GDP UPDATE
November 2009
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
The U.S. economy grew more than expected in the third quarter, according to the government's initial report on gross domestic product. The Commerce Department said the nation's gross domestic product grew at an annual rate of 3.5% last quarter, the first positive quarterly growth in a year, and the largest quarterly advance since the third quarter of 2007. GDP contracted by 0.7% in the second quarter. The official declaration of the beginning and end of a recession has traditionally been given to the National Bureau of Economic Research, which has not raced to make any such declaration. Its Web site continues to mark the endpoint of the current recession with a question mark.
Third-quarter growth was led by double-digit gains in durable goods and residential real estate, categories propped up by government stimulus programs such as the first-time home buyer credit and the cash for clunkers program. While that raises questions about the sustainability of growth as stimulus programs unwind, the Obama administration did not hesitate to take the credit.
"Today's numbers indicate that the tough decisions this administration made to rescue the economy from the abyss were correct," Commerce Secretary Gary Locke said in a statement. "We're headed in the right direction, and even though there are still too many Americans out of work and still much work to be done, without the action taken in the early days of this administration, the pain families are feeling today would be much worse."
Brazil's economy grew a little more in 2007 than previous data suggested, rising 6.1% from 2006 compared to the older figure of 5.7%, according to Brazil's census and statistics bureau, IBGE,.
IBGE published gross domestic product figures for 2007 last year, but revised the numbers upward as new data such as personal income tax and a new farm census became available.
In current values, Brazil's 2007 GDP reached 2.66 trillion Brazilian reals, or $1.53 trillion.
As expected, Brazil consumers helped push the economy higher, with consumer spending rising 6.3% in 2007 and real incomes rising 5.4%.
Canada's gross domestic product shrank by 0.1% in August, casting doubt on whether the country climbed out of recession in the third quarter and making official growth projections all but impossible to reach. Analysts polled by Reuters had expected the economy to grow 0.1% in August after a month of stagnation in July. But lower oil and gas production nudged GDP lower in the month, and August showed a 4% year-on-year decline in GDP, a broad measure of goods and services in the economy.
"Two months into the quarter and the economy is largely standing still. Worse, the economy is headed in the wrong direction," HSBC Securities economist Stewart Hall said, in a note that expressed "palpable disappointment" in the data.
"It would seem that Canada will have to wait until the fourth quarter for the economy to transition from economic stabilization to economic recovery."
The August figure means that a Bank of Canada forecast for annualized growth of 2.0% in the third quarter looks unrealistic and should remove any lingering talk of an early interest rate hike to rein in inflation.
Statistics Canada officials said September GDP would have to grow by an almost unprecedented 2.0% to meet the central bank's forecast and by 0.6% to record any growth at all in the third quarter.
Scotia Capital analysts Derek Holt and Karen Cordes said Canada was paying the price for the lagging recovery in the United States, Canada's largest trading partner.
"The Bank of Canada is nowhere close to hiking rates with this kind of disappointing growth and inflation dynamic in the Canadian economy," they said in a note.
The bank says it will keep its overnight rate at a record low of 0.25% at least until the second quarter of next year unless inflation emerges as a risk. Consumer prices in September fell by 0.9% from a year earlier.
The economy has also been hit by the high value of the Canadian dollar, which is hurting the manufacturing sector.
The GDP data pushed the Canadian dollar as low as C$1.0808 to the U.S. dollar, or 92.52 U.S. cents, from C$1.0670 to the U.S. dollar, or 93.72 U.S. cents, at Thursday's close and prompted cautious words from Finance Minister Jim Flaherty.
"The figures quite frankly confirm what we've been saying and that is that there are some positive signs in the economy but the recovery is fragile and tentative," he said in Toronto.
Bank of Montreal said the economy had turned the corner regardless of the August figures, and the painful recession was now "in the rear-view mirror."
The largest single month-on-month GDP increase in the last few decades was the 1.6% recorded in October 1985. The last time the economy grew by as much as 0.6% was in December 2006.
The official opposition Liberal Party said the GDP data showed the government's program to stimulate the economy was not working.
Statistics Canada said oil and gas extraction fell by 2.3% in August as maintenance work at some east coast crude petroleum facilities slowed production.
The manufacturing sector fell by 0.7% on a drop in primary metal products that was caused mainly by labor disputes. Wholesale trade fell by 0.5%, reflecting weakness in both foreign and domestic demand.
Ian Pollick, economics strategist at TD Securities, said growth at the initial phase of a recovery would be tepid.
"We wouldn't draw too many dire conclusions ... As the massive fiscal and monetary stimulus continues to garner momentum, the recovery should regain traction," he said.
