GDP UPDATE
November 2008
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
The Commerce Department said gross domestic product, the broadest measure of goods and services produced in the country, shrank at a 0.3 percent annual rate in the third quarter. The drop was smaller than many economists had expected, but the sharp fall in consumer spending was the largest since second quarter 1980. Consumer spending, which accounts for about two-thirds of economic activity, shrank at a 3.1 percent annual rate.
The economy contracted slightly at the end of 2007, but grew at a 2.8 percent annual pace in the second quarter this year. The new figures mark the worst performance since the July-September period of 2001, when the economy, mired in recession, shrank at a 1.4 percent pace. During the far steeper downturn of 1990-91, economic activity slid at a much steeper 3 percent annual rate in one quarter.
"This is the first of a run of negative GDP numbers; the economy is in recession," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. He expects business and consumer activity to contract more severely into 2009.
Richard Moody, chief economist at Mission Residential, predicts the third quarter numbers will be revised to show a larger drop in activity. "Given the scope of job losses seen thus far and still to come, sagging wage gains, restrictive credit conditions, and the ongoing housing market correction, consumer spending is on course for an even larger decline," Moody said, predicting the economy won't recover until the second half 2009.
GDP figures are subject to revision in subsequent months as more data become available.
The pillars that held up the economy in the second quarter, including consumer spending and business investment, have been buckling.
Consumers pulled back as the impact of a $168 billion federal stimulus package of business and personal tax breaks faded. A continuing depression in the housing market — with spending on home construction down 19 percent in the third quarter — contributed to the slide in economic activity. Businesses slashed spending on equipment and software at a 5.5 percent pace, largest decline since early 2002.
Increased government spending, including defense spending, softened the numbers. Trade continued to be a positive, but even there the picture wasn't as rosy. Exports rose at a nearly 6 percent rate in the third quarter, but that's down from 12 percent the previous three months.
Economists cautioned that third quarter figures don't include October's stock and financial market carnage. A recent survey of 45 top economists by USA TODAY predicted the economy is headed toward a recession that will last for three quarters.
"The full effect of the credit crunch has yet to be felt," said Steven Wood, chief economist at Insight Economics, adding that the economy "slipped" in the last quarter but could fall at as much as a 3.5 percent rate in the final months of 2008.
Thursday's report follows the Federal Reserve's decision Wednesday to cut a key interest rate half a percentage point to a low 1 percent in an effort to spur economic activity, bank lending and bolster confidence.
The rate reduction, second in a month, is just part of a massive federal effort to stabilize the economy, including a $700 billion economic rescue package designed to recapitalize banks, the nationalization of mortgage giants Fannie Mae and Freddie Mac, and direct government bailouts of select financial firms.
On Capitol Hill, lawmakers who are normally in their home states campaigning at this point, have been holding hearings on a possible second stimulus bill, including extended unemployment benefits, aid to states and new spending on roads, bridges and other infrastructure projects.
Fed Chairman Ben Bernanke earlier this month endorsed another stimulus effort, suggesting that Congress craft a significant package including loan guarantees to help revive business investment and spending.
The National Bureau of Economic Research, the panel of experts that determines officially when U.S. recessions began and ended, uses a broader definition to determine recessions than the thumbnail rule of two quarters of contracting GDP. That didn't happen in the last recession, in 2001. The NBER takes into account income, employment and other barometers, and their finding is usually made well after the fact.
The Canadian economy shrank by 0.3 percent in August, slightly better than the decline economists had been expecting, but still down. What does this mean for the economy? Here are some thoughts from a couple of economists.
Douglas Porter, deputy chief economist, BMO Nesbitt Burns: “This result simply unwinds part of the surprising strength seen in July, and would normally be treated as no big deal. However, given the marked deterioration in the economic outlook since that time, it unfortunately will look like a loud early warning shot.”
Charmaine Buskas, senior economics strategist, TD Securities: “There are significant headwinds that will plague the Canadian economy going forward and the risk is to the downside for growth.”
Australia will tip into a shallow recession early next year as a slowing global economy reduces demand for its mineral exports, a leading investment bank says. JP Morgan Australia chief economist Stephen Walters said downward revisions for global growth for this quarter and the first quarter of 2009 had led to a more pessimistic outlook.
He forecast GDP growth of 0.7 percent in 2009, down from 1.4 percent, already downgraded last week from 1.8 percent. Australia's GDP growth for the rest of this year would fall to 2.1 percent from the previous forecast of 2.5 percent, Walters said.
"These new forecasts include expected falls in Australia's GDP in Q4 2008 and Q1 2009. If realized, the coming quarters will define the first technical recession in Australia since 1990/91," he said.
As global growth weakens, Australia's export volumes would fall slightly and prices for commodities such as iron ore and coal would "significantly weaken", Walters said. That would drag terms of trade and national income lower.
