GDP UPDATE
September 2009
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
It appears the US economy is not shrinking any more. Pundits are predicting a 2-3% growth in the Gross Domestic Product in the third quarter of the current year. If their predictions turn out to be correct, the length of the current recession would be about 19 months — the longest since the Great Depression, but just two or three months longer than the recessions of the early 1970s and early 1980s, and the sixth longest since the beginning of the 20th Century.
Just the other day, remember, pundits were predicting that the current recession in America may be similar to the Japanese recession that started in the early 1990s and lasted more than a decade. There were fears that the bursting of the real estate bubble in the US that had triggered a financial meltdown across the globe would cause a global economic depression similar to the Great Depression that lasted almost four years and wiped out a quarter of the US GDP.
Short, it may be, but the so-called likely end of the recession does not look sweet. The US economy remains fragile and job market conditions are terrible. The economy has lost close to seven million jobs in less than two years. The job loss continues although at a much slower pace than it did at the peak of the recession.
True, there is some good news driving the positive forecasts. In the second quarter of this year, the GDP fell by just 1% after shrinking by 6.5% in the first quarter. The manufacturing index is up and inventories are down. The housing market is looking much rosier. After falling for three consecutive years, the index of housing prices in top 20 cities has become flat and housing prices in eight of them have begun to increase. In June, sales of existing houses rose for the third consecutive month.
What has spurred such quick recovery from what seemed like a global depression just a few months ago? In two words: government intervention. According to Christina Romer, chief of the President’s Economic Advisory Council, the government’s stimulus package raised GDP growth in the second quarter by at least two percentage points.
Non-government experts give somewhat less credit to the stimulus package per se, but there appears to be a consensus that government intervention has rescued the economy from recession. Note that most of the $787 billion has not yet been spent. White House officials say that only $100 billion of the stimulus money had been spent through June. Hopefully, the remaining hundreds of billions would create green or non-green jobs for those millions who have lost employment since the beginning of the recession.
Stimulus spending has been just one of the several ways in which the US government has tried to rescue the economy, and so far, not the most significant one. Perhaps the most important government intervention was the bailout of banks that restored confidence in the ability of the banking system to cater to corporate credit needs. Next to that was the role that the Federal Reserve played by creating a number of borrowing programs for financial institutions and businesses through which it channeled vast sums of money to thaw the credit freeze confronting corporate America.
The Federal Reserve is also buying trillions of dollars worth of mortgage-backed securities which has lowered mortgage costs for homeowners and new buyers. These decisions have been heavily criticized by the media and US Congress, but they have helped rescue the economy from what could have become a second Great Depression.
The good news is that the signs of economic recovery appear to be global. A recent OECD report states that there are strong signs of economic recovery in Italy and France and clear signs of troughs in Canada, Germany, the United Kingdom and the US. Asian economies are also emerging from economic slowdowns. Such recovery, if it materializes, will strengthen global economic growth.
Pessimists, however, think that the ensuing recovery will be short-lived. There is also some mention that the current recession will not be V-shaped but W-shaped, meaning that the current expected recovery will be followed by another recession very soon. However, there is something to be said about the immense ability of the US economy to adjust to the economic environment by allowing outdated industries to die or restructure, and it is one of the factors behind the early signs of recovery.
The worst may be over and the economic situation may be better than what everyone predicted three months ago. The long-term job market situation, however, appears to be very bad. According to July employment report, a third of the unemployed have been out of work for more than six months, the highest since the government started collecting this data in 1948. The number of persons who have been unemployed for at least 15 months has increased by 74% since last December. Indeed, if recessions were measured by the state of the job market, pundits would be cautious in pronouncing the end of the recession in the US.
Will unemployment fall as quickly it has risen in the past one year? Will GDP growth translate into more jobs quickly? If the past is any guide, the answer to these questions is negative. The unemployment rate has often remained high and rising for months after the US economy has emerged from a recession.
For instance, the unemployment rate kept rising for a year and a half after the 2001 recession was over, and for a year and three months after the end of the 1991 recession. The unemployment situation is much worse in this recession than it was in the previous two recessions.