Australia’s central bank, Reserve Bank of Australia (RBA) has raised the country's gross domestic product (GDP) forecast to 1.75% for this year and 3.25% in 2010. Three months ago, RBA had initially forecast GDP growth of 0.5% and 2.25% for current year and 2010 respectively. Earlier this week, RBA became the first central banker this year to raise borrowing costs twice this year, citing a rebound in consumer confidence and strengthening Chinese demand for exports.
China's economy is likely to perform better overall next year, the World Bank said, setting the stage for the government to withdraw some of its pro-growth policies. But analysts say Chinese officials are likely to continue to resist pressure from other countries to let its currency appreciate, which could be a theme for discussion at a meeting of finance officials from the Group of 20 economies this weekend in Scotland.
China had been letting the yuan rise amid widespread criticism from abroad that it was undervalued, but it halted the appreciation in July last year as its export sector began to feel the brunt of the global economic slowdown.
The rapid recovery in China so far this year is helping to drive growth in commodity-exporting countries such as Australia and Brazil, as well as in the rest of Asia. In its latest quarterly update, the World Bank forecast China's economy will grow 8.7% in 2010, slightly higher than its revised estimate of 8.4% for 2009. The improvement next year will come from exports returning to growth and a property sector that is continuing to strengthen, the bank said.
China's economic growth has clearly stabilized, but there is a growing risk that the massive surge of bank lending this year will lead to asset bubbles and wasted investment, bank economists said.
"China's stimulus was much more front-loaded, so China should probably pull back on the monetary [policy] front before some of the other countries," Ardo Hansson, the World Bank's lead economist for China, told reporters in Beijing. A stronger currency could help in that regard, and also encourage structural reform, he said. "If China needs to have more domestic demand and less reliance on exports, then a more appreciated exchange rate is probably something that's in the pipeline," he said.
With some other major economies having already withdrawn some stimulus measures -- Australia has raised interest rates twice—China could face questions on its policies at the G-20 meeting in St. Andrews, Scotland.
Chinese officials say they are determined to hold to their current course. Chinese Foreign Ministry spokesman Ma Zhaoxu urged governments around the world to continue policies that support their economies. "We need to proceed from our own national conditions and bear in mind the big picture of the early recovery of the global economy," he said.
China could let the yuan rise mildly against the U.S. dollar next year, but it "won't promise anything" on exchange rates at the G-20 meeting, said Hu Yifan, chief global economist for Citic Securities in Hong Kong.
Beijing's government-led stimulus program of four trillion yuan ($586 billion) is due to run its course at the end of 2010, and there is still concern private demand is too weak to pick up the slack. China would probably like to see a firmer global rebound to help sustain its own recovery, as its exports remain weak.
But senior Chinese policy makers are now confident China will meet its 8% growth target for this year, so there is increasing debate over what policies should replace the stimulus. The state banking system's massive increase in lending has led to worries about inflating housing and stock prices.
India is projected to grow 6.2% this fiscal, report the media, quoting global banking major HSBC. It raised its assessment for the next fiscal by 0.5% to 8.5%, provided the economy recovered.
HSBC Co-Head, Asian Economics, Global Markets, Robert Prior-Wandesforde reportedly said in Mumbai that the WPI-inflation was likely to reach 8% by February-March. It could be due to higher energy and manufacturing prices.
In a related development, the Reserve Bank of India (RBI) projected inflation at 6.5% by March-end and the GDP growth at over 6%. Wandesforde said the RBI's measures indicated that the monetary policy was moving towards an inflation-focused regime. He opined that the apex bank's actions were preventive to avoid an asset-bubble in the system, and it could have done this to convince the market that the policy was focused to contain inflation.
Indonesia's economy is estimated to have grown an annual 4.1 - 4.2% in the third quarter, the finance minister said, at the lower end of a previous estimate of 4.1-4.3%.
Indonesia' economy grew 4% in the second quarter, the slowest pace in nearly six years, prompting the central bank to cut its key interest rate, BIPG, to a record-low of 6.5% to support growth.
"In a 'normal' situation, the economy usually expanded faster in the first, second and third quarter. This year, it seems growth in the fourth quarter will be higher than in previous quarters," Finance Minister Sri Mulyani Indrawati told reporters.
"We estimate the economy expanded between 4.1 - 4.2% in the third quarter," she said.
The finance minister estimated economic growth in the fourth quarter would be between 4.6 - 4.7% and 4.3% for the full year.
The World Bank has also become more optimistic on growth in Southeast Asia's biggest economy and expects GDP to grow 4.3% this year.
France's central government budget deficit more than doubled over the first nine months of this year to reach €125.8 billion ($187.5 billion) due to shrinking tax revenues, the budget ministry has said. The deficit totaled €56.6 billion on September 3, 2008.
