GDP UPDATE
August 2008
McIlvaine Company
Table of Contents
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
The White House cut its forecast for U.S. economic growth this year and indicated President George W. Bush's successor will face the dual headwinds of rising unemployment and faster inflation.
U.S. gross domestic product will grow 1.6% this year and expand 2.2% in 2009, the White House's Council of Economic Advisers said in a mid-year review today. The forecasts were slashed from an outlook in February for 2.7% growth this year and 3% for 2009.
The effects of the economic slump have worsened the job market, and the White House forecast the jobless rate will average 5.3% this year and 5.6% in 2009. The unemployment rate averaged 5.1% in the first six months of 2008 and was at 5.5% in June, unchanged from the 3 1/2-year high reached in May.
"The U.S. economy has continued to expand, but growth has slowed as a result of the sharp housing decline, disruptions in financial markets, and high energy prices," the report said. "Because of the recent slower economic growth, the labor market is likely to remain sluggish for a period of time before returning to better performance."
The consumer price index will rise 3.8% this year, compared with a February forecast for 2.7%, the White House said. Next year, the cost of living will increase 2.3%, faster than the 2.1% gain predicted five months ago.
The nation's unemployment rate, as an annual average of monthly figures, hasn't exceeded 5.3% since 2004, when it reached 5.5%.
The White House's latest forecast for GDP growth was similar to private economists for this year and more optimistic for 2009.
The economy will expand 1.6% in 2008 and grow 1.7% in 2009, according to the median estimate of economists surveyed by Blue Chip Economic Indicators this month.
Chile's gross domestic product will probably expand 4.25% this year, below its potential because of energy shortages, the International Monetary Fund said.
``Chile has obviously faced a very difficult environment over the last year,'' Martin Muhleisen, the IMF's mission chief, said in a conference call with journalists. IMF officials visited Chile from May 19-30, meeting Central Bank President Jose De Gregorio and Finance Minister Andres Velasco.
Expansion in South America's fifth-biggest economy will lag behind its 5% potential as record prices for crude oil and natural gas hurt domestic demand and investment, the IMF said. Chile must import most of the petroleum it uses and drought earlier in 2008 cut hydroelectric output.
``The economy has proved remarkably resistant and the latest numbers are consistent with GDP growth of 4.25%,'' said Muhleisen. ``The risks to growth are still on the downside.''
Chile's economy grew 2.1% in May from a year earlier, the second smallest monthly expansion since 2002. The fund forecasts GDP growth may accelerate to 4.6% pace in 2008, slower than the 5.1% expansion in 2007. The IMF forecasts annual inflation this year of 5.5%.
``We feel confident projecting that growth will improve in 2009 including because of general improvements in the energy sector as the prospect for rainfall has improved and new power projects come on line,'' Muhleisen said.
Growth in 2010 is forecast at 5.5%.
A consensus estimate produced by 17 Chinese and foreign institutes is that China's gross domestic product (GDP) will grow 10% and the consumer price index (CPI) will rise 6.1% during the third quarter, down 0.1 percentage points and 1.7 percentage points, respectively, from the second quarter.
"The government's tight monetary policy is beginning to work to bring down inflation with the quickened pace of renminbi appreciation and a slowdown in money supply and GDP growth, " Lu Feng, a professor at Peking University and one of the forecasters, said.
"The dramatic increase in demand since last year was driven by money supply growth," said Song Guoqing, another Peking University economist. "However, statistics released in June showed a steady downward trend in money supply.
"Besides, a large portion of the 'hot money' is deposited in banks to profit on interest rate and foreign exchange rate differentials. Plunging stocks have caused wealth losses. These are being translated into a slower pace of fund circulation," said Song.
"Considering changes in the pace of fund circulation and money supply, the growth rate in overall demand is expected to continue slowing," Song observed.
China's GDP grew 10.6% in the first quarter and 10.1% in the second, with 10.4% growth for the first half of 2008. The CPI stood at 7.9% in the first half.
