GDP UPDATE
October 2009
McIlvaine Company
TABLE OF CONTENTS
The International Monetary fund (IMF) recently raised its 2010 growth forecast for the world economy to 3.1 percent from 2.5 percent, saying the global recession "is ending". In its latest World Economic Outlook (WEO), IMF predicted that the global economy would grow by 3.1 percent in 2010, 0.6 percent higher than its prediction in July. it envisioned the world economy would have a contraction of 1.1 percent in 2009.
The global recession "is ending" but the pace of recovery is slow and activity remains far below pre-crisis levels, said the report.
Advanced economies are projected to expand sluggishly through much of 2010, with unemployment continuing to rise until later in the year. Annual growth in 2010 is projected to be about 1.3 percent, following a contraction of 3.4 percent in 2009, the report said.
Among the major advanced economies, the projection for U.S. growth in 2009 as a whole is minus 2.7 percent, but has been improved to 1.5 percent in 2010. Growth rate is also projected to go up in the euro area, which is expected to turn from minus 4.2 in 2009 to 0.3 percent in 2010, while the picture in Britain is to turn bright as it would register a 0.9 percent growth in 2010 from a contraction of 4.4 percent.
In emerging and developing economies, real gross domestic development (GDP) growth is estimated to reach almost 5.1 percent in 2010, up from 1.7 percent in 2009, said the report, adding that the rebound is driven by China, India and a number of other Asian economies. China will lead Asia out of the economic recession by growing by 8.5 percent this year and 9.05 percent in 2010, the report said.
India is expected to expand by 5.4 percent this year and 6.4 percent next year. Russia would grow 1.5 percent in 2010 from minus 7.5 percent in 2009.
The IMF upgraded its estimates for 2010 GDP growth in almost every country and region in the world based on its belief that the recession is receding rapidly into the past. Among the more interesting forecasts in its World Economic Outlook are the ones for the US and China. The IMF was more aggressive in increasing the rate of growth in the US compared to its July estimates than it was in moving up the number for the world’s most populous nation.
The IMF now expects China’s 2010 GDP to expand at 9%, up .5% from the July figure. The US economy will grow 1.5%, up .7% from the figure the IMF posted three months ago. The US is clearly growing much more slowly than China is, but the agency no longer expects America’s economy to hug a flat line. A similar comparison holds true for India. The IMF downgraded its expansion forecast for 2010 by .1%.
The IMF’s warnings about the risk to growth next year parrot those of many other organizations and economists. The expansion of most national economies depends on stimulus packages which have to stay in place while organic growth is still extremely weak.
The natural by-product of accepting the IMF’s advice is an expansion of sovereign debt which in essence raises the odds that interest rates will rise due to increased national borrowing. In addition, the tax burden of pushing debt back down will be great enough to undermine growth two or three years from now.
The IMF’s prescription for keeping the global economy from moving back into recession may be correct, but it will force most nations to pay a significant financial price very soon.
Chile's consumer price index will likely end 2009 showing a 0.6% decline on the year compared with a 7.1% increase in 2008, while the gross domestic product will likely contract 1.5%, according to the median forecast of 26 local analysts in the central bank's monthly economic outlook survey.
Analysts' inflation expectations where higher than in last month's poll, when they saw a 1% decline in inflation for the year, while GDP expectations remained unchanged from last month's poll with an expected contraction of 1.5%.
For the fourth quarter of 2009, analysts expect GDP to grow 2% from the same period a year earlier, according to the poll.
The economy began the year with GDP contracting 2.3% year-on-year in the first quarter and 4.5% in the second quarter.
The central bank, according to its quarterly Monetary Policy Report, expects the consumer price index to end the year with a 0.8% drop and GDP to contract between 2% and 1.5%.
As for monetary policy, analysts expect the central bank to maintain the benchmark interest rate, known as TPM, at its record low 0.5% at least through December, according to the poll. By September 2010, the TPM should climb to 2.13% and end 2010 at 3.0%, the poll indicated.
During the first seven months of 2009, the central bank slashed the key rate a total of 775 basis points, bringing it to 0.5% from 8.25% in December 2008.
