-than-expected 0.1% in April, bolstering the case for the Bank of Canada to pause its interest-rate increases in August. The increase reported by Statistics Canada in Ottawa matched March's figure and was less than the median estimate of a 0.2 percent gain in a Bloomberg News survey of 16 economists.
The slower-than-expected growth may allow the central bank to limit its series of rate increases to seven since September, which brought borrowing costs to 4.25 percent. Reports this month showing the highest core inflation since 2003 as well as unexpected surges in retail sales and job growth fueled speculation the bank would raise rates July 11.
“The growth is sustained, but slower than we've seen recently and since it's slightly below the economy's potential growth, it will give the Bank of Canada more leeway as it sets monetary policy,'' said Martin Lefebvre, an economist with Montreal-based Movement Desjardins, which predicted the 0.1% gain. The central bank will keep rates unchanged at its July 11 announcement unless a July 7 jobs report shows growth this month was much faster than expected, Lefebvre said.
2. ASIA
CHINA
China's economy is set to maintain a steady and fast pace of growth for full-year 2006, said Qiu Xiaohua, director of the National Bureau of Statistics, the official Xinhua News Agency. That growth pattern has been determined by low inflation, strong administration by the government and a favorable global economic situation.
But a number of problems still exist in the economy, including overly rapid fixed-asset-investment and credit-supply growth, and an imbalance in the country's international balance of payments. China's gross domestic product expanded 10.3% in the first quarter this year from the same period last year, after growing 9.9% in 2005. Qiu said the balance of payments imbalance has "intensified," as shown by China's surging trade surplus and growth in new yuan-denominated loans in the first five months of the year.
INDIA
Deputy chairman of the Planning Commission, Montek Ahluwahlia said that foreign direct investments (FDI’s) which currently are estimated at $10 billion would be doubled by mid of 11th plan period to ensure that the current flip of infrastructural development attains vigorous peace. Mr Ahluwahlia said that the 11th plan approach document paper aims at accelerating the GDP growth rate of 9.5% by mid of the period to make sure that the GDP growth rate of 8.5% on an average is achieved by the end of next plan period. The government expects the 10th plan GDP growth rate on an average rate of 7.5%.
SOUTH KOREA
The outlook for the nation's key industries is sunny in the second half, according to the state-run Korea Institute for Industrial Economics and Trade. In a report, the institute predicts domestic car demand will grow less than 5% but exports will continue to surge more than 15%. The situation is similar in shipbuilding, which has recently enjoyed a record volume of orders for LNG carriers, the more expensive commercial vessels. Electrical appliances can expect bigger domestic demand than in the same period last year, while semiconductors should see booming business at home and overseas.
Industries to see lackluster performance are textiles, steel, and petrochemicals, which are expected to suffer from a double whammy of low profitability and slowing demand.
Meanwhile, GDP will rise 5.9% in the first half year-on-year, but only 4.4% in the second half, the institute said, adding high oil prices and the stronger value of the won will slow growth.
PHILIPPINES
Gross Domestic Product (GDP) likely grew "at least 5.5%" year-on-year in the first half of the year, driven by a rebound in agriculture and exports, Economic Planning Secretary Romulo Neri said. However, Neri said growth might lose steam in the second half because of the failure of Congress to pass the government's proposed budget of 1.053 trillion pesos.
"Growth might slow down in the second half because we now operate with a re-enacted 2005 budget [of 918.6 billion pesos] which trims government spending on infrastructure. We have to look for other growth drivers," he told reporters.
The government is aiming for GDP growth of 5.5-6.2% for this year. Annual growth in the first quarter was 5.5%.
The Department of Agriculture recently projected growth of 4.5-5.0% in farm output in the first half, helped by favorable weather. Merchandise exports rose 15.6% in the first four months of the year, growing at nearly double the government's projected rate of 8% for the full year.
VIETNAM
The Vietnamese National Assembly has released a five-year socio-economic plan, setting a target of a stable growth rate between 7.5 and 8% until the year 2010. According to the plan, the national gross domestic production (GDP) by the year 2010 is expected to reach VND 1.69 to 1.76 trillion (roughly US $94-98 billion).