In the last two recessions, however, the government did not announce any stimulus package, and was nowhere as closely involved in the rescue effort as the current administration. President Obama’s approval ratings will not remain insulated from the state of the job market for long, and therefore, his government is expected to use stimulus funds to create jobs.
China's industrial output expanded in July at the fastest rate in 9 months but fell short of forecasts, underscoring why officials have said that the country's recovery is still not solid.
The output figures were among a series of economic data, including investment, inflation and retail sales, released by the statistics agency, which showed that the world's third-largest economy was getting back in gear, but perhaps more gradually than expected.
Leading economists believe Japan's economy may have rebounded faster than previously expected in the April-June quarter, a government-affiliated group said in a report. The country's gross domestic product may have risen 3.03% in annualized terms, surpassing the 1.98% rise forecast last month, according to the Economic Planning Association.
Such a rise would be the first time the country's economy has grown since the January-March quarter of 2008, and would represent a sharp rebound from the record plunge of 14.2% in the January-March period. The brighter forecast comes after data recently showed a pickup in exports helping Japan's industrial output rise 8.3% on quarter in the April-June period, a significant improvement from the record 22.1% plunge in the January-March quarter.
With the country's factories dialing up output as firms begin restocking after inventory adjustments, and the country's benchmark Nikkei 225 Stock Exchange marking fresh 2009 highs, the economists overwhelmingly believed the economy has already moved past the worst of its recession. Of 36 economists surveyed, 33 said the economy has already passed that point, while the remaining three said on average they see a 48.3% chance it will do so within a year. But robust recovery may remain elusive, the survey suggested, with a worsening job market and persistent price falls, known as deflation, possibly slowing further growth. The survey showed the economists expect the jobless rate to continue rising, from 5.4% in June to match the post-war record high of 5.5% in the July-September period, before setting a new record high of 5.73% in the first quarter of 2010.
As deflation sets in, core consumer prices excluding fresh food will likely continue falling until at least 2011, the economists said.
In contrast with expectations for central banks in other major economies like the U.S. to begin raising interest rates as soon as early next year, almost all the economists said they expect the Bank of Japan won't hike rates until at least July 2010.
Earlier, the BOJ decided to hold its policy rate at an ultra-low 0.10%, as was widely expected.
The Philippines economy dodged the recession that engulfed much of Asia and enjoyed its strongest performance in more than two years in the second quarter, prompting the central bank to say it may change its policy.
Second-quarter gross domestic product growth at a seasonally adjusted 2.4% from the first quarter was the highest since 2.4% in the first three months of 2007, the state socio-economic planning agency said, and beat market estimates.
The government's stimulus package -- investments in infrastructure and social services -- lifted economic output in the second quarter, offsetting stubbornly weak exports. Officials said they expect stronger growth in coming quarters as consumer spending rises ahead of Christmas and next year's elections.
'Growth came mainly from investments in construction, government consumption expenditure, and household spending,' said Romulo Virola, head of the government's statistics board.
Analysts had expected the Southeast Asian economy to expand by a seasonally adjusted 2.0 percent in the second quarter and to reverse the previous quarter's revised 2.1 percent contraction, according to the median of a Reuters poll.
Singapore revised slightly higher its economic growth in the second quarter, but warned U.S. consumption must pick up to sustain the recovery. Gross domestic product grew an annualized, seasonally adjusted 20.7% in second quarter, the Trade and Industry Ministry said in a statement. The ministry last month initially reported a 20.4% expansion.
Manufacturing surged 49.5%, construction jumped 32.7%, and financial services rose 22.8% from the previous quarter, the ministry said.
"This improvement was largely driven by the spike in output from the volatile biomedical manufacturing cluster and inventory re-stocking," the ministry said. "Financial services were boosted by sentiment-sensitive segments such as stock market activities."
"It is uncertain if these can be sustained into the second half."
Before the April to June period, the economy contracted the previous four quarters as the global recession undermined demand for Singapore's exports. The government expects the economy to fall up to 6% this year.
