GDP UPDATE
June 2008
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
New estimates released recently by the U.S. Bureau of Economic Analysis show that economic growth slowed in most states and regions of the country in 2007. Real gross domestic product (GDP) growth slowed in 36 states, with declines in construction and finance and insurance restraining growth in many states. Nationally, real economic growth slowed from 3.1 percent in 2006 to 2.0 percent in 2007, one percentage point below the average growth of 3.0 percent for 2002-2006.
Real economic growth either slowed substantially or was unchanged in all eight BEA regions. The Far West region experienced the largest deceleration, dropping from 4.1 percent growth in 2006 to 1.9 percent in 2007. Even the Southwest region, which led all regions in growth in 2006 and 2007, slowed to 3.7 percent, down from 5.1 percent in 2006. The two regions that did not experience a slowdown in 2007 — the Great Lakes and Plains — were already the slowest-growing regions in 2006.
The deceleration in growth in 2007 was most pronounced in Arizona, California, Florida, and Nevada. Each of these states had experienced faster real growth than the nation since 2003, but slowed dramatically between 2006 and 2007, to rates below the national average. In 2006, Arizona and Nevada were in the highest growth quintile, and California and Florida were in the second-highest quintile. But in 2007, Arizona dropped to the third quintile; California dropped to the second-lowest quintile; and Florida and Nevada dropped to the lowest quintile. In Arizona, Florida, and Nevada, construction subtracted more than 1 percentage point from real GDP growth. In California, construction and finance and insurance combined subtracted one percentage point from real growth.
Three states — Delaware, Michigan, and New Hampshire — saw their economies contract in 2007. Like the states above, construction- and finance-related industries were largely responsible for the weakness. In Delaware, the decline was primarily due to a large decline in finance and insurance, and secondarily due to a decline in construction. In Michigan and New Hampshire, declines in these industries and in real estate, rental, and leasing were largely responsible for the decreases in real GDP.
In contrast, Utah had the fastest economic growth in 2007 (5.3 percent), growing at more than twice the national rate. Durable goods manufacturing, retail trade, and real estate, rental and leasing led the way in Utah, accounting for more than half the state's growth. New York was the only eastern state among the ten fastest-growing states. Contrary to the nation and most states, finance and insurance was a strong contributor to growth in New York. Finance and insurance along with real estate, rental and leasing accounted for 53 percent of New York's growth.
The downturn in the U.S. economy has finally had a serious impact on Canada, with economic activity declining for the second consecutive month in March.
“Anyone who thought that the downturn in the U.S. economy would not seriously impact Canada should have a look at this morning’s (May 30’s) real GDP figures for the first quarter of 2008,” said TD Bank economist Pascal Gauthier.
According to a report on Real Gross Domestic Product (GDP) by Industry released by Statistics Canada, real GDP edged down 0.1 percent in the first quarter of 2008.
This is the first quarterly decline since the second quarter of 2003.
Overall economic activity declined for a second consecutive month, decreasing 0.2 percent in March and 0.3 percent in February.
“The economy, which had started to lose momentum in the second half of 2007, as exports declined, stalled in the first quarter due to widespread cutbacks in manufacturing, most notably in motor vehicles,” said the Statistics Canada report.
“In addition, weather disruptions hampered economic activity in the quarter.”
Construction activity decreased 0.2 percent in March, but increased by 0.3 percent in first quarter of 2008.
“The declines in residential construction, and engineering and repair work, were only partially offset by an increase in non-residential building,” said the report. “Apartments and alterations and improvements work were the only type of residential construction activities that advanced for the month, while all types of non-residential building moved forward.”
The declines in manufacturing were widespread and GDP in this sector fell 2.5 percent.
Motor vehicle production was the hardest hit with a drop in transportation equipment accounting for nearly half the decline.
“To put the current cycle in context, recall that after peaking in the first quarter of 2007 at a stunning 4.1 percent growth rate, Canadian real GDP practically came to a halt in the last quarter of 2007, edging up by only 0.8 percent, at the same time the U.S. economy was experiencing a similar slowdown,” said Gauthier.
