GDP UPDATE
May 2009
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
The U.S. economy plunged again in the first quarter, making this the worst recession in at least half a century. Gross domestic product dropped at a 6.1% annual pace, weaker than forecast, after contracting at a 6.3% rate in the last three months of 2008, according to the Commerce Department. The report, which reflected a record slump in inventories and further declines in housing, came hours before Federal Reserve officials said the economy continued to contract at a “somewhat slower” pace.
Smaller stockpiles may set the stage for a return to growth in the second half of the year amid signs Fed efforts to reduce borrowing costs and unclog lending are starting to pay off. The contraction persisted even as lower gasoline prices and larger tax refunds helped bring an end to the worst slump in consumer spending in almost three decades.
“We are likely to emerge from this recession very slowly and the recovery will be very weak,” said Richard Berner, chief U.S. economist at Morgan Stanley in New York. “The aggressive policy response we have gotten will take time to work, but it will counter the still-strong headwinds holding the economy back.”
The Fed refrained from increasing purchases of Treasuries and mortgage securities, saying that the economy is showing some signs of stability. “Household spending has shown signs of stabilizing, but remains constrained by ongoing job losses, lower housing wealth and tight credit,” policy makers said in their policy statement. The target rate was unchanged near zero.
Stocks rose as more companies beat profit estimates and investors speculated bank losses peaked. The Standard & Poor’s 500 Index climbed 2.2% to close at 873.64. Treasuries dropped, pushing the yield on benchmark 10-year notes up to 3.09%.
“This is one of those good-bad numbers,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said in a Bloomberg Television interview. “Businesses are running about as lean as they possibly can be. It sets up the reality that any sort of increase in demand will cause firms to have to increase production.”
As a result, Naroff predicted growth won’t “be nearly as bad in the current quarter, and will probably be reasonably good.”
The world’s largest economy has shrunk 3.3% since peaking in last year’s second quarter, already making this the second-worst recession since the Great Depression. GDP shrank 3.8% during the 1957-58 contraction, according to figures from the Bureau of Economic Analysis.
The median forecast of 71 economists surveyed by Bloomberg News projected GDP, the sum of all goods and services produced, would shrink at a 4.7% pace. Estimates ranged from declines of 2.8% to 8%. This advance report is the first of three estimates on first-quarter growth.
Consumer spending, which accounts for about 70% of the economy, climbed at a 2.2% annual pace last quarter, the most in two years. Purchases dropped at an average 4.1% rate in the last half of 2008, the biggest slide since 1980.
Part of the improvement may be due to government efforts to stem the recession. In its prior meeting on March 18, the Fed pledged to double mortgage-debt purchases to $1.45 trillion and buy as much as $300 billion in long-term Treasuries. That’s helped bring down rates on mortgages and auto loans.
“Most people are saying we could bottom out in the second half of the year, maybe in the third quarter, and then see positive growth again,” Christina Romer, the White House’s chief economist, said in a Bloomberg Television interview. “We’re certainly looking for some positive news towards the end of the year.”
Companies trimmed stockpiles at a $103.7 billion annual rate last quarter, the biggest drop since records began in 1947. Excluding the reduction, the economy would have contracted at a 3.4% pace. Companies cut total spending, including equipment, software and construction projects, at a record 38% annual pace.
Residential construction also decreased at a 38% pace last quarter, the most since 1980.
“The hangover from the Bush administration is even worse than we thought,” Congresswoman Carolyn B. Maloney, chairman of the Joint Economic Committee, said in a statement. “These numbers reflect a drawdown in business inventories and continued weakness in the housing and commercial real estate markets. Americans are starting to spend more and I’m optimistic that we will begin to see the effects of the stimulus next quarter.”
President Barack Obama signed a $787 billion stimulus plan into law in February that included increases in spending on infrastructure projects and a reduction in taxes.
The economy is “leveling off at a low level” and doesn’t need a second fiscal stimulus package, former Fed Chairman Paul Volcker, one of Obama’s top economic advisers, said on Bloomberg Television’s “Conversations with Judy Woodruff”. In the recorded interview following the GDP report, he said the economy is functioning only “by the grace of government intervention.”
One reason for the larger-than-projected decline in GDP was that the government slashed spending at a 3.9% pace, the most since 1995. The drop reflected a cutback in defense spending and the biggest decrease in state and local government outlays since 1981, reflecting slumping tax revenue.
Recent announcements by companies including General Motors Corp. indicate the economy will shrink again this quarter, albeit at a slower pace. GM last week said it will idle 13 U.S. assembly plants for multiple weeks to trim production by 190,000 vehicles from May through July. Sales in its home market fell 49% this year through March.
