GDP UPDATE
May 2007
McIlvaine Company
INDUSTRY ANALYSIS
1. AMERICAS
U.S.
The Commerce Department reported that the U.S. economy slowed to a seasonally adjusted annualized real growth rate of just 1.3 percent in the first quarter of 2007. Following a fourth quarter rise of 2.5 percent, this marks the slowest rate of growth in four years, largely a result of a slumping housing market and rising inflation. With the robust 5.6 percent GDP (Gross Domestic Product) increase from one year ago now removed from the year-over-year total, growth for the last twelve months now stands at an anemic 2.1 percent.
CANADA
Economic growth in Canada accelerated in February, growing by 0.4 percent month-on-month after 0.1 percent growth in January, Statistics Canada announced. Economists had forecast a more modest rise of 0.2 percent.
Excluding oil and gas extraction and utilities, economic activity grew by 0.2 percent.
CHILE
Chile's economy expanded at its fastest pace in almost two years in March and the central bank reported that exports surged to a record, increasing the chance that policy makers will lift rates this year.
The economy grew 6.5 percent in March from a year earlier, the fastest since June 2005. Growth was faster then the 6 percent median forecast from 13 analysts in a Bloomberg survey. The bank also reported that the trade surplus widened to $2.6 billion in April.
“This was higher than expected,” said Luis Cancino, head of currency and debt trading at Scotiabank Sud Americano in Santiago. “The market is now pricing in that there will be one or two rate hikes.”
Chile's peso, which has gained to its strongest in a year on surging exports, will likely continue to strengthen after these reports on growth and trade, Cancino said. The currency is up 5.8 percent against the dollar since Feb. 5 on higher prices for copper, the country's top export.
Chile's trade surplus in April was larger than the $2.4 billion forecast from eight analysts in a Bloomberg survey. Exports rose to a record $5.86 billion, while imports fell from the previous month to $3.26 billion, the central bank said.
Finance Minister Andres Velasco said these figures show the economy is on track to meet the government's forecast for 5.7 percent growth in 2007.
``Exports are growing,” he told reporters at the Finance Ministry in Santiago. ``We have a package of policies that allow us to guard against fluctuations, up or down, in the price of copper.”
Chile is saving almost all its surplus from copper sales in foreign accounts in dollars in a bid to secure future spending and avoid stoking a rally in the peso. Government holdings surged 40 percent in the first quarter to $14.2 billion.
In the first quarter, the economy grew an accumulated 5.9 percent, the fastest pace since the beginning of 2005, Velasco said.
2. ASIA
CHINA
(1) Efforts by the Chinese government to temper the country’s incendiary growth failed in the first quarter, with gross domestic product growth of 11.1 percent, for a total of 5.028 billion yuan ($657.82 million). Industry production grew 18.3 percent year-over-year, with the refining of raw materials up 26.2 percent, and the manufacturer of electronic and telecom products up 26.1 percent, and motor vehicles rose 22.3 percent, with cars gaining 32.1 percent. Overall, heavy industry year-over-year growth was 19.6 percent, compared to 15.6 percent growth in light industry.
Profits for industry enterprises were up 43.8 percent compared to 2006, with 35 out of 39 industrial divisions showing year-on-year profit growth. The chemical industry was among the top five divisions with profit increases, joining steel, electric power, manufacturing of transportation equipment, and petroleum processing and coking.
Trade remains robust, with the total value of imports and exports up 23.3 percent to $457.7 billion. Exports made up $252.1 billion of that figure, with imports accounting for $205.7 billion—growth of 18.2 percent from last year compared to 27.8 percent for exports. China’s trade surplus grew by $23.1 billion to $46.4 billion. By the end of the first quarter, China had $1.2 trillion in foreign exchange reserves, an increase of $135.7 billion over the end of 2006.
(2) China's GDP grew by an enviable annual average of 9.67 percent from 1978 to 2006, elevating the Communist giant as the world's fourth largest economy and third largest trading nation.
