GDP UPDATE
December 2007
McIlvaine Company
Table of Contents
AMERICAS
Merrill Lynch economists now believe the U.S. economy will contract slightly in the fourth quarter, registering the first decline in output since 2001. David Rosenberg, the firm's chief economist for North America, said in a research note U.S. gross domestic product will shrink 0.1 percent next quarter, following the third quarter's surprisingly robust growth of nearly 5 percent.
"Investors need to be aware that an outright decline in GDP this quarter is a very real possibility," Rosenberg said. "Contractions have a way of feeding on themselves since the reality of declining activity can cause producers to throttle back on production even further in the months ahead," he said.
On Monday another big Wall Street firm, Morgan Stanley, said the U.S. economy is likely headed for a recession, pulled down by tightening in credit markets that is curbing business spending.
Brazil's economy expanded in the third quarter at the fastest pace in more than three years, stoking speculation that the central bank may keep borrowing costs unchanged for most of 2008 to cap inflation.
Gross domestic product rose 5.7 percent in the third quarter, compared with a revised 5.6 percent increase in the second quarter, the government said. The expansion was above the median 4.9 percent forecast in a Bloomberg survey of 37 analysts.
Growth in Latin America's biggest economy is surging as record low interest rates power consumer spending. A jump in investment spending by companies may not add output capacity fast enough to prevent a rise in prices, prompting the central bank to keep rates on hold, said Nuno Camara, a senior economist for Dresdner Kleinwort Group.
``Investment was very strong, which will make the investor more confident about the sustainability of growth,'' Camara said in an interview from Sao Paulo. ``But more investment means bigger aggregate demand, which is another sign the central bank should keep a cautious scenario.''
Latin America's biggest economy expanded 1.7 percent from the previous quarter, faster than the revised 1.3 percent pace in the second quarter, according to the Rio de Janeiro-based statistics agency.
In the four quarters ended Sept. 30, the economy grew 5.2 percent from 4.9 percent in the same period ended in June, the biggest accumulated annual growth rate since the end of 2004.
Ecuador's economy will probably post its smallest growth in eight years in 2007 after disruptions in oil production caused output to tumble, Economy Minister Fausto Ortiz said.
Gross domestic product may grow less than 2.5 percent, Ortiz said at a news conference in Quito. That would be the slowest expansion since Ecuador's $40.9 billion economy contracted 6.3 percent in 1999 as the country's currency collapsed, leading the government to adopt the U.S. dollar.
``The improvements we've been making in recovering oil output haven't allowed us to outweigh the drop in production,'' said Ortiz. ``That's dragging down gross domestic product growth.''
Growth won't meet the central bank's most recent estimate from August, when it said growth would slow 3.4 percent this year, down from 4.1 percent in 2006, as a result of political and management disruptions in the oil industry. From January through October, oil output fell 6 percent to 154.33 million barrels from 164.33 million barrels in the same period last year.
With private and public-sector oil output recovering, GDP growth next year will probably top the 4.2 percent rate estimated in the 2008 budget, he added.
``The fear we had regarding private sector production has faded,'' Ortiz said.
The previous administration stripped U.S. oil company Occidental Petroleum of its concession, where that company produced some 100,000 barrels a day.
State oil company PetroEcuador, which inherited the fields, initially lacked the resources to manage them and only this month pushed daily output back to the levels reached by Occidental, Ortiz said.
Unrest in Ecuador's part of the Amazon basin, where it produces most of its oil, has also undermined output, and President Rafeal Correa on Nov. 29 decreed an emergency over much of that area as well as over PetroEcuador in a bid to avoid further attacks on the company. Correa's 11-month old administration has now resolved most of the issues affecting the oil industry, though it had some start-up problems to solve, said Ortiz.
Ecuador, the smallest member of the Organization of Petroleum Exporting Countries, averaged oil output of 509,000 barrels of oil a day from January through October. By the end of 2008, the government aims to push oil output to some 520,000 barrels a day.
ASIA
The Hong Kong economy is likely to remain strong in 2008 - albeit with GDP growth slowing to 5.0 percent from the 6.1 percent forecast for this year - with buoyant domestic demand likely to help offset a softer external sector, Hang Seng Bank said. Hong Kong's economy is estimated to have expanded at a strong pace of 6.1 percent in the first three quarters of 2007, boosted by better-than-expected consumption spending, Hang Seng Bank said in its 2008 economic outlook report. With strong growth recorded in the first three quarters, the economy is well on track to achieve full-year growth of 6.1 percent in 2007, the report said.
