GDP UPDATE
February 2008
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TABLE OF CONTENTS
AMERICAS
U.S. growth, hurt by a sharp housing market downturn, should pick up in the second half of 2008 driven by a stimulus package and the resilience of the economy, U.S. Commerce Secretary Carlos Gutierrez said.
Gutierrez said the impact of the housing crisis, which took a heavy toll on growth in the latter part of 2007, could last "a couple of quarters" before recovery "to a growth rate more akin to what we have been having over the last several years".
"In the first half of the year we will see a lower growth rate ... but our growth should pick up in the second half of 2008," Gutierrez told Reuters in Amman. Gutierrez said the economy, which grew last year at 2.2%, the slowest pace in five years, would continue to grow despite the downturn.
"While we go through this correction we will see a slower rate of GDP growth but we will continue to see GDP growth ... our economy is strong. We will get through this correction the way we got through many others," he said.
U.S. growth slackened to a 0.6% annualized pace in the final three months of the year and many economists fear the country is being dragged into a recession by the slumping housing market, that has sparked a global credit crunch.
Gutierrez said a government stimulus package of over $150 billion approved by Congress was designed to "be temporary, quick and impactful to keep the economy moving while we go through this housing correction".
Less affected segments of the economy would ease the impact of the crisis in the housing sector on growth. "Our economy is so large and diverse that we have a lot of segments that can offset when one segment is going through a correction ... you cannot really point to one area and say that's what we are going to use to drive growth," he said.
Gutierrez cited positive factors such as latest unemployment figures, resilient exports and continued business investment and healthy non-residential housing construction.
"Our last reading of unemployment was 4.9%. That's below the average of each of the past three decades," he said. A U.S. export boom encouraged by free trade deals and relentless efforts to open up new markets for U.S. products by "getting rid of barriers was now paying off and helped growth", he added.
The fall in residential construction spending, which was 16.9% over course of the full year, marking the worst annual performance since 1982, was being tempered by growth in commercial and industrial construction, Gutierrez said.
"Interestingly non-residential construction has been almost offsetting and in some quarters has offset residential construction," he said.
But the slowdown in the "next couple of quarters" in consumer spending, which fuels more than two thirds of the U.S. economy, could adversely hurt foreign enterprises investing in the U.S. market, he warned.
"Seventy percent of our GDP is driven by consumer spending ... So if our economies decline and our consumer spending declines that could impact, of course, exports to the U.S. and businesses that are doing transactions in the U.S. That could impact how investments perform in the short-term," he said.
Ultimately recovery was underpinned by fundamentals of a large and diverse economy, the senior U.S. official said.
"We are talking about something short-term ... this is a correction ... and we will get through because we have a very strong, large, diverse and resilient economy. We have had very difficult shocks to our economy but we have always recovered and continued to grow," Gutierrez said.
ASIA
Releasing upward revisions of India’s real growth over the last two years earlier this month and feeling just a tad disappointed at the CSO’s forecasts of a lower than 9% growth for the current year, the Finance Minister, P. Chidambaram’s confidence in undiminished growth next year and beyond was as robust as ever.
He is certainly not alone in his optimism. With current decadal average real GDP growth of 7% and last four years’ average growth of 8.8% as evidence, most observers feel that with some policy tinkering, India can sustain 8-10% annual average growth rate in the long-term. Yet, a more detailed look at India’s current growth process makes such a buoyant outlook far from a self-evident prophesy.
The burgeoning ranks of middle- and high-income households with strong consumption demand are often assumed to be the catalyst of the growth story. The reality, however, is different; the share of private final consumption in GDP declined from over 70% in the early 1990s to 65% a decade later and to below 59% in 2006-07. Moreover, while the gulf between real GDP and private consumption growth somewhat narrowed in the mid- and late-1990s, it widened after 2001-02. The main propellant for India’s take-off onto a high growth trajectory was investment.
The Japanese economy is likely to grow an average 1.7% in fiscal 2008, according to a survey by the Cabinet Office's Economic Planning Association. This was 0.18 percentage point lower than what was projected in the January survey. This also trailed the 2% growth projected earlier by the government.
Meanwhile, Japan's fourth quarter GDP data is due out soon. Most economists predict that the real GDP growth to be 1.36% for the quarter. The report further said, that the next rate hike by the central bank would be in January 2009, if not earlier in September this year.
