GDP UPDATE
April 2011
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
In the third and sort of final revision, U.S. GDP grew at a pace of 3.1% in the fourth quarter, according to the Bureau of Economic Analysis. That's better than the 2.8% growth estimated in the second revision, but it's slightly worse than the 3.2% estimated initially. Today's report finalizes the last quarter of 2010's GDP calculation for the time being, but each year a major revision occurs that re-calculates growth for prior years. For now, however, why was growth revised up to 3.1%?
The difference between 3.1% and 2.8% isn't huge, so there won't be any exciting revelations about certain components of GDP being far better than anticipated. In fact, most contributors of GDP barely shifted from the prior estimate. Of the four major components, consumer spending, net exports, and government spending all revised GDP growth by less than 0.1% compared to the second estimate. That means the bulk of the revision came from business investment.
Business investment pushed GDP 0.5% higher than the second estimate reported. The second revision showed a $112 billion decline in business investment, but today's final calculation shows a $94 billion decline. That's $18 billion better than we thought.
This change was mostly caused by two factors: additional spending on equipment and software and additional spending on inventories. The components were revised higher by $6 billion and $9 billion, respectively.
Since the third revision wasn't a huge change, the narrative for the fourth quarter's economic activity remains mostly the same. Consumer spending and net exports provided a strong performance. Business investment was relatively weak, due mostly to less spending on inventories. Government spending also declined a little.
A 3.1% rate of growth isn't terrible, but it isn't wonderful either. For the U.S. to add millions of jobs quickly, more economic activity would be needed. If this sort of growth continues, the recovery will clearly be underway, but the labor market will improve at a slower pace than we might like.
Canada's gross domestic product rose 0.5% in January, largely based on manufacturing gains, Statistics Canada reported from Ottawa. The increase matched December's gain.
Manufacturers of fabricated metal products and motor vehicles and associated parts helped the manufacturing sector post a 2.8% gain in January, while the transportation and warehousing sector advanced 1.2%, the report said.
"The finance and insurance sector grew 0.6%, as a result of higher volume of trading on the stock exchanges and increased personal and business loans, mortgages and mutual fund sales," StatsCan said.
Wholesale trade increased by 0.7%, although retail trade edged down 0.1% in January. The other sector that saw a decline was mining and oil and gas extraction, which retreated 0.5%, the report said.
Uruguay's government will raise its 2011 economic growth forecast from the current 4.5%, Vice President Danilo Astori told the Reuters Latin America Investment Summit. The South American country's economy is expanding for an eighth straight year, buoyed by high commodity prices.
"Without a doubt, the government will have to update its prediction on the upside," Astori, an influential economic policy voice in the leftist government of President Jose Mujica, said in Montevideo.
Uruguay's economy grew by 8.5% last year.
Last week, Uruguay's central bank raised its benchmark lending rate 100 basis points to 7.5% in an unexpectedly bold move aimed at taming inflation. Annual inflation was 7.67% through February, above the central bank's target range of 4% to 6% by year-end.
Astori said policymakers are ready to keep taking steps aimed at keeping consumer prices from rising too fast. "The government is ready to take more measures, if necessary," he said.
The South American country does not plan to change its inflation target, the vice president added.
"We are worried that we are out of the target range ... We want to meet the target because it is a commitment," Astori said. "We do not plan to modify the target range on the upside."
The government's intervention in the foreign exchange market will continue as it attempts to control the strength of the local currency, Astori said.
"The buying and selling of foreign exchange, which the government is doing more of, will continue to play an important role," he said.
The Uruguayan peso strengthened to a nine-month high of 19.2 per U.S. dollar on Wednesday, up 4.4% so far this year against the greenback.
The Queensland floods and cyclone Yasi may have a much larger impact on the economy than first thought, with the loss of coal production expected to be double that of official forecasts. According to the quarterly business liaison report prepared by Treasury, businesses expect the loss of coal production to be between 20 million and 30 million tons during the March quarter, compared to official estimates of 15 million tons.