Still, data in recent weeks, including signs of stability in home sales, residential construction and consumer confidence, signal the recession will ease.
Ford Motor Co., working to avoid a federal bailout, is among companies seeing some improvement. The automaker last week posted a first-quarter loss that beat analysts’ estimates.
“We’re not quite sure where the bottom is,” Ford’s Chief Executive Officer Alan Mulally said in an April 24 Bloomberg Television interview. “But we believe with the stabilization of the banks, freeing up the credit, and the stimulus packages we have, both monetary and fiscal, that we’re going to see an uptick in the third and fourth quarter.”
The Brazilian gross domestic product (GDP) will undergo a shrinking of 0.44% this year, said a report by the country's Central Bank. The results are worse than that in the last survey, during which economists projected a contraction of 0.3% for the Brazilian economy. In 2008, Brazil's GDP was up 5.1%, despite the negative effects of the international financial crisis in the last quarter of the year.
According to the Focus survey, Brazil's industrial production will also fall sharply in 2009 -- the economists predicted a contraction of 4.13%, from 3.84% in the last survey.
The projection for the country's basic interest rate did not change from the last survey and is still at 9.25%. The interest rate recently underwent a one percentage point cut and is currently at 10.25%, the lowest value ever registered.
The estimates for Brazil's trade surplus in 2009 reached 17.5 billion U.S. dollars, from 17 billion dollars in the last survey. In the first quarter of this year, the trade surplus totaled 3.7 billion dollars.
Meanwhile, the survey said the exchange rate will be at 2.20 Brazilian reais per U.S. dollar by the end of 2009. After undergoing a 5.18% fall last week, the rate is currently at 2.07 reais per U.S. dollar.
The country's inflation rate will stand 4.36% in 2009 from 4.3% in the last survey. Brazil's inflation rate target for the year is 4.5%.
Chilean inflation will likely end 2009 at 1.2%, down from 7.1% in 2008, while the gross domestic product will likely contract 0.7%, according to the median forecast of 29 local analysts in the central bank's monthly economic outlook survey. Analysts' expectations fell considerably from last month's poll, when they saw 1.8% inflation for the year and expected GDP to contract 0.5%.
If 2009 inflation meets analysts' expectations, it will fall beneath the lower band of the central bank's target of 3%, plus/minus one percentage point.
"At this juncture, there is the risk that inflation will remain below the center of the inflation target band for quite some time which should encourage the central bank to continue to take steps - conventional and possibly unconventional in the near future - in order to ease monetary policy and inflate the economy," Goldman Sachs senior economist Alberto Ramos said.
As to economic growth, for the second quarter analysts expect GDP to contract 1.5% on the year, according to the poll. The economy began the year on negative ground, with the Imacec monthly economic activity index falling 2.1% on the year in the first quarter. The Imacec index is considered a proxy for the country's gross domestic product because it encompasses 90% of the components in the GDP.
For April, analysts see the Imacec contracting 2% on the year, according to the poll. The central bank will release first quarter GDP data next week.
Although the central bank currently sees 3.1% inflation this year and 2%-3% GDP growth, it's expected to downwardly revise this outlook when it releases its four-month Monetary Policy Report.
As for monetary policy, analysts expect the central bank to cut the key interest rate, known as TPM, another 25 basis points to 1% its next monthly monetary policy meeting in June, according to the poll's median estimate.
Last week, the bank cut the TPM 50 basis points. So far this year, the monetary authority has slashed the TPM a total 700 basis points from 8.25% late last year. For December, analysts see the bank changing direction in monetary policy with a 25-basis-point increase, according to the poll.
Some analysts, however, aren't ruling out that the bank will slash rates to near 0% and resort to quantitative easing and buy back bonds later in the year to inject cash into the local economy.
"We continue to believe that Banco Central de Chile will follow the US Fed steps and could even reduce interest rates to zero percent before year-end," UBS Pactual analyst Gabriel Casillas recently said.
Mexico's foreign minister says the swine flu crisis could reduce her country's GDP by as much as 1%. Last week Mexican Finance Minister Agustin Carstens said the reduction would be between 0.3 and 0.5% of Mexican output.
Foreign Minister Patricia Espinosa said in an interview with the Spanish daily ABC the economic loss stems in part from international reaction to the swine flu outbreak that began in Mexico last month.
"The economic impact has been major," Espinosa said.
Mexico said last week the outbreak had cost it at least $2.2 billion so far.
Espinosa insisted it is safe to travel to Mexico, although countries including Cuba, Peru, Ecuador and Argentina have enacted travel restrictions.
