GDP UPDATE
September 2007
McIlvaine Company
TABLE OF CONTENTS
ASIA
“The country's economy is likely to expand by 8.5-9 percent this fiscal year”, Planning Commission deputy chairman Montek Singh Ahluwalia said. Ahluwalia told reporters on the sidelines of a FICCI meeting that even if the economy grows by 8.5 percent, it would be "very good". He also said inflation is in "comfort zone" and is expected to remain around the current level.
The country's GDP recorded a growth of 9.3 percent during the first quarter this fiscal. Inflation, on the other hand, has declined to 3.79 percent for the week ended August 25 from a peak of 6.69 percent in January this year.
The Japanese economy in the second quarter contracted for the first time in three quarters after non-residential investment, which had been the key growth driver of the world's second-largest economy in recent years, marked its second straight quarterly decline due to reduced spending by the leasing and real estate sectors. While the downturn in the non-residential investment, which accounts for nearly 15 percent of the Japanese economy, is seen as a blip and driven by technical factors, economists now believe the Bank of Japan will be inclined to make sure downside risks can be avoided before delivering any rate hike.
Citing revised data, the Cabinet Office said the economy shrank 0.3 percent in the June quarter from the previous quarter, or at an annualized rate of 1.2 percent. In its preliminary estimate released last month, the government said the economy grew by 0.1 percent in the second quarter from the previous quarter for an annualized rate of 0.5 percent.
The government has changed the way it seasonally adjusts the data and has revised past growth figures using the new methodology. As a result, it said the Japanese economy contracted in the third quarter of 2006 by 0.1 percent. It had originally reported that real GDP grew by 0.1 percent in that quarter
The major downward revision came after non-residential investment, which is nearly equal to corporate capital investment, fell 1.2 percent in the quarter, the second straight quarterly fall, a reversal from the preliminary reading of a 1.2 percent rise. This was the first time that it fell for more than one quarter since it had declined for four straight quarters in 2001.
Cabinet Office senior economist Hiroki Owaki said the downward revision was due to weaker spending by the leasing, real estate, construction and land transportation sector. Economists had predicted a weak capital investment showing following the release last week of corporate spending survey by the Ministry of Finance, which showed sluggish spending.
The MOF's survey, which covered more than 24,000 companies, showed last week that the combined capital investment of non-financial Japanese companies fell 4.9 percent in the June quarter from a year before, the first drop in 17 quarters, due to a downturn in outlays by non-manufacturers such as leasing and real estate companies. The government uses the results of the MOF's quarterly corporate survey released earlier to fine-tune the non-residential investment and private sector inventory data used in calculating GDP.
But economists believe the downturn in the corporate capital investment is due largely to a change in the companies included in the MoF survey, rather than a signal of weakening appetite to increase production capacity.
'The change of the sample base at the MOF's survey apparently distorted the underlying trend of non-residential investment,' NLI Research Institute senior economist Taro Saito said.
'So it is reasonable to consider that the decline in non-residential investment is a blip rather than taking it as a sign of the start of a serious downtrend,' he said.
Other economists generally agree with Saito's view. However, some point to the need for a more careful and thorough assessment of additional data.
'While we believe that the weakness in non-residential investment in the April-June quarter is temporary, we would also be better off if we check how investment in the real estate and leasing sector will do' in the months ahead, Daiwa Institute of Research senior economist Junichi Makino said.
'Because these sectors have relatively large bank borrowings and are sensitive to interest rate movements, the past rate hikes might have started to constrain their appetite for fresh investment,' he said.
Meantime, private consumption, which accounts for nearly 55 percent of the Japanese economy, rose 0.3 percent, slightly slower than the preliminary estimate of a rise of 0.4 percent, as consumers continued to spend on clothing and home appliances but spent less on leisure and recreation. But as the decline in non-residential investment outpaced the rise in private consumption, private demand fell 0.4 percent, the first fall in three quarters. And as private demand fell, the Cabinet Office stopped short of repeating the same analysis that the Japanese economy continues to recover, led by private demand.
Meantime, net exports -- the difference between exports and imports -- were neutral to the Japanese economy, after pushing up real GDP by 0.4 percent points in the previous quarter. This was the first time in four quarters that net exports had failed to contribute to the Japanese economy.
Economists now believe that the Bank of Japan may need to spend more time in assessing the trend in the corporate sector and in exports before resuming its gradual rate hike cycle, which was halted by the financial market problem.
'The BoJ should not rush into hiking interest rates not only because of the (current) confusion in financial markets stemming from the US subprime loan problem, but also because of uncertainty about the outlook for the corporate sector,' Norinchukin Research Institute senior economist Takeshi Minami said.
The Bank of Japan, which had been widely expected to hike its overnight call rate target by 25 basis points to 0.75 percent at its last board meeting in August also held fast, with officials saying they want to monitor developments in credit markets further before taking a fresh policy step.
'A limited prospect for an immediate acceleration in price momentum also suggests that the central bank can wait longer, as there is definitely no imminent inflationary risk that it needs to address by hiking interest rates,' Minami said.