The Treasury said this could lead to losses equating to between $5.5 billion and $8 billion worth of coal production, much higher than present estimates of about $5 billion. The Treasurer, Wayne Swan, said the economic costs of the Queensland floods and cyclone Yasi were ''unprecedented for a natural disaster'' and warned it would inevitably affect the federal budget.
''These events will also have big implications for the budget, with the early years bearing the brunt of the rebuilding and recovery costs, and slower growth reducing government revenue in the short term,'' Mr Swan said.
An economist at RBS, Kieran Davies, said he expected gross domestic product for the March quarter to have contracted by up to 0.2%. He said the loss of coal production had stripped 0.75% off GDP growth, compared to official Reserve Bank estimates of about 0.50%.
''We think for the March quarter there is a reasonable chance GDP contracted due to the hit to coal exports and also the general disruptions caused by the natural disasters. It just shows how important coal is to the country,'' Mr Davies said.
As open-cut coal mines continue to be affected by floodwaters, Treasury said the slower than expected recovery in coal production and exports could drag on. It also said the natural disasters have had a significant effect on the agriculture and tourism industries.
''The port numbers show a big drop-off in coal exports for January and February so I guess the uncertainty is how quickly things can get back to normal,'' Mr Davies said.
But with no shortage of demand, coal producers are expected to benefit from record prices.
The Queensland floods were a key factor in a record settlement by Xstrata for steaming coal in Japan. Xstrata secured a price of $US129.90 a ton, up from just under $US100 a ton last year. The higher prices will also offset the impact to GDP.
The Queensland Resources Council, whose board of directors includes executives from BHP Billiton, Rio Tinto and Xstrata, also said official estimates for lost output may be too low, and should be about 30 million tons. Traditionally about 85% of the state's coal is exported.
Schroders has cut its forecast for Japanese GDP growth in 2011 from 1.2% to 0.8% as a consequence of last month’s earthquake and tsunami.
However, Keith Wade, the chief economist of Schroders, expects the downside impact to be short-lived, leading the group to revise up its GDP forecast for 2012 to 2.4% from 2%.
Wade says: “There is a consensus building amongst economists that the negative impact on GDP growth will be relatively short-lived with the economy expected to follow a V-shape path: a sharp fall in GDP over the next quarter, followed by a rebound as reconstruction begins.”
Estimates of the cost of rebuilding following last month’s disaster have been put at as much as £186 billion, which Wade says is about 6% of Japan’s GDP, indicating the recovery could be a multi-year process.
“The risks to this view largely depend on developments at Fukushima, as an escalation in the nuclear crisis would deepen the downturn (as people stay indoors rather than go out spending) and delay the recovery as concerns about radiation hamper rebuilding.
“Widespread power cuts would also slow the upturn. In this respect, the current crisis may be different from that of Kobe in 1995, where reconstruction after the earthquake was able to begin relatively rapidly.”
For the rest of the world, Wade says the greatest risk relates to Japan as a provider of capital, rather than a source of demand. While Japan may be the world’s third largest economy, he says that being export led is dependent on the rest of the world rather than vice-versa.
“Instead it is the potential disruption to capital flows from Japan which could be disruptive for markets like US Treasury bonds,” Wade says. “The ability of the G7 to stabilize the currency is critical in this respect.
The impact from flooding in the south will be only short-lived and would affect the gross domestic product growth by only 0.1-0.2%, according to the Siam Commercial Bank. The SCB said it will stick with its earlier economic growth projection for 2011 at 4-5%.
“The negative impact from southern floods will be limited and even though the economy of the eight southern provinces accounts for 7% of GDP, the impact will be short-lived. Therefore, the overall impact will be minimal,” the bank said.
Hardest hit is the agricultural sector, with more than 700,000 rai of farmland, about 0.5% of the total agricultural land, inundated. In a worst case scenario, this would trim the 2011 GDP by 0.05%, the SCB said.
About 8% of foreign tourists visited the eight southern provinces, the flooding could temporarily prevent foreign tourists from visiting them.
Again, in a worst case scenario, the tourism sector revenue would drop by about 10 billion baht and the GDP would be reduced by 0.1%, the bank said.
