GDP MARKET
UPDATE
November 2010
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
Recent GDP numbers and personal income reports provide more proof of an economy that is flat or limping toward recovery. According to the federal Bureau of Economic Analysis, real GDP — gross domestic product — was up 2% in the third quarter compared to the second quarter. In the second quarter, real GDP was up 1.7%.
The BEA report said the GDP gain was primarily from higher consumer spending, restocking of inventories, investments in non-residential property and government spending.
Consumer spending — the bulk of economic activity in the U.S. — was up 2.6% in the third quarter, and was up 2.2% in the second quarter. Durable goods purchases were up 6.1% in the third quarter and nondurable goods purchases were up 1.9%. Spending on services increased 2.5% in the third quarter.
Jeff Collins, A Northwest Arkansas-based economist and economist for The City Wire’s The Compass Report, said, “The recovery is clearly underway and with each passing quarter, the likelihood of slipping back into recession dims. Yet, no observer of the current economy can be thrilled with the pace of growth or the lack of job creation. One bright spot: initial jobless claims were down to the lowest level in three months. The employment data however, indicates current trends are essentially flat.”
Brazil’s Central Bank survey of the Brazilian market (the Focus report) found financial consultant's estimates of GDP growth for 2010 steady at 7.55%, which is what it has been for three consecutive weeks. On the other hand, the market estimate for GDP growth in 2011 is 4.5% and has been for 45 consecutive weeks.
Expectations regarding industrial sector growth this year are at 11.30%, but for 2011, the estimate is 5.20%. As for net public sector debt as a percentage of GDP, the estimate for this year is close to 41%, falling just below 40% in 2011. The exact numbers varied between 40.94% and 40.89% for this year; and 39.67% and 39.64% for next year according to Focus.
Analysts expect Chile's gross domestic product to grow 5.4% on the year in 2010, according to the median forecast of 46 local analysts in the central bank's monthly economic outlook survey. In the first and second quarters of 2010, GDP grew 1.5% and 6.5% on the year, respectively, putting last year's recession and the devastating February earthquake quickly behind it.
Third-quarter GDP, to be released in late November, likely will post a 7.1% gain on the year, according to the central bank's Imacec GDP proxy index. For the fourth quarter, analysts expect GDP to grow 6.2% on the year, the same estimate they had in last month's poll.
For 2011, analysts polled say GDP probably will grow 6.0%; for 2012, GDP is seen growing 5.5%.
Private economists surveyed last month by the Bank of Mexico increased their 2010 economic growth expectation to 4.8% from 4.6% in September, and see inflation marginally lower at 4.3% instead of 4.33%, according to the central bank. In the survey of 31 economists conducted in the second half of October, the average estimate was for core inflation of 3.74% compared with 3.84% in the September survey.
For 2011, the economists put gross domestic product growth at 3.5%, practically unchanged from the September survey, while seeing inflation at 3.73% versus 3.84% previously.
The estimates are in keeping with recent economic data, which show inflation rising at a slower rate than had been forecast and economic growth maintaining a strong pace in the third quarter despite expectations of a slowdown.
The World Bank has edged up China’s GDP growth projection for 2010 to 10% after the third quarter data. They see growth at 8.7% in 2011 and easing somewhat further in the medium term. Pushed up by higher food prices, inflation may stay above the 3% target for a while. It is unlikely to escalate as core inflation remains in check. However, raw commodity prices may rise further while sustained high wage growth is unlikely but cannot be ruled out. Given the fundamental drivers of property prices, they are unlikely to be contained for long.
Japan's gross domestic product for July-September is expected to show a fourth straight quarterly increase, up a real 0.6% on quarter or an annualized 2.5%, thanks largely to last-minute buying of automobiles and tobacco, a survey of economists conducted by Market News International found. This follows GDP growth of +0.4% q/q (+1.5% annualized) in April-June, +1.2% (+5.0%) in January-March and +0.9% (+3.4%) in the final quarter of 2009. But GDP for October-December 2010 is likely to post a contraction, in payback for high durable goods spending in the previous quarter.
Takehiro Sato, chief economist at Morgan Stanley MUFG, said, "The July-September GDP likely accelerated because some government policy measures and record high temperature appears to have pushed up personal consumption, but that is just temporary. The GDP will probably contract in October-December after strong consumption in July-September."
The July-September growth was led by personal consumption, but net exports, which had supported the modest economic recovery until recently, lost some steam. Personal consumption is expected to have increased by 0.9% on quarter, the highest gain since +1.3% in April-June 2009.
