GDP
UPDATE
McIlvaine Company
May 2006
INDUSTRY ANALYSIS
1. AMERICAS
U.S.
The Commerce Department announced today that GDP grew at a 4.8 percent annual rate in the first quarter. This confirmed the consensus forecast, which was also 4.8 percent. This remarkable pace was partially catch up from the 1.7 percent growth posted in the fourth quarter but also reflected fundamental shifts in the sources of demand. Business investment is increasingly the engine pulling the economy forward.
Consumption continued to grow solidly, expanding at a 5.5 percent annual pace in the first quarter; however, investment in equipment and software jumped 16.4 percent and nonresidential construction expanded 8.6 percent. The residential sector continued to cool, with housing construction expanding 2.6 percent in the first quarter after growing only 2.8 percent in the fourth quarter.
With consumers saddled with debt and bearing higher gas prices, business investment in equipment and software and commercial construction will power the expansion going forward or the economy will falter.
The trade deficit continues to drag on the economy. With crude oil prices soaring and China investing in new export capacity at a breakneck pace, the trade deficit will continue to pull down U.S. growth. Without a devaluation of the dollar against the Chinese yuan, U.S. growth will slow significantly in the second half of this year.
CANADA
Canada's economy grew 0.2 percent in February, led by a rebound in utilities as well as strong wholesale sales, construction and finance, according to Statistics Canada data on Friday.
The February month-on-month growth in gross domestic product matched forecasts by analysts in a Reuters survey, and it matched January's 0.2 percent growth rate. February GDP was 3.3 percent above the level in February 2005. Statscan said February's month-on-month growth was helped by a 5.1 percent surge in electric power generation and transmission and a 4.6 percent climb in natural gas distribution.
The energy sector jumped 1.1 percent in February following a 3.0 percent decline in January due to mild weather. As in January, wholesale trade also fueled growth, with sales concentrated in computers, electronics, office equipment and motor vehicles.
However, a rebound in car manufacturing was insufficient to prevent a decline of 0.4 percent in manufacturing output in February, the agency said. Mining and oil and gas extraction also slowed growth.
Robust stock markets also meant the financial sector was a key component of growth in February for the third time in the last four months, Statscan said.
"Beneath this calm surface, the economy is churning mightily below, with wide divergence among sectors," said Doug Porter, economist with BMO Nesbitt Burns, in a note to clients.
Porter said the uneven numbers from different industries was evidence of a bigger trend in the economy caused by the strong Canadian dollar and interest rates that are still relatively low.
In the Bank of Canada’s monetary policy report, it forecast Canadian growth of 3.2 percent in the first quarter and 3.0 percent in 2006.
2.
ASIA
AUSTRALIA
Economic growth is expected to pick up this year to around 3.0 percent from 2.5 percent last year, while inflation is expected to remain under control, according to the International Monetary Fund (IMF). The organization, in its latest economic outlook for the Asian and Pacific region, said Australian economic growth this year will be driven by domestic demand.
The IMF said business investment is expected to expand rapidly as firms alleviate bottlenecks in the wake of a commodity price boom started by China's demand for raw materials. But it said that private consumption is likely to remain subdued as a result of a flat housing market and high gasoline prices.
The organisation said inflation was limited to 2.75 percent last year, and it expects inflation to stay around this level this year, or within the Reserve Bank of Australia's 2-3 percent target range.
The IMF said prices have been under pressure from rising energy costs and a tightening labor market, in which the unemployment rate of 5.00 percent is the lowest in about three decades.
CHINA
China's economy is expected to grow at an annual rate of at least 8 percent this year, with consumption, investment and foreign trade maintaining their pep.
The prediction was made in the spring edition of the report on China's foreign trade, which was publicized by the Ministry of Commerce at the ongoing Chinese Export Commodity Fair held in Guangzhou, capital of South China's Guangdong Province..
The report said last year China realized 18.23 trillion yuan (US$2.27 trillion ) in gross domestic product, or GDP, up 9.9 percent over the previous year.
