GDP UPDATE
January 2009
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
The Congressional Budget Office today sharply cut its 2009 GDP estimate to -2.2 percent, a contraction reflecting a recession that's now in its second year, and also raised its estimates for the unemployment rate and the budget deficit.
CBO's estimate of a 2.2 percent contraction in GDP follows its September estimate of 1.1 percent growth, although that estimate was made before NBER officially declared that the US has been in a recession since December 207.
CBO said it believes unemployment will hit 8.3 percent in 2009, a sharp increase from the 6.2 percent unemployment rate it predicted in September. CBO thinks unemployment will reach 9.0 percent in 2010. But like many other analysts, CBO sees lower inflation in the year ahead. CBO cut its estimate for the consumer price index to 0.1 percent (down from 3.1 percent).
Slower growth in 2009, plus the parade of economic stimulus ideas that involve more government spending and tax cuts; forced CBO to drastically raise its estimate for the fiscal year 2009 budget deficit to $1.186 trillion.
Slower growth and a bigger deficit means CBO's estimate of the deficit as a percentage of GDP rose to 8.3 percent from 3.0 percent.
CBO also raised its FY 2010 budget deficit estimate to $703 billion, another sharp increase from the $431 billion it estimated in September.
Chile’s economy will probably expand 2 percent to 3 percent this year, the central bank said, leaving unchanged forecasts made in November after the government announced a $4 billion stimulus plan.
The bank lowered its forecast for inflation this year to 3.1 percent from 4 percent in November’s outlook and said it expects further interest rate cuts. The bank lowered its monetary policy rate by 1 percentage point, the most in a decade, on Jan. 8 to 7.25 percent.
Chile has been preparing itself “for many years” for a crisis like the current one and has implemented policies to reduce the economic costs, the bank said. Its monetary and fiscal policies are designed to be used as a “countercyclical tool”. Chile’s policy of saving copper revenue in sovereign wealth funds and its conservative rules for banks will help “mitigate the impact of more restrictive global financial conditions as well as a significant worldwide deceleration,” central bank President Jose De Gregorio told the Senate.
The bank cut its forecast for the price of copper in 2009 to $1.50 per pound from $1.65 in November’s report. It lowered its 2010 copper price forecast to $1.60 from $1.90 per pound.
The bank’s policy committee expects that “in the most likely scenario, it will continue a process of monetary easing, the rhythm of which will depend on outlooks for inflation.”
The central bank may cut interest rates faster than the market expects, it said. Those expectations imply that the policy rate will fall to 5 percent to 5.5 percent by the middle of the year, it said.
Inflation will probably “converge rapidly” with the central bank’s 3 percent target, the bank said, reaching about that level by the second half of the year. The bank made its projections in its tri-annual monetary policy report.
The report indicates that “the bank will undertake a rapid and front-loaded process of interest rate normalization,” Goldman Sachs Group Inc. economist Alberto Ramos wrote today in a note e-mailed to clients. “We expect the policy rate to move to as low as 5 percent by June, with risk that it could go as low as 4 percent.”
The government and the bank closely coordinate policy, De Gregorio told the Senate. Without the government’s $4 billion of tax cuts and spending, including a temporary elimination of stamp duties worth 1.2 percent of loans, monetary policy would have been “still more stimulative,” De Gregorio said.
Other emerging market countries will probably reduce interest rates in coming weeks, he said.
The government decided to act at the start of this year after it became clear that the external economic environment had deteriorated and that the “magnitude of the external shock that affects Chile will be bigger than was expected a few months ago,” Finance Minister Andres Velasco told reporters today in Santiago.
Falling global growth means less demand and lower prices for Chile’s exports. The country is the world’s biggest exporter of copper.
Ecuador's gross domestic product grew 1.19 percent in the third quarter of 2008, compared with a 2.71 percent increase in the previous quarter, while annualized growth in the period rose to 8.63 percent from the third quarter of 2007, the Central Bank said Monday.