Central bank governor Amado Tetangco urged more infrastructure spending to keep the Philippines economy on a high growth track amid a looming United States slowdown.
"There is sufficient liquidity available in the system right now, and it would be good if this opportunity is used by the government to pursue its infrastructure programs," he added.
The Arroyo cabinet is discussing a proposed 75 billion-peso (1.84 billion-dollar economic stimulus package, though her economic managers are understood to have reservations with some components.
Tetangco said the Philippines achieved an "ideal convergence" last year when GDP rose to a 31-year high of 7.3% and inflation fell to a 20-year low of 2.8 %.
He said Filipino economic managers remain confident of achieving GDP growth of between 6.3 and 7.0% this year and of keeping inflation at four percent plus or minus one percentage point.
Economists say the Philippines needs to sustain GDP growth at 7% or more over one generation to make a significant dent on the 40% of Filipinos who live on two dollars a day or less.
Tetangco said slower US economic growth this year "is not seen to have a significant immediate impact" on the Philippine economy. "However, we recognize that a longer-than-expected US recession could take its toll on the economy."
The large overseas-based work force, including three million Filipinos living in the US, send home salary remittances that are equivalent to about 11% of the Philippines gross domestic product (GDP), Tetangco said. Recession or flatter US growth would also dampen demand for Filipino labor as well as merchandise exports, Tetangco said. The export sector accounts for about 45% of the economy.
Philippine exports rose 6.1% from a year earlier to 50.3 billion dollars in 2007, lower than government's growth target of at least 8.0%, the National Statistics Office (NSO) said. Exports grew 21.4% to 4.5 billion dollars in December after a 2.1% annual drop in the previous month.
"We have built up buffers," he said, citing the decline in the US share of Philippines export market to 18% from 30% a generation ago, "but there has not been a complete decoupling".
He said "the full impact of the US subprime mortgage market woes has yet to be felt" and could lead to "further risk aversion against emerging economies, including the Philippines."
Inflation rose to a 15-month high of 4.9% last month, and Tetangco said "prolonged high oil prices is a threat to our inflation outlook."
"We are looking at a turtle-back-like inflation trend for the whole year, but the average will still fall within the target of 3-5%," he added.
Average inflation in 2009 is also expected to be within the target of 2.5-3.5%, he added.
Given sustained strong inflows, the central bank is projecting surpluses of 6.9 billion dollars for the current account and 3.4 billion dollars for the balance of payments.
Growing global uncertainty is clouding the prospects for Korea's export-driven economy this year. Fuelled by inflation, rising oil prices and subprime defaults spilling over to financial markets, global investment banks are lowering their initial gross domestic product (GDP) growth projections for Korea, indicating that it will be difficult to post a 5% increase.
According to the Korea Center for International Finance, Korea's GDP growth is expected to average 4.7% in 2008 based on data compiled from nine investment banks, down 0.3 percentage points from an initial forecast last August.
Of the nine, Deutsche Bank issued the lowest outlook for Korea's GDP at 3.9%, followed by UBS at 4.1%. Meanwhile, Merrill Lynch, BNP Paribas and Goldman Sachs project the country's economic growth to accelerate over 5%. The rest, including Lehman Brothers and Morgan Stanley forecast it to achieve a mid 4% level this year.
Ongoing credit woes on the subprime fiasco are attributable to the economic deceleration expected by investment banks, the center noted.
Although Korea posted a 4.9% growth thanks to solid exports in 2007, analysts expect outbound shipments to slow due to worsening credit conditions especially in the U.S. where consumption, which accounts for two-thirds of its economy, is contracting.
``A deterioration in U.S. consumption will first weigh on China's export performance, then affect the rest of the region, especially economies such as Japan and South Korea that heavily rely on demand from the mainland,'' said Moody's Economy.com.
It said with an increasingly gloomy outlook on Korea's main growth engine, its economic expansion will only reach 4.5%, adding that: ``A sharper than anticipated slowdown in the global business cycle could see Korean forecasts revised down further in the coming months.''
In addition, the Bank of Korea cut its growth forecast for this year to 4.7% from its previous forecast of 5% in December, citing the fallout of U.S. subprime mortgages and rising oil prices. President-elect Lee Myung-bak, who had pledged to boost growth rate by 7% during his campaign, revised this down to 6% amid growing uncertainty.
