GDP UPDATE
September 2008
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
The U.S. domestic economy is weak due to depressed housing starts, poor auto sales and tight credit. Consumers are less confident about making major purchases on account of falling house prices and a poorer jobs outlook. But the foreign trade sector of the economy is doing much better. A surge in exports has allowed real (inflation-adjusted) Gross Domestic Product (GDP) to expand at a 3.3% annualized pace in the second quarter of this year versus the first.
U.S. GDP growth for the full year 2008 is now expected to be around 1.5%. Beyond this year is where the analysis starts to get tricky. First, there is the uncertainty about who is going to win the Presidential election on November 4th. This will have significant tax and spend implications.
Then there are the dynamics of the domestic market versus the world market. U.S. at-home weakness has caught the rest of the world in its web. Purchases from overseas are not as robust as previously. As a result, Europe’s economy is slowing, as are those of Japan and China. U.S. exports will not have as easy a time of it next year as this year.
2009 GDP Growth to be 1.5% to 2.0%
At home in the U.S., housing starts should start to perk up a little in 2009. The air-pocket drop in commodity prices will take pressure off the Consumer Price Index. The problems in the financial sector should settle down, causing a relaxation in lending standards between institutions. The net effect should be a U.S. economy that grows at least as fast next year as this year, say at a pace of 1.5% to 2.0%.
Brazil's economic growth picked up speed in the second quarter, led by a boom in corporate investments and surging domestic demand that contrasts sharply with slowdowns in the United States, Japan and Europe. The faster-than-expected expansion, at more than a 6% annual growth rate, may help Latin America's largest economy weather a global credit market turmoil, economists said. Still, the fast pace underscores central bank concerns of red-hot domestic demand that could keep inflation elevated.
"The economic cycle in emerging markets in general is in a very benign phase and Brazil is part of that," said Zeina Latif, chief Brazil economist at ING in Sao Paulo. "The country is reaping the benefits of a strong economy that tends to create greater resistance (to external shocks), even if you compare to other emerging markets."
Gross domestic product grew 1.6% in the second quarter from the first quarter compared with a revised 0.8% expansion in the first three months of the year, statistics agency IBGE said.
The economy expanded a hefty 6.1% when compared with the second quarter of 2007 after posting revised year-on-year growth of 5.9% in the first quarter. A Reuters poll forecast growth of 1.1% from the first quarter and 5.5% from the second quarter of 2007.
The agriculture sector, often referred to as the green anchor of the Brazilian economy, grew 3.8% from the first quarter, leading the GDP expansion. It rebounded from a 1.3% drop in the first three months of the year.
Services growth quickened to 1.3% from 1.2% in the previous quarter and jumped 5.5% year on year.
Industry grew 0.9% quarter-on-quarter, slowing from a 1.7% expansion in the first quarter. It grew 5.7% from the second quarter of 2007.
Capital investments in areas such as machinery, factories and infrastructure increased 5.4% quarter-on-quarter after expanding 1.6% in the first quarter.
Investments jumped 16.2% from the second quarter of 2007 as companies spent heavily to expand capacity and keep up with red-hot domestic demand.
The figures released with strong capital investments are proof that Brazil is poised for sustained growth in the years to come, Finance Minister Guido Mantega said.
"This growth is quality growth because one of the items that rose the most was investments," Mantega said. "We should end the year with a very good performance, between 5 percent and 5.5 percent."
Still, Mantega voiced concerns about robust domestic demand potentially driving up inflation, saying he would like to see a slowdown in consumption.
Brazil's economy is forecast to grow 4.8% in 2008, according to a central bank estimate. Last year, the economy expanded 5.4%, its fastest growth rate in three years.
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%.
There will be no respite from rising prices in the immediate run, with PM's Economic Advisory Council (PMEAC) suggesting that inflation may touch 13% while the GDP growth rate is expected to slide to 7.7% from 9% recorded last year.
"For some more time inflation can increase. It could touch 13%...but by December it will start declining and is likely to moderate to 8-9% by March 2009", said outgoing chairman of the PMEAC C Rangarajan while releasing the Economic Outlook for 2008-09.
Approving the Reserve Bank of India's tight monetary policy to contain inflation, which has touched the 13-year high mark of 12%, Rangajaran said, "It (inflation) could be brought down to 8-9% by March 2009 through coordinated policy action."
