GDP UPDATE
March 2010
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
U.S. real gross domestic product increased at a 5.9% seasonally adjusted annualized pace in the final three months of 2009, revised up from 5.7% estimated last month. The revision was exactly in line with expectations of economists surveyed by MarketWatch. Read our complete economic calendar. The revisions "add further evidence that manufacturing remains the strongest sector in the economy, helped by global trade and the inventory cycle," said Anna Piretti, an economist for BNP Paribas.
In the third quarter, GDP rose at a 2.2% annual pace. GDP fell 6.4% in the first quarter of the year and 0.7% in the second quarter. Read the full report on the government's website.
Nearly two thirds of the growth in GDP in the fourth quarter was accounted for by changes in inventories, not by final sales. Businesses had been reducing their overstocks at the fastest pace in generations earlier in the year, and then sharply slowed the pace of reductions in the fourth quarter. The slowdown accounted for most of the fourth-quarter growth.
Although GDP grew at the fastest pace in six years, final demand in the economy was tepid, rising 1.9% annualized, revised down from 2.2% earlier. Excluding exports, final sales to U.S. purchasers rose at a 1.6% annual rate.
Even with healthy growth in the second half of the year, it was the worst year for GDP since the 10.9% drop in 1946, when the United States geared back to a peacetime economy. The economy shrank 2.4% in 2009 compared with 2008, the government said. In 2009, business investment fell the most since 1942, while imports fell the most since 1946.
Compared with the first estimate of fourth-quarter GDP released a month ago, investments in inventories were higher, business investments were higher, exports were higher, and prices were lower. On the other hand, consumer spending was weaker, and government spending fell more. Consumer spending increased at a 1.7% annual rate, down from 2.8% in the third quarter when the government's cash-for-clunkers program boosted auto sales.
Business investment grew at a 6.5% annual rate, the first increase since the spring of 2008. Investments in equipment and software increased at an 18.2% annual rate, but investments in structures plunged at a 13.9% pace. The strong gain in capital spending is "consistent with our view that business investment will be a major factor propelling this recovery forward," said Merrill's Dutta.
Investments in homes increased at a 5% pace, the second straight increase after 14 consecutive quarters of falling investment.
Foreign trade added to growth as well, with exports of goods increasing at a 22.4% annual rate, the best in 13 years.
Direct government spending fell at a 1.2% annual rate.
The data published by the Central Bank of Venezuela (BCV) at the end of the fourth quarter of 2009 make clear that the recession has deepened despite the recovery in oil prices. In the fourth quarter of 2009, the price of the Venezuelan oil basket averaged US$70.20, thus leaving far behind a decline due the global financial crisis. However, the Gross Domestic Product fell by 5.8%.
The statistics show that in the fourth quarter of 2009, private consumption declined 6.7%, investment plummeted 19.6%, government spending slightly increased by 2.1%, although it was the smallest increase in the past seven years. The only positive data was the surge of Venezuelan oil exports (56.2%), due to the rebound in oil prices.
As a result, the Venezuelan economy recorded its deepest decline in the fourth quarter of 2009 since 1994, excluding the period 2002-2003, when the lockout and the political upheaval hit Venezuelan production seriously.
The private sector plunged 7% to accumulate seven quarters of decline or growth around zero, while the public sector fell 0.3%. If there is no output growth, sales fall, private companies do not need to hire new staff and there are no profits to increase salaries.
Further, Venezuela has the highest inflation rate in Latin America. As a result, purchasing power is declining every month.
The Central Bank admits that the decline in private consumption has a significant influence in the "fall in real income," which leads to a decline of the purchasing power of salaries. According to economic forecasts made by 15 private firms such as Barclays, JP Morgan and Citigroup, Venezuela could reach a 0.5% growth this year, although the Venezuelan oil basket is around US$69.82 thanks to increasing oil demand from China and other emerging economies.
Australia's economy grew at the fastest pace in almost two years last quarter on a potent mix of fiscal pump priming, business investment and consumer spending, and all the signs favor a further acceleration this year.
Gross domestic product, or the value of all goods and services produced, rose 0.9% in the fourth quarter, from the previous quarter when it increased by just 0.3%. The upbeat result supported the Reserve Bank of Australia's (RBA) decision to lift interest rates this week, and the likely need for more hikes as growth nears the economy's speed limit.