So far in 2008, the American economy is outperforming its Canadian counterpart.
According to preliminary estimates recently released by the Bureau of Economic Analysis, real GDP in the U.S. increased at an annual rate of 0.9 percent in the first quarter of 2008.
Expectations of a Reserve Bank interest rate cut this year have been dashed by evidence of surprising strength in the economy. Gross domestic product expanded by 0.6 percent, seasonally adjusted, in the first three months of 2008, double the 0.3 percent pace economists expected. It was down just 0.1 percent from a revised 0.7 percent in the December quarter.
At an annualized rate, growth came in at 3.6 percent, mildly weaker than the revised 4 percent rate for the December quarter and faster than the 2.8 percent pace analysts had tipped.
Seven weeks ago, the futures market was forecasting two interest rate cuts, according to data compiled by Bloomberg. After yesterday's GDP reading, the market is pricing in a rise of 25 basis points by December.
On Tuesday the RBA left official interest rates on hold for a third month at 7.25 percent, the highest in 12 years. The central bank warned, though, that it might have to raise rates further if the inflation rate did not subside.
"Considerable uncertainty remains about the outlook for demand and inflation," RBA governor Glenn Stevens said in a statement on Tuesday. "Inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected.
"Should demand not slow as expected, or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed."
An economist with ANZ, Riki Polygenis, said it was predicting two more rate rises — one in August and one in November, which would take the cash rate to 7.75 percent by the end of 2008.
The pace of growth in GDP, which reflected the surging resource industry and strong consumer spending, beat the estimates of all 22 economists surveyed by Bloomberg.
Quarter-on-quarter growth in Victoria was only 0.6 percent, behind the mining states of Queensland, rating 1.1 percent, and Western Australia, with 1.4 percent. NSW grew by 0.7 percent. South-eastern states would be more affected by the tightening credit, Ms Polygenis said.
The dollar rose more than US$0.05 to about US$95.50 in afternoon trade as investors increased their bets on higher rates ahead.
The sharemarket initially rose on the GDP figures, but later fell back, though closing with a small gain.
On a quarterly basis, construction and capital expenditure added 0.3 of a percentage point to growth, while household final expenditure added 0.4 of a percentage point. The largest drag on growth was on the trade front, where a surge in imports helped subtract 0.8 of a percentage point from the 0.6 percent growth rate for the quarter.
Without the floods in Queensland earlier this year, exports would have been stronger, and so would have overall growth. Coal exports dropped 7.7 percent from the previous quarter while mineral ores grew 7.2 percent as miners took advantage of rising commodity prices. Cereals, too, expanded, rising 39.4 percent for the period as drought eased in many regions.
Imports increased by 4.2 percent, with capital goods up 8.5 percent and consumption goods growing by a more subdued 3.3 percent.
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 percent quarter on quarter. "Other" goods and services jumped by 2.5 percent.
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 percent from 0.5 percent while first-quarter private capital expenditure contracted by 2.5 percent from growth of 5.1 percent. Data out yesterday showed new vehicle sales last month fell 2.2 percent, seasonally adjusted, compared with April, Reuters reported.
Monthly data from the Australian Federal Chamber of Automotive Industries showed sales rose 5.4 percent 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 percent.
The Organization for Economic Cooperation and Development (OECD) said India's output growth is projected to gradually slow below 8 percent as it sees the current account and fiscal deficits to widen this year.
'With a more restrictive monetary policy stance and a more normal harvest, output growth is projected to gradually slow to below 8 percent in 2008 and then to recover slightly in 2009. Higher oil and commodity prices are likely to push the current account deficit to 2 percent of GDP this year,' it added in its semiannual economic outlook.
'Much higher food and energy prices are leading to demands for offsetting policy action. Such demands ought to be resisted. Only by allowing the right price signals to affect demand and supply, can better balance be established in these markets. Concerns for living standards among those on low incomes are better addressed through an appropriately designed tax and social transfer system,' the OECD said in its editorial.
