GDP UPDATE
September 2006
McIlvaine Company
INDUSTRY ANALYSIS
1. AMERICAS
U.S.
The Commerce Department said the economy as measured by the GDP grew at a 2.9 percent annual rate in the second quarter, better than first estimated last month but still a decline from the first quarter. Investors are scrutinizing economic reports to determine if the economy is slowing too fast, a trend that could hurt both consumer and corporate spending. So a slight improvement in the GDP was a welcome sign for investors.
BRAZIL
Brazil's economic growth slowed sharply in the second quarter against the first quarter, weighed down by a decline in industrial output and a fall in the export sector, the government said.
Gross domestic product, the value of all goods and services produced within the country's borders, grew 0.5 percent from the first quarter, slowing down from a revised 1.3 percent expansion in the first three months of the year. The government statistics agency IGBE added that Brazil's GDP grew also 1.2 percent from the second quarter of 2005, slowing sharply from the 3.3 percent revised first-quarter growth rate compared with a year earlier.
Weighing down the economy was a 0.3 percent contraction in the industrial sector in the second quarter from the first quarter and a 5.1 percent slump in export production, also against the first quarter the IBGE said. It was the first quarterly decline for exports after 12 consecutive quarters of expansion.
Latin America's largest economy was projected to have grown 0.8 percent in the second quarter from the previous quarter, according to the median forecast of 19 economists surveyed by Reuters. The GDP growth figure came in at the lowest end of the forecasts, which ranged from 0.5 percent to a 1.4 percent increase in GDP.
The economy was expected to have expanded 2.1 percent from the second quarter of 2005, according to the survey.
CANADA
Canada's gross domestic product rose at an annualized rate of 2.0 percent in the second quarter of 2006, a sharp slowdown from the 3.6 percent economic growth in the first quarter. Economists had expected second quarter growth to come in at about 2.3 percent.
Statistics Canada said the lower growth reflected reduced growth in consumer spending and business investment, and a cooling of the housing market. Statscan reported that Canadian economic activity in June was “essentially unchanged” from May, as the production of goods declined, offsetting gains in service industries. The economy grew by 0.2 percent in April, and 0.1 percent in May. That put the overall growth in the second quarter at 0.5 percent, compared to 0.9 percent in the first quarter.
The service industry was the big winner in the second quarter, with strong growth in retail businesses, wholesale trade, finance, insurance and real estate. Goods producing industries were far weaker, with slowdowns in manufacturing, mining, and oil and gas extraction. Utilities showed some growth.
Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said in a report that most of the details in the GDP release are on the “soft side” of expectations. “This should fully cement the view that the Bank of Canada will be content to bide its time on the policy front over the rest of 2006,” he said.
Despite the sub-par results for second quarter, “the underlying trend in GDP growth remains quite steady at around 3 percent, in line with the Bank of Canada's view of potential growth,” Mr. Porter said.
David Tulk, an economist at Toronto-Dominion Bank, said the GDP numbers show that most of the weakness in the Canadian economy can be traced to the trade sector, as exports declined and imports increased sharply.
MEXICO
Mexican Finance Minister Francisco Gil Diaz Wednesday said the economy should grow around 4.2 percent this year. Gil, who had previously predicted a growth rate above 4 percent, noted that some private forecasts are above that level.
"The rate of economic activity this year has been accompanied by important increases in job creation," said Gil, noting that industrial production and exports have driven the better-than-expected economic growth. Gross domestic product grew 3 percent in 2005.
The government has predicted that more than 1 million jobs would be created this year. President Vicente Fox estimated a growth rate of between 4.5 percent and 5 percent for 2006. Gil noted that some private estimates are within that range. "But we won't know until the end of the year," he said.
2. ASIA
CHINA
China's statistics bureau revised upward the country's 2005 Gross Domestic Product growth to 10.2 percent from 9.9 percent, reflecting faster expansion in industry and services than first reported. The National Bureau of Statistics said on its Web site (www.stats.gov.cn) that the agriculture and fisheries sector grew by 5.2 percent last year, industry by 11.7 percent and the service sector by 10.0 percent.
It had originally reported that the three sectors grew last year by 5.2 percent, 11.4 percent and 9.6 percent, respectively. The revised figure made 2005 the third consecutive year in which China's economy grew by at least 10 per cent. It expanded by 10.0 percent in 2003 and 10.1 percent in 2004. That activity has only accelerated this year, with annual GDP growth hitting 10.3 percent in the first quarter and 11.3 percent in the second.
