GDP UPDATE
November 2007
McIlvaine Company
Table of Contents
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
AMERICAS
UBS trimmed its 2008 outlook for the U.S. federal funds rate, saying it expects it to decrease to 3.50% compared with an earlier forecast of 4.25%, as the Federal Reserve eases monetary policy to counter a slowing economy.
UBS analysts also downgraded their expectations for 2008 annualized gross domestic product (GDP) growth to 2.0% from an earlier 2.4%. They predicted that fourth-quarter growth would come in at an annualized 1.2% compared with an earlier forecast of 1.7%.
They blamed the downward revisions for growth on a faster deterioration in housing construction and credit problems that they expect to continue into next year.
"Further reductions in expected housing starts next year reflect evolving credit-crunch-related difficulties limiting how quickly home sales can reduce a still unusually high number of vacant residential units for sale," UBS economists said in a research report.
Last month, the Fed pared the fed funds rate by a quarter percentage point to 4.50% in a bid to forestall the fallout of the credit market turmoil on the economy. It also cut rates by a half point in September. The next Fed rate-setting meeting is scheduled on Dec 11.
In light of their weaker growth outlook, UBS economists expect more labor market slack and less pressure on core inflation in 2008. They projected that the U.S. jobless rate would rise to 5.2% versus an earlier prediction of 5.0%, and the index on core personal consumption expenditure (PCE) prices, the Fed's preferred inflation gauge, would slip to 1.6% on a year-over-year basis from an earlier forecast of 1.7%.
The strong growth being posted in the Peruvian economy is becoming more widespread, government officials have said. Growth traditionally has been centered mainly in the capital region of Lima, but expanding domestic demand has now brought that growth to more of the provinces as well.
"The provinces are posting better growth than Lima. That is reversing the trend that we have seen in past years," Prime Minister Jorge del Castillo said at a conference sponsored by the Council of the Americas and the Peruvian Foreign Affairs ministry.
Brokerage Centura forecast growth in Peru's gross domestic product at 7.7% this year and 6.7% for next year. GDP expanded 7.6% last year.
"There are now more regions that are growing strongly than there are ones that aren't growing strongly," Finance Minister Luis Carranza said at the same conference.
The strong growth has been seen in rising levels of employment, he noted.
Carranza forecast that average per capita income will expand to $5,000 by 2011 from about $4,000 now, leading to greater dynamism in spending on things such as automobiles and mortgages.
"Peru is a low-income nation that is moving towards being a medium-income one," he said, adding that this will bring about structural changes in the economy.
Weakening global growth could cause some weakening of the expansion in the Peruvian economy next year, economists said. Peru's finances are expected to remain strong, though, in part due to rising tax revenues.
Carranza said Peru should post a fiscal surplus of some 2.2% of GDP this year, and a surplus in the current account of the balance of payments of 1% of GDP
ASIA
The Bhutanese economy grew by 8.5%in 2006 with the gross domestic product (GDP) increasing to Nu 31.6 billion from the previous Nu 29.2 billion, the National Statistical Bureau said.
The growth was achieved mainly by the electricity sector, which grew by 35.30% because of the partial commissioning of the 1,020 MW Tala hydroelectric project, followed by mining and quarrying (63%), hotels and restaurants (32.3%) and finance, insurance and real estate (17%).
The gross national income (GNI) was estimated at Nu 39.639 billion as compared to Nu 32.078 billion in 2005.
INDIA
Better agriculture growth and mixed corporate performance may help the country achieve 9% GDP growth in 2007-08, says the CII state of the economy report.
“Given the robustness of the economy and better performance of agriculture vis-à-vis industry and services, we do not expect a major deviation from our earlier forecast of GDP growth at 9.2% for the year 2007-08,” CII said in its statement.
However, it added that continuation of tighter monetary policy in the light of higher inflationary expectation due to international oil price hike and slowing down of the US economy are current downside risks to high GDP growth.
The state of the economy report analyzed the financial results of 2,584 firms, including 1,595 manufacturing firms, in the first half (H1) of the fiscal. According to the analysis, net sales growth has come down to 16.2% during H1 of FY08 from 29.6% during the corresponding period of the previous fiscal. CII attributed the lower growth in net sales to the significantly lower growth in net sales recorded in manufacturing — it came down to 11.9% in H1 of the current fiscal from 28.6% during the corresponding period last year.
Japan's economy grew at an annualized rate of 2.6% in the July-September quarter on strong exports, the government said recently, but the outlook for exports was clouded by sluggish economic signs in the United States. Gross domestic product grew a price-adjusted 0.6% from the previous quarter, according to preliminary data released by the Cabinet Office. On an annualized basis, the July-September GDP increased by 2.6%.