The OECD said the government foresees a further reduction in its fiscal deficit this year — the official estimate of the combined fiscal deficit of the Union and the States is 4.5 percent of GDP, well below the deficit target of 6 percent enshrined in the Fiscal and Budget Management Act — despite rapid growth of spending in the fiscal 2008 budget and income tax cuts.
However, it said the fiscal deficit remains above 6 percent of GDP if subsidy payments to oil, food distribution and fertilizer companies and a pay award for public sector employees set by the Pay Commission effective in fiscal 2008 are taken into account. Also the government plans to write off the bank debt of small farmers at a cost of 0.8 percent of GDP, it added.
The OECD said policy interest rates are projected to be raised during 2008 with inflation well above the authorities' objective. It added that the inflation may moderate in 2009, if the commodity prices stabilize, and 'make room for a measure of monetary policy easing in 2009'.
The OECD said the principal risk to its projection is that of inflation not moderating, which may arise from a considerable boost to demand if the total Pay Commission award for government employees were to be paid out immediately. It also added that immediate action to write off small farmers' debt would also add substantially to demand.
The OECD said an eventual rise in petroleum prices, in absence of a marked fall in world oil prices, will further aggravate inflationary pressures and the current account deficit will widen.
A smaller than expected cut in capital spending by Japanese firms may see economic growth for the first quarter revised up, but analysts said that did not lift the air of uncertainty hanging over the economy.
GDP growth in the first quarter was initially estimated as 0.8 percent, an annual rate of 3.3 percent. That will likely be revised up after government figures showed capital spending excluding software rose from the previous quarter and the fall from a year earlier was only around half what was expected.
But analysts warned that weak corporate sales and profits point to a downbeat outlook for the world's No.2 economy as it faces risks from rising costs and a U.S. slowdown, leaving future moves in Japanese interest rates highly uncertain.
"I expect an economic contraction in April-June, so this capital spending figure won't change our view on the economic outlook," said Kyohei Morita, chief economist at Barclays Capital Japan.
The capex data comes at a time of uncertainty both at home and abroad in the wake of the U.S. subprime mortgage crisis, which has forced the Bank of Japan (BOJ) to drop its bias towards raising interest rates and assume a neutral stance.
Finance Minister Fukushiro Nukaga said although markets seem to have stabilized of late it is too early to conclude that global market turmoil is over.
The capital spending figure, which follows recent bleak reports on industrial output and household spending amid rising inflation, is used to calculate revised gross domestic product (GDP) for the quarter which is due out on June 11.
"My impression is that the capex component in the revised GDP will likely be revised up," said Takahide Kiuchi, chief economist at Nomura Securities. "But sales and recurring profits were pretty bad. Although GDP growth accelerated in January-March, today's corporate data suggests that we shouldn't take GDP at face value."
All firms' capital spending fell 4.9 percent from a year earlier, the Ministry of Finance said, better than market expectations for a 9.6 percent drop.
It was the fourth straight quarter of annual declines, following a 7.7 percent drop in October-December, which was the biggest decline since 2002.
Economists cited a 1.3 percent rise in capital spending excluding software from the previous quarter as a reason behind a likely upward revision in the capex component of revised GDP.
Sun Life Financial Philippines has scaled down its growth forecast on the domestic economy to 5 percent to 5.7 percent from 6 percent to 6.5 percent after the release of weaker first quarter figures, according to Sun Life Philippines president and chief executive Henry Herrera. Herrera said SunLife, however, remained bullish on the country’s economic prospects, adding that a 5 percent growth was actually “decent.” He said remittances from Filipinos abroad would continue to drive growth while business process outsourcing (BPO) companies would take on a bigger role than before.
“BPOs will still continue to prosper,” Herrera said. “If you look at the real estate, much of the buildings are pre-contracted and that’s solid growth.” Herrera said the growth now was sustainable because the infrastructure had been put into place that would ensure activity, especially for BPOs.
“We finally found our comparative advantage in the BPOs. That’s a niche that we finally have and it continues to grow... that’s where our optimism is coming from,” Herrera said.