Authorities have introduced a raft of monetary and administrative tightening measures in recent months to try to slow the economy, especially investment that it fears could aggravate imbalances in the world's fourth largest economy.
It said that based on the revisions, agriculture and fisheries accounted for 12.6 percent of overall output in 2005, while industry made up 47.5 percent and services 39.9 percent.
INDIA
India's economic growth is expected to stay well above 8 percent in the fiscal year to March 2007 on the back of robust expansion in manufacturing, a lobby group said. "With the manufacturing sector achieving its 10-year peak performance of 11.2 percent in the first quarter of the current fiscal and services showing a booming performance, overall GDP growth will remain well above the 8 percent mark in 2006-07," the Associated Chambers of Commerce and Industry (ASSOCHAM) said.
The economy is estimated to have expanded by 8.4 percent in 2005/06.
The ASSOCHAM survey of 270 chief executives said concerns on high crude prices and rising global interest rates do bother industry leaders who have lined up huge investments for capacity expansion to meet growing domestic and export demand. However, it said the growing pace of consumer demand and the investment requirements would more than make up for the hiccups generated by higher interest rates and rising energy prices.
Part of the optimism for maintaining growth of more than 8 percent comes from vibrant performance in the external sector helping merchandise as well as services exports maintain a good performance, it said.
The survey said CEOs want interest rates to remain steady in the coming months for India to attain high economic growth.
MALAYSIA
The country's gross domestic product (GDP) growth this year is expected to be better than last year's 5.3 percent amid strong domestic and external demand in the second half of the year, said Deputy Finance Minister Datuk Awang Adek Hussin.
GDP grew 5.4 percent in the first half on the back of high private demand and private investments and strong contributions from the manufacturing, services and agriculture sectors, he said at the opening of the National Mergers and Acquisitions Conference 2006.
PHILIPPINES
Economists polled by XFN-Asia expect annual gross domestic product during the three month period up to June to have grown by an average of 5.4 percent with forecasts ranging from 5.0 to 5.8 percent.
The economy expanded by 5.5 percent in the first quarter and the government is expecting the second quarter growth to come in between 5.3 percent and 5.8 percent.
“I think agriculture will provide stronger contribution to overall growth. The remittances also remained strong and supportive of domestic consumption, said Singapore-based economist Song Seng Wun of CIMB-GK Research who gave the most bullish growth forecast of 5.8 percent.
Farm output grew to 6.41 percent in the second quarter which is the fastest pace since 2004 as favorable weather boosted rice and corn harvests, according to data released by the department of agriculture.
Filipinos working abroad sent home $1.1 billion in June, up by 18.1 percent year-on-year, bringing remittances in the first half to a record 6.0-billion dollars or 15.4 percent more than a year earlier, the central bank said. There are more than 8-million Filipinos or about a tenth of the population who decided to work in foreign countries because of low wages at home.
Increase government spending on infrastructure in preparation for next year’s elections will boost growth, offsetting the negative impact of high oil prices on the economy, said Jonathan Ravelas, market strategist of Banco de Oro Universal bank who added that Philippine economy likely grew 5.25 – 5.50 percent in April to June from a year ago and is on track to sustain this pace of expansion for the rest of the year.
Dennis Arroyo, director for planning and policy of the National Economic Development Authority said that growth in exports this year would likely exceed the government’s target of 10 percent given an upbeat outlook for global semiconductor demand in the second half, which comprises the bulk of Manila’s shipments.
SOUTH KOREA
Korea’s Gross Domestic Product was recorded at $787.5 billion last year, making the country the world’s 12th largest economy. It is one step down from the year earlier. The country’s economic growth rate also came down from fifth place in 2004 to seventh among 30 member nations of the Organization for Economic Cooperation and Development. The rate was 4.7 percent in 2004 and 4.0 percent in 2005.
The National Statistical Office released a set of data called, “A Statistical Glance at Korea in the World”. According to the new data, Korea’s GDP last year fell behind that of Brazil, which reached 796.1 billion dollars, ranking 12th among 94 countries surveyed. Brazil had ranked 15th in 2004.
Korea’s GDP in 2005 is a sixteenth of that of the U.S, which ranks first, and a sixth of that of Japan, which comes second. The U.S. recorded 12.487 trillion dollars and Japan recorded 4.559 trillion dollars of GDP.
