GDP UPDATE
February 2009
McIlvaine Company
TABLE OF CONTENTS
INDUSTRIAL ANALYSIS
INDUSTRY ANALYSIS
The U.S. real gross domestic product (GDP) is expected to decline 2.7% this year, 'triggering decreases in domestic energy consumption for all major fuels,' the Energy Information Administration said.
That is a bigger decline than the 2.0% drop in GDP the agency had forecast last month. 'Economic recovery is projected to begin in 2010, with 2.2% year-over-year growth in GDP,' the EIA said in its new monthly energy forecast.
Brazilian economists and financial market analysts have reduced their forecast for 2009 and 2010 gross domestic product growth, according to the central bank's weekly market survey. For the whole of 2009, analysts are expecting GDP to expand 1.5%, compared with the 1.7% forecast in the previous week's survey.
Gross domestic product growth in Latin America's largest economy accelerated to 6.8% in the third quarter from 6.1% in the second quarter, beating analysts' forecasts of 5.74%. In the meantime, analysts reduced their GDP growth view for 2010 to 3.6% from 3.8% seen previously.
Peru's gross domestic product surged 9.84% in 2008, its fastest pace since 1994, but there are mounting signs that Latin America's fastest-growing economy is starting to slow. In December, the pace of growth eased to 4.9% from the same month a year ago, according to the country's statistics agency. In November, growth cooled to 5.08%.
Construction was a bright spot in December, climbing 10.33%, and growing 16.46% in 2008. Mining was relatively weak in December, growing 3.41%, and rose 7.58% for the year.
This year, Peru's economy is expected to slow to about 5% as prices fall for its metals exports, which normally make up 60% of all exports. Credit growth is also slowing on the global financial crisis.
But the government has unveiled a stimulus package to boost public investment at a time when capital spending by businesses is slipping. The jobless rate in metropolitan Lima, which is used as a proxy for the country, rose to 8.8% in the last three months through January, from 8.1%in the same period last year.
The average wage in Peru's capital, Lima, rose 11.6% to 1,047 soles ($324) from the year-ago period.
India's gross domestic product (GDP) has increased by 7.5%, 9.5%, 9.7% and 9% in the first four years from fiscal year 2004-05 to 2007-08 recording a sustained growth of over 9% for three consecutive years for the first time. India is second fastest growing economy in the world with 7.1% GDP expansion in 2008-09, Pranab Mukherjee said.
With per capita income growing at 7.4% per annum, this represented the fastest ever improvement in living standards over a four-year period. The gross domestic savings rate shot up from 29.8% to 37.7% during this period.
The growth drivers for the period were agriculture, services, manufacturing along with trade and construction.
The fiscal deficit has come down from 4.5% in 2003-04 to 2.7% in 2007-08 and revenue deficit from 3.6% to 1.1% in 2007-08.
JAPAN faced "the worst economic crisis of the postwar period", Economy Minister Kaoru Yosano said after the national economy shrank 3.3% in real terms in the final three months of 2008.The fourth-quarter slump, 12.7% annualized, is the steepest since the first "oil shock" in March 1974, and raises fears of the world's second largest national economy falling into what by some measures looks more like depression than recession.
Mr. Yosano flagged the Government would rush out a third stimulus package since September 1, with talk in the markets yesterday of another Y20 trillion (about $335 billion) of new expenditure.
"Doing nothing after we see these miserable economic numbers is tantamount to the negligence of our duty," he told reporters immediately after the release of the preliminary GDP estimates.
Hopes for new public outlays in Japan, and particularly for the Obama administration's $US789.5 billion stimulus package to arrest the US slide, held the markets up in the face of yesterday's shocking figures.
The headline bad news was supplemented by a downward revision of the already record decline in December industrial production, a key forward indicator, to -9.8%, month on month. However, the Nikkei 225 index yesterday slipped only 0.4% to 7750 points and yen exchange rates, which have added severely to export manufacturers' burdens, barely quivered.
Standard & Poor's sharply lowered its forecast for South Korean economic growth this year but said currency swap agreements with the United States, China and Japan have helped ease concerns surrounding banks' ability to pay back maturing foreign debt.
The rating agency's prediction came after the release of more grim data, this time showing South Korean exports fell a record 33.8% in January over a year earlier, worse than a provisional 32.8% drop reported early this month.
Asia's fourth-largest economy will contract by about 3.5% this year, S&P sovereign ratings analyst Kim Eng Tan told Reuters in an email interview, down sharply from a zero growth forecast in late January. But he said concerns about South Korean banks' ability to refinance maturing foreign debt were not as serious now as late last year when they helped push the won to an 11-year low.
