GDP UPDATE
December 2009
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
The U.S. economy will pick up in the coming year, particularly in the housing sector, according to a survey conducted by the Federal Reserve Bank of Chicago. However, recovery from the worst economic slowdown since the Great Depression will occur while the unemployment rate remains painfully high, survey participants said.
The Chicago Fed questioned a group of 31 economists, business and academic leaders in the five-state Chicago Fed region in November. The panel sees gross domestic product--the amount of all goods and services produced in the U.S.--growing by 2.5% in the fourth quarter of 2010.
The government's latest figures estimate U.S. GDP rose 2.8% in the third quarter of this year, the first increase since the second quarter of 2008.
The survey forecasts residential investment rising 11.4% in the fourth quarter of 2010, compared with the same period this year. The survey predicts construction of 740,000 new homes in the fourth quarter of next year. That's up from the projection of 570,000 units for the fourth quarter of 2009.
The unemployment rate in the fourth quarter of 2010 is seen at 9.8% versus 2009 predictions for a 10.1% jobless rate.
The latest government data pegged the November unemployment rate at 10.0%, from a 26-year high of 10.2% in October.
Some Federal Reserve policy makers have indicated in recent weeks that the ailing job sector must improve before the Fed considers raising the short-term federal-funds rate, which has stood at 0% to 0.25% since December 2009. Fed rate-setting is also dependent on expectations for inflation, which the survey sees as moving higher next year.
The Federal Reserve greatly expanded its balance sheet during the past couple of years by pumping massive amounts of liquidity into the financial system. The action, deemed necessary to rescue credit markets, is also viewed as a potential trigger for inflation.
Personal consumption expenditures, including food and oil prices, are expected to rise 2.0% in the fourth quarter of next year versus end-of-2009 forecasts for a 1.0% increase. Another inflation indicator, the consumer price index, is expected to climb 2.2% at the end of next year, compared with the 2009 forecast for a 1.2% rise. The survey's CPI prediction also includes food and oil prices.
The Chicago Fed said its forecasters see the price of West Texas Intermediate crude oil, or WTI, increasing to $82.51 a barrel in the fourth quarter of next year. The panel's end-of-2009 prediction is for WTI to cost $77.50 a barrel.
Industrial production is seen growing 4.0% in the fourth quarter of next year, rebounding from a 5.5% expected decline in the fourth quarter of 2009.
Survey participants also expected 11.4 million cars and light trucks sold by the end of next year, better than the end-of-2009 forecast of 10.2 million sales.
The Chicago Fed survey predicted the yield for the one-year Treasury note will climb to 1.2% by the end of next year and the 10-year Treasury rate will rise to 4.0%.
Gross domestic product in Latin America and the Caribbean is expected to grow 4.1% in 2010, picking up from a previously expected 3.1% rate, according to the U.N.'s Economic Commission for Latin America and the Caribbean.
For 2009, the U.N. body estimates a 1.8% GDP contraction in the region, slightly more optimistic than its previous forecast of a 1.9% decrease.
"The worst of the crisis is behind us now," said Alicia Barcena, who heads the commission known as Eclac. "The motors of growth have been restarted, but we don't know how long the fuel will last."
The situation in some European nations, such as in Greece, restrictions on credit and premature withdrawal of monetary and fiscal stimuli, still pose a threat to the global recovery, Barcena said.
The economic recovery will be most noticeable in South America and Central America, excluding Mexico. These two regions will have growth rates of 4.7% and 3%, respectively, in 2010, Barcena said at Eclac's Santiago headquarters. The Caribbean nations are expected to grow at a much more modest rate of 1.8% next year.
Brazil will lead the region, likely growing 5.5%, followed by Peru and Uruguay, each expected to post a 5% annual GDP increase, Eclac said. The region was better equipped to face the crisis, unlike in previous crises, because of six years of growth and external account surpluses, as well as improvements in public finances, which led to decreased public debt and an increase in international reserves, said Barcena.