The nine investment banks expect the country's growth to rebound by 0.2 percentage points to 4.9 percent in 2009 on the easing of credit woes going forward.
EUROPE / AFRICA / MIDDLE EAST
Bulgaria's economy would grow by a real 6% in 2008, fueled by continued growth in the industry and services sector, as well as the recovery of its agriculture, economic policy think tank Center for Economic Development (CED) forecast on February 12, 2008. Incoming EU structural finds would also have a positive impact, CED representatives told a news conference at which they presented a report on Bulgaria's economy in 2008.
The think tank's experts believe Bulgaria's economic growth to have slowed down to 5.5% in 2007, compared to 6.1% a year earlier. The National Statistics Institute is expected to release the full-year data in March.
CED expects Bulgaria’s current account deficit to exceed 20% of gross domestic product (GDP) for 2007, but projected its growth to slow down in 2008. However, the think tank does not expect it to decrease, since its main driving force, the trade gap, is unlikely to shrink. Even though exports are expected to go up, productivity will remain low and EU subsidies will further boost imports, CED said.
Despite the global credit crunch, foreign direct investment in 2008 will reach six billion euro, an increase over last year's 5.5 billion euro, but to keep investors interested in the long term, the Cabinet will have to prove its commitment to structural reforms that would improve the business climate, the report's authors said.
CED also believes it unlikely that the combination of factors that caused inflation to jump to a seven-year high of 12.5% at end-December would not repeat itself this year, but still forecast it to remain above the EU average over the next several years.
Slovak economic growth probably slowed in the fourth quarter of 2007 due to a worse trade balance, but the rise still remained one of the highest in the European Union, a Reuters survey recently showed. The survey of eleven analysts showed a median forecast of 8.9% gross domestic product (GDP) growth in the fourth quarter, which would be below the record quarterly rise of 9.4% seen in the July-September period.
Analysts saw the economy growing by 9.0% for the whole of 2007, which would be the fastest full-year growth ever, after an 8.5% rise in 2006. The Statistics Office will release the preliminary fourth-quarter flash GDP estimate on Feb. 14. The full-year data will be published on March 4.
"Dynamics of the net exports' contribution in the fourth quarter was probably slightly lower than in the third quarter," said Maria Valachyova, senior analyst at Slovenska Sporitelna. "Growth structure was balanced... driven by household consumption, investments and net exports," she added.
Slovakia has had one of the highest GDP growth rates in the EU in the past few years, fuelled by booming car and electronics industries and reviving household consumption after years of belt-tightening reforms. The central bank said economic growth had not created inflationary pressures last year, and it did not see a danger of economic overheating this year and in 2009.
Most analysts concurred, saying growth structure was healthy in 2007 and that economy was not running above its potential.
"We believe that growth of (output) potential, related to foreign direct investment inflows, is behind the high economic rise," said ING Bank analyst Eduard Hagara.
Slovak economic growth is expected to slow down in 2008, with the central bank forecasting a 7.7% rise, and some analysts saw external risks for the small and open economy.
"We believe there is a strong downside risk in external demand, which was the main driver of growth in 2007," said Jaromir Sindel, the Prague-based economist at Citibank. "However, we expect household consumption to continue rebounding in 2008, owing to stable rise in real wages and an increase in employment," Sindel said.
Finance Minister Christine Lagarde said she maintains her expectation that French GDP growth will be around 2% in 2008, the same level she anticipates being reported for 2007.
In an interview with the daily Le Figaro, she said the French economic situation is 'very different' from that in the US, with the employment situation remaining dynamic, consumption absorbing the shock and the property market not hurt by the US slowdown.
1.) Italian industrial production fell by 0.5% in December, its fourth monthly decline, indicating that the overall economy probably shrank in the final quarter of last year. Data posted by official statistics agency ISTAT showed industrial output fell 6.5% year-on-year, in workday adjusted terms, the biggest drop in six years.
Many economists had expected a rebound from November's output decline, which was revised on Monday to -1.1%, from the initial 0.9% month-on-month fall.
"We thought there would be a bounce back after the very negative number in November," said Chiara Corsa of Unicredit.
