GDP UPDATE
August 2007
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
ASIA
Chinese central bank said it would put the task of preventing the national economy from overheating as the top priority of current macro control. The country's economy has recorded a stable and fast growth in the first half, and it is highly possible it would maintain a high growth rate in the second half under the favorable conditions, said the People's Bank of China in its second-quarter monetary report.
However, it pointed out there was a more obvious trend for the economy to shift from fast growth to overheating. The expanding trade surplus and rapid growth of bank loans and investment remained big challenges to the economy, it said.
China's GDP expanded 11.9 percent in the second quarter this year, lifting first-half growth to 11.5 percent, the National Bureau of Statistics announced in July.
The central bank said it would continue to implement the prudent monetary policy in the second half and would call into necessary macro control measures to maintain the stability of the country's financial situation. It also pledged to take measures to control the inflationary expectations and maintain the price stability, according to the report. The bank said it would continue to address the excessive liquidity with open market operations and reserve requirement ratio and also with the creation of more hedging instruments.
The central bank would let the market supply and demand play a bigger role in determining the yuan exchange rate and make it more flexible while maintaining the stability of the currency's exchange rate at a reasonable and balanced level, said the report.
The yen should gain in value over time as Japan gradually lifts interest rates, the International Monetary Fund said as it raised its forecast for the country's economic growth this year. IMF "directors felt that the yen could be expected to appreciate over time, supported by policy reforms to boost domestic demand," it said in a statement.
In a regular assessment of the country's economic health, the IMF raised its forecast for Japanese growth in 2007 to 2.6 percent from the 2.3 percent pace it had estimated in April, while judging inflation would stay flat.
The IMF also said Japanese monetary policy was still appropriately accommodative, given very muted inflation risks, but it expected interest rates would rise.
"With no signs of worrisome financial imbalances, a return to a neutral monetary stance should proceed in tandem with inflation prospects," it said.
Malaysia’s young population, investments in human capital development and trade openness will drive its economy to sustain a 5.5 percent gross domestic product (GDP) growth up to 2020.
Deutsche Bank group chief economist Prof Norbert Walter said Malaysia’s stable political climate and orientation towards improving education were also positive factors driving this growth.
“The large number of young workers is important to build a knowledge-based economy.
“This is further enhanced by the government and private sector’s recognition that life-long learning is vital to develop human capital,” he told a media briefing on Wednesday.
Walter also said Malaysia’s discipline of allocating a “considerable” part of income for investment and not consumption was beneficial to the country’s growth in the long term. Walter, who is also Deutsche Bank Research managing director, said the country was expected to face a slowdown this year but would get back on track to higher growth. He sees Malaysia’s GDP growth reaching 6 percent next year.
“The growth is compounded with giants like India, which are performing better than expected, in Malaysia’s vicinity.
“Having co-operations or venturing into these markets will be enough of a compensating factor to get Malaysia back into higher growth rates,” he said.
Walter said economies needed skilled labor, not just cheap labor, to sustain growth.
Singapore's GDP grew at a better-than-expected rate of 7.6 percent year-on-year in the first half, Prime Minister Lee Hsien Loong said in his National Day address.
'Economic growth in the first half of this year was 7.6 percent, higher than we had expected,' Lee said.
The government had increased its 2007 GDP growth forecast to 7-8 percent from 5-7 percent previously. Lee said the outlook remains favorable despite the volatility in global markets in recent days.
'The medium term fundamentals for Asia remain strong,' Lee said.
'It has been ten years since the Asian financial crisis. Asia has progressed, and become more developed and dynamic. China and India are powering ahead, and Japan's economy has revived,' Lee said.
Lee said Singapore's growth will be underpinned by several new projects that are underway, including the integrated resorts and the new banking and financial center on Marina Bay.
EUROPE / AFRICA / MIDDLE EAST
Greece’s economy grew at an annual 4.2 percent rate in the second quarter after a 4.6 percent pace in the first three months of the year, the country’s finance minister said recently.
“Growth is high and in the second quarter it should be 4.2 percent,” Finance Minister George Alogoskoufis told reporters.