The latest GDP data failed to provide any fresh developments on price trends. The GDP deflator, which measures the degree of deflation, was down by 0.3 percent in the quarter from a year earlier, in line with the preliminary reading and also in line with the decline in the previous quarter. Yet this was the smallest fall since April-June 1998 when the deflator registered a drop of 0.1 percent.
The government said last month the core CPI, which excludes volatile prices of fresh food but includes energy prices, fell 0.1 percent in July from a year earlier, falling for the sixth straight monthly decline.
'The Bank of Japan can wait until the core CPI starts to register a rise of 0.5 percent on a stable basis,' Minami said.
Malaysia's government voiced confidence recently that there are no domestic threats to the economy that could derail its target for gross domestic product growth. In a new financial report, the government forecast economic expansion at 6 percent for this year, followed by between 6 percent and 6.5 percent for 2008.
"There is no threat whatsoever to the growth target coming from the domestic sector," Second Finance Minister Nor Mohamed Yakcop told reporters.
Only the external environment remains an unknown, Nor Mohamed said, referring to the U.S. subprime mortgage market turmoil and accompanying credit crunch. The Finance Ministry said that economic growth next year should remain broad-based, led by consumer spending, increased global demand for commodities including oil, gas and palm oil, as well as higher exports growth.
Despite plans to reduce corporate tax, Nor Mohamed said the government is optimistic that higher tax revenue resulting from company earnings growth - such as for state-owned oil and gas company Petroliam Nasional Bhd., also known as Petronas - should keep its economic growth target achievable.
Corporate tax, which currently stands at 27 percent, is slated to go down to 26 percent in 2008. Prime Minister Abdullah Ahmad Badawi said the rate will be further reduced to 25 percent in 2009 to enhance the country's competitiveness and spur the growth of private investment.
EUROPE / AFRICA / MIDDLE EAST
Bulgaria's real GDP growth will decline from 6.2 percent in 2007 to 5.5 percent in 2008, and to 5.1 percent in 2009, according to the latest forecast of the Economist Intelligence Unit (EIU). The average rate of inflation is forecast to fall below 5 percent in 2008 and to 3 percent in 2009, compared with 6 percent in 2007.
Rapid import growth is expected to keep the current-account deficit very high over the forecast period, and it is forecast to reach just under 20 percent of GDP in 2007.
The Economist's analytical unit commented that Bulgaria's government, consisting of the Bulgarian Socialist Party (BSP), the National Movement for Stability and Progress (NMSP, formerly known as the Simeon II National Movement) and the mainly ethnic Turkish Movement for Rights and Freedoms (MRF) will find it difficult to maintain its unity in 2008-09.
The experts believe that the party of popular mayor Boyko Borissov could win as much as 40 percent of all seats in parliament in the event of an early election. The party could use further success at local elections in November 2007 to press for an early national election.
Czech GDP growth slowed down to 6 percent in the second quarter of 2007 from a revised 6.4 percent in January-March, the Czech Statistical Office (CSU) said.
"The Czech economy is growing twice as fast as the EU economy. It has made another step to catch up with the EU average. This year, the Czech Republic may get to 80 percent of average EU GDP per capita," said Patria Finance analyst David Marek.
The growth, faster than expected, was pulled by household spending and gross fixed capital formation, statisticians said. Analysts in a CTK poll predicted 5.7 percent growth on average.
"It is obvious that Czech economic activity is still very strong, but it has already peaked," said Czech Banking Association analyst Filip Sterba. Prime Minister Mirek Topolanek said the slowdown was predictable.
"I think this is not due to transformation changes. Our economy is quite saturated, it does not have the potential to develop that we can see in Slovakia, for instance," he added.
"It may be due to the situation in the EU and markets," Topolanek said, adding the government would be glad if GDP growth stayed at this level, because it would enable the changes it has started to make.
Household spending on final consumption grew by 6.5 percent year-on-year in real terms and by 8.6 percent or Kc32.6 billion in current prices, beating the disposable income growth slightly. The categories of cars, food, tobacco, furniture and recreation showed the highest nominal increases in spending.
In current prices, GDP grew by 10.2 percent to Kc899.7 billion in the second quarter. Total gross added value rose to Kc813 billion. The difference is formed by taxes on products, above all excise tax and VAT, less subsidies.
The year-on-year growth in added value was pulled by the processing industry, car sales and repairs, and services for companies.
Gross fixed capital formation grew by 4.2 percent in real terms year-on-year on investment in buildings and non-housing construction, which swallowed 41 percent of total investment in gross fixed capital.
The contribution of individual spending items to GDP growth varied. Spending on household consumption and gross fixed capital formation grew, while foreign trade had a negligible impact and a drop in spending on final consumption by institutions in the government sector was a negative influence.
Statisticians also revised indicators for the first quarter, raising the original GDP growth estimate from 6.1 to 6.4 percent.
GDP in EU-27 countries grew by an estimated 2.8 percent year-on-year in the second quarter, said the EU's statistical office Eurostat. Euro zone GDP grew by 2.5 percent.
GDP in Slovakia grew by 9.4 percent, in Poland by 6.9 percent, in Austria by 3.7 percent, in Germany by 2.5 percent and in Hungary by 1.8 percent in the second quarter.