Consumers would cut their spending and expected jobs growth would falter over the next two years, he said.
"We forecast that the jobless rate will reach 9 percent by the end of 2010 when, on our forecasts, more than one million Australians will be out of work."
Deep uncertainty in the global financial system has forced Bangladesh Bank (BB) to make a cautious forecast for this year's GDP growth, BB chief economist Dr Mustafa K Mujeri said.
“We want to be relatively cautious because we do not know about the possible impacts of the global financial meltdown on our economy,” Mujeri told reporters at a briefing on the publication of BB quarterly report for July-September 2008 at the central bank's headquarters.
The BB quarterly projected a GDP growth rate ranging from 6.2 percent to 6.5 percent although the government estimated the growth in the budget for 2008-09 at 6.5 percent.
Bangladesh's economy grew 6.2 percent in fiscal 2007-08 despite the political turmoil and erosion in business confidence.
Major economic indicators in the first quarter of the current fiscal year show positive signs, which actually started in the second half of the last financial year, the report revealed. Despite a clear indication of continued upturn in economic activities, the central bank has made a relatively lower GDP growth rate because of what it said current global turmoil and uncertainty.
“The impact of the global crisis on our economy is still unclear. We will be able to assess the impacts once the BB completes its study,” Mujeri said. “We are yet to know what will be the impact on our export and remittances.”
The Policy Analysis Unit (PAU) of the central bank is conducting a study to diagnose the possible impacts of the present global situation.
China is likely to expand around 9 percent in 2009, despite the global credit crisis, if Beijing introduces a raft of stimulative policies to support growth, a key government think-tank said recently.
Economists at the State Information Centre (SIC) led by Fan Jianping and Zhu Baoliang attach a 60 percent probability to their forecast, published in the China Securities Journal, which assumes low growth but no recession in the United States, Europe and Japan.
South Korea’s economy expanded a seasonally adjusted 0.6 percent in the third quarter from the previous three months, in line with expectations, central bank data showed.
The quarterly growth was the slowest since a 0.5 percent expansion in the third quarter of 2004.
Gross domestic product was expected to have grown 0.6 percent during the July-September period from the previous quarter; a Reuters poll of 13 economists had showed.
A 100 billion baht ($2.9 billion) increase in government spending will boost Thailand's economic growth by one percentage point in 2009, Finance Minister Suchart Thada-Thamrongvech told reporters.
The Bank of Thailand has forecast the economy to grow by 3.8-5.0 percent in 2009.
Suchart said the extra spending in the wake of a global financial crisis would raise the projected 2008/09 (October/September) fiscal budget deficit to about 350 billion baht.
The International Monetary Fund (IMF) forecast Finnish economic growth to slow sharply next year as the global economy struggles. It said at its annual country review that Finnish GDP growth would grow at best 0.5 percent in 2009 after expected growth of 2 percent this year.
The "economy will grow by no more than half a percent next year," Lorenzo Figliuoli, IMF's head of Finland mission, said in a news conference.
"Finnish financial markets and banks have been remarkably resilient to the global turmoil so far, but the spillovers from the persistent upheaval will take a severe toll on 2009 growth," the IMF said in a statement. "Looking forward, rapid population ageing and slowing productivity threaten longer-term growth, competitiveness and fiscal sustainability," it said.
Finland has thus far weathered the global financial crisis better than many of its European Union peers, with its banking sector relatively less exposed to bad debt, although industry and consumer confidence has fallen sharply in recent months.
The IMF said Finnish inflation growth should peak at about 4 percent in 2008, before falling back next year as food and fuel prices drop.
Germany is better placed than most of its peers to cope with the deterioration in the global economic environment, Finance Minister Peer Steinbrueck said in a newspaper interview released recently.
“Germany is better positioned than most of our competitors around us,” Steinbrueck told the Hamburger Abendblatt. But he added: 'We are experiencing a clear downward development in the real economy.'
The German economy contracted in the second quarter and a government official told Reuters that gross domestic product (GDP) probably contracted by 0.25 percent in the July-September period, which would put Germany in recession.
World Bank study has indicated that Ghana's Gross Domestic Product (GDP) has been underestimated by about 80 percent, Dr Anthony Akoto Osei, Minister of State at the Ministry of Finance and Economic Planning, has said.
Addressing a book launch in Accra, which was attended by President J.A. Kufuor, Dr Akoto Osei said the bank had requested another study to confirm its initial finding about Ghana's GDP.
The book, titled An Economic History of Ghana: Reflections on a Half-century of Challenges and Progress, was edited by Ivor Agyeman Dua, an author and journalist. Mr. Agyeman Dua, who is now the Minister Counselor at the Ghana High Commission in London, already has six books to his credit.
