GDP UPDATE
July 2010
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
The International Monetary Fund (IMF), in its world economic outlook, has noted that the world economy will expand 4.6% in 2010, the biggest gain since 2007, compared with an April projection of 4.2%. The revised forecast reflects a stronger-than-expected first half.
According to the Washington-based organization, Canada and the US are leading advanced economies out of the worst recession since World War II, trailed by Euro-area countries that need additional measures to boost confidence in their banks.
It further noted that faster expansions in Brazil, China and India are helping to protect the global recovery as a sovereign-debt crisis weighs on Europe.
Economists have never been too impressed with the composition of growth in gross domestic product in the first quarter. More than half of the GDP increase came from inventory rebuilding, a temporary factor. The revisions to this final reading on first-quarter GDP only highlighted the unbalanced nature of growth as consumer spending was revised lower.
Final sales, which exclude inventories, increased at a 0.8% annual pace, revised down from 1.4%.
First-quarter growth, originally estimated two months ago at a 3.2% annualized rate, was revised down to 3.0% growth in last month's estimate. The revisions come from more complete data than were available at the time of the first and second estimates. The downward revision was a surprise. Economists surveyed by MarketWatch had been expecting no revision in the third estimate.
Growth in the first three months of the year decelerated from the 5.6% expansion in the fourth quarter of 2009. The figures are seasonally adjusted and adjusted for price changes
Economists are forecasting stronger growth -- about 3.8% on an annualized basis -- in the second quarter ending June 30. But big questions remain about prospects for economic growth during the second half of the year.
The revisions to first-quarter GDP were in two major areas: consumer spending and trade. Gross domestic purchases -- sales to U.S. residents -- rose at a 3.5% annual rate, revised down from 3.6%. Corporate profits increased a revised $116.9 billion or a 8.0% quarterly rate, in the first quarter. This is up from the initial estimate of a 5.5% gain.
Profits generated by domestic financial corporations increased $11.2 billion, while domestic nonfinancial profits rose $79.6 billion.
Brazilian financial market analysts and economists have raised their estimates for the country's 2010 gross domestic product growth for the 16th consecutive week, according to the Central Bank of Brazil's market survey. The average estimate for 2010 GDP growth increased to 7.2% from 7.13%. Estimates for 2011 were steady at 4.5%. Brazil's GDP fell 0.2% last year.
The central bank's weekly survey tracks the opinions of 100 analysts and economists from banks and brokerages, reporting the average of their expectations.
In the meantime, the 2010 year-end forecast for the IPCA inflation rate was kept at 5.55%. It is still well above the central bank's inflation forecast of 4.5% for the year.
The average estimate for 2011 inflation was maintained at 4.8%. The rolling 12-month IPCA inflation rate through May was 5.22%, according to the Brazilian census bureau, or IBGE.
The analysts' average forecast for the benchmark Selic interest rate at the end of this year was increased to 12.13% from 12%. Currently, the Selic is at 10.25%. For 2011, analysts kept the Selic rate view at 11.75%.
The average expectation for debt-to-GDP ratio at the end of this year was kept at 41%.
The forecast for the 2010 foreign-trade surplus increased to $15.72 billion from $15.36 billion. Analysts expect a current account deficit of $47 billion by the end of this year.
Analysts expect Chile's gross domestic product to surge 5.9% on the year in the second quarter, according to the median forecast of 35 local analysts in the central bank's monthly economic outlook survey.
With GDP surging in the second quarter, following a 1% annual increase in the first quarter, the Chilean economy is showing signs it is quickly recovering from February's powerful earthquake. Analysts polled expect GDP to surge 4.8% on the year in 2010, higher than the 4.5% gain seen in last month's survey.
For 2011, they say GDP will likely grow 5.8%, a slight gain from last month's outlook of a 5.7% climb. For 2012, GDP is seen growing 5.3% on the year.
The central bank expects GDP to grow 4% to 5% in 2010.
China's gross domestic product will likely grow around 9.5% this year and a double dip in the economy is unlikely, a key government economist said in comments published by the state-run People's Daily.
The comments by Lu Zhongyuan, vice director of the Development Research Center of the State Council, come after two purchasing managers’ indices last week showed China's manufacturing activity slowed in June. Economists expect data due out soon to show China's economic growth slowed to around 10% in the second quarter from the previous quarter's 11.9%.
Lu said China's exports will grow 10% to 15% this year despite the euro-zone debt crisis, according to the report
India's gross domestic product growth is expected to return to "9 percent plus" this year, the country's Trade Minister said recently, led by strong corporate performance and rising savings levels. Anand Sharma also said he expected inflation, which is fuelled by food demand, to be brought under control.
"We are seeing strong economic growth. We are going back this year to plus 9% GDP growth," Sharma told reporters in Singapore at the end of a two-day trip aimed at drumming up investment in the infrastructure sector.
The Indian finance ministry has forecast 8.5% growth for Asia's third-largest economy in the current year, following a 7.4 expansion in the previous year. The IMF has forecast 8.8% growth.
Strong corporate sector performance and high levels of saving and investment have led to higher growth, Indian officials said last month. India is saving and investing about 34% of GDP, compared with around 30% prior to 2003.
Inflation, running at over 10%, has been a mounting concern, however, Sharma said he expected it to be brought under control this year.
"Inflation has been there, fueled by food articles demand and supply issues last year. We are assured this will improve this year," he said.