Croatia's economy contracted less than previously thought in the fourth quarter of 2010, the latest report from the Bureau of Statistics showed. Gross domestic product (GDP) fell 0.6% year-on-year, slower than a 0.7% decline reported in February.
The statistical office also revised up third quarter GDP growth rate to 0.3% from 0.2%. Further, it said the economy contracted 1.2% in 2010. That compares with a previously reported 1.4% decline.
The Czech Republic’s public finance deficit narrowed to 4.7% of economic output last year, totaling less than the initial estimates showed, the country’s statistics office said. The Czech Finance Ministry initially estimated the public sector deficit, which is the fiscal yardstick for assessing a European Union member’s readiness to join the euro area, at 4.8% of gross domestic product. The deficit was 5.8% in 2009.
Czech public-sector debt, another condition for euro adoption, rose to 38.5% of GDP, from 35.3% in the previous year, the statistics office said in a statement posted on its website.
Mauritius expects its economy to grow by 4.5% this year, higher than a 4.2% forecast issued in December, the Central Statistics Office (CSO) said recently. The revised forecast mirrors the central bank's view that the Indian Ocean island nation's economy will grow more than previously forecast, driven by a robust last quarter recovery.
Central bank governor Rundheersing Bheenick said that the economy could expand by 4.6% in 2011, up from an earlier forecast of 4.2%.
“On the basis of information gathered on key sectors of the economy, and taking into consideration measures announced in the last budget, GDP is now forecast to grow by around 4.5% in 2011, higher than the 4.2% growth forecasted in December 2010," the CSO said in a statement.
The CSO said the hotels and restaurants sector would grow by about 4.0% this year based on 980,000 tourist arrivals, up from 934,827 visitors in 2010.
"Tourist earning is forecasted at 42.5 billion rupees ($1.5 billion) in 2011 compared to 39.4 billion rupees in 2010," it said.
Portugal had a budget deficit of 8.6% of gross domestic product (GDP) in 2010, latest estimate from the National Statistics Institute. That was higher than a government target of 7.3%. The estimate adds fuel to the fire as markets expect Portugal will be forced to seek an international bailout, following Ireland and Greece.
The statistical office revised 2009's deficit to 10% from 9.3%. It estimates 2011 deficit to be at 4.6% of GDP.
Russia’s economic growth accelerated in the fourth quarter as commodity prices rose and companies boosted investment to meet rising domestic demand.
Gross domestic product rose an annual 4.5% after a revised 3.1% in the previous three months, the Federal Statistics Service in Moscow said in an e-mailed statement. The median estimate in a Bloomberg survey of 14 economists was for 4.8%.
President Dmitry Medvedev set a 10% growth target to pull the world’s biggest energy supplier into line with emerging-market peers in China, Brazil and India. The economy lost momentum in the third quarter after the country’s worst drought in at least half a century slowed expansion by as much as 0.8 percentage point, according to the Economy Ministry.
“I still think we can say this is a pretty lackluster recovery, particularly by historic standards,” Neil Shearing, senior emerging markets analyst at Capital Economics in London, said by phone today. “There’s mounting evidence that real wage growth has started to slow, and that’s feeding into slow retail sales.”
Industrial output unexpectedly eased in February and fixed-capital investment shrank during the first two months of the year after 10 consecutive monthly gains.
Real disposable incomes fell an annual 1.5% in February after a 5.8% drop in January. Unemployment was 7.6% in February, almost the highest level in 10 months.
“Construction activity and investment” may have peaked as companies “rushed to close their projects by the end of last year,” Natalia Orlova, chief economist at Alfa Bank in Moscow, said by telephone before the release.
“Overall, the business mood is more complicated this year as opposed to the fourth quarter last year” after the government raised payroll taxes from Jan. 1, Orlova said.
GDP grew 4% last year, the statistics service said, reiterating its first reading. Second-quarter growth was revised down to 5% and expansion in the first quarter was upgraded to 3.5%, the service said.
Manufacturing rose an annual 13% in the fourth quarter, while construction jumped 6.1% after declines in the previous three quarters, the service said. Agricultural output shrank 7.1% from the same period last year.
South African Finance Minister Pravin Gordhan recently cut the 2010/11 budget deficit and said this year's growth might be higher than previously forecast, suggesting further future reductions in the fiscal deficit.