"The annual GDP growth rate was much higher than that of the world economy, which was about 3.3 percent on average in the same period", China's top planner, Ma Kai said. "During the period, China has beefed up its comprehensive national strength and elevated its international status", Ma, Minister of the National Development and Reform Commission, said.
China has become the world's fourth largest economy and third largest trader, he noted.
"The per capita disposable income of urban residents rose from 343 yuan (USD 44) in 1978 to 11,759 yuan (USD 1,521) in 2006, while the per capita net income of farmers grew from 134 yuan to 3,587 yuan", Ma said.
Meanwhile, China's budgetary revenues rose from 113.23 billion yuan to 3.93 trillion yuan.
"As it opens wider to the outside world, China has received more foreign direct investment than any other developing country for 14 straight years and by the end of 2006 there were 590,000 foreign-invested firms in China", Ma said. "But we must be aware that as a large developing country, China still faces a number of difficulties and challenges in economic development, including the increasing environmental restraints, the arduous industrial restructuring and the growing gap between urban and rural areas", the senior official said.
NEPAL
A UN report has estimated that the GDP of Nepal will grow by around 4 percent in 2007 thanks to positive development in the country. The Economic and Social Survey of Asia and the Pacific 2007, released by the UNESCAP said that the GDP grew by an estimated 1.9 percent in 2006, adding, "The recent peace agreement has, however, brought new hope and Nepal is expected to return to a new phase of sustained growth and development." The report also said that the inflation rate has increased by 3.5 percent in 2006 and reached to 8 percent in 2006 due to rise in petroleum and food prices.
The report further said that the fiscal situation remained weak with growing recurrent expenditure, low capital spending and a high budget deficit, which increased to 4.3 percent in 2006 from 3.4 percent in 2005." It added, "Reform needs to be maintained to sustain high growth and rapid poverty reduction. With fiscal adjustment still a challenge, more progress is needed in tax collection and resource mobilization to reduce large budget deficits.” On regional perspective, the report said that the economy of the Asia Pacific region grew by 7.9 percent in 2006 up from 7.06 percent in 2005. The report also said that the inflation rate will be 3.8 percent in 2008. “The region is losing US$ 42-47 billion per year because of restrictions on women's access to employment opportunities and another US$ 16-30 billion a year because of gender gaps in education," the report further said.
SOUTH KOREA
A free trade pact with the United States is expected to boost South Korea's annual economic growth by around 6 percent in the next 10 years and help create substantial employment opportunities, South Korean think tanks said. The forecast by 11 state-run think tanks including the Korea Institute for International Economic Policy (KIEP), the Korea Development Institute and the Korea Rural Economic Institute (KREI) also forecasted greater trade volume and more foreign investment in the country.
It said annual gains in gross domestic product (GDP) from the free trade agreement (FTA) will reach 0.6 percent each year until 2018. This translates into an addition of roughly 80 trillion won (US$86.2 billion) to the economy during the cited period. "Even in the short run, before the FTA takes full effect, increased trade could add 0.32 percent to economic growth, compared to a situation in which there is no pact," said Lee Chang-jae, vice president of the KIEP.
Asia's third-largest economy grew 5 percent last year and is expected to post growth of 4.5 percent this year.
The report, the first comprehensive impact analysis since the pact was reached on April 2, predicted that lower prices caused by scrapping of import tariffs and broader consumer choices would improve welfare levels of ordinary South Koreans. It claimed that the gains would be equivalent to 2.9 percent of the GDP, or 20 trillion won. Average tariff level rates for South Korea currently stand at 11.9 percent, higher than 4.9 percent of the United States.
On employment, Lee said the FTA will help create an average 34,000 new jobs every year in the first decade. The country failed to provide its minimum target of 300,000 new jobs last year.
"In 10 years, the accumulation capital, improvement in productivity and more trade could push the number of new jobs to 340,000," he claimed. He said 1,000 jobs a year can be lost in the farming sector, but that 8,000 and 27,000 new positions would be respectively created in the manufacturing and service industries.
