GDP UPDATE
June 2007
McIlvaine Company
INDUSTRY ANALYSIS
1. AMERICAS
U.S.
1.) U.S. economic growth is expected to return to trend levels in 2008 as housing demand stabilizes, according to participants in a Federal Reserve Bank of Chicago survey. Real gross domestic product growth was forecast at 2.3 percent in 2007, down from 3.3 percent in 2006, and at a near-trend 3.0 percent in 2008.
Inflation should fall slightly this year and further in 2008 even as the labor market stays tight.
The forecasts came from 26 participants from manufacturing, banking, consulting and services firms, as well as academics. Most of the major components of real GDP are expected to contribute to this year's lower growth, especially a projected further decline in residential investment.
Housing starts were forecast at 1.46 million units in 2007, down 19 percent, but should inch up to 1.53 million units next year, the survey showed.
Industrial production was expected to grow 2.3 percent this year, down from 4.0 percent in 2006, before rising 2.8 percent in 2008.
U.S. car and light track sales were forecast to hold steady in 2007 at 16.5 million units before rising slightly next year.
Respondents anticipated minor relief from high energy prices, with the average price of crude oil seen at $60 per barrel by 2008 against $66.10 in 2006.
2.) The US government lowered its economic growth forecast for the year 2007, while guiding to a marginally lower unemployment rate during the year.
According to the latest estimates released by the Bush administration, the US economy is expected to grow by 2.3 percent in the current year, as compared to the earlier guided growth rate of 2.9 percent. The downward revision has been attributed to the slowdown in economic growth in the first quarter of 2007. The US economy grew by only 0.6 percent in the first quarter, the worst growth rate witnessed in the past four years. The US economy had grown by 3.1 percent in 2006.
The International Monetary Fund had earlier this year reduced its 2007 economic growth prediction for the US economy from 2.9 percent to 2.2 percent. Meanwhile, the country’s unemployment rate is expected to increase to 4.7 percent in 2007, down from the earlier guided 4.8 percent, the US administration said. The forecast for consumer price inflation has been raised to 3.2 percent, from the earlier guided 2.6 percent in the wake of rising energy costs.
BRAZIL
Brazilian economists and financial market analysts raised their forecasts for the country's 2007 gross domestic product growth, according to the central bank's weekly market survey. Analysts raised their 2007 GDP expansion estimate to 4.2 percent from 4.16 percent in the previous survey. In 2006, Brazil's GDP grew 3.7 percent.
Experts maintained their 2008 GDP estimate at 4 percent.
The weekly central bank survey tracks the opinions of 100 analysts and economists from banks and brokerages, reporting the average of their expectations.
In the meantime, analysts kept their estimates for 2007 inflation as measured by the official consumer price index, or IPCA, at 3.5 percent. The inflation projection is well below the central bank's inflation target of 4.5 percent for the year. The official IPCA inflation rate reached 2.99 percent for the 12 months through mid-May, according to the latest data from the IBGE. Analysts maintained their 2008 year-end IPCA outlook at 4.0 percent in Monday survey.
CHILE
Chilean financial analysts have raised their forecasts for 2007 economic growth to 5.9 percent from 5.7 percent a month ago. They have also hiked their inflation forecasts for the year to a median of 3.2 percent from an estimate of 2.9 percent a month ago, according to the bank's monthly survey.
The revisions follow the earlier announcement of accelerating growth and rising inflation in Chile. The country's economic activity index, the IMACEC, rose 6.6 percent in April compared with a year earlier, maintaining this year's strong growth trends. Meanwhile, Chile's consumer price index rose 0.6 percent in May, pushing inflation for the 12 months to the end of May to 2.9 percent from 2.5 percent in the year to the end of April.
The data has fueled expectations of a rate hike in coming months from the central bank, which has held its target overnight lending rate at 5.00 percent for the past four months.
The central bank poll showed that the majority of analysts expected the bank to hold the rate for a further month before raising it by 25 basis points in either July or August. They also expected a further rate rise to 5.5 percent by the end of the year.
The Chilean economy has been growing apace this year after a disappointing 2006 in which it expanded a lower-than-expected 4 percent. The government has forecast economic growth of 5.7 percent in 2007 while the bank has predicted growth at the top end of its 5-6 percent range.
The central bank recently raised its forecast for 2007 inflation to 2.8 percent from an earlier 2.3 percent.
MEXICO
The pace of growth of Mexico’s GDP, which reached 4.8 percent in 2006, is slowing—it was just 2.6 percent year on year in the first quarter of 2007—in response to deceleration of demand growth in the US for Mexican products, particularly manufactured goods.