The central bank recently said it will likely begin withdrawing monetary stimulus in the second quarter of 2010, although some analysts don't rule out the bank beginning to raise rates in the first quarter.
China's economy will expand more quickly in each of the remaining two quarters of this year than in the first half, when gross domestic product grew 7.1% from a year earlier, the nation's vice premier, Zhang Dejiang, said. Zhang's comments at a China-Russia business summit are in line with expectations that economic growth is picking up in the second half, due to the government's stimulus program and a favorable base of comparison.
He added China plans to expand the settlement of cross-border trade using the yuan or the ruble, particularly on the border, and to set up a two-way currency agreement. He urged Chinese banks to set up outlets in Russia, and Russian banks to do the same in China. Some trade on the Sino-Russian border is already settled using local currencies. China has said it plans to embark on a yuan-settlement trial for trade with Russia, and already has started a similar trial for trade with Hong Kong.
India aims to factor the use of natural resources in its economic growth estimates by 2015, environment minister Jairam Ramesh said, as New Delhi seeks to underscore the actions it is taking to fight global warming.
The stand is likely to strengthen India's stance at crucial negotiations in Copenhagen in December on a treaty to succeed the Kyoto Protocol, which obliges 37 rich nations to cut emissions by an average of 5 percent below 1990 levels by 2008-12.
India is under no obligation to cut emissions but says it is taking unilateral domestic actions such as increased use of renewable energy and more efficient use of energy to help seal a global deal in the Danish capital.
Talks are currently deadlocked on the question of levels of emission cuts to be taken by rich countries and developing nations. Rich nations will also have to come up with billions of dollars in aid and green technologies for the poor.
In a move that India could highlight as proof of its sincerity in fighting climate change, Ramesh said the country would seek to make "green accounting" part of government policy on economic growth.
"I think certainly by 2015 or thereabouts India should be in a position to provide alternative GDP (Gross Domestic Product) estimates which account for the consumption of natural resources as well," he said.
He said this would help find out how much of a natural resource was being consumed in the course of economic growth, how much was being degraded and how much was being replenished.
"I'm sure that in the next two years, more and more economists will focus their time and energies upon social investment accounting or green accounting ... so that GDP really becomes not gross domestic product but green domestic product."
India is among countries most threatened by climate change with experts warning that rising temperatures will lead to more floods, heat waves, storms, rising sea levels and unpredictable farm yields.
Yet millions of people living in poverty mean India needs to burn fossil fuel to help them improve their lives. Some half a billion people in India still don't have access to electricity, making it necessary to use dirty coal for almost 70% of its power needs. But New Delhi says it needs to follow a different development path than rich nations' heavy reliance on coal, oil and gas, and that it could shift to a low-carbon future with a little hand-holding by rich nations to keep it on the right path.
Malaysia is expected to unveil plans for a fiscal deficit of 7.3% of gross domestic product when the 2010 budget is tabled, according to a Reuters poll of 11 economists and IMF forecasts.
This year's budget deficit, according to the poll, is expected to reach 7.7% of GDP, slightly more than government forecasts of a 7.6%.
The large shortfall is expected as the country keeps its fiscal stimulus measures until end-2010 and highlights the need for Malaysia to reduce its heavy dependence on oil revenues.
While economists say Malaysia can run another high deficit in 2010, it needs to start to reduce that to a deficit of 4% of GDP from 2011 onwards.
"Running persistently large fiscal deficits beyond the near-term need for cyclical fiscal protection would pose fiscal concerns over the longer term," said Morgan Stanley Research in its budget preview for Malaysia
Pakistan's gross domestic product (GDP) growth is expected to remain unchanged at 2% in the 2009/10 fiscal year, the International Monetary Fund (IMF) said. The government's GDP growth target for this July-June fiscal year is 3.3%.
GDP growth is expected to rise to 3% in the 2010/2011 fiscal year, the IMF said in its Regional Economic Outlook posted on its website.
Pakistani growth was 5.6% in the 2007/08 fiscal year but it slowed to 2% the following year because of macroeconomic imbalances, deteriorating law and order and an uncertain political scene.
