GDP UPDATE
July 2008
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
The U.S. economy grew slightly more in the first quarter than previously estimated and home sales rose in May, but concerns are rising about potential threats to growth in coming months.
"For the balance of this year, it looks like the economy is trapped in a subpar growth pace but not a recession," said Stephen Stanley, chief economist with RBS Greenwich Capital in Stamford, Conn.
The Commerce Department said the nation's gross domestic product rose at an annual rate of 1% during the first three months of the year, up from its previous estimate of 0.9%. The economy grew at an anemic 0.6% pace in the final quarter of last year. Stronger consumer spending and export growth helped boost growth in the first quarter; inflation rates also were revised higher.
The price index for personal consumption expenditures excluding energy and food -- a gauge of inflation watched closely by the Federal Reserve -- rose at a 2.3% pace, above the 1.5%-to-2% range that the Fed considers price stability.
Sales of previously owned houses, meanwhile, rose 2% last month to a seasonally adjusted annual rate of 4.99 million after declining in the previous two months, according to the National Association of Realtors. Still, the sales pace of existing homes, which make up about 85% of the market, is down about 16% from May 2007.
Sales of existing single-family homes rose 1.6% last month to a 4.4 million rate but are down about 15% from a year earlier. The monthly rise was likely fueled by declining prices; the median single-family home price last month was $206,700, 6.8% lower than in May 2007. Condominium and co-op sales also rose last month but remain 25% below the year-ago pace.
On GDP, analysts expect a similar performance for the April-through-June period, as government economic-stimulus checks provide some relief to consumers. Rising exports also continue to buoy growth.
Of concern now is how the economy will fare later this year and early next year, as the impact of the stimulus checks fades. Consumer confidence plummeted this month as a result of labor-market worries and soaring prices for oil, fuel and other commodities.
Meanwhile, newly filed claims for unemployment benefits last week totaled 384,000, after seasonal adjustment, unchanged from the week before, the Labor Department said. The four-week average rose by 2,250 to 378,350 last week -- its highest level since Hurricane Katrina hit in 2005.
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%.
Standard and Poor’s (S&P) and its Indian subsidiary Crisil have lowered their India growth forecast for the current year to 7.8% from 8.1-8.6% earlier. In a release issued recently, the agencies said that the Indian economy would be hit by the surge in inflation fuelled by energy and commodity prices. The Reserve Bank of India (RBI) has already hiked interest rates twice in June to curb inflationary pressures and may well do so again.
Higher rates are expected to moderate growth even further. It said that inflation is expected to average between 8.5% and 9% during 2008-09. On the positive side, the outlook for food prices has improved, given comfortable levels of wheat stocks, and expectations of a normal monsoon. However, high oil prices, strong input costs, and a depreciating rupee continue to exacerbate inflationary and other pressures. High interest rates, along with a slowing global economy, will trim the GDP growth to 7.8% in 2008-09. The yield on 10-year government securities is expected to remain high at 8.5-8.7% by the end of this fiscal.
Rising inflation, slowdown in economic growth forecast, and turmoil in global financial markets have dampened investor confidence, leading to foreign capital outflows. This has forced the rupee, which was already under pressure from rising oil import costs, to depreciate as sharply this year as it appreciated in 2007. India’s current account deficit is expected to swell to about 2.6% of GDP. The rupee should remain at about its current level for the major part of the current financial year, before appreciating to Rs 41.5/$ toward the end of the fiscal year, as global market conditions become more stable and oil prices moderate. Fiscal improvements in the past few years, too, are likely to be reversed this year, due to a surge in oil, fertilizer, and food subsidies.
The central government’s fiscal deficit, including off-budget liabilities, is an estimated 6.2% of GDP compared with the budgeted 2.5%, excluding off-budget liabilities. The consolidated fiscal deficit of the Centre and states should touch 8.5% of GDP. Crisil has noted that after four years of noteworthy fiscal consolidation, a reversal is on the cards in 2008-09. The fiscal improvement was supported by very strong revenue gains, particularly from direct tax. These gains are now being offset by the sharp surge in the subsidy burden from petroleum products and fertilizers. The Sixth Pay Commission and a farm loan waiver will add to the fiscal stress this year. Despite the deterioration, the situation is not yet as bad as it was in the beginning of this decade, when the consolidated deficit of the Centre and states was above 10% of GDP.
Indonesia's gross domestic product (GDP) is projected to grow 6.0% to 6.4% in 2009, a lawmaker said. The GDP growth projection for next year is part of a set of macroeconomic forecasts approved by a parliamentary budget committee.
