GDP UPDATE
April 2009
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
A recent report showed the U.S. economy shrank at a 6.3 percent annual rate at the end of 2008, the worst showing in a quarter-century. The Commerce Department says the economy sank a bit faster than the 6.2 percent annualized drop for the October-December quarter it estimated a month ago.
However, the revision was better than expected. Economists were bracing for an even sharper 6.5 percent annualized decline in the government's third and final estimate of gross domestic product.
Hit by the global crisis and a series of domestic problems, Argentina's economy grew less than expected in January, expanding 2.3 percent from the same month a year earlier, the national statistics agency, Indec, reported. On a monthly basis, the economy expanded by 0.3 percent from December.
Indec's data confirm that Argentina's economy is in the middle of a slowdown. But the data are far more optimistic than are data provided by private economists, most of whom say Argentina is in the midst of a full-blown recession.
"Right from the start we know this data is incorrect," said Fausto Spotorno, an economist at Orlando J Ferreres & Asociados. "You've got declines in almost all industrial sectors. We see that the economy is in a recession."
OJF's estimate puts January's economic activity down 2.9 percent from the previous year. January's growth, as reported by Indec, is lower than what was expected by economists in a monthly survey by the Argentine Central Bank. The survey indicated growth would total 3.2 percent. However, this survey tends to forecast what economists think Indec will report. In some cases, it does not reflect what economists think about real economic data.
INDEC's indicator is considered a proxy for gross-domestic-product growth and is widely watched by economists. Economists across the board have been reducing their estimates for economic growth in Argentina, noting especially that Argentina's important farm sector is particularly susceptible to declining demand for food exports.
Meanwhile, local events like an ongoing farm conflict, the recent nationalization of private pension funds, and a decision to move congressional elections up by four months have put investors on edge and led many Argentines to withdraw their money from banks and curb consumption.
At the same time, suspicions continue to abound about the quality of Indec's data, especially its inflation data, which the government is widely accused of understating. Statisticians say that this understatement could be contributing to an overstatement of real GDP and economic activity expansion.
Government officials consistently deny that they are cooking the books.
Recent market forecasts for Brazil's economic growth over the coming year are unduly low, Brazilian Central Bank President Henrique Meirelles said recently.
"We think the forecasts for growth are a little bit pessimistic," Meirelles told members of the Brazilian Senate Economic Affairs Committee during testimony.
According to the central bank's latest weekly market survey, Brazil's economy is seen growing by only 0.01 percent this year and by 3.50 percent in 2010. Brazil's economy grew by 5.1 percent in 2008. The economy contracted by 3.6 percent in the fourth quarter of the year compared with the previous quarter, however, in reaction to international deceleration and heightened investor risk aversion.
The Brazilian economy, however, is well positioned to return to growth before other countries, Meirelles said.
"There is a certain perception that Brazil will grow more than the world average and more than the majority of emerging market countries," he said.
Brazil's central bank is scheduled to release a new official estimate for 2009 GDP growth in its first-quarter inflation report. The central bank president noted that losses around the globe have totaled more than $2 trillion during the current international slowdown, but said he believed that the financial sector would be more affected than the real economy.
Meirelles encouraged the U.S. government to take measures to halt the decline of prices in the housing sector there in order to help end the crisis.
Locally, the central bank president said, the government is taking measures to cut the country's high consumer borrowing costs. He said the government's National Monetary Council could announce new borrowing cost-reduction measures soon.
According to central bank data, average interest rates in January stood at 42.4 percent annually. Rates for businesses stood at an average of 31.0 percent, while rates for individual consumers stood at 55.1 percent. The Brazilian central bank reference Selic interest rate currently stands at 11.25 percent annually.
Meirelles acknowledged that current low inflation rates in Brazil left room for ongoing reduction of the Selic rate. He noted, however, that current rules on investment in government securities and savings accounts could hinder public-sector debt financing and the bank's efforts to bring the rate downward.
Analysts have noted a recent investor migration to non-taxable savings accounts from taxable government fixed-income securities alongside a recent decline in the Selic rate. Savings investment in Brazil currently pays investors a real return of around 3 percent annually, while investment in government fixed-income securities pays real returns of about 4 percent after taxes.
Meirelles said that finding a solution for the problem was up to the country's congress. However, he noted that recently proposed changes in the country's tax code would take too long in implementation to be of help in the short term. Under Brazilian legislation, tax changes can only take effect during the tax year following the year in which they are approved.
According to recent market forecasts, Brazil's central bank is seen cutting the Selic rate to around 9 percent annually to help stimulate a slowing local economy.
Canada's real gross domestic product will likely shrink 8.5 percent this quarter and 3.5 percent in the following three months, Parliamentary Budget Officer Kevin Page said. That's much worse than the Bank of Canada's January forecast of a 4.8 percent annualized contraction in January through March and 1 percent in April through June. GDP shrank 3.4 percent in the quarter through December, the sharpest since 1991.