The euro zone economy saw its deepest contraction on record in the fourth quarter of 2008, boosting pressure on the European Central Bank to cut interest rates by 50 basis points in three weeks.
Gross domestic product in the 15 countries using the euro in the last three months of 2008 shrank 1.5% against the previous quarter for a 1.25 fall year-on-year, the European Union statistics office Eurostat said.
"Now it's official: the euro zone economy is in its deepest recession since the end of the Second World War," said Christoph Weil, economist at Commerzbank.
"The collapse of exports and a sharp fall in investments were most probably the main reasons for the slump," he said.
Economists polled by Reuters had expected a 1.3% quarterly drop after 0.2% contractions in the second and third quarters, and a 1.1% year-on-year decline.
"The best we can hope is that the fourth quarter marked the worst quarter in terms of the pace of contraction," he said. Economists said the numbers pointed to a euro zone GDP contraction in 2009 of 2-3%. The mid-point of ECB growth forecasts for this year is a contraction of 0.5%, with a -1.0 to 0.0 range, but it will release new forecasts on March 5.
"The radical downward revision to the (ECB) staff projections will open the door to a further cut in interest rates on 5 March: 50 basis points remains our forecast," said Ken Wattret, economist at BNP Paribas.
Eurostat said that in the whole of 2008, the euro zone grew 0.7% against 2007, when it expanded 2.6%. The 2008 outcome is worse than the Jan. 19 estimate from the European Commission, which put last year's growth at 0.9%.
The shrinking euro zone output of goods and services was led by a record weak performance from the bloc's biggest economy, Germany, as well as deeper-than-expected falls in output in France and Italy. Germany shrank 2.1% quarterly in the fourth quarter, France fell 1.2% and Italy produced 1.8% less in goods and services than in the previous three months. Spain shrank by 1%.
The quarterly economic decline in the euro zone was bigger than in the United States, where the economy contracted 1% quarter-on-quarter in the last three months of 2008.
An economic stimulus package approved by the Czech cabinet is based on a forecast that the Czech economy will drop by 1% or more this year.
'We are working with a scenario of a drop of 1% or more, even though current predictions are for (slightly below) zero or at worst a 0.3% (drop),' Prime Minister Mirek Topolanek told a news conference.
The cabinet approved a package of tax cuts and spending which, together with earlier measures, totals 1.9% of GDP.
Greece's economy will be hit by the global crisis and grow by only 0.5% this year after 3.1% in 2008, the central bank said, and urged a mix of fiscal tightening and reforms to weather the storm.
High budget deficits and a ballooning debt left the government little room for fiscal stimulus as the pillars of the economy - tourism and shipping - take a hit from the international financial storm, it said in its policy report.
Still, a combination of fiscal discipline and "extensive, daring" public sector reforms could contain public debt - now almost the size of the 250 billion euro economy - and allow some government spending on infrastructure to boost activity.
"There is an urgent need to apply long-term policy measures that will cure chronic internal imbalances and structural weaknesses that feed and expand external debt," said central bank governor and ECB governing council member George Provopoulos. The bank said inflation would slow to 1.8% in 2009, from 4.2% last year. GDP growth will slow significantly but remain positive, better than the euro zone average.
"The Bank of Greece sees the annual GDP growth rate, which last year slowed to 3%, coming to 0.5% in 2009," the report said.
The central bank's projection is above the European Commission's 0.2% forecast but below the Greek government's 1.1% growth estimate.
Hungary’s government is proposing to overhaul taxes worth as much as 900 billion forint ($3.8 billion) to revive the economy after forecasting a contraction of as much as 3.5% this year, which will also cut budget revenue.
The government wants to cut payroll taxes and allow more people to pay the lower of two income tax rates, while increasing value-added taxes and excise taxes to limit the impact on the budget, Prime Minister Ferenc Gyurcsany announced. The deficit may be as much as 2.9% of gross domestic product, rather than an earlier 2.6% goal.
Eastern Europe’s economies are buckling under the weight of the global financial crisis, which has slowed demand in key export markets. Hungary, which needed international aid to avert a default last year, must maintain a tight budget policy to avoid instability even as the economy plunged into its second recession in two years at the end of last year.
“These measures are consistent with a change in the direction of more competitive economic fundamentals,” said Janos Samu, an economist at Concorde Securities in Budapest. “The measures seem to be enough to limit the budget’s financing need even under a relatively pessimistic growth scenario.”
The government expects the economy to contract between 3% and 3.5% this year, while the budget gap will be between 2.7% and 2.9% of GDP, said a government official, who declined to be named.
The annual inflation rate may average between 3.7% to 3.9%; instead of the previous 2.5% to 3% forecast, after raising value-added taxes, the official told Bloomberg before Gyurcsany’s speech.