"In Pakistan, the economic slowdown began before the global crisis," the IMF said.
The U.S. ally, which is fighting a Taliban insurgency, was kept afloat by a $7.6 billion IMF emergency loan last November. The loan was increased to $11.3 billion in July. The IMF projected inflation this fiscal year to be 13.9%, compared with 20.3% last year. The government has an inflation target of 9.5%. The IMF has projected inflation to ease to 9.4% in the 2010/11 fiscal year.
The IMF and the government have projected the fiscal deficit to narrow to 4.9% of GDP this fiscal year as compared with 7.3% of GDP in the last fiscal year.
Singapore's economy continued its fast-paced rebound in the third quarter, prompting the government to raise its outlook for the full year. But the central bank kept monetary policy steady, striking a cautious tone about the risks to the recovery.
The numbers may be an indicator of how Asian economies are faring, as Singapore's economic performance is considered a gauge for export-dependent nations like South Korea and Taiwan. Singapore's nonoil domestic exports account for nearly 60% of the economy.
The island state's gross domestic product (GDP) expanded 14.9% in the third quarter on a seasonally adjusted and annualized basis, in line with market expectations and slower than revised growth of 22% in the second quarter, according to advance estimates by the Ministry of Trade and Industry.
The ministry revised up its 2009 GDP forecast to a contraction of between 2.5% and 2% from its previous forecast of a 6% to 4% fall, the second straight quarter it has raised its outlook.
Still, the Monetary Authority of Singapore said it will retain its neutral stance on the local currency, keeping it within a flat trading band, flagging risks such as persisting weakness in export markets and the transition to private-sector-driven growth as governments exit expansionary policies.
The MAS uses the Singapore dollar as its chief monetary policy tool and guides it within an undisclosed, trade-weighted band because trade dwarfs Singapore's domestic economy. The central bank made no change to the width or the center of the policy band.
"Against continuing weakness and uncertainties in the external economic environment, the strength of the recovery in the Singapore economy is expected to be moderate beyond the initial uplift," the central bank said in its semiannual policy statement.
The trade ministry said a "clear but modest recovery is under way globally" for the next three or four quarters, but added that a sustained recovery in private consumption and investment in developed economies is needed to support growth momentum into the second half of 2010.
The comments echo the warning this month by Prime Minister Lee Hsien Loong, who said the risk remains of a W-shaped recovery characterized by a double dip. He said developed markets' sustained growth is uncertain once government stimulus packages end.
The median forecast from a Dow Jones Newswires poll of 10 economists tipped third-quarter GDP to have grown 14.8% from the previous quarter. All 10 economists polled by Dow Jones expected the central bank to stand pat.
The central bank played down the domestic price-stability concerns.
"While there could be some upward pressures on consumer prices emanating from higher global oil and food prices, underlying domestic cost pressures will be contained," the MAS said.
It now expects the consumer-price index to be flat this year, compared with a previous forecast range of between a 0.5% rise and a 0.5% fall, and expects the CPI to rise 1% to 2% in 2010.
"The last thing [central banks] want to do is start tightening policy and run even a small risk of seeing their economies collapse again," HSBC economist Robert Prior-Wandesforde said. "So I think their balance of interest is to keep things loose until it's absolutely crystal clear that things are on the mend."
South Korean Finance Minister Yoon Jeung-hyun said the country's economy would contract by less than 1% this year, better than the official 1.5% fall forecast, local media reported.
'I expect it to be between minus-1% and zero%,' Yonhap news agency and other private media quoted Yoon as telling a parliamentary session when asked by a lawmaker.
Asia's fourth-largest economy contracted by a real 3.2% in the first half of this year over a year earlier.
Yoon's reported remark suggests gross domestic product (GDP) will grow in the second half of 2009 by much more than the central bank's earlier forecast of 0.2%.
A sharp depreciation in the won and resilient demand from giant neighbor China, along with the effect from the government's bold stimulus spending, have enabled South Korea to pull out of the global downturn sooner than expected.
Investors bet the Bank of Korea will begin raising interest rates any time between November and early next year, becoming among the first Group of 20 central banks to unwind stimulus policy support introduced since late last year.
