GDP UPDATE
May 2010
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
The anticipated GDP results are expected to present sustained economic growth for the third consecutive quarter. We are forecasting a quarterly annualized growth rate of 3.5% in 1Q10. While the economy will expand at a slower rate than 4Q09’s 5.6%, the results are expected to illustrate firming of private demand.
As in the fourth quarter, GDP growth will be driven by personal consumption and inventories. Consumption is expected to expand at an accelerating pace of 3.1% in 1Q10 and contribute two-thirds of overall economic growth. Preliminary BEA data indicate that non-durable goods and services will be the primary drivers, while durable goods may be a drag on the recovery due to the slow in auto sales experienced in January and February.
Inventories will also provide a significant boost to GDP growth as they are expected to increase for the first time since 1Q08. After significantly whittling down inventories to accommodate the steep decline in demand, businesses are now beginning to rebuild stock to meet demand growth.
Non-residential investment will also contribute to GDP growth by rising for the second consecutive month. The 6.0% increase in industrial production of high tech goods indicates that businesses continued to invest in equipment and software in 1Q10. Nevertheless, investment in structures declined as indicated by the average 3.5% drop in non-residential construction spending in the first two months of 2010.
Residential investment in 4Q09 benefitted from a boom in November before declining in the following months. As a result, even though construction spending grew in January and February, average residential investment for the quarter will fall below that of the previous quarter and subtract from GDP growth. Nevertheless, residential investment is expected to recover slowly throughout the year.
Lastly, while export growth has helped to boost economic growth by stimulating industrial production, net exports will subtract from GDP growth due to stronger growth in imports.
First quarter GDP growth will be stronger than previously expected, primarily due to consumer demand, which is picking-up faster than anticipated. Our growth estimates for 1Q10, coupled with better than expected GDP growth in 4Q09, have led us to revise up our GDP forecast for 2010 to 3.0% from 1.9%. The main driver of the revision is softer household deleverage which supports higher consumer spending. Looking forward, even though the job market is improving, the unemployment rate will remain high, averaging 9.3%, in 2010. Therefore, personal consumption will expand at a stable pace. However, the impact of inventories will ease in 2H10 as businesses bring stocks closer in line with sales, while the pace of business investment will decelerate somewhat. As a result, growth will be stronger in the first half of the year than in the second half. Our outlook still assumes a high level of excess capacity and thus limited inflationary pressures, both of which will justify low interest rates for a prolonged period
Mexico’s economy rebounded in the first quarter, expanding more than 4% from a year earlier after contracting 2.3% in the last three months of 2009, the Finance Ministry’s chief economist said.
Consumer demand is reviving even as the export-driven manufacturing industry bounces back faster than domestic sectors like services, Miguel Messmacher said in a telephone interview from Mexico City.
“The economic recovery is stronger than we anticipated,” Messmacher said. “The fundamentals in Mexico have surprised to the upside.”
Gross domestic product will grow as much as 5% this year, according to the central bank, after Latin America’s second-largest economy shrank 6.5% last year, its worst slump since 1932. The economy grew 3.4% in February from a year earlier, the national statistics agency reported today.
Gross domestic product showed a “rather sluggish performance” in the first two months of the year given that it only grew 0.4% in February from the previous month and shrank by 1.1% in January from December, Barclays Capital said. Barclays had forecast the economy would grow 4.6% in February from a year earlier.
Messmacher also said that core inflation, which excludes some food and energy prices, will continue a “declining trend.” Overall inflation tends to follow core prices, he added. Core inflation slowed to an annual pace of 4.4% in March, a two-year low.
While annual inflation reached a seven-month high in March, the central bank may use a quarterly report to say the increase is being driven by one-time effects from taxes and gasoline costs, said Eduardo Suarez, an emerging-market strategist at RBC Capital Markets in Toronto.
Banco de Mexico has kept the benchmark interest rate at 4.5% since July and Governor Agustin Carstens said there’s no need to boost rates “at this stage.”
Venezuela's economy could shrink for the second consecutive year in 2010, President Hugo Chavez said recently, reversing an earlier forecast of growth in a sign the OPEC nation is struggling to recover from recession.