The government will use the approved macroeconomic assumptions to draft the 2009 budget, which President Susilo Bambang Yudhoyono will present to parliament in August. Lawmaker Harry Azhar Azis, a vice chairman of the parliamentary budget committee, said consumer inflation in 2009 is projected at 5.8% to 6.5%, against 6.5% initially projected for this year.
This year's GDP growth forecast of 6.4% and inflation forecast of 6.5% are unlikely to be met after the government unexpectedly raised subsidized fuel prices by an average of 28.7% last month.
The government and parliament have yet to revise the growth and inflation forecast numbers.
Aziz said the rupiah exchange rate is forecast to average at 9,000 to 9,200 per dollar, while the interest rate for the three-month Bank Indonesia Certificates is seen averaging at 7.5% to 8.5%. He said the country's oil production is assumed to average 927,000 to 950,000 barrels per day in 2009 against 927,000 barrels per day estimated for this year. The Indonesian crude oil price is seen to average at $95 to $120 per barrel next year.
The budget deficit for 2009 is forecast at 1.5% to 2.0% of GDP against 2.1% of GDP estimated for this year. Assuming that the deficit is at 1.6% of GDP, it will reach 82.1 trillion rupiah ($8.9 billion).
Aziz said the committee is considering some options to minimize the impact of oil price volatility on the government's subsidy spending. He said if the oil price exceeds $120 per barrel, parliament may agree to an additional oil subsidy but only if oil prices do not exceed $130 a barrel. The government should take other initiatives if the average oil price exceeds $130 per barrel, such as by hiking fuel prices or cutting the volume of subsidized fuel products, he said. The volume of subsidized fuel products is seen at 38.8 million kiloliters in 2009 from 35.5 million kiloliters estimated for this year. In May, the government hiked fuel prices by an average of 28.7% to keep the fuel subsidy at not more than 135 trillion rupiah this year.
New Zealand economic outlook is strong despite the economy contracting for the first time in over two years in the first quarter, Finance Minister Michael Cullen said recently.
"While the March quarter GDP data today are disappointing, it is important to remember that this is a temporary disappointment driven by an unusual set of negative overseas economic developments, but that New Zealand's medium-term economic and social prospects are very healthy and strong," Cullen said in a statement.
Data showed gross domestic product fell 0.3% in the March quarter, following a 0.8% rise in the previous quarter.
The International Monetary Fund (IMF) has cut its economic growth forecast for the Philippines in 2008 given the slowdown in the global economy and rising food and fuel prices. A visiting IMF mission from Washington led by Il Houng Lee said the country's gross domestic product (GDP) would grow by 5.2% this year, lower than its earlier forecast of 5.8%. The country achieved a 31-year high growth of 7.3% last year.
The IMF warned that food- and fuel-led consumer price hikes would remain close to double-digit levels in the coming months.
"The macroeconomic policy environment has become more challenging. The Philippines, together with its peers in the region, faces the twin challenges of a slowing global economy and escalating food and fuel prices," said the Washington-based mission.
The IMF's revised growth forecast is in line with the actual 5.2% growth in the first quarter and sharply lower than the previous quarter's expansion number of 6.4%.
Last month, the government revised its 2008 growth forecast to 5.7 to 6.5% from its previous target of 6.3 to 7.0%. Citing past fiscal reforms, the IMF said the impact on the overall domestic economy of the deteriorating external environment had been limited.
"Nevertheless, continued prudent macroeconomic policy is needed to navigate through the challenging times ahead," it said.
The IMF mission added that efforts to cushion the poor from the impact of high food prices were adding to the fiscal burden of the government, which has abandoned its goal of a balanced budget this year. The IMF also supported the government's "targeted pro-poor spending," referring to cash subsidies for poor households. But it said the government must protect its fiscal targets for 2009 given revenue pressures arising from the legislated expansion of tax exemptions and the expected cut in corporate income taxes. The IMF reiterated its support for the passage of new tax measures, particularly the streamlining of fiscal incentives offered to investors, as well as reforming the excise taxes on cigarettes and alcohol. The mission added that further improvements in tax administration were needed to boost tax revenues.
On monetary policy, the IMF said it was "appropriate" that the country’s central bank, the Bangko Sentral ng Pilipinas (BSP) had turned "hawkish"—or biased towards monetary tightening—given the sharp increase in consumer prices. The IMF mission said there were already "second-round" effects from the fuel- and food-led inflation.
The central bank raised its key interest rate, its overnight borrowing rate, by 25 basis points early this month, the first monetary tightening measure in three years.
