GDP UPDATE
March 2008
McIlvaine Company
TABLE OF CONTENTS
AMERICAS
JPMorgan has lowered its U.S. economic targets for 2008. The firm lowered US GDP growth outlook to +0.9% from a prior +2.1%. This call implies that JP Morgan now sees its S&P 500 target at the end of 2008 at 1450, down from a prior 1590 target. The most significant downward earnings revisions are in technology and consumer discretionary spending sectors, while energy and healthcare have the best visibility.
S&P 500 EPS still looks down 5%-7% for the first half of the year but the second half of 2008 is expected to show a more modest single-digit to low-double digit recovery. We just noted a Reuter’s survey that noted a more flat Q1 and Q2 2008 EPS.
What is very curious here is how the growth in many models magically reappears in the second half of the year. That would make this recession a mere footnote in the history books. It might not even technically qualify as a recession because that would be defined by "two consecutive quarters of negative GDP." So far, rate cuts have yet to make a dent as the situation is still deteriorating. Rate cuts arguably take 2 quarters to really work their way into the system, but rates currently haven't been able to help a stretched consumer that really doesn't need more credit.
We'll know starting in summer if these fears are unjustified or if we are still deteriorating. But this magic second half is still somewhat of a mystery.
Latin America's biggest economy grew more than 5% in 2007 on high global demand for Brazilian ethanol, iron ore, and agricultural products and a booming domestic market, Finance Minister Guido Mantega said recently.
Mantega said the country's gross domestic product grew between 5.2% and 5.3% last year. The government reported expansion of 5.7% in the third quarter of 2007, largely because of big gains in the agricultural and industrial sectors. Brazil's IBGE Census Bureau is scheduled to release GDP figures for 2007 on Wednesday.
"We already know that it will be more than 5%," Mantega said at a meeting of the Institute of International Finance in Rio de Janeiro. He said he expects Brazil's GDP to grow another 5% in 2008. Growth in 2006 was 3.7%.
Mantega said the country's industrial output is expected to grow more than the 6% posted in 2007, given the country's increased production of capital goods and rising imports of equipment and machinery.
A domestic spending boom has been fed by higher salaries, easier credit and falling interest rates. Brazil's benchmark Selic interest rate now stands at 11.25%, down from a high of 19.75% in mid-2005.
Mantega said Brazil is well-prepared if the U.S. economy goes into recession. The subprime crisis has not reached Copacabana beach yet," he told the meeting at a hotel near Rio's famous beach.
Brazil's recent history includes frequent bouts of boom and bust economic cycles, but many experts believe those trends have been smoothed through orthodox monetary police embraced by the government of President Luiz Inacio Lula da Silva.
Chilean economists cut their growth forecast, the central bank said on its Web site. The economists expect the economy to grow 4.2% this year, compared to 4.6% in the March survey.
The economists surveyed by the bank expect the peso to trade at 455 per dollar in the next two months.
The peso rose for a ninth day, strengthening 0.3% to 443.76 per dollar at 8:04 a.m., New York time, from 445.23 yesterday. It touched 442.69, its strongest level since February 1998.
ASIA
National gross domestic product (GDP) climbed by a seasonally adjusted 0.6% in the December quarter, the Australian Bureau of Statistics said.
The economy also expanded by 3.9% in the 2007 calendar year, which was in line with market forecasts.
Domestic final demand rose by 1.6% in the December quarter to post an annual growth rate of 5.7%.
China's economic growth should ease to 9.3% in 2008 as the global economy slows and domestic policy tightening takes effect, Standard and Poor's said.
China has posted double-digit GDP growth for the past five years.
'The cooler pace will result from the significant global economic slowdown and from domestic policy tightening,' S&P analyst Kim Eng Tan said in a note.
Tan added that the unusually heavy snowfalls that wreaked havoc across much of the country in January and February will only take a fraction of a percentage point off the nation's GDP growth, partly because the damage is proving to be temporary. Besides, the greatest disruption to manufacturing came during the Chinese New Year holidays, when production is seasonally slow. Production can also be ramped up to cover part of the shortfall when the weather improves, Tan noted.
