GDP UPDATE
January 2008
McIlvaine Company
TABLE OF CONTENTS
AMERICAS
The recession risks in the US economy stem mostly from the financial markets' problems, St. Louis Federal Reserve Bank President William Poole said, but those problems do not yet justify predicting a recession.
'2008 looks to be a year of rising growth,' he told a meeting of financial planners in St. Louis. Poole's text was released to reporters.
'Economic forecasters expect slow expansion in the first half of the year and a quickening pace in the second half,' he said.
While this remains the consensus among Fed officials, at least in their public statements, private forecasters are growing increasingly pessimistic. Several have now said the US is either about to enter or is already in a recession.
Goldman Sachs' economic team joined that group, cutting its full-year US GDP forecast to just +0.8% and predicting a recession in the second and third quarters.
Merrill Lynch economist David Rosenberg has already said 'the economy was transitioning into an official recession towards the end of last year'.
For his part, Poole said 'it's too early to tell right now' whether the housing sector recession will drag the rest of the economy down with it.
The weekly Central Bank Focus Bulletin that was recently released projects higher growth in Gross Domestic Product (GDP) for 2008 and a lower trade balance surplus for the year. The financial market representatives polled increased their forecast for GDP growth in 2008 from 4.50% to 4.60%, after twenty-six consecutive weeks of stability. The estimation for growth in GDP for last year increased from 5.19% to 5.20%.
The forecast for this year's trade balance surplus was dropped from US$ 31.94 billion to US$ 31.90 billion. Last year’s trade balance surplus closed out at US$ 40.039 billion.
ASIA
1) China's gross domestic product is expected to expand 10.8% in 2008, the State Information Center (SIC) said in a report in the official Shanghai Securities News.
The consumer price index (CPI) is expected to rise 4.5% this year and fiscal revenue is expected to climb 20% for 2008, while fiscal expenses are likely to rise 14%. Overall investment for the year is seen expanding 24%. Energy consumption per unit of GDP is expected to fall 4.4% for 2008. Total foreign trade is seen growing 20%.
2) JPMorgan said it expects China's gross domestic product to grow by 10.5% this year, versus an estimated 11.4% in 2007. The yuan's appreciation against the US dollar is likely to pick up pace, it said.
'There is a growing domestic consensus that faster yuan appreciation would be an effective policy tool for the authorities to deal with the current inflation problem,' the US bank said.
'In 2008, faster yuan appreciation of at least 10% in a widened band is a very achievable target,' it added.
It also said that the central bank is likely to raise interest rates three times this year after last year's six rises.
Union Finance Minister P. Chidambaram recently expressed concern over the lack of consensus on carrying out more financial reforms to ensure and sustain high GDP growth.
"If India has to grow at 9% plus continuously, its financial sector has to be modernized, with a slew of reforms in the banking, insurance and pension sectors," Chidambaram said.
Referring to the long delays in increasing the FDI (foreign direct investment) limit to 49% from 26% in the insurance sector, giving statutory powers to interim pension regulator and more voting rights for foreign agencies in private banks, the minister said the UPA government was keen to push ahead with financial sector reforms, as it had only 15 months left in power.
"If these key sectors remain undeveloped, backward, rigid, out of sync with the demands of the modern economy, it will be difficult to sustain the GDP growth at 9% or more," Chidambaram said.
Though the GDP grew at 9.4% last year and has the potential to grow at 10% and above, the minister said the reforms were imperative in the insurance and pension sectors, as the banking system accounted for a small part of financing, forcing the other two sectors to share the burden of financing.
"The growth of every player in the financial sector has to be commensurate with that of GDP. Ironically, those who want the high growth story to continue are, however, opposed to the changes in the structure of these key sectors," Chidambaram quipped.
Earlier, the minister said the state-run banks should reach out to farmers, students and women to drive the economic activity further.
Kazakhstan's economic growth slowed down in 2007 due to volatility in international debt markets that hit local banks, the Central Asian country's government said. Kazakh banks had been borrowing aggressively abroad which left them vulnerable to the global liquidity crunch.
"According to preliminary data economic growth was 8.7% (in 2007)," the government said in a statement Kazakhstan's gross domestic product grew 10.6% in 2006.
The government reiterated its earlier outlook for 2008 GDP growth of 5-7% and annual average inflation of 10%.
Citigroup is maintaining its forecast of 6% gross domestic product (GDP) growth for Malaysia this year, to be driven by strong domestic demand with increasing emphasis on investment rather than consumption. Its Asia Pacific economic and market analysis vice president, Zheng Kit Wei, said firmer signs of investment revival have emerged but downside risks remained considerable.