Looking ahead, domestic demand, in particular private consumption, is expected to continue to display strength and will remain the key driver of growth in 2008, the report said. Consumer spending is projected to record another year of strong growth at 6.4 percent year-on-year, compared with an estimated 6.8 percent in 2007.
Overall investment spending is projected to show faster growth of 6.8 percent, up from an estimated 5.6 percent for 2007.
In contrast, the external sector is set to moderate on waning global demand. Exports and imports are expected to slow to 7.1 percent and 8.3 percent, respectively, slightly lower than the estimated growth of 7.4 percent and 8.8 percent in 2007.
Against a background of steady domestic demand growth, further US dollar and therefore Hong Kong dollar weakness, the accelerating pace of yuan appreciation and low interest rates, consumer prices look set to rise by 3.5 percent in 2008. Heightened recession fears in the US imply that the US Federal Reserve is likely to continue cutting interest rates in the first half of 2008, it said. With the Hong Kong dollar pegged to the US dollar, local interest rates have to track the downward trend of their US counterparts, the report said.
India’s medium-term growth prospects will not be affected by the global economic slowdown and its economy is likely to achieve a growth rate of about 8.5-9 percent during the current fiscal year and thereafter maintain the 9 percent growth in GDP (gross domestic product) in each of the next three years and touch 10 percent during the terminal year of the XI Plan (2011-12), Planning Commission Deputy Chairman Montek Singh Ahluwalia said.
Addressing delegates at the ‘TIE Entrepreneurial Summit 2007’ here, Dr. Ahluwalia said the Government would make efforts for achieving more inclusive growth so that the benefits of the ongoing reforms reached the hitherto neglected sections of the society, particularly in rural areas. The Government’s policies in this regard, he said, would focus on agriculture, health, education and infrastructure. “We would be looking forward to greater participation of [the] private sector in development of infrastructure sector,” he said.
Indonesia expects economic growth to surpass its target for 2008 as rising demand from India and China shields the Southeast Asian nation and its neighbors from a U.S. slowdown.
``We are aiming for higher than 6.8 percent,'' Finance Minister Sri Mulyani Indrawati said in an interview in Jakarta, referring to the government's forecast for next year's expansion. ``India and China will be quite strong in actually pulling growth in the region.''
Indonesia's economy, Southeast Asia's largest, is expanding at the fastest pace since a regional financial crisis of 1997-98 amid soaring prices for palm oil, coal and other commodities demanded by India and China. Exports to China are growing four times quicker than Indonesian sales in the U.S.
``We have seen that trend,'' said Aldian Taloputra, an economist at PT Mandiri Sekuritas. ``Indonesia's exports to other countries in the region, especially China, are increasing, which will reduce the impact of a recession in the U.S.''
India and China, the world's two largest buyers of palm oil, have helped push up prices and earnings of Indonesian producers of the vegetable oil.
Third-quarter profit at PT Astra Agro Lestari, Indonesia's biggest publicly traded agriculture company, almost tripled to a record 603.34 billion rupiah ($65 million) on higher palm oil prices. The company sold 46 percent of its palm oil to India in the first 10 months of the year.
China, the world's largest user and producer of coal, will be a net importer of 18 million metric tons in 2008, UBS AG said in a report on Dec. 6, pushing up prices of the energy and helping miners in Indonesia, which is the biggest exporter of coal used in power plants.
Still, the U.S. is Indonesia's second-largest export market. Companies in the world's biggest economy have purchased $9.4 billion of Indonesian non-oil products in 2007. China has bought $5.43 billion.
The Malaysian economy is on track to meet the official target of 6 percent growth this year but rising crude oil prices remain a major threat, according to Prime Minister Abdullah Ahmad Badawi.
“I am happy with the third quarter GDP growth of 6.7 percent. However, we are also concerned with high oil prices,” said Abdullah.
Malaysia, a net exporter of petroleum, has set a GDP growth target of 6 percent for this year and 6-6.5 percent for 2008. High oil prices translate into higher oil revenue for Malaysia but the government is also under pressure to raise domestic fuel prices which are heavily subsidized. World oil traded lower in Asia as the market entered a traditional year-end cooling off period and concerns persisted over slower US economic growth.
State oil company Petronas has been urging the government to allow it to raise the price of natural gas it supplies to the local power sector. The existing subsidy mechanism is not sustainable given high crude oil prices, said Petronas.
The government will allow Tenaga Nasional Bhd, the country's sole power distributor, to hike its electricity tariffs if fuel costs rise, Deputy Prime Minister Najib Razak said last month.
