GDP UPDATE
APRIL 2007
McIlvaine Company
INDUSTRY ANALYSIS
1. AMERICAS
U.S.
The economy grew at a 2.5 percent pace in the final quarter of last year, healthier than first thought but still largely caught up in a spell of sluggishness.
The new reading on gross domestic product, released by the Commerce Department, was an improvement from the prior estimate of a 2.2 percent growth rate for the October-to-December period. However, it marked the third quarter in a row where the economy's growth clocked in at a lethargic 2 percent or better, reflecting the drag of the crumbling housing market on overall business growth.
Many economists expect the GDP will remain mediocre, hovering at around the 2 percent pace in the current January-to-March quarter. Gross domestic product measures the value of all goods and services produced within the United States. Economists were expecting the fourth-quarter GDP figure to be unchanged from the previous 2.2 percent pace.
The small upgrade to fourth-quarter GDP mostly stemmed from businesses investing more to build up their inventories of unsold goods, especially automobiles, than the government previously estimated a month ago.
The 2.5 percent growth rate at the end of the fourth quarter capped a year that started off strong and then hit a hard patch as the strain of the housing slump took its toll, mostly on spending and investment by businesses. Resilient consumers spent modestly, helping the economy to move ahead. In the fourth quarter alone, investment in home building was slashed by 19.8 percent, on an annualized basis, the most in 15 years.
2. ASIA
The main driver of the continued expansion in global apparel consumption and in cotton use has been the unparalleled growth in consumer spending in Asia, led by China and India. In 2007, over 75 percent of China's ever-expanding textile and apparel output will be consumed internally, and that percentage will reach 90 percent in the next five years. China's retail sales are again set to double by mid-2010 at the current growth rate. It is not only China experiencing this growth — India is also going through a retail revolution, with its economy growing just below the rate of China. The remainder of the Asian region is also experiencing a surge in retail activity and consumer spending.
The Asian Development Bank (ADB) has just revised its forecast for 2007 and 2008. It has revised upward its 2007 forecast higher for most of the Asian region and predicted that 2008 growth would continue strong. It cited a continued expansion in consumer spending as one of the driving forces in its forecast. The ADB has forecast total Asia (not including Japan) 2007 economic growth would reach 7.6 percent, which is up from 7.1 percent in its previous forecast. China would continue to lead the region with growth of 10 percent, which is up from its previous forecast of 9.5 percent but down from 10.2 percent in 2006. India and Vietnam would be leaders, outside of China. India's GDP is forecast to grow 8 percent, which is up from its previous forecast of 7.8 percent, and Vietnam's GDP growth would reach 8.3 percent. Strong growth is forecast for the rest of the Asian region, except for Thailand, where GDP expansion is forecast at only 4 percent.
CHINA
Estimates for China's GDP growth for 2007 are being revised upwards, with virtually all major economic indexes in January and February 2007 having exceeded their performance in the same period last year.
Early last month the Chinese government forecast that the country's GDP would grow by about 8 percent this year, after four consecutive years of double-digit growth, including 10.7 percent GDP growth last year, the fastest in a decade.
Analysts say the lower growth was an attempt to shift to slower but quality growth over one driven by large numbers.
Deputy Director of the Institute of Economic Research of the National Development and Reform Commission, Chen Dongqi reported, "GDP growth in the first quarter will be faster than in the equivalent period last year and also that of the previous quarter." The state information center has adjusted its GDP growth forecast for the first quarter from 10.2 percent to about 11 percent.
Despite the government last year adopting a number of tightening measures, economic growth has shown clear signs of rebounding in the past quarter.
Statistics show that urban fixed-asset investment picked up moderately to 23.4 percent year-on-year in January-February, and from about 20 percent in the fourth quarter of last year, reversing the trend of a gradual slowdown since last July.
JAPAN
Japan's economy grew 1.3 percent in October-December from the previous quarter, the government said on Monday, more than an initial estimate of a 1.2 percent expansion.
The revised growth in gross domestic product (GDP) for the final quarter of last year in real, price-adjusted terms matched economists' forecasts. It translates into an annualized expansion of 5.5 percent, compared with a preliminary reading of 4.8 percent growth and economists' median forecast for a revision to a 5.3 percent rise.