The book chronicles the economic development of Ghana from independence until now. High profile academics, professionals and ministers, including Jeffery Sachs, Mr. Moses Asaga, a former Deputy Minister of Finance and Economic Planning, a former Vice-President, Professor John Evans Atta Mills, and Dr Akoto Osei contributed to the write-up. Dr Akoto Osei said careful observation of economic trends in Ghana over the last few years indicated that a lot of economic activities that had taken place might not have been captured in the GDP. He said the economy had been robust but the triple shocker of high prices of oil and food and the global financial crunch implied that donor support to developing countries such as Ghana would reduce.
The situation, Dr Akoto Osei said, brought to the fore the need for the country to strengthen its domestic revenue mobilization and management. He said although domestic revenue had increased from GH¢3 billion in 2001 to GH¢16 billion in 2008, there was still room for improvement.
Launching the book, Dr K.Y. Amoako, a former Executive Secretary of the Economic Commission for Africa, commended the author for excellent work done and said the book was about progress, which had been made by the country and opportunities it had missed.
He said the book also dwelt on lessons from the past, the present situation and the components of the future.
The European Commission projects Hungary's economy will expand 0.7 percent in 2009, according to its autumn economic forecast 2008-2010. The Commission noted that the government's proposals in the government's revised 2009 budget, submitted to Parliament on October 18, as well as a high level of uncertainty on global financial markets could change the projection.
In the government's latest revision of the 2009 budget bill, Hungary's economy is seen contracting as much as 1 percent in 2009, instead of 1.2 percent GDP increase assumed in the October 18 revised budget. The Commission sees GDP growth in Hungary picking up to 1.8 percent in 2010. It put GDP growth in 2008 at 1.7 percent.
The start of economic in improvement in Hungary has been stymied by the global financial crisis, the Commission said. At the beginning of October, the country's government securities market came to a standstill, the share market plunged and the forint weakened sharply. The Commission blamed Hungary's vulnerability on its high level of external debt.
Iceland's Prime Minister Geir Haarde said the total cost of the country's banking crisis could amount to 1.1 trillion Icelandic crowns ($9.40 billion), or 85 percent of 2007 gross domestic product. According to a statement released by the prime minister's office, Haarde told parliament the 2009 budget deficit could be as high as 10 percent of economic output, pushing gross debt -- which stood at 29 percent of GDP at the end of 2007 -- above 100 percent by the end of next year.
In a separate statement, Haarde said Iceland was still looking at possible legal action against Britain after a conflict over billions of crowns in frozen deposits in Icelandic financial institutions.
"As I have said before, my government has retained the services of a British law firm to investigate where there are grounds for legal action against the British government because of its absurd decision to apply terrorist legislation against Icelandic interests in the UK," Haarde said.
The island nation's financial system has all but collapsed since the country was forced to take over three of its biggest banks this month. Some fear the economy will contract as much as 10 percent next year.
Unlike countries such as Britain or the United States, Iceland has been unable to bail out its banks due to the size of the financial sector in relation to the country's GDP. After an overseas acquisition spree over the last few years, Icelandic banks owed more than $60 billion to foreign lenders.
Iceland's GDP in 2007 was around $11 billion.
In wake of the registered 1.6 percent Gross Domestic Product growth in Latvia in the first half of 2008, a decrease of 2 percent to 2.5 percent could be expected in Q2. Thus a GDP decrease of an average 0.3 to 0.5 percent can be expected in 2008, Senior Vice President of Parex banka Eriks Brivmanis prognosticates in an interview to the newspaper Dienas Bizness.
"Most probably the GDP growth index will remain negative until the second half of next year, and then a gradual economic recovery will follow. Also in 2008, economic growth will stay close to zero," the expert underlined.
Evaluating the current situation, Brivmanis pointed out: "It is an economic regularity – growth continued longer than experts predicted, but the recession, when it began at last, gathered pace much more rapidly than previously expected. Latvia paid too little attention to the surging problems in the U.S. housing market, which have now turned into a global scale credit crisis."
Parex banka expected recession to start sooner than it did, which is proved by cautiousness in its actions at the end of the last year. Parex banka was one of those few commercial banks in Latvia which did not become involved in the aggressive handing out of credits for real estate purchase.
"We were among those, who sold their real estate property at the moment, when the market was at its highest peak. We were the only ones to say out loud that in order to keep a healthy balance; the value of issued loans has to correspond with the volume of attracted deposits. The dynamics of slowdown of economic growth in Latvia – from 10 to 11 percent GDP increase last year to the expected negative growth ratio in 2008 – in my opinion, cannot even technically be called a "hard landing". In Latvia's case "hard landing" would be a prolonged downslide with negative GDP growth in the course of several years. If we do manage to get back to positive GDP growth results in three to four quarters' time, we will be able to say that it was the "soft landing" we experienced," the financial expert underlined.