Despite expectation that exports may soften further on downshifting US growth prospects, he said Malaysia's economic corridors launched last year could be the driver for this year's growth. Even though the economic corridors are private sector-led investments, Zheng said there was a chance of public investment spending being ramped up further if private investments failed to pick up as anticipated.
"The government could ramp up development spending to aid the investment revival if private investment fails to pick up as anticipated. High oil prices will give the government ample space to increase development spending, especially if fuel subsidies are removed," he said.
However, Zheng warned that inflation remained a key risk, with fuel price hikes likely to be implemented after the general election, echoing the widely held view of analysts of election being held within the next three months.
"In the worst case scenario, the consumer price index (CPI) could go up between 3.5 and 4% this year should the quantum of fuel price hike turn out to be larger than expected," he said. "Right now, we are looking at a relatively modest quantum of increase, around 10 to 15%, which translates to around 20 to 30 sen. But given that crude oil price has already reached US$100 per barrel as opposed to budgeted assumption of around US$75 per barrel, I think we cannot rule out the possibility of a higher quantum of increase." According to him, the government will probably prefer to stagger the oil price hike.
Citigroup has raised its inflation forecast to 2.8% from 2.5%, with risks tilted to the upside, Zheng said.
"But should inflation persistently step out of its comfort zone, Bank Negara Malaysia may be compelled to raise interest rate in the second half to keep inflation expectations under control," he said. "However, we think that central bank may prefer a stronger currency to combat imported inflation."
1) Singapore's economy unexpectedly contracted for the first time in 4 1/2 years as factory output slowed, suggesting Asia's export-dependent markets may face increased risks from weaker global growth.
Gross domestic product shrank an annualized 3.2% last quarter after adjusting for inflation, from a revised 4.4% expansion in the previous three-month period, according to the trade ministry. Economists had expected a 3.1%gain.
Singapore is first in Asia this year to report fourth-quarter figures, giving analysts an insight into how turmoil in global markets and the subprime-mortgage crisis in the U.S., the region's biggest export destination, may affect Asian economic expansion. South Korea and Taiwan have already warned that easing demand for semiconductors, mobile phones and computers portends weaker growth in 2008.
``We definitely should expect to see more softness in exports in the next couple of quarters, and that's bad news for electronics-heavy Asian economies,'' said Kit Wei Zheng, an economist at Citigroup Inc. in Singapore. ``That means slower growth for Singapore and the rest of Asia.''
2) The Singapore economy grew by 7.5 percent in 2007, supported by the construction and services sector, Prime Minister Lee Hsien Loong said in his New Year message. The growth was slower than the 7.9-8.2% growth forecast by economists polled by Thomson Financial but was inline with the 7.5-8.0% growth forecast by the government.
'This year, the world economy faced a number of challenges. But so far Asia's growth continues to be strong, and this has benefited us,' Lee said.
A record 172,000 new jobs were created in the nine months to September as a result of the strong economy, bringing the city-state's unemployment rate to a near 10-year low of 1.7 percent, Lee said.
But following the robust economic growth seen in 2007, Lee said he is cautiously optimistic over the outlook for 2008 as growth started to slowdown in the fourth quarter.
'The US may go into a recession because of the financial market problems. A US downturn would affect Asia too, but the impact on us would be offset somewhat by the strong momentum in the dynamic Asian economies,' Lee said.
The government expects GDP growth in 2008 to slow to 4.5-6.5%, he said.
1) South Korea's Finance Ministry lowered this year's economic growth forecast to take account of higher oil prices and the likelihood of slowing exports. The $887 billion economy will expand at an “upper 4%” pace in 2008, down from a previous forecast of 5%, Finance Minister Kwon Okyu said.
Increasing oil prices are fanning inflation and boosting costs to businesses and consumers in an economy that imports 97% of its energy needs. Exports may slow as the U.S. housing recession cools the expansion of the world's biggest economy, damping global growth.
“Our external conditions will be tougher than in 2007,” Kwon said. “Downside risk factors such as high oil prices and the U.S. sub-prime problem are increasing.”
Inflation is becoming a “burden” for the government, Kwon said. The central bank should closely check prices and economic and financial market conditions to “flexibly” manage its interest rate policy, he said.
The Finance ministry's new forecast is close to the estimate published by the Bank of Korea last month. The central bank sees growth of 4.7%, cooling from an estimated 4.8% in 2007. The economy grew 5.2% in the third quarter from a year earlier, the fastest annual pace in almost two years.