As regards RBI monetary policy, Rangarajan, who is also a former RBI Governor, said, "The tight monetary stance needs to be maintained till the pace of inflation comes down." Justifying the 7.7% economic growth projection for 2008-09, Rangarajan said, "There is a slowdown in agriculture, industry and services and the global environment is not very conducive to growth. This will affect Indian economy as well."
The agriculture production is likely to grow at a slower pace of 2% in the current year as against the 4.5% in the last fiscal year, he said, adding industrial output is expected to decelerate to 7.5% from 8.5% and services to 9%.
Japan’s economy shrank by the biggest margin in almost seven years during the second quarter of this year as stumbling exports and tougher terms of trade battered Asia’s biggest industrial powerhouse. A revision to official GDP data suggested that the economy is contracting more quickly than previously imagined, as companies around the world slash capital spending and suspend purchases of machinery and industrial robots.
Although the Government had previously released growth figures for the April to June quarter which showed a 2.4% annualized contraction over that period, the new numbers had that figure at an annualized 3.0%.
Economists now predict that when the figures come out for the third quarter early next month, the verdict could be just as bad, sending the economy into a recession. The technical definition of a recession is two consecutive quarters of negative GDP.
Kazakhstan sees the economy growing at 5-7% annually in the next three years and inflation easing, according to a draft three-year budget report. Central Asia's largest economy has suffered from the global liquidity squeeze coupled with runaway inflation. The government sees gross domestic product (GDP) growth slowing down to 5.3% this year from 8.7% last year.
It expects to increase the budget deficit to 3.0% of gross domestic product next year from 2.1% planned this year. The budget, based on the projected average price of Brent crude of $60 per barrel throughout the next three years, forecasts a gradual slowdown of average annual inflation to 6.5 - 8.6% by 2011.
The government sees annual (December to December) inflation close to 10% this year.
Releasing its economic growth forecasts, the European Commission has revised down its estimates for growth in the euro zone for 2008 and warned that downward revisions to the following year's estimates may also be seen. In its report, the commission speculated that the euro area economy would expand by only 1.3% this year, down notably from the 1.7% forecast previously published. Along with downwardly revised growth forecasts, the EU report also highlighted upwardly revised inflation profiles and now expects euro zone inflation to average 3.6% this year, up from 3.1% previously forecast. The CPI growth rate in Germany is now expected to average 3.0% in 2008, up 01 percentage points from initial estimates. French inflation forecasts were revised up to 3.5% from 3.0% initially, while Spanish CPI is expected to reach a growth rate of 4.5%, up from the initial forecast of 3.8%.
Belgium's economic forecasting agency has sharply cuts its forecast for growth in 2009 and trimmed its estimate for this year as both the domestic economy and exports cool. The Federal Planning Bureau (FPB), whose estimates the federal government uses to draw up budgets, said it saw the Belgian economy expanding by 1.6% in 2008 and by 1.2% in 2009. It had previously forecast 1.7% growth in both years after a 2.8% increase of gross domestic product (GDP) in 2007.
The government, which is aiming to have a budgetary surplus of 0.3% of GDP next year, said the new forecasts meant it would have a hole of around €5 billion ($7.01 billion) to plug for 2009.
"There's no reason to be overly pessimistic, but you shouldn't be naive about the situation either. We will need to take further measures," Prime Minister Yves Leterme told a news conference after a cabinet meeting.
Finance Minister Didier Reynders said earlier this month that Belgium might post a deficit of 0.2 to 0.3% this year, rather than the planned budgetary balance, as tax income declined. The FPB said it believed quarter-on-quarter growth would drop to around zero in the third quarter before a gradual recovery to 0.5% in the second half of 2009.
Gross domestic product rose by 0.2% in the second quarter, the lowest rate since the first quarter of 2005 when it was zero. Exports would grow by 2.9% this year and pick up to 3.0% in 2009, helped by the declining euro to the dollar. Exports rose by 3.8% last year.
Domestic demand growth would ease to 2.7% this year and 1.1% in 2009 after 3.3% in 2007.
The FPB forecast inflation of 4.7% this year and 2.7% next. It had previously forecast figures of 3.8% and 2.0%.