Third quarter non-oil GDP expanded 1.98 percent from the second quarter and grew 10.18 percent on the year, while oil-related activities fell 9.75 percent on the quarter and dropped 8.95 percent on the year.
In year-on-year terms, construction increased 26.87 percent, financial intermediation was up 11.63 percent, fishing activities gained 11.39 percent, commerce rose 9.77 percent, electricity and water utilities grew 8.87 percent, manufacturing increased 8.77 percent, transportation was up 6.10 percent, and agriculture and cattle breeding rose 5.90 percent. According to a Central Bank source, growth in the construction sector is heavily charged by government spending. Meanwhile, oil and mining declined 0.97 percent and oil products fell 8.04 percent.
Ecuador's gross domestic product rose 2.49 percent in 2007, compared with 3.90 percent growth in 2006.
The official data released by the central bank has generated criticism among economists, who said that "there is a political handling of the central bank´s information and there has not been transparency in the diffusion of the central bank´s economic information."
The central bank had forecast 5.32 percent GDP growth for 2008. The economy is expected to grow 3.15 percent this year, according to the central bank.
The economy is forecast to record zero growth through 2009 as the global credit crisis stifles business activity, a report says. Dun and Bradstreet's (D&B) Economic and Risk Outlook Report says Australian real gross domestic product (GDP) would slow to zero through 2009, from an estimated 1.9 percent in 2008.
D&B chief executive Christine Christian said the slowdown in emerging markets would be felt most among Australia's exporters, who send about 40 percent of their goods to the Asia-Pacific region.
"Demand from Asia is critical to Australia's economic prosperity,'' Ms Christian said in a statement.
"However with this demand expected to decrease markedly and default risks likely to rise, Australia's exporters will be hit hard in 2009.''
Ms Christian said lower interest rates and the federal government's fiscal stimulus package would encourage spending in 2009.
"However, regardless of the outcome of these measures, business activity will remain depressed,'' she said. "Business confidence has already declined to levels not seen since the 1990s and it may have further to fall as the challenges of late 2008 continue throughout 2009.''
Australian real GDP was expected to rebound to 1 percent in 2010, the report said.
World economic growth was expected to fall to 1 percent in 2009, the lowest level in more than 10 years amid deteriorating trade conditions and slumping demand.
"The international credit crisis dominates the current risk outlook more than any risk factor since the early 1990s,'' said the report. “While the vulnerabilities vary across the globe, no region will escape the fallout completely.''
World economic growth would improve to 2.1 percent in 2010, the report said.
The economies of five member nations of the Group of Seven - the US, UK, Germany, Italy and Japan - were expected to contract in 2009.
The remaining two G7 members - France and Canada - were expected to post positive growth in 2009.
China's central bank is still basing its economic policies on the assumption the country will grow at a rate of 8 percent this year but knows the economy's performance will be at the mercy of external factors.
Speaking to reporters in the Swiss city of Basel, Chinese central bank head Zhou Xiaochuan suggested predictions for growth were proving challenging in a crisis environment and risks abounded for any forecasts. Zhou's comments on the sidelines of a Bank for International Settlements (BIS) meeting come as worries intensify over the depth of the slowdown in the world's fourth-largest economy, once thought virtually immune to global weakness.
'Most people believe it (8 percent GDP growth for 2009) is a reasonable goal but we know we need to watch the international situation,' Zhou said.
'No one really has good enough empirical data to show how to predict (in) the crisis period,' he said.
The Chinese authorities were still looking to implement policies with a long-standing gross domestic growth (GDP) goal of 8 percent in mind 'at least for right now'.
But Zhou flagged risks to any scenario, acknowledging this year's growth target may not be fulfilled.
'There will certainly be risks to both sides. This is only a prediction, forecasting data,' he said.
Chinese government economists have expressed confidence that the authorities can engineer a soft landing and meet the growth goal deemed necessary to create enough jobs for the millions of people joining the workforce each year. But independent analysts have predicted growth could slow to as little as 5 percent as factory output growth grinds to a halt and exports shrink in the face of falling global demand.
