GDP INDUSTRY ANALYSIS
UPDATE
August/September 2011
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Bureau of Economic Analysis reported that real gross domestic product in the US increased at an annual rate of 1.3% in the second quarter of 2011. This acceleration in real GDP was driven primarily by a slowdown in import demand, stronger federal spending, and a pickup in non-residential fixed investment. Real gross domestic purchases - GDP minus net exports - was weaker than the headline, increasing 0.7% on the quarter, reflecting the positive contribution from external demand. Domestic demand is barely growing - remember these are annualized rates, not q/q rates.
Below the hood, the pace of personal consumption expenditures slowed markedly, +0.1% in the second quarter compared to +2.1% in the first. Some of the drag to consumption will bounce back in the third quarter, as auto sales and the supply chain disruptions dissipate - durable goods decreased 4.4% over the quarter. On the bright side, real nonresidential fixed investment picked up 6.3% in the second quarter and tripling the pace seen in the first. Real net exports contributed a large 0.58% to the headline growth number, as real exports maintained a healthy pace and imports decelerated over the quarter.
Overall, the story is pretty consistent with the details of the labor market: the economy is improving, but domestic demand is very weak. The US economy is increasingly likely to enter a 'growth recession' - sub-potential growth - in 2011. And as David Altig highlights, a growth recession is generally associated with an economic contraction.
The drop in Q1 2011 growth to 0.4% was certainly not expected. Much of it was due to a reclassification of domestic inventory build (adds to GDP) to imports (subtracts from GDP). But there's a lot more.
The estimates reflect the annual revisions of the US national accounts. The revisions date back to 2003, which show a deeper recession and a quicker rebound. We now know that GDP bottomed in the second quarter of 2009, after having fallen 5.1% since the fourth quarter of 2007. Previously, the cumulative drop in GDP was 4.0%. The recovery through Q1 2011 was slightly faster, 4.9% in the pre-revised data compared to 4.64% in the revised series.
Broadly speaking, though, the revisions show that economic momentum is petering out on a 6-month/6-month annualized basis. In sum, nominal spending on consumption goods and services was revised downward by 307.8 billion dollars spanning the years 2008-2010, and nominal fixed investment spending dropped by 83.9 billion dollars compared to previous estimates. Government spending is proving to be less of a drag than previously thought (in nominal terms), having been revised 5 billion dollars higher compared to previous estimates over the same period.
Brazil’s economy expanded at its fastest pace in six months in July, even as the central bank bets on slower growth to curb the fastest inflation in six years.
Economic activity, a proxy for gross