Danske Bank's Finnish subsidiary Sampo Bank said in its September outlook that it saw the Finnish economy growing by 2.4%this year and by 1.5% in 2009, having forecast 2.6 and 2.1%, respectively, in June. Last year, Finland's gross domestic product grew by 4.5%.
Danske expects Finland's inflation rate to fall below the 3% mark next year from 4% seen in the January-to-July period this year.
Iceland's real gross domestic product (GDP) grew 5% in the second quarter, a report released by Statistics Iceland said. On a seasonally-adjusted basis, the GDP grew 4.9% in the second quarter compared with a 1.4% decline in the preceding quarter.
Domestic expenditure in real terms fell 8% year-on-year in the second quarter. Exports grew 25%, while imports fell 12%. The report said improvement in the balance on trade in the goods and services account helped the growth of the GDP.
In a separate report, the statistical office said total labor costs in the country rose 3.1% in the transport storage and communication sector in the second quarter compared with the preceding quarter. This was followed by a 1.9% rise in construction, and a 0.9% increase in manufacturing. However, labor costs declined 0.7% in wholesale and retail trade and repair.
The Italian economy was confirmed to have contracted 0.3% on a quarterly basis in Q2 following the previous quarter's 0.5% gain, the National Institute of Statistics (ISTAT) said. Year-over-year, however, GDP estimates were revised down and pointed to the Italian economy having contracted 0.1% in the second quarter of 2008. Preliminary estimates had suggested that the growth rate had merely stagnated in Italy after reaching 0.3% in the previous period.
An official from Mozambique’s Central Bank (BM) said that the country’s economy was this year expected to reach its growth target of 7% despite a rise in fuel and food prices. BM spokesman Valdemar de Sousa told a press briefing convened to present the national economic climate in the first half of 2008 that gross domestic product (GDP) growth has been 6.7% in the period.
"In the same period in 2007, GDP growth was below a forecast 7%, which meant it was possible to end the year without moving away from the planned level of economic growth,” he said.
Previously, BM had indicated a growth of 3.5% in the first quarter of this year, against 10% in the previous year, as a reflection of an adverse international economic climate (the economy had not grown by less than 7% since before the year 2000). The bank pointed to the “bad period in the world economy” and, especially, to the cost of importing fuel which rose from US$350 million in the first six months of 2007 to US$700 million in the same period of this year, affecting the state budget by the equivalent of 0.7% of GDP until December.
Most observers have pointed to an increased slowdown of the economy in 2008, after record growth in 2006 (8.5%), and 7% last year. Mozambique’s services industry (mainly retail, transport and communications) is the main driver of the country’s economy, accounting for over half of its GDP.
According to the figures presented by the central bank, the Mozambican economy posted an accumulated inflation of less than 4.8% from January to August of the current year.
The Mozambican authorities’ target is to end the year with an inflation rate of less than 10%, which would depend on price fluctuations, especially during the Christmas period.
Romania's domestic consumption rose 11.6% on the year in the second quarter, signaling potential first signs of slowdown in the overheated economy, statistical data showed recently. Analysts said the consumption growth rate, compared with 11.4% in the second quarter of last year and 13.5% in the first quarter of 2008, could be a sign of diminishing demand due a series of interest rate hikes in recent months.
Rampant consumption has fanned economic concerns for Romania, bloating its current account deficit to 14% of gross domestic product (GDP) last year and helping bring inflation to three-year highs of 9% in July.
Earlier in September, statistical data showed the Romanian economy expanding by 9.3% in the second quarter, on course to being the fastest-growing in the European Union.
'Consumption is still quite big, but if the slowing trend persists this will be good news,' said Ciprian Dascalu, analyst at Millennium Bank in Bucharest.
Romania's GDP is expected to expand by roughly 8% this year, with government estimates reaching as far as 9%, compared to the 2007 expansion of 6%. However, some economists said the slowdown in second-quarter consumption was driven primarily by statistical calculations earlier in the year and not by a palpable decline in demand pressures.
'A slowdown in consumption in the second quarter compared with January-March is hard to be explained given the fact that data showed retail sales growth has accelerated,' said Ionut Dumitru from Raiffeisen Bank in Bucharest. 'I suspect that GDP deflator data are not ok.'