Although the finance secretary is predicting GDP recovery in the second half of 2007 to a growth rate of 3.8 percent (and between 3.6 percent and 4 percent in full-year 2008), this appears optimistic, particularly in the light of the recent downward revision to our US GDP growth forecast in 2007, to 1.9 percent (from 2.3 percent previously). The Economist Intelligence Unit expects full-year GDP expansion in Mexico to be 3.1 percent in 2007 and 3.5 percent in 2008. As growth decelerates, tax revenues will dip, converting the modest fiscal surplus of 2006 into a modest deficit in the subsequent four years, according to our latest forecasts.
2. ASIA
AUSTRALIA
Australia's economy boomed in the first quarter, buoyed by consumer spending, business investment and a mining upswing, setting the stage for a 17th consecutive year of expansion but also stoking the case for a rate increase. Gross domestic product rose 1.6 percent in the first quarter from the fourth quarter of 2006 and rose 3.8 percent from the year-earlier period, the Australian Bureau of Statistics said yesterday. It was the fastest quarterly pace of growth since the fourth quarter of 2003.
Economists, on average, had expected a 1.2 percent rise in GDP on a quarterly basis and 3.1 percent year over year. Analysts said the Australian economy has sailed into a "sweet spot," featuring strong growth, low inflation, low unemployment and record terms of trade.
Even the worst drought in 100 years proved only a mild head wind for the economy. Treasurer Peter Costello said there were clear signs that the drought was easing and, with the investment pulse racing, there is the prospect of even faster growth over the next year.
"If the rural sector returns to more normal conditions, you will see even further acceleration," Mr. Costello said.
With elections coming at the end of the year, Australia's center-right Liberal-National coalition government is hoping economic strength will translate into votes.
The sharp acceleration in GDP growth has also reawakened concerns of a rise in official interest rates over the medium term, possibly before year end. Economists have cautioned that A$31.5 billion (US$26.4 billion) of income-tax cuts, announced in the government's 2007-08 budget last month, has tilted the risk toward a rate increase.
INDIA
Recently, the government has come out with growth figures for the economy that have once again stoked a strong feel-good factor and, perhaps, a dose of nationalistic fervor. The latest in the series is the quick estimate of the gross domestic product (GDP) for 2006-07 which has now been pegged at 9.4 percent, the highest in nearly two decades.
However, a few doubting Thomases feel that the figures may be slightly bloated. Other critics say the growth isn’t touching the majority of Indian’s lives, leading to a simmering discontent which sometimes boils over.
S.P. Gupta, former member of the Planning Commission, says, “We use the gross output method to calculate our quick estimates of national income, while we use the far more accurate value-added method to calculate the final estimates. This is what makes a huge difference.” Gupta and many other economists feel that in the gross output method used for quick estimates, the value of imports is also being counted as value added locally.
“We are importing more now. When these figures are lumped into our gross estimates, the over-calculation is that much more,” says Gupta.
In 2003-04, India imported goods worth $78.15 billion. In the first 11 months of 2006-07, India imported goods worth $164.98 billion, which means imports doubled in just three years in value terms.
The other problem, economists argue, is that the growth reflects manufacturing and service sector trends. “The GDP is being presented as an iconic figure and the fact that two-thirds of our people living directly or indirectly off farming are left untouched by it is being glossed over,” says Kamal Nayan Kabra of the government-run Indian Institute of Public Administration. Estimates show that manufacturing and services powered last year’s growth surge while farming lagged behind.
Manufacturing, which accounts for 15 percent of the GDP, grew at 12.4 percent and services, which accounts for nearly 60 percent of the economy, grew at 9.9 percent. However, farming and allied activities, which engage more than 60 percent of the country’s population, grew at just 2.7 percent.
“Worse, the GDP growth is without employment generation,” says Kabra. India is creating new jobs but the rate at which it is creating them is far short of the number of working age people it is throwing up. An inefficient farming business is sheltering far too many people, while manufacturing is unable to create the jobs, which could absorb the excess labor from farms.
This obviously creates its own set of problems of equity. With money flow restricted to urban-based services and manufacturing sectors, India’s hinterland is a seething nation of discontent. “The Gujjar agitation over caste-based reservations is really a manifestation of the rural anger. In one sense, it is a strong protest against the way that urban India with its service sector riches is going forward, leaving villages just a few kilometres away in terms of distance far behind,” says Gupta.
JAPAN
Japan's economy probably grew more than the government initially estimated in the first quarter after a report showed business investment rose to a record. The economy expanded at an annual 3.2 percent pace in the three months ended March 31, faster than the 2.4 percent preliminary number, according to the median estimate of 15 economists surveyed by Bloomberg News.