In the first quarter of this year, the GDP stood at 4,331 billion yuan (US$534 billion), up 10.2 percent year on year, the report said.
INDIA
The pockets of Indian citizens are going to deepen as per capita income in the country is slated to double to US$1,200 per annum in the next four years, if industry chamber Assocham's statistics are anything to go by.
The increase in per capita income would result from doubling up of GDP to 1,100 billion dollars from the current 550 billion dollars owing to an increase in the efficiency of the system. The projected efficiency enhancement will translate into a 35 per cent rise in GDP-investment ratio.
India's existing labor laws, transport system and irrigation pattern are inadequate and restrain GDP performance by 2 percent, the study said, adding that in the next 4-5 years Indian ports, agriculture and irrigation patterns will witness extensive modernization, the study on Future's GDP Projections said.
India has the potential to attract $50 billion FDI in the next five years. Current FDI flows into India are 0.8 per cent of GDP, it said.
It estimated that the opening of all modern sectors of India's economy to well-regulated competition and lifting certain restrictions will increase FDI by at least 1.6 per cent of GDP within the next five years.
Productivity growth and increased investment could create more than 50 million new jobs outside agriculture in the next five years. While employment in the modern sectors would increase by around 28 million jobs, the same in transitional sectors will grow by around 22 million new jobs, it said.
JAPAN
Japan's economic growth likely broke sharply in the first three months of 2006 after a brisk pace in the previous quarter, though the slowdown may well be temporary, a preliminary Reuters survey showed.
The January-March gross domestic product (GDP) data, due out on May 19, will likely show the economy grew at a real 1.2 percent pace on an annualized basis from the previous quarter's 5.4 percent, according to the survey's median forecast.
Forecasts in the snap poll of seven economists were unusually wide-ranging with growth estimates ranging from 0.1 percent to 2.1 percent. Reuters plans a larger poll when more economists produce their forecasts in the coming week or two.
Private-sector consumption growth ground to a halt after a big increase in October-December, though most economists expected a recovery trend to remain intact, helping GDP growth to rebound in the April-June quarter.
"In the GDP stats, January-March private sector consumption is likely to be weak, but given the improvements in employment and wages and consumption-related data other than the household survey, the underlying recovery is probably intact," said Taro Saito, senior economist at NLI Research Institute.
The monthly household spending data, a component of initial GDP estimates, is notoriously volatile due to its relatively small sample base. Some economists expect a weak consumption reading in the initial GDP report to be revised higher later on.
The forecast first quarter slowdown and second quarter pick-up in Japan's GDP resemble a slowdown in fourth quarter U.S. growth to 1.7 percent and a first quarter rebound in that country to 4.8 percent -- the fastest expansion in 2-½ years.
PHILIPPINES
The Bangko Sentral ng Pilipinas (BSP) said private-sector economists have forecasted higher inflation and modest economic growth in 2006 and 2007. In a BSP survey, private economists have improved its inflation forecast for 2006 to 7.1 percent from 7.2 percent on expectations of stable international oil prices and continued strength of the peso exchange rate. However, their projection is lower than the BSP’s inflation forecast of 7.3 percent to 7.9 percent this year.
For 2006, the private-sector economists expect a 5 percent growth in the Philippines’ gross domestic product (GDP). Although an improvement from their prior forecast of 4.8 percent, the economists’ projection is still below the government’s target of 5.7 percent to 6.3 percent.
Analysts cited improved investor confidence in the fiscal performance, additional room for government spending on key areas such as infrastructure and continued strength in the service sector and recovery of agriculture output as bases for their higher output growth forecast.
But again, for 2007, the private-sector economists expect the country to post a significantly lower GDP growth of 4.9 percent than the government’s assumption of 6.1 percent to 6.5 percent. However, their inflation forecast for the year, has eased slightly to 5.8 percent from the prior forecast of 5.9 percent, higher than the government’s assumption of 4 percent to 5 percent.
