GDP UPDATE
November 2006
McIlvaine Company
INDUSTRY ANALYSIS
AMERICAS
U.S.
A slumping housing sector helped slow U.S. economic growth in the third quarter to its weakest pace in more than three years, the Commerce Department reported. Gross domestic product, which measures total economic activity within U.S. borders, expanded at a 1.6 percent annual rate during the third quarter, down from 2.6 percent in the second quarter for the slowest advance since 1.2 percent in the first quarter of 2003.
Third-quarter GDP growth was well below Wall Street analysts' forecasts for a 2.2 percent rate of growth and reflected a range of influences that combined to slow the economy. Most striking was a 17.4 percent annual rate of contraction in spending on new housing - the biggest decline in 15-1/2 years since a 21.7 percent drop in the first quarter of 1991. In addition, business spending on inventories increased only at a $50.7 billion rate, slowing from $53.7 billion in the second quarter, and the volume of imported goods accelerated sharply to a 7.8 percent annual rate of increase in the third quarter, more than three times the second quarter's 1.4 percent increase.
The drag on growth from a rapidly softening housing sector was expected, since other reports have shown prices are weakening for both new and existing homes and builders are offering incentives to try to reduce their inventories of unsold homes. By contrast, the GDP report showed that business investment remained healthy and consumers picked up their spending pace, giving credence to forecasts that the economy retains enough vigor to keep growing at least at a moderate rate. Nonresidential investment, which serves as a proxy for business spending, rose at an 8.6 percent annual rate in the third quarter, close to double the second quarter's 4.4 percent. Consumer spending, which accounts for roughly two-thirds of national economic activity, increased at a 3.1 percent rate, up from 2.6 percent in the second quarter.
CANADA
The Ontario government cut its forecast for 2006 growth in gross domestic product, blaming a weaker U.S. economy and other external factors. The province, Canada's most industrialized, now expects GDP growth of 1.6 percent for 2006, down from the 2.3 percent the government forecast in its March budget.
Ontario's growth "has moderated due to external factors such as a slowdown in the U.S. economy, high oil prices, and a strong Canadian dollar," Greg Sorbara, the finance minister, said in a statement. The United States is the main market for goods manufactured in Ontario.
Ontario's forecast deficit for 2006-07 remains at C$1.95 billion ($1.74 billion). The forecast includes a reserve of C$1 billion, which if not needed will cushion the deficit further.
ASIA
AUSTRALIA
1.) Australia's worst drought in history will subtract 0.7 percentage points from economic growth in the year ended June 30, 2007, the Australian Bureau of Agricultural and Resource Economics said.
The nation may produce 9.5 million metric tons of wheat this harvest, the bureau said in a report, cutting 42 percent from its Sept. 19 forecast of 16.4 million tons. The bureau was previously not scheduled to update its estimate until December.
A drought-causing El Nino event is developing in the tropical Pacific Ocean and is predicted to continue next year. That may cut farm production in Australia, the world's third-biggest wheat exporter, where economic growth has already cooled to the slowest in three years.
``We're now looking at the worst drought in Australia's recorded history,'' said Justin Smirk, senior economist at Westpac Banking Corp. in Sydney. ``Because of rising farm costs from more expensive imports, this could also be the worst rural recession we've seen.''
The Australian economy expanded just 0.3 percent in the three months ended June 30 from the previous quarter as consumer spending slowed and companies depleted stockpiles. The annual growth rate of 1.9 percent was the slowest in five years. Australia's government in May predicted the economy would expand 3.25 percent in the 12 months to June 30, 2007.
Production by farms and related industries account for 12 percent of Australia's gross domestic product, according to the National Farmers Federation. The 2003 El Nino, until now the worst Australia had experienced, slowed the economy by about 1 percentage point, slashed farm exports by 27 percent and drove wheat production to an eight-year low. El Nino events, caused by warming of equatorial waters in the Pacific Ocean, occur every two to seven years and shift normal weather patterns around the world. A new El Nino in Australia would follow below-average rainfall in the first half of the year and the driest August since records began in 1900.