Private spending may hold up in 2008 even as rising interest rates drive up debt-servicing costs because the job market is improving and incomes are rising, the minister said.
2) Goldman Sachs Group Inc. said South Korea's economy may expand at the fastest pace in six years in 2008 as the new president's plans to encourage investment and spending provide ``much-needed impetus.'' Goldman raised its growth estimate to 5.1% from a November prediction of 4.8%. The central bank will cut its benchmark interest rate a half percentage point by mid-year, Goldman's Seoul-based economist Kwon Goohoon wrote in a report e-mailed to Bloomberg News.
Lee Myung Bak won the Dec. 19, 2007, presidential election on his pledge to increase annual economic growth to 7% and to double per capita income to $40,000 by 2017, by encouraging big companies to boost spending and hiring. One of his goals includes building a 550-kilometer canal running almost the length of the country.
``The recent presidential election in Korea was a landmark event, turning the political landscape in favor of deregulation, markets and growth,'' Goldman's Kwon wrote.
``The positive political developments, together with an enthusiastic reaction from the business community, could provide much needed impetus to the economy.''
An annual growth rate of 5.1% this year would exceed the government's estimate of an “upper 4%” pace in 2007, and would be the quickest since a 7% expansion in 2002.
Sri Lanka's 2008 economic growth is estimated at 7% while annual inflation is expected to be brought down to 10-11% by end of this year, the Governor of the Central Bank said.
"The economy is expected to ... grow by 7% in 2008," Governor Ajith Nivard Cabraal told a news conference, releasing the Central Bank's 2008 policy announcement. Consumer prices in December were 18.8% higher than a year earlier, while the 12-month moving average on a recently introduced index was 15.8%.
The Central Bank also estimates the 2008 fiscal deficit will be 7% of gross domestic product compared to 7.2% in 2007.
The Central Bank hopes it can cut interest rates this year, officials at the authority said after a weekly auction of treasury bills managed to hold rates steady for the first time in two months.
"Our (central bank) strategy for this year - is to reduce interest rates and keep the rates at reasonable level as much as possible," a central bank official, who asked not to be named, said.
The Thai economy is expected to benefit from stronger fiscal spending which will help spur private investment in 2008, according to Michael Spencer, Deutsche Bank's managing director for global markets research. Mr. Spencer said the new government was likely to promote fiscal stimulus through a mid-year supplementary budget to help spur private investment.
''The Thai government typically enlarges fiscal spending when export growth slows down. Fiscal capital expenditure should increase to 15% year-on-year, from 7% year-on-year growth [under the fiscal 2008 budget] to be sufficient,'' he said at a briefing in Bangkok.
Greater fiscal spending would increase the budget deficit to 2% of gross domestic product (GDP), compared with 1% under the current budget.
Deutsche Bank projects Thai economic growth of 4% this year and 4.5% in 2009. The forecast is based on an assumption of 3% private consumption growth this year and 4% in 2009, compared with 1.6% growth in 2007.
Overall investment this year is projected to rise 4%, compared with 1% growth in 2007. Export volume is projected to grow 4.3% this year and 6% in 2009.
Mr. Spencer said private investment had been slowing down since late 2003 partly because of the higher oil prices. Thailand's competitiveness had also declined in comparison with countries with cheaper labor costs such as China and Vietnam, as well as high-technology producers like Taiwan.
Thailand is one of several Asian countries where investment has been below its potential for the past few years, he said.
''Politics has been blamed, but there is a deeper underlying economic reason. The challenge for Asian countries, including Thailand, the Philippines and Indonesia, is to break the middle ground,'' Mr. Spencer said.
He said the Thai economy was relatively less sensitive to the US economy than to oil prices compared with other Asian countries.
Thai economic growth would fall by 0.5 percentage points for every one-point slowdown in US growth. But Thai growth would decline by 0.6 percentage points for every 10% rise in oil prices.
''Oil prices, which are expected to fall 15% this year, could benefit Thailand more than other Asian countries,'' he said.
Mr. Spencer said the Bank of Thailand was likely to cut interest rates twice from 3.25% now in the third quarter as inflation decelerated.
He expected Brent oil prices to drop 15% to $65 per barrel by the end of 2008, in light of slower demand from the US and China.
The baht, meanwhile, was expected to continue to appreciate, reaching 32.5 to the dollar by the end of 2008.
The central bank is unlikely to lift the 30% reserve requirement on capital inflows this year, as it currently had no tangible impact on economic growth.
