GDP UPDATE
June 2007
McIlvaine Company
TABLE OF CONTENTS
3. EUROPE / AFRICA / MIDDLE EAST
1. AMERICAS
The U.S. economy will grow at a moderate clip in 2007 as consumer spending growth slows and business spending moderates during the second half, a key economic forecast recently showed. The closely watched Blue Chip Economic Indicators forecast saw year-over-year real gross domestic product, or GDP, growth of 2.1 percent in 2007 and 2.9 percent in 2008.
After a pickup in business inventories and a narrowing of the trade deficit, the economy is expected to have grown by a more robust 3.0 percent annual pace during the second quarter, following an anemic 0.7 percent rate in the first three months of the year, the report said.
"That would mark a sharp improvement over the lackluster 0.7 percent rate registered in Q1 and represent the fastest pace of growth since Q1 2006," the report said.
The consensus predicts that real GDP will grow at a 2.6 percent clip in the third quarter, unchanged from prior surveys. Real GDP will register marginally better growth of 2.8 percent in the last quarter.
Brazilian economists raised their economic growth forecast for this year as low inflation and higher wages boost consumer spending. Economists raised their forecast for 2007 gross domestic product to 4.34 percent from 4.30 percent a week earlier, according to the median estimate of about 100 economists in a June 29 central bank survey. They increased their inflation forecast for this year to 3.64 percent from 3.6 percent, the survey showed.
Brazilian families are purchasing more durable goods, such as refrigerators, cars and microwaves, as an 8.6 percent increase in the country's minimum wage and an appreciating currency cut the cost of imports, said Antonio Madeira, a senior economist with MCM Consultores. Brazil's real has gained 11 percent this year, the best performer among the 16 most- traded currencies against the dollar.
“Consumption is strong because low inflation encourages people to purchase more,'' Madeira said in a phone interview from Sao Paulo.
President Luiz Inacio Lula da Silva raised the monthly minimum wage for this year to 380 reais ($197.6) from 350 reais last year. The increase took effect on April 1.
Brazil's central bank lifted its 2007 growth estimate to 4.7 percent from a previous 4.1 percent in March, according to the bank's quarterly report on inflation. The bank cut its inflation forecast for this year to 3.5 percent from 3.8 percent.
2. ASIA
Goldman Sachs forecast that China's gross national product (GDP) will grow 12 percent in the third quarter, powered by a 20 percent increase in industrial production and over 30 percent rise in fixed asset investment. The forecast was based on recent M3 money supply trends, it said.
'M3 growth has been hovering around 18 to 19 percent for a year, and is now approaching its peak level as in mid-2003. Not surprisingly, demand growth and inflation have surprised on the upside,' Goldman Sachs in a research note.
M3, the broadest measure of liquidity in the economy, includes bonds and equity-related assets, on top of deposits and cash.
Given the rapid changes and developments in the capital markets, 'many financial assets that are included only in M3 have now arguably become as important and as liquid as deposits in the banking system,' the investment bank said.
“We are likely to see stronger growth in (economic) activity in the coming quarter, based on our observations of the recent M3 trends.”
The investment bank also expects further tightening measures to be taken, saying that it sees 9 percent yuan appreciation in 12 months' time. Other possible measures include the abolition of Interest Income Tax, more trade tax adjustments, more window guidance on lending, and more intensified sterilization operations.
The International Monetary Fund expects Indonesia's gross domestic product (GDP) growth this year to beat the Fund's initial projection of 6 percent, given strong exports and rising levels of direct investment, IMF Indonesian representative, Stephen Schwartz said.
'Our (initial) projection was 6 percent. Based on recent trends, we do see some upside potential, in particular as a result of the strong export growth and if investment picks up faster than our baseline projection in the second half,' Schwartz told Thomson Financial.
'I think the government's more ambitious target of 6.3 percent should be achievable,' he said.
Schwartz said he expects the Indonesian economy to grow at between 6.5-7 percent over the next few years, supported by rising exports and investments, and lower inflation levels. Schwartz said he expects consumer price inflation to 'finish well within Bank Indonesia's range of 5 to 7 percent this year.'
He said benign inflation and the downtrend in the central bank's benchmark interest rate, which currently stands at 8.25 percent, are positive signs for the economy.
'Lower inflation (and easier rates) is an encouraging development because it will stimulate corporations to borrow more and boost consumer sector growth.'
The Philippine government is set to raise its economic growth target for next year to 6.1-6.8 percent from 5.8-6.6 percent in anticipation of higher farm output and investments, officials documents showed. The Development Budget Coordination Committee (DBCC), an inter-agency body that sets the government's macroeconomic and fiscal goals, is set to present a new set of targets for 2007 and 2008 to President Gloria Arroyo and her Cabinet for approval.