"The Venezuelan economy, according to the IMF, and repeated by the World Bank, entered into recession in 2009 -- that's true, and will shrink again in 2010 -- that could be true," Chavez said at a meeting of his Socialist Party.
He also said preliminary data showed the economy had shrunk in the first quarter of this year. The GDP data for the first three months of the year is due in May.
In February the leader said the economy would likely grow between 0.5% and 1 % in 2010. Venezuela's GDP fell by 3.3% last year and deepened by the fourth quarter to 5.8% as other countries in the region have begun to pull out of the slump.
Chavez blamed the country's problems on a crisis in capitalism. He said another fall in GDP this year was not reason to worry, since it was caused in part by a drop in imports of non-essential items such as new cars. He said the world economic crisis was an opportunity for socialism to spread and take root, saying capitalism over-consumption was leading to the destruction of the planet.
Venezuela's economy grew rapidly for five years before the recession, driven by heavy public spending of record oil revenues.
Bangladesh's central bank expects the economy to grow more than 6% in the fiscal year ending June 2011, slightly outpacing expected growth in the current year, and inflation should stay below 10%, according to Governor Atiur Rahman.
"We expect inflation to remain in single digits during the period (2010/11) though we are witnessing an upward trend since the start of the current fiscal year, mainly due to rising food prices," Atiur told Reuters in an interview.
Inflation has surged to 9.06% from a 90-month low of 2.3% in June 2009 as commodity prices, notably food items, rose steadily despite good harvests.
Atiur said the government's budget deficit would ease to 4.5% of GDP in 2010/11, from an estimated 5% in 2009/10, after finance ministry officials this week announced spending plans.
China's economy accelerated more than expected in the first quarter, while consumer and wholesale inflation -- though mixed -- indicated a broadly rising trend, stoking further concerns of economic overheating in the world's third-largest economy.
Gross domestic product (GDP) rose 11.9% from the year-ago period, accelerating from 10.7% in the last quarter of 2009. The expansion was the fastest in nearly three years.
On the inflation front, March's consumer price index was 2.4% higher than a year earlier, easing slightly from a 2.7% rise in February. Dow Jones Newswires and Reuters had each published surveys expecting a 2.6% rise in the CPI.
Meanwhile wholesale prices for the month were up 5.9% year-on-year, compared to a 5.4% rise in February.
"There are signs of overheating," said Stephen Green, Standard Chartered's head of Greater China research in Shanghai. He said Chinese central planners could be faced with an asset-price bubble in the second half of the year that could trigger a sharp credit contraction in 2011 unless growth is coaxed onto a more sustainable pathway.
Some analysts, however, said the robust growth figures were unlikely to be much of a worry in Beijing. Statements released at the end of a State Council meeting indicated policy makers’ view that the growth figures had already discounted the double-digit expansion as distorted somewhat by limp growth in the year-earlier period.
"The government won't be excited by the seemingly high year-on-year GDP growth," said Bank of America-Merrill Lynch economist Ting Lu. "We take this as a signal that the government won't take a 'U-turn' on policies." He added the emerging picture is one of little urgency among Chinese policy makers to revamp monetary policy, with the benchmark lending rate likely to remain on hold until the fourth quarter.
Indonesia expects gross domestic product to grow by 6.3% for full year 2011, higher than 2010's forecast of 5.7%, according to Finance Minister Mulyani Indrawati. In a speech to a planning seminar, Indrawati also said inflation for 2011 was expected to be around 5% and investment expected to grow by 11%, higher than 2010's forecasts of 5.7 and 8% respectively.
"Growth will still be dominated by domestic demand," she said, adding that consumption was expected to grow by more than 5% next year.
Southeast Asia's biggest economy expanded 4.5% last year, making it one of the only Asian countries to post positive growth in a year dominated by the global financial crisis, thanks to steady domestic demand and a lower dependence on exports.
Indrawati said while inflation was forecast at 5%, "it will not be an easy job to maintain due to the expectation of a rise in commodities prices".