The UAE economy will grow by 16.5% in nominal terms in 2007, driven by a higher-than-forecast expansion of the non-oil sector as well as record crude oil prices, reported the Dubai-based newspaper Emirates Business 24/7 quoting a Ministry of Economy report. Real GDP growth for 2007 is estimated around 7%.
Gross domestic product (GDP) is expected to reach AED698 billion (US$190.2 billion) exceeding earlier IMF expectations predicting a GDP of AED679 billion (US$185 billion).
In 2006, the UAE economy grew by 23.5% in nominal terms and 9.4% in real terms, the report said.
The Ministry also expected non-oil sectors to grow by 21% to AED455 billion, making up 65% of total GDP. Total investment is expected to have risen to AED144 billion (US$39.2 billion), up 19%.
The private sector will play a big role in the volume of investments in 2007, contributing 58% of total investments, the report said. Oil accounted for 41% of exports in 2006.
Economic reform in Vietnam did not bring inequalities in the distribution of wealth, experts said when analyzing last year's results. The country's Gross Domestic Product (GDP) grew 8.5% and the poverty rate dropped from 18 to 14.7% in 2007.
During that period, Vietnam benefited from record direct foreign investments of 20.3 billion dollars, structural changes were made, and the GDP increased 10.6% in the industrial sector and 8.7% in the service sector.
Agriculture continued to be leading Vietnam's economy, sharing 19.8% of the GDP, despite predictions of possible risks due to the sector's transformation, official sources said. At the same time, agricultural products accounted for 25% of exports, according to the Ministry of Agriculture.
EUROPE / AFRICA / MIDDLE EAST
Cyprus's economy grew in 2007 a provisional 4.4% compared to 4% in 2006, the statistics department said recently. The island's gross domestic product at market prices rose to 9.07 billion Cyprus pounds (S$ 22.68 billion) from 8.42 billion Cyprus pounds in 2006.
The service sector grew 4.7% above 2006 levels, mainly driven by banking and real estate, renting and business activities, which grew 11% and 6.8% respectively.
The secondary sector was driven mainly by construction and increased a 3.8%, while the primary sector contracted by 2.2% compared to 2006.
1) Germany's DIW research institute said it sees 2008 GDP growth for the country at 1.8%, adjusted for the number of working days, and 1.7% in 2009. In unadjusted terms, the economy will expand at a rate of 2.1% in 2008, which will slow to 1.7% in 2009, according to a report published by the institute.
Foreign trade in 2008 will slow GDP growth by 0.3% after boosting economic growth by 1.5% points in 2007, DIW said. In 2009, the effect of foreign trade will be near zero. Import growth will exceed export growth this year due to the strong euro and the recovery of domestic demand, while the cooling global economy will weigh on export growth in the first half of 2008, DIW said.
Inflation will slow to less than 2% this year, compared with an estimated 3.1% in 2007, as production catches up with demand for energy and food and the one-time effect of a value-added tax increase is not repeated.
2) German finance minister Peer Steinbrueck expects to have to lower his forecast for 2008 economic growth due to the strong euro and dimmer prospects for exports.
"We are in a pleasant upturn but the risks have increased and the economy is developing less well than it was when we made our predictions in the autumn," Handelsblatt daily quoted the minister as saying in a letter to "top federal authorities."
The paper also cited high oil prices and a surprise rise in inflation in Europe's biggest economy at the end of last year as reasons for Steinbrueck's plans to lower the forecast.
The government lowered its official forecast for 2008 gross domestic product (GDP) growth in October to 2.0% from 2.4% previously.
Economy Minister Michael Glos said this week the government was preparing to lower this year's growth forecast to "just under 2%."
Steinbrueck's comments also echo a statement from Germany's BGA wholesalers' association which said earlier firms were seeing serious risks to growth.
The BGA expects German GDP growth of 1.7% this year although the Berlin-based German Institute for Economic Research (DIW) predicted growth of 2.1%.
Handelsblatt also said Steinbrueck was leaving open the possibility of making cuts to spending in Germany's budget.
"We are reserving the right to make additional savings," the paper quoted Steinbrueck as saying in the letter, noting his decision would depend mainly on economic developments.
The paper also quoted Steinbrueck as saying it was an "ambitious target" to cut federal net new borrowing to zero by 2011.
Israel's economy grew 5.3% in 2007, expanding for a fifth year on increased exports and consumer spending, the Central Bureau of Statistics said, citing preliminary figures.
An 18.3% jump in investment in machinery and equipment in 2007 points to a positive business outlook.