Nominal GDP, the broadest measure of the government's tax base, is expected to contract 15 percent in the first quarter and 4 percent in the second from falling commodity prices, Page said in testimony before the House of Commons Finance Committee. He said shrinking output will lead to roughly 380,000 jobs shed over the first half of this year. The jobless rate will likely peak at "just over" 9 percent in 2010, he said.
It's the first time the PBO is reporting near-term forecasts. Page said that given the continuously evolving economic situation, it was important for Parliament to have access to up-to-date views. He said that, even if the minority Conservative government's C$39.9 billion fiscal stimulus has its full impact, "Canada faces a larger economic challenge than was envisioned when the (2009) budget was prepared."
Page said this doesn't necessarily imply more stimulus is needed as recovery also depends on global economic and fiscal developments.
He projected budget deficits of C$38 billion in 2009/2010 and C$35 billion in 2010/2011, versus government forecasts of C$33.7 billion and C$29.8 billion, respectively. The government's fiscal year runs from April 1-March 31.
Real GDP is expected to shrink 2.3 percent this year and rebound 2.2 percent in 2010, according to the PBO's March survey of private sector forecasters. The 2009 budget forecast a 0.8 percent decline this year and a rebound of 2.4 percent next year.
Page suggested that Parliament make it mandatory for the government to provide progress reports on budget measures to increase transparency. The first such report released this month was an "important first step" and will ultimately strengthen Parliament's budgetary oversight role, he said.
The Liberal opposition demanded progress reports on the budget in return for their support for the plan.
Colombia’s economy probably expanded at the slowest pace since 2002 in the fourth quarter of last year as the deepening global recession curbed exports and stalled consumer spending. Gross domestic product probably grew 1 percent in the final three months of 2008, according to the median estimate of 20 economists surveyed by Bloomberg. By comparison, GDP expanded 7.9 percent in the fourth quarter of 2007 from a year earlier.
Latin America’s fifth-largest economy slowed last year as central bank policy makers raised interest rates to the highest since 2001 in a bid to stem inflation. With borrowing costs at an eight-year high, the global financial crisis spread to Colombia, stifling exports and prompting consumers to scale back purchases of big ticket items like washing machines and cars.
“The economy came to a halt in the fourth quarter,” said Boris Segura, an economist at Morgan Stanley in New York, who expects 0.3 percent growth in the quarter. “Exports to Venezuela and the U.S. have really impacted growth.”
Colombia’s economy, which slowed in each of the first three quarters of last year, last decelerated in four consecutive quarters in 1998-1999.
The country’s exports dropped 6.7 percent in December from a year earlier, the National Statistics Agency reported. For all of 2008, exports totaled $29.3 billion, a 22 percent drop from 2007.
Ecuador's gross domestic product is expected to expand by more than 2.0 percent this year, Finance Minister Maria Elsa Viteri said.
"It will be over 2.0 percent," Viteri said at a press conference held during the annual meetings of the Inter-American Development Bank, without giving more details.
Separately, she also played down any suggestions that the Andean nation was planning to introduce its own currency, while dropping the use of the U.S. dollar. She said that rumors that Ecuador planned to introduce a new currency called the "Condor" were incorrect.
"The only condors are those flying in the sky," she said at the press conference.
The Latin American economies will likely contract substantially in 2009, a top official from the International Monetary Fund said recently.
"The world is definitely in negative territory in 2009, there is no doubt about that," Nicolas Eyzaguirre, the IMF's Director for its Western department, told reporters. Latin America will look like the world, he added.
Unlike what happened in previous recessions, "this time around preparedness was much better" in Latin America, Eyzaguirre said. Some countries had some room for fiscal expansion, or at least to keep spending levels in infrastructure and strengthen safety net.
"In the past, governments typically cut on infrastructure and subsidies to the poor," Eyzaguirre said.
Countries have also been able to cut interest rates as they had previously anchored inflation expectations. Eyzaguirre said the region might start growing again in 2010 so long as developed countries do what the IMF suggested that they do: Employ an expansive monetary and fiscal policy and fix their banks.
The IMF expects to boost lending to Latin American countries that have sound economic policies. Those new loans won't have posterior conditions, Eyzaguirre said.
China's injection of 4 trillion yuan into the economy is likely to secure 6.5 percent growth and help pull rest of Asia out of slump, World Bank predicts. The Chinese economy is likely to recover by the second half of this year and could help to pull Asia out of its slump, the World Bank forecast.
Despite the contraction in overseas markets, the bank said Beijing's pump-priming measures would enable China to secure a growth rate of 6.5 percent this year.