Japan says its economy will expand 2.6% in the current fiscal year to March 2011, higher than an earlier estimate of 1.4% growth.
The Cabinet Office said the upward projection of Japans' gross domestic product was due to brisk growth in Japan's exports and improving corporate earnings.
South Korea's central bank updated its financial forecast for 2010, increasing expected GDP growth to 5.9%, a huge increase from 2009's 0.2%, the Bank of Korea announced. Additionally, the group updated the estimated GDP growth of 2011 to 4.5%, somewhat lower than 2010's. In addition to the GDP growth, demand will also grow including exports and facilities investments.
While the unemployment rate is expected to increase to 3.7% from last year's 3.6%, there will be an additional increase of employed persons to the amount of 330,000. For 2011, the number of persons employed will jump by 230,000 and the employment rate will drop to 3.5%.
Current account surplus is expected to shrink from 2009's $42.7 billion to $21 billion. For 2011, the current account surplus is expected to be around $11 billion as imports will increase on a much larger scale than exports and the services account deficit will also widen.
Finally, during the second half of 2010, the rate of GDP growth will decline to between 0.7-0.9% as the private sector is expected to lead the rise in economic activity.
Prime Minister Mirko Cvetkovic stated that the Serbian people will be able to see the first signs of economic recovery in the second half of this year, when GDP growth and an increase in the employment level are expected.
In an interview with Tanjug news agency, Cvetkovic emphasised that a full economic recovery is expected to take place in 2011, adding that people will be able to see an improvement when the economic growth rate rises above 2% and reaches nearly 3% of the GDP, which is predicted to happen next year.
At the micro level this will happen when the employment rate increases as a result of GDP growth and vice versa, he observed.
Official statistics show that Serbia exited recession in the first quarter of 2010, as a GDP growth of 0.6% to 0.7% was seen then when compared to the same period last year, Cvetkovic highlighted.
The Prime Minister said that although no official statistics are available for the second quarter he is convinced that the GDP growth rate will be over 1%, adding that certain indicators give reason to believe that it could be nearly 2%, which will bring the economy closer to growth rates seen prior to the crisis.
There could be surprises in store for us regarding expected growth rates but not negative rather positive ones, because now the growth of the Serbian economy has a far better basis than it did prior to the global economic crisis, he explained.
These estimates are based on statistical data on industrial growth and exports during the first six months of this year, taking into consideration the obvious fact that national economy is now entering new markets outside the country, he underlined.
The Serbian government’s long term strategy will mostly focus on creating an export oriented economy. This will make the economy sustainable in the long term and it will not be vulnerable to temporary disturbances if they occur, outlined Cvetkovic.
Looking at official statistics, it is surprising to see that some countries in the region, as well as Europe, have still not exited recession. This presents a cause for concern because these countries are a market for the Serbian economy, the Prime Minister asserted.
Serbia’s high double digit figure of exports growth rate is a success which gains in significance even more in the light of the fact that countries still in recession are importing Serbian goods, stressed Cvetkovic.
Anti-crisis measures implemented by the Serbian government played a big role in Serbia’s exit from the recession, he remarked, adding that the partial recovery of the global economy also helped. Growing exports and industrial production in the food sector, which was least hit by the crisis, contributed to the climb out of recession. The worst hit was the durable consumer goods sector, he elaborated.
Britain's official statisticians have confirmed that the economy grew by 0.3% in the first three months of the year, marking the second quarter of recovery from a deep recession.
Zambia has cut its economic growth forecast for 2010 to 5.8% from 7% due to the possibility of a sluggish global economic recovery, Finance Minister Situmbeko Musokotwane said.
The government and Bank of Zambia are also aiming for inflation of 8% by the end of the year, Musokotwane said in a letter to the International Monetary Fund. Annual inflation stood at 7.8% in June, slowing steadily from double-digit rises last year.
Despite the lower economic growth forecast, outlined in the June-dated letter, senior Treasury officials said growth was likely to come in above the new forecast.
"We revised the target downwards because of the global economic crisis but agriculture and mining have performed very well and we expect to grow the economy beyond 5.8%," Likolo Ndalamei, Secretary to the treasury, told Reuters.
In the letter, Musokotwane said growth in Africa's biggest copper producer would be driven mainly by new investments in mining, power generation, construction and agriculture.
"As agricultural output reverts to trend levels, real GDP growth is expected to fall marginally to 5.8% in 2010 before rising to 6% thereafter," Musokotwane said.
"A number of large investments in the mining and energy sectors are expected over the medium-term." Musokotwane also said Zambia would start financing talks this year for the 600 megawatt Kafue Gorge Lower power project and the 120 MW Ithezi-Tezhi project. Both are expected to be completed by 2017.
Mines mothballed during last year's global economic slump have reopened, while tourism may receive a boost in the wake of the soccer World Cup in South Africa.
Musokotwane said domestic revenues were expected to rise to 16.3% of GDP due partly to better tax collection and an increase in excise tax on diesel from 7 to 10%.
"Downside risks, however, still remain amidst uncertainties about a full-fledged global recovery in 2010 and rising oil prices," Musokotwane said.
Musokotwane said the government would reduce its spending by 0.9 percentage points of GDP relative to 2009 to allow for more capital spending, which was expected to rise to 4.6% of GDP.
"The overall fiscal deficit is expected to remain at 2.5% of GDP, and domestic financing is expected to remain as programmed at 1.9% of GDP," he said.
Musokotwane said the government's spending plans were consistent with a year-end inflation target of 8 percent.
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