If inflation rises beyond the BSP's control, the IMF warned it would complicate macroeconomic management. When consumer prices rise indefinitely, this tends to create panic among consumers and producers, creating further upward inflationary pressures.
"Inflation is expected to remain close to double-digit levels in the coming months as the recent increases in food and fuel prices filter through to the CPI (consumer price index)," the IMF said. CPI refers to the basket of goods and services consumed by a typical household. Inflation is measured based on the changes in this key index.
In the first five months, inflation rate averaged 6.9%, overshooting the BSP's maximum target of 5.0%. In May, the inflation rate hit a nine-year high of 9.6%. For the whole of 2008, the BSP expects the inflation rate to average at 7.0-9.0% and for next year, at 4.0-6.0%.
Two research institutes said the Austrian economy will expand in 2008 at a slightly faster rate than they previously forecast, though high oil and raw materials prices will weigh on growth more than anticipated next year. The WIFO institute expected Austria's gross domestic product (GDP) to grow by 2.3% in 2008, while IHS saw an expansion of 2.2%. In March, both institutes had forecast GDP growth of 2.1% for 2008.
For 2009, WIFO cut its forecast to 1.4% from 1.7%, while IHS lowered its to 1.9% from 2.2%. "The GDP expanded more than expected in the first quarter due to manufacturing, the construction industry and tourism," WIFO said in its statement. "Though the economic upswing is set to weaken. The significant increase in global oil prices is one of the contributing factors, which leads to a significant acceleration in inflation."
IHS said the good economic development in the first quarter was mainly due to a strong performance in Germany, Europe's biggest economy, though a slowdown was on the cards. "The rising raw materials prices are pushing up inflation and reduce consumers' purchasing power," said IHS. "The high inflation momentum will lead to a tightening of monetary policy. The strong euro and the slowing down in global trade are weighing on exports. Sentiment indicators point to a slowing growth."
The rising inflation would prompt consumers to be prudent with their cash, said both institutes, which also expected rising unemployment in 2009 as the labor market would catch up with overall economic developments. The slowing momentum in world trade and the strong euro would weigh on exporters, though the sector would continue to drive growth, according to WIFO. Both institutes added they expected a recovery of the economic momentum at the beginning of 2009, though due to volatility in raw materials prices, currency exchange rates, and financial markets, predictions were more difficult.
Most new European Union member states, Bulgaria included, have weathered well the global financial crisis, but should be wary of a belated impact in the latter half of the year, the chief economist at the World Bank Ivailo Izvorski told reporters. Bulgaria is in a relatively favorable position with the largest economic growth in Central and Eastern Europe after achieving a record 7% GDP growth for the first quarter of 2008. The bank’s analysts expect Bulgaria to keep GDP growth on par with 2007 at 6%.
France's gross domestic product rebounded less than initially estimated in the first quarter as household spending, the driving force of the economy, failed to grow. Europe's third-biggest economy expanded 0.5% in the quarter from the previous three months, when it grew a revised 0.4%, Paris-based government statistics office Insee said in an e-mailed statement. In its preliminary report in May, Insee said GDP grew 0.6% in the latest quarter.
The first quarter ``was a bit supernatural,'' said Jean- Christophe Caffet, an economist at Natixis in Paris. ``From there on, growth figures will be particularly bad.''
Soaring energy and food prices are stoking inflation, crimping consumers' spending power across the 15-nation euro region. European Central Bank President Jean-Claude Trichet said that the ECB may increase its benchmark rate next month to rein in inflation expectations even as economic growth slows.
French inflation, based on a non-EU harmonized method, will peak at a 17-year high of 3.6% in the coming months before slowing to 2.8% in December, Insee forecast earlier this month. Inflation will average 3.2% in 2008, the highest since 1991 and up from 1.5% last year, Insee said.
As a result of soaring prices, consumer spending, which has been the main engine of French growth in the past decade, remained flat in the first three months of 2008 after growing 0.5% in the fourth quarter, and 0.8% in the third.
French households saved 16% of their disposable income in the first quarter, unchanged from the fourth quarter, Insee said. Their gross purchasing power failed to grow after having added 1% in the earlier quarter. France's economy will expand 1.6% this year, the slowest pace in five years, as rising prices damp consumer spending and the housing market slumps. Confidence among French consumers fell to a record low in June, according to a recent report.
Producer prices rose 1.3% in May from April and jumped 6.7% from a year earlier, Insee said in a separate report. Economists polled by Bloomberg expected a 0.6% increase on the month, according to the median of 15 forecasts.