A Reuters poll had given consensus forecasts of 0.5% seasonally adjusted month-on-month growth and a 3.1% fall on a workday adjusted year-on-year basis.
"In light of (Monday's data) we are revising our estimates for GDP in the fourth quarter from -0.1 to -0.2 on the quarter and we see downside risks for this estimate," said Corsa. "In the next few months we expect to see underlying weakness."
Output for the final quarter was down 2.2% on the previous three months, when it grew by 0.4%, ISTAT said. A breakdown of the data showed contractions in all sectors, with investment goods hit the hardest, down 2.3%, and output of consumer goods down 1.4%.
"A look at the details shows the decline is spread out through all the components," said Luigi Speranza of BNP Paribas. "It's hard to find anything positive, it's a nasty figure."
"We thought that November might have been a distortion but clearly that was not the case. There are downside risks for our estimate of -0.1% for Q4 GDP. What is sure is that the quarter will have negative growth."
2.) Italy's economy is expected to avoid a recession — two successive quarters of quarter-on-quarter falls in GDP — after negative growth expected in the fourth quarter, said private sector economists. ISTAT said Italy's industrial output fell by 0.5% in December, from November, while November output was revised down, below expectations for December for a 0.8 rise.
'Today's weak number pushes fourth quarter industrial production deeply into negative territory and paves the way to a disappointing fourth quarter GDP reading,' said Unicredit's Chiara Corsa.
'Our previous forecasts for a 0.1% quarter-on-quarter fall looks clearly too optimistic and we now expect GDP growth to hover around minus 0.2-0.3 pct,' she said in a note from the bank.
The unexpectedly weak production was attributed to technical factors such as the way Christmas holidays fell in the calendar as well as a truck drivers strike during December, she said.
Economists said they see fourth quarter growth at between minus 0.3-nil.
ISTAT is scheduled to announce full year 2007 GDP data on Feb 29, 2008.
In the first quarter of 2008, economists said GDP will rebound, up 0.2-0.3% from previous quarter, boosted by technical effects after the weak fourth, and recuperating from the truckers' strike.
ING economist for Italy Paolo Pizzoli said the impact of the truckers' strike was only 'a partial surprise', with the bigger surprise being the downward revision in the November data. December's strike can be positive in the first quarter, as business recovers, while the international framework remains unfavorable, and Italy's political crisis dents company and consumer confidence, he said.
Italy holds elections April 13-14 after the fall of Romano Prodi's centre-left government recently.
Dresdner Kleinwort economist Matteo Radaelli declined to quantify changes in first quarter GDP, saying this trend depends on the world economy, with Italy facing weak prospects as other countries.
In addition to weak company sector, consumer spending continues 'to be very weak and can weaken further. I don't see a reversal in this trend,' he said.
Unicredit's Corsa said businesses will be affected by a slowing trend in exports, partly caused by the strong euro. Pizzoli said he sees the dollar strengthening during the year.
Intesa Sanpaolo economist Paolo Mameli said: 'We are not in a recession but this possibility cannot be excluded.'
The political crisis means any fiscal stimulation by a new government will have to wait until June, he said.
Full year 2008 GDP is seen up between 0.6%-0.8%, the economists said.
1.) Russian Finance Minister Alexei Kudrin said current forecasts call for the nation's GDP growth to slow to 7% this year, down from a preliminary 8.1% total in 2007, Interfax reported. Earlier forecasts called for 6.6% growth in 2008, but strong growth last year encouraged the government to raise its estimates.
'Even given the influence of some factors that could head downwards, we could secure 7 % of GDP growth in 2008,' Kudrin told journalists in Tokyo.
Kudrin also reiterated that 2008 inflation could reach 8.5%, despite 2.2% growth in January.
'This is linked to the fact that core reasons behind inflation in Russia are decreasing,' Kudrin said.
2.) Russian economic growth slowed to a 30-month low of 6.1% in January, reflecting weaker expansion in services, London-based VTB Bank Europe said in its latest GDP Indicator report. The figure indicated the weakest rate of economic expansion in Russia since July 2005.
The indicator slowed in January from the 6.3% rate registered throughout October-December of last year, the bank said. The Russian economy grew at an annual rate of 6.4% in July-September of last year, according to the bank's earlier GDP Indicator reports.