Capital spending surged 13.6 percent to the highest ever in the first quarter, the Finance Ministry said, prompting economists to say corporate outlays were stronger than the initial GDP report suggested. Toyota Motor Corp. and TDK Corp. unveiled plans last month to build factories.
``We're going to see a considerable revision to GDP,'' said Katsuhiro Oshima, an economist at Mitsubishi Research Institute in Tokyo. ``The economy will keep growing steadily this year, thanks to solid domestic and overseas demand.''
``Capital spending wasn't as weak as we initially thought,'' said Yasukazu Shimizu, a senior market economist at Mizuho Securities Co. in Tokyo. ``Capital spending strength reflects companies' optimism about demand.''
Both domestic and overseas demand may boost business investment in coming months. A report this week is expected to show that machinery orders, a key indicator of future spending plans, rose 5 percent in April, halting two months of declines.
A recovery in spending by Japan's consumers may gain momentum. The jobless rate fell to 3.8 percent in April, the lowest level in nine years, and household spending rose for a fourth month, the longest winning streak in three years.
``Japan's economic recovery will continue, based on solid domestic demand,'' Vice Finance Minister Hideto Fujii said at a news conference in Tokyo. ``The corporate sector's strength will spread to households.''
Sales and earnings surged to a record in the first quarter as companies benefited from the economy's longest postwar expansion, today's report showed. Sales rose 6.3 percent and profits climbed 7.4 percent.
The GDP report showed corporate spending, which is measured by capital goods shipments in preliminary calculations, fell 0.9 percent from the fourth quarter. Inventories subtracted 0.1 percentage point from growth.
Companies reduced inventories last quarter, the first decrease in almost three years, the ministry said. Those figures probably won't have a major impact on GDP because the initial report already showed companies are cutting back stockpiles, according to Mizuho's Shimizu.
THAILAND
Thailand’s economy grew 4.3 percent on year in the first quarter, same as in the prior quarter, a report from the National Economic and Social Development Board indicated. While the result exceeded the 3.7 percent growth expected by economists, it also showed a sharp fall from the 6.1 percent growth posted a year ago.
The growth in private consumption was down to 1.3 percent from 2.5 percent recorded in the prior quarter. Consumption of durable goods declined 6.2 percent on year, while consumption of petroleum products declined 5.7 percent in the first quarter.
Vehicles, electrical and electronic appliances were the worst affected as they were sensitive to income slowdown, higher interest rate and lower confidence, the report said. Private investment declined 2.1 percent, reversing the 2.3 percent growth in the previous quarter.
However, a robust external market partially offset the slow down in domestic consumption. Export value rose 18.5 percent, with quantity and prices rising 13.2 percent and 4.7 percent respectively. Import value increased 3.5 percent as quantity and prices climbed 3.4 percent and 0.1 percent respectively. The trade balance showed a surplus of US$4.13 billion, in the first quarter from US$2.24 billion for the entire year 2006.
The report said that overall production expanded more slowly, caused mainly by a sharp decline in inventories.
The agricultural sector grew 4.3 percent on the strength of sugar cane and cassava production, while rice and maize production declined.
Production in the manufacturing sector slipped 4.3 percent led by industries of textile, petroleum products, automotives and accessories, electrical goods and jewelry.
Lower confidence among companies impacted a slowdown in activity, particularly in investment and services sector such as construction, hotel and restaurant, wholesale and retail trade and financial services, the report said.
On the positive side, the headline inflation averaged at 2.4 percent in the first quarter. Unemployment rate narrowed to 1.5 percent. Current account balance recorded a surplus of US$5.4 billion. Government expenditure increased in both current and investment spending by 11.2 percent and 2.1 percent respectively at the constant price.
The NESDB trimmed the growth forecast for 2007 to 4.0 percent-4.5 percent from 4.0 percent-5.0 percent estimated earlier.
“Based on key assumptions, assessment of latest economic indicators in the first four months of this year, including positive and risk factors, NESDB considered that it is less likely for the economy to grow within the range of 4.5- 5.0 percent since the recovery of private consumption and investment has not yet fully realized.”
NESDB expected that the economic stability would be sustained with a low jobless rate and a falling inflation, aided by a solid current account surplus of around 3.0- to 4.0 percent of GDP.
3. EUROPE / AFRICA / MIDDLE EAST
EUROGROUP
Eurogroup finance ministers were due to open talks on the economic outlook for the countries using the euro currency amid European Central Bank inflation fears and a likely new rate rise. Ministers from the 13-nation currency bloc will be joined by finance chiefs from the 14 other European Union states to agree to new rules aimed at simplifying value-added tax services.
An upbeat report by the European Commission last month said that eurozone Gross Domestic Product (GDP) would grow by 2.6 percent growth in 2007 and 2.5 percent in 2008, increasing the prospects of the currency bloc expanding at a faster pace than the United States.