The figures beat the annualized 1.8%gain forecast by economists surveyed by Dow Jones Newswires.
In the April-June quarter, Japan's GDP declined 1.2% on an annual basis, marking the first contraction in growth for three quarters. Although the latest results suggest Japan's economy is still recovering, there are also worrying signs.
Exports, which accounted for much of the third-quarter growth, are at a risk of decelerating because of a slowdown in the U.S. economy. Another sign is that housing investment, though its contribution is small, is declining. Private residential investment plunged 7.8% -- the largest drop since an 11.1% tumble in the April-June 1997 quarter -- likely hurt by tighter building regulations that came into force in late June. That was the third straight quarter of declines, after a revised 4.1% fall in the April-June period.
Although housing investment accounts for only 3% of the GDP, its decline is a cause for worry because it could hurt factory output and business investment by cooling demand for construction materials and durable goods such as refrigerators and TVs. Such a slowdown in internal demand would mean that the Bank of Japan will likely have to wait until next year to lift short-term interest rates from the current 0.5% level.
In the July-September period, consumer spending, which accounts for more than half of Japan's GDP, rose 0.3% on quarter, better than a revised 0.2% rise in the April-June period. Solid sales in the travel industry attributed to the rise. Business investment rose 1.7%, rebounding from a revised 2.1% decline in the April-June period. Companies bought more general industrial machinery, according to the Cabinet Office.
The data, meanwhile, indicate that Japan has so far withstood the impact of the slumping U.S. housing sector, which since August has roiled global stock markets, sank some hedge funds and caused the leaders of major U.S. banks to be sacked.
Exports rose 2.9%, up for the 10th straight quarter and much faster than a revised 0.9% gain in the April-June quarter as Asian nations bought more Japanese goods, such as cars and motorcycles. Imports were up 0.5%, after gaining 0.8% in the second quarter, due in part to higher oil and natural resource prices.
Malaysia is still confident of achieving gross domestic product growth of 6% this year as its economic diversity will cushion it from the impact of high oil prices, according to second finance minister Nor Mohamed Yakcop. But high oil prices, if prolonged, will hurt the economy, he said.
“'Everyone agrees in the long run that very volatile and high oil prices are not really good for the world,” he said.
Oil prices rose to a record 98 US dollars per barrel on Nov 7 but have dipped to below 95 dollars after the Organization of Petroleum Exporting Countries (OPEC) said it would consider the possibility of raising production if needed.
“The strength of an economy, of a system, is basically how resilient you are in the face of a crisis, we think we have a reasonable degree of resilience so at this of point of time, there is nothing much to worry but as I said in the long run, very high and volatile oil prices will not be something that we look forward to,” said Nor Mohamed.
Malaysia has over the years built 'a few layers of insulation' to diversify the economy and protect it from external shocks and over-dependence on exports, he said. The country can depend on investments and domestic consumption to drive economic growth in the event exports drop significantly, he said.
Malaysia recorded a GDP growth of 5.6% in the first half. The central bank is scheduled to release third-quarter GDP data on Nov 30.
On the proposal to review the fuel subsidy structure announced by the government over the weekend, Nor Mohamed said 'studies are being done' on the matter.
Malaysia's Prime Minister Abdullah Ahmad Badawi said energy subsidies would have to be reduced, and he suggested a mechanism where the rich will be taxed more to enjoy cheaper fuel.
A stronger services sector may have compensated for the weakness in manufacturing, allowing the Singapore economy to post robust growth in the third quarter, in line with the government's initial estimate, economists said.
Recently, the Ministry of Trade and Industry said gross domestic product expanded 9.4% in the third quarter based on preliminary data, outpacing the 8.7% growth in the second quarter.
Economists polled by Thomson Financial remained upbeat about the overall economy despite the surprisingly weak manufacturing and exports data in September. Non-oil domestic exports were up a marginal 2.2% in September while manufacturing output shrank 2.8% on account of a sluggish electronics sector.
Of the five economists polled, three were expecting the final GDP data to show 9.4% growth in the third quarter as the government had announced last month. The other two were looking at the number being revised slightly lower.
Including the decline in September, manufacturing output for the quarter grew 10.5%, slower than the government's estimate of 12.3%. The lower-than-expected manufacturing growth 'will shave 0.5 percentage point off the third-quarter GDP growth estimate' but the impact could be mitigated by the likely out-performance of the services sector,' said Ho Woei Chen, economist at United Overseas Bank.
The services sector may have grown by more than 8.1% during the quarter.