"You certainly can't keep a good economy down," said Michael Blythe, chief economist at Commonwealth Bank. "And recent indicators suggest more to come as we move into 2010."
"I doubt the RBA expected it to move quite so quickly," he added. "We're expecting a cash rate of 5% by year-end, and that looks like a good call in light of these numbers."
The central bank raised its cash rate by 25 basis points to 4.0%, the fourth rise in five policy meetings, and flagged further increases back toward a more normal range of 4.25 to 4.75%.
China’s government said it will again aim for economic growth of around 8% this year as it attempts to rein in lending and manage a transition from a massive stimulus program. The target was widely expected. China has been seeking annual economic growth of 8% since 2005; it set a 7% target for 2004. This year, as with other years, the non-binding target flags Beijing’s intentions: Last year, the government was determined to revive the economy amid the global financial crisis. This year, it seems to be taking steps to tackle risks from its massive stimulus program, while providing support for the economy amid uncertainties in the global economic outlook.
China, the world’s third-largest economy, has already begun to restrain credit growth as the economy has rebounded. Despite such changes in policy, Premier Wen Jiabao reiterated in his annual report to lawmakers that the government will continue its "active" fiscal policy and "moderately loose" monetary policy. It will also maintain the "basic stability" of the yuan exchange rate, he said.
By continuing the policy stance, Wen signals that China still wants to support the economy. He cautioned that "there is insufficient internal impetus driving economic growth." But the policy wording still gives Beijing room to scale back stimulus; the central bank has twice ordered banks to keep a bigger portion of deposits on reserve this year to curb loan growth, without changing the monetary policy stance.
Setting the same economic growth goal as last year, even though the outlook has improved dramatically, also represents a shift toward tackling challenges, like surging housing prices and potential bad debt, away from last year’s single-minded focus on reviving the economy. Gross domestic product expanded 8.7% last year, helped by a credit boom and government investments.
The central bank is more upbeat on Indonesia’s economy this year, raising its economic growth forecast to 5.6% from 5.2% — in line with the government’s estimate of 5.5%. The growth forecast for quarter one was raised to 5.7% from 4.8%, Bank Indonesia (BI) Deputy Governor Hartadi A. Sarwono said in an email to Bloomberg.
Analysts have said Indonesia’s economy may expand closer to 6% this year on stronger trade and investment.
“We have nudged our growth forecast slightly higher to 5.8% in 2010 and 6.2% in 2011 with a strong export outlook, and an expected revival of investment; although political heat over the Century bailout presents a downside risk,” Citi analyst Johanna Chua said in a statement.
Analysts and businesspeople said politics might distract the government from focusing on economic growth. Lawmakers voted 325-212 on March 3 that the bailout, endorsed by Finance Minister Sri Mulyani Indrawati and Vice President Boediono, involved legal violations.
Last year the economy grew by 4.5%, lower than the 6.1% recorded in 2008, according to the Central Statistics Agency (BPS). Lower growth was partly attributed to a drop in exports and investment following the 2008 financial crisis. The economy showed signs of recovery during the fourth quarter of last year during which the quarterly GDP growth accelerated to 5.4% from the same period last year.
Mulyani said recently that the 5.4% growth in the last quarter of 2009 indicated that exports might have recovered “sooner than expected”. But the Finance Ministry has kept its economic growth figure at 5.5% in the revised 2010 state budget.
The government expects banks can increase lending this year in support of the real sector. BI estimates lending growth could expand between 17% and 20% this year, up from 10.7% in 2009.
There have been talks between state-run banks, BI, the Industry Ministry and the ministry of state-owned enterprises (SOE) to encourage banks to gradually cut lending rates in support of the real sector. State SOE Minister Mustafa Abubakar said state-run banks might cut lending rates by 1 to 2% from the existing average rates of above 12%, as shown by BI data.
Coordinating Economic Minister Hatta Rajasa said the government would strive to boost the real sector to absorb more labor. In August 2009, the rate of open unemployment stood at 7.87% out of Indonesia’s 114 million workers, the BPS said. The figure declined from 8.39% in August 2008.