"However, the situation was drastically different in various Caribbean nations," she added.
In 2009, the countries strongly dependent on exports and services to the U.S. experienced the biggest drops in GDP, Barcena said.
Mexico's GDP, which is intimately tied to U.S. economic activity, contracted an estimated 6.7% for the year as U.S. GDP shrank 2.5%, according to Eclac figures. Both Mexico and the U.S. are expected to rebound in 2010 and post GDP growth of 3.5% and 2%, respectively.
Additionally, Eclac said, the large fiscal stimulus packages governments injected into their countries played a key role in the quicker-than-expected economic turnaround. As a region, some 2% of GDP went towards these packages.
The expected growth in the region will likely augur a drop in unemployment rates to around 8% for 2010 from 8.3% this year, Barcena said.
Inflation, which has often been cripplingly high in the region, fell from 8% in 2008 to about 4% this year. "It is not a top priority for 2010, except for the case of Venezuela," Barcena said.
The Brazilian Census Bureau reported that GDP expanded 1.3% in the third quarter compared with the second quarter this year, representing a solid recovery from a slow first half. The figure, however, was lower than the median forecast of 1.9% in a Dow Jones Newswires poll. The lower-than-expected GDP pours cold water on the belief that the Brazilian economy is surging out of recession--the economy shrank 1.2% compared with the third quarter of 2008.
"The economy is growing much more moderately than forecast but this has a positive aspect as it doesn't pressure the central bank to raise interest rates soon," said Newton Rosa, economist at Sulamerica Investimento in Sao Paulo.
The figure will likely cause analysts to revise forecasts for the central bank possibly raising interest rates in the first half of 2010.
More recently, Brazil's central bank held the Selic interest rate steady at 8.75% for a third consecutive meeting, but hinted at an earlier-than-expected rate hike in the first half of next year.
However, improved risk appetite worldwide following good economic news from Australia and New Zealand helped boost the local currency.
GDP rose by 0.2% in the September quarter to be 0.5% higher through the year.
The growth was driven by a 0.7% increase in household expenditure and a 6.2% increase in public investment, offset by a 0.9% fall in private investment, and a strong fall in net exports. The fall in net exports was due to a 2.3% fall in exports and a 5.8% rise in imports.
The industries that provided the main contribution to growth in the September quarter were rental, hiring and real estate services with a 9.9% increase in seasonally adjusted volume terms and construction with a 2.2% increase in seasonally adjusted volume terms.
Today’s outcome is a cautionary reminder that growth momentum in the Australian economy is not yet self-sustaining, with businesses and households still facing ongoing impacts from the global recession.
Once again the Government’s economic stimulus was vital in supporting the economy, offsetting the continued weakness in private sector demand. Treasury estimates that fiscal stimulus added 0.4 of a percentage point to GDP growth in the September quarter. Without the stimulus the economy would have contracted in the September quarter by about 0.2 per cent.
Without the Government’s stimulus measures, the Australian economy would have contracted in each of the past four quarters, shrinking by 2% over the past year. Instead, with the help of fiscal and monetary stimulus, Australia has continued to outperform and outgrow nearly all other advanced economies. Among the world’s advanced economies, Australia is one of only three economies to have grown in the year to the September quarter.
Household consumption spending strengthened in the quarter, rising by 0.7%, with growth underpinned by solid levels of consumer confidence, the continued resilience of the labor market, and the continuing effects of the Government’s cash stimulus payments earlier in the year.
Dwelling investment rose for the first time in a year, reflecting the effects of historically low interest rates and support from the Government’s First Home Owners Boost and the Energy Efficient Homes Package. These measures have been driving strong finance and approvals data in recent months, and are now being reflected in construction work.
Private business investment fell in the quarter, but there were substantial differences among the components. Machinery and equipment investment fell by 2.9%, following the bring-forward of investment in the June quarter from the Small Business and General Business Tax Break. Non-residential building investment slumped a further 6.0%, following sharp falls over the past year. The fall would have been larger if not for the growth in school investment associated with the Building the Education Revolution program. Engineering construction investment also declined, but remains at a high level, following strong growth over the past couple of years.