The Government is endeavoring to raise the per capita GDP to US $1,050-1,100 and double the export value of 2005 during the 2006- 2010 period. The total exports value is expected to increase by 16% per year with the per capita export value reaching US $770-780 by 2010, a two-fold increase against the 2005 figure. The total annual social investment capital is expected to reach nearly US $140 billion, accounting for 40% of the GDP.
The rate of trained laborers will account for 40% of the total workforce by 2010. The country aims to generate jobs for over 8 million people, half of them being female and to provide vocational training for 7.5 million employees.
3. EUROPE / AFRICA / MIDDLE EAST
BULGARIA
Bulgaria’s economy is projected to grow by a real 5.8% next year, by 6.2% in 2008 and 6.1% in 2009 according to the government.
Bulgaria’s current account deficit is expected to rise to 11.8% of gross domestic product (GDP) in 2007 from the 11.3% deficit projected for this year. The Cabinet sees the external deficit narrowing to 9.7% of GDP in 2009. It gave no forecast for 2008. The government has set a fiscal surplus target of 0.8% of the projected gross domestic product for 2007. The surplus is projected to fall to 0.7% of GDP the following year and to 0.6% of GDP in 2009.
In the medium-term, the major challenge to the budget policy is the attainment of the national priorities by maintaining a stable fiscal position and preserving the country’s macroeconomic stability after its entry in the European Union. The average inflation in 2007 is expected to be 4.4%, 2.8% in 2008 and 3.1% in 2009.
The three-year budget forecast has been made by taking into account the financial inflow from the EU structural and cohesion funds and the money from the Common Agricultural Policy system. The key challenge to the Government in the next three years will be the fullest possible optimum use of the EU funds in order to achieve a lasting positive effect on production, economic growth, and approximation of the EU living standards. The money will be channeled mainly to the rehabilitation of roads, the energy sector, agriculture, environment, development of human resources, education and science.
FRANCE
French economic growth is accelerating as increased hiring spurs consumer spending, the national statistics office said. Gross domestic product in Europe's third-largest economy will expand by 0.6% this quarter, up from 0.5% in the first three months, and by 2% for the year, according to Paris-based Insee. The prediction would reach the low end of the government forecast range of 2% to 2.5%.
``Private consumption is very well oriented,'' said Michel Devilliers, Insee's chief forecaster, said at a briefing yesterday in Paris that was embargoed until today. ``When the unemployment rate falls, families save less'' and spend more.
Economic growth in France and the euro region has prompted the European Central Bank to raise the benchmark rate three times in the past six months to 2.75%. The euro region will grow 2.1% this year, the fastest pace since 2000, the ECB forecasts. Last year, French GDP growth was 1.2%.
Unemployment in France will fall to 9% by the end of the year, the lowest since June 2002, from 9.3% in April, thanks mainly to government subsidies and incentives in the non-profit sector.
Insee estimates 196,000 jobs will be created this year, of which 121,000 will get some subsidies or be in the non-profit sector. In all of last year, 99,000 jobs were created, of which 63,000 were in for-profit companies and not subsidized.
The pace of economic growth will probably remain at 0.6% in the third and fourth quarters, Insee said. Household spending growth will slow to 0.5% in each quarter from 0.7%in the April-June period.
GERMANY
Modern Germany is displaying itself to the world via the World Cup. It is a truly impressive sight. The overwhelming feeling is of a country that has turned the corner and is reaping the dividend from five years of restructuring among German companies trying to compete in global markets. Growth this year will probably top 2%, having averaged just 0.6% in the previous four years. But dig a little deeper and you will find a country proceeding with trepidation.
Germans, rather like Scots, are not renowned for an optimistic disposition. Many of the companies interviewed last week are genuinely concerned about the economy's ability to sustain its recent performance. It is a view apparently shared by most economists – another group which has a troubled relationship with optimism. The average growth expectation for next year is a measly 1.1%. What's more, 8 of the forecasters expect a return to stagnation conditions (sub-1% growth) with the country's largest bank expecting GDP growth of just 0.1% in 2007. The consensus is saying that this economy is only capable of growing at 1%.