But analysts said a tariff hike for Tenaga may still be a long way off as the government is unlikely to undertake any unpopular decision ahead of general elections, which are widely expected to be called early next year.
Malaysia's inflation rate was at 1.8 percent in the third quarter, well below the official target of 2-2.5 percent.
The Malaysian economy will be able to withstand inflationary pressures arising from high crude oil prices, said Zeti Akhtar Aziz, the governor of Bank Negara, the Malaysian central bank.
“We can deal with it,” said Zeti, without elaborating. She also declined to say if the central bank is planning to revise upwards its forecast for inflation next year.
Global banking giant Citigroup Inc. expects the Philippine economy in terms of the gross domestic product (GDP) to grow 6.8 percent next year and 7.6 percent in 2009 on the back of an investment recovery and buoyant domestic demand.
“We expect an upbeat private investment cycle over the next two years to be supported by sustained public investment and favorable financial market setting,” Citigroup said in its Asia-Pacific outlook for 2008.
It also said that while the US property downturn and rising oil prices were causing financial stress in the Asian region, the global economy had other sources of resilience. It forecast global structural adjustments next year, after the US mortgage fallout, which would pave the way for an export recovery in the Philippines in 2009.
“The US economy enjoys strong productivity growth, the absence of significant industry imbalances outside the housing sector, and strong balance sheets for both corporate and households,” the report said. “Strong financial positions should limit vulnerability of [employment] and business spending to tightening credit conditions.”
Another source of strength seen for the global economy is the sustained high growth that has been established in core emerging economies like China and India.
In the Philippines, Citigroup said domestic demand should also remain buoyant in 2008-09, with an average GDP growth of at least 7 percent, especially with rising infrastructure spending and further policy interest rate easing by the central bank.
For this year, Citigroup expects the Philippines’ GDP growth at 7.1 percent, noting the robust performance in the first three quarters despite weakened export output in the third quarter. The report said a combination of export recovery and investment peaking in the second half of 2009 would probably generate GDP growth of close to 8 percent in the third and fourth quarters of 2009. It said real investments would likely grow 10.7 percent next year and 14.5 percent in 2009. It forecast real investments to peak slightly below 19 percent of GDP in 2009, from the present 17 percent.
EUROPE / AFRICA / MIDDLE EAST
Belgian gross domestic product in the third quarter grew by 0.5 percent quarter-on-quarter, the country's central bank said in an upward revision to the 0.4 percent growth it reported at the end of October. On an annual basis, GDP grew by 2.6 percent rather than the 2.5 percent previously reported, marking a slight decrease from the 2.8 percent annual growth posted in the second quarter. Growth remained robust in services and rose slightly in the industrial sector but construction activity declined, the bank said in a statement.
"Economic growth was largely due to domestic demand, in particular households," the bank added.
The data showed that the Belgian economy was resisting a strengthening of the euro, rising oil prices and the subprime crisis, said Jacques De Pover, economist at banking group Dexia.
"This brings Belgium's growth closer to that of the euro zone (0.7 percent quarter-on-quarter)," he said.
De Pover said he expected economic growth to slow in 2008 but there would be "no hard landing".
Industrial output data for October from the euro zone's three largest economies gave conflicting signals on growth prospects for the fourth quarter, with production slipping in Germany and Italy but soaring in France.
Italian output fell 0.3 percent, data showed, defying expectations for a rebound after a 1.2 percent drop in September and mirroring an identical fall reported last week in Germany, the euro zone's industrial powerhouse. However the gloom was brightened by France, which reported a 2.1 percent output jump, the largest since May 2006 and far outweighing a 1.2 percent fall the month before.
A Reuters' survey conducted before the national data pointed to a 0.3 percent monthly rise, following a 0.7 percent drop in September.
The European Central Bank will have to decipher the mixed bag as it tries to assess the likely hit to growth from market turmoil, a strong euro, record high oil prices and weaker prospects in the United States.
"Taken together these output data confirm our view that industrial activity in the region is decelerating gradually towards year-end, in line with the reassuring message from the November manufacturing PMI," said JP Morgan's Maryse Pogodzinski.
Purchasing managers' surveys have weakened sharply since the summer, but business confidence in Germany and France rose last month and so far there has been no conclusive evidence of a slump in hard data. The picture was further muddied by better than expected German export data for October, showing a 0.6 percent rise from the month before and a widening trade surplus.