Agricultural shipments account for 20 percent of Australia's exports, and farms occupy almost two-thirds of Australia's landmass, the Farmers Federation estimates.
2.) The drought will have a huge impact on farm income but won't have a significant effect on total national production, Prime Minister John Howard said, adding that the cut in drought income would be offset by other sectors.
"The aggregate impact on our gross domestic product will not be all that great," he said. The drought also would have some impact on prices, Mr. Howard said. "It's already starting to have some impact," he said.
The prime minister also warned that an interest rate rise next month may be necessary to contain a bigger increase in the future. Inflation came in at a higher-than-expected annual rate of 3.9 percent this week, ratcheting up expectations of a rate rise when the Reserve Bank meets next week.
CHINA
China's gross domestic product is expected to rise by 10.2 percent in the fourth quarter, and by 10.5 percent for the whole of 2006, a government think-tank said in a report published in the China Securities Journal.
'With the guidance of macro-tuning measures, China's economy will continue the trend of rapid and steady growth in the fourth quarter. The growth speed will slow down slightly but any significant decline is unlikely', the State Information Center said.
The State Information Center also projects the consumer price index will increase by about 1.6 percent in the current quarter and by 1.4 percent for the full year.
Fixed-asset investment (FAI) is expected to rise over 20 percent in the last quarter of the year, while total nominal FAI should increase about 26.2 percent for the full year, the think tank said. Urban fixed-asset investment for 2006 is seen to grow by about 27 percent from the previous year.
The growth of exports will probably drop significantly in the fourth quarter and in the first quarter of 2007, with a cooling global economy, faster appreciation of the yuan and a reduced export rebate rate, the report said.
In the third quarter, the government's macro controlling measures successfully curbed the 'overheating' seen in parts of the economy, the report said.
It added though that the authorities must strengthen and improve the macro controls, maintaining prudent fiscal policy, and a moderately tight monetary policy in the fourth quarter and even into 2007.
'The authorities should stick to the policy of strict controls on fixed-asset investments, promote domestic consumption, and make more efforts to adjust the structure of exports,' it said.
INDIA
Finance Minister P Chidambaram said that containing inflation was the government's "most immediate goal" and cautioned that some sectors of the economy were showing "signals of overheating".
"Our most immediate goal is keeping inflation moderate at around 4 percent through a mix of fiscal and monetary steps," he said at the bankers' conference.
Inflation, which rose to a four-month high of 5.41 percent for the week ended October 21, was largely on account of rise in prices of primary articles. The RBI's repo rate hike was a signal that the central bank was ready to take monetary steps to check inflation. The government will simultaneously take the necessary fiscal measures to achieve the objective.
"Some sectors such as housing and credit cards are witnessing very high credit growth," he said, adding the banking sector must moderate their lending to such sectors and re-balance their portfolio.
Chidambaram said the economy will post 8 percent growth in FY07. Pointing to the growth of the manufacturing sector, he said India could well become a manufacturing hub like the services sector. "By and large, the outlook for the economy is encouraging," he said.
JAPAN
Japan's real gross domestic product for the July-September quarter appears to have grown by 0.3 percent from the previous quarter, or at an annualized 0.9 percent pace, according to a survey of 15 private-sector research institutions by the Nihon Keizai Shimbun. Because of unstable weather in the summer, consumer spending -- a major pillar of domestic demand -- declined for the first time in seven quarters in the three months to September, but growth in capital spending and brisk net exports more than offset this weakness, the business daily said.
In the three months to June, real GDP grew by 0.2 percent from the previous quarter and at an annualized rate of 1.0 percent.
MACAO
Macao's gross domestic product (GDP) growth rate is expected to stand around 10 percent this year, local media reported. The Macao Post Daily quoted Tam Pak Yuen, Secretary for Economy and Finance, as saying that he is "fully confident" that local economic growth will reach the 10 percent target which was set at the start of the year.
The gross receipts generated by the pillar gaming industry so far this year were "quite good," the policy official told the newspaper. The gaming receipts reached a record 13.54 billion patacas (1.69 billion U.S. dollars) in the third quarter. Tam also predicted that the gaming receipts will accomplish a year-on-year rise of 14 to 15 percent this year.