The growth rate of Korea’s consumer price index in 2005 was 2.7 percent, down by 0.9 percent from 3.6 percent in 2004. The figure is roughly the average of OECD members, which stood at 2.6 percent. The index was -0.3 percent in Japan, continuing their minus growth since 1999.
THAILAND
Finance Ministry said it expects lower economic growth in 2007, mainly because of expected delays in government disbursements, before improving in the following years. The ministry expects economic growth of 3.5 to 4.5 percent next year, compared with 4.0-5.0 percent forecasted for this year.
Thailand's gross domestic product (GDP) is expected to grow 5-6 percent in 2008 and 2009 as government spending and private investment recover, Naris Chaiyasuth, director general of the ministry's Fiscal Policy Office said.
According to Naris, continuing strong export growth should support GDP growth this year despite adverse impacts from the political instability which affected consumption and investment.
3. EUROPE / AFRICA / MIDDLE EAST
DENMARK
The Ministry of Finance raised its 2006 gross domestic product growth forecast to 2.7 percent from 2.6 percent previously, and to 2.0 percent for 2007 from 1.9 percent previously in its Economic Review on the Danish economy. The ministry said the upturn in the Danish economy has, in some areas, been stronger than anticipated in the May report.
Private employment has increased sharply and the decline in unemployment has, contrary to expectations, continued with undiminished strength in recent months. Registered unemployment has fallen by 62,000 since the peak in December, 2003 and is now roughly 125,000 people, or 4.25 percent of the work force, which is the lowest level in over 30 years, said the ministry.
For 2006, the number of jobless is now forecast at 127,000, falling to 120,000 for 2007. These numbers compare with the previous forecast of 131,000 and 125,000 respectively.
Demand has also continued to increase strongly, driven, among other things, by the rise in exports and private consumption. The ministry raised its private consumption growth forecast to 3.1 percent for 2006 from 2.5 percent previously, and to 2.0 percent for 2007 from 1.8 percent previously.
The declining growth in private consumption in 2007 should be seen in the light of rising interest rates and slowing growth in house prices. Consumer prices are still seen at 2.0 percent for this year and 1.8 percent for 2007.
Growth in exports is forecast at 6.5 percent for 2006 and 3.4 percent for 2007. Imports are expected to grow by 10.3 percent this year and by 3.8 percent next year.
GERMANY
German economic think-tank Institut fuer Weltwirtschaft (IfW) has raised its forecast for German 2006 GDP growth to 2.4 percent from its previous forecast of 2.1 percent, but reduced the estimate for 2007. The IfW, one of Germany's six leading economic research institutions, said it now expects GDP growth of 1.0 percent next year in real terms, down from its earlier forecast of 1.2 percent.
IRELAND
The country should see GDP growth of 5.5 percent this year with a similar rate of growth anticipated for 2007. That is according to AIB Global Treasury, which says the outlook beyond 2007 is not as gloomy as is often predicted. However, it warns that there is a risk from domestically induced wage inflation which is potentially damaging to the country's longer term economic prospects. It also says a slow down in productivity growth is now a real concern.
In its August Irish Economic Update, chief economist John Beggs says his research team is forecasting that GDP will continue at the same 5.5 percent rate in 2007. Inflation will run at 3.6 percent next year compared to the anticipated 4 percent for 2006.
The research finds that the housing market is well underpinned by solid demand stemming from demographic and employment related drivers with a high level of house completions in 2007. 'We expect new house completions of around 90,000 in 2006 and 85,000 in 2007,' the report says. 'However, the leveling off in hew housing output is likely to be offset by strong increases in public capital spending and sustained growth in non-residential private sector construction output.' However he said that there will be a 'material' slow down in house price inflation from this autumn.
In relation to International Monetary Fund concerns about the economy's over reliance on construction activity at the expense of competitiveness, the bank says there is limited value in making comparison between the state of investment in Irish GDP with that in more infrastructurally developed economies. It says Ireland's infrastructure is not sufficiently developed in many areas to make us sufficiently competitive in international markets.
LEBANON
The Lebanese economy could go into recession in 2006 because of the damage done by the recent Israeli offensive and its ongoing air and naval blockade of the country, Lebanon's Finance Minister Jihad Azour has warned. Azour added, however, that there could be a quick economic turn-around should current circumstances improve. "Yes, there is a risk of negative growth but there is also a chance of a recovery in growth if the blockade is lifted quickly," he said.