European Monetary Affairs Commissioner Joaquin Almunia said the impact on the euro zone economy of the strong euro, trading at $1.4685 at 1146 GMT, was being compensated by buoyant global trade. However, most analysts expect growth to slow significantly after the 0.7 percent rise between July and September. A Reuters poll in November pointed to 0.4 percent Q4 growth.
Frederique Cerisier of BNP Paribas pointed out that the jump in French output in October was "mainly attributable" to a 6.9 percent rise in car manufacturing, which tends to be volatile.
"We still think the slowing of the US economy, the persistence of a strong euro and high oil prices are going to amplify the deterioration of the business climate in the euro area," he said in a research note.
Italy, which has consistently grown less than its partners for the last decade, is looking particularly vulnerable. October's output was below all forecasts in a Reuters' poll and, unlike in Germany, followed a steep drop the month before. Italian business confidence is declining and several analysts said they expect industrial output to contract in the fourth quarter and GDP growth of just 0.2 percent.
Finland's economy is set for a bigger slowdown next year than previously thought as global growth cools and the strong euro dampens demand for key exports, bancassurer Tapiola has warned. The bank has cut its forecast for 2008 Finnish GDP growth to 2.3 percent from its previous estimate, made in the summer, of 2.8 percent.
Chief Economist Jari Jarvinen told Thomson Financial News the downgrade stems primarily from the impact of the subprime loans crisis and a broader economic slowdown. He said the dollar's drop against the euro and autumn's inflation-busting pay deals for employees in key industries would also put pressure on business.
Tapiola projects rising wages, energy costs and food prices to push up inflation to 2.8 percent next year, before it eases back to 2.0 percent in 2009
A surprisingly strong reading for French industrial output in October showed manufacturing bearing up well after September's slowdown, and could be a sign that French economic growth will slow less sharply than expected in the fourth quarter, economists said. According to data from the Insee statistics office, industrial output for October was up 2.1 percent month-on-month, far outstripping the 0.4 percent consensus estimate of economists polled by Thomson Financial News and reversing the 1.2 percent fall in September.
Manufacturing output, which excludes food and energy, was up 1.9 percent versus a consensus forecast of 0.5 percent and compared with a 1.4 percent fall the month before.
'Of course (the increase) is partly due to a correction after the September decline (...), but it shows the underlying trend is also stronger than expected,' commented Dominique Barbet of BNP Paribas.
He added that the strong output figures 'support the surprisingly strong PMI and INSEE' manufacturing surveys.
Like Tullia Bucco of Unicredit, Barbet noted that all main components showed growth, led by auto production (up 6.9 percent). Buccio also highlighted the 2.4 percent rise in food output as the highest increase in nearly two years. Both economists said the good figures could lead them to adjust upwards their GDP outlook for the fourth quarter.
'Today's outcome leaves October manufacturing production roughly 0.8 percent above Q3 level, casting significant upside risks to our scenario for a softening in Q4 production and a consequent deceleration in GDP below trend,' Bucco said.
'This is positive news for Q4 GDP,' Barbet concluded, 'and we may have to revise it up from 0.3 percent to 0.4 percent.
French GDP has been seen slowing sharply again after the 0.7 percent quarter-on-quarter rise posted in the third quarter, which followed a weak second quarter.
Economists have been expecting full-year growth to come in below 2 percent, which is the bottom end of the government's official target range of 2-2.5 percent. However, in an interview published in Les Echos today, Prime Minister Francois Fillon said he now expects 2007 GDP growth to be 1.9 percent.
Italian industrial output slumped to its weakest annual rate in 18 months in October, official figures revealed, adding weight to market forecasts that the country's gross domestic product growth will slow in the fourth quarter. Statistics office Istat said output declined 1.5 percent on the year, the weakest rate since it slumped 2.5 percent in April 2006. On the month, output fell 0.3 percent in October, compared with a downwardly revised 1.2 percent drop in September, as the production of intermediate goods slumped 3 percent and consumer goods dropped 2.8 percent.
The data for industrial production, which accounts for almost one-third of Italian gross domestic product, fell far short of market expectations. A Dow Jones Newswires survey of economists forecast a 0.4 percent rise on the month and a 0.6 percent rise on the year.
"Industrial production fell because of soft consumer demand," said Marco Fortis, Vice-Chairman of Fondazione Edison. "Families are spending less because of higher mortgage and energy costs, and they are seeing higher prices at the grocery store too."