MACAO
Macao's gross domestic product (GDP) saw a growth rate of 16.6 percent in 2006, the second highest since the region returned to the Chinese motherland in 1999, according to official statistics. The figures released by the government-run Statistics and Census Service (SCS) showed that the GDP reached a record 114.36 billion patacas (14.30 billion U.S. dollars) in 2006.
The SCS attributes the GDP hike mainly to the "open policy" implemented by the central government to help promote Macao's economic development.
"The mainland's individual visit program and the gradual appreciation of the yuan brought to Macao a huge influx of visitors, helping the region's tourism industry gain strong impetus," a statement issued by the SCS said.
Meanwhile, the region's pillar gaming industry saw a 22 percent rise in its receipts in 2006, also contributing largely to the GDP growth, said the statement.
THAILAND
In response to discouraging economic indicators, the University of Thai Chamber of Commerce Economic and Business Forecasting Centre expects to lower its GDP growth target. UTTC Director Thanawat Phonvichai urged the government to stimulate domestic consumption through the mass media in order to reverse the slowdown.
Indicators pointing to continued economic slowdown, according to Dr. Thanawat, include the consumer confidence index, which hit a five-year low, and the Thai Industry Sentiment Index (TISI—compiled by the Federation of Thai Industries), which fell below the 'normal' level for the 10th consecutive month, among other indexes, including those released by the Bank of Thailand.
In response, the UTTC expects on April 19 to issue a downward revision of its gross domestic product (GDP) growth target from the 4-4.5 percent set earlier.
Currently, according to Dr. Thanawat, the Thai confidence crisis continues even as purchase orders for industrial products from abroad are expected to drop sharply in the second quarter. The expected continued appreciation of the baht would further affect revenue in dollar terms. He projected that the GDP would bottom out and then begin to pick up in the third quarter of this year and expects the Bank of Thailand to cut the policy interest rate in a bid to stimulate third quarter product trading. It is expected that the short-term repurchase rate would drop by one percentage point for the year.
The UTTC also projects a sharp second-quarter drop in spending on luxury goods such as vehicles, housing units, and health-care as well as on industrial goods, due to the consumption slowdown. To stimulate spending, Dr. Thanawat urges the government to accelerate efforts to boost consumption through all available media, such as television, radio and the newspapers.
3. EUROPE / AFRICA / MIDDLE EAST
AFRICAN CONTINENT
The United Nations Economic Commission for Africa (UNECA), highlighted Angola as the second best-performing African country in terms of economic results in 2006, with gross domestic product (GDP) growth of around 17.6 percent.
According to a document from UNECA on the ‘development of the economic and social situation of Africa,” obtained by Angolan news agency, Angop, amongst ten African countries with the best results in 2006, Angola was placed second after Mauritania.
As indicators of the improved performance of the Angolan economy the document pointed to macroeconomic stability, the rise in value of its national currency (kwanza) and, as a consequence of this, a rise in foreign direct investment (FDI) in several of the country’s economic sectors. However, despite the improved performance of sectors of the Angolan economy such as agriculture, fishing, and civil engineering, the oil sector continued to be the main “lever” of the country’s GDP, with a contribution of around 57 percent.
Africa as a whole, saw GDP growth of 5.7 percent in 2006, against 5.3 percent in 2005 and 5.2 percent in 2004. In general, 26 countries saw significant economic growth over the last three years, said the UNECA document. The ten countries with best results in 2006 were, in decreasing order, Mauritania, Angola, Mozambique, Sudan, Ethiopia, Libya, Liberia, the Democratic Republic of Congo, Congo Brazzaville and Malawi. The worst performing African economy was Zimbabwe which in 2006 posted negative growth of 4.4 percent.
BULGARIA
Bulgaria's economy grew by a real 6.1 percent last year, a touch slower than the 6.2 percent gross domestic product (GDP) reported in 2005, according to revised figures made public by the country's statistics board NSI. Bulgarian officials earlier estimated that the country's economy would grow by 6.5 percent in 2006.
CIS
In January-February 2007, GDP grew 9 percent on average in the CIS against the same period in 2006, the CIS intergovernmental statistics committee said.