Chinese economic growth probably slowed to an annual 7 percent in the fourth quarter of last year, according to a median forecast of 28 economists polled by Reuters. That would mean the country registering its weakest expansion in nearly a decade and would compare with 9.0 percent growth in the third quarter and 11.9 percent in all of 2007.
Asked whether he had been taken by surprise by the pace of China's economic slowdown until now, Zhou said:
'It's a moderate slowdown. Certainly we will keep a very good vigilance to prevent a sharp slowdown but up to now I think we can see in comparison with many other countries it is a moderate slowdown,' he said.
'We still have GDP growth, industrial production growth... a very small decline in export growth, I think probably minus 2 or minus 3 percent,' he added.
From a production point of view, China's performance was still alright but the country needed to ensure strong policies to prevent any sharp deceleration, he said.
Zhou gave no hint on future monetary policy measures in the wake of a series of recent interest rate cuts.
Beijing had taken steps to deal with the economic situation from mid-September and only the actual situation would show if enough had been done, he said.
China is relying on massive spending in the form of a 4 trillion yuan ($585 billion) stimulus package to cope with the economic challenge and is working out plans to provide support to slumping industries such as autos and textiles.
Indonesia's economy is estimated to have grown more slowly in the final quarter of last year, the finance minister said, as global demand for commodities cools amid the global economic slowdown.
Sri Mulyani Indrawati estimated Southeast Asia's biggest economy expanded 5.8-5.9 percent in the fourth quarter of last year from the same period in 2007. The economy grew 6.11 percent in the third quarter from a year earlier. Indrawati stuck to a forecast of 6.2 percent growth for all of 2008.
Indonesia's economy grew 6.3 percent in 2007, the fastest pace in a decade, on the back of booming commodity exports.
"Economic growth could reach 6.2 percent in 2008, with annual growth in the fourth quarter likely to be between 5.8-5.9 percent," Indrawati told a meeting of business leaders.
Indonesia's economy has been growing at an average rate of around 6 percent since the end of 2006. A rate of six percent is the minimum analysts regard as able to make a dent in unemployment in the world's fourth most populous country.
The central bank cut its key interest rates BIPG by 50 basis points to 8.75 percent in January in a bid to boost the economy. Indonesia also raised its forecast for its 2009 budget deficit to 2.5 percent of GDP, from 1 percent previously, as the government seeks to counter the global economic downturn in an election year.
The finance minister has also announced plans to spend more than 72 trillion rupiah ($6.46 billion) on infrastructure and other projects to create more jobs.
Malaysia's gross domestic product (GDP) will be able to achieve 3.5 percent growth this year if the economy gets a quick boost from the RM7 billion stimulus package, according to the Economic Planning Unit (EPU) of the Prime Minister's Department.
"It's important that we push that stimulus package," said EPU director-general Tan Sri Dr Sulaiman Mahbob. "If the effect is slow, I think the highest we can achieve is 2.5 percent. We must make sure that the stimulus package is being implemented effectively," he said.
He was speaking to reporters on the sidelines of the International Conference Public-Private Partnerships in Development organized by Universiti Malaya's Faculty of Economics and Administration.
Sulaiman said the world's economy appeared to be getting worse.
"We are looking at our numbers. We have to assess how it will affect our economy on this quarter and next quarter. But how bad it's going to be, we don't know," he said.
Recently, Citigroup Global Market downgraded its forecast for Malaysia's 2009 GDP to 0.5 percent from 3.1 percent previously amid a slowdown in economic activities.
The Malaysian Institute of Economic Research has revised downward its forecast for the GDP growth this year to 1.3 percent, and adjusted its estimated economic growth for last year to 5.1 percent from 5.5 percent earlier.
On another note, Minister in the Prime Minister's Department, Tan Sri Amirsham A. Aziz, said Malaysia has massive amount financial resources that are not channeled to productive use.