The analysis said exports to the United States could jump $1.33 billion, with imports rising around $860 million per year for the next 10 years. Bilateral trade between the two countries exceeded $74.5 billion in 2006, with Seoul's exports topping 41.6 billion won. Greater imports of U.S. farm goods could cause the trade deficit in this field to reach 270 million on a yearly basis, with $9 million being added for fisheries. It said the country's global trade volume will rise as well, with exports climbing $2.34 billion and imports gaining $380 million as a result of the agreement.
In addition, the FTA could allow more foreign direct investment (FDI) to enter the country. Think tanks said FDI could rise by an average of roughly $2.3-3.2 billion every year for the next 10 years. Seoul aims to attract about $11 billion, the same as the tally for 2006, by the year's end. By sector, the report said manufacturing will be the main beneficiary of a liberal trade regime, with exports rising $2.55 billion on average every year for 15 years. Import gains could reach $370 million. Output in this sector could shoot up to 5.5 trillion won, with 2.9 trillion won coming from autos. Besides autos, electronics and textiles are likely to benefit the most from the FTA. Exports of electronics are expected to jump 1.1 trillion won, while those of textiles forecast to rise 484.6 billion won. Production in agriculture, however, is expected to fall by an average 669.8 billion won every year for 15 years, with the livestock sector suffering the most.
"Output of beef, pork, chicken, tangerines and dairy products are likely to be hit hardest," said Oh Se-ik, vice president of the KREI. He added that by 2023, the total loss in agricultural production could reach 1 trillion won or 0.07 percent of the GDP. Farming accounted for 2.8 percent of the overall economy last year, down from 3.1 percent in 2004. However, he said cheap imports will be beneficial to consumers. Korean beef is about 2-3 times more expensive than the American product.
South Korea could also benefit in the areas of general machinery, electricity-related equipment and electronics.
"The benefits derived from cheap imports may reach 625.8 billion won in the first 15 years after the FTA goes into effect," said the economist.
In the services sector, the think tanks estimated improved output and profits in telecommunications and broadcasting, but said South Korea will have to pay more for intellectual property protection.
Pharmaceuticals are another area where production and profits are expected to decline. Economists said the FTA could cause local production to fall up to 168.8 billion won every year for a decade, with profits decreasing correspondingly.
Experts, meanwhile, said the report is based on the best possible estimates and could not be 100 percent accurate.
"It may be up to 80-90 percent correct overall, yet there is no way to be certain," said Kim Do-hoon, senior research fellow at the Korea Institute for Industrial Economics and Trade. He said the way that South Korea deals with the FTA will determine the extent of its future gains.
THAILAND
Concerned about impacts from the private investment and consumption slowdown, the Finance Ministry plans to announce soon that it is reducing its gross domestic product (GDP) growth estimate for this year to something under 4 percent. Pannee Sathavarodom, director-general of the Fiscal Policy Office, said the country’s economic conditions in March had still been pressed by the continued investment and consumption slowdown.
The private consumption expanded only 1.9 percent in March compared with 4.6 percent in February.
The slower growth went in the same direction with the consumer confidence index, which dropped for the fifth consecutive month upon concerns over political and economic uncertainties, and higher oil prices.
Mrs.Pannee said exports, which grew by 18.4 percent to a record high of US$13.1 billion in March, continued to serve as a key driving force for the economic growth. Still, imports increased only 0.6 percent to $10.8 billion, down from 3.1 percent in February. In this scenario, there were mounting concerns whether local production would manage to expand.
VIETNAM
Between 1997 and 2006 GDP increased by 10 percent, reaching a peak of VND5.8 million in 2005 (higher than the average GDP of the whole Mekong Delta).
Trade activities between Cambodia and the south west border area have seen a considerable increase since a bilateral trade agreement was ratified in 1998. According to custom departments in the area, import-export is increasing significantly with exports dominating over imports.