Sunlife said the Philippine economy continued to be resilient and that government would play a bigger role in boosting the economy this year.
“Government will be spending more and that will contribute to the improvement [of the economy] in the third to fourth quarter because it didn’t spend much in the first,” Herrera said. “The other silver lining is the OFWs [overseas Filipino workers remittances] and the BPOs.”
The Philippine economy grew 5.2 percent in the first quarter, much slower than government’s initial forecast. With higher world oil and grains prices pushing up inflation across the globe and financial market turbulence shaking up emerging market economies, the Philippines reduced economic growth target for the year to 5.7 percent to 6.5 percent from 6.3 percent to 7 percent.
The recession in the US and the slowdown in the global economy are expected to dampen demand for Philippine exports. Meanwhile, skyrocketing world oil prices will result in an increase in the country’s import bill. The slower economic growth is due in part to the revision of the exports growth forecast to 6 percent from 8 percent
The government sees the trade gap widening by $600 million this year with imports growing by 7 percent to $61.586 billion and exports inching up to $52.28 billion.
Euro zone GDP growth grew 0.8 percent in the first quarter from the fourth quarter of last year, and was up 2.2 percent year-on-year, EU statistics office Eurostat said. The figures show an upward revision to provisional figures reported on May 15. Eurostat provisionally put first quarter growth at 0.7 percent quarter-on-quarter. Its year-on-year estimate was unchanged.
Eurostat revised its fourth quarter figures to a quarter-on-quarter rise of 0.3 percent from 0.4 percent and to a year-on-year increase of 2.1 percent from 2.2 percent.
The agency gave a breakdown of first quarter GDP for the first time. It said household consumption rose 0.2 percent quarter-on-quarter and investment rose1.6 percent. Government spending rose 0.4 percent and inventories increased by 0.2 percent. Meanwhile, exports increased 1.9 percent and imports rose 1.8 percent.
Household consumption made a positive contribution of 0.1 percentage points to the quarterly GDP figure, while investment made a positive contribution of 0.4 points. Changes in inventories made a positive contribution of 0.2 points and government spending accounted for 0.1 percentage points of the GDP increase.
Net exports contributed 0.1 points.
Austria's gross domestic product (GDP) is set to grow at an average annual rate of 2.3 percent in real terms between 2008 and 2012, according to a new five-year forecast released by the Austrian Institute for Economic Research (WIFO). According to WIFO, this projected GDP growth rate lies slightly below the average for the preceding five-year period, which stood at 2.4 percent, but economic growth in Austria will continue to outpace the average GDP growth rate for the euro zone as a whole.
WIFO said that while the economic downturn in the United States will weigh on growth throughout the euro zone during the second half of 2008 and in 2009, it expects an upswing among European economies as of 2010.
Austrian companies are likely to benefit disproportionately from this upswing on account of their export focus and strong positioning in Central and Eastern Europe, while Austria's economy will also benefit from the tax reform planned for 2010, WIFO said.
Kenya's government is targeting economic growth of 12 percent by 2012 as it boosts investment in road and power infrastructure and tourism, Prime Minister Raila Odinga said. The east African nation expects to increase electricity generation capacity to 10,000 megawatts in the next decade from 1,200 megawatts currently, Odinga told journalists in Cape Town at the World Economic Forum. The government will publish its new economic growth plan, called Vision 2030, on June 10, he added.
Odinga is at the conference to help shore up investor sentiment in Kenya after ethnic fighting following a disputed election killed 1,500 people in the first quarter and disrupted production. The violence will probably cut Kenya's economic growth rate to 4 percent this year from 7.1 percent in 2007, according to government forecasts.
``Kenya is up and running once again,'' Odinga said. ``It's ready to do business.''
The government wants to focus investment in industries including tourism, agriculture, retail, telecommunications and infrastructure to help boost growth, Deputy Finance Minister Oburu Oginga said in an interview in Cape Town. Tourism accounts for about 13 percent of the economy.
