GDP WORLD MARKET
UPDATE
December 2010
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
Economists are more positive about economic growth in 2011 in the United States, according to a survey by the Wall Street Journal. The 55 respondents raised their growth projects for gross domestic product for nearly every period, including the current quarter, the paper said.
On average, the economists now predict GDP growth of 2.6% in the current quarter, up from the 2.4% growth projected last month, the paper added.
The U.S. economy has been seeing some signs of growth. It grew 2.5% in the third quarter and 1.7% in the previous quarter. However, recent indicators like housing, job data and mortgage rates have been inconsistent, creating doubts whether the economic growth is losing steam.
The economists now see stronger expansion in the first half of 2011, with growth picking up speed as the year progresses, WSJ said in the report, adding that GDP is expected to grow about 3% in 2011.
"Meanwhile, they have reduced the odds of a double-dip recession to 15%, the lowest average forecast of the year, from 22% in September survey," the paper added.
Most of the respondents state that there are better chances of the economy outperforming the forecasts in 2011 than underperforming, according to the report.
The possible extension of tax cuts from the Bush era will also help the economy, the survey stated.
However, since the survey was conducted from Dec. 3-8, not all forecasts take the tentative tax deal into account, WSJ said.
In the meantime the effect of the second round of quantitative easing remains a little uncertain. The U.S. Federal Reserve announced the QE2, as it is popularly known, in the first week of November, to boost inflation and economic growth.
While the bond-buying program would add fuel to the recovery, the economists said the effect may not be large, the paper said.
Boston Fed's Chairman, Eric Rosengren, expects the economy to add about 700,000 jobs or reduce the unemployment rate by half a percentage point by 2012.
According to WSJ's survey, 42 of the 52 respondents believe this estimate to be too optimistic.
This is one of the risk factors associated with economic growth next year.
"Though more than 4-in-5 economists don't see the unemployment rate increasing from here, the pace of job growth still is expected only to bring the jobless rate down slowly," the paper said.
Housing starts also continue to be under stress, though they show some signs of stabilization. The economists expect continued moribund housing starts in the new year, while home prices are flat, WSJ said.
Gross domestic product in Latin America and the Caribbean likely will grow an upwardly revised 6% on the year in 2010, the U.N.'s Economic Commission for Latin America and the Caribbean said recently. The commission known as Eclac, headquartered in Santiago, also increased its GDP growth outlook for next year to a 4.2% on-year gain.
In a report published in July, Eclac expected regional GDP to grow 5.2% in 2010 and 3.8% in 2011, following 1.9% contraction in 2009. The more-optimistic outlook for the region is the result of a consolidation of an economic recovery due to countercyclical measures and expansive monetary policy. The countercyclical measures implemented by most of the governments in the region have permitted a rapid recovery to levels that are in general higher than they were prior to the crisis.
The 6% gain expected for this year is the highest annual gain since 2004, the commission said.
Inflation in the region, meanwhile, will be 6.2% this year, compared with 4.7% in 2009, while posting a combined current account deficit of 1.1% of GDP.
The unemployment rate in the region likely will fall to 7.6% from 8.2% last year, the U.N. body said.
The Korean economy is expected to grow by 4.5% next year, according to the economic outlook for 2011 released by the Bank of Korea in which the central bank forecast that economic growth will slow down next year. However, exports and private consumption are anticipated to continue its upward trend.
"Korea will continue to see an increase in outbound shipments with domestic consumption and investment in equipment growing steadily. The nation is expected to post 4.5% growth next year."
BOK officials explain that the nation's economy will show low growth in the first six months and high growth in the latter half of the year.
This comes as front loading of budgetary spending is expected to decrease in the first half of 2011 while economic recovery in advanced countries will accelerate during the July to December period. Employment conditions are also expected to improve.
"The number of employed people is expected to increase by 260,000 next year and the unemployment rate will drop from this year's 3.8% to 3.5%."
For this year, the central bank projected a 6.1% gross domestic product growth rate, which is the highest figure in eight years. This is also a 0.2 percentage point increase from its previous forecast in July. The central bank says this situation is due to the base-period effect in the course of recovering from the global financial crisis.
Meanwhile, upward pressure on consumer prices is expected to continue next year.BOK officials expect the inflation rate to stay above the 3% target for a prolonged period of time.