Without the floods in Queensland earlier this year, exports would have been stronger, and so would have overall growth. Coal exports dropped 7.7% from the previous quarter while mineral ores grew 7.2% as miners took advantage of rising commodity prices. Cereals, too, expanded, rising 39.4% for the period as drought eased in many regions.
Imports increased by 4.2%, with capital goods up 8.5% and consumption goods growing by a more subdued 3.3%.
Inventories rose by $1.5 billion in the quarter, matching the increase in the December quarter.
Economist Stephen Roberts, of Lehman Brothers, said the strength in consumption spending did not square with earlier figures on quarterly retail sales or vehicle sales.
"All told, we have a much stronger domestic spending position than previously thought," Mr Roberts said. "The net result is that we still need a fair bit of slowing in the economy.
"These are truly strange figures which don't tally with retail sales figures."
Rents, electricity and furnishings all had "pretty big rises in the quarter", he said, adding that growth in the insurance and financial services sector was another surprise. Spending on those services rose by 1.2% quarter on quarter. "Other" goods and services jumped by 2.5%.
Those figures were not picked up in retail sales readings, Mr Roberts said, which accounted in part for their surprisingly large contribution to GDP.
In the past two weeks, economic data has shown retail sales growth for April at -0.2% from 0.5% while first-quarter private capital expenditure contracted by 2.5% from growth of 5.1%. Data out yesterday showed new vehicle sales last month fell 2.2%, seasonally adjusted, compared with April, Reuters reported.
Monthly data from the Australian Federal Chamber of Automotive Industries showed sales rose 5.4% in original terms in May, after a weak April result. Compared with May last year, sales were flat.
This marked a sharp slowdown from April when annual growth stood at 11.2%.
Goldman Sachs has reduced India's growth forecast for fiscal year 2010 to 7.2% from 8.2% due to a weak investment outlook on account of rising interest rates. Investment has been an important driver for growth in recent years, contributing to nearly half of total GDP growth in fiscal year 2008, the investment bank said.
"With significantly higher rates than at the start of the year, we expect financing issues to become a key hurdle, especially for new investment plans," Tushar Poddar and Pranjul Bhandari, economists at Goldman Sachs, said.
However, the growth forecast for FY09 remains unchanged at 7.8%.
"The government has imparted a massive fiscal stimulus by means of greater spending on a rural employment scheme, a debt waiver to farmers, and wage hike to civil servants. These will continue to bolster demand and growth," they wrote.
Goldman Sachs has also raised its inflation forecast for both FY09 and FY10. For FY09, the forecast has been raised to 11.5% from 10%, while for FY10 it has been increased to 5.3% from 4.7%. India's annual inflation rate was holding just below 12% in mid-July.
Inflation is likely to come off in FY10, due to weakening demand driving growth below potential, a slowdown in the rate of change of commodity prices, a favorable monsoon, well-anchored inflationary expectations, ongoing productivity change and a very high base from 2008.
South Korea's economy grew a seasonally adjusted 0.8% in the second quarter from the previous quarter, above market expectations, central bank estimates showed. Gross domestic product in Asia's fourth-largest economy was expected to have risen 0.7% during the April-June period from the previous three months, a Reuters poll of 11 economists showed. That compared with a 0.8%rise in the first quarter and a 1.6% expansion in the fourth quarter of 2007.
The Bank of Thailand revised its economic growth estimate for 2008 downward, citing high oil prices, soaring inflation and fears of a slowdown of the global economy. Thai Gross Domestic Product (GDP) growth is now forecast at 4.8-5.8% this year, down from the previous forecast of 4.8-6.0%, said Bank of Thailand assistant governor Duangmanee Vongpradip. "GDP in the next six months of this year is expected to slow down, compared to that of the first six months, because of various risks," Mr Duangmanee told reporters, citing the worldwide concerns of fuel costs and inflation.
The Bank of Thailand statement also revised down 2009 growth projections from 4.5-6.0 to 4.3-5.8.
Inflation in Thailand hit a 10-year high of 8.9% in June. Central bank officials have already warned it could reach double digits this month. The central bank said it expected inflation across the year to average 7.5 to 8.8% - up from previous estimates of 4.0 to 5.0.