“With growth of 4.6 percent in the first quarter and 4.2 percent in the second, economic expansion in the first half averages out at 4.4 percent,” Alogoskoufis said.
Economic growth is likely to top a previous 3.9 percent government forecast for 2007 with the budget deficit expected to shrink to 2.4 percent of GDP, without taking into account a 25 percent upward GDP revision that is awaiting clearance by Eurostat in Brussels.
The Gulf economies are expected to grow at a slower pace in 2007 as the growth rates of their real gross domestic product (GDP) are slowing, according to medium-term forecasts by Standard Chartered Bank.
The GDPs of the UAE and Qatar are expected to witness real growth rates of 8.5 percent and 8.0 percent, respectively, compared to 9.7 percent and 8.8 percent in 2006.
Kuwait's GDP growth is forecast to drop from 5.0 percent in 2006 to 3.2 percent this year, while Bahrain's economy will be growing at 6.8 percent this year compared to 7.7 percent last year.
According to the revised projections, Oman's economy will slow down by almost 1.0 percent from 5.9 percent to 5.0 percent in 2007.
While the surging oil prices are keeping the nominal GDP high, inflation is taking its toll on the real growth.
Earlier this year, the International Monetary Fund said in a report that Gulf growth rates are expected to slow down.
It is not expected to have any major impact on the region's economic activity because of the huge fiscal surpluses the Gulf Countries have built over the past few years due to the high oil prices.
While the oil prices are being supported by resilience of the global economy, Standard Chartered's report on the region said the growth outlook for the Gulf is bright.
"The higher than expected oil prices clearly support GCC economic activity in two ways. First, it has a direct impact on GDP via increasing value of the region's oil exports. Second, it increases the governments' confidence in future fiscal surpluses which can then be reinvested more aggressively in the region's diversification projects," said Steve Brice, an economist with Standard Chartered.
Along with the economic growth, the region has witnessed mounting inflationary pressure during the past 18 months.
With inflation becoming more widespread around the GCC, the Standard Chartered report observes that the lack of policy tools to combat price rise is worsening the situation.
Although a shortage in housing units and consequent rent rises have been the major components of inflation, the report suggests that there is growing evidence of the role of imported inflation in the form of rising prices of imported items such as food and clothing, which calls for currency reforms.
"Inflation is becoming more of a concern and there may be a perceived need to do something about it ... and the perceived costs of moving away from the dollar pegs have fallen markedly this year," Brice said referring to the ease with which Kuwait moved away from dinar's peg to the dollar.
"With central banks in the region increasingly concerned about the level of inflation, irrespective of its actual causes, then the temptations to look for ways to mitigate it must be increasing," he added
Gross domestic product in Lithuania grew 8.1 percent over the first six months of the year, slightly beating analysts’ expectations. According to the statistics department, growth was led by gains in construction, wholesale and retail, real estate and communications sectors. In nominal terms, GDP amounted to 43.5 billion litas (€12.5 billion), the department said.
Analysts are predicting that full year economic expansion will amount to 8 percent, which contrasts to the red-hot, double-digit growth economies of Estonia and Latvia. As a result, the latter two are particularly susceptible to an overheating and subsequently a hard-landing scenario.
“Domestic consumption, which continues to grow on the back of strong consumer expectations, accounts for a large part of GDP. Services export growth is also good, [as well as] industrial export figures, apart from difficulties at Mazeikiu Nafta,” Rimantas Rudzkis, chief analyst with DnB Nord Bankas, told the Baltic News Service.
Regarding the second half of the year, he said, “The fundamental factors are unlikely to change very much. However, we cannot rule out the possibility of slower growth given the first reports of falling real estate prices from neighboring Latvia and Estonia.”
Lithuania’s economy has shown itself to be more robust than analysts thought at the beginning of the year. Last month Hansabank was forced to revise its forecast from 7 to 8 percent for annual GDP growth.