The number of people living in poverty fell to 32.53 million in March 2009, or about 14.15% of the 230 million total population, the BPS said.
Shanghai's GDP in 2009 exceeded that of Hong Kong for the first time after it surpassed Hong Kong as China's biggest port and stock-market operator, the China Economic Net reported.
Shanghai's GDP grew 8.2% year-on-year to 1.49 trillion yuan ($218.26 billion) in 2009, whereas Hong Kong saw its GDP decreased to HK$ 1.61 trillion ($207.39 billion) in the year, according to statistics released by the municipal government and the special administrative region government, respectively.
Economists said the current gap between the two economies might not be permanent as Hong Kong was affected by the global financial crisis.
Shanghai's rise is not a threat, Hong Kong Chief Executive Donald Tsang told reporters on the sidelines of the ongoing Two Sessions, adding that the most important thing is for both sides to seek development opportunities.
Korea ranked third in economic performance among OECD member countries last year, with its gross domestic product growing 0.2%, behind Poland and Australia, according to the organization. It said that Korea's robust economic performance was mainly thanks to the government-led stimulus measures to minimize the economic downturn.
Poland ranked top with a 1.7% expansion, followed by Australia with 1.4%. The United States, the epicenter of the global financial crisis, saw its economy shrink 2.4%, while Britain, France and Germany posted contractions of 5%, 2.2% and 5%, respectively.
Though data from all 30 member countries have yet to be made available, observers say that the three nations would be the only ones to report expansions in their economies last year.
"Those countries who have yet to unveil their preliminary growth figures are expected to see annual contractions in their economies last year given their gross domestic product data until the third quarter," an official at the Ministry of Strategy and Finance said.
It was widely expected that Asia's fourth-largest economy would contract last year for the first time in a decade, but it managed to expand on the back of the government's diverse stimulus measures, including tax benefits and extra-budget spending, which helped ease the downturn. The Paris-based organization also expects that Korea's economy will be among the best performers this year.
It was projected to grow 4.4% this year, marking the highest growth among the OECD member nations, according to the report. It is much higher than the OECD average of a 1.9% expansion.
Economic growth in the 16 countries that use the euro slowed as expected in the fourth quarter, with the fragile recovery entirely dependent on exports, revised official data showed. Quarterly gross domestic product growth slowed to 0.1% in the final three months of last year from 0.4% in the three months to the end of September, the European Union's Eurostat statistics agency said.
The figures are in line with the first estimate of euro-zone GDP published last month and the market consensus estimate from a Dow Jones Newswires survey of economists.
"We suspect that first-quarter growth might only be slightly better than the fourth quarter's meager performance, due to the adverse impact on activity of the unusually harsh winter weather in some member states," said Martin van Vliet, an economist at ING Bank NV. "But this means that second-quarter GDP could surprise on the upside, particularly if the inventory cycle turns and inventory replenishment rather than destocking becomes the norm."
On a year-to-year basis, GDP was 2.1% weaker in the fourth quarter, also in line with the preliminary figures and economists' expectations. However, the yearly drop in GDP in the third quarter was revised to show a deeper decline of 4.1% from the previous reading of 4%. The figures suggest the currency bloc's economy is very fragile and may take longer than expected to recover from the severe recession triggered by the global credit crisis and resulting slump in trade.
The weakness of domestic demand also suggests inflationary pressures will remain subdued for some time, giving the European Central Bank plenty of room to maintain its ultra-loose monetary policy. The ECB is widely expected to announce that it is leaving its main interest rate unchanged at 1% after wrapping up its policy meeting at 12:45 p.m. Thursday.
"In big picture terms we share the ECB's assessment of an uneven recovery, with subdued rates of growth, hampered by weak domestic demand," said Ken Wattret, an economist at BNP Paribas SA. "These themes are likely to be reiterated at the press conference later today."
The euro was little moved by the figures, while bunds were stable. Exports contributed 0.6 percentage points to the overall expansion, while imports subtracted 0.3 percentage points and gross fixed capital formation took away another 0.2 percentage points, Eurostat said.
Among the main components of GDP, exports increased 1.7% on the quarter while imports rose 0.9%. Gross fixed capital formation dropped 0.8%, government expenditure dipped 0.1% and household consumption was unchanged after dipping 0.2% in the third quarter, Eurostat said.