GDP shrank 3.5% in the second quarter from a year earlier, better than the previous estimate of a 3.7% contraction, the ministry said.
Non-oil exports, which account for about 60% of GDP, rose a seasonally adjusted 7.6% in the second quarter from the first quarter, while falling 14% from a year earlier, the ministry said. The government expects non-oil exports to contract up to 12% this year.
An economic recovery in the second half and next year will likely be muted unless U.S. consumer demand grows more than expected, Ravi Menon, deputy trade ministry, said at a news conference.
"The subdued and weak recovery that we see taking place in the second half of this year is likely to continue to next year," he said. "That's not a bad outcome if we continue to avoid financial slippages and double dip recession scenarios."
Unexpected gains in German and French gross domestic product in the second quarter brightened the outlook for the euro zone as a whole, signaling an emergence from recession. Economists surveyed by Dow Jones Newswires recently had estimated that the euro-zone economy contracted by 0.4% from the first quarter and by 5.0% from a year earlier. But a surprise comeback posted by the 16-country region's two biggest economies signal a better result.
"We now expect a slight pickup in euro-zone GDP after the strong German and French figures," said Kraemer, chief economist at Commerzbank AG in Frankfurt.
"Companies are gradually starting to invest again, and we expect an acceleration of activity in the coming months," Kraemer said.
As a result of the credit crisis, and especially the collapse of the U.S. investment firm Lehman Brothers last year, Kraemer said companies had cut back on investment spending.
"Second quarter (euro zone) GDP should show a far smaller contraction than seen in the first quarter, which should help boost market sentiment about a turn in economic activity," said ING economists in a note.
The European Central Bank's expectations that the euro-zone recovery will begin by mid-2010 now appears too pessimistic, with private-sector economists likely to bring forward expectations of recovery. The rebound will focus attention on the timing of the ECB's planned withdrawal of monetary stimulus, set up over the past two years to offset the recession and help banks through the credit crisis. According to a recent poll of economist, the majority of ECB-watchers until now haven't expected a rise in ECB interest rates through the first half of 2010.
European stock markets rose on the news as expectations grew that economies could now be coming back sooner than previously expected. Government bond markets responded by knocking down prices as the anticipated timings of interest boosts were brought forward. In trading in German government bonds, the September bund futures contract was down 0.32 on the day at 120.33.
The German economy, aided by government stimulus programs, posted its first quarterly gain since early 2008. German second-quarter real gross domestic product rose 0.3% from the first quarter, compared with economists' forecasts of a 0.2% contraction, data from the Federal Statistics Office showed. The result will be likely to bring forward forecasts on the time and pace of the German recovery from its worst recession since World War II.
France also brought a surprise, reporting that GDP grew 0.3% in the three months to the end of June, central statistics office Insee said. Analysts were expecting the euro zone's second-largest economy to shrink for the fifth running quarter, by 0.3%, prolonging a recession that has already lasted for a whole year.
"As of today, we are one of the only countries to have pulled out" of recession, Finance Minister Christine Lagarde said on radio station RTL ahead of the release, calling the figures "very surprising."
French first-quarter gross domestic product data were revised down, showing a contraction of 1.3%, sharper than the 1.2% fall initially announced. GDP fell 2.6% from the second quarter last year. French private and public consumption increased on the quarter, 0.3% and 0.5%, respectively, while investment fell 1% on the previous three months.
German GDP shrank 5.9% in the second quarter from the year-earlier period, when adjusted for the number of working days each year, the German data showed. The German statistics office said government spending and private consumption boosted economic activity in the second quarter. Construction investment and net exports were supportive too, but a running-down of stocks depressed quarterly economic growth. The statistics office also revised up GDP numbers for the first quarter of 2009. The German economy contracted by 3.5% from the preceding quarter, compared with a 3.8% drop previously reported.