“This year Lithuania’s economic growth will remain robust, underpinned by growing consumption and a very rapid expansion of sectors that provide for domestic needs,” said Tomas Andrejauskas, head of the bank’s financial services department.
But there was a warning flag up as well, he added. “Unfortunately, as a result of intense business expansion and out-migration, there is a workforce shortage in many business areas already,” he said. “That has created favorable conditions for excess growth of prices and wages.”
In a recent report, Hansabank said that the Baltic economies are on different cycles, with Estonia and Latvia’s slowing down while Lithuania’s expands. As a result, their rates of growth could come close to converging in 2008.
On the downside, inflation is also picking up in Lithuania. In June the annual rate reached 5 percent, far over the level allowed by the Maastricht treaty used for adopting the euro. Inflation has been fueled by construction prices, which soared 1.6 percent in June alone and 14.3 percent over the year as of the end of June.
The Russian GDP Indicator pointed to the weakest rate of economic growth in Russia for over two years in July, VTB Bank Europe said in a recently released report. The indicator registered 6.2 percent growth in July compared with 6.3 percent in June.
"The Russian GDP Indicator softened for the ninth consecutive month in July, suggesting the weakest rate of economic growth for two years…However, looking further ahead the all-industry index points to a broad-based acceleration in private sector output, suggesting a strengthening in the GDP Indicator over the coming months," said Chris Green, senior economist at VTB Bank Europe Research.
The all-industry index picked up further from 57.6 in June to 58.2 in July, VTB Bank Europe said. That was the highest level since January and pointed to a rate of output growth that was above-trend, suggesting a strengthening in the GDP Indicator in the coming months.
The latest data from VTB Bank Europe's surveys of the Russian manufacturing and service sectors signaled a broad-based acceleration in private sector output growth at the start of the third quarter, VTB Bank Europe said. Services continued to post a slightly stronger rate of expansion. Activity growth was underpinned by slightly sharper increases in new business and employment in both sectors, the bank added.
The all-industry index is a composite index designed to provide a snapshot of the health of the economy. A reading above 50.0 signals expansion in the sector compared with the previous month, while a reading below 50.0 signals a contraction.
The Bank of Spain said it sees GDP growing 4.0 percent in the second quarter from a year earlier, rising 0.8 percent quarter-on-quarter.
In a statement, the central bank said initial evidence points to Spanish economic growth maintaining a rate close to the 4.1 percent seen in the first quarter 'with possibly slightly less dynamism.'
According to Fitch Ratings, 'Tunisia continues to enjoy good and stable growth with low inflation and modest current account and budget deficits. The country also benefited from a number of positive developments in 2006, in particular the sale of a minority stake in the national telecom company, Tunisie Telecom, which allowed the state to speed up public and external debt reduction. International liquidity indicators also improved markedly, as a result of large foreign currency inflows,' Fitch said.
Fiscal performance was better than expected, with a budget deficit of 3.1 percent of GDP, and GDP growth accelerated to 5.4 percent from 4.2 percent in 2005, driven by sustained growth in manufacturing and services. The banking sector also showed some improvement, with reduced non-performing loans and improved profitability.
However, economic growth averaging over 5 percent over the last four years has not been sufficient to reduce unemployment, which remained over 14 percent in 2006, the agency added. It continued that only a small fall can be expected in the short- to medium-term, as Tunisia continues a gradual process of economic reform.
The Bank of England said worsening credit conditions may pose a downside risk to GDP growth, adding that it will monitor the situation closely.
Alongside its inflation forecast, the Bank of England (BoE) predicted that GDP growth will moderate to its long-term average of about 2.5 percent over the coming two years as private and public spending, as well as business investment slow down.
Specifically, it reckons that the annual rate of GDP growth will ease from just below 3.0 percent at present to just below 2.5 percent in two years time.
The BoE also indicated that second quarter GDP, provisionally estimated at a quarterly 0.8 percent, may be revised up given robust business surveys and the pattern of revisions before. It also said that surveys point to firm growth in the third quarter this year, though it conceded that the recent flooding across the UK may have a 'modest adverse impact'. The BoE said risks to growth are balanced.
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