Commenting on the government's actions in dealing with the problems, Brivmanis points out that in the plan adopted in 2007, the government put too much emphasis on limiting the issue of loans because it was an easier thing to do than to work on crucial long term solutions – raising export competitiveness, optimizing the tax system and courts, etc.
"The only thing that the private sector businesses expect from the government is for it to define equal and honest rules of the game, the rest should be entrepreneurs' own responsibility. The short time, which was necessary for Latvia's economy to recover from the previous crisis – 1995 bank crisis and 1998 crisis in Russia – proves that Latvian businessmen are flexible enough," the senior vice president of Parex banka said.
Currently the government should give the entrepreneurs additional liquidity and fasten repayment of value-added tax. It is necessary to review employment legislation to combat the "envelope salaries". The slow, inefficient bankruptcy procedure rules should be reviewed as well. From Brivmanis' point of view, in coming years, no changes should be introduced in tax legislation, except for separate cases related to tax benefits for promotion of investment and export.
Nigeria expects its gross domestic product (GDP) to grow 9.5 percent to 20.29 trillion naira ($172 billion) next year, according to a copy of the draft 2009 budget seen by Reuters.
The forecast compares to an expected GDP figure of 18.53 trillion for 2008, according to the document. President Umaru Yar'Adua is expected to seek parliamentary approval for the 2.67 trillion naira draft budget next week.
Romania's economic growth could slow down to 4.5-5 percent in 2009 from an expected 9 percent this year, as the global crisis lowers foreign cash flows, President Traian Basescu said.
'The situation is not easy ... capital inflows are not coming in as they used to, but we have resources to reach economic growth of 4.5-5 percent next year,' Basescu told reporters.
At 9.3 percent on an annual basis, Romania's economic growth was the fastest in the EU in the second quarter. Third-quarter figures that will encompass the initial impact of global crisis are not yet available.
A decline in both internal and external demand has led to a slowdown in economic growth. According to estimates, GDP growth totaled 7.7 percent in January-September. Due to the anticipated slowdown in dynamics in the fourth quarter, GDP growth is expected to total 7.3 percent in 2008, according to the Russian Economic Development Ministry in a report on the country's socioeconomic development over the first nine months of the year.
Spanish economic output shrunk in the third quarter, according to provisional data, suggesting the country is on the brink of recession. The Bank of Spain estimated that growth in gross domestic product in the three months to end-September was a -0.2 percent compared with the second quarter. If confirmed, it would be the first quarterly contraction in GDP in 15 years.
It attributed the slowdown mainly to an “intense correction” in construction activity and a fall in the value of manufactured goods. Growth in domestic demand, an important component of GDP, slowed to 0.3 percent year-on-year.
The Bank’s estimates are the latest confirmation that Spain, among the fastest-growing European economies in the last decade, has been battered by the impact of the global credit squeeze on an already-weakened construction sector.
The country’s residential housing market collapsed last year amid oversupply and climbing interest rates. Heavily indebted property and construction groups have since had to contend with tighter credit conditions, which have driven up defaults and bankruptcies.
“The persistence of instability in international financial markets… has aggravated a correction which began in preceding quarters, and has contributed to putting the brakes on growth in activity,” the Bank said.
Most economists expect Spain to enter technical recession – defined as two consecutive quarters of negative growth – this quarter, as unemployment rises and households continue to cut spending.
New car registrations in September, for example, fell 32 percent year-on-year, while industrial output in August declined an adjusted 7 percent. El Corte Inglés, the country’s biggest department store group, this week warned it might suffer its first annual sales drop.
Joblessness in the country has already surged by about three percentage points this year, to 11.3 percent, and is expected by some to reach 15 percent next year. Many expect GDP to contract by at least 1 percent in 2009.
The U.K. economy will shrink for the first time since 1991 next year and debt will surge to more than 60 percent of gross domestic product as Prime Minister Gordon Brown ramps up spending, European Commission forecasts show.
The economy will contract 1 percent after expanding 0.9 percent this year, the European Union's executive arm said in a report published in Brussels. It will grow 0.4 percent in 2010. Debt will be 50.1 percent of GDP this year, 55.1 percent in 2009 and 60.3 percent in 2010, the commission said.
Brown and Chancellor of the Exchequer Alistair Darling signaled last week they will abandon a decade-old pledge to limit debt to 40 percent of GDP as they try to ease the effects of a likely recession on consumers and companies. Brown must call an election by mid-2010 and polls show his Labour Party trailing the opposition Conservatives.
Inflation, which accelerated to a decade-high of 5.2 percent in September, will cool to 1.9 percent next year, below the Bank of England's target of 2 percent, the EU said.
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