. MALAYSIA
The Minister in the Prime Minister's Department, Datuk Seri Effendi Norwawi, is confident that the country's Gross Domestic Product (GDP) figures in the second half of this year will be better than those of the first half. His confidence was based on the eventual roll out of 20 high impact projects under the Ninth Malaysia Plan (9MP) and the rise in construction activity in the country.
Malaysia's economic growth grew by 5.5 percent in the first quarter of 2006 and 5.9 percent in the second quarter. Growth in 2005 totaled 5.2 percent.
"There is all round good news in the country. Government revenue has increased of late and the stock market touched its historical highs recently," he said.
UNITED ARAB EMIRATES
Sheikha Lubna Bint Khalid Al Qasimi, Minister of Economy, has anticipated that this year’s Gross Domestic Product (GDP) of the UAE will jump by 23 percent to touch Dh 597 billion at current prices compared to figures recorded in 2005. She estimated that local investment would grow by 24.9 percent to reach Dh 117 billion given the volume of projects under construction around the country, which include roads, airport expansions and other development activities.
The minister said non-oil sectors would continue their growth, thanks to the increasing role both private and public sectors play resulting in a balanced economic performance. She cited telecommunications, tourism, real estate and construction sectors as an example.
She predicted that the country’s commodity exports will surge by 21 percent to reach Dh 514 billion with oil representing 40 percent. Imports will witness a slight rise of 3 percent to reach Dh 306 billion. Citing a statistical report which was issued by the Ministry, Sheikha Lubna said that the oil price windfall helped the economy to flourish again and translated into a budget surplus, the first since the eighties decade.
The GDP grew in 2005 by 8.2 percent to Dh 357 billion, compared with Dh 330 billion in 2004. Driven by a notable growth in manufacturing, trade, transport and telecommunications, non-oil sector’s contribution to the GDP rose to 64 percent to reach Dh 312 billion in 2005, against Dh 263 billion in the previous year.
EUROPE / AFRICA / MIDDLE EAST
CZECH REPUBLIC
The Czech National Bank expects GDP to grow by 5.8-6.6 percent this year, by 4.4-6.6 percent in 2007 and by 3.4-6.4 percent in 2008, CNB governor Zdenek Tuma told reporters.
"The standpoint on economic developments has not changed considerably. The economy still finds itself in a fast growth phase," said Tuma.
The main uncertainties concerning the forecast include a future development of public finances, oil price movements, and the issue of economic growth and the development of interest rates in the euro zone.
The CNB has also revised its inflation estimate up in the long run. It expects inflation at 2.8-4.2 percent in September 2007, the same pace as in June 2007. In March 2008, inflation should reach 3.5-4.9 percent.
LITHUANIA
The Bank of Lithuania forecast that the country's GDP growth will reach 8 percent this year, but will decelerate to 6.7 percent next year. In its medium-term macroeconomic projects, the central bank's analysts predicted that inflation would be 3.9 percent in 2006 and 4 percent in 2007.
Private consumption is forecast to increase by 10.8 percent this year and by 7.5 percent next year. Public sector consumption growth is seen at 4.1 percent this year and 2.4 percent next year. Exports are forecast to grow by 17 percent this year, but slow down to 8.6 percent growth next year. Imports are expected to grow by 15.1 percent this year, slowing to 6.7 percent next year.
Lithuania's foreign trade deficit is projected to reach 8.7 percent of GDP this year, and fall to 6 percent next year. The current and capital account deficit should decrease from 7.1 percent of GDP this year to 4.6 percent next year. The unemployment rate is expected to be 5.7 percent this year and fall to 4.9 percent next year.
NIGERIA
Governor of Nigeria's Central Bank, Charles Soludo, said that Nigeria's gross domestic product (GDP) growth may achieve the target of 8 percent this year. Soludo told a news conference that the country's economy was still on course in view of good performance of its non-oil sectors this year.
Considering the poor state of the economy in the last few years, he said: "we are getting to where we should be."