"These data support our view that consumption has entered a phase of stabilization, while a genuine acceleration in the course of 2010 remains unlikely given that employment is still falling and inflation is off the lows," said Marco Valli, an economist at UniCredit Research.
The EU's quarterly growth rate slowed to 0.1% from 0.3%, while the year-on-year contraction moderated to 2.3% from 4.3%. Eurostat said U.S. GDP grew 1.4% on the quarter in the final three months of the year, while Japan expanded 1.1%. The U.K. economy grew 0.3% in the fourth quarter.
French economic growth is likely to slow in 1Q, even more than expected a month ago, as the industry upswing appears to be losing steam, the Bank of France said recently, revising down its previous forecast for 1Q GDP growth by 0.1 point to 0.4%.
The national statistics institute, Insee, had also projected 1Q GDP growth of 0.4% last December. Growth in 4Q accelerated to 0.6% from 0.2% in 3Q.
Industry growth continued in most sectors in February but at a slower pace than in January, the central bank said, citing the results of its monthly business survey. After a full point rebound in January, sector capacity utilization edged up another 0.3 point in February to 74.4%, still nearly eight points below the long-term average.
The central bank's industry sentiment index, based on three months' results, fell two points in February to 102, reversing January's gains to slip back toward the long-term average of 100. Most analysts had expected no change or a smaller downtick.
The Bank of France's indicator for industry orders dropped six points in February to the lowest level since September, pointing to weaker demand growth. Inventories were largely in line with targets, it said.
Industry's expansion is expected to remain sluggish in the near term. The March output index regained two points after a nine-point drop in February. Short-term gains are seen strongest for consumer goods (+19) and weakest for capital goods (+2), with semi-finished goods (+11) and autos (+10) in between.
France's factory PMI index also fell back slightly in February, down half point to 54.9, as weaker output and orders growth offset slower declines in stocks and employment.
Growth in services activity was steady in February, buoyed by a recovery in the IT branch, the central bank said. The sector sentiment indicator edged up another point to a 17-month high of 90, still 10 points below average.
Near-term growth is likely to remain subdued here as well, the central bank said. The strongest gains are expected for management consulting (+19), computer engineering (+14) and technical engineering (+11), the weakest for advertising consulting (+1) and cleaning services (-4).
France's services PMI shed another 1.9 points in February to 54.6. The composite PMI thus eased to 55.6 from 58.0 in January.
Lithuania’s economy shrank an annual 12.8% in the fourth quarter, undercutting efforts to contain the deficit. Fitch estimates the economy may grow 1% this year.
The EU said on Jan. 27, 2010, that measures to stem the shortfall were “adequate” and gave Lithuania until 2012 to narrow the budget gap to the within 3% of GDP.
Lithuania, which maintains a fixed-exchange rate for the litai to the euro, is using deflation and wage cuts to restore competitiveness after a credit-fueled boom led to an economic overheating following accession into the EU in 2004.
Real wages fell 7.3% in 2009 from the previous year. The Finance Ministry estimates consumer prices may fall 1% this year, after rising 4.2% in 2009.
Lithuania raised its forecast for the economy this year on Feb. 1, predicting a 1.6% expansion, compared with a previous forecast of a 4.3% contraction.
The government of Portugal sees its budget deficit at 6.6% in 2011 and 4.7% in 2012, while projecting its debt-to-GDP ratio to peak at 90.1% in 2012. It plans to cut wage costs by 100 million euros a year. As for growth, the government sees 2010 GDP at 0.7%, 2011 GDP at 0.9% and 1.3% for 2012. For 2013, it sees GDP at 1.7.
It plans to cut wage costs by 100 million euros a year, and reportedly wants to keep annual pay hikes for state employees below the rate of inflation up to the year 2013. Last week, civil servants walked off their jobs in a 24-hour protest over wage freezes and other austerity measures that left hospitals, schools and transport systems disrupted. Similar protests have been seen in Greece and Spain, where governments are also struggling to bring spiraling deficits under control.
"The risk is that, as in many countries the private sector is simultaneously adjusting from unsustainably high debt levels, the public sector retrenchment will weigh on growth more than generally anticipated. In turn, this would damage the ability of governments to comply with the announced targets."