According to Azerbaijan's Today.Az news agency, Azerbaijan is the unquestioned front-runner with a 41.7 percent rise, with Armenia in the second position far behind it with 9.2 percent. Belarus's GDP grew 9 percent, Tajikistan's 4.6 percent, Russia's 8.8 percent, Ukraine's 8.6 percent and Kyrgyzstan's 3.6 percent.
No GDP growth data is yet available for Georgia and Kazakhstan for 2007, while in 2006 GDP went up 9.4 percent in Georgia, and 10.6 percent in Kazakhstan.
CYPRUS
The Economist Intelligence Unit (EIU) have revised down Cyprus’ growth forecast for 2007 to 3.4 percent (from 3.6 percent previously) and to 3.6 percent in 2008 (from 3.8 percent), primarily owing to quarterly growth in the fourth quarter, which was slower than expected. GDP growth is expected to average around 3.6 percent in 2007-11, with a slight acceleration in 2008-09, after euro area accession. Inflation will remain moderate, although it will be higher than in the euro area. The current-account deficit will remain substantial, but financing problems are not expected.
Cyprus's score in the EIU’s business environment rankings improves in the forecast period (2007-11), but as improvements in other countries are more substantial, its relative position will deteriorate in the global rankings. Cyprus's main attraction for foreign investors is the low-tax environment and the proximity to Middle Eastern markets, combined with regulatory reliability, underwritten by the EU. The main drawbacks are the small size of the domestic market and the high labor costs relative to eastern Europe. The uncertainty resulting from the division of the island also cuts off the large potential market of Turkey, but the risk of conflict remains small.
DUBAI
Dubai announced a nine-year economic plan that will fuel an 11 percent annual growth in GDP to US$108 billion by 2015 from the current US$37.4 billion.
The Dubai Strategic Plan (DSP) 2015, outlined by Sheikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, would translate into a 41 percent growth in per capita GDP to US$44,000 by 2015 from US$31,140 now by creating 882,000 new jobs and bring the total employment to 1.73 million. At the announcement of the Dubai Strategic Plan Sheikh Mohammed said, "The impossible does not exist in the (UAE's) dictionary." And the way the rapid strides Dubai has made in the field of economic development one have to agree with him.
The Vision 2010 was announced in 2000. By 2005, Dubai had achieved what was planned to be achieved by 2010. Vision 2010 was very much orientated towards developing the economy and all that is related to it to entice investment from abroad and encourage local industry to receive the benefits of the burgeoning financial infrastructure. "In the year 2000, the plan was to increase GNP to US$30 billion by 2010. In 2005, that figure was exceeded, with GNP reaching US$37 billion," he said.
"The plan also included an increase in income per capita to US$23,000 by the year 2010. In 2005, the average income per capita reached US$31,000. In other words, we realized, in five years, economic achievements went beyond those which were planned for a 10-year period.
"Over the last few years, economic restructuring has been another very important achievement. In 2005, the non-oil sector played a major role, contributing 95 per cent to GDP, as compared to 90 per cent in 2000, and approximately 46 per cent in 1975. The services sector was the driving force behind Dubai's economic growth, contributing 74 percent of GNP, mirroring the economies of the developed world," he said.
Now, DSP, set to maintain double-digit economic growth, achieve a GDP of US$108 billion and increase real per capita GDP to US$44,000 by 2015, embraces a far wider dimension, reaching into the livelihood and social condition of all residents, be they Emiratis or expatriates.
The most significant aspect of the DSP launched under the theme "Dubai Where The Future Begins", is that five areas have been identified whereby change is inevitable and ultimately will be made to accord with the times and targets for the future. These are: economic development; social development; infrastructure, land and environment; safety, security and justice; and public sector excellence.
The plan sets out a strategic approach that focuses on developing Dubai's most dynamic economic sectors that have been the key contributors to Dubai's annual real GDP growth rate of 13 percent since 2000.
"The plan encompasses many new attributes, with a foundation firmly built on quantitative achievements which form a solid base for sustained growth in the era of the knowledge economy. The plan will not be affected by oil price fluctuations. Dubai has succeeded in diversifying its sources of income, and reducing its dependence on oil, so that today, oil's contribution to GNP is a mere three per cent," Sheikh Mohammed said.