France's gross domestic product is still expected to grow by 0.3% in the third quarter of this year as the country emerges from recession, Bank of France Governor Christian Noyer said, but warned that the economy is "fragile" and will remain so until the unemployment rate starts to ebb. Speaking to a group of journalists, Noyer reaffirmed European Central Bank President Jean-Claude Trichet's position that there is "no reason" for the ECB to shift its monetary policy stance.
Germany's economic slump is less severe than previously expected but the recovery will still be sluggish because growth incentives from abroad are restrained, the Berlin-based DIW institute said as it raised its forecasts for Europe's biggest economy. The institute forecast a 5.1% contraction in gross domestic product for 2009, and predicted the economy will grow 1.3% in 2010. Back in July, the institute forecast the economy to shrink 6.4% this year and to grow by 0.5% in 2010.
"A notable growth is not yet in sight during the forecast period," said Stefan Kooths, an economist with DIW's economic department. "We are still in a [period of] underutilization."
Not until the end of next year will German economic activity return to the pre-crisis levels seen in 2006, the Berlin-based institute said. German exports, which make up nearly half of the country's GDP, are likely to plunge 15% in 2009 before growing by 4% in 2010, the DIW said. The recession will hurt the labor market, although less strongly than previously estimated. The DIW forecast German unemployment at 8.3% this year and 9.6% in 2010, up from 7.8% in 2008.
"Companies have reacted to the abrupt crash in demand by cutting working hours," the DIW said in its report. "But because the economic recovery will be rather weak and will need a long time, the pressure on the labor market will increase."
Consumption will again give the "most important boost" to the economy next year, with private consumer spending gaining in significance. DIW forecasts a 0.5% increase in private consumption this year before rising 0.6% in 2010, said DIW. The institute forecasts German consumer prices to rise an annual 0.3% this year and 1.0% in 2010.
With Germany's debt reaching "unheard-of" levels in its most recent 60-year-history, the next government faces a "considerable consolidation need."
"There is no leeway for a policy that will lead to a net reduction in the overall [tax and social welfare contribution] burden," said DIW report. "A cut in net taxes is impossible in the current situation."
It said that the government would actually have to cut indirect taxation, such as value-added, energy or property taxes. Germany's public budget deficit is expected to widen to 3.1% of GDP this year from a balanced budget in 2008, and to 4.9% of GDP in 2010, the DIW said.
The Economic and Social Research Institute said it expects the Irish economy to contract 7.2% in 2009 and to fall 1.1% next year. The think tank forecasts growth to return in the latter part of 2010.
In the Supplementary Budget, the government had announced that the Budget 2010 would include savings of EUR 4 billion, equivalent to 3% of GDP on a full year basis. The institute said, "If the government implements the EUR 4 billion fiscal package for 2010, we estimate that this will be sufficient to stabilize the General Government Deficit but will not reduce it."
The International Monetary Fund revised upwards to 4.2% its 2010 real gross domestic product estimate for the Middle East but kept its 2% growth forecast for 2009. The 2010 revision is 0.5% higher than its July forecast, the IMF said in its World Economic Outlook report. In comparison, emerging markets were given a 5% growth forecast for 2010.
The IMF forecasts that the region's oil exporters, including Iran, Saudi Arabia, the United Arab Emirates and Kuwait, are expected to post real GDP growth of 1.3% in 2009, down from 4.9% in 2008. Real growth is set to hit 4.2% next year.
"The sharp slowdown in activity of oil exporters reflects cutbacks in oil production, a result of efforts by the Organization of Petroleum Exporting Countries to stabilize oil prices, although most oil exporters have maintained strong public spending growth to help their nonoil sector," the IMF said in the report.
Many Mideast-based economists expect government spending to be felt by the region's economies in the late part of this year and into 2010. The expansionary fiscal policies some Mideast countries adopted in light of the global economic downturn helped support domestic demand and stabilize economies, the IMF said.
