GDP UPDATE
December 2008
McIlvaine Company
Table of Contents
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
Goldman Sachs has sliced its estimates and price targets on most of the enterprise software companies it covers to reflect a dire outlook for the U.S. economy and IT spending.
In a research note, Goldman’s Sarah Friar notes that the firm’s economics team now sees real GDP shrinking 5 percent in Q4 and 1.6 percent in 2009, worse than their previous forecast of down 3.5 percent and down 0.8 percent. Goldman now sees unemployment next year reaching 9 percent, above their previous estimate of 8.5 percent. Slowing business activity and lower headcount translates to reduced spending by companies big and small; she cuts her 2009 IT spending forecast to down 4 percent, from down 1 percent.
Recently, Statistics Canada released third-quarter 2008 Gross Domestic Product (GDP) figures for Canada. The “real” (inflation-adjusted) quarter-to-quarter annualized change was +1.3 percent and the year-over-year change was +0.5 percent. The former was a step upward versus the two previous quarters, but the latter was another step downward for the fourth quarter in a row.
Both the quarter-to-quarter and year-over-year changes might be termed “satisfactory” in the context of the period covered. There is one big problem, however. These numbers are looking backwards and current developments are altering radically and in an unpleasant direction. World trade has dropped off, the commodity price bubble has burst and U.S. demand for Canadian export products is in a tailspin.
Everyone is now interested in what has happened since the end of the third quarter. September 29th was the day stock markets plunged after the U.S. Congress first rejected the financial bailout package. Equity prices have gone on to explore new lows since then, driving down business and consumer confidence. This has also torn down the desire and ability to spend. There seems little doubt that recession has descended on the Canadian economy and job losses and reduced economic activity levels are starting to appear.
What the third-quarter GDP numbers do say is that Canada has entered this period of economic uncertainty in reasonable shape. Consumer spending (+0.7 percent quarter to quarter annualized) has been on a downward slide since fourth-quarter 2007, but it still remained positive. Goods exports (-5.2 percent) were negative in the latest quarter, but this was to be expected given the weak market in the United States for our forest, auto and energy products. Goods import (-3.9 percent) were also down, due to fewer Canadians traveling abroad. Residential investment (-0.1 percent) stabilized after two negative quarters and non-residential investment (+2.7 percent) was a mix of stronger engineering work, but reduced non-residential building activity.
Japanese capital spending fell 13.0 percent in the third quarter from a year earlier, pointing to a downward revision in the country's third-quarter gross domestic product (GDP) due next week. Preliminary estimate showed last month Japanese economy shrank for the second consecutive quarter in July-September, meeting a widely used definition of recession.
The Philippine economy expanded a seasonally adjusted 0.9 percent in July-September from the previous quarter and annual growth climbed to 4.6 percent from a revised 4.4 percent in the second quarter despite the global financial crisis.
South Korea's economy expanded by 0.5 percent in the third quarter compared to the previous quarter, the Bank of Korea said in a revised report. The preliminary read had shown a 0.6 percent quarterly increase. South Korea's economy expanded 0.8 percent in each of the first two quarters of the year.
On an annual basis, the South Korean economy grew 3.8 percent in the third quarter - down from the 3.9 percent annual increase from the preliminary report.
The export of goods was down 1.9 percent on quarter following a 4.3 percent quarterly gain in Q2. Private spending edged up 0.1 percent from the previous quarter, the central bank said, while facility investment added 2.1 percent from the previous quarter.
Real gross national income (GNI), which measures the actual purchasing power of the population, was down 3.7 percent in the third quarter. It fell by the biggest margin since the first quarter of 1998 when GNI dipped 9.6 percent, according to the bank.
The central bank also said that economic growth for the year may come in shy of its earlier estimate of 4.4 percent as the global financial crisis has hurt the export-driven economy harder than expected. Some analysts are predicting that GDP may come in under 3 percent.
Further evidence came a day earlier, when government data showed that South Korean exports fell 18.3 percent on year in November, standing at $29.26 billion. That marked the country's biggest decline in seven years, and it was sharply lower than forecasts that called for a decline of 11.2 percent following an 8.5 percent gain in October and a 28.2 percent jump in September. November marked the first decline in exports since a 1.1 percent annual fall in September 2007, and it was the biggest decline since plummeting 20.4 percent in December 2001.
On a regional basis, South Korean exports were down everywhere except in the Middle East, which saw a 30.6 percent annual increase. Exports to the United States were down 6.2 percent on year, while exports to China fell 27.8 percent, exports to Japan were 13.5 percent lower and sales to the European Union were down 12.5 percent.