"Malaysia's savings rate, which is close to 35 percent, is among the highest in the world. Some of this is due to the high marginal propensity to save among individuals as well as forced savings under the Employees Provident Fund (EPF)," he said in his speech before officiating at the conference.
Amirsham said the bulk of this savings, however, came from private sector surpluses. According to him, greater use of such savings will enhance economic growth, particularly through investments in emerging economic activities. Many of these activities will be in non-traditional areas such as the creative industry and biotechnology, he said.
Amirsham also said that the banks needed to discard collateral-based lending practices and adopt innovative risk management tools to deal with emerging fields.
"Our banks must gear up to manage the massive changes taking place in our economic landscape," he said.
South Korea's economy contracted by more than 4 percent in the fourth quarter of 2008 from the third quarter, a much sharper decline than a previous projection for a 1.6 percent contraction, the Hankyoreh newspaper reported, citing a Bank of Korea official. "We came up with an estimate before the Jan 9 monetary policy meeting that fourth-quarter GDP posted a more-than-four-percent drop from the third quarter," the paper quoted an unidentified high-ranking Bank of Korea official as saying.
The central bank slashed the base rate by 50 basis points to a record-low 2.50 percent, warning that the economy has been in a rapid slump due to sluggish demand both at home and abroad. The Bank of Korea declined to confirm the report, saying only that preliminary estimates for the fourth-quarter GDP figures were expected to be released on Jan. 22.
Separately, the Maeil Business Newspaper reported, citing the Ministry of Knowledge Economy, that the country's exports contracted 39.3 percent in the first 10 days of January from the year-ago period due to the deepening global economic downturn.
Belgium's gross domestic product (GDP) will fall 0.6 percent this year, a report by 10 banks that have primary dealer contracts with the Belgian National Bank to issue government securities said recently. The figure is worse than the central bank forecast of a contraction of 0.2 percent, which was revised at the beginning of December from a previous projection of growth.
'Even these new forecasts are still subject to downside risks, as the latest pieces of information have been very negative and forecasts are almost continuously being revised downwards,' the report, published on the central bank's website, said.
It is too early to issue a new forecast, an official at the central bank said, adding that news since December offered little hope for an improvement.
The Belgian economy, which makes up less than 4 percent of the euro zone but is highly trade-sensitive, is expected to have grown by 1.4 percent in 2008 compared with a previous forecast of 1.6 percent, the central bank said in December.
Bulgaria's current account deficit widened to 21.9 percent of gross domestic product from January through November, up from 18.6 percent a year ago, mainly due to strong imports, according to central bank data. The deficit increased to €7.47 billion ($9.82 billion) in the first eleven months from €5.36 billion in the same period in 2007, the data showed. The gap for November alone was €838 million, up from €752 million a year ago.
The deficit is a key concern for the European Union member state and increases Bulgaria's vulnerability to external shocks in the times of a global economic downturn. Analysts and rating agencies say Bulgaria's external imbalance and dependence on foreign cash could lead to a hard landing for the emerging economy, which has already seen its growth slowing.
The International Monetary Fund sees the external deficit slowing to 15 percent of GDP this year, mainly due to an expected economic slowdown that will hit incomes and put a brake on strong imports. The data showed imports growth slowed in November to 11.8 percent, or 1.8 billion euros when compared with the same month a year earlier.
On an annual basis imports grew 19.1 percent to €22.5 billion in January-November, while exports rose by 15.5 percent to €14.3 billion, the data showed.
Merrill Lynch has slashed its real growth estimate for Israeli gross domestic product in 2009 to zero from 1 percent as a result of a downturn in the United States. Merrill also estimated that the Bank of Israel will continue to lower short-term borrowing costs this year to a rate of 1 percent from 1.75 percent currently.
“The Israeli economy faces one of its most challenging periods since the 2001-2002 recession,' according to Merrill emerging markets analyst, Turker Hamzaoglu. 'We now expect real GDP to stay flat in 2009, the current account balance to slip into deficit and the budget deficit to widen.