However, other euro-zone economies continued to contract in the second quarter. Dutch GDP fell 0.9% from the first quarter, while Italian GDP was down 0.5%. Italy's recession eased in the second quarter, with gross domestic product contracting less than expected, preliminary data from statistics office Istat showed. Italian GDP shrank by a quarterly 0.5% in the April-June period, after a record 2.7% drop in the first three months of 2009, Istat said, without providing a detailed breakdown.
Compared with the second quarter of 2008, Italian GDP fell by 6% in April-June 2009, after dropping by the same amount year-on-year in the first three months. Dutch GDP in the second quarter posted a sharp fall as exports and investments continued to drop, a first estimate of the Dutch Central Bureau for Statistics showed. Second-quarter GDP contracted 0.9% on the quarter and 5.1% on the year, the CBS said. The annual contraction was larger than in the first quarter, when GDP declined 4.5%, which was already the largest drop since World War II.
Estonia's recession deepened in the second quarter, but the quarterly rate of decline eased, suggesting the country's economic fall may be bottoming out.
The Baltic country's gross domestic product was 16.6% lower in the second quarter compared with the same quarter of 2008, Statistics Estonia said. In the first quarter, economic output was down 15.1% from a year earlier.
The national statistics agency said lower manufacturing and construction, due to reduced domestic and external demand, weighed on second-quarter output. On a seasonally adjusted quarterly basis, Estonian GDP fell by 3.7% in the second quarter. Encouragingly, economists note that is a softer rate than the 6.1% GDP decrease in the first quarter.
"This would indicate that the pace of decline in the economy is slowing, and the contraction is likely to moderate towards the end of the year," said Annika Lindblad, an economist with Nordea Bank AB. This data "generally surprised on the upside," she said.
The Baltic region needs good news. Estonia along with neighbors Latvia and Lithuania are seeing their economies tumble as the global financial upheaval further cools their overheated economies.
Credit agency Standard & Poor's Corp. early this week downgraded its Estonia and Latvia ratings due to economic challenges. It put Lithuania on review. But of the three countries, Estonia's prospects look the least grim.
Lithuania had the worst-performing economy in the region in the second quarter, with a 22% contraction in GDP in annual terms.
Latvia has been forced to turn to the International Monetary Fund for emergency funding aid and is still struggling to keep its budget deficit compared to GDP in single digits this year. By contrast, despite a sharp economic contraction, Estonia still has a chance to keep its budget deficit under 3% of GDP and qualify for euro adoption this year if government spending is cut further. Acceptance into the single currency zone would hoist investor confidence in Estonia's small, fragile economy.
"It looks as if the economic decline has reached the bottom," said economists at Danske Bank A/S in a research note after the GDP data were released. "Estonia's economic situation is in better shape than the other Baltic states."
Finland bumped up its forecast for economic growth next year as the government ended its 2010 budget talks, and said it expected interest expenditure to rise significantly in the years ahead. The government forecast gross domestic product would grow 0.5% in 2010, above its previous forecast of 0.3% growth made in June, but said growth depended on economic recovery in Finland's key trading partners. Growth is seen returning next year after a projected 2009 GDP decline of 6.0 percent.
British gross domestic product saw a quarterly contraction of 0.7% in the second quarter according to the Office for National Statistics, compared to a preliminary estimate of a 0.8% decline. Compared to the same period last year, GDP fell 5.5%, compared to an initial estimate of a 5.6% decline. The ONS said upward revisions to production trimmed the decline in GDP.
Greece's economy suffered its first contraction in 16 years last quarter, hurt by a slump in exports and investment, and is seen sliding into recession this year as the global downturn takes a toll. Flash estimates by the country's statistics service (NSS) showed gross domestic product (GDP) shrank 0.2% year-on-year in the second quarter following a sharp slowdown in growth to 0.3% in the first three months of 2009. The economy's performance last quarter was better than expected, though. Economists polled by Reuters were forecasting a 0.7% decline in GDP year-on-year.
'The annual fall of 0.2% is quite small. A decline in imports may have limited the fall a lot,' said Chris Pryce, an analyst at Fitch Ratings.