The DBCC has decided to maintain the GDP growth target for this year at 6.1-6.7 percent, supported by an 11.0 percent increase in exports and 10.0 percent growth in imports. The agency had revised down its projection for imports growth from 12.0 percent as seen earlier.
The DBCC has also changed its foreign exchange rate assumption for this year to 47.00-49.00 pesos per dollar, from 48.00-50.00 earlier, on the back of strong remittances from Filipinos working overseas and rising foreign investments.
For 2008, the agency has assumed 12.0 percent growth each for exports and imports, and a dollar/peso rate of 47.00-49.00.
The economy grew at a faster-than-expected year-on-year clip of 8.2 percent for the second quarter to June, on the back of a rebound in manufacturing, with the data suggesting further upside to full year growth estimates for the city state, economists said. The advance GDP estimates from the Ministry of Trade and Industry (MTI) surpassed growth projections of economists polled by Thomson Financial, who had expected a 6.2 percent -7.7 percent rise. In the first quarter the economy expanded 6.4 percent.
On a quarter-on-quarter seasonally adjusted annualized basis, real GDP grew 12.8 percent in the period after rising 8.5 percent in the first quarter. The advance second quarter GDP estimates are largely based on data from April and May.
DBS Bank economist Irvin Seah said the strong growth could see the government lifting its GDP growth forecast for the full year. Last month, the MTI raised the growth forecast for 2007 to 5-7 percent from 4.5-6.5 percent after the first quarter showing.
'The chances are high that the government will increase its GDP forecast, assuming that the final number for the second quarter comes in more or less at this number (preliminary figure),' he said.
Seah's current projection for full year growth is 6.3 percent, but he plans to boost it after re-assessing his growth estimates for manufacturing and construction services.
The MTI data showed that in the second quarter manufacturing grew 10.2 percent, underpinned by strong growth in the biomedical manufacturing and transport engineering clusters. In the previous quarter it rose 4.4 percent he construction sector expanded 17.9 percent n the period from 11.6 percent n the previous quarter, while the services sector grew 7.0 percent slightly below the 7.2 percent ise recorded in the March quarter.
Seah believes the growth momentum in the construction sector can be sustained.
'I will not be surprised if the construction sector continues to power forward, at this kind of pace, given the healthy series of projects both from the government and from the private residential sector,' he said. 'If you look at historical data, the period prior to the (Asian financial) crisis, this sector has hit growth of 30 percent. So the growth potential is there,' Seah said.
CIMB-GK regional economist Song Seng Wun has lifted his full year GDP growth estimates to 7.5 percent from 6.6 percent, in the wake of the second quarter data.
He said the construction sector recorded its strongest advance since the third quarter of 1997.
Song expects manufacturing to record 8 to 10 percent growth for the year, with the general belief that tech exports should pick up in the second half to provide support.
'Barring any sort of nasty surprises from pharma in the second half, manufacturing should do reasonably well in the second half especially since we expect tech to be a smaller drag,' he said. 'Couple that with construction in the themes, and the overall goods producing sector should do well.'
The South Korean economy is expected to grow at a slightly faster pace than previously projected, reinforcing the view that the Asia's fourth-largest economy will sustain its recovery, data from the Bank of Korea show. The central bank said it now expected GDP to grow by 4.5 percent in 2007, having previously forecast a growth rate of 4.4 percent.
It estimates that the economy grew by 4.4 percent year-on-year in the first half and that it will grow by 4.7 percent in the second.
'We expect the economy to continue with its up-trend for the time being, thanks to sustained solid export growth, stemming from a benign global economy, and amid a modest recovery in domestic demand,' the Bank of Korea said in a written statement.
The director-general of the central bank's research department, Kim Jae-Chun, said: 'Exports, private consumption and corporate facility investment are seen to be stronger than previously estimated. Our earlier forecast that the economy would pick up its pace of growth, although moderately, starting from the second quarter, seems valid.'
The central bank said the economy would grow at a faster rate in 2008 than in 2007. In 2006, the economy grew by 5.0 percent. The increase in its growth forecast for 2007 may give the central bank another reason to increase interest rates when it next meets. The market is almost evenly split over what the Bank of Korea will decide to do.
The central bank said some beneficial influences on the economy had emerged, including a global economy that was stronger than expected, a reduction in the threat from North Korea and greater confidence among important players in the economy. But it said the won's strength and the instability of global prices for raw materials might be a drag on the economy here.
The central bank estimates that the headline rate of inflation will accelerate to 2.4 percent in 2007 from 2.2 percent in 2006 because of higher prices of raw materials. However, this estimate is still below the central bank's own target range of 2.5-3.5 percent.