'Strong financial services activities may lead the upgrade in services growth to about 8.5%,' said Chua Hak Bin, economist at Citigroup. (NYSE:C)
Growth in construction may also be nudged up from 15.5%, he said.
Economic growth this year should still be able to hit, if not surpass the top end of the Singapore government's target of 7.0-8.0% despite the turbulence in global financial markets.
EUROPE / AFRICA / MIDDLE EAST
Real GDP growth in Cyprus accelerated in the third quarter of 2007, rising by 4.3% compared with the same period of 2007 according to “flash” estimated based in initial data. A full breakdown of GDP will be published in a few weeks’ time, which will show in detail what has been driving growth.
The Statistical Service Cystat noted that the increase is mainly due to financial intermediation, wholesale and retail trade, hotels and manufacturing activities.
At the same time, the Statistical Service revised up its growth rates for the first and second quarters. The first quarter was revised up to 4.1%, from 4.0%, while the second quarter was revised to 3.8% from 3.6% previously.
As part of its regular practice Cystat has also produced a thorough revision of all GDP numbers going back to 2002.
Estonia's growth rate slowed to 6.4% in the third quarter compared to the same period in 2006, the national statistics office said, citing preliminary figures. The year-on-year growth figure for the third quarter was the lowest quarter in four years.
Tonu Mertsina, head of the office's national accounts service, said the decelerated GDP growth was caused by a slowdown in the manufacturing and retail trades, as well as the transport, hospitality and real estate sectors. The slower growth rate in the third quarter was also influenced by the high level in the same period a year ago: in July-September 2006 Estonia's GDP had grown by 11.6%. The Estonian economy grew by 11.4% on an annual comparison in 2006.
Last month, the central bank lowered its 2007-2008 economic growth forecast to 7.3% from the previous 8.4%. It also trimmed its 2008 forecast to 4.3% from 6.4%.
Euro zone growth rebounded more strongly than expected in the third quarter thanks to a robust performance by its three biggest economies but economists cautioned a slowdown loomed. European Union statistics office Eurostat said GDP in the 13 countries using the euro rose 0.7% quarter-on-quarter in the July-September period against 0.3% in the previous three months.
In annual terms the economy grew by 2.6%, up from 2.5% in the second quarter. Economists polled by Reuters had expected quarterly growth of 0.6% and a 2.5% annual expansion.
"This is already an old story. The turnaround in every leading indicator clearly points to a sharp slowdown in Q4," said Olivier Gasnier, senior economist at Societe Generale.
"Due to weaker international demand and to the sharp loss of competitiveness triggered by the euro appreciation, exports will be far less dynamic," he wrote in a research note.
"Moreover, the housing market downturn can only be exacerbated by the tightening in credit conditions. In addition, consumer spending will suffer further from the rise in oil and food prices," he said.
He said he did not expect anything stronger than 0.2% quarterly GDP growth in the fourth quarter. Germany, the euro zone's biggest economy, led the third-quarter surge with 0.7% quarterly growth fuelled by construction, investment in equipment and private consumption. Economists said stronger domestic demand in Germany could also be signaled by a rise in imports.
France saw its economy expand by 0.7% in the third quarter, its fastest in just over a year, thanks to accelerating private consumption and investment as well as a positive contribution from trade.
The foreign trade result seemed to go against long-standing French complaints about the negative impact of the strong euro on its exports, which showed vibrant growth and outpaced also strong imports.
Economists said the third-quarter result was consistent with expected full-year French GDP growth of 1.9%, below government forecasts but in line with European Commission projections.
In Italy, the third-biggest euro zone economy, GDP grew by 0.4% quarter-on-quarter thanks to rising activity in industry and services. Economists expect to see strong consumer spending when a detailed breakdown is published in December.
Finland's GDP grew 1.7% in September from the same month a year earlier, and was 0.3% higher from August, official figures from Statistics Finland showed. Output in September was up 0.3% from August.
Statistics Finland said output declined 1% year-on-year in the wood and paper industry.
In energy supply, output fell 9%, while the level of output was 1% lower in the whole metal industry and 9% weaker in its sub-industries, which includes electronic and electrical products manufacturing.
September chemical industry output was up 3%, and it recorded 4% in construction and was 3% higher in retail trade.
France's stronger third quarter GDP growth rate is 'encouraging', finance minister Christine Lagarde said in an interview with Le Monde. French GDP rose 0.7% quarter-on-quarter, rebounding from the weak 0.3% growth rate recorded in the second quarter.
'These encouraging figures show that the French economy is not dependent on just one element, while we have said for a long time that growth was principally driven by consumption,' Lagarde said, adding 'the financial turbulence over the summer has not had a direct impact, for the moment, on the real economy.'