Imports also fell more than expected, coming in 14.6 percent lower on year at $28.96 billion in spite of forecasts that called for a fall of 5 percent. Imports had surged an annual 10.4 percent in the previous month.
The trade balance remained a surplus at $297 million - but that was far less than the $1 billion surplus that had been expected. October saw a revised trade surplus of 1.21 billion. The trade balance has posted a deficit in eight of the first 11 months of the year, resulting in a $13.34 billion shortfall in that span. The last time South Korea posted a deficit for an entire year was an 8.4 billion shortfall in 1997.
The country is now expected to post a trade deficit of more than $10 billion in 2008, the ministry said. The government had originally expected to post a shortfall of $1.89 billion following the $14.6 billion surplus in 2007.
European Central Bank staff revised down forecasts for gross domestic product growth and inflation across the 15-nation euro zone. The forecasts, released Thursday following the ECB Governing Council's decision to cut the bank's key lending rate 75 basis points to 2.5 percent, see GDP growing by 0.8 percent to 1.2 percent in 2008, then falling between -1 percent and 0 percent in 2009, before rebounding by 0.5 percent to 1.5 percent in 2010. In September, staff forecast growth of 1.1 percent to 1.7 percent in 2008 and 0.6 percent and 1.8 percent in 2009. ECB staff now see consumer inflation of 3.2 percent and 3.4 percent in 2008, declining to between 1.1 percent and 1.7 percent in 2009 and coming in between 1.5 percent and 2.1 percent in 2010. In September, they forecast 2008 inflation of 3.4 percent to 3.6 percent, falling to 2.3 percent to 2.9 percent in 2009.
The Belgian economy expanded by 0.1 percent in the third quarter, the central bank said recently, confirming its initial estimate, although it revised its year-on-year figure. Seasonally adjusted gross domestic product (GDP) increased by 1.3 percent year-on-year, compared with an initial figure of 1.2 percent, the bank said in publishing final data.
Quarter-on-quarter growth in the first and second quarters of 2008 was 0.4 and 0.3 percent respectively. The bank reported that the contribution to GDP of the service sector grew by 0.2 percent and for construction by 0.4 percent, while that for manufacturing fell by 0.5 percent. Corporate investment fell by 1.0 percent after five successive quarters of increase, while household spending and investment stagnated. Exports of goods and services fell by 0.6 percent. Imports stabilized.
While the decline in German factory orders did not come as a tremendous surprise, the speed at which the industrial sector is deteriorating has caught many off guard. As a result, economists expect industrial production to slow further in the near term, signaling another quarter of negative GDP in Germany. Reflecting ongoing weakness in domestic and foreign demand, German factory orders fell by an unexpected 6.1 percent between September and October, significantly outdoing the 0.5 percent decline expected, the German Economics Ministry said. Meanwhile, September's monthly figure was revised down from an initial estimate of -8.0 percent to -8.3 percent.
In a report issued recently, the Economics Ministry noted that domestic orders contracted 6.1 percent on a monthly basis in October, deepening the 4.7 percent decline in the previous period. Meanwhile, foreign demand declined 6.2 percent following September's monthly fall of 11.6 percent. On an annual basis, orders fell 17.3 percent in October, down from September's 3.0 percent decline, the ministry noted. Economists had expected a less pronounced decline of 12.1 percent, while September's figure was revised down from an initial estimate of -2.7 percent.
Disaggregating the data, domestic demand fell 11.2 percent in October year-over-year, down notably from September's 2.5 percent gain. However, foreign order levels suffered even more, falling almost 23 percent in annualized terms.
"We think the industrial meltdown will continue for some time, leading into Germany's worst recession in post-war history," UBS economist Martin Luck said following the stronger-than-expected decline in orders. "While we still think that there will be some light on the horizon at some stage, economic indicators will likely continue to get a lot worse before they turn for the better."
In a research note to clients, Luck acknowledged that the decline in orders, on its own, did not come as a surprise, given the record lows in the new orders components of the purchasing manager’s index for manufacturing.
"What surprises us, however, is the speed of the industrial meltdown. It is now pointing to a much sharper contraction of GDP growth than the consensus is currently expecting (-0.4 percent average GDP growth in 2009)," Luck said. "Our own forecast is significantly lower (-1.2 percent), and we think the risk to even this pessimistic call is clearly on the downside."