BOK officials say that a considerable amount of uncertainties still remain in the world economy, that can affect economic situations next year. This includes geopolitical risk factors resulting from North Korea's recent artillery shelling, debt woes in Europe, inflation in China and Washington's second quantitative easing program.
The Plan panel recently stuck to the projection of 8.5% economic growth this fiscal year, even as the top advisor of the Finance Ministry has said that the target would be revised upwards because of robust 8.9% economic expansion in the second quarter.
"The growth rate is very good. There will be base effect because growth began to pick up last year. I still say 8.5%. 8.5% is pretty good," Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters on the sidelines of a function to mark 5 years of Jawaharlal Nehru National Urban Renewal mission.
Ahluwalia's remark is in contrast with Chief Economic Advisor Kaushik Basu's optimism that growth projections for this fiscal period would be revised in the mid-term economic review. "We had earlier given a projection of 8.5%. We will revise it. It is very, very likely that it will be revised a little bit (upwards)," Basu had told reporters.
Basu's comment came within days of the government data release showing that the country registered an economic growth of 8.9% during the July-September quarter. The Government also revised the first quarter growth to 8.9% from 8.8%, taking the pace of economic expansion to 8.9% in the first half.
Indian economic growth had slowed down to 6.7% during 2008-09 due to the impact of global financial crisis from average of 8.7% in the previous five years. After the government provided stimulus, the economic growth accelerated to 7.4% during 2009-10.
The growth rate in the first half is quite tremendous, also because stimulus was partially withdrawn this fiscal. On widening the current account deficit, Ahluwalia said, "We are watching the developments in CAD very carefully, it is true that this year CAD will be wider. But capital flows are adequate. So I don't expect a problem." He added, however, that the situation on CAD front should continue to be watched since these are uncertain times.
Japan's economy grew at a faster pace than initially forecast in the July to September quarter, spurred mainly by a bigger-than-reported increase in capital spending. GDP grew at an annualized pace of 4.5% in the three months ended Sept. 30, faster than the 3.9% reported last month, the Cabinet Office said in Tokyo.
Private consumption, which accounts for about 60% of GDP, also fueled the expansion as households stepped up purchases of energy-efficient cars ahead of the expiration of a subsidy program.
In nominal terms, the Japanese economy expanded by 2.6%, less than the 2.9% earlier projected, as price declines deepened.
Despite the upward revision in the third-quarter GDP growth, the Japanese economy is most likely to contract in October-December period due to a global slowdown and a stronger currency.
The International Monetary Fund (IMF) has upgraded its 2011 growth forecast for the Philippines, noting improved prospects for the country. Vivek B. Arora, IMF assistant director for the multilateral institution’s Asia and Pacific department, announced a 5% gross domestic product (GDP) growth forecast for next year, up from the 4.5% bared last October.
"The reason [for the upgrade] is we have taken into account improvements in the investment environment, the initiatives that are underway and the general sense that growth prospects may improve for the Philippines," he said at a briefing.
"For a long time, people looked at the Philippines as lagging. Growth in the Philippines was lower than key competitors in the region. The 5% we project in the future is actually in line with what we project for other countries like Thailand and Malaysia," he added.
In its World Economic Outlook released last October, the IMF said it expected Thailand and Malaysia to grow by 4% and 5.3%, respectively, next year.
Mr. Arora said investments made under the government’s public-private partnership (PPP) initiative to address the country’s infrastructure gaps would add to growth.
"PPPs will be there in 2011 but it will slowly increase over time. We do take into account that the program will start in 2011 but the impact may be a little small because it is just starting," he said.
The government officially has a 7.0-8.0% growth target for 2011 but officials have lately been playing up a 5% uptick assumed in the 2011 budget.
For this year, Mr. Arora said the IMF still expected the Philippines to grow by 7%. GDP growth averaged 7.5% as of the end of September, well above the official 5.0-6.0% target. He said the IMF was also confident the government would be able to keep the 2010 budget deficit under a P325-billion cap.
"Going forward, I think the key is build up [the] revenue base so that spending on key priorities like public investment, social services can be increased over time," he said.
He added that with revenues falling below targets this year, there is a need for the government to step up its tax administration efforts and consider new revenue generating measures.
Asked if the government should start with rationalizing fiscal incentives next year, he replied: "If they start early, then it can help."
The economic growth in Azerbaijan in the first 11 months of this year was 4.5% and was expected to rise by 4.7% to 4.8% by the end of the year, according to officials.