Lagarde said the US subprime crisis does not indicate a slowdown in the US economy. 'Despite major financial turbulence and the subprime crisis, it continues to create a considerable number of jobs (160,000 in September) and has posted a rate of growth of 3.6% in the last three months. There is no slowdown in the USA as a whole.'
Lagarde said she is pleased that the detaxation of overtime hours has been introduced and also with the progress of a draft bill designed to stimulate consumer spending.
'These two reforms are likely to play a counter-cyclical role and support consumption,' she said.
Lagarde confirmed she believes economic growth for 2007 will exceed 2% 'At the end of August many people were forecasting 1.7%. Today most expect 1.9%,' Lagarde said, adding that the government has not changed its forecast.
Lagarde said she is pleased that European discussions on the structure of VAT will be starting as soon as possible and should be completed while France holds the EU presidency.
German economic activity strongly rebounded in the third quarter on healthy investment in machinery, equipment and construction, data from the Federal Statistics Office showed. On the quarter, real gross domestic product rose 0.7%, after increasing 0.3% in the second quarter. The outcome, which accounts for seasonal and calendar effects, is in line with economists' forecasts.
Investment in machinery and equipment as well as construction spending buoyed economic activity in the July-September period, the statistics office said. A moderate rise in private consumption also supported growth.
Net exports, however, failed to support third-quarter activity, after a notable increase in imports, the office said.
"The German business cycle remains on a robust growth course," Economics Minister Michael Glos said after the release of the data.
On the year, German GDP rose 2.5% in the third quarter, when adjusted for the number of working days in each quarter, the same rate as in the second quarter, the data showed. The economy expanded 2.4% on the year, when calendar effects weren't taken into account. But forward-looking indicators point to a slowdown in economic activity in Germany and elsewhere in the euro zone at the end of this year and going into 2008.
"Headwinds are blowing strongly in the face of German companies and consumers...A growth dip in the quarters ahead is very likely," said Andreas Rees, Chief German Economist at UniCredit.
Should German GDP be flat between the third and the fourth quarters of this year, the economy would expand by a calendar-adjusted 2.5% in 2007, after gaining 3.1% in 2006, a spokesman at the statistics office told Dow Jones Newswires, but declined to make a growth prediction for the last quarter.
German GDP data, which follow robust growth numbers from Italy, Spain and the Netherlands, support expectations that economic activity in the euro zone bounced back in the third quarter.
The 22 economists surveyed by Dow Jones Newswires last week expect GDP in the 13-nation area to rise 0.6% on the quarter and 2.6% on the year. Eurostat is due to publish its flash GDP estimate later Wednesday. The German statistics office said it will publish a breakdown of German GDP numbers Nov. 22.
Greek third-quarter GDP growth came in at 3.6%, down from 4.1% in the second quarter, initial estimates from the National Statistical Service (NSS) showed. The NSS said GDP growth for the first quarter of this year was 4.6%.
The director of National Bank of Greece (NYSE:NBG) strategy and economics research division, Paul Mylonas, said 'third quarter growth was slightly softer than we had projected at between 3.6 to 3.9% and no details of compositions were released'. The senior economist said he thinks 'the key aspect for the lower than expected figure is likely to be faster deceleration of fixed investment or a weaker export performance'.
'Nevertheless, growth continues at a comparatively high pace and should end up at 4% for the year,' Mylonas said.
HUNGARY
Hungary's economic growth rate slowed to 1.0% in the third quarter of 2007, according to calendar year adjusted figures, the Central Statistical Office (KSH) said. Growth was 1.1%, according to unadjusted figures, said KSH, quoting preliminary figures.
In the first to third quarters, gross domestic product grew an annual 1.6%.
Third-quarter GDP rose 0.3% in a month after just 0.1% increase from the first to second quarters.
Italian economic growth recovered as expected in the third quarter, with gross domestic product rising 0.4% from the previous three months, but analysts say it is already slowing again. Preliminary data from national statistics bureau ISTAT showed GDP rose 1.9% year-on-year after a 1.8% increase the previous quarter, while the 0.4% quarterly rise followed a 0.1% increase between April and June.
The data was broadly in line with market expectations. The mid-point forecast in a Reuter’s poll of analysts pointed to a 0.4% quarter on quarter rise and a 2.0% year on year increase.
High oil prices, the strong euro and tighter credit conditions will all weigh on activity in the fourth quarter, analysts said, though they expect GDP to slow only slightly at the end of this year.
"There are growing signals of a possible slowdown in economic activity at the start of 2008," economic institute ISAE said after the data, citing its own forward indicator which has been on a downward trend since June.