In the meantime, there is no agreement by economists and aid agencies on how much Lebanon's economy has suffered as a result of the war. The Lebanese Council for Development and Reconstruction (CDR) has said that Lebanon sustained some US $3.6 billion in material losses from Israeli bombings during the conflict.
This includes more than 15,000 destroyed houses and up to 80 severely damaged bridges and roads. CDR's estimate does not include indirect damage such as lost revenues and stalled foreign investments.
Economist Mazen Soueid said that the Lebanese economy could lose US $9.5 billion in total, or 40 percent of the country's GDP, as a result of reduced economic activity and the ongoing Israeli blockade. This loss would include about US $3 billion in tourism receipts, some US $200 million in lost export revenue, as well as about US $700,000 million in lost tax revenue. At best, the country would register zero economic growth instead of the 6 percent growth projected for 2006, said Soueid.
The much higher figure of US $15 billion has been cited by the UN Development Programme (UNDP) for Lebanon's direct and indirect losses as a result of the conflict. "The damage is such that the last 15 years of work on reconstruction and rehabilitation, following the previous problems [the 1975-1990 civil war] that Lebanon experienced, are now annihilated," UNDP spokesperson Jean Fabre said.
Israel says its continued air and sea blockade is aimed at preventing Hezbollah from re-arming, although it has been granting permission to aid-bearing ships to dock at Lebanon's ports.
The London-based Economist Intelligence Unit warned that Lebanon's 2006 Gross Domestic Product (GDP) would be about 10 percent less than original projections. This would mean that Lebanon's national debt of US $38.5 billion would be the equivalent to more than 200 percent of the country's GDP.
According to Azour, however, "it is too early to say whether [Lebanon's] GDP would shrink by 10 percent".
While the airport is set to reopen fully soon, it is not clear how long it will take for the necessary conditions to be in place before Israel lifts its naval blockade. Though UN agencies say that immediate humanitarian needs are generally being met now in Lebanon, a receding economy poses many problems for the long-term health of the country.
"In the larger scheme of the Lebanese economy, humanitarian assistance is a small input and targets the most vulnerable," said David Shearer, UN Humanitarian Coordinator in Beirut. "Overall, if the naval blockade continues, then the whole of Lebanon becomes more and more vulnerable."
LITHUANIA
Lithuania's gross domestic product grew by 8.4 percent year-on-year in the second quarter to reach 20.481 bln litas (6.04 bln eur), reported BNS news wire citing a revised estimate from the Statistics Department.
The second-quarter GDP and GDP growth figures were revised up from previous estimates of 20.281 bln litas and 7.7 percent, respectively.
POLAND
Warsaw-European Union newcomer Poland saw better-than-expected economic growth in the second quarter of 2006, as the Central Statistical Office (GUS) reported the gross domestic product (GDP) expanded by 5.5 percent. This year's second quarter figure compares favorably to 2005 when the GUS tallied only 2.9 percent growth in GDP.
Poland's first-quarter GDP growth was 5.2 percent. In early August, the Economy Ministry had reported a GDP growth of 5.2 percent in the first half of 2006.
International financial analysts Merrill Lynch also recently predicted Poland could expect GDP growth in excess of 7 percent in the medium term.
Poland was the largest of 10 mostly ex-communist states that joined the European Union in May 2004. Analysts concur that foreign direct investment (FDI) combined with the influx of EU subsidies have invigorated economic growth in Poland and most other EU newcomers.
ROMANIA
Romania’s National Commission for Prognosis has announced a higher economic growth for the second quarter of 2006 that might exceed the 6.9 percent GDP growth posted in the first quarter of the current year, the Romanian Rompres news agency reported. According to the commission, the higher economic growth in the second quarter might raise the GDP to over 7 percent for the first semester of the current year.
The industrial output grew in the first six months by 6.7 percent, in real terms, compared to the same period a year ago. The turnover of the companies dealing in trade was by 16.5 percent higher than in the same period in 2005.
The construction sector kept on posting growth of 16.4 percent by the end of June against 2005, in terms of the volume of the construction works.
The annual inflation rate dropped to post-1990 historic lows, at 6.2 percent in July on the background of reduced foodstuff prices thanks to an agricultural year with no negative events.
According to the commission, the unemployment rate continued to fall down to 5.1 percent at the end of July, after a historic low of 5.5 percent recorded in May.