The World Bank expects Angola's oil-rich economy to grow by 20% in 2008, with growth slowing to between 10-11% next year, the World Bank's director for Angola said. In an interview with Reuters, Alberto Chueca said GDP growth was expected to slow as Angola's daily oil production stabilized at about two millions barrels per day after years of sharp increases in output.
"We do not expect an increase in the barrel of petrol (price) and since (Angola) already reached the top of OPEC's production cap we think next year growth will be around 10-11%," Chueca said. He also praised Angola's government for making its economy more transparent.
The Democratic Republic of Congo's economy will grow by 10% by the end of 2008, while inflation was seen accelerating, central bank Governor Jean-Claude Masangu said.
"By the end of 2008 GDP growth will have reached 10%," he said at the opening of a Standard Bank branch in Lubumbashi, the largest city in the heart of the Congo's Katanga mining region.
Mining interest has boomed in the mineral-rich central African country since the election in 2006 of its first democratically-elected leader in more than four decades. Formerly known as Zaire, Democratic Republic of Congo is Africa's third-largest country, covering almost 2.3 million sq km (900,000 sq miles) -- nearly 80 times larger than former colonial master Belgium. The economy suffered under decades of kleptocratic rule under late dictator Mobutu Sese Seko and violence since his overthrow in 1997.
Masangu also said inflation was seen averaging 21.5% for 2008, up from 9.8% at the end of 2007, largely due to rising international food and fuel costs.
"We have a target of 21.5%. Last year it was 9.8%. Part of it is imported inflation in the form of fuel and food," he said.
Finnish confidence indicators plummeted to new historic lows in July as gloomy global economic outlook hit consumers and businesses, data published recently showed. Finnish consumer confidence fell to +6.5 points in July -- to its lowest level in more than six years --from +10.2 points in June, Statistics Finland (SF) said. The indicator has fallen from a six-year high to a six-year low in 13 months.
Consumers are much more pessimistic about the national economy than their own, the statistics office said. Their expectations of Finland's economy were the gloomiest since 1990, when Finland entered a recession.
'It is somewhat surprising (that) consumer confidence has weakened so much in Finland,' said think-tank ETLA economist Pasi Sorjonen. 'Other data shows that we are not doing as bad as confidence indicators make it seem,' he said adding retails sales have been at a good level. 'But people follow business news, and they have been negative lately, and that brings the sentiment down.'
Finnish industry confidence fell to -5 points, its lowest level in five years, the Confederation of Finnish Industries (EK) said in a separate statement.
'Order books are close to long-term average level but the stocks of finished products grew clearly above normal,' EK said. Finnish economy has grown at about twice the euro-zone average in the past two years. Most economists expect Finland's gross domestic product (GDP) growth to be 2.5 to 3% this year and slightly less in 2009.
About half the consumers thought in July that the economy would deteriorate in the next 12 months, while 12% believed that Finland's economic situation would improve. But a quarter of consumers believed in July that their own economy would improve while 17% of them feared it would worsen over the year. Consumers' expectations about their own economic situation were the most cautious since 1996, Statistics Finland said.
'Steeper interest rates, higher-than-expected inflation and expensive gasoline have made people more wary about their own economy as well,' Sorjonen said.
Lithuania's GDP grew at a slower year-on-year rate in the second quarter, according to a preliminary report by the Department of Statistics. The GDP at constant prices grew 5.5% year-on-year in the second quarter, compared to the 8% rise in the same period the previous year. On a seasonally and working day adjusted basis, GDP grew 5.7% reversing the 1.1% decline in the previous period.
In the second quarter, the GDP was valued at LTL 28393.3 million compared with LTL 23685.2 million in the same period previous year. On a seasonally and working day adjusted basis, the GDP was valued LTL 28405.8 million compared with LTL 23691.6 million in the previous period. The per capita GDP increased to LTL 8448 from LTL 7010.
In another report, the Bank of Lithuania had revised the country's growth rates to 6% from 6.6% growth forecasted previously in April. Although, the growth had been revised downwards, the bank said the growth rates remained sufficiently high.