BSP said inflation risks relate to continued increase in oil prices and its impact on food supply and power rates. High oil prices would lower the country’s GDP growth as this would lead to lower consumption of goods, consumption spending being the main driver of the Philippines’ GDP growth. However, some analysts paid little attention to the inflationary impact of the reformed value-added tax (RVAT) as manufacturers continue to absorb the burden of higher input costs. Others, however, pointed to the inflation risks that global crude oil prices and La Niña may impose on food prices.
In its inflation forecast, BSP has factored the wont of Filipino workers to march and seek higher wages on Labor Day. However, it dismissed a wage increase of 8 percent and 5 percent in 2006 and 2007, respectively, as "not inflationary." BSP Deputy Governor Diwa C. Guinigundo had said a wage increase requires serious study and needs congressional action. Also, an increase in labor productivity is inflationary..
THAILAND
The Kasikorn Research Center (KRC) has projected that the Thai economy during the first trimester of this year will expand by 5.3 percent as forecasted by the Bank of Thailand. The central bank has predicted that the national economy will expand more than the 4th trimester of 2005, which was 4.7 percent. The KRC stated that the figures of production in the industrial, agricultural and services sectors, especially the ones relating to tourism businesses, have expanded considerable in comparison to the previous trimester.
Regarding the economic situation last month, the research center stated that public spending and investment of private sectors were hit by the fuel crisis. It is expected that the inflation will increase to 6 percent.
The KRC indicated that the adjustment of interest rates and the instable political situation might affect the confidence of private sector. The strengthening of Thai baht value will have impact on Thai exports as well.
3. EUROPE / AFRICA / MIDDLE EAST
ISRAEL
The International Monetary Fund (IMF) published its bi-annual global forecast indicating that the rate of economic growth in Israel during 2006-2007 will be substantially higher than that of most developed countries in Europe & in North America.
The IMF global forecast says that Israel’s real GDP in 2006 and 2007 will reach 4.2 percent. This figure is an increase on the IMF’s earlier estimate of real GDP being 3.9 percent.
According to the global forecast Israel’s economic prospects look much brighter than those of many other developed countries. The forecast expects that the average real GDP growth rate for all the developed economies in Europe, North America and Asia will reach 3 percent in 2006 and 2.8 percent in 2007.
The average growth forecast in 2006 for the members of the Euro block is 2 percent and 1.9 percent in 2007, while the US will reach real GDP growth of 3.4 percent in 2006 and 3.3 percent growth in 2007.
The IMF forecast also noted that: Inflation in Israel will reach 2.4 percent in 2006 and 2 percent in 2007. Unemployment in Israel will continue to fall, reaching 8.5 percent in 2006 and 8.2 percent in 2007.
POLAND
A report by the Conference Board, a research company, has found that Poland's productivity growth accelerated by 7.7 percent last year, second to China and much higher than the rich economies of Western Europe or the US. It calculated that gross domestic product per hour worked was $19.90 for Polish workers, outpacing the $19.40 for South Korea.
RUSSIA
Russia's GDP growth in March stood at 5.4 percent year-on-year and 4.4 percent in the first quarter of 2006, a senior official of the economics ministry said Friday. Andrei Klepach also said GDP growth month-on-month was 1.4 percent with no account for seasonal factors.
"This is good growth. It is linked with the increase of manufacturing output and investments in the construction after a standstill in January and February," he said.
The official forecast of GDP growth for 2006 is 6 percent.
TUNISIA
Tunisia wants annual economic growth to accelerate to 6.3 percent in the coming ten years from 5.0 percent over the past decade to help reduce double digit unemployment, Prime Minister Mohamed Ghannouchi said.
“Achievement of an economic growth rate of 6.3 percent over the next decade is absolutely essential to reduce the unemployment rate,” Ghannouchi said in a statement dated April 29. A strong private sector expansion based on new information technology and development of the services sector would bolster the economy and reduce the jobless rate to 10.3 percent by 2016 from an official rate of 13.9 percent currently, the statement said.