The analyst added that inflation is likely to come in at 4.4% this year.
'Higher food prices will keep headline inflation elevated at least for the first six months of 2008. Based on expectations that the situation will improve in the second half of the year, we project inflation in 2008 at 4.4%,' Tan said.
Hong Kong's economic growth is likely to slow to 5.0% this year from the 6.3% it achieved in 2007, as it faces a more challenging external environment this year, Hang Seng Bank said in its latest economic outlook.
Hong Kong's real GDP growth accelerated to 6.7% year-on-year in the final quarter of 2007, contributing to the robust 6.3% it recorded for full-year 2007.
However, the slowdown in the US economy and its spillovers to other economies are clouding the prospects of Hong Kong's exports in the coming months, the bank said. Although January exports soared 15.8% year-on-year, the figure was distorted by exporters rushing shipments ahead of the Lunar New Year holidays.
"We see total export growth (decelerating) to 6.1% year-on-year in the first two months this year, which implies (exports) would decline by 5.7% in February," the bank said.
"For 2008 as a whole, we keep our view that total export growth will ease to 7.2%," it added.
The bank noted that rising inflationary pressure poses another challenge for the territory's economy. January CPI inflation eased to 3.2% year-on-year from 3.8% in the previous month, due to property rate concessions. However, taking out the one-off effect, underlying inflation was much higher at 4.3%.
The underlying forces point to growing price pressure, but the government's waiver of property rates for all four quarters of 2008 and electricity subsidies will knock down the CPI reading, the bank said.
"Therefore, we have revised downward our CPI forecast for the full year of 2008 from 3.5% to 3.2%," the bank said.
The bank said strong domestic demand is likely to provide some buffers against a sharp slowdown in the external sector. Private consumption spending is expected to stay robust, underpinned by good employment prospects, rising wages and wealth, it said.
The government's tax rebates and other concessionary measures would also help boost consumer confidence, it said.
Hong Kong's retail sales registered the ninth straight month of double-digit growth, up 23.3% in January, with the timing of the Lunar New Year helping to boost spending during the month.
The labor market remained tight with the January unemployment rate hovering at a 10-year low of 3.4%, as business usually surges in the run-up to the Lunar New Year holidays, Hang Seng Bank said.
But the unemployment rate is likely to rise as waning demand for workers from the trade sector is likely to become more apparent in the coming months, it added.
In a CEOs Snap Poll conducted on the macroeconomic outlook for the economy during 2008-09 at the CII’s National Council meeting, revealed that GDP growth during the year 2008-09 is expected to be in the range of 8.0% to 8.5% as revealed by 50% of the CEOs, said a CII press release. Another 41% of the CEOs revealed that the GDP growth is expected to be in the range of 8.5% to 9%. The median GDP growth rate expected by majority of the CEOs was at 8.5% during the year 2008-09.
On inflation, 68% of the CEOs expected Inflation to be in the range of 4 to 5% during 2008-09.
Of the CEOs who responded to the CII Snap Poll, 50% of them expected manufacturing growth to be in the range of 9 to 10% during 2008-09. In the light of the budget announcements and the prevailing macro economic conditions, 79% of the CEOs expected an increased in investments in the economy during the year 2008-09. While 75% of the CEOs said that industrial investments would increase, 80% of the CEOs said that fresh investments would continue to increase in their respective companies.
In the light of the Union Budget 2008-09 announcements, 78% of the CEOs polled said that they expected increase in demand for consumer non-durables and about 68% of the CEOs expected an increase in demand for consumer durables.
The real estate sector was a key contributor to the UAE GDP in 2007, according to a report released by UAE Ministry of Economy. The segment accounted for 8% of the country’s GDP last year. UAE economy attained an overall growth of 7.4% in 2007 over 2006; the country’s GDP reached Dh698 billion, says the report.