"We have come a long way towards achieving the objectives of an economy independent of oil. Indeed we have exceeded all expectations and predictions."
FRANCE
French gross domestic product was revised up in both the third and fourth quarters of 2006, according to data from Insee, the French statistics office.
GDP growth in the fourth quarter was revised up to 0.7 percent from a previous estimate of 0.6 percent, while growth in the third quarter was revised up to 0.1 percent from 0.0 percent. GDP growth in 2006 as a whole was 2.1 percent compared with 1.2 percent in 2005.
HUNGARY
Hungary's GDP growth will slow to 3.0 percent in 2007 from 3.9 percent in 2006, according to the latest macroeconomic outlook by economic research company GKI jointly with Erste Bank.
GKI expects the inflation rate to peak close to 9 percent in the Q1 of 2007, after which it will gradually fall for the rest of the year to give Hungary average annual inflation of 6.5 percent. The National Bank of Hungary will probably start cutting rates in the second quarter already, reducing the base rate to 6.00-6.50 percent by year-end, GKI said. GKI projects real wages will fall 3.0-3.5 percent in 2007. Hungary's current-account deficit in 2006 was much better than expected, GKI noted, narrowing 800 million from 2005. FDI in Hungary fell, however, although Hungarian investments abroad rose. Driven by exports, industrial production continued to grow in January at about the same rate as in 2006 - around 10 percent. Energy production fell 3.5 percent because of the mild winter weather, but production in the building materials sector jumped 60 percent. Building sector output fell, however, 3 percent in volume terms, albeit from a high base.
Both Hungary's exports and imports rose about 20 percent in January compared to the same month a year earlier, but imports rose slightly faster than exports, unlike recent years. GKI expects exports to increase 13 percent for the whole year and imports to rise 10 percent. It projects Hungary's terms of trade will stop deteriorating. Gross wages rose 7.1 percent in January from the same month in 2006, and net wages were up 0.9 percent. Real wages fell 6.4 percent. The gap between gross and net wages widened as did the difference between public and private sector wage growth, which were 5.6 percent and 10.4 percent, respectively, in January. January data reflect, however, several one-off factors, GKI said. It projected net wages will rise 3 percent for the full year.
ITALY
Italy's Institute for Economic Studies and Analysis (ISAE) upped its 2007 GDP growth forecast from 1.3 percent to 1.8 percent, in line with recent moves by other major agencies and the Italian government itself.
According to local media reports, the ISAE also lowered its forecast for the deficit/GDP ratio, a key part of the European Union's financial framework, from 2.7 percent to 2.3 percent. The revisions came after the government adjusted these forecasts from 1.3 percent to 2 percent and from 2.7 percent to 2.3 percent ten days ago.
Like the government, the ISAE said its new figures reflected recent unexpectedly large tax revenues. It said Italy's finances appeared to be back under control but warned against loosening the Treasury's purse strings.
Italy has been reporting stronger economic growth and increased tax returns recently, prompting international bodies to call for cuts in its debt mountain, the third-highest in the world.
JORDAN
A senior official at Jordan's Statistics Department said that the country's gross domestic product (GDP) has grown by 6.4 percent last year compared to 2005, in spite of the political and economical obstacles in the Middle East region, Arab News reported. The official, who was addressing a press conference in Amman, indicated that Jordan's internal and foreign debt's share of the GDP has shrunk from 83.5 percent in 2005 to 72.7 percent last year, as the government has been following strict measures to reduce costs.
According to the latest monthly bulletin of the Central Bank of Jordan, the country's external debts value stood at $7.2 billion, while the internal public debt amounted $4 billion at the end of 2006.
MONACO
The government of Monaco has for the first time publicly announced figures relating to the size of the Principality's gross domestic product.
As part of the series of monthly conferences with the press, the government said last week that it has calculated Monaco's GDP to stand at EUR3.4 billion (US$4.5 billion), or a little under EUR50,000 per capita.
The data, announced by Gilles Tonelli, Government Counsellor for Finance and the Economy, was obtained by consulting group, Mazars, with the help of the Department of Economic Expansion that conducted a survey, in June 2006, of all economic agents in the Principality.
The government hopes that by this time next year, it will also have announced figures relating to gross national income. Revenue of workers who are non-residents of the Principality will be excluded from these figures.