'As the fiscal stimulus will not come until mid-second quarter 2009 at the earliest, due to parliamentary elections in February, the burden is on Bank of Israel for now.'
He noted that Israel is a small and open economy, with 70 percent of its exports going to the United States and Europe.
Hamzaoglu projects a budget deficit of 4.2 percent of GDP in 2009 after an estimated 1.4 percent deficit in 2008. He also expects a current account deficit in Israel's balance of payments of 1 percent of GDP this year after a flat 2008.
The Bank of Israel forecasts 2009 growth of 1.5 percent but the bank has indicated it would lower its estimate should the global economy slow more than expected. Bank of Israel Governor Stanley Fischer has chopped Israel's key lending rate by 2.5 percentage points over the last three months.
'The Bank of Israel has been globally one of the most proactive central banks with aggressive rate cuts and targeted monetary policy responses so far. Together with the expected fiscal stimulus, its policy is likely to pay off later in the second half of 2009,' Hamzaoglu said.
Despite lack of a budget, the Finance Ministry has unveiled steps to stimulate the economy and ease the credit crunch.
Hamzaoglu said the conflict between Israeli forces and Hamas militants in Gaza would have little impact on the economy and financial markets.
'Increased geopolitical uncertainties and/or elections in Israel have historically had limited impact on domestic markets. There is little reason to expect it to be any different this time,' he said. 'Still, the duration of the conflict in Gaza and its future course given the parliamentary elections cast some clouds over (the) macro outlook.'
Forecasts of a 2 percent fall in Italy's GDP this year are 'realistic', Economy Minister Giulio Tremonti said recently.
'Everything is realistic. It's the kind of forecast that has been around for some time,' Tremonti told a news conference.
He added that the Italian Treasury's view was in line with most international institutes but stressed there was a huge degree of uncertainty. Italy's economic growth trend this year was still 'unknown territory', Tremonti said.
Some economists say that as Latvia's economy — now the worst performer in the EU — continues to slide, deflation is the greatest risk and could prolong the country's troubles. Latvia's economy has undergone a drastic reverse in fortunes. For years it was the fastest growing economy in the EU, with GDP growth reaching 12.2 percent in 2006.
This year GDP is expected to contract 5 percent and another 3 percent in 2010, according to the government's forecast.
That has forced the center-right government to turn to emergency lenders as it struggles to fill a yawning budget gap and meet international obligations. In December the government procured euro7.5 billion worth of loan commitments from lenders such as the International Monetary Fund, the EU and Scandinavian government.
Romania revised its budget deficit forecast for this year to 2.0-2.5 percent of gross domestic product from a previous 1.7-2.0 percent, Finance Minister Gheorghe Pogea was quoted as saying.
'The budget deficit will be between 2 and 2.5 percent of GDP ... and any spending exceeding the 2 percent of GDP level will be going exclusively to public investment,' Pogea was quoted by daily Gandul as saying.
He also revised his economic growth forecast downward from a previous 3.5 percent.
'The economy will land from growth of 7.9 percent, the estimation for 2008, to under 3 percent, probably 2.5 percent,' Pogea said.
Prime Minister Emil Boc said last week the 2008 budget deficit would be around 5 percent of GDP and the previous forecast for this year's budget gap was built on wrong budget data for last year and needed to be changed.
Tajikistan's economic growth inched up to 7.9 percent in 2008 from 7.8 percent a year earlier, the state statistics committee said recently. Inflation in the Central Asian state slowed last year to 11.8 percent from 19.7 percent in 2007.
Tajikistan's indicator of inflation slipped into negative territory in November and December last year as remittances from Tajiks working in Russia fell in line with a slowdown of the Russian economy.
Tajikistan attributed 45.5 percent of its growth in gross domestic product (GDP) to remittances last year.
McIlvaine Company,
Northfield, IL 60093-2743
Tel: 847-784-0012; Fax: 847-784-0061;
E-mail: editor@mcilvainecompany.com;
Web site: www.mcilvainecompany.com