'It is Q3 figures that matter in Greece and I expect Q3 to be worse because it includes about 80 percent of tourist arrivals. Until we have Q3 figures, we will not really know what is happening,' he said.
Quarter-on-quarter, the 250 billion euro economy, about 2.5% of the euro zone, rebounded 0.3% after a -1.2% decline in output in the first quarter.
The economy had been expanding without interruption since 1993, booming thanks to households taking advantage of the euro zone's low interest rates to buy homes and consumer goods after Greece adopted the single currency in 2001. But it now faces the risk of extended slow growth if it fails to adopt structural reforms to boost competitiveness and correct its fiscal imbalances, the EU and the IMF have said.
Economists point to the need for a new export-oriented growth model for Greece to prosper in a post-crisis world, succeeding the consumption-driven boom of the last decade. In its latest assessment earlier this month, the International Monetary Fund (IMF) underlined that the country's large fiscal and external imbalances render the economy vulnerable. It projected GDP will shrink 1.7% in 2009.
The OECD and the European Commission also see a recession this year, projecting declines in output of 1.25 and 0.9%, respectively.
'Economic activity contracted on an annual basis for the first time in the last 16 years, the result of stagnant private consumption and a continued slump in private investment and lower income from export services,' said National Bank economist Nikos Magginas.
'We expect a further decline in economic activity in the third quarter with the annual rate of growth at -1.0 for the year as a whole,' he said.
French gross domestic product posted a surprise 0.3% rise in the second quarter of 2009, according to data from statistics office INSEE. Economists polled by Reuters had forecast a 0.3% contraction from the previous three months.
According to Laurence Boone, Barclay’s Capital, Paris:
'It's a positive surprise.”
It comes from exports and particularly from consumption. That poses the question of whether the growth is sustainable over coming months given that certain factors that were supporting consumption such as the fall in inflation and the scheme to give consumers money for scrapping their old cars are likely to come to an end.
'The contribution of exports to this quarterly growth is a surprise in the French context, although it should be taken with caution. Over the medium term, positive factors that could support growth are monetary policy which will continue to be very favorable, and public investments included in the stimulus package which have yet to come through. So in summary, we've probably come out of recession, but the recovery will be weak rather than vigorous.'
(1.) German gross domestic product is on track to shrink by 5% or 6% in 2009, according to Chancellor Angela Merkel. Merkel said the economy may have reached bottom but warned that the crisis isn't over. The German government in April forecast real GDP to shrink by 6% in 2009. GDP, however, saw an unexpected return to growth in the second quarter. The second-quarter data and other figures have prompted banks and think tanks to revise or consider altering their forecasts
(2.) Germany's economy returned to growth in spring, final estimates of gross domestic product for the second quarter confirmed. GDP rose 0.3% on the quarter in April-June, after a drop of 3.5% in the previous three months. The figures were unrevised from the first estimate of GDP for the second quarter.
The figures break a sequence of four consecutive quarters of economic contraction that have constituted the worst recession in Germany since the Second World War. The recovery in Germany has also helped the broader European economy to bottom out. Euro-zone GDP fell only 0.1% in the quarter and many economists - though not, officially, the European Central Bank - expect it to return to growth in the third quarter.
The recession has led to a sharp deterioration in Germany's public finances, among other things. After originally forecasting a balanced budget for this year, the government now expects it to be around 4% of GDP. Destatis reported in a separate announcement that the general government deficit in the first half of the year was EUR17.3 billion, or 1.5% of GDP.
The GDP estimate "confirmed what we already knew, still it is balm for the soul," Carsten Brzeski, an economist with ING Bank, said in a note to clients. However, he echoed the warning of Deutsche Bundesbank President Axel Weber that the economy "is still on a drip, getting infusions from policymakers...some doubts remain whether the economy can stand on its own feet."
In year-on-year terms, gross domestic product was still down by 5.9% from the second quarter of 2008, also unchanged from the first estimate by Destatis earlier this year, and less than the 6.7% drop recorded in the first quarter. The year-on-year figures are adjusted to take account of three fewer working days in the second quarter of 2009 than in the same quarter of 2008.