Analysts at UniCredit went one step further, saying the moves announced may not be enough to avoid another downgrade by ratings agencies. The GDP forecasts from the government, for one, may be too optimistic as growth averaged 0.8% from 2002-2008. That would also cast doubt on bringing the deficit down at the government's desired pace, they said.
Switzerland's gross-domestic-product (GDP) growth accelerated in the fourth quarter of 2009, adding to recent signs that the country is fast recovering from the global financial crisis. However, despite the positive data, the Swiss National Bank is still expected to keep interest rates at their current record low at its Next meeting and for some time to come given the uncertain global growth outlook.
In the last three months of the year, GDP grew 0.6% on a year-to-year basis—the first increase of the year. The quarterly growth rate was 0.7%, compared with 0.5% in the third quarter, boosted by solid household spending, government economic support measures and good global demand for Swiss goods, the government agency SECO said.
The figures were above market expectations for quarterly growth of 0.6% and a contraction of 0.3% on the year. The average rate of contraction was 1.5% for the whole of 2009.
"The growth discrepancy with the euro region is amazing, and should keep the euro/Swiss franc exchange rate under pressure," said Bank Sarasin senior economist Jan Poser.
Switzerland's strong performance suggests the SNB will raise rates "well before" the European Central Bank, BNP Paribas economist Eoin O'Callaghan noted, predicting the first Swiss tightening in September 2010. The ECB, by contrast, is likely to increase rates only late next year, he said.
Many Swiss institutes have recently revised their growth forecasts higher, with some of them expecting an economic growth rate of up to 2% this year. The Swiss government's chief economist, however, has a more guarded outlook.
"The rebound is expected to be moderate this year for a number of reasons, one of them being that global stimulus programs will run out," said Aymo Brunetti, head of the Economic Policy Directorate. The current strength of the Swiss franc remains a risk to the recovery, he added.
In light of the uncertain outlook, it is unclear how fast central banks will increase rates and governments will end programs to boost economic growth, he said. "The timing of exit strategies will remain a challenge for monetary authorities as well as for governments. It's far from clear when such steps may happen," Mr. Brunetti said.
SECO, which currently expects Swiss GDP growth of 0.7% this year and 2.0% in 2011, will update its estimates March 16.
Switzerland's central bank has signaled it is too early to increase rates in the current uncertain environment. The SNB targets 0.25% in the three-month Swiss franc London interbank offered rate—a record low level that has been in place since March 2009.
Any future interest-rate moves in Switzerland will depend on the exchange rate, which has become a key focus of the central bank, economists have said. Switzerland, traditionally a country with trade balance and current-account surpluses, is heavily dependent on its exporting industry. The recent strength of the Swiss franc against the euro, the currency of most of Switzerland's trading partners, makes Swiss goods lose their competitiveness.
A year ago, the SNB took up currency interventions to keep the Swiss franc under control, and is expected to continue with that strategy. At its quarterly meeting, the central bank will likely stick to the wording that it would fight any excessive strengthening of the Swiss franc, said Credit Suisse economist Fabian Heller. However, foreign-exchange interventions will gradually become less important in the months to come, he added.
In the short term, however, the likelihood of interventions remains high. Commerzbank said a euro level close to 1.46 francs may trigger an SNB move. On the foreign-exchange market, the euro traded at 1.4631 francs, little-changed from before the GDP release.
Estimates that the UK economy will grow by 2.3% in 2011 have been revised down to 2.1% by the British Chambers of Commerce (BCC). The business group said that barriers to continued economic recovery now appear "greater" than they did when the previous estimate was made in December 2009.
Unemployment will continue to rise in the coming months before peaking at 2.65 million in the third quarter of 2010, also a downward revision from the 2.7 million predicted at the end of last year.
David Frost, director general of the BCC, said that the UK may technically be out of recession but there is "no room for complacency". He added: "For the recovery to be sustained, it is crucial that all the political parties recognize the vital role of wealth-creating businesses in driving economic growth and job creation.
"The government must use the forthcoming Budget as a platform for laying the foundations for a business-led recovery. If it fails to do so, the recovery will take longer to gain momentum and may even slip into reverse."
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