Gross domestic product (GDP) in the first quarter of this year may hit a 10-year low at minus 6.5%, but could show a slight improvement in the second quarter, the Kasikorn Research Centre (KRC) reported. The think tank said the contraction stemmed from the global economic crisis, which substantially affected exports, employment and household incomes.
However, government spending in the first quarter rose 28.8% mainly due to the government's economic stimulus measures, particularly the 2000-baht gift checks to people on low incomes.
The KRC believes the economy in the second quarter might improve on the first quarter, but only slightly due to the prevailing negative factors. The GDP in the second quarter would likely shrink by only 5.6 to 7.0%, provided that economic objectives were met and the global economy continues to recover, encouraging the private sector to invest more. However, the Thai economy would have to deal with the continuing political instability, effects from rising unemployment and the government's financial situation.
The KRC therefore called on the government to quickly rebuild the confidence of foreign investors and tourists in the country, by improving its credibility and the political situation.
The current economic crisis will have severe consequences for the African continent, cutting its expected GDP growth in half and ballooning its regional budget deficit, according to the 2009 African Economic Outlook (AEO).
'Following half a decade of above 5% economic growth, the continent can expect only 2.8% (growth) in 2009, less than half of the 5.7% expected before the crisis,' the AEO declared.
As a result, many people will fall back into poverty, the AEO said, and predicted that 'only a handful of African countries' is expected to meet the aim of halving the share of the population living on less than a dollar a day by 2015.
Economic growth in Southern Africa is expected to slow to a mere 0.2% this year, following GDP growth of 7% in 2007 and 5.2% last year. Other African regions will be less severely affected, the AEO said, with North African GDP expected to slow to 3.3% this year from 5.8% in 2008, and West African countries foreseen to have an average GDP growth of 4.2% in 2009, down from 5.4% last year.
In addition, the collapse of commodity prices and plunging demand from industrialized countries as a result of the crisis will have severe consequences on budget balances, with the regional budget deficit estimated at about 5.5% of GDP, instead of the 3.3% surplus forecast last year.
'However, we should not despair,' said Louis Kasekende, chief economist of the African Development Bank. 'The decade of reform has introduced efficiency in macroeconomic management and made African economies more competitive.'
These reforms have strengthened fiscal balances and reduced inflation to single-digit levels, the AEO said. Many countries have also benefited from substantial debt relief, with the result that most countries now boast low debt service/export ratios.
The AEO is a joint project of the African Development Bank, the OECD Development Centre, the United Nations Economic Commission for Africa and a network of African think tanks and research centers. The 2009 Outlook covered 47 countries, up from 35 last year.
The IMF, in its regional economic outlook published for the MENAP (Middle East, North Africa, Afghanistan and Pakistan) covering 22 countries, forecast a lower GDP growth of 2.6% for the region in 2009, compared to 5.7% in 2008, as a result of the global financial crisis.
However, the fund said that although the region is not spared from the crisis, strong economic fundamentals and sizeable currency reserves have helped mitigate the impact of the shock. The IMF expects a higher recovery of 3.6% for the region in 2010.
While releasing the spring 2009 outlook in Dubai, IMF Middle East and Central Asia department director Masood Ahmed said, ''given the global reach of the current economic crisis, countries in the Middle East and North Africa have also been impacted negatively.''
''However, they are likely to fare better than countries in other regions of the world, in part because of prudent financial and economic management, but also because oil exporters in the region can draw upon their large reserves to cushion the impact of the global slowdown on their own economies and the economies of their neighboring countries with which they have growing economic links," he added.
The region's oil exporting countries (Algeria, Bahrain, Iran, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, UAE and Yemen) are affected by a more than 50% fall in revenues due to the slump in oil prices. The economies grew on an average 6% during the past five years, on account of rising oil revenues which is expected to decline to 2.3% in 2009. Despite the fall in revenues, most of the governments are spending high, on account of the huge accumulated reserves, providing an impetus to the domestic and global demand. Countries with less cash reserves - like Iran, Sudan, and Yemen - need to prioritize their expenses, the IMF said.
The IMF believes that, with the oil prices hovering around current levels, the oil exporter's external current account position could reverse from a $400 billion surplus in 2008 to a deficit of $10 billion in 2009.
The global turmoil has resulted in credit crunch especially in the Gulf Cooperation Council (GCC) states whose financial systems are more integrated with the global financial markets. The governments reacted by taking various steps to stabilize the financial markets, ease liquidity and support commercial banks.
With regard to the ten oil importing countries (Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia), they have mostly evaded the crisis mainly because of low oil prices and their limited exposure to the global financial markets. However, their export earnings, especially from Europe and the US have taken a knock and so foreign direct investment. Income from tourism and remittances too are likely to be affected. The GDP of this group of countries is forecast to be 3.2% in 2009 compared with 6.2% in 2008.