The data release also confirmed continued strong growth in the construction industry, which rose 33.9% in the second quarter, compared with 32.3% in the same period in 2007.
Agriculture expanded 3.7% in April to June, versus a decline of 9.9% a year earlier, supporting expectations that this year's strong harvest has started to add fuel to economic growth.
Slovenia was the euro zone's most robust economy with a 5.5% expansion in the second quarter, but analysts said a slowdown was just around the corner. Statistic office data showed growth of gross domestic product (GDP) stemmed mainly from a 10.9% jump in investment in annual terms, down from 17.3% in the first quarter of the year.
The office also revised up 2007 GDP growth to 6.8% from a previously estimated 6.1%, which was already Slovenia's highest growth figure since it declared independence from the former Yugoslavia in 1991.
'The growth in the second quarter is surprisingly high and these figures mean that growth at the end of this year is likely to be near 5%, which is higher than expected earlier,' said Janez Sustersic of the Faculty of Management Koper.
The European Commission recently cut its forecast for the euro zone's expansion to 1.3% and for the EU as a whole -- to 1.4%.
Most analysts, including the government's macroeconomic institute, say the small eastern European economy is likely to lose some steam as several of its biggest trading partners slide toward recession.
'In the second half there will be a slight slowdown (in Slovenia), due to the slowdown globally and in the EU, but it will be much smaller in Slovenia than in the euro zone (as a whole),' said Martin Stelzeneder of Austria's Raiffeisen bank.
The government's Institute of Macroeconomic Analysis and Development in Ljubljana estimated 2008 economic growth at 4.4% in April. A fresh forecast is due in late September.
'Industry expectations and export dynamics... indicate that growth will move towards 4 percent by the end of the year,' said former central bank governor Mitja Gaspari, now a researcher at the Economic Institute of Ljubjana's Law Faculty.
'I would be surprised if 2008 GDP growth were significantly above 4.5 percent,'
Sweden's gross domestic product was unchanged in the second quarter from the first three months of 2008 and was up 0.6% year-on-year, revised data from the statistics office shows. Initial figures on Aug. 1 had shown GDP was unchanged from the first quarter and up 0.7% from a year earlier.
The office said first-quarter GDP rose 0.1% from the fourth quarter and was up 2.0% from a year earlier.
The quarterly reading was unchanged from the previous estimate but the year-on-year rate compared with a previous reading of 2.1% growth
Turkey's gross domestic product (GDP) grew 1.9% year-on-year in the second quarter, the slowest pace since the country emerged from a recession six years ago, the Turkish Statistics Institute (TURKSTAT) said. Gross domestic product growth slowed to 1.9% from a revised 6.7% in the previous quarter. The economy was expected to expand by 3.7%, according to the median estimate of 15 economists surveyed by Bloomberg.
Turkey's economy grew at the slowest pace since the country emerged from a recession six years ago as higher interest rates and the threat of political instability hurt consumer spending, according to the figures. With the latest figures, the total growth counted for 4.2% in the first half of 2008.
Industrial production growth slowed to 3.2% in the second quarter from 7.1% in the first three months of the year. Exports jumped 35% in the quarter compared with a year earlier, after expanding 44% in the first quarter.
Agriculture showed a surprise slowdown, as did the manufacturing and construction sectors -- key drivers for country's growth. Trade, financial services, and the real estate sector were the main gainers.
The pace of Turkey's growth slowed as the global credit squeeze dampened demand in export markets and the central bank added to the cost of borrowing. Consumers also lost confidence as the Islamist-rooted ruling Justice and Development Party faced the prospect of closure on allegations it became the focal point of anti-secular activities in the country.
"The third and fourth quarters may be even worse than this," Haluk Burumcekci, chief economist for Fortis Bank AS in Istanbul told Bloomberg. "On the face of it a slowdown in growth would support an easing of rates, but the bank is going to be watching many other things, including the currency."
The Turkish government had set a growth target of 5.5% for 2008, although government officials have since revised its estimates down to around 4.5% which was reached at the end of 2007.
The National Institute of Economic and Social Research (NIESR) estimated that the UK economy slowed by 0.2% in the three months to August. This figure is down from July's downwardly revised -0.1% growth rate. NIESR uses statistical projection techniques to project UK GDP one month ahead.
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