The Latvian state statistics agency says that gross domestic product plummeted 10.5% in the fourth quarter last year compared with the same period in 2007.
The result maintains Latvia's position as the worst-performing economy in the 27-member European Union. The Baltic nation already had the bloc's worst economy in the third quarter, when GDP fell 4.6% year-on-year.
The Latvian statistics agency said that the fourth-quarter result was an estimate and could be revised.
The country is in a slump after years as the fastest-growing EU economy. Some analysts predict that it could contract by as much as 10% this year.
Russia's economic outlook darkened, with a government forecast for a 2.2% contraction adding to a batch of gloomy data releases to put pressure on the ruble and stocks. Wage arrears -- a cause of social unrest in the 1990s -- jumped nearly 50% last month, affecting half a million people, and officials said they would even cut spending on hosting the 2014 Winter Olympics, previously seen as sacred.
Earlier news surfaced of a record slump in industrial output in January, as companies idled factories and cut working weeks in the face of slumping demand. The Economy Ministry responded by slashing its outlook for the once buoyant economy, despite keeping unchanged its oil price forecast of $41 per barrel for 2009 and a currency exchange rate assumption of 35.2 ruble per dollar.
"The GDP forecast has worsened to minus 2.2% (from minus 0.2%)," Interfax news agency quoted Deputy Economy Minister Andrei Klepach as saying.
Such a deterioration would be in sharp contrast with previous years when gross domestic product grew at between 6 and 7%. Even in 2008 it grew by 5.6% despite a sharp downturn in the fourth quarter.
The slump in oil prices, flight of investors from emerging markets and the drying up of foreign funding sources due to the credit crunch mean that Russia is heading for its worst year since the sovereign default and currency collapse of 1998. In 1998, Russian GDP contracted 5.3%, according to the International Monetary Fund data.
"Winter may be approaching an end in some parts of the northern hemisphere but in Russia it is likely to get worse before improving," Uralsib analyst Chris Weafer said in a client note. "The same can be said about the economy, except that the fact of worse to come is a certainty rather than just likely."
Ukraine's GDP declined 20% in January year-on-year, the head of the group of advisors to the chairman of the National Bank of Ukraine, Valeriy Lytvytsky, told Interfax.
"The decline in GDP in January was about 20% according to my reckoning. It's the biggest drop ever. It's a bad start," he said.
The construction sector and industry have been the hardest hit by the economic crisis, he said.
"Industry has declined for the sixth month in a row. The 16.1% decline in January compared to December 2008 was the biggest decrease since January 1994, when there was an 18.6% drop," Lytvytsky said.
Industrial production in January was 34.1% below the level in January 2008. The year-on-year decline in construction increased ten-fold to 57.6%, he said.
"At the start of last year there was one sector in recession - construction. All the rest were in positive territory. Now only one economic sector is growing - agriculture - with growth of 0.5%, within the margin of error. All the other basic industries, which account for about 80% of GDP, are contracting," he said.
The State Statistics Committee will not be publishing monthly GDP results for January in line with the switch to international-standard, quarterly reporting. However, it will continue publishing monthly results for individual economic sectors - agriculture, industry, construction and transportation.
The U.K. economy will shrink at almost twice the pace previously forecast this year as the credit famine plunges the nation deeper into the worst recession in almost 30 years, the Confederation of British Industry said. Gross domestic product will contract 3.3%, instead of the 1.7% predicted in November, the biggest U.K. business lobby said recently. By the end of 2009, the economy will have contracted for six consecutive quarters, it said.
“The world has changed dramatically,” Richard Lambert, the CBI’s director general, told reporters in London. “Faced with a global confidence crisis, a rapid fall in demand and credit constraints, U.K. firms have been forced to scale back investments and cut jobs.”
Prime Minister Gordon Brown has pledged billions of pounds to revive lending as a housing slump deepens and job losses mount. The CBI expects the economy to shrink 4.5% from the start of the recession in the third quarter of last year, only slightly less than in the early 1980s slump during Margaret Thatcher’s first term. Output will stagnate in 2010, it said.
Government net borrowing will balloon to 148.7 billion pounds ($211 billion) in the next financial year, or 10.6% of GDP, and then rise to 11.8% of GDP the following year, the CBI said in the forecasts. Chancellor of the Exchequer Alistair Darling said in November that borrowing would be 8% of GDP in the year ending March 2010.
As banks rationed loans, home values slumped. The average price advertised by sellers in February recorded the biggest annual fall since at least 2002, declining 9.1% to 216,163 pounds. In London, they fell 3.5%. Mortgage approvals stayed close to a decade-low in December.
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