In calculating its GDP value, the authorities had to take into account both non-resident workers (31,386 French and 3,566 Italians), which make up 80 percent of the territory's workforce, as well as resident employees (34,021).
The government opted for a formula based on four fundamental figures: the total cost of remuneration (EUR759.8 million), EBITDA (earnings before interest, taxes, depreciation and amortization, EUR1.4 billion) and tax (EUR428.5 million), from which the amount of grants is deducted (EUR156.7 million).
The GDP calculation initiative has been undertaken to follow through on a commitment by Prince Albert II to contribute 0.7 percent of the Principality's GDP to the United Nations' Millennium for Development project. It will also enable Monaco to calculate its compulsory contributions to international organizations, while giving the Principality economic evaluation and indication tools comparable to those of other countries.
The lack of a structure for the collection of income declarations or national accounts statistics, in addition to economic boundaries that are hard to define has meant the Principality has hitherto not been able to calculate its own GDP.
POLAND
Poland's economy will likely expand by 6 percent in 2007, Deputy Finance Minister Katarzyna Zajdel-Kurowska said recently.
"At the moment, there are chances for 6 percent growth," Zajdel-Kurowska said. "There are solid foundations; the European environment is very strong. Will it be 7 percent? We'll see. It would be premature optimism."
Forecasts of Poland's GDP growth have been steadily on the up with most analysts now expecting first-quarter growth in the region of 7 percent. That figure has also been bandied about by officials at both the economy and finance ministries, Zajdel-Kurowska included.
As recently as the third quarter of last year, when the convergence program was submitted to the European Commission, the government assumed growth in the region of 5 percent in 2007.
"It seems now that 5 percent [assumed in the convergence program] is an extremely pessimistic assumption," Zajdel-Kurowska said.
ROMANIA
Annual inflation is expected to slow to 4.3 percent from 4.87 percent last year, the commission said. For 2008, it predicted that GDP growth would slow to 6.3 percent, with inflation of 3.5 percent. Romania, which joined the European Union on January 1, has enjoyed rapid growth since 2001, after years of recessions and restructuring of heavy industries in the 1990s.
SLOVENIA
The central bank projects that the Slovenian economy will expand by 4.6 percent this year, slowing down to 4.4 percent in 2008 and 4 percent in 2009. Inflation is to amount to 2.7 percent this year and next, and 2.6 percent in 2009, according to the report on price stability which Banka Slovenije unveiled in March.
"The basic scenario indicates a continuation of the favorable economic climate. There are risks, which however can be prevented or mitigated with a reasonable combination of economic policies and timely action," Banka Slovenije Governor Mitja Gaspari told the press. According to Gaspari, supply-side shocks such as labor costs, oil prices, excise duties and administered prices are the main factors which could affect gross domestic product (GDP) growth in the coming years.
"These elements can have a relatively strong impact on changes to what we believe is a good basic scenario," Gaspari added.
The biggest uncertainty is the price of oil: if it increases by 5 US dollars per barrel on average, it would push inflation higher by 0.5 percentage points at the initial stage. There is also a "moderate probability" of deviation from the basic scenario for labor costs and effects of fiscal policy on prices, said Gaspari.
"This has to do with uncertainty over hikes in excise duties, administered prices and value added tax (VAT). The government is saying it will not raise VAT, but it leaves the option open in the 2008 budget."
A hike in excise duty combined with a VAT increase would contribute 0.7 percentage points to inflation the year that it is raised, he said. According to Gaspari, free prices will have a bigger impact on inflation trends and administered prices a smaller impact than they used to.
SWITZERLAND
The University of Zurich's Centre for Economic Research (KOF) said it has hiked its GDP forecasts to 2.4 percent, up from 2.1 percent for 2007, and to 3.5 percent from 1.5 percent in 2008.
'GDP growth will temporarily fall in the second and third quarters. But, towards the end of the year the quarterly growth rates will have already returned to figures above 2 percent and remain there until the end of the forecast horizon,' Kof said.
The institute added that it expects consumer price inflation to fall to 0.3 percent this year with a 'slightly higher rate' expected for 2008.
On interest rates, KOF forecast a further hike of 25 basis points by the third quarter of 2007. The target value for the three-month Libor will then be 2.5 per cent.