The IMF said it advises countries with "fiscal room," particularly oil-exporters, to continue with these policies whereas those with weaker fiscal positions need to "cut back unproductive spending to avoid an unsustainable debt path." The region's oil exporters have ramped up government spending this year. Saudi Arabia unveiled the largest fiscal stimulus package relative to GDP among the Group of 20 countries, or G20, with spending for 2009 at $126.84 billion.
The IMF report forecasts inflation for the region to slow to 8.3% in 2009 from 15% last year before falling further to 6.6% in 2010. Oil-exporters will see inflation drop to 7% this year from 15.8% in 2008. Egypt and Iran are likely to see double-digit inflation this year at 16.2% and 12% respectively, while Lebanon and Jordan are to see the largest drop in consumer prices to 2.5% and 0.2% respectively, according to the report.
Meanwhile, the Middle East's current account balance for the year will reach 2.6% of GDP, which is seen rising to 7.9% in 2010, the IMF said. However, "the current account surplus of the region is projected to narrow by 15.75% of GDP in 2009, primarily from a sharp reduction in oil exports," the report added. The IMF cautioned that its outlook may be affected by oil prices, which could fall sharply if a global recovery isn't sustained.
"Another risk is that the banking systems of several oil-exporting countries could come under severe stress if global financial conditions tighten again," the report said. In this scenario, the IMF suggested oil exporters may need to cut public spending to bolster their fiscal positions.
Banks, particularly in the Gulf, need to be closely monitored by governments through regular stress-tests, the report advised, adding that mechanisms for cross-border banking supervision need to be established. The IMF also warned that bank credit to the private sector has dried up, in turn hindering an economic recovery.
Poland faces risks that its gross domestic product growth next year will be lower than projected by the International Monetary Fund, said Slawomir Skrzypek, head of the National Bank of Poland.
"There are downside risks and we should get to work on that in particular," he said in an interview from Istanbul with news channel TVN CNBC.
According to the IMF's latest projections, the Polish economy should grow 2.2% in 2010 after rising 1% this year.
The decline in Britain's manufacturing and services sectors eased markedly in the third quarter, but probably not by enough for the economy to return to growth just yet. In its quarterly survey of over 5,500 firms, the British Chambers of Commerce said the pace of decline in domestic sales and orders for both sectors was its slowest in more than a year.
Services companies reported growth in export orders and sales for the first time in a year. Manufacturing export sales were flat, and export orders fell, albeit at their slowest pace since mid-2008.
The improvement in the survey was broad-based with almost all components returning to levels last seen before the collapse of U.S. bank Lehman Brothers just over a year ago triggered global economic crisis.
However, the lobby group warned that conditions remained fragile and that the economy likely stagnated or even continued to shrink in the third quarter given news recently of an unexpectedly sharp fall in industrial output in August.
The Q3 results support our assessment that the UK economy is on the brink of leaving recession. However, the improvement is not sufficiently strong to allow us to conclude without doubt that GDP has already returned to positive growth,' said BCC chief economic adviser David Kern.
Kern said there was just as much chance that Q3 GDP could turn out to be negative as positive, in contrast to his forecast last month for growth of 0.3 %.
Economists had been expecting Britain to return to growth in the July-September period after more than a year in recession. However, a 2.5% drop in industrial output in August suggested the recovery may take longer to materialize. And the BCC cautioned that the improvement in the third quarter was driven mainly by a slower pace of destocking and firms' increased confidence in the future, and thus provided only a fragile basis for recovery.
Concerns about the sustainability of an upturn lay behind the Bank of England's decision to expand its quantitative easing program to 175 billion pounds in August and keep interest rates at a 0.5% record low this month. Most analysts reckon the central bank will not expand its asset-buying program any further, although last week's poor output data and the large degree of spare capacity in the economy leave open the risk it may yet inject more stimulus.
Indeed, the survey showed that firms are still operating well below full tilt to satisfy demand. And Kern said that with the government under pressure to cut spending to repair the public finances, monetary policy would need to stay loose for longer to prevent the economy sliding back into recession.
'It would be folly to start withdrawing stimulus now, but there does have to be a credible exit plan,' Kern said. 'The fiscal side will have to be addressed first and the monetary side will have to be left for longer in an expansionary state,' he added. 'The biggest risk is that we get a double dip.'
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