A positive sign is the strong contribution from inventories in the September quarter as businesses began restocking in anticipation of stronger demand. Imports also rose strongly in the quarter, consistent with the increase in inventories.
Public investment increased strongly in the quarter, helping to offset the weakness in private investment and providing a timely fillip to demand as the investment phase of the Government’s stimulus gathered momentum. Public investment rose by 6.2% in the quarter, with much of the increase coming from the stimulus. Public investment contributed 0.3 percentage points to growth in the quarter.
Export volumes fell by 2.3% in the quarter, but prospects remain positive as global growth recovers. The fall reflected lower base metal exports, in addition to falls in exports of mineral fuels and gold – goods which are typically volatile. The terms of trade stabilized after sharp falls over the past three quarters.
Nominal GDP rose by 0.2% in the quarter, after falling in the previous three quarters. Business profits fell further in the quarter and have contracted by 16.3% through the year, the second weakest growth in the history of the National Accounts. Wages and salaries rose marginally in the quarter and grew by only 0.3% through the year, the weakest through the year growth since the September quarter 1991.
While economic conditions are clearly improving, today’s National Accounts show that Australia’s economic recovery still has a way to go. The stimulus continues to provide crucial support and the gradual phased withdrawal that is already underway remains appropriate as the global recession washes through the Australian economy.
The Asian Development Bank or ADB has raised India's gross domestic product or GDP forecast to 7% for the calendar year 2009 from its earlier projection of 6%.
The Reserve Bank of India has projected 6% GDP for fiscal 2009-10 with upward bias while the Planning Commission estimates it at 6.3% and above.
ADB's revision of GDP forecast follows the higher than expected second fiscal quarter growth of 7.9%. The country's GDP for the March quarter was 5.8% and 6.1% for June quarter. However, the bank pointed out that the country is facing inflationary pressures as it rose to 4.78% in November from 1.34% in October. It stressed the need for coordination between monetary and fiscal policy to moderate inflation while sustaining growth momentum.
Japan’s government said it may change its calculation method for gross domestic product, soon after revised figures showed the economy grew at a third of the pace initially projected. Japan’s economy expanded an annual 1.3% in the third quarter, a Cabinet Office report showed, compared with 4.8%figure announced on Nov. 16. The cut was the largest since comparable data were made available in 2002.
“The fact that there was a steep revision at a time when the economy is extremely hard to read isn’t something we take lightly,” Keisuke Tsumura, a parliamentary secretary at the Cabinet Office, told reporters in Tokyo.
Tsumura said it would take at least a year to implement any changes, which could include altering the release date, increasing statisticians and improving the quality of data fed into the GDP report. The Nikkei 225 Stock Average slid after the release, which came two days after the government corrected for miscalculations in consumer spending that forced it to revise growth figures for the fiscal year ended March 31.
“When GDP is revised this much from the first preliminary report to the second report, it seems ridiculous for us economists to be basing our predictions on these reports,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “It’s like having a speedometer that isn’t reliable.”
The median forecast of 17 economists surveyed by Bloomberg News was for 2.8% growth.
Japan’s GDP data is incomplete when the preliminary figures are released, making is susceptible to revisions. Only half of the capital spending component is revealed in the first release, based on capital good shipments. Actual spending plans by companies are reflected in the revised figures. Business investment was cut to a drop of 2.8% from a gain of 1.6% in yesterday’s report.
Former Finance Secretary Roberto de Ocampo expects the Philippines to post faster economic growth next year on the back of improving domestic demand and improving labor market. De Ocampo told participants of a forum sponsored by the Asian Institute of Management (AIM) that the country’s gross domestic product (GDP) expansion would accelerate to between 3 and 4% this year.