"The GDP production in the country by the end of 2010 is expected to grow by 4.7-4.8%," said Arif Veliyev, chairman of the Azerbaijani State Statistics Committee.
The Azerbaijani statistics chief attributed the year-end boost to the relatively high non-oil GDP growth between January and November, which amounted to 6%. However, there was a decline in food production in Azerbaijan, by 8-9%, and the grain production declined by as much as 25%, Veliyev said.
The government of Azerbaijan has predicted a growth of 6.6% for this year and 4.5% for 2011.
The World Bank, however, has predicted a 5.2% growth for Azerbaijan in 2010. The UN body predicted a 9% GDP growth for the country in 2011.
Before the current global financial and economic crises, Azerbaijan posted a 10.8% growth in 2008.
The Azerbaijani statistical office said that the country's inflation would reach 5.6% to 5.7%, after having averaged 5.5% for the first 11 months of this year.
Estonian economic growth will probably slow in the fourth quarter from the 5% annual pace in the previous three months due to a stronger year-earlier comparison, the Finance Ministry said.
“The strong confidence of companies and households points to a continuation of positive developments, although fourth-quarter growth will probably trail third-quarter due to the growth trend that started at the end of last year,” the ministry in Tallinn said in an e-mailed statement today. Still, average 2010 gross domestic product growth will exceed the ministry’s August forecast of 2%, it added.
Estonia’s gross domestic product expanded 5% from a year earlier in the third quarter, the fastest increase since the fourth quarter of 2007, compared with a preliminary estimate of 4.7%, the Tallinn-based statistics office said on its website.
Domestic demand has recovered faster than expected and will increasingly contribute to growth in coming quarters, the ministry said. A decline in investments is stabilizing, it added.
Economies of the European Union rose 0.5% in the third quarter, Eurostat said, revising the preliminary estimate by 0.1 percentage points. Eurostat held to its estimate of 0.4% quarter-to-quarter growth for the 16-nation eurozone.
From the third quarter a year ago, the EU's economy has grown 2.2%, while the eurozone economy has grown 1.9%, Eurostat said.
The figures compare to 0.6% quarter-to-quarter growth in the United States and 0.9% in Japan.
In Europe, Sweden led quarter-to-quarter growth with the GDP gaining 2.1%. In Poland, growth reached 1.3%, while in the Czech Republic growth was pegged at 1.1%. The estimate for growth in Germany was unchanged at 0.7%.
At the bottom of the list, the gross domestic product in Greece shrank for the fourth consecutive quarter, dropping 1.1%, a figure unchanged from a month ago. Romania's economy slowed 0.7%.
Data was not available for Ireland, which accepted a $90 billion international aid package this week to help the government restore confidence in its ailing banks. Ireland's economy shrank 1.2% in the second quarter compared to the first after growing 2.2% in the previous quarter.
French Economy Minister Christine Lagarde said recently that a 1.7% increase in gross domestic product this year would be a nice end-of-year surprise but for now she was sticking to a forecast of a "big 1.6"%. She repeated the government's forecast of 2% growth next year..
Lagarde was speaking on RMC radio after a weekend during which prime minister Francois Fillon said growth would be clearly above initial government forecasts.
The 2010 budget is based on 1.4% GDP growth but the government has since said growth is likely to hit 1.6% or so this year.
Germany's Bundesbank said it expects that "after the fulminant catching-up process," the German economic recovery will continue over the next two years. The central bank predicted GDP growth of 3.6% this year, 2.0% next year and 1.5% in 2012. Yet, it pointed to a marked statistical overhang next year as the reason why 2011 average growth is higher than that of 2012.
While exports will remain the main growth-driving force, they will increasingly stimulate domestic demand, the report said. Equipment and construction investments are also seen boosted by low interest rates, while private consumption is supported by rising employment and wages, it remarked.
Average annual unemployment is predicted by the Bundesbank to fall from 3.2 million this year to 3.1 million next year and further to 2.9 million in 2012.
German inflation will likely increase at a "stability-consistent" path, the central bank said. It forecast German HICP inflation to rise from 1.1% this year to 1.7% next year and fall back to 1.6% in 2012. German HICP inflation ex-energy is tabled at 0.7% in 2010, 1.1% in 2011 and 1.5% in 2012.