The Bank of Korea expects exports to increase by 11.0 percent in 2007 amid firm demand, having expanded by 12.6 percent in 2006. It foresees corporate facility investment growing by 7.5 percent in 2007, having grown by 7.6 percent in 2006.
It projects that private consumption will grow by only 4.1 percent in 2007, having grown by 4.2 percent in 2006, partly because of the lackluster performance of the self-employed and higher levels of household debt.
The Taiwan Research Institute forecast recently that the nation's GDP growth would reach 4.35 percent this year, lower than last year's 4.68 percent because of the weaker global economy. The Taipei-based institute's projection matches a forecast made last month by the Directorate General of Budget, Accounting and Statistics (DGBAS) that the nation's GDP growth will reach 4.38 percent.
Taiwan Research's economic growth rate forecast was slightly higher than the 4.31 percent predicted by the Polaris Research Institute and lower than the Academia Sinica's figure of 4.46 percent released last week. Chung-Hua Institution for Economic Research forecast 4.17 percent growth in April.
The nation's exports are expected to be affected by the global economy's growth rate this year, Taiwan Research said in a statement.
The International Monetary Fund and Global Insight Inc, a Massachusetts-based forecasting firm, have both forecast that the global economy's growth rate will drop by 0.5 percentage points this year from last year.
Taiwan Research predicted exports would grow by 6.27 percent this year, compared to 10.34 percent last year. Private consumption is expected to increase, thanks to the stable employment market, robust stock and real estate market, and the subsiding effects of last year's credit abuse storm, Taiwan Research said.
3. EUROPE / AFRICA / MIDDLE EAST
Economy Minister Mikalay Zaychanka told reporters in Minsk that his ministry still regards a GDP growth of 8 or 9 percent in 2008 as realistic.
Guided by the fact that the present macroeconomic situation is rather stable, "we believe that the figures projected in the 2006-2010 development program still remain obtainable," he said, noting, however, serious differences with the Ministry of Finance, other ministries and the National Bank in work on the draft social and economic development prognosis for 2008, which the economy ministry plans to submit to the Council of Ministers in August.
This is a "rather complicated matter, as a new change in energy prices is expected in 2008 and how much we'll have to adjust the forecast will become clear later," the minister said. "Then we'll be able to talk about [forecast] indicators more specifically, but for the time being, the earlier projected figures are the guide," Mr. Zaychanka said.
In particular, according to him, the inflation rate in 2008 should be within six to eight percent. "We'll hardly be able to considerably lower inflation, as it will partially compensate for changes in external conditions," he noted, adding that inflation, as the rate of change in the level of consumer prices, could be boosted by the current higher rise in the prices of industrial products, which, according to Mr. Zaychanka, rose by eight percent in the first five months of 2007.
A slump in agriculture meant Morocco's gross domestic product (GDP) growth slowed to 1.9 percent in the first quarter from 6.7 percent a year earlier, the country's High Planning Commission said recently. Farm production fell by 18 percent in the first three months of 2007 compared to the same period a year earlier, the HCP said in a statement on its Web site, while non-agricultural growth was 4.7 percent.
Construction and public works grew 9.3 percent, underpinned by a state-backed infrastructure and housing drive. The hotel and restaurant sector expanded by 8.1 percent, as more tourists visited the kingdom.
Growth of GDP in the trading sector slowed to 4.3 percent from 6.9 percent a year earlier, the HCP said, without giving a reason.
Farming accounts for up to 17 percent of Morocco's economy but the figure varies widely because of cyclical droughts. Last year saw the best grain harvest in 10 years. The HCP has forecast growth of 1.6 percent this year, down from 8.1 percent in 2006, proving Morocco still has far to go to free its economy from the uncertainties of farming. With poverty and unemployment rife, the government is trying to create more jobs by expanding existing industries such as tourism and textiles while pushing into new areas like back-office outsourcing.
The government's healthy economic position yielded an impressive macroeconomic environment of Oman in 2006, according to the Central Bank of Oman's (CBO) annual report for 2006.
"The robust economic growth was characterized by large surpluses in the fiscal and balance of payments positions, low and declining levels of public debt, comfortable levels of foreign exchange reserves, easy domestic liquidity conditions, high growth in bank credit, strong momentum in creation of new employment opportunities for Omanis, a sound and growth supportive banking system, and remarkable progress on economic diversification," the apex bank said in its report.
Nominal GDP growth of 15.6 percent in 2006 represented high growth for the third consecutive year, and the significant progress on diversification was evident from 34.9 percent growth in non-petroleum activities as well as 46.3 percent increase in non-oil exports of Omani origin.