Production of shoes and leather goods led the losses, falling 15.4 percent on the year, followed by production of electrical appliances, down 10.6 percent. However, an Istat official noted that the transport sector continued its strong growth, up 7.7 percent on the year, driven by production of automobiles, which rose 15.7 percent on the year according to unadjusted figures.
Energy production also rose, up 3.9 percent on the year and 1.3 percent on the month in October, Istat said.
Economists said GDP growth was likely to be weaker in the fourth quarter than in the third, when growth was 0.4 percent on the quarter and 1.9 percent on the year
"We currently expect GDP to grow by 0.2 percent in Q4 from 0.4 percent in Q3 but risks to this forecast look increasingly skewed to the downside," BNP Paribas said in a note.
UniCredit also said it saw downside risks to its forecast of 0.2 percent quarterly GDP growth in the fourth quarter
"We expect further weakness in coming months as business confidence indicators remain on a clear downtrend," it said.
Following the data, Italian research institute ISAE cut its forecasts and said industrial production was set to fall 0.1 percent on the quarter in the fourth quarter after October's data failed to meet expectations. In November, ISAE said that industrial production could rise by up to 0.2 percent in the fourth quarter. On the month, ISAE forecast a fall of 0.1 percent in November, a rise of 1.1 percent in December, and a fall of 0.3 percent in January. In the first 10 months of the year, industrial production rose 0.5 percent, as a 2.7 percent rise in investment goods boosted the index.
Russia's industrial production growth forecasts have been raised from 5.2 to 5.7 percent for 2008, from 4.9 to 5.5 percent for 2009, and from 5.2 to 5.6 percent for 2010, the Russian Economy Ministry's press office has reported.
According to revised projections, GDP growth is expected to reach 6.6 percent in 2008 (up from 6.4 percent, according to earlier released figures), 6.3 percent in 2009 (up from 6 percent), and 6.4 percent in 2010 (up from 6.3 percent).
Slovenia's gross domestic product growth slowed to 6.3 percent on the year in the third quarter from 6.4 percent in the second, but remained the strongest in the euro zone, official data showed. However, the National Statistics Office of Slovenia, which adopted the euro at the beginning of the year, said GDP grew 1.6 percent on the quarter between July and September, up from the 1.2 percent expansion seen between April and June. GDP grew 6.5 percent on the year in the third quarter of 2006.
Nominal GDP in the euro-zone's newest member was 10.7 percent larger at the end of September than at the same point a year earlier, it said.
The strong growth has been fueling robust upward pressure on prices. The latest prices data released late last month showed Slovenia's European Union-harmonized index of consumer prices rose 5.8 percent on the year in November, almost twice the euro-zone average rate. The growth data showed exports rose 15.8 percent on the year in the third quarter while imports rose 17.4 percent.
Domestic consumption remained steady, growing at a 7.4 percent rate. But final household consumption grew only 2.7 percent on the year, suggesting domestic demand was led by business investment. Gross fixed capital formation rose 17.7 percent on the year in the third quarter, with investment in building outstripping that in machinery and equipment by a factor of two. Total employment rose 2.7 percent on the year, led by the construction and transport industries.
Spanish Economy Minister Pedro Solbes predicted growth in the domestic economy would slow to around 3 percent next year from an estimated 3.8 percent this year.
Activity in Spain has been boosted by a decade-long property boom, which is now showing clear signs of having run its course. The College of Property Registrars yesterday estimated the number of housing transactions this year is set to fall by 12.7 percent from a year earlier to 800,000.
The government's official forecast for GDP growth next year is 3.3 percent, but that figure is expected to be revised downward later this year due to the potential fallout from the credit crunch generated by the US subprime mortgage crisis. Solbes said sharply higher oil prices had also increased the risks on the downside. The economy minister estimated the pace of activity in the final quarter of this year would slow to around 3.3 percent annually from 3.8 percent in the previous three months.
Solbes said that the adjustment in the housing sector was taking place in a "relatively gentle" manner and that this was to be expected given a certain mismatch between demand and supply.
Despite the slowdown, the economy continued to "cruise" along at a health clip, and in a more balanced fashion, Solbes said, with investment in equipment taking up some of the slack left by the residential construction sector.
The College of Property Registrars said that the drop in house sales reflected higher interest rates, which had reduced the purchases of property for investment purposes, while other sectors had opted to rent or wait to buy in more favorable circumstances. The association also said that the current slowdown was to be expected "in a saturated market after 10 consecutive years of price increases."
Solbes said he expected consumer price inflation to remain at high levels after hitting 4.1 percent in November, but that it would start to ease from March or April due to the base effect of oil prices.
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