The main reasons for the rebound were domestic consumption, which has been supported by government subsidies for scrapping old cars, and for employers that keep their workers on shortened hours rather than laying them off. Private consumption rose 0.7% in the quarter, while government consumption rose 0.4%. In addition, external trade made a positive contribution to the economy of 1.6%. Both exports and imports fell, by 1.2% and 5.1% respectively, but as imports fell faster than exports, the net contribution to overall GDP was positive.
By contrast, a sharp drop in inventory levels provided a hefty negative contribution of 1.9% to GDP in the quarter, as companies either chose to run down production, or were forced to by the lack of access to credit to replenish working capital. Colin Ellis, a European economist with Daiwa Securities in London, said that the drag from the inventory cycle "should now wane." Incoming orders to manufacturers rebounded sharply in May and June, and many of these will be realized in the third quarter. However, Ellis, too, warned of substantial uncertainty in the outlook for the economy as a whole, the most important being whether external demand for German products can recover sustainably, beyond the simple process of rebuilding inventories.
Elsewhere in its report, Destatis said investment in fixed assets grew 0.8%, adding 0.1% to overall growth, due entirely to a 1.4% contribution from construction output, which rebounded from its usual weather-related weakness in the first quarter. Investment in plant and machinery fell 0.5% on the quarter, after a drop of 18.5% in the first quarter.
Breaking down its government budget figures, Destatis said government revenue fell 1.1% over the six-month period, the first such drop since 2004. Tax revenue fell 3.8% and revenue from corporate profits tax was particularly hard hit, falling 46% from a year earlier.
Government spending rose 3.5% from a year earlier, due partly to increased transfers to the Federal Labor Office, which pays subsidies to companies that put their workers on shortened working hours. The subsidy scheme has been widely credited with preventing a much sharper rise in unemployment, and thus with supporting consumption during the worst of the recession.
Hungary's gross domestic product contracted by 7.6% in the second quarter compared to the same period a year ago, the Hungarian Statistics Office reported, citing preliminary estimates. The decline was bigger than the consensus expectation of a 7.1% drop. The economy shrank by 2.1% compared with the first quarter. "Overall, today's GDP numbers are a disappointment and even though we see some stabilization in the Hungarian economy, we only expect a relatively fragile recovery," said Lars Christensen, chief analyst at Danske Bank
The Dutch economy is now provisionally expected to be flat in 2010, instead of contracting 0.5% as previously forecast, government think tank CPB said. The CPB maintained its forecast that the economy would shrink 4.75% this year, however, it shaved its 2009 budget deficit forecast to 4% of GDP from 4.1%.
CPB also lowered its unemployment forecast, now projecting a rate of 8% by the end of 2010. As recently as mid-June it had seen a rate of 9.5%.
A CPB spokesman said the figures were provisional and were provided to the government as it prepares to present its budget in September.
Poland's economy grew faster than expected in the second quarter of the year, thanks to solid consumption and a large internal market, boding well for the future and diminishing further rate cut prospects. Data showed the economy grew by 1.1% year-on-year in the April-June period, well above the 0.5% forecast and the first quarter's 0.8% growth.
The zloty gained as much as 0.4% on the data.
'Certainly these are very good numbers. They should dispel thoughts of negative growth as represented by the IMF,' said Peter Attard Montalto, emerging markets economist at Nomura.
'Poland is a more closed economy and is driven by internal demand...the Monetary Policy Council will not change interest rates until the end of the year,' he said. 'But the government still has to keep an eye on the budget.'
Portugal's gross domestic product (GDP) grew 0.3% in the second quarter of 2009 compared to the previous three-month period after three straight quarters of contraction, the National Statistics Institute (INE) said. In its flash estimate, the institute said GDP contracted 3.7% year-on-year in the second quarter of 2009, the same as in the January-March period.
In the second quarter of 2008, the economy grew 0.2% quarter-on-quarter and 0.7% year-on-year. The quarter-on-quarter decline in January-March of this year was 1.6%.