Widening fiscal deficits had caused some concern among some investors about the long-term debt sustainability in Africa's biggest economy, and saw bond yields rising after the February budget especially on the long end.
Gordhan said the budget gap for the year ended March 31 was 5% of GDP, slightly lower than the initial forecast of 5.3%, due to higher-than-expected tax collection. This year's budget deficit is also 5.3% of output, narrowing to 4.8% in 2012/13.
The South African Revenue Service (SARS) collected R674,2-billion, slightly more than the target of R672,2-billion, Gordhan said.
"The remarkable performance that SARS is reporting indicates that our economy is recovering," Gordhan said.
Asked whether the better-than-expected revenue for 2010/11 might also apply to the next fiscal year, he said: "There are good indications that South Africa's economy might grow faster than we believe," adding the budget deficit could therefore be revised.
In his budget in February, Gordhan said the economy was expected to grow by 3.4% for 2011, rising to 4.4% by 2013.
Gordhan said it was still unclear whether higher international oil prices would undermine economic growth.
South Africa's GDP forecasts are still a fraction of the 7% growth the government has said is needed to make a dent in unemployment, currently more than half the adult population.
A separate survey showed that although the manufacturing sector, the second biggest contributor to GDP, was on the mend, it was still struggling to create jobs.
Sweden’s economy will grow 4.2% this year as employment reaches the highest level in two decades, underpinning consumer demand in the largest Nordic economy, the National Institute for Economic Research said.
Gross domestic product will expand 3.2% in 2012, forcing the central bank to raise the benchmark interest rate to 3% by the end of next year, the Stockholm-based institute said in a statement on its website.
Sweden is delivering the biggest economic rebound in the European Union as an export-led expansion creates jobs and underpins consumer spending. The central bank has raised rates five times since July, bringing the repo to 1.5%, and signaled more increases are needed to steer the recovery and offset inflationary pressures.
Inflation will exceed the central bank’s 2% target through next year as it averages 3.2% in 2011 and 2.2% in 2012, the institute said.
Turkey says its economy grew by 8.9% in 2010, making it one of the fastest-expanding economies in the world. The state statistics authority figures, released recently, also showed 9.2% growth in the last quarter of 2010.
The rate topped predictions of around 7% growth for 2010 and is a boost for Prime Minister Recep Tayyip Erdogan's government, which is seeking a third term in elections on June 12.
The statistics authority said GDP rose to $736 billion and national income per capita was around $10,000.
The fastest-growing sector was Turkey's construction industry, which rose by 17%.
The UAE’s non-oil economy grew by around 2.1% in 2010 and is projected to rebound by nearly 3.3% in 2011 because of higher oil prices and expansion in some sectors in Dubai, the IMF has said.
In a statement concluding its fourth consultation with UAE authorities, the International Monetary Fund said the country’s GDP, the second largest in the Arab region after Saudi Arabia, is gaining ground, benefiting from strong crude prices, low interest rates and improved growth prospects in Asia. But the report stressed the UAE needs to take measures to increase its economic resilience in face of any shocks in the future.
Its figures showed the UAE’s real GDP sharply rebounded by around 3.2% in 2010 following a contraction in the previous year as a result of a sharp rise in crude prices.
"The momentum is carrying into 2011 with non-oil GDP growth projected to accelerate from 2.1% in 2010 to 3.3%, reflecting strong tourism, logistics, and trade in Dubai; and large public investment spending in Abu Dhabi, including through GREs," the report said.
"Higher oil prices are contributing to a marked improvement in the fiscal position and balance of payments. The successful restructuring of DW’s debt has improved market confidence, allowing top-grade Dubai issuers to regain market access."
The Washington-based IMF urged the UAE, a key OPEC oil producer, to strengthen the economy’s "resilience to shocks in the future."
It said the recent episode of debt restructuring in Dubai and the ramp-up of GRE borrowings in other emirates underline the need to identify, assess, and mitigate the risks posed by these entities.