Oil importing countries that trade mainly with the GCC states could be protected for some time. However, a prolonged recession could have severe impact on these countries, with rising unemployment and poverty. The inflation is estimated to ease from 14.4% in 2008 to below 10% in 2009 providing some relief.
In order to mitigate the global downturn, the IMF stressed that the government's economic policies should concentrate on key measures, such as increased public spending wherever possible, strengthening of the financial system, easing of monetary policies to support growth, and development of policies to protect the vulnerable sections of the society.
The French economy is expected to shrink by 0.6% in the second quarter of 2009, the Bank of France said in its latest survey, highlighting an easing in the rate of decline in economic activity levels. The central bank said April's contraction in industrial activity was more limited than in previous months, although order levels remained very low.
The outlook for future activity was also improving and the business sentiment indicator for the industrial sector rose to 75 in April, from 74 on March. The March figure was previously given as 73.
In the services sector, the central bank said the pace of contraction moderated in April compared to the previous month. However demand continued to fall and firms made further cuts in staffing levels and prices in order to adjust to the difficult conditions.
The business sentiment indicator in the services sector fell to 75 in April after 77 in March and the central bank said the outlook for the coming months remained to the downside.
Hungary's economy could contract by more than 6% this year but the fall is not expected to reach 7%, Prime Minister Gordon Bajnai was cited by national news agency MTI as saying.
MTI said Bajnai told local ATV television that the government was not planning more measures that would dampen consumption, and if necessary will use budget reserves to offset the impact of a bigger recession on the budget.
Bajnai's government, which took office last month, earlier projected the economy would contract by 5.5-6.0% this year as exports fall and domestic demand is hit by spending cuts and a slowdown in lending.
Iceland's Finance Ministry cut its outlook for gross domestic product, forecasting the economy will shrink 10.6% this year. The ministry's previous forecast, released at the start of the year, had been for a contraction of 9.6%.
A finance ministry official said the government forecasts the economy will return to growth of 0.6% next year and expand by 5.0% the following year. The ministry's previous forecast was for GDP to remain unchanged next year. It had not previously issued a forecast for 2011.
The island's economy is reeling from the collapse of its main commercial banks and currency in October, 2008, which forced it to seek aid from the International Monetary Fund and its European neighbors.
Italian industrial output slumped by a worse-than-expected 4.6% month on month in March, prompting fears the euro zone's third largest economy contracted more sharply than previously thought in the first quarter. On a year-on-year workday adjusted basis, production tumbled 23.8% in March -- the worst figure since statistics institute ISTAT started the series in 1990.
A Reuters poll of analysts had pointed to a 1.6% monthly fall in industrial output, and a 21.3% decline year-on-year.
The heaviest falls in March came in the production of electrical and domestic equipment, which slumped 10.6% month-on-month. Metals and metal products fell by 9.3%.
'It's definitely very bad and much worse than expected. It looks like our forecast for a 1.8 fall in (first quarter) GDP is too conservative now,' said Marco Valli, economist at Unicredit MIB.
'This increases downside risk to our euro zone forecast of -2.1%, because Italy will probably be significantly weaker than previously expected.'
For the first quarter as a whole, industrial production contracted by 9.8% versus the previous three month period.
Latvia's economy nose-dived a staggering 18% in the first quarter of 2009 compared with the same three months last year, according to a preliminary estimate by the country's statistics agency. The steep fall was largely in line with the most pessimistic forecasts and confirms that Latvia continues to have the most troubled economy in the 27-member European Union.
The Baltic state is seeing economic activity contract in all sectors as a result of both years of excessive growth and the world financial crisis.
The statistics agency said industrial output fell 22% in the first quarter year-on-year, while retail trade sunk 25% over the same period. Hotels and restaurants were the hardest hit, with overall activity in the sector down 34% compared with the first quarter in 2008.
Latvia's Finance Ministry has said it expected this year's gross domestic product to plummet 13%.
The current center-right government is slashing expenditures to keep its budget deficit within approximately 5% of GDP.
In December major world lenders led by the International Monetary Fund pledged euro7.5 billion (euro10.2 billion) in bailout funds to rescue Latvia from default.
After joining the EU in 2004, Latvia's economy grew at an average 10% for four years straight, which most economists agree is why the country's economy is contracting so sharply now.
McIlvaine Company,
Northfield, IL 60093-2743
Tel: 847-784-0012; Fax: 847-784-0061;
E-mail: editor@mcilvainecompany.com
Web site: www.mcilvainecompany.com