The downward revision of the growth rate was attributed to problems facing the economy in the form of higher inflation and other problems in the external sector. Although the country was not directly affected by the global financial crisis, indirectly it faced problems in the external front in the form of lower exports, as most of its trading partners were suffering under the grasp of the crisis. Moreover, other Baltic Tiger economies were also experiencing a slowdown in the growth, with the exception of Russia.
Meanwhile, the report also projected that inflation, in the form of the harmonized index of consumer prices, was likely to rise 11.8% in the current year and 7.8% in the following year on account of higher commodity and oil prices.
Russia's Economy Ministry has raised its 2008 inflation forecast to 11.8% from 10.5% and revised its outlook for economic growth, Deputy Economy Minister Andrei Klepach told Reuters. The ministry sees gross domestic product (GDP) growth at 7.8% in 2008, compared with its earlier forecast of 7.6%. Economists polled by Reuters see 2008 inflation at 13.3% and GDP growth at 7.8%.
"We believe there is a good chance to significantly lower inflation. We see that inflation rates are falling already. From a purely monetary point of view, we can make 11.8% or even less," Klepach said. "There are some upside risks linked to prices for fuel and food," he added.
The new forecast is just 0.1 percentage point lower than the 2007 inflation rate of 11.9%, underlining the government's target of bucking the rising inflation trend and dampening inflation expectations. The new forecasts, which also include figures for 2009-2010, have been given to the Finance Ministry, which is working on a new three-year budget. The forecast figures, once approved by the government, will serve as a basis for the budget.
The Finance Ministry has not yet confirmed the figures but Kremlin's economic aide Arkady Dvorkovich told reporters he agreed with the new numbers.
"Inflationary pressures are easing. We expect annual inflation within the targets set by the Economy Ministry," Dvorkovich said.
Inflation has become the government's main economic headache, fuelled by lavish state spending last year ahead of parliamentary election and a poll to elect a successor to ex-President Vladimir Putin, as well as by global food price rises.
"We view inflation as the main short-term risk for the economy," Dvorkovich said.
An inflation rate exceeding the 2007 level will further fuel rising inflation expectations in Russia and deprive the economy of long-term funds, desperately needed to fix infrastructure bottlenecks and sustain economic growth. Annualized inflation is currently running at over 15% but the government hopes inflation rates will fall due to a high base effect and slower money supply growth.
Investors examine inflation data for clues to the central bank's monetary and exchange rate policy. The central bank runs a managed float of the currency and the rouble's rate is the bank's most effective weapon against inflation.
In May a number of major foreign banks stirred investors' interest in the Russian currency predicting a massive appreciation of the rouble within months if the central bank were to meet its own inflation target of 10.5%. The central bank responded with a new exchange rate policy allowing the rouble to fluctuate within a wider corridor against the dollar/euro basket but inflows of oil revenues and capital have since pushed the rouble about 1.0% stronger.
Dvorkovich said the central bank has already done everything possible on the inflation front, bringing money supply rates down to 31.2% on July 1, 2008 from 53.1% on July 1, 2007. He added that a further tightening posed risks for the economy and banks. Klepach earlier said that Russia, which saw economic growth of 8.1% in 2007, is facing an economic slowdown despite higher prices for oil, Russia's main export commodity, which the ministry now sees at an average of $115 per barrel in 2008.
UniCredit Group has estimated that the average growth rate of the Serbian GDP by 2010 will amount to 6.2%. This projection is above the average figures for the region of southeastern Europe.
Economists with UniCredit expect a relatively high growth rate of the GDP regionally, with 6.8% in Romania, 6.2% in Serbia, 6% in Bulgaria, 5.8% in Bosnia-Herzegovina, and 4% in Croatia. The high deficit in the balance of payments, the dependence of the growth on outside sources of investments, and growing inflation pressures indicate that southeastern Europe is exposed to similar challenges as the Baltic states.
There, the report said, the economic situation has deteriorated due to a constantly increasingly poor macroeconomic balance, severe conditions of financing, and an overheated real estate market.
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