Due to the healthy economic recovery, Germany's fiscal situation is seen improving. The Bundesbank forecast that the public deficit will fall to 2.5% of GDP next year from a projected 3.5% this year. "In the year 2012, the improvement of public finances could continue if the budget consolidation course is upheld," it asserted.
As downside risks to its forecast, the Bundesbank noted "continuing uncertainties" on financial markets related to the "fragile state" of public finances in a row of industrialized countries. The main risks for price stability are coming from international commodities markets, the central bank said. Given the expected strong global growth, a stronger rise of commodity prices "is not unlikely," it said. This would have an immediate impact on energy and food prices, it pointed out.
While wages could also rise more strongly than expected, this would only have an impact on inflation at the end of the forecasting period, the Bundesbank remarked.
On the other hand, if the economy develops worse than expected, inflation rates could develop more moderate than forecast, it noted.
For its forecasts, the central bank assumed an effective foreign exchange rate of the euro of $1.34 in 2010, $1.39 in 2011 and again $1.39 in 2012. Moreover, the forecasts are based on the assumption of a crude oil price of $79.5 this year, $88.6 next year and $90.7 in 2012.
The Bundesbank's forecasts form part of the new ECB's staff forecasts. Upbeat expectations issued by the German central bank suggest that Germany is expected to remain the key growth driver in the common currency region in the month ahead.
The new ECB forecast puts 2010 GDP in a range of 1.6% to 1.8%, with a growth midpoint of 1.7%. That compares with a range of +1.4% to +1.8% and a midpoint of 1.6% in the September forecast. For 2011, the staff now projects growth in a range of 0.7% to 2.1%, yielding a midpoint of 1.4%. In September, the forecast for next year was also in an extremely wide range of +0.5% to +2.3%, yielding the same midpoint of 1.4%.
The ECB staff also released its first GDP forecast for 2012, putting GDP in a wide range of +0.6% to +2.8%, for a midpoint of +1.7%.
Following the release of the new staff forecasts, ECB President Jean-Claude Trichet said the new growth projections reflect recent indicators showing "the positive underlying momentum of the economic recovery in the euro area remains in place."
However, risks to growth are "tilted to the downside with uncertainty remaining elevated," the ECB chief cautioned.
Turkey's gross domestic product (GDP) managed to grow by only 5.5% in the third quarter, to TL 28.76 billion, despite expectations of at least 6.6%, which also marks a sharp decline compared to the first two quarters, in which the country posted double-digit growth rates with 11.8% and 10.2%, respectively.
Factors that led to this relatively poor performance include an insufficient contribution from the agriculture and trade sectors in the mentioned period and a contraction in export revenues due to protracted problems in eurozone countries, which are Turkey's primary customers, accounting for nearly half of all its sales abroad.
The Turkish Statistics Institute (TurkStat) announced that the GDP recorded a growth rate of 5.5% in the third quarter in constant prices compared to the same three-month period of a year ago. Market expectations for the year-end growth rate are displaying variations between 7 and 8%. The economy is expected to register a growth rate of around 4.5% in the coming year.
Despite the ebb in the rates in the third quarter, the Turkish economy is still in a much better condition compared to the rest of the world and is one of a few countries that are still able to make progress in a post-crisis environment that has left many trying to recuperate from losses.
The highest jump was realized by the construction sector in the third quarter, which enjoyed an increase of 24.%, thanks to a large basis effect, given that it had suffered a sharp decline of 18.2% in the same period of the previous year.
The fisheries, which had grown by 9.8% in the third quarter of 2009, continued their good run this year too, posting a 13% rise and ranking as the second-fastest growing sector. The financial intermediaries industry came in third with 12.7%, improving its performance a year before, which was 9.5%.
The manufacturing industry was jubilant about being able to post an increase of 8.7% in the stated period, counterbalancing the 4.2% contraction a year ago.
The growth rates of the remaining major sectors were 0.1% for mining and quarrying; 11.4% for electricity, gas, hot water production and distribution; 7.5% for wholesale and retail trade; 0.7% for hotels and restaurants; 6.7% for transportation, warehousing, storage and telecommunications; 6.4% for the activities of financial intermediary institutions; and 2.7% for house ownership.
The major sectors that sustained drops in the third quarter were agriculture, animal husbandry and forestry (0.8%); education (0.5%); and health affairs and social services (1.1%).
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