Economists said personal consumption was raised by some temporary factors. Consumers rushed to car dealerships before the government ended providing subsidies for buying energy-efficient vehicles in September (lower tax rates or tax exemptions still apply for buying and owning hybrid and other low-emission vehicles through early 2012).
New vehicle sales fell 4.1% from a year earlier to 308,663 units in September.
New vehicle sales in Japan excluding mini vehicles (with engine displacement of less than 660 cc) surged 46.7% on year to 290,789 in August, posting the 13th straight month of year-on-year gains and the highest rise since July 1969, when sales jumped 64.3%.
Consumer spending was also boosted by last-minute buying of cigarettes before the Oct. 1 tobacco tax hike and strong retail sales of summer clothing and beverages triggered by killer heat waves.
Business investment in equipment is likely to show a steady 0.9% gain on quarter, marking increases for four straight quarters, thanks to recovery in corporate profits.
Core private-sector machinery orders, a leading indicator of capital investment, are estimated to have posted gains for the fourth consecutive quarter in July-September.
Housing investment is also expected to have risen 1.1% q/q, reversing from a 1.3% fall in the previous quarter.
In contrast, the uptrend of net exports (exports minus imports) appears to have weakened after driving the economic recovery for five quarters through April-June.
The positive contribution of net exports to GDP is expected to have shrunk to zero in July-September.
According to a Cabinet Office estimate, export volume declined 2.6% on quarter in July-September, posting the first drop since January-March 2009, when it fell 27.6%. In particular, exports to Asia which accounts for the largest share in overall Japanese exports, declined 2.7% q/q in Q3, posting the largest drop since Q1 of 2009.
As for the broadest measure of price developments, the GDP deflator is forecast to have dropped 1.6% from a year earlier in July-September, gradually improving from -1.7% in April-June and -2.8% in January-March.
Many economists think relatively high Q3 GDP growth, above Japan's potential annual growth of around +0.5%, is unlikely to continue because personal consumption, the largest component of GDP, is expected to show a decline in October-December after a temporary surge in auto and tobacco sales in the previous quarter.
Ryutaro Kono, chief economist at BNP Paribas Securities, forecasts such factors to push down the Q4 GDP by 0.3% percentage point, and the GDP will show an annualized 1.7% drop, showing the first drop since July-September 2009, when GDP contracted by 0.3%.
Naoki Murakami, chief economist at Monex Inc, thinks Japan's economy has slipped into a slight downturn but said it should be able to return to a recovery track
Estonia’s economy, recovering from the second-worst recession in the European Union, probably expanded about 6% in the third quarter from a year earlier on export demand, the Finance Ministry said. The $19 billion economy, due to adopt the euro in January, enjoyed robust growth mainly due to accelerating industrial output and improving revenue in the transport and financial industries, according to Erki Lohmuste, an adviser at the ministry’s economics department in Tallinn.
“Exports achieved pre-crisis levels in the third quarter,” Lohmuste said. “Private consumption could have had a slightly positive contribution despite accelerating price growth, largely thanks to car sales recovering from the spring. A decline in investment has probably stopped and inventories should have given a robust boost similar to the previous quarter.”
An export-led recovery will help Estonia’s economy expand 2.5% this year and 4.2% in 2011, after GDP shrank by almost a fifth in 2008 and 2009, second in the EU to neighboring Latvia.. GDP returned to annual growth in the second quarter, expanding 3.1%.
Estonia’s industrial production increased at the fastest pace in at least a decade in September as demand for the country’s goods and services increased in key markets including Finland and Sweden.
Germany's council of independent economic advisers sharply raised its forecast for 2010 German GDP growth to 3.7% from the 1.6% it had projected in November of 2009. The German government recently raised its GDP forecasts for this year and next to +3.4% and +1.8%, respectively, from the +1.4% and +1.6% projected in April.
"Current economic indicators signal that the upswing should continue albeit at somewhat slowing speed," the council said in its report. External impulses will be increasingly replaced by domestic momentum, the economists predicted. Still, they cautioned that the global economic environment is uncertain due to the heterogeneous developments around the world.
Because of the healthy economic recovery, Germany will meet the deficit limit of 3% of GDP set under the EU Stability and Growth Pact by next year. The economists also forecast a total public budget deficit of 3.7% this year and 2.4% next year.
The economists assume that the European Central Bank will leave interest rates unchanged until the end of 2011.