Indonesia's annual inflation has been contained below 3.5% so far this year, allowing the central bank to keep interest rates at a record low of 6.5% for eight consecutive months. But most analysts expect prices to pick as commodity and energy prices rise, pressing the central bank to raise interest rates by the end of the third quarter.
Indrawati also said the government would plan 2011's budget deficit at 1.7% of GDP, lower than proposed 2010 budget deficit of 2.1%.
"This will make Indonesia's debt to GDP ratio decrease below 27%," she added.
South Korea's economy grew at a faster pace in the first quarter than initially estimated on rising exports and a pickup in demand, confirming that Asia's fourth-largest economy is on track for strong growth this year. Gross domestic product rose a seasonally adjusted 1.8% in the January-March period from the fourth quarter of 2009, when the economy grew 0.2% from the earlier quarter, the Bank of Korea said.
From a year ago, the economy expanded 7.8% in the first quarter due largely to a lower comparative base in the year-earlier period, after rising 6% on year in the final quarter of 2009.
"Manufacturing turned to grow from the previous quarter and private consumption and investments also continued expansion," the central bank said in a statement.
The first-quarter performance beat the median 1.5% on-quarter growth--and 7.4% on-year rise--forecast by economists polled by Dow Jones Newswires. The results also came above the BOK's initial estimate.
The central bank said early this month that GDP likely grew 1.6% on quarter and 7.5% on year. For all of 2010, the export-dependent economy is expected to grow 5.2%, following a 0.2% rise in 2009, the BOK said.
Analysts said the strong growth in the first quarter won't likely prompt the BOK to start tightening its monetary policy in the near future given global uncertainties and the still-sluggish domestic job market.
"With recovering exports, private demand is also picking up rapidly, which will help the overall economy to continue to grow firmly in the second quarter," said Kim Jong-su, an economist at NH Investment & Securities. "But in the second half of this year, the growth momentum could slow on risks linked to a possible slowdown in the U.S. and troubles in Europe."
Economists generally expect the BOK to start raising its key policy rate, which it has kept at a record low 2% for 14 months, sometime in the second half of the year.
A forecast by leading institutes for 1.5% economic growth this year is roughly in line with the view of the German government, German Economics Minister Rainer Bruederle said recently. Still, he warned that the German economy is not out of the woods and it will take years for a return to its pre-crisis level.
In their report, part of which was seen by Dow Jones Newswires in advance of its release, the think tanks said growth of 1.5% this year and 1.4% in 2011 would be led by a recovery in Germany’s vast export industry.
The government is currently forecasting 1.4% growth in 2010. A review is due next week.
Speaking to the Berlin Capital Club on how to emerge stronger from the crisis, Bruederle also said Germany’s labor market had held up remarkably well and that this could be termed a miracle. But he signaled concern about extending the subsidized short-term working scheme.
One has to consider how long to use government-subsidized measures as this is "not so cheap" and could "delay" the necessary adjustment process, Bruederle said. The government plans to prolong the state-supported short-term working scheme, which Bruederle said costs EUR5 billion annually.
The Q110 Kuwait Retail Report predicts that the country’s retail sales will grow from US$41.59bn in 2009 to US$59.27bn by 2014. Key factors behind the forecast growth in Kuwait’s retail sales are a favorable long-term economic outlook, a sophisticated consumer base and high levels of disposable income.
Kuwait’s nominal GDP was US$113.38bn in 2009, with 2009’s decline of 2.4% expected to translate into growth of 2.0% in 2010 as the economy slowly begins to recover. Average annual GDP growth of 2.0% is now predicted by BMI between 2009 and 2014. With the population rising from its 3.2mn in 2009 to reach 3.5mn by the end of the forecast period, GDP per capita is predicted to rise by more than 53% by 2014, reaching US$53,950. Approximately 80% of the Kuwaiti population is expatriates, while foreign workers crossing the border from Iraq also stimulate the retail market.
Lithuania's gross domestic product or GDP dropped 2.9% on an annual basis in the first quarter, compared to the 12.1% decline in the previous quarter, a flash report from the Statistics Lithuania showed. The fourth quarter GDP was revised from 12.8% fall reported initially.