"The recent boom-bust experience highlights the challenge of macroeconomic management over the cycle. Given the pegged exchange rate regime, this requires mutually-supportive countercyclical fiscal and macro-prudential policies. Underpinning these reforms is the need to improve statistical capacity to inform policy decisions and disclosure.
The report said it believed a fragile recovery is gaining strength in the UAE, benefiting from a favorable global environment, including high oil prices, improved growth prospects in Asia, and low interest rate.
"Real GDP is projected to continue to grow at 3.3% in 2011. Driven by higher food prices, consumer price inflation is expected to rise, but will remain moderate at 4.5% in 2011, as rents continue to decline."
The IMF said its analysis of the real exchange rate in the UAE suggests that the dirham is in line with fundamentals. According to the report, the economic recovery in the UAE remains fragile because of some factors, including UN sanctions on Iran, a key trading partner of the Emirates.
"Furthermore, the unfolding turmoil in the region poses downside risks to the outlook. The re-pricing of risk in the region would result in more difficult market conditions," it said.
"On the positive side, there are indications that the UAE may benefit from increased tourism and investments looking for diversification within the region. Higher oil prices are also benefiting the UAE as a hydrocarbon exporter, though if sustained, they may dampen the recovery in view of lower demand from Asia."
The report said it believed the UAE’s macroeconomic policies should aim at supporting the recovery in 2011 and responding to the economic spillovers from the unfolding events in the region, if needed.
It said the government should also avoid contracting further its fiscal stance to ease economic recovery.
"With the reduction in communication fees, the federal government budget foresees a budget deficit in 2011. In contrast, to preserve fiscal sustainability and with the completion of some investment projects, Dubai is planning a fiscal consolidation," it said.
"While Abu Dhabi’s budget for 2011 is still not available, the mission concurs with the preliminary intentions of the government of Abu Dhabi to increase infrastructure spending, including through the GREs."
It urged the government to stand ready to expand spending on productive investment, in case the regional unrest starts affecting the economy.
It said the central bank should also monitor bank liquidity conditions and stand ready to relieve potential pressures.
"The re-pricing of risk in the region could trigger a sudden reversal of the recent deposit inflows to the banking sector. The central bank should monitor individual bank liquidity conditions to ensure that banks have the needed liquid assets to respond to such reversal."
Britain's huge service sector bounced back in January, the first official figures out this year showed, raising hopes that the economy started 2010 on a stronger footing. The service sector is on course for 0.7% growth for the first quarter of this year, according to business surveys.
Output from the service sector, which accounts for three quarters of GDP, rose 1.3% month-on-month, the Office for National Statistics (ONS) said, the biggest monthly rise in more than eight years, after the sector shrank 1.1% as snow hit in December.
Without the distortions from the weather, growth would have been "broadly flat" over the two months, said statisticians.
Taking business surveys into account suggests the sector is on course for 0.7% growth for the first quarter of this year, said Chris Williamson, an economist at researchers Markit.
That could help GDP as a whole grow as much as 0.8%, after falling 0.5% as the weather hit in the previous quarter, he said.
However, he noted output for "Government and other services" jumped 0.7% in January, its biggest monthly rise in two years.
The leap could indicate the public sector has embarked on a "last-ditch" round of spending before the new financial year starts and austerity measures bite in earnest. If so, growth could end up looking strong for the quarter, but this would not be an indication of the sector's - or the wider economy's - true strength, said Mr Williamson.
The delicate outlook for the sector was confirmed as the CBI's survey of retailers showed a slight pick-up in sales growth for March. A net balance of 15% of shops saw year-on-year growth, up from 6% in February, but they thought sales poor for the time of year.
"Look beneath the surface and conditions remain tough," said Ian McCafferty, the CBI's chief economic adviser. "Even the best performing sectors – namely grocers and clothing - have seen volumes continue to fall."
Consumers are under pressure as inflation climbs but wages do not keep up. Confidence stayed in the doldrums this month after collapsing in January, the monthly survey from GfK NOP showed, sticking at a reading of -28.
Given the pressures on growth, interest rates will probably stay at their record 0.5% low until the second half of the year, according to a Reuters poll of economists, despite inflation currently running well over the 2% target at 4.4%.
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