Eurozone average HICP inflation is projected at 1.6% in 2010 and 1.4% in 2011. The ECB's price stability goal calls for inflation of close to but below 2%. German inflation is tabled at 1.1% this year and 1.4% next.
Hungary projects that gross domestic product growth of 1.5% this year, rising to 3% in 2011 before accelerating to 5-6% or even 7% in the subsequent years, a government official said. The latest estimate is an upward adjustment in the government's forecast for 2010, previously at 0.8%.
The International Monetary Fund, which concluded its annual consultations with Hungary recently, projects that Hungary's GDP will rise 1% this year and 2.5% next year.
"Maintaining the stability of the budget is the priority, nobody questions that. The question is, however, what will happen three years from now," said deputy state secretary Endre Horvath at a conference of companies engaged in commerce.
In its 2011 budget draft, Hungary set a budget deficit target of 3% of gross domestic product for next year. The government wants to reach that with one-off, "crisis" taxes levied on multinational retailers, banks, telecommunications companies and energy firms for three years starting this year.
It will, at the same time, launch a flat personal income tax Jan. 1, 2011 and reduce corporate tax to 10% to all firms from Jan. 1, 2012, to boost economic growth.
The extra taxes "are a swift and unexpected step toward [fiscal] stability. While we are taking away with one hand, we are also giving back with the other hand; the [personal income] tax cuts will boost consumption," Horvath added.
THE Irish economy will grow by just 1.7% next year, according to advisory firm Ernst & Young. In its Economic Eye report, the accountancy and consulting firm has revised down the 2011 GDP forecast for the Republic from 2.8% to just 1.7% growth.
Speaking at the launch of the all-island report, Ernst & Young’s Graham Harrison said Ireland was developing a “two-speed economy.” He said that while exports are forecast to grow, public spending cuts, a weak construction sector and pressures on consumer spending mean that the domestic economy will struggle. The quarterly report forecasts that exports will equate to 100 per cent of GDP by the end of 2010.
Mr. Harrison warned however that, “exports can only deliver so much. To reduce unemployment faster, there will need to be greater domestic demand and job creation.”
The report confirms that the Republic’s deficit is expected to exceed 30% of GDP for 2010 with the inclusion of the bank bailout cost, giving us the worst fiscal position across developed nations, including Greece. Commenting on the figures, Ernst & Young senior advisor Neil Gibson said that, while the Irish Government has done much to ease fears that no rescue package will be required from the EU or the IMF, “international confidence remains uncertain. We have yet to approach foreign markets for funding since the bank bailout details were released.”
The report predicts that unemployment will rise for a further two years, and will remain at 10% until at least 2018. It estimates that peak employment levels will not return until 2024.
Regarding the property market, it predicts that jobs uncertainty and net migration will see house prices drop again in 2011. Mr Harrison said that, “in contrast to UK house prices which are expected to return to peak values by 2013, housing in the North and in the Republic will not regain peak 2008 values until 2020.”
The report concludes that Ireland will not meet the target of reducing the deficit to 3 per cent of GDP by 2014, missing it by 2.6%.
Latvia's statistics agency says the country's recession-troubled economy grew slightly in the third quarter compared to the previous three-month period. Latvia Statistics says that the economy grew 0.8% in the July to September period, the third quarter in a row that the Baltic state's economy has registered a slight gain.
The statistics agency said that figure is based on preliminary, seasonally adjusted data and could be revised.
Latvia's economy shed 18% of its value last year, a fall that the International Monetary Fund has described as the worst in the world. The country is expected to post a slight decline in output for 2010 and return to annual growth next year.
The International Monetary Fund estimated the Romanian economy will return to quarterly growth in the fourth quarter of 2010, followed by more consistent growth of 1.5% in 2011, news agency Mediafax reported. For the whole of 2010, however, Romania's gross domestic product is expected to contract by 2%, IMF mission head Jeffrey Franks said.
He estimated Romanian annual inflation will be slightly above 8% in December 2010, following the introduction in July of a five-percentage-point increase in the sales tax to 24%. For 2011, the inflation rate should ease toward 3%, in line with central bank's estimates, the IMF said.
Romania was hit hard by the global downturn in 2009, when it posted an economic decline of 7.1%. Analysts have forecast the country won't exit the recession until 2012.
The World Bank recently lowered its forecast for Russia's 2010 gross domestic product growth to 4.2% from 4.5%.
"With a slower-than-expected recovery in the first quarter of 2010 and remaining downside risks to global economic recovery, we have revised our real GDP projection to 4.2% in 2010, followed by a 4.5% growth in 2011, and 3.5%in 2012," the bank said in its report on the Russian economy.