“The Russian GDP Indicator in January eased back to an estimated annual growth rate of 6.1%,” said Chris Green, senior economist at VTB Bank Europe Research, commenting on the survey. “Underpinning this softening growth profile has been a weakening in the rate of growth in the services sector, although this was somewhat offset by a rise in manufacturing sector activity over the month.”
Despite strong GDP growth in 2007, Green projected the growth rate to slow this year.
“While preliminary official estimates suggest robust GDP growth of around 8.1% in 2007, the latest Russian GDP Indicator survey suggests that the rate of expansion will ease over 2008,” he said.
South Africa's economic growth, which is expected to be in the region of 5% for a fourth consecutive year in 2007, could slow sharply to only 3.4% this year, the country's Bureau for Economic Research said. The BER, which is attached to the University of Stellenbosch, said that when official statistics are released at the end of the month it expects them to show gross domestic product growth of about 5% in 2007.
However, the list of factors that are likely to weigh on growth this year has grown significantly in recent weeks following the suspension of mining activity in the country on Jan. 25 after state power company Eskom Holdings Ltd. warned it couldn't guarantee uninterrupted electricity supplies.
The BER said its baseline scenario assumes that mining closures will result in a quarter-on-quarter decline of 20% in mining real value added, but that the sector will fully recover in subsequent quarters as power is restored and operations continue as normal. This, it said, would see mining output falling by 1.6% in 2008 and GDP growth slowing to 3.9%. However, it said that if, after falling 20%, mining sector output doesn't recover after the first quarter of 2008 and shows no growth, then overall GDP growth for the year would be only 3.4%.
The BER said that in both scenarios GDP growth is forecast to recover to 4.8% in 2009
The economic growth rate, which was equal to 3.8% for the first three quarters of 2007 with GDP increasing 1.5% in the third quarter, was significant.
Turkey's GDP will be $501.5 billion in the event that the growth rate for the fourth quarter is equal to that of the first three quarters — covering the January to September period -- with the help of increasing inflation.
In addition the GNP per capita, which was expected to be $6,625, will grow to $7,139 as a recent census showed the population below expected levels. Although growth is at a standstill, the GDP will increase to $7,075 per capita in the last quarter. GNP per capita exceeding $7,000 almost certain
British businesses face a difficult year in 2008, according to the British Chambers of Commerce (BCC). But although there is a risk of a downturn, it says, a recession is unlikely if the Bank of England and the government 'take correct policy measures'.
The predictions are part of the BCC's quarterly economic forecast, which says that the UK's year-on-year GDP growth will fall from a strong 3.1% in 2007 to 1.7% in 2008. The BCC also predicts that the Bank interest rate is likely to fall to 4.75% by mid-2008, but that a rate as low as 4.25% is 'realistic' if the economic slowdown worsens.
"Lower interest rates are necessary, but may not be enough on their own to counter the risks of a downturn," said BCC economic adviser David Kern. "Recent tax changes and weaker demand will have adverse effects on business, particularly if banks tighten credit."
"Small businesses are particularly vulnerable when the banking sector is under pressure," he added, "and the government may have to take special measures to support them if the credit crunch worsens."
Despite forecasts of real GDP growth this year, the erratic power supplies, and other operational limitations faced by companies may lead into economic recession, the Herald Business revealed.
Companies have and continue to lose significant production time to electricity shortages, and several of them have already reported severe losses, and sharp drop in productivity. Sectors worst hit have been that of agriculture (tobacco and wheat), manufacturing and mining. The three sectors combined provide more than 50% of Zimbabwe's GDP.
Rough estimates suggest output in these industries has declined by almost half, as a result of low electricity supplies, and the general shortage of raw materials, foreign currency etc. Analysts and industrialists polled by Herald Business estimate that GDP would fall further this year, particularly if the power outages were sustained, and the attendant problems in industry persisted.
Finance Minister, Dr Samuel Mumbengegwi has projected a growth of 4% in the economy in 2008, building hope on the anticipated growth in agricultural productivity. "The situation in industry at the moment is very dire," explained Harare industrialist, Mr Patterson Sithole, who is also former president of the Confederation of Zimbabwe Industries. "Power cuts have affected an industry that is already struggling with various operational constraints. Most companies have scaled down production, particularly those on 24-hour shifts.
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