The Romanians' net pay went up by 7.5 percent in real terms, compared to 2005, with the most significant rises being in education and health care. Such increases are backed by a 10.7 percent rise in industrial productivity over the same period.
The foreign investments expanded by 50 percent in the first six months compared to the same period a year ago. There were 125,199 foreign-owned commercial companies registered in the trade registry at the end of the first half-year.
The combined value of the exports went up by 20.3 percent in the first six months, the increase being accompanied by the improved structure in favor of high complexity products.
The increase in the exports of capital goods, fuels and lubricants was higher than the imports for these categories, and it was only the imports of consumer goods that were more dynamic than exports. As a result, the trade gap is 5.807 billion euros (about 7.325 billion U.S. dollars), 313 million euros lower than the estimated level for this period.
RUSSIA
Russia's GDP growth of 5.5 percent in the first quarter of 2006 was the highest among the Group of Eight leading industrialized nations for the period, the country's statistics service said. The Federal State Statistics Service, citing figures from the International Monetary Fund, the Organization for Economic Cooperation and Development and data from other national statistics services, said real year-on-year GDP growth in Russia during the first quarter reached 5.5 percent, compared to 3.7 percent, 3.4 percent and 3.3 percent in the United States, Japan and Canada, respectively. The rate was 2.3 percent in Great Britain, 1.7 percent in Germany, and 1.5 percent in France and Italy.
However, Russia's GDP still falls well behind other G8 economies. IMF preliminary estimates based on first quarter performance put Russia's GDP for 2006 at $900 billion, compared to $13.2 trillion for the U.S., $4.42 trillion for Japan, $2.75 trillion for Germany, $2.23 trillion for Great Britain, $2.10 trillion for France, $1.75 trillion for Italy, and $1.26 trillion for Canada.
Russia's consumer spending grew 10.7 percent during the first quarter, the highest level among G8 nations. Industrial production climbed 4.4 percent during the first six months of the year, putting Russia in second place behind Germany, with 4.8 percent.
SPAIN
GDP grew a final 0.9 percent in the second quarter from the first and was up 3.7 percent from a year earlier, the National Statistics Institute (INE) said. The month-on-month increase was in line with the provisional data released on Aug 14, while the year-on-year figure was revised upwards from an initial 3.6 percent rise.
In the first quarter, GDP expanded at an annual rate of 3.5 percent.
In a statement, INE said domestic demand contributed 4.8 percentage points to GDP growth in the second quarter, compared to 5 percentage points in the first, while the negative contribution from the external sector was 1.1 percentage points compared with 1.4.
Employment grew at an annual rate of 3.1 percent, implying annual net job creation of 555 full-time posts. Average unit labor costs rose 2.6 percent in the second quarter from a year earlier to stand at almost one and a half percentage points below the GDP deflator, INE said.
INE said gross fixed capital formation rose 6.1 percent in the second quarter from a year earlier, compared with the revised 6.3 percent in the first, mainly as a result of a slowdown in the rate of investment in construction, up 5.7 percent in the second quarter compared with a 5.8 percent rise in the first. Investment in capital goods 'maintained its robust trend,' however, increasing 9.1 percent in the second quarter compared with a revised 8.6 percent rise in the first.
Exports of goods and services registered a sharp slowdown in the second quarter from the first, posting a 5.3 percent rise compared with a revised 9.5 percent increase in the first, while imports of goods and services were up 7.9 percent compared to 12.4 percent, INE said.
UKRAINE
Ukraine hopes to double the country's gross domestic product within 10 years, Finance Minister Mykola Azarov said. "Doubling GDP is a guiding policy for us," Azarov said, referring to the new government's 10-year program.
A new government led by Prime Minister Viktor Yanukovych recently came into power, promising to develop the country's economy. Azarov said the plans call for industrial, financial and social reforms aimed at improving living standards.
"Reforms never can be done fast. But I am sure we will cope with this task," said Azarov, who is also first deputy prime minister.
The economy slumped after President Viktor Yushchenko took office in 2005, but it has begun to turn around. GDP growth was running at an annual rate of 5.0 percent over the first six months of the year; in July it was 7.7 percent above the same month in 2005. Ukraine's GDP growth plunged from 12 percent in 2004 to 2 percent in 2005, blamed in part on attempts to re-negotiate privatization deal -- a move that scared off foreign investors.