In its June report, the World Bank said it expected the Russian economy to grow 4.5% in 2010, 4.8% in 2011 and 4.7% in 2012. According to the Russian government's forecast, GDP growth will amount to 4.0% this year, 4.2% in 2011 and 3.9% in 2012.
World Bank economist Sergei Ulatov told a news conference on the bank's report that Russia's GDP was expected to grow 4% in the third quarter and 4.3% in the fourth quarter while the bank's 4.2% GDP growth forecast for 2010 reflected the general trend of the Russian economy recovery in coming years.
"After a disappointing first quarter in 2010, the growth momentum has been regained throughout Q2 and Q3, supported by recovery in household consumption and inventory restocking. In the second half of 2010, the sources of growth are likely remain the same, while net exports are expected to be a drag on growth, as import volumes pick up in line with economic recovery," the report said.
"We expect that the pace of economic growth in 2011 and 2012 will be constrained, and will depend on sustained gains in consumption and the pace of recovery in longer term credit to the private sector, needed to facilitate growth in fixed investment," the report said.
The UAE’s GDP is expected to gain more than $15 billion in current prices this year to maintain its position as the second largest Arab economy after Saudi Arabia, according to the International Monetary Fund (IMF). The UAE had the second largest Arab GDP in 2009 despite a sharp fall because of lower crude prices and a projected growth will allow it to retain that position in 2010 and 2011, the IMF said in its Middle East report.
From around $223.9 billion in 2009, the country’s nominal GDP is forecast to swell to nearly $239.6 billion in 2010, an increase of about $15.7 billion. The GDP will gain a further $15.5 billion to grow to nearly $255.1 billion in 2011, its highest ever level in current prices, the report showed.
At that level, the UAE will have the largest Arab economy this year after Saudi Arabia, whose nominal GDP is projected at nearly $434.4 billion in 2010, far higher than its level of about $376.3 billion in 2009.
The nominal GDP of all Gulf oil producers tumbled last year because of lower output and a decline of nearly $30 a barrel in crude prices. It had hit its highest level in most regional nations in 2008 when crude prices climbed to an all-time average of nearly $95 a barrel and Gulf States were pumping at near capacity. In real terms, regional economies sharply slowed down because of the cut in their oil production in line with OPEC’s collective agreement to trim supplies to prop up prices in the wake of the 2008 global fiscal distress.
The IMF gave no reason for its projection about a surge in the nominal GDP of the UAE and other Gulf states but its figures showed crude prices will likely be higher and their oil production is expected to rebound this year and next year.
In the UAE, crude output slumped to 2.3 million barrels per day in 2009 from nearly 2.6 million bpd in 2008. The IMF forecast production to climb to around 2.4 million bpd this year and 2.5 million bpd in 2010 apparently because of a recovery in the global economy and subsequently oil demand.
Saudi Arabia, which bore the brunt of Opec’s cuts as it pumps nearly a third of the Cartel’s supplies, is expected to lift production from around 8.4 million bpd in 2009 to 8.5 million bpd this year and 8.9 million bpd in 2011. Its output was as high as 9.2 million bpd in 2008, according to the IMF.
The figures showed Egypt, the most populated Arab nation, had the third largest economy in the Arab region in 2009, standing at $188 billion. It is expected to climb to around $216.8 billion in 2010 and $239.2 billion in 2011.
Algeria, another Opec member, emerged as the fourth largest Arab economy, which stood at around $139.8 billion in current prices last year. The IMF projected the GDP to swell to 159 billion this year and $171.6 billion in 2011.
Kuwait had the fifth largest GDP in the region, standing at $98.4 billion last year. It is forecast to reach $117.3 billion this year and $127.8 billion in 2011.
Qatar had the sixth largest economy of around $98.3 billion in 2009 but it is expected to overtake Kuwait when its nominal GDP will swell to nearly $126.5 billion this year and about $157.9 billion in 2011 because of a sharp increase in its LNG exports, now estimated at 77 million tonnes per year.
Morocco, which does not export oil or gas, was the seventh largest economy in the Arab world, with its nominal GDP standing at around $91.4 billion this year and a projected $91.7 billion in 2010 and $96.3 billion in 2011.
Iraq, which had the second largest GDP in the region before its economy was wrecked by wars, retreated to the eighth place. Its nominal GDP stood at $65.8 billion in 2009 and is forecast by the IMF to climb to around $84.1 billion this year and nearly $92.9 billion in 2011.
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