Though oil prices averaging US$69.1 billion constituted 35% of the UAE GDP in 2007, it was the non-oil sectors that made a major impact on the country’s economy, accounting for 65% of Gross Domestic Product in 2007; the manufacturing sector, whose diversified activities in oil, liquefied gas and factories in free zones, contributed 13% to the GDP in 2007.
The UAE real estate sector, invested Dh25.8 billion in 2007. While manufacturing and real estate sectors together accounted for 35% of the total investments in the country last year, investments industries such petrochemical, building material, medicine and food industries continued to surge. The real estate investments in the UAE were not restricted to Dubai alone; rather the realty sectors of emirates like Ajman, Ras Al Khaimah and Abu Dhabi invited massive funds in 2007.
EUROPE / AFRICA / MIDDLE EAST
Austrian economic growth slowed to 0.6% in the last quarter of 2007 amid lower growth in state spending and exports remained the main driver, research institute WIFO said.
The institute, which calculates gross domestic product on behalf of the statistics office, was adjusting its flash estimate for the period issued on Feb. 13, when it said fourth-quarter growth was 0.7%. It revised its calculation for GDP in the third quarter to 0.7% from a previously stated 0.8%.
WIFO confirmed its previous estimate that 2007 real GDP had grown by 3.4%, down from 3.3% in 2007.
"The strength of growth has been weakening since the second quarter of 2007 and this has continued into the first months of 2008, as shown by surveys of companies," the institute said.
It cited the effects of the downturn in the United States economy and said exchange rate developments represented an increasing danger for European exporters.
Public spending showed a rise of 1.2% in the quarter, down from the high level of 2.0% in the third quarter, WIFO data showed.
The situation in the Austrian labor market was exceptionally favorable. "This typically reacts with a delay to the overall economy," WIFO said.
The domestic construction industry, after weakness at the end of 2007, was doing better at the start of 2008.
"Tourism expanded especially strongly. Both the number of overnights as well as the earnings for the first half of the 2007/8 winter season were well ahead of the previous year," WIFO said
The Czech statistical office (CSU) today revised down its estimate for fourth quarter growth to 6.6% year-on-year from an earlier 6.9% although analysts said the expansion was still robust. The Czech Republic's growth was mainly driven by higher economic activity on the back of higher employment and increased manufacturing and retail trade, the office said.
The fourth quarter was affected by several one-offs, mainly by increased performance of the health industry and higher spending of health insurance companies, without which gross domestic product (GDP) would have only grown by about 6%, the offices said.
'The economy grows faster than expected and its expansion is well-balanced,' said Raiffeisenbank in a note, adding consumption, investment and foreign trade all buttressed up the expansion.
For all of 2007, gross domestic product grew 6.5%, the office said, compared to last month's estimate of 6.6%.
'This year we expect a slowdown to 5% on the back of slackening household consumption,' Raiffeisenbank analysts said.
Estonia's fourth-quarter gross domestic product growth slowed to a 4.8% annual rate from 6.4% in the third quarter, according to Statistics Estonia. For the full-year 2007, annual economic growth slowed to 7.1% from 11.4% in 2006.
"In 2007, the GDP growth decelerated gradually due to the deceleration of domestic demand and exports and imports of goods and services," the national statistics agency said.
It said domestic demand slowed in 2007 to 9.3% from 16.1% due to a "steep deceleration" of household final consumption expenditure and capital investment.
It also said export and import growth also slowed in 2007, with exports growing at a lower rate at 1.5% and imports growing at a lower rate at 2.8%.
Weaker domestic demand and fewer imports and exports also hampered growth in the fourth quarter.
"Deceleration of the GDP growth continued in the 4th quarter being influenced by deceleration in the growth of domestic demand, by decrease in the exports and imports of goods and services and hence by a steep deceleration in the value added growth of corporations' sector," it said.
Seasonally adjusted on-quarter growth was 0.8% in the fourth-quarter compared to the third-quarter.