Russia’s economy contracted the most on record last quarter as rising unemployment sapped consumer demand, bank lending stalled and the government failed to approve a stimulus package until just two months ago.
Gross domestic product contracted an annual 10.9% in the second quarter, the Federal Statistics Service said, citing preliminary data. The median estimate in a Bloomberg survey of seven economists was for output to shrink 10.2%. The service’s data go as far back as 1995.
Russia’s economic decline is worsening after output contracted 9.8% in the first quarter, ending 10 years of expansion that averaged close to 7%. The worst global financial crisis since the Great Depression undermined demand for Russia’s oil, natural gas and metals. Industrial production plunged as companies depleted stocks and struggled to raise funds during the credit crunch.
“We can’t develop like this any longer,” President Dmitry Medvedev said during a meeting with political party leaders in the Black Sea resort of Sochi. “It’s a dead end. And the crisis has placed us in a situation where we will have to make decisions on changing the structure of the economy.”
The ruble weakened for a fifth day versus dollar, its longest losing streak since February, slipping 1.4% to 32.2419 per dollar in Moscow, the lowest level since July 13. The currency lost 1.4% against the euro to 45.7151. Those movements left the ruble at 38.2879 against the central bank’s target currency basket.
Russia “crumbled” after commodity prices collapsed, Medvedev said. Energy, including oil and natural gas, accounted for 68.8% of exports to the Baltic states and countries outside the former Soviet Union in the first six months of the year, Russia’s Federal Customs Service said last week.
Urals crude oil, Russia’s chief export earner, averaged $61.03 a barrel during the last quarter after reaching a record $142.5 in July 2008.
Russia failed to free itself of its reliance on commodities during Prime Minister Vladimir Putin’s tenure as President between 2000 and 2008, said Natalia Orlova, chief economist at Alfa Bank, Russia’s biggest privately-owned lender.
“Because of high oil prices, capital came in; banks transferred this capital into the economy,” she said. “Rising wages fed consumer growth, so there was no reason to invest or create new production. Now capital has stopped coming in and consumption has stopped. This model has ceased to exist. We don’t have a new one.”
“The planned fiscal relaxation might fail to stimulate private consumption in the face of significant uncertainty about future income,” the International Monetary Fund said in a recently published report. “Absent a more determined policy intervention, there is a risk that banks will continue to struggle to adjust balance sheets, stifling credit expansion and impeding a recovery.”
Russia’s economy will need between four years and five years to match last year’s pace of growth, Finance Minister Alexei Kudrinsaid. GDP in 2008 grew at the slowest pace since 2002, expanding 5.6% compared with 8.1% a year earlier. The IMF forecasts a 6.5% economic contraction for Russia this year, followed by growth of 1.5% in 2010.
The central bank’s five interest-rate cuts since April 24 have failed to spur lending as banks hold back on concern borrowers can’t repay loans. Lending to consumers dropped 1.1% in June for the fifth consecutive monthly decline and banks shrank their corporate loan books by 1.2%, according to central bank data.
GDP expanded a non-seasonally adjusted 7.5% from the previous quarter after contracting 23%in the first three months, the office said
The Spanish economy grew a less-than-previously-stated 0.9% in 2008, official data shows, as a long housing boom came to an end and recession loomed. Gross domestic product (GDP) was revised down from growth of 1.2% year-on-year previously announced for 2008, National Statistics Institute INE said.
The euro zone's fourth-largest economy entered recession in 2008, contracting 0.3% in the third quarter versus the second, and a further 1.0% in the fourth. Quarterly figures will likely be revised in a full breakdown to be released later.
INE said the change was mainly due to domestic demand, whose contribution swung to negative from positive, while foreign demand increased its contribution.
The government has been plowing public funds into the economy in an attempt to offset the impact of a housing and construction collapse, which has caused unemployment to soar to around 18%.
The government was quick to hail mildly positive recent economic data as the first glimpses of recovery, but the economy still shrank 1.0% quarter-on-quarter in the second quarter -- contrasting sharply with surprise growth in other euro zone peers France and Germany.
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