TURKEY
Turkish Parliament`s General Assembly approved the 9th Development Plan which predicts that gross domestic product (GDP) will rise by 7% annually and national income is predicted to reach 800 billion USD, by 2013. The plan envisions that national income per capita will attain 10,100 USD in 2013.
According to previsions, agriculture sector is to grow 3.6% annually while its share in added value will drop to 7.8% as of 2013. On the other hand, industry sector will grow 7.8% annually, and its share in added value will be 27.2% during the term of the Plan. Fixed-capital investments of public and private sectors are envisioned to increase 9.4% and 8.1%, respectively. Also the share of public investments in education are expected to reach 21%, and 8.6% in health sector, in 2013.
Within the scope of these developments, the ratio of current account deficit over GDP is expected to drop to 3% in 2013. Tourism incomes are expected to increase by 9.34% annually and to reach 36.4 billion USD in 2013. Also, an annual direct capital inflow of 12.1 billion USD is expected during the period.
Ratio of general expenditures of the state to the gross domestic product is envisaged to drop to 36.1 percent in 2013, while ratio of state incomes to the gross domestic product is expected to increase to 39.7 percent in 2013.
UNITED ARAB EMIRATES
A new report by financial advisory firm AT Kearney has predicted that the UAE's GDP could rise by as much as 60% in the next few years. The study highlights the country's economic diversification and reform as reasons behind the accelerated growth rate. The UAE was described as a model for other nations in the region to follow.
UNITED KINGDOM
Britain has been understating its economic growth performance since 2001, official statisticians said as they raised their figure for the first quarter of 2006. Economists said the news increases the chances of a rise in interest rates from the Bank of England. The Office for National Statistics said GDP grew by 0.7% in the first three months of the year, leaving it 2.3% higher than a year earlier. Analysts had expected no revision from last month's estimate of 0.6% quarterly growth and 2.2% annual growth.
The chief reason for the revision was higher business activity. Moreover, the ONS's annual reworking of economic history - the Blue Book revision - showed that GDP grew by 1.9% in 2005 instead of the 1.8% previously reported. Growth in previous years was also revised up suggesting the degree of spare capacity - one of the key sources of contention on the Bank of England's Monetary Policy Committee - was even less than previously thought.
"The upward revisions to GDP growth since 2001 will increase the BoE's concern about the amount of spare capacity in the UK economy," said Howard Archer, economist at Global Insight. "This increases the odds of an interest rate hike before the end of the year, although the MPC currently seem in no hurry to act and we believe that they will wait until 2007."
The Treasury was quick to trumpet the higher growth, saying it showed how the economy had proven resilient to high oil prices and an end of the housing bubble. The detailed data show growth is becoming more balanced with business investment strengthening.
ZAMBIA
Zambia will continue posting positive economic growth in the coming years as the economic gains that the country has achieved have set the stage for future sustained growth, Bank of Zambia (BOZ) governor Caleb Fundanga has said.
"We see the future of Zambia's economy as one which is highly diversified through resuscitating the industrial base to enable increased value addition and employment creation," the bank chief was cited by Sunday's Times of Zambia as saying when he addressed a business forum over the weekend in Ndola, 360 km north of Lusaka.
Fundanga pointed out that Zambia had from 2001 to 2005 posted growth in real gross domestic product (GDP) which had averaged 4.7% per annum. He said the growth had been broad-based, extending beyond the recovery of the mining sector, and last year it was recorded at 5.0%, making it the seventh consecutive year of positive growth.
The bank chief also attributed the growth to the expansion in construction driven by a robust demand for housing as well as large scale investment which led to a pickup in mineral production, particularly copper.
The improved economic confidence following the attainment of the Heavily Indebted Poor Country (HIPC) initiative completion point, which resulted in reduced external debt service obligations as well as increased foreign direct investments, reflected increased market confidence in the economy.
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