Exports of goods and services grew 8.6%, up from 5.9% in 2006, while consumer spending rose 7.2%, up from 4.5%, bureau officials said at a Jerusalem news conference. The latest estimate for GDP, based on data up through November, is 0.1 percentage point higher than the bureau forecast in October. GDP rose 5.2% in 2006.
"It was a good year," Soli Peleg, chief of macroeconomics at the statistics bureau, said on the sidelines of the news conference. "Figures for the second half of the year indicate that the trend is continuing. Growth was all across the economy. Growing investment in machinery points to a positive outlook."
Israel's gross domestic product has expanded more than 5% in the past four years as the world economy grew and the government deregulated the economy and cut taxes. Growth will probably slow to 4.2% next year, Finance Minister Ronnie Bar-On said, citing a sputtering US economy.
"The figures are great: There has been strong domestic demand and exports aren't showing any signs of weakness," Dan Aks, an economist at Ramat Gan-based Prisma Investment House Ltd. said by telephone. "In 2008, we expect to see more moderate growth, mostly due to the negative affect of the US slowdown on exports."
Business GDP, which excludes government output, probably grew 6.3% this year from 6.5% in 2006, the bureau said. Investment in machinery and equipment jumped 18.3% in 2007, compared with 11.6% in 2006. Investment in residential construction rose 1.1%, slowing from 6% in 2006, the bureau added.
Higher consumer spending and investment helped boost the growth in imports to a preliminary 12.6%, almost four times its pace in 2006, the bureau said. Israel's current account surplus narrowed to 3.2% of GDP from 5.6% in 2006, it added.
The government budget deficit, including municipalities, probably narrowed to 0.3% this year from 1.4% in 2006, the bureau said, which would make it the smallest deficit since 1986.
Lithuanian economy surged by about 10% in 2007 but will slow sharply this year, the economics ministry said.
'Economic growth continued in the last quarter of 2007 and we expect that GDP (gross domestic product) growth for 2007 will be about 10%,' the ministry said.
The ministry forecast that growth would dip to 5.3% this year, mainly because of a labor shortage and tougher rules for issuing consumer credit. The ministry's forecast is pessimistic compared to the outlook from the Lithuanian Central Bank at the end of October estimating that the Baltic country's GDP would grow by 7.4% in 2008.
The Lithuanian economy grew by 7.5% in 2006 and is one of the fastest growing in the European Union, which it joined in 2004, 14 years after declaring independence from the Soviet Union. Thousands of Lithuanians have taken advantage of the EU's free movement rules to find work in other member states of the union, notably Britain and Ireland. In an attempt to deal with the ensuing labor crunch in this country of 3.3 million people, Lithuanian authorities have been trying to tap neighboring former Soviet nations for workers.
Data from the Lithuanian labor bureau showed that the number of permits issued to foreign workers had more than doubled in the first nine months of 2007.
Mozambique’s Gross Domestic Product (GDP) posted growth of 7.5% in third quarter of 2007, according to figures from the National Statistics Institute (INE), cited by Mozambican newspaper Notícias. GDP growth was driven by the performance of the construction sector (54.1%), financial services (21.6%), public administration (16.5%), transport and communications (12.9%) and agriculture (9.9%).
Also according to INE, the Consumer Price Index (CPI) for the city of Maputo, the official indicator of inflation in Mozambique, rose 1.88% in November, which contributed to annual inflation totaling 9.51%, after 9.04% in the previous month (October).
The behavior of the prices of foodstuffs was a determining factor for monthly inflation, with significant rises in the price of bread (0.36%), horse mackerel (0.33%), tomatoes (0.25%), live chicken (0.17%) and coconut (0.1%).
Amongst the non-food category, the rise in the price of lighting oil made a contribution of 0.06% points.
The Bank of Portugal has cut its 2008 GDP growth forecast to 2% from 2.2% previously, saying that the cut reflects forecasts for decreased domestic consumption and exports.
In its winter bulletin, the bank said private consumption in 2008 is expected to grow 1.1%, down from the 1.4% projected in the bank's summer bulletin, while public consumption is expected to remain unchanged, compared to the earlier projected 0.3% growth.
Regarding export growth, the central bank reviewed its projection to 4.9% from the earlier 6.5% forecast.
Spain is expected to post a minimum GDP growth of 3% in the next few years, Prime Minister Jose Luis Rodriguez Zapatero said. Speaking at a conference organized by the Nueva Economia Forum, Zapatero also said that the 2007 budget surplus is expected to be at least at the same level as in 2006. In 2006, the budget surplus stood at €17.898 billion, 1.83% of GDP.
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