ISAE said fourth quarter growth should be "close to" the 0.4% rate posted in the third and confirmed its forecast of full-year 2007 growth of 1.8%.
ISTAT said "acquired growth" for 2007 stood at 1.7% at the end of the third quarter. This means that even if quarter on quarter growth is zero in the fourth quarter, full year 2007 growth would still come in at 1.7%.
Analysts say the impact on exports of the rise of the euro, which scaled new heights above $1.47 last week, will be increasingly felt from the start of next year.
The 0.4% quarter on quarter rise in the third quarter stemmed from an increase in activity in industry and services and a fall in agriculture, ISTAT said. It offered no numerical breakdown of GDP components, which will be released only with final Q3 GDP data in December.
"When the GDP breakdown comes out I think we'll see that consumer spending was quite strong and there was also a recovery of investments," said Giuseppe Vera of Deutsche Bank.
In September Italy's government trimmed its forecast for full-year 2007 growth to 1.9% from 2.0% and cut its 2008 forecast to 1.5 from 1.9%.
Many analysts say the new projections are already looking too optimistic and Economy Minister Tommaso Padoa-Schioppa said that growth prospects were worsening.
The Dutch economy grew 4.1% in the third quarter compared to the same period a year earlier, the highest growth recorded in more than seven years, the Central Bureau of Statistics (CBS) said. GDP also increased 1.8% when compared to the first quarter of this year, the CBS said, adding that the growth is considerably higher than previous quarters and is the highest in more than a decade.
Increased production of gas was primarily responsible for the year-on-year GDP growth, in combination with production growth in commercial services and healthcare. Exports and household consumption clearly grew quicker than in the first half of the year, the CBS said.
PORTUGAL
GDP was down 0.1% in the third quarter of this year from the second, and was up 1.8% from a year earlier, according to preliminary statistics from the INE statistics institute.
A senior official of Russia's central bank has forecast a 7.5% annual growth of the Gross Domestic Product (GDP) in 2007, according to Interfax news agency.
In the coming years, Russia's GDP growth will stay at 6.5 to 7%, central bank First Deputy Chairman Alexei Ulyukayev said at an international investment forum held in Moscow. He attributed the growth to a favorable foreign trade balance in previous years, but to domestic impetus and investment in the last two years. Investment in Russian enterprises is soaring at a 22% growth rate, which indicates that the investment climate has been optimized, he said.
The inflation rate, however, is expected to reach 10 to 11% in 2007. Ulyukayev blamed the hike in food and energy prices on the international market, increasing government spending and residents' income for the inflation, pledging to avoid an excessive swing of the ruble's exchange rate.
In a bid to stabilize the ruble, the central bank could start buying currency for the Stabilization Fund on the open market in February 2008, when the Fund is split into the Reserve Fund and the National Welfare Fund, he said.
The Slovak economy grew 9.4% year-on-year in the third quarter of 2007, data showed, and analysts said growth beat market expectations thanks to stronger exports. Third quarter growth matched the 9.4% reading from the second quarter and was above the 8.6% forecast by analysts in a Reuters poll.
"Acceleration of GDP was related to growth of added value in manufacturing, particularly in manufacturing of machinery, electrical equipment and transportation means," The Statistics Office said in a statement.
"From the expenditure side, GDP growth was influenced mainly by continued foreign demand, alongside persistent growth of domestic demand."
The Statistics Office did not release any detailed data in its flash estimate. It will publish the breakdown on Nov. 30.
The higher-than-forecast third quarter growth was not a major surprise for the market because data last week showed an unexpected trade surplus for September and a downward revision of the cumulative trade deficit for January-August.
"The figure is a partial surprise. We do not know the structure yet but we can expect that firming pressures on the crown will remain," Miroslav Plojhar, a JP Morgan economist.
"The structure will probably show a stronger contribution of foreign trade than previously. This would mean that the GDP growth is healthier than before," he said.
The Slovak crown's reaction was muted. It rose to an eight-month high of 32.870 per euro after the release but quickly retreated to 32.910.
The Slovak economy has charted one of the highest growth rates in the European Union in the past few years, helped by rising car export volumes and solid domestic demand as household consumption rises after years of belt-tightening reforms. Investment has also increased in the past year, mainly thanks to large project such as car factories of French PSA Peugeot and South Korean Kia Motors.
Market watchers did not expect any monetary policy implications from third quarter GDP data.
"We saw increase in household consumption in the second quarter, but even if we see further rise in the third quarter, the NBS should be comfortable since productivity growth outpaces wage growth," said Piotr Matys, an analyst at 4Cast in London.
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