Sequentially, the GDP decreased 12.9% in the first quarter, after falling 3.8% in the fourth quarter.
On an unadjusted basis, the GDP was down 2.8% in the first quarter, compared to the 12.5% fall in the previous quarter. The GDP dropped 4.1% sequentially, after a 1.3% growth in the fourth quarter.
Russia's economy grew 4.5% in the first quarter of 2010 compared to the same period last year, official figures showed. Growth picked up in March when gross domestic product (GDP) rose 4.9% compared to March 2009.
"In March, after a pause in February, we saw a revival of economic activity," it said. "Compared with February, there have been positive trends in construction and manufacturing."
The figures indicated that Russia's economy is recovering from a deep recession that saw GDP contract by 7.9% last year. Russia was hammered by the global economic crisis that struck in late 2008, with its hydrocarbon-dependent economy punished for failing to diversify in better times.
Since then, rising commodity prices have driven a modest recovery, prompting Prime Minister Vladimir Putin to declare this month that the recession was over while also warning that the effects of the crisis still demanded careful attention from policy-makers.
Last week, Russia raised 5.5 billion dollars in its first international bond issue since its 1998 financial crisis as it seeks new ways to bolster its finances and plug a growing budget deficit
Britain's economy grew at a slower pace than expected in the first three months of this year as the harshest winter weather in 30 years hit hard, official data showed. The Office for National Statistics said GDP grew by 0.2% in the first quarter, half the 0.4% rate forecast by analysts, who had expected a repeat of the pace of growth seen in the last three months of 2009.
The figures gave the ruling Labor Party a chance to reprise its charge that economic recovery remains too fragile for fiscal tightening of the scale being proposed by the opposition Conservatives in campaigning for a May 6 national election. The data will also support expectations that the Bank of England will hold interest rates at their record low rate of 0.5% until the strength of the recovery becomes clearer.
Sterling weakened by almost half a cent versus the dollar and by a quarter of a cent against the euro.
Prime Minister Gordon Brown said recovery was under way but it could be threatened by Conservative policies.
"The dangers of the Conservative policy of cutting ... 6,000 million pounds out of the economy as they propose for an emergency budget in June are as grave as they are ill-judged," he told a news conference.
Conservative finance spokesman George Osborne, on Sky Television, countered: "We now have this jobless recovery from this weak government."
Year-on-year, GDP contracted by 0.3%, the smallest decline since the third quarter of 2008.
Britain suffered its deepest downturn since at least the 1930s in the 18 months to September 2009, losing more than 6% of economic output. The ONS said there was anecdotal evidence that harsh winter weather, the worst in 30 years, depressed output from both the retail sector and industry in the first quarter of this year.
"It is not a disaster but I think the overall story is that this economy is not powering its way out of the blocks. This reinforces my view that we are going to get a very sluggish recovery," said Ross Walker, economist at Royal Bank of Scotland.
The 0.2% overall GDP growth was at the bottom of the range of forecasts from a Reuters poll of 33 economists, and analysts noted that the ONS's preliminary estimates of GDP were frequently revised higher. An initial reading of 0.1% growth for the last quarter of 2009 eventually ended up at 0.4%.
"Over the last year or 18 months, markets have learned to treat these first estimates with kid gloves," said Philip Shaw, economist at Investec."It's true the snow did depress services and manufacturing in the first part of the period ... it's likely that the underlying pace of recovery is greater than these figures suggest."
The preliminary data showed distribution, hotels and restaurants -- which includes retail and makes up 15% of the economy -- bore the brunt of the bad weather and contracted by 0.7%, the biggest drop since the first quarter of 2009. However, business services and finance -- which accounts for 30% of the economy -- grew by 0.6%, its best performance in two years, providing the lion's share of total GDP growth in the first quarter.
The overall service, sector, three quarters of the economy, expanded at less than half its pace of late 2009, growing by just 0.2% in the first quarter.
While quarterly manufacturing growth slowed to 0.7% from 0.8%, the broader industrial production measure grew by 0.7% on the quarter, its strongest pace in four years.
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