Experts expect that in the next 10 or 15 years goods exchange between Viet Nam and Cambodia will continue to see an upward trend, mostly on average-quality products.
3. EUROPE / AFRICA / MIDDLE EAST
CZECH REPUBLIC
(1.) The Czech National Bank (ČNB) board said it revised its gross domestic product (GDP) growth estimate up to 4.9–6.5 percent for this year and to 3.8–6.8 percent for 2008 in a new forecast.
In the previous forecast from January, the ČNB predicted 4.4–6.2 percent GDP growth for 2007 and 3.1–6.5 percent growth for 2008. The central bank left interest rates unchanged, but two board members wanted rates to go up by a quarter point.
(2.) The Czech Republic's economic growth is seen falling to 4.9 percent in 2007 and 2008 from 6.1 percent in 2006, the European Commission said in a downwardly-revised forecast.
"The exceptional growth of the previous two years is expected to moderate in 2007 and 2008 to just below 5 percent of GDP while the pattern of growth is expected to stay broadly similar," the European Commission wrote. "Domestic demand should provide the greater stimulus whereas the growth contribution of the external balance is likely to be partly affected by an appreciating koruna (Czech crown)."
The European Commission lowered its GDP growth forecast, which is below the Czech Finance Ministry's 2007 estimate of 5.3 percent growth, as the Czech state budget deficit continues to rise. The commission expects the deficit to reach 3.9 percent of GDP in 2007.
"The forecast is for a deficit of 3.9 percent of GDP in 2007 and 3.6 percent of GDP in 2008," the commission wrote, adding that the rising deficit significantly increases the likelihood of missing the target of 2.7 percent of GDP in 2008, as set out in the country's eurozone entrance convergence program.
FRANCE
French GDP growth will 'most likely be revised upwards' for the first and second quarters of 2007 to an annualized rate of 'between 2.5 percent and 3 percent', French finance minister Thierry Breton said in an interview with radio station Europe 1.
'The government's range of forecasts was for 2 percent to 2.5 percent annualized growth. I think we're closer to 2.5 percent and 3 percent for the first and second quarters', Breton said.
Statistics office Insee is due to publish initial estimates for first quarter GDP growth on May 15 and at end-March was predicting a rise of between 0.5 percent and 0.6 percent for the first two quarters, giving an annualized rate of close to 2 percent.
The Bank of France, meanwhile, said it expects GDP in France to grow at 0.8 percent in the first quarter of the year, giving an annualized rate of 3.2 percent.
ISRAEL
The Ministry of Finance predicted that the economy will grow by 5 percent this year, after 5.1 percent growth in 2006. Business product is projected to grow by 5.6 percent, after 6.4 percent growth last year.
The ministry said the global economic environment and domestic demand made this growth projection achievable. It added that the rise in real wages, the increase in employment, fall in the unemployment rate, and the fairly low real interest rate supported further growth in domestic demand.
NIGERIA
(1) The privatized and revitalized Eleme Petrochemicals Company Limited, Port Harcourt, now under the management of Indorama Group, is to increase Nigeria’s Gross Domestic Product (GDP) by about N7.6 - N10.2billion ($60 – 80 million) this year through its exports to Europe, Asia and across Africa.
The company has maintained a high production level since January this year, and is currently exporting its products to 21 countries while also meeting local demands. The exports will surely help in enhancing Nigeria’s favorable balance of trade. Apart from the exports, Indorama/EPCL’s supplies to the domestic market is a plus on the import-substitution goal of the federal government of Nigeria.
The import-substitution measure is helping many Nigerian manufacturers of plastics to save million of foreign exchange. Such manufacturers had in the past imported their raw materials, but now, they buy them from Indorama/EPCL warehouses in Port Harcourt and Lagos. A similar warehouse would soon be opened in Kano to serve the Northern market.
Petrochemical products are indispensable raw materials in the manufacturing of various plastics products. Many items in people’s homes and offices are by-products of plastics.