Hungary's economy grew an adjusted 0.7% year-on-year in the fourth quarter and rose 1.3% in 2007 compared to the year before, official final GDP data showed. Unadjusted growth in the fourth quarter was 0.8%. The figures correspond to preliminary data released in mid-February.
Household consumption fell 1.2% in the quarter, a slight improvement on the last quarter, while government consumption rose 5.5% compared to a fall of 3.8 the quarter before.
'We can see improved consumption due to households and government,' said Ozlem Yedkik, an economist at DZ Bank. 'There was a small increase in exports but the accumulation of inventories shows a lack of willingness to invest.'
'Last month the national bank held interest rates partly because they thought (low) GDP was helping the disinflationary process. This month they are likely to be more focused on the forint (currency) and wage data,' she said.
Latvia will see a more moderate economic growth in 2008 than in previous years, with its GDP expected to expand by 7% this year, the Latvian Economics Ministry said in a report on economic development, according to BNS. In the mid-term, Latvia's GDP growth is likely to range between 5 and 8%, the ministry's specialists predict.
According to the report, Latvia has seen fast economic growth for several years already, and the growth of GDP was impressive also in 2007. The ministry's estimates show that last year, the Latvian economy grew by 10.6%.
The steep growth rate of recent years was mainly sustained by strong domestic demand, with private consumption and investments increasing substantially as well. The role of export growth at the same time has been smaller.
Authors of the report also note that the measures taken under the government's anti-inflation plan and more cautious lending policy adopted by Latvia's largest commercial banks has slowed the fast crediting growth, which in turn has curbed the rate of consumption.
As the impact of the inflation-driving factors decreases, inflation and the current account deficit are likely to drop. In 2008, however, inflation is still expected to remain relatively high due to the planned significant rise of regulated prices and excise tax on tobacco and fuel, the ministry said.
Malta's gross domestic product in real terms rose 3.8% year-on-year in 2007, the National Statistical Office announced. In 2006, the economy grew 3.4%. Gross National Income at market prices went up 8.1%. Total final consumption expenditure by households, by Non-Profit Institutions Serving Households and by General Government climbed 2.3%.
Gross fixed capital formation at constant prices remained practically unchanged. Real exports and real imports of goods and services were down in the year 2007.
Portugal's GDP rose 1.9% over 2007, which compares with a 1.3% pace set in 2006, according to final figures from the INE statistics institute. In a statement, INE said the increase was boosted by an increase in domestic demand, specifically a rebound in investment.
GDP was up 2% year-on-year in the fourth quarter, INE said.
Turkey's economy is almost one-third bigger than previous estimates, boosting the government's per capita income targets and increasing the prospect its credit rating will be raised. According to official figures released recently, Turkey's gross domestic product was TL758bn ($606bn, £300bn) in 2006, a 31.6% rise on the previous estimate of TL576bn. Per capita income for that year was raised sharply, from $5,480 to nearly $7,500.
Turkey is one of the most-watched emerging markets and foreign investors own 70% of the Istanbul stock market. The revision, which had been anticipated, could spark an upsurge in foreign direct investment and lift Turkey's debt-to-GDP ratio, economists said. It would boost government ambitions of lifting per capita GDP to $10,000 by 2013.
"We've become rich overnight," the daily newspaper Vatan reported, perhaps reflecting some skepticism at the revisions, which are designed to bring Turkey's official statistics into line with the way economic data are compiled in European Union countries. Turkey is negotiating to join the EU.
Still, the revised data give a more accurate picture of the economy, which has grown by at least one-third since 2002 under a government policy of tight fiscal discipline, a strong manufacturing base, a boom in construction, and rising FDI.
A sizeable part of the rise comes from better measurement of the unregistered economy, which officials have tried for years to estimate accurately and to include in official data.
The government, urged on by the International Monetary Fund, is looking to reform the tax and social security systems to encourage the unregistered economy into the official sector and to ensure that people and corporations pay taxes.
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