"A ray of hope may be emerging with signs of China's economy bottoming out by mid-2009," the bank said. "A recovery in China, fuelled largely by the country's huge economic stimulus package, is likely to begin this year and take full hold in 2010, potentially contributing to the region's stabilization, and perhaps recovery."
With gross domestic product (GDP) in other leading industrialized nations expected to contract, growth in China will be a welcome boost to the world economy and a further sign of its rising influence. China has had double-digit growth for most of the past 30 years but its export sector, which accounts for 40 percent of GDP, has been hurt by the decline of demand from Europe, North America and Japan. In February, exports declined by 25.7 percent.
To make up for the shortfall, the government is pumping 4tn yuan (£396bn) into spending on public works, consumer subsidies and other economic stimulants. Bank lending has increased and demand has grown for steel and power. President Wen Jiabao said further pump-priming was possible if the world economic crisis worsened.
Indonesia's economy is estimated to have grown between 4.3 and 4.8 percent in the first quarter from the same period a year ago, the finance minister said , although there was downside risk due to the global crisis.
'Our projection for economic growth in the first quarter is more optimistic than others...although the risk of lower economic growth still exists amid uncertainties in the global economy,' Minister Sri Mulyani Indrawati told a news conference.
The central bank had previously estimated the economy grew 4.6 percent in the first quarter from a year ago.
The Asian Development Bank (ADB) has estimated Indonesia's economy will grow 3.6 percent this year, down from 6.1 percentin 2008.
The South Korean government's extra budgetary spending is unlikely to stop the economy from shrinking this year, given the global downturn's impact on export demand, a senior Bank of Korea official said.
"The global economy is mired in a deep downturn. The extra spending alone won't turn things around," Choi Chun-sin, director general of the BOK's economic statistics division, said after the central bank issued final economic data for the fourth quarter of last year. "The Korean economy is already in technical recession, and I expect [gross domestic product] to continue to contract in the first quarter, although it'll be milder than the previous quarter's fall."
The domestic economy shrank 5.1 percent in the fourth quarter of last year from the prior quarter after adjustments for seasonal variations, its worst performance in almost 11 years. Year-to-year, GDP contracted 3.4 percent. (Preliminary data had shown that the GDP shrank 5.6 percent from the prior quarter and 3.4 percent year-to-year).
The Bank of Korea also said that the economy grew 2.2 percent last year, revising down its earlier estimate of 2.5 percent. In 2007, GDP rose 5.1 percent.
The latest data confirm faltering demand for Korean manufactured components and finished products, especially from China and the Western economies.
Most economists expect Korea's economic growth to fall by more than half this year from 2.2 percent in 2008. Many even predict a contraction, though they say the economy will likely hit bottom in the first quarter.
"Signs of a recent rebound in some activity support our baseline scenario that GDP will return to positive growth from the second quarter," said Citigroup economist Oh Suk-tae.
The government this week unveiled a 28.9 trillion ($21.7 billion) supplementary budget, its largest ever, to help spur growth. The government, which has forecast that the economy will contract 2 percent this year, said earlier that it expects the additional fiscal spending to help boost gross domestic product by as much as two percentage points.
The latest data might pressure the government to expand its stimulus plans and the central bank to ease monetary policy further. The BOK has already cut its base rate by 3.25 percentage points since early October to prop up the $1 trillion economy.
The euro-zone economy's record contraction in the final three months of 2008 was even deeper than previously thought, statistics agency Eurostat said in its final estimate of fourth-quarter gross domestic product. Eurostat revised down its estimate of fourth-quarter activity to show a 1.6 percent drop in GDP compared to the third quarter. Eurostat previously estimated a 1.5 percent contraction in the fourth quarter.
Compared to the final quarter of 2007, GDP fell 1.5 percent, wider than an earlier estimate of a 1.3 percent decline. Economists had largely expected no change in the final estimate. The European single currency extended losses on the data and remains 1 percent lower versus the U.S. dollar at $1.3264.
The euro zone tipped from economic growth into recession during the third quarter of 2008, when data showed that GDP declined by 0.3 percent for a second consecutive quarter. Two consecutive quarters of lower GDP is an informal but widely used definition of a recession.
Eurostat revised up households' final consumption to show a 0.3 percent, quarterly drop, a reversal after a 0.1 percent rise the previous quarter. Investments plunged 4 percent in the final three months of the year, steeper after a 0.7 percent decline in the third quarter. Meanwhile, exports plunged 6.1 percent, also far worse than a 0.2 percent decline in the previous quarter, Eurostat said. Imports dropped 4.7 percent, turning lower following a 1.3 percent increase in the third quarter.