Under these conditions, Luck expects the European Central Bank to continue to lower its main refinancing rate to 2 percent by Q2 2009 at the latest, while anticipating the German government to quickly agree on measures to stimulate demand. "However, this stimulus better be quick, as otherwise a quite dramatic jump in unemployment and, hence, far deeper recession than expected so far can no longer be ruled out," Luck said.
Natixis economist Costa Brunner noted the strong declines in capital goods and foreign orders at -8.2 percent and -6.2 percent, respectively.
"Today's outcome shows the weakness of the German industry during an economic slowdown: it is highly dependent on both foreign demand and on demand for capital goods (capital goods accounts for 30.6 percent of total manufacturing output)," Natixis economist Costa Brunner said.
With the automotive, chemical and engine construction industries the most important and the most affected by the ongoing economic crisis, Brunner is not holding out much hope for Q4 in Germany.
"The fourth quarter will be one of the weakest since reunification: we expect the GDP will contract by 1.3 percent QoQ and 0.9 percent YoY, mainly caused by a disastrous export business. Nevertheless the consumer goods producing industry should be a stabilizer during the next few quarters," Brunner said.
Greece's economy slowed in the third quarter to growth of 3.1 percent year-on-year, down from a second quarter reading of 3.6 percent, the statistics service (NSS) said, based on provisional estimates. Third-quarter economic growth was unchanged from a previous flash estimate. Quarter-on-quarter, growth was revised lower to 0.4 percent from a previous 0.5 percent flash estimate in November.
Romania's economy expanded much faster than expected in the third quarter, even as its main trading partners in the euro zone slipped into recession. Nonetheless, recent indicators suggest the country's economic boom may be over. Romania's gross domestic product grew 9.1 percent from the year-earlier quarter, the National Statistics Institute in Bucharest said. The strong performance was driven in part by 27 percent growth in agricultural output from the year-earlier period, when Romania experienced a drought.
Despite the strong figures, growth in private credit is slowing, the property market is seizing up, and trade flows around the region are starting to fall. Companies are announcing job cuts or production cutbacks. And new central-bank regulations calling for tougher screening of new loan applicants mean few qualify, especially for mortgages, at a time when house prices are falling, bankers say.
Last month, Mihai Ionescu, head of a Romanian exporters' lobby group, said existing orders for the fourth quarter were being cut by as much as 30 percent. Forecasts for next year vary widely. The European Bank for Reconstruction and Development last week said it expects Romania's economy to grow 3.0 percent in 2009, down from 8.0 percent this year. Ratings agency Moody's Investors Services predicts a recession next year. Romanian central-bank Governor Mughur Isarescu, on the other hand, projects GDP will expand by 3 percent to 6 percent in 2009.
Romanian equity markets have shed more than two-thirds of their value this year, while short-term borrowing costs have jumped as the central bank intervened in money markets to prop up the leu. The currency has fallen around 20 percent against the euro since the summer of 2007.
A Nov. 30 general election produced no clear winner, and politicians are still jockeying to form a coalition. The major parties all promised tax cuts and higher public-sector wages, so next year's deficit could jump to 5.5 percent of GDP unless spending cuts are implemented, said ING senior economist Nicolaie Alexandru. That is unlikely unless the parties compromise and form a government of technocrats.
The departing government is targeting a deficit of 2.3 percent of GDP this year, but many economists say it's likely to be higher. The government projects a deficit of 2 percent of GDP for 2009.
Russia's GDP is expected to grow 3-3.5 percent in 2009 amid declining world oil prices, according to Deputy Economic Development Minister, Andrei Klepach.
"The fall of oil prices to $50 (1400 rubles) per barrel will not generate a crisis. The Russian economy [in 2009] will be able to grow 3-3.5 percent and in 2010 may reach 5 percent," Klepach said at the Russian economic and financial forum in Austria.
In its transition report, the European Bank for Reconstruction and Development revised downwards its GDP growth forecast for Russia in 2009 from 6 to 3 percent.
The EBRD said the rapidly declining volumes of liquidity in the Russian financial system coupled with the absence of access to foreign sources of credit were the main sources of danger for Russia's economic growth.
Klepach also said that the average price for Russia's Urals crude is expected to be at $50 per barrel in 2009, $55 (1540 rubles) per barrel in 2010 and $60 (1680) per barrel in 2011.
Serbia’s economic growth will slow more than earlier forecast as the global financial crisis cripples the banking industry and investment shrinks, central bank Governor Radovan Jelasic said. Gross domestic product may expand 5.5 percent this year, compared with the bank’s initial estimate of 7.5 percent, Jelasic said in an interview in Belgrade. The economy grew 6.4 percent in 2007, when investments helped raise living standards and wages.