Indorama/EPCL announced recently that it had started export of its High Density Polyethylene (HDPE) to various countries in Europe, Asia and across Africa, after capturing about 60 percent share of the local market. The HDPE grade is used as raw material for numerous end-products in the plastics industry. Many items that people use in their homes, offices, construction sites, industrial complexes are bye-products of plastics.
(2) Annual growth of the Nigerian economy has been on the downward trend, with real Gross Domestic Product (GDP) growth rate declining from 9.57 percent in 2003 to 5.03 percent in 2006. Analysts, however, say it is not all gloom as the current economic reforms, if not sustained, may just be the answer.
Data from the Central Bank of Nigeria, Nigerian Stock Exchange, Debt Management Office, Money Market Association of Nigeria, and First Discount House Research Unit indicate that industrial capacity utilization dropped from 61.50 percent to 25 percent, growth in national disposable income, the amount of money available to Nigerians after expenses declined from 11.91 percent to 6.05 percent in 2005.
The decline in real GDP growth rate was in spite of the steady growth in total GDP at current market price from N7.80-trillion in 2002 to N18.07-trillion in 2006, indicating that inflation took its toll on total GDP. But it was not all bad news for the economy as some key indicators like growth rate in non-oil sector GDP, inflation, external reserves, exchange rates, lending rates, unemployment and all share index recorded impressive performances.
According to the study, non-oil sector GDP grew from 4.44 percent in 2003 to 8.93 percent in 2006. Inflation declined from 23.83 in 2003 to 8.50 in 2006. External reserves increased from $7.68-billion to $41.39-billion, while exchange rate has been oscillating between N133.3 and N120 to the US dollar since 2002. Cost of funds in the money market dipped as lending rate declined from 20.60 in 2002 to 17.76 percent in 2006.
According to the data, unemployment rate slumped from 14.80 percent in 2003 to 5.30 percent in 2006. The decline in the real GDP shows that performances in the other indicators were not strong enough to lift the real GDP growth, a development that could be explained partly by the high cost of production following epileptic power supply. This may have resulted in the plunge in industrial capacity utilization.
Analysts, however, believe that if the current economic reforms are sustained, especially focus on infrastructural development, growth in the economy stands a bright chance of resurgence. The effort to build independent power plants across the country through private sector initiatives is expected to help in the turn-around effort.
POLAND
Poland's fourth quarter gross domestic product growth has been revised to 6.7 percent on the year from a previous estimate of 6.4 percent, according to the Central Statistical Office, or GUS. The adjustment is part of a wider revision in quarterly national accounts figures for 1999-2006 due to fresh data and a reclassification of pension fund transfers to comply with European Union accounting rules.
On April 23, GUS increased its full-year 2006 GDP growth estimate to 6.1 percent, from 5.8 percent, as part of the revision.
PORTUGAL
The European Commission has revised upwards the GDP growth estimates for Portugal in its spring economic bulletin. The commission now sees Portugal's GDP growing by 1.8 percent in 2007, up from the 1.5 percent growth estimated in its autumn forecast.
In 2008, the commission sees Portuguese GDP growing 2.0 percent, up from the 1.7 percent estimated in the autumn bulletin. The commission sees Portuguese inflation at 2.3 percent in 2007 and 2008, while the unemployment rate is seen at 7.7 percent in 2007 and 7.5 percent in 2008.
RUSSIA
Russia's economy grew at the slowest rate in 18 months in April, London-based VTB Bank Europe said in its latest GDP Indicator report.
"The Russian GDP indicator eased for the sixth consecutive month in April, suggesting the slowest rate of expansion for eighteen months," said Chris Green, senior economist at VTB Bank Europe Research. "However, with growth projected at around 6.6 percent in April, it continues to remain robust and above its long-run trend of 6.1 percent. Looking further ahead, this softening in Russian activity is consistent with our expectation for GDP growth for the full 2007 year of 6.5 percent."
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