Economists have penciled in a first-quarter decline similar to the fourth-quarter plunge. Stabilization in some leading indicators, such as purchasing managers indexes for manufacturing and services, point to a bottoming out of output, however, toward mid-year, said Joerg Radeke, an economist at the Center for Economic and Business Research. Still, the euro-zone is in for a rough year amid a sharp, synchronized global downturn, he said.
"There is no illusion that 2009 will be the worst year in terms of economic performance for the euro member states since the Second World War," he said.
Consumer and business confidence stood at a record 24-year low in March, undermining prospects for investment, employment, and consumer spending, said Howard Archer, chief European economist at IHS Global Insight. Retail sales remain soft, manufacturing is struggling, and survey evidence suggests that service-sector activity still contracted in March at the second-deepest rate, after February, in at least 10 years, Archer said, in a research note. Meanwhile, exports continue to plunge.
As a result of those factors and other evidence, IHS Global Insight is likely to cut its 2009 euro-zone GDP forecast from a 3 percent decline to a 4 percent contraction, he said
There is no doubt about it: Italy's economic situation has worsened considerably during the current quarter. Only recently, the OECD forecast that Italy's gross domestic product is likely to fall by 4.2 percent in 2009. This follows hot on the heels of an earlier statement where the OECD said the situation in Italy this year and next was "much worse" than it had previously thought, and that Italy would not come out of its recession until "some time" in 2010 at the earliest. According to the earlier forecast, the OECD expected GDP to fall this year by 1 percent and then by a further 0.8 percent in 2010.
The Bank of Italy has also changed its forecast and now suggests that GDP this year will fall by 2.6 percent. In January (the last time they revised their Italy forecast), the IMF forecast a fall of 2.1 percent. This is almost certain to be revised downwards in the April World Economic Outlook forecast review. The Italian employers’ lobby Confindustria cut its forecast for 2009 GDP, saying the economy will contract by 3.5 percent while public debt will climb to 112.5 percent of GDP.
These forecasts are not drawn like rabbits out of a hat, since evidence of the deterioration in Italy's economic performance is now to be found everywhere. But perhaps nowhere is this clearer than in the most recent exports and industrial output numbers. Italian exports plummeted 26 percent in January from a year ago, the biggest drop since records began in 1991, with the drop in exports leaving the country with a trade deficit of 3.6 billion euros.
Latvia has downgraded its gross domestic product (GDP) forecast for 2009, it has been revealed. Speaking to the BNS news agency, finance minister Einars Repse explained that the country will now be basing its budget on a GDP fall of 13 percent. Previously, it had expected a 12 percent drop in output this year.
"It [the fall in GDP] will certainly not be lower than 13 percent, but it is currently very hard to tell whether it will be even worse," he said.
The country's government is set to deliver its next budget in June and the announcement should attract attention from a variety of sources.
Last week it was revealed that the International Monetary Fund delayed the first payment of a €20 million (£18 million) loan it had agreed to pay Latvia because the country had failed to cut its public spending to agreed levels. The new budget will be aimed at addressing this issue.
Russia's economy will contract by 4.5 percent in gross domestic product terms in 2009 amid a further massive retreat of capital, the World Bank said in its semi-annual report. The new GDP figure represents a major revision of the bank's earlier forecast of 3 percent growth and is double the latest estimates for a contraction of 2.2 percent issued by the Russian government.
"The scale of this revision reflects the dislocation of the global economy in the intervening months," the bank's Chief Economist for Russia, Zeljko Bogetic, said in the report.
The country's economy also faces further downside risks due to the uncertainty surrounding the price of oil -- Russia's chief export -- and the timing of a possible global recovery, Mr. Bogetic said. The bank's new forecast is based on global oil prices oscillating this year around $45 a barrel -- some $30 a barrel less than the bank assumed in its previous report issued in November.
Mr. Bogetic also said Russia's net capital outflows may exceed the record capital flight last year and amount to an impressive $170 billion this year, chiefly due to the debt repayment obligations of Russian banks and corporations. Last year, Russia saw $130 billion flying from the country following the late-summer outbreak of financial and economic crisis. Recently, First Deputy Chairman of the Russian Central Bank Alexei Ulyukayev said this year the outflows should slow down and amount to less than $83 billion. However, the World Bank's estimates are based on the $135 billion debt obligations that the banking and corporate sectors face this year as well as a significant slowdown of foreign direct investment and further outflow of capital from the country, Mr. Bogetic said.
The bank also said Russia's unemployment rate may exceed 12 percent and that the government needs to boost its social spending to aid the unemployed and the poor to prevent any social unrest.
Britain's gross domestic product shrank by 1.6 percent in the final three months of 2008 compared to the previous quarter, marking the largest decline since 1980, the Office for National Statistics said. Compared to the final quarter of 2007, GDP contracted 2 percent. Both figures were revised from previous estimates of a 1.5 percent quarterly contraction and a 1.9 percent year-on-year decline.
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