``If consumer spending clearly slows in relation to the faster inflation and the decrease in households' purchasing power, we may hope trade will in turn contribute to growth'' through lower imports and stronger exports to countries such as Germany, said Mathieu Plane, an economist at Paris-based Observatoire Francais des Conjonctures Economiques.
Exports jumped a revised 3.2% in the first three months of the year. In a June note, Insee said it expects exports to drop 0.1 in the second quarter and show little growth in the second half. Imports also increased by 2.3% in the first three months after having fallen 1.1% the previous quarter. Trade added 0.3 percentage points to the fist quarter compared with 0.7 percentage points the last three months of 2007, Insee said.
French GDP will grow 0.2% in the second quarter, the least in almost two years and a third of the pace of the first three months of 2008. The economy will stagnate in the third quarter and expand 0.2% in the final three months.
``The second quarter won't be as solid and strong as the first, but even so I think that Insee's forecasts are very gloomy,'' French Finance Minister Christine Lagarde said in a Bloomberg Television interview on June 19. She cited job creation and falling unemployment as reasons to be optimistic.
Italy's 2008 GDP will rise 0.1%, from 2007, while in 2009 GDP will go up 0.6%, said the study centre of employer federation, Confindustria.
It estimated that public deficit in 2008 will be 2.5% of GDP, while based on unchanged policies; the 2009 deficit will be 3.2%.
The government last week forecast 2008 GDP up 0.5% and 2009 up 0.9%, while the deficit is planned at 2.5% this year and 1.8 next, including impact of tax and spending policies.
The Minister of State for Finance, Mr. Remi Babalola has revealed that Nigerian ranks 49 out of 190 countries in the world with regard to the level of nominal Gross Domestic Product (GDP). She is also ranked No. 35 at 6.1% in terms of growth rate. The Minister made this known recently while presenting a keynote address at the Cardexpo Africa 2008 conference held in Abuja.
The Minister emphasized that in order to achieve Vision 2020, "we need to ask ourselves, what drives global change; what have our fellow countries done differently and in what ways?"
He identified the main focal points for global change as: "People: because demographics drive the rapid expansion of telecommunications and Information network technology; Geopolitics: because there are agreements among nations and regions; Economics: because GDP growth in nations like Nigeria is expected to double; Environment: because issues such as pollution and waste disposal continue to change how we live; Technology: because technology improves the quality of life, the speed of information flow, and more importantly, technology fosters creativity".
The Minister also stated that the inclination in developed countries is to move more towards electronic payment than any other form of payment for convenient, fast and easy business transactions, adding that for Nigeria to join this league of developed economies by 2020, e-payment must form the bedrock of all financial transactions.
Speaking on "e-payments powering NV2020", the Minister further said, "In the past 25 years, we have seen what people have termed "miraculous" advancements in some economies. Especially our Asian 'tigers' - China , Malaysia , India as well as our fellow Africans - Angola , South Africa. Indeed, the immense benefits associated with the use of electronic payments both to the individuals and the country are not in doubt. But while tremendous progress is being made on card systems in developed countries, the African continent appears to have been left significantly behind".
He said it was in recognition of the above development which has implications on the growth of business on the African continent that the need for urgent action became imperative. He challenged all the participants to reflect and "ask ourselves whether some time ago we would have thought to be here right now. About 8 years ago, MTN predicted that there would be 40 million subscribers by the end of 2010. Today there are 43 million active subscribers.
Romania needs annual average paces of the Gross Domestic Product's (GDP) growth at 5 to 7% for a long time if it wants to reach the European average, President Traian Basescu told an international conference on European Standards, Support for Market Surveillance. Basescu stressed that the strategic problems of Romania consist in the increase in the competitiveness of the national production.
'Romania needs a new culture of the quality. We must adjust the production and consumption patterns and the need for high quality should take a central place in the system of the Romanian consumers and producers', he said.
The president argued that standardization also means the consumers' protection, since the citizens know the products are safe and have essential characteristics and that their health is protected. On the other hand, Basescu underscored the importance of expediting the decentralization of the public administration. 'We need coherence in decentralization, so as to have an efficient institutional system', he said.
The fact that the international conference on standardization is being held in Bucharest represents 'a symbol of certain reforms required for the development of Romania as a high-performance state in the European family', the Romanian leader pointed out. Basescu insisted that the various interest brackets in Romania should be 'better represented'. Romania also fully backs the European Union's energy and neighborhood policy, he added. The Romanian president voiced satisfaction that the Caspian countries have been invited into the European standardization process.