Kenya's worst political crisis since independence in 1963 ended in April when opposition leader Odinga was sworn in as prime minister, forming a national unity administration with his rival in the elections, President Mwai Kibaki.
Poland's economic growth in the second quarter probably remained unchanged from the first quarter's 6.1 percent, according to Economy Minister Waldemar Pawlak.
"We expect economic growth in the second quarter to be the same as in the first quarter," Pawlak told Reuters on the sidelines of a farming conference in Warsaw.
Poland's economy expanded by 6.1 percent year-on-year in the first quarter, more rapidly than expected, on the back of robust demand and investment. The finance ministry estimates second quarter growth will reach about 6 percent, but a slowdown is expected in the second half so that overall growth for 2008 is likely to ease to 5.5 percent from 6.6 percent in 2007.
The International Monetary Fund (IMF) said that Russia's gross domestic product (GDP) will grow by 7.75 percent this year but its inflation is likely to reach 14 percent.
"We expect demand to remain brisk and GDP to grow 7.75 percent in 2008," IMF Mission leader Paul Tomsen was quoted by the RIA Novosti news agency as saying at a news conference in Moscow.
High oil prices, a large inflow of capital, and an increase in bank credit had brought about momentum in investment, productivity, incomes and consumption in Russia, the IMF official said.
At the same time, inflationary pressure on the Russian economy is expected to remain, and consumer prices could rise 14 percent this year, he said. Russia's GDP grew 8.1 percent in 2007, and expanded at an annual rate of some 8 percent in the first four months of the year.
The Russian government's inflation target for 2008 is 10.5 percent. According to Russia's State Statistics Service, consumer prices grew 7.5 percent from January 1 to May 26.
Slovakia's economy slowed a touch in the first quarter but still posted robust growth backed by strong domestic demand that could filter into further price pressures as the country prepares for Euro adoption next year. The Slovak statistical office confirmed an earlier estimate showing 8.7 percent year-on-year real GDP growth, down from 14.3 percent growth in the fourth, but still highest among regional economies. The office also forecast full-year 2008 GDP growth to come in at 7.9 percent year-on-year, compared with 10.4 percent in 2007.
Foreign demand rose 12 percent year-on-year, while household consumption grew by 8.4 percent and gross fixed capital rose 2.9 percent.
'The economic growth was driven mainly by domestic demand, more specifically surging household consumption and stock building,' Erste Bank analysts wrote in a note. 'Indeed, the household sector was surprisingly strong.'
Growth in the nation of 5 million people, which adopts the EU's common currency next year, has been boosted by exports from the its two largest car makers PSA Peugeot Citroen and Kia Motors Corp, as well as rising demand due to fast growth of wages.
Real wages in the first quarter grew 6.2 percent annually, while in nominal terms the rise was 10.4 percent, above many forecasts.
'For the first time since 2005, the real wage growth slightly outpaced productivity growth,' Erste analysts said.
'Although, this is a signal for cautiousness on the central bank side and on the budgetary discipline, the real wage growth lagged the productivity gains significantly in the past two years, so we read the current development as a catch up for the previous periods.'
Slovak interest rates have been on hold at 4.25 percent, or 25 basis points above the European Central Bank's main rate, for the past year, although rates will have to be converged with the euro zone's before the country starts using the bloc's common currency in Jan. 2009.
Economy and Deputy Prime Minister Pedro Solbes said that gross domestic product 'will be in the 2 percent range,' at the end of 2008. Speaking during an interview with Radio Nacional, Solbes said that the figure is the 'most realistic number', although GDP could grow by 2.1, 2.2 or even 2.3 percent this year.
Solbes said that Spain will grow at its potential of 'around 3 percent in one or a few years'.
At the end of April, the government cut 2008 growth forecasts to 2.3 percent from 3.1 percent and the same rate it sees for 2009, and forecasts 2.8 percent growth in 2010 and 3.1 percent in 2011.
Recently, Solbes warned that Spain may not meet those 2008 and 2009 GDP growth targets.
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