Serbia is fighting the effects of a worldwide credit squeeze that has pushed emerging markets lower. It secured a $516 million standby loan on Nov. 14 from the International Monetary Fund, the fourth eastern European nation to tap the institution for funds. The IMF sees 2009 growth of 3 percent and Jelasic said the first quarter “will be challenging.”
“Let’s be fair and admit that most of the growth originated in non-trade sectors, from financial services to transport,” Jelasic said yesterday. “I expect these sectors will be dropping now.”
The dinar fell as much as 1.6 percent to the weakest since the introduction of the euro, after his comments.
Serbia’s slowdown comes at a time when the economy is still recovering from the devastating Balkan wars and international isolation in the 1990s. To counter the effect of the worldwide credit crunch, the Narodna Banka Srbije will ease some banking rules this month to improve liquidity and help support the industry during the economic slowdown. For the past two months, Serbia’s banking industry has been experiencing a decline in deposits. Hungarian lender OTP Bank Nyrt. canceled a plan to sell its Serbian unit because of “extremely depressed” market prices.
Jelasic also said the inflation rate this year will dip below 10 percent, compared with 10.4 percent in November and 15.9 percent in June, because of falling crude oil prices.
“This does not mean we are happy because without lower crude oil prices the figure would be much higher,” he said.
The core inflation rate at the end of this year will be 10.9 percent, instead of a previous target of 8.7 percent, the central bank said.
To combat inflation, the central bank in October boosted its repurchase benchmark rate to 17.75 percent, the second highest in Europe. Jelasic said the “future of the repo rate” will depend on the budget and a meeting with the IMF’s board of directors scheduled for Dec. 19.
The central bank for the past two months has spent as much as 500 million euros ($637 million) to maintain liquidity in the currency market. The institution’s key problem is “drastic” drop in trading on the currency market.
“The dinar is in shallow waters, and the key reason for that is the mistrust of foreign investors,” he said.
The dinar fell to as low as 92.1585 today and was trading at 91.9160 per euro at 10:16 a.m. in Belgrade.
The bank sold 10 million euros to stabilize the dinar. The dinar declined 12 percent this year as the country struggles to attract funds to finance its $6.2 billion current- account deficit. In October, the central bank lowered compulsory reserves for commercial banks. The IMF warned that government overspending may push the current-account deficit this year above 18 percent of GDP, which it must cover through increased borrowing.
Prime Minister Mirko Cvetkovic’s government promised to cut the budget gap to 1.5 percent of GDP from 2.7 percent of GDP to help weather the global crisis and attract investors. Budget revenue has been set at 715 billion dinars ($10 billion) and spending 761.5 billion dinars. Jelasic said lowering minimum reserves, narrowing the budget deficit and complying with IMF recommendations may help strengthen the dinar.
“We can’t foresee the exact timing for that to happen,” Jelasic said.
Ukraine will see GDP growth of 3.5 percent-4 percent in 2008, compared with 7.6 percent in 2007, the Ukrainian Economy Ministry predicts. The inflation forecast for the year ending December 2008 has been raised to 21 percent, First Deputy Economy Minister Serhiy Romanyuk told the press.
The macroeconomic forecast for 2009 has not yet been given final approval because of the uncertain exchange rate outlook, he added. "We will not approve (the 2009 forecast) until we can clearly foresee the way the exchange rate will behave," Romanyuk said.
The government was due to discuss the 2009 macroeconomic forecast on Wednesday, December 3.
Earlier the Ukrainian government forecast GDP growth of 6.8 percent in 2008 with inflation of 9.5 percent. For a long time the government refused to change its GDP growth forecast, but it did raise the inflation forecast, putting it at 15.9 percent in the summer. GDP rose 5.8 percent in January-October 2008 with inflation at 18 percent. GDP dropped for the first time since August 2005 in October 2008, falling 2.1 percent with inflation at 1.7 percent.
The Economy Ministry said last week that it predicted a 5 percent slump in GDP in 2009, but there is still no official government forecast for 2008 and 2009. The European Bank for Reconstruction and Development forecasts GDP growth in Ukraine of 6 percent in 2008 and 1 percent in 2009. Fitch Ratings predicts 4.5 percent growth in 2008 and a drop of 3.5 percent in 2009, while the International Monetary Fund says GDP will grow 6.4 percent and 2.5 percent, respectively.
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