“This Philippines is fortunate to be in the right part of the world…,” the former Finance chief stressed.
According to him, domestic demand would strengthen, supported by the 2010 election spending, while the labor market would improve due to the rise in business confidence in the second half on the assumption of a smooth election and transition in government.
He pointed out that net exports are expected to make a slight contribution to GDP growth next year with the continued decline brought about by the global economic slump. He said the National Government also intends to limit the budget deficit to P233.4 billion or 2.8% of GDP next year from P250 billion or 3.2% this year.
The budget shortfall this year is expected to reach as much as P320 billion due to weak tax collection and accelerated spending brought about by the implementation of the P330-billion Economic Resiliency Plan.
De Ocampo said next year’s budget deficit is expected to swell to P375 billion given the heavy spending needed to revive the economy.
The country’s GDP is expected to grow between 0.8% and 1.8% this year from 3.8% last year. The GDP expansion eased to 0.7% in the first three quarters of the year from 4.2% in the same period last year.
De Ocampo said the Philippines avoided a recession due to timely and monetary stimuli, revival of private spending, resilient overseas Filipino workers’ remittances, and others.
He said the Philippines would continue to face challenges next year despite the projected faster GDP growth. “Despite the Philippines’ projected growth for 2009 and 2010 hurdles will keep the Philippines from achieving pre-crisis level growth, top of which is a non-conducive business environment, as illustrated by the country’s dismal ranking in competitiveness surveys,” he lamented.
He also added that the government’s ambitious revenue targets may not be reached since it has not been able to win legislative approval for revenue-strengthening proposals such as the excise tax reforms and changes in fiscal incentives to investors. The former Finance chief said there is an urgent need for government to strengthen revenue collections and boost investors’ confidence in order not to derail the projected economic growth next year.
He also cited the need for a smooth government transition after next year’s national and local elections.
Germany's economy will grow in 2010, but recovery is likely to be tentative and far from self-sustaining, the Duesseldorf-based IMK think tank said recently.
IMK, one of Germany's main economic research institutes, now forecasts real gross domestic product will grow 2.0% in 2010, up from its previous forecast of 1.2%. The institute predicts that the economy will contract 4.9% this year, less than the 5.0% it had forecast previously. Despite the improved outlook, the institute cautioned that it sees "no stable, self-supporting recovery."
"The data is pleasing, but unfortunately it's a bit deceptive," said Gustav A. Horn, IMK's research director.
Germany's labor market will take a further hit, the IMK said, forecasting 3.6 million unemployed in 2010, or about 8.3% of the workforce. Unemployment in November was at 8.1%, according to Germany's labor office.
And while the institute improved its forecasts for German exporters, it said it is "skeptical that foreign trade can regain its longstanding role as a driving force of economic development."
Exports will slump 14.6% this year and grow in 2010 by 8.1 over the previous year, the IMK predicted.
"The German export economy profits from the impulse of economic stimulus programs abroad that, as of now, will fade in the course of 2010," the institute said in its report.
Ireland's gross domestic product rose 0.3% in the third quarter against the previous three months after remaining flat in the second quarter, the Central Statistics Office said, showing that in technical terms, the country has emerged from recession. However, gross national product--which excludes the profits from multinationals based here--deepened its decline, falling 1.4% in real terms from July to September, against a 0.5% drop in the second quarter, the CSO said.
A technical recession is defined as at least two consecutive quarters of contraction in quarter-on-quarter GDP.
Davy Research economist Rossa White said that indigenous manufacturing is struggling, whereas sectors exposed to the global recovery are seeing expansion. "The good news is that service exports seem to have bottomed," he said.
On an annual basis, GDP was down 7.4% in the third quarter versus a 7.9% fall in the second quarter and GNP was down 11.3% against a 12.2% drop in the previous quarter, the CSO added.
Bloxham Stockbrokers economist Alan McQuaid said the annual figures "are likely to remain quite negative for a few quarters yet .. But we should take some consolation that on a quarterly basis, Ireland came out of recession ahead of the U.K."