The governor was optimistic that the country's objective to be among the world's top 20 economies was realistic in the next few years. He said, "The banking sector is now sound and strong after the consolidation exercise and the sector is still expected to achieve much more."
POLAND
Poland's economic growth in the 3rd quarter of 2006 was at some 5.0 percent and will exceed 5.0 percent in the entire 2006, said Polish Economy Minister Piotr Wozniak.
Meanwhile, a report of the Polish economy ministry's analysis and forecast department indicates that economic growth between January and September was at 5.3 percent. The ministry's department attributed the growth to an increase of consumption. Earlier the ministry estimated the 3rd quarter growth at 5.2-5.3 percent and at 5.2 percent in the entire 2006.
RUSSIA
Russia’s GDP is expected to amount to 6.6 or 6.7 percent in 2006, compared to 6.4 percent in 2005, according to the Economic Development and Trade Ministry. Earlier, Russian officials forecast a 6.6 percent GDP rise for this year. A few tenths of percent are needed for the Russian GDP to be rising fast enough to double by 2010 – a major goal that Russian officials has been promoting for a couple of years.
Annual GDP in Russia came to 6.9 percent in the third quarter of the year, compared to the total 6.6 percent last year. The economic ministry was anxious at the beginning of the year when the economy was showing signs of a decline. In the first quarter, however, GDP went up from the annual 5.5 percent to 7.4 percentin the second quarter of the year.
The Economic Development Ministry accounts for the rise with a consumer boom and burgeoning demand on investment. Investments in Russian enterprises added 11.7 percent between January and September. Construction and commerce lead the way in the growth. Writers of the report admit that natural resources exports still remain the main driving force of Russia’s economic well-being. “A further rise in consumer demand and investment secure the growth of Russian economy for short-term outlook. Exceptionally favorable prices on world fuel and raw materials markets will help all institutional sectors of the economy increase their profits,” the report reads.
SWEDEN
The Swedish central bank, the Riksbank, has raised its 2007 GDP growth forecast to 3.1 percent from 2.8 percent, it said in its latest quarterly inflation report. For 2008 and 2009 it expects GDP growth of 2.7 percent and 2.2 percent respectively.
It said GDP growth in Sweden and abroad remained high during the first six months of this year and was stronger than anticipated.
“Growth is also expected to be relatively strong for the remainder of this year and during next year. However, the economy will gradually move into a calmer phase,” it added.
Consumer price inflation is expected to reach 2.2 percent in one year's time, and 1.9 percent in two years, with the UND1X measure of underlying inflation seen at 1.5 percent in one and 1.7 percent in two years' time.
SWITZERLAND
The University of Zurich's Centre for Economic Research (KOF) said its economic barometer, a leading indicator for economic growth, fell to 2.00 points in October from a revised 2.19 in September, signaling that domestic GDP growth will start slowing down early next year. The October figure was at the lower end of economists' forecasts, which ranged from 2.00-2.25 points. The September figure was revised down to 2.19 from a previous 2.32.
“If the barometers lead is taken into account, then GDP growth is still likely to accelerate up to the end of the year, followed by a subsequent slowdown,” the institute said.
ZAMBIA
Zambia's economy was on track to grow by 6 percent in the coming year as a result of a resurgence in mining and agriculture, according to the International Monetary Fund. After its delegation completed a visit to the country, the IMF said Zambia's monetary expansion had been faster than previously projected.
"Inflation, at 8 percent, is at its lowest point in three decades," said the head of the IMF mission Francisco Caramazza. "The renaissance of the copper sector, and extensive debt relief have remarkedly strengthened the economy's prospects," he said.
Under the terms of an IMF debt relief program, Zambia earlier this year saw $3.8bn of the $7.1bn it owed international creditors cancelled. Zambia has attained positive real gross domestic product (GDP) of 5 percent in the last three consecutive years, which the IMF said was very impressive for the country.
"This is expected to rise to 6 percent this year, mainly due to significant expansion in the mining and construction sectors and a strong recovery in agriculture," the IMF said. Zambia's President Levy Mwanawasa, who was re-elected for the second and final term five weeks ago, has won praise from the international community for introducing fiscal discipline in government and reduced corruption.