TURKEY
Official figures released recently showed that Turkey's real GDP growth reached 6.1 percent in 2006, well above the 5 percent forecast for the fifth year since the devastating financial crisis of 2001.
"The cumulative rate of real GDP growth reached 40 percent in the past five years, marking it as the longest stretch of uninterrupted growth in Turkey's history," Bloomberg news agency quoted Serhan Cevik, an economist at London-based Morgan Stanley, as saying in a note to investors.
A report published by the Turkish Statistical Institute showed that GDP growth for the fourth quarter last year was 5.2 percent year on year, much higher than an earlier projection of 4.3 percent for the last three months of 2006 and 0.4 percent higher than the 4.8 percent rise in the third quarter.
Turkey's gross national product (GNP) -- the total wealth earned or brought into existence in a particular year by a country -- rose by 6 percent in 2006, to stand at almost $400 billion.
Describing Turkey's macroeconomic performance since 2001 as "impressive," an IMF statement attributed it to political stability, structural reforms, and favorable external conditions. "In particular, improvements in the bank supervisory framework, tax reform, and privatization have strengthened the banking system, promoted foreign direct investment, and enhanced productivity."
A move by the Turkish Central Bank last spring to raise its overnight lending rates by 4.25 percentage points to 17.5 percent in response to a major outflow of capital from emerging markets in May and June fuelled expectations for a contraction in the latter half of 2006. But that did not materialize and the economy continued to grow.
"Everybody was expecting a contraction in the second half of last year after the crisis, but that didn't happen," Cevik said. "There has been a significant decoupling of financial volatility and economic performance in Turkey, which is part of being a normal economy."
However, the higher costs of borrowing have brought about a slowdown in consumer spending. A 24 percent increase in consumer credits in the three months preceding the rate increase was followed by a sharp decline, with banks posting an only 3 percent rise in the third quarter of last year. This was followed by a rebound in the final quarter, when total outstanding loans to consumers increased by 6.5 percent.
The fiscal discipline pursued by the government has translated into a reduction of the net public debt stock to 44.8 percent of GDP in 2006, the Turkish daily Zaman quoted Economy Minister Ali Babacan as saying at a press conference in Ankara. The public debt to GDP ratio for the previous year was 51 percent, down from 91 percent in 2001. Babacan also noted that the national income per capita grew from $2,598 in 2002 to $5,477 last year. As a result of a significant improvement in income distribution, only 0.01 percent of Turkey's population now lives on less than $1 a day, the minister said.
Prime Minister Recep Tayyip Erdogan, who is also the leader of the ruling Justice and Development Party (AKP), has promised to boost per capita national income to $10,000 by the end of the next five-year period.
"A secure and stable environment allowed for historic jumps in terms of figures in Turkey," a report Monday by the Turkish Press quoted Erdogan as saying. "Foreign investments exceeded $10 billion as of March, which shows that Turkey has become a promising economy for not only domestic investors but also for international ones who trust the economy's stability and resilience."
UNITED KINGDOM
Britain's economy did not grow as quickly as had been estimated in the final quarter of 2006. UK GDP fourth-quarter growth was 0.7 percent, 0.1 percent less than previous estimates, according to figures from the Office for National Statistics (ONS). This meant total GDP growth in 2006 reached 2.8 percent, driven by consumer spending.
Richard Snook of the Centre for Economics and Business Research (Cebr) believes that the 0.1 percent slip is bad news for Chancellor Gordon Brown, who was relying on the 2.8 percent figures to ensure his growth predictions for 2007 are met.
"This downward revision will make Brown's hugely optimistic growth forecasts even more difficult to achieve," Mr Snook said.
He explained that the lack of stronger growth in the final quarter meant the next three quarters would begin from a lower-than-anticipated base, making Mr Brown's 2.75-3.25 percent growth predictions unlikely.
Howard Archer of research firm Global Insight suggested that additional factors meant consumer spending would struggle in 2007, further dampening expectations for the UK's performance this year.
"We believe that the upside for consumer spending will be limited by significant headwinds including higher interest rates, relatively moderate real earnings growth, an increasing tax burden and rising debt levels," he said, adding that a strong pound would continue to damage exports in the manufacturing sector.
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