The healthy fiscal position of the government was a hallmark of the vastly improved macroeconomic climate of Oman in 2006, the CBO said.
The sound fiscal environment was characterized by sustained surpluses, growing transfers for creation of increasing financial assets, declining debt as a percentage of GDP, and expenditure reorientation in favor of higher capital expenditure. The capital expenditure registered a high growth of 24.1 percent, and the progress on internal debt consolidation was evident in the gradual decline in government debt as a percentage of GDP from 16.3 percent in 2002 to 8.2 percent in 2006.
GDP growth rates will be at least 7 percent this year, while growth rates of industry will hit the same figure by the year-end. This forecast was made by vice-premier Alexander Zhukov at the international forum “New business to new Russia”. He emphasized that the quality of economic growth in Russia changed mostly thanks to active growth in the processing industry, which amounted to 10-12 percent since the start of the year. According to his data, commodity sectors are rising at a lower pace.
Zhukov called attention to a rise in domestic demand and purchasing power of population. Housing construction jumped up by 40 percent as against the first half of last year.
The capital inflow to Russia totaled 67 billion US dollars in the first half of 2007. Zhukov noted that funds are now invested in the development of the car industry, both in assembly and production, as well as in the power industry. Investments into Russian industry «are made sometimes despite the will of the governments of countries, which recommend their companies against investing money in Russian production”. However, business, forecasting its profits, continues to build production facilities in Russia.
UBS AG sees GDP growth of around 2.8 percent for the second and third quarters of 2007, according to its latest economic outlook survey. The study shows that, overall, Switzerland's industry is 'powering ahead', especially in the watch, chemicals and pharmaceuticals segments.
According to the Swiss banking group's survey of around 340 companies in June, growth prospects for the third quarter will be driven by full order books and 'a strong intake of new orders' in the second quarter.
'Orders received, sales, production, and earnings showed clear net increases yet again in the second quarter,' said UBS. Export orders were up for 53 percent of the companies surveyed, with domestic orders higher by 43 percent, added UBS.
'Capacity utilization was exceptionally high at 90.7 percent,' UBS said.
Companies were almost as bullish for the third quarter outlook, thereby indicating that the 'upswing is sustainable', UBS said.
UBS cautioned that although the overall picture of Switzerland's industry is positive, some individual industries, such as plastics, textiles and printing, saw a 'marked slowdown in business during the second quarter'. They are also expected to underperform in the third quarter, said UBS.
First-quarter GDP grew 6.8 percent year-on-year in 2007, much higher than the consensus expectation of 5.8 percent, the Turkish Statistical Institute said. The gross national product (GNP) rose 6.7 percent year-on-year in the first quarter, beating expectations of 5.5 percent.
"The big surprise probably came in with the government spending, which was up quite significantly," said Paul Biszko, senior emerging markets analyst at RBC Capital Markets. Also surprising, he added, was the "resiliency of exports.” “The market interpreted the results as a sign that the bank will hold off on cutting interest rates until they see tightening of fiscal spending," he said.
The central bank will probably keep rates on hold until the fourth quarter and will not "hike or cut as imminently as some have speculated," Biszko said.
Government spending rose 9 percent in the first quarter, exports of goods and services grew 14 percent, while imports of goods and services rose 4.2 percent, the Turkish Statistical Institute said. Private final consumption rose only 1.6 percent. The spike in government spending was "pre-election fiscal loosening" ahead of the parliamentary elections on July 22, Biszko said.
Turkey has been weathering several months of political turmoil triggered by a dispute over the parliament's election of a president. At the heart of it is the clash between secularists and the ruling AK Party, which has Islamist roots and whose presidential candidate -- Foreign Minister Abdullah Gul -- was blocked by opposition parties.
"While the political turmoil, stemming from the uncertainty in electing Turkey's president, faded in June, all eyes have now turned to the course of the general election," said Sinan Goksen, analyst at EkspresInvest, in a research note.
Ample global liquidity drove Turkey's financial markets in June despite the political uncertainty.
Despite the stronger-than-expected GDP reading in the first quarter, analysts expect a slowdown going forward.
"We see that first-quarter figures came in higher than expectations on the back of government expenditures in the pre-election period and we think that after the elections, government spending will decelerate," said Mehmet Besimoglu, analyst at Oyak Securities, in a research report. As a result, Besimoglu keeps his growth estimate at 5 percent.
Biszko of RBC Capital Markets also expects a slowdown in GDP growth in the coming quarters, since net exports are likely to contribute less, domestic demand is weak, and government-spending is election related.
The next important economic indicator is the CPI figure for June, which will be released soon. CPI is expected to be 8.9 percent.
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