Kenya's economy is expected to grow at 3.5% next year, faster than a projected 2.5% this year, the World Bank said recently.
Wolfgang Fengler, lead economist at the World Bank's Kenya country office, attributed the forecast to expected growth in services and industry. He added the growth rate could reach 4% if there was enough rain.
Fengler said the growth forecast was close to the expected average growth of 4.1% for Sub-Saharan Africa in 2010. But it was much lower than that of its east African neighbors.
The global economic downturn and a severe drought have slowed growth in east Africa's largest economy in 2008 and 2009, undermining government plans to achieve a sustained 10% growth rate from 2012. The government said it expected the economy to grow nearly 4% next year, helped by more rain in many parts of the country and a recovery in tourism.
Finance Minister Alexei Kudrin announced that Russia's gross domestic product rose 8% in November month-on-month -- and is set to show 2% growth for the fourth quarter. Briefing parliament on the country's finances, Kudrin said GDP for the first 11 months of the year was still down 9.1% compared to the same period last year.
Kudrin said he expected the economy to show a 2% jump in the fourth quarter, after a 1.1% rise in the third quarter -- both set against year-ago figures.
Economic contraction is now expected to be slightly less marked, at 8.5%, than the previously forecast 8.7%.
Kudrin said the government had spent 900 billion rubles ($30 billion) from its 1.4 trillion ruble anti-crisis fund by Nov. 1 to spur lending and help the country's industry giants. The government has put aside 195 billion rubles ($4.5 billion) for the anti-crisis fund "which will allow to quickly respond to any possible problems in the real economy next year," Kudrin said.
Russia's economy is still reeling from the global downturn, which saw the ruble tumbling, foreign investors fleeing the country's markets and oil prices -- the lifeblood of the economy -- falling from record highs.
According to the Slovak Central Bank, the development of Slovakia’s economy this year will be better than expected a few months ago. The central bank’s latest prognosis sees a 4.8% drop in the gross domestic product in 2009, while in September this was expected to shrink 5.6%. The bank is also more optimistic about next year too. It has revised its September estimate of economic growth upward from 2.9 percent to 3.1% of GDP for 2010. Despite these improved forecasts, the Central Banks’ Governor Ivan Sramko believes that the estimated recovery of both the global and Slovak growth is fragile and uncertainties prevail. He considers the main risk the economic development of Slovakia’s biggest trading partners.
The latest prognosis expects employment rate to fall by 2.4% this year, by 1.2% next year and in 2011 it should increase by 0.5%. The governor considers appropriate wage development in the public sector to be an important factor. Otherwise, the competitive strength of Slovakia’s economy may deteriorate. The development of consumer prices will be influenced by the slower-than-expected inflation rate in recent months, which should be reflected in a lower average harmonized index of consumer prices for the whole year. The index could reach 0.9%, down 0.2 points from the previous prognosis. Following years of steep economic growth, the Slovak economy is experiencing the opposite development at the moment. As a result of the global economic crisis and rapid decline in foreign demand, the country’s open economy has been posting a record high GDP contraction compared with last year. While a year ago the Slovak economy grew by 6.2%, already in the first quarter of this year the economy reported a contraction of 5.7%. The negative development continued in the second quarter when GDP contracted by 5.5% and in the third quarter when the drop was 4.8%.
Turkey's third-quarter gross domestic product contracted by 3.3% from the same period a year ago, the Turkish Statistical Institute reported on its Web site. Most analysts expected a decline of 3.7%. The institute also said that GDP declined 7.9% in the second quarter compared with its previous estimate of a 7% contraction. In recent trading, the Turkish lira edged higher against the U.S. dollar and the euro.
McIlvaine Company,
Northfield, IL 60093-2743
Tel: 847-784-0012; Fax: 847-784-0061;
E-mail: editor@mcilvainecompany.com;
Web site: www.mcilvainecompany.com