With the 13-member eurozone expected to turn in a strong economic performance this year, the European Central Bank (ECB) this week is expected to raise its 2007 forecasts for eurozone inflation and growth with further interest rate hikes likely to be announced.
A sudden new pickup in oil prices and big wage deals emerging in the eurozone are also likely to be behind the revision.
The currency bloc's export machine is underpinned by robust demand from the fast-paced growth in emerging economies such as China, India and Eastern Europe, which largely compensates for the slowdown of the US economy.
EU finance ministers also are expected to agree that Germany, Greece and Malta are no longer in breach of EU rules as they had cut their budget deficit below the EU limit of 3 per cent of Gross Domestic Product (GDP).
The commission - which acts as the EU's financial watchdog - has said that the German budget deficit fell from 3.2 percent of GDP in 2005 to 1.7 percent in 2006. It is the first time Berlin has managed to bring its budget deficit in line with the EU threshold since 2002. Germany is expected to pare its once-excessive budget deficit down to 0.6 percent this year, reaching 0.3 percent of GDP in 2008.
The commission has said that the principal contribution to the better outturn came from increased German revenues and direct taxes which yielded substantially stronger revenues than the growth in the tax base would have suggested.
In a separate move, they are expected to confirm the commission's recommendation that Cyprus and Malta have fulfilled the criteria for introducing the euro currency starting January 1, 2008.
The commission last month said that Eurozone governments must use their strong current economic performance to put their finances in order, urging the 13 eurozone countries to implement reforms that will increase the euro-area's growth potential and show "leadership on global issues."
The euro-area economy had gone from strength to strength in the last 12 months, the commission said. GDP in the eurozone grew by 2.7 percent in 2006, its fastest growth rate since 2000, and well-above its long-term average.
Employment growth in the eurozone accelerated to around 1.5 percent in 2006, yielding an increase of close to 2 million new jobs and inflation remained around 2 percent.
ITALY
In its economic outlook, the OECD predicted that Italy's GDP this year should rise at close to last year's rate of 1.9 percent, the deficit will run at 2.5 percent of GDP this year and in 2008, while the primary surplus will climb to 2.2 percent of GDP in 2007 and level out at 2 percent next year, unless further reforms are adopted.
POLAND
The Polish economy is expected to grow by 6.5 percent this year on a 12-month comparison, central bank head Slawomir Skrzypek said. Poland's GDP will be boosted by investments by Polish firms, plus a healthy inflow of foreign capital and European Union funding, Skrzypek said.
The rate of GDP growth is likely to remain above 5.0 percent over the next few years, he added, quoted by Poland's PAP news agency.
Official data showed that the Polish economy had grown by 7.4 percent in the first quarter of this year compared to the same period in 2006.
GDP expanded by 6.6 percent in the fourth quarter of 2006.
The government has already raised its full-year growth forecast for 2007 to 6.0 percent, after earlier having predicted a 4.6 percent rate in the annual budget. Analysts, however, have said they were cautious about the government forecast, saying that the authorities needed to cut spending, taxes and bureaucracy, or risk lower than expected GDP growth.
Poland's GDP grew by 5.8 percent in 2006.
SWITZERLAND
Swiss economic growth will ease to 2.0 percent in 2007 from 2.7 percent in the previous year, the IMF said Monday. “While the outlook is favorable, the authorities need to remain vigilant to global economic and political developments,” the IMF noted.
Inflation was 1.0 percent in 2006 and is expected to be slightly lower in 2007. Opening the labor market to EU workers has benefited Switzerland, increasing productivity and containing inflation, the IMF observed. The Swiss National bank has continued to normalize interest rates in 2006, with five quarterly step increases of 25 basis points, the IMF report said.
The report noted that the financial sector was performing well and was in a favorable cyclical setting. The profitability of banks was robust and indicators of financial soundness have improved. The insurance and pension sectors were recovering from previous balance sheet pressures, the IMF report said.
The Executive Directors of the IMF commended the Swiss authorities on their prudent economic management and sound policy framework. The IMF sounded caution on the need to keep inflation expectations well anchored, “especially in view of the strong run-up in capacity utilization.”
On the health of the Swiss franc, the IMF observed that carry-trades could be pushing it below its equilibrium, but considered the present independent floating exchange rate regime to be the best way to handle the uncertainties.
In an interview to Swiss Internet platform Swissinfo, Jean-Pierre Roth, the President of the Swiss National Bank said, “In real terms there has been a weakening of the franc against the euro recently. But if you want to conclude that the franc has definitively become weaker, this ignores the fundamentals.” Roth said the fundamentals are that the Swiss economy is growing strongly and inflation is low.
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