Estonian economic growth slowed to 7.6 percent in the second quarter of 2007 on an annual comparison, the national statistics office said recently, issuing revised figures. In the first quarter of 2007, gross domestic product expanded by 9.8 percent on a 12-month comparison.
The office attributed the slowdown in the second quarter to weaker domestic demand and a considerable deceleration in exports.
EUROPEAN UNION
The crisis of the financial markets slows down European economies. In 2007 the GDP in the euro zone will grow 2.5 percent and in the EU27 2.8 percent. The Direction Economic and Monetary Affairs under commissioner Joaquin Almunia announced this, cutting this spring's forecasts for growth by 0.1 percent for both euro zone and EU27. The Direction raised estimates on 2007 inflation by 0.1 percent on the other hand to 2 percent for the euro zone and 2.2 for the EU. "The solid basis of European economy will help it manage the financial turbulence," Almunia reassured in the note, "but the growing risks ask for governments to maintain their agenda focused on reforms and financial consolidation, in order to increase the resistance of the EU economy". Growth forecasts, the note explains, are made based on an analysis of the economic situation of seven countries (France, Germany, Italy, Holland, Poland, Spain and the UK), together responsible for 80 percent of the European GDP, and the lower forecast is the reflection of the weaker quarter than expected.
The Lithuanian finance ministry said that gross domestic product is expected to surge by 8.6 percent this year.
'The strong exports, which grew by 29 percent in the first half of 2007 as well as continuing growth of credit will result in faster GDP growth', the ministry said in statement.
The forecast for GDP growth in March was 7.2 percent, it was changed to 'over 8 percent' in June this year. Lithuania's GDP shot up by 8.1 percent in January - June this year compared to the same period a year ago. The forecasts for the future years remained unchanged with a projection of 5.3 percent growth in 2008, 4.5 percent in 2009 and 5.2 percent in 2010.
However the inflation forecasts were reviewed upgrading the projections for annual average inflation from 4.7 to 5.2 for 2007 and from 4.2 to 5.6 for 2008. High inflation was the main obstacle for Lithuania to introduce euro from the beginning of 2007.
Russia's gross domestic product grew 7.8 percent year-on-year in April-June 2007, reaching 7.648 trillion rubles ($298 billion), the Federal Statistics Service said. In the second quarter of last year GDP grew 7 percent, and in the first quarter of 2006 rose 5 percent.
The first deputy chairman of the Central Bank, Alexei Ulyukayev, said earlier this month that annual GDP was expected to grow 7.5 percent in 2007, up from an earlier forecast of 7.2 percent. The World Bank forecasts Russia's 2007 GDP growth at 7 percent. In January-July the economy grew 7.9 percent year-on-year.
Slovenian GDP grew by 6.3 percent in the second quarter of the year compared with the same period in 2006, the Slovenian Statistical Office reported. The economy expanded 1.2 percent from the first quarter, the office said.
'High export growth continued in the second quarter, increasing by 13.6 percent,' the office added. It also revised its 2006 GDP growth, raising it 5.7 percent from 5.2 percent published earlier this year.
Spanish GDP growth is expected to fall to 3 percent in 2008 from an expected 3.8 percent this year, according to a survey of private sector economists published in newspaper El Pais. The paper, which polled a dozen economists for its survey, said that the fall in growth was a consequence of the subprime mortgage crisis in the United States and a slowdown in the construction sector. The government in Spain, one of the eurozone’s most dynamic economies, expects growth of 3.3 percent in 2008 after 3.8 percent in 2007. The International Monetary Fund predicted in July growth of 3.4 percent for 2008.
Turkey’s economy grew by 3.9 percent in the second quarter of 2007 compared to the same period last year, the Turkish Statistics Institute said. The figure shows the change in gross national product (GNP) over the period, the preferred measure of Turkish economic growth, which includes the output of millions of Turkish workers abroad. Turkey’s GNP increased by 6.7 percent in the first quarter of the year and by 5.2 percent in the first six months, the institute said. In 2006, Turkey achieved 6.0 percent growth in GNP for the whole year, above the official forecast of 5.0 percent. The institute said that gross domestic product (GDP), which covers only goods and services produced within a country, rose by 3.9 percent in the second quarter of 2007. Turkey’s GDP grew by 6.8 percent in the first quarter of the year and by 5.3 percent in the first six months of 2007, the institute added.
A report issued by the United Arab Emirates' central bank showed that the country's gross domestic production (GDP) grew 23.4 percent at current prices in 2006 to amount to $163 billion compared to a year earlier, Gulf News reported. According to the report, the increase in the non-oil sectors surged to 20.3 percent, representing 62.7 percent of the total GDP, while revenues from oil and gas production increased by 29 percent to $60.8 billion.
The money supply (M1) continued to increase and expanded by 14.9 percent to touch $30 billion, driving the broad money (M2) up by $20.5 billion or 33.2 percent to $108.7 billion. Net domestic credit swelled by 42 percent by the end of 2006, according to the central bank's data. Meanwhile, expenditures increased by 22.8 percent amounting to $35 billion by the end of 2006.
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