The Slovak Finance Ministry said it had revised its forecast of 2008 real gross domestic product growth to 7.7%, from the previously predicted 7.5%. The ministry also revised the forecast of average inflation, calculated under the European Union methodology, to 3.8% for this year, from of 3.1% price growth estimated in January forecasts. The new set of forecasts, published on the ministry's web page www.finance.gov.sk), said Slovakia's current account deficit should stand at 4.1% of GDP in 2008, almost twice as big as the previously expected 2.2% gap. The finance ministry did not comment on the predictions.
The upward revision of GDP forecast shows the government is not concerned that rapid rise of the Slovak crown will have damaging impact on the economy, which showed EU's high growth rate of 8.7% in the first quarter. The crown has gained 10% to the euro since the start of the year, and the fast appreciation had led to a 15% revaluation of its peg to the single currency within the ERM-2 currency mechanism on May 28.
Slovakia has received the green light to join the euro zone in 2009, and the market expects the conversion rate at which the country will swap its currency for the euro to be at, or near the current ERM-2 central rate of 30.1260 crowns per euro. Strong crown has helped Slovakia to tame consumer price growth, although EU authorities have expressed concerns whether the central European country will be able to keep inflation low after it becomes the 16th member of the single currency area.
Slovak price growth has accelerated in the past few months, mainly on the back of global increase of food and energy costs. EU-norm inflation hit a 20-month high of 4.0%, on an annual basis in May, but the central bank expects price growth to slow down in the second half of the year.
The Swedish National Debt Office said it expects a central government financial surplus of 163 billion Swedish crowns this year, up 62 billion crowns from its previous forecast and the largest budget surplus ever. The Office said the upward revision is mainly due to expectations that state-owned Vasakronan will be sold this year for around 36 billion crowns. This will take the state's overall income from divesting assets this year to 86 billion crowns. Increased income from taxes and lower social insurance costs also contributed to the new surplus forecast.
In 2009, the Debt Office sees the surplus decreasing to 83 billion crowns due to the effects of the ongoing economic slowdown. However, this forecast is still 23 billion crowns higher than its previous estimate. The change is due to a 13 billion crown reduction in estimates for social insurance expenditure in 2009 following new rules covering the payment of health insurance.
Tax income is also expected to increase by 9 billion crowns next year, while interest on central government debt is seen falling. GDP growth in both 2008 and 2009 is forecast at 2.0%, which the Debt Office noted is considerably lower than in recent years. It forecasts total central government debt will fall to 1.016 billion crowns by the end of 2008, and to 933 billion by the end of 2009.
'This is equivalent to 32 and 38%of GDP respectively, the lowest percentage for 30 years,' it said.
The health of Swedish finances would make the country a welcome addition to the euro zone. One of the EU's key criteria for introduction of the euro is for central government debt to GDP ratio to not exceed 60%. In 2007, however, the average debt among euro zone countries was 66.3%, with Italy's debt running at 104% of GDP.
Swedes, however, rejected membership of the euro in a referendum in 2003, and polls show a clear majority are still oppose the move.
The economy grew more slowly than previously thought in the first quarter as the service sector recorded its weakest performance in more than a decade, official figures show. The Office for National Statistics said GDP rose by 0.3% on the quarter, revised down from 0.4%. That was the weakest rate in 3 years. The annual rate was also marked lower to 2.3% from 2.5%.
Analysts had predicted no revisions and sterling fell after the report as investors scaled back bets the Bank of England would raise interest rates this year to combat above-target inflation.
"It's not a positive report at all," said George Buckley, chief economist at Deutsche Bank.
The service sector, which makes up around three-quarters of the economy, grew by just 0.3%, its weakest rate since the fourth quarter of 1995.
Household consumption rose by a healthy 1.1% but this is expected to slow over the coming months, especially as real disposable income fell by 1.0%, the biggest drop since the third quarter of 1999.
Consumers are clearly running down their savings to maintain their spending habits. The savings ratio fell to 1.1%, its weakest since the fourth quarter of 1959.
Separately, the ONS released first quarter balance of payments data showing a current account deficit of 8.4 billion pounds from a revised 12.2 billion pound gap in the fourth quarter of 2007.
The deficit was lower than expected as the surplus on income rose as banks increased their margins to repair battered balance sheets.
Zimbabwe's gross domestic product has contracted each year since 2000, the biggest decline in 2003 when it fell 10.4%. The IMF estimates GDP will fall by 4.5% this year.
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