Services account for 20 percent of Tunisia’s gross domestic product. The government expects that to rise to 35 percent for the period ahead due to its strong growth potential and ability to absorb a growing number of job seekers.
The North African country has pledged to create 100,000 jobs yearly from 2007 to 2016. Over the past 10 years, Tunisia’s economy has become less dependent on the volatile farming sector and opened up to foreign investors. Foreign investment has created an average of 260,000 jobs over the past decade, with about 80 percent of those in labor-intensive businesses such as food processing, textiles and automobile assembly.
UNITED KINGDOM
The British economy grew strongly at the start of the year, buoyed by a surprise expansion in manufacturing, according to official statistics. First estimates of first-quarter gross domestic product from the Office for National Statistics revealed growth of 0.6 percent. That pushed the annual rate of GDP growth up to 2.2 percent from 1.8 percent in 2005.
Manufacturing output benefited from increased oil and gas output, growing 0.5 percent overall over the three months. The sector recorded a 1.1 percent drop in the final quarter of last year. The rise meant that the manufacturing sector was growing almost as quickly as the services industry, which has been the main driver of growth in recent years. The services sector grew 0.6 percent over the quarter.
Standard Chartered economist Gavin Redknap said the data was in line with the Bank of England's expectations for growth and would not significantly affect its inclination to keep interest rates on hold.
"We will see lower rates later in the year, but for now, with the economy growing at about trend and in a balanced manner, there are few reasons for policy to be altered in either direction," he said.
ZAMBIA
Zambia's economic growth is projected to edge higher this year fuelled by growth in copper production, tourism and financial services. According to figures obtained from the treasury, real Gross Domestic Product, (GDP) would expand by 6 percent in 2006 from 5.4 percent last year.
Finance Minister Ng’andu Magande has indicated that debt relief to Zambia by global lenders has helped the government expand spending on infrastructure as it tried to get more children to school and construct hospitals in remote rural districts. Magande said Zambia’s fiscal policy had won the hearts of donors and would lead to the country receiving millions of dollars in development grants, after the bulk of its foreign debt, which was estimated at US$7.1 billion last year is cancelled.
“Prospects are looking very good for our economy. Our aim is to lower inflation to a single digit and stabilize the exchange rate,” Magande said. And treasury data shows that annual inflation declined to 15.9 percent last December from 17.5 percent in the same month in 2004.
Tourist numbers jumped 26 percent last year to 650 000 and could rise further in 2006 as mainly European and American visitors opted for Zambia’s side of the fabled Victoria Falls, a gem shared with Zimbabwe, which is facing economic decay and political instability. Analysts claim that Zimbabwe’s problems are Zambia’s gain.
“The political problems in Zimbabwe created an opportunity for Zambia to boost its tourism,” CitiBank Zambia treasury head, Ignatius Chicha said.
“Tourism now ranks as one of the areas of economic growth,” Chicha said. He also expected a huge jump in agricultural production due to a surplus expected in maize and other crops.
Copper production is expected to expand to 600,000 tons in 2006 from 466,799 tons last year. “Copper mining will do very well after the recapitalization in most mines last year,” Chicha said.
Chicha said he sees construction weighing in on growth citing Zesco’s plans to construct two power plants at a cost of $1.2 billion and a project to build 5 000 new urban homes in Zambia with cash from the US government.
Analysts say Zambia must launch a second wave of economic reforms in order to tap into foreign direct investment and grow the economy faster. An official from the International Monetary Fund has said that Zambia needs to do more to help the private sector thrive, and maintain transparency and efficiency in management of public resources to inspire foreign investment.
McIlvaine Company,
Northfield, IL 60093-2743
Tel: 847-784-0012; Fax: 847-784-0061;
E-mail: editor@mcilvainecompany.com;
Web site: www.mcilvainecompany.com