The widening gap was due to the "impact of the economic climate on revenues and the effect of economic recovery measures estimated at up to €29.9 billion," said the budget ministry in a statement.
Prime Minister Francois Fillon plans to present a new fiscal strategy early next year to bring French spending under control and ensure the overall public deficit is under three percent of GDP by 2014, in line with EU rules.
France came out of a year-long recession in the second quarter with a 0.3 percent jump in GDP and the government is tabling on a return to growth in 2010.
The Gambian economy will expand this year at a faster pace than previously forecast, aided by strong growth in agriculture, the International Monetary Fund said in a recent report. Gross domestic product will increase about 4.5% to 5% in 2009, up from an earlier estimate of about 3.5%, according to a statement issued after IMF officials visited the Africa nation from Oct. 23 to Nov. 5. Real GDP growth is projected “to rise slightly” in 2010, based on a partial recovery in tourism and remittances, the IMF also said in the report e-mailed to Bloomberg News.
“Given the uncertainty of weather conditions for agriculture and prevailing weakness in some countries with economic linkages to The Gambia, there are still downside risks to the outlook for 2010,” the fund said.
“The Gambian government still faces a heavy debt burden,” the IMF said, estimating interest on government debt to consume almost 20% of government revenue in 2009.
Germany's export-led rebound will eventually turn into a broad-based recovery that will gather pace in 2011, the European Commission said recently, raising its economic forecasts for Europe's largest economy for this year and next.
It also said that the "main challenge" for Germany will be "to reconcile the necessary fiscal consolidation with the strengthening of the economy's long-term growth potential." It forecasts Germany's general government deficit to widen to 3.4% of gross domestic product this year, after a balanced budget last year, and to widen to 5.0% in 2010, which is above the 3% budget deficit threshold set by European Union budget rules.
In its autumn projections for 2009, the commission predicted German GDP to contract 5.0%, from the 5.1% decline predicted in its interim forecast from September. It also forecast 1.2% growth for 2010, compared with its 0.3% growth seen in its spring forecast from May. For 2011, the commission predicts 1.7% growth.
"Given the production structure of the German economy, an impulse from external demand will be crucial to kick-start the economic recovery," the autumn report said. But still, growth composition is set to be more balanced in the years to come with exports to lose slightly in significance.
"A moderate but steady recovery in exports is projected for 2010, gathering momentum in 2011 and sustaining a relatively broad-based post-crisis recovery in the economy," the report said. "With domestic demand projected to respond more vigorously to the increase in economic activity than in the past, import growth should also pick up markedly, especially in 2011," it said.
The outlook is in line with that of the German government, which in October forecast the economy to contract by 5.0% this year and grows by 1.2% in 2010. Last year, Germany's economy, which accounts for about a third of the euro-zone total, grew by 1.3%.
The commission stayed clear of any direct comment on the new German government's planned EUR24 billion in income tax cuts from 2011 despite a widening budget gap. But it called for a "careful review of government expenditure, including the fiscal stimulus administered, the removal of subsidies potentially hindering structural adjustment, and safeguarding growth-enhancing spending should be conducive to higher potential growth."
The commission forecast German inflation to accelerate in 2010 because energy prices are rising again and the base effects are gradually petering out by the end of this year.
The EU-harmonized consumer price inflation in the country will average around 0.3% this year, the commission said. It forecast inflation to average 0.8% in 2010.
Ireland's gross domestic product (GDP) will fall 7.5% in 2009, but ease to a 2.4% fall in 2010, the Organization of Economic Cooperation and Development said. The OECD also sees gross national product--excluding profits from multinationals based here--falling 10.5% in 2009 and 2.8% in 2010.
"The priority now is to restore the banking sector to good health," the organization said in its report on Ireland, adding, "Substantial fiscal consolidation is needed."
It sees the Irish unemployment rate averaging 11.9% in 2009 and 14% in 2010 and consumer prices, calculated on a European Union-harmonized basis, are expected to fall an average of 1.5% in 2009 and fall 0.3% in 2010.
Ireland's general government deficit is expected to be 12.2% of GDP in 2009 and 11.3% of GDP in 2010, the OECD added.
The Paris-based think-tank added, "Living standards are likely to be permanently lower as the result of the unwinding of economic imbalances, which built up during the recent period of unsustainable activity." It added, "A key question is how far prices and wages will need to fall to restore macroeconomic balance and competitiveness.
Qatar should enjoy impressive real GDP growth thanks to the doubling of its gas capacity between 2008 and the end of 2010, says a Standard Chartered Bank’s senior economist. Qatar is boosting its gas output and finding ways to monetize it. This will likely support the strongest GCC growth in 2009 (8.5%) and 2010 (9.5%), said Philippe Dauba-Pantanacce in his report.
According to official statistics, in 2008, the oil and gas sector GDP grew by 52% year-on-year in nominal terms, versus 27% year-on-year growth for the non-oil GDP. This is likely to continue, and the hydrocarbon sector’s contribution to real growth could be even greater in 2009. The hydrocarbon sector is expected to drive strong GDP growth of 8.5% in 2009 and 9.5% in 2010, despite weakness in sectors such as banking and real estate. Qatar’s current crude oil customers are also a quasi guarantee of future revenues.
Qatar began to invest substantially in its gas infrastructure in the 1990s, when hydrocarbon prices were a fraction of their current level. It is now reaping the benefits of this long-term strategy. Despite a collapse in hydrocarbon prices (both oil and gas) this year, Qatar should enjoy impressive real GDP growth thanks to the doubling of its gas capacity between 2008 and the end of 2010.
“We argue that, given the abundance of this natural asset, it is difficult to envisage any substantial economic diversification away from hydrocarbons,” said Philippe.
South Africa's statistics agency has rebased its gross domestic product survey and added previously excluded activities that could lead to revisions of past economic growth numbers. Joe de Beer, executive manager for national accounts at Statistics South Africa, told reporters the GDP data to be released later this month would give a more accurate picture of the size of and conditions within Africa's biggest economy.
National accounts would be benchmarked and re-based to the year 2005 from 2000 as part of a regular 5-yearly revision. Previous rebasings have led to big increases in the size of the economy -- 13.7% a decade ago and 3.5% for data released in 2004 -- and on both occasions growth was revised upwards. However, those changes were also affected by other substantive changes that were made to the survey and the revision may not be as large this year.
The new data will include calculations for the "non-observed economy", including estimates of illegal activities such as the drugs trade and abalone poaching, unregistered professionals and expanded estimates for the informal sector.
"We are including estimates for those activities to make sure we capture all economic activity," De Beer said.
Stats S.A. will give third quarter growth figures on November 24, and revisions to data going back to the first quarter of 2002.
The current size of the South Africa's economy is about 2.5 trillion rand.
But De Beer said there was no guarantee that growth for previous years would be higher given possible changes to the formal economy from more accurate benchmarking. Any revisions will impact on other indicators, including the budget deficit, which the Treasury has estimated will swell to a record 7.6% of GDP in the current financial year.
Ukraine's gross domestic product (GDP) is expected to fall by 12% in 2009, forecasts Economy Minister Bohdan Danylyshyn.
"Despite the fact that we have a low comparative basis for the second half of 2008 and a certain revival of the economy seen from the second quarter, the [GDP] decline is most likely to be about 12% over the year in general," he said in an interview with the 2000 weekly.
According to him, such a cooling of the economy has undermined the resource basis of budgets of all the levels, but that this had been difficult to forecast when the national budget for 2009 was being drafted.
"While drawing up late in 2008 the budget for this year, the government proceeded from the fact that the impact of the global financial crisis on the domestic economy should not be too catastrophic, as it mainly had foreign roots… Last autumn, the situation in the economy was stable in general," he said.
He also pointed out the importance of International Monetary Fund's loans to the budget.
"The alternative to such debt-related financing of the [budget] deficit is either an increase in the tax burden on the entire economy or … methods of financing domestic borrowing through printing money, which [risks] high inflation," he said.
The U.K.'s gross domestic product or GDP shrank 0.4% in the three months ended October compared to the previous three month period and similar to the 0.4% decline in the three months ended September, the latest monthly estimate of GDP from the National Institute of Economic and Social Research showed. The GDP indicator has been on a declining trend for the last seventeen months.
The latest estimate raises further doubts over the health of economy, with an exit from recession still seemingly nowhere in sight. The institute said that the buoyant industrial production data was positive, although growth in recent months had been offset by a renewed weakness in August.
The profile of the economy suggested that the current recession is slightly worse than the recession in the 1980's but not as bad as the great depression in the 1930's, NIESR said.
Official data showed that the British economy contracted 0.4% sequentially in the third quarter, after shrinking 0.6% in the second quarter. Economists had expected the economy to exit the recession in the third quarter by expanding 0.2%. The decline in the third quarter was the sixth consecutive quarter of contraction, and marks the longest streak of economic contraction on record.
The disappointing GDP data has forced the Bank of England to raise its quantitative easing measures even further. Earlier in the day, the central bank's Monetary Policy Committee decided to maintain its key interest rate at 0.50%, while the size of the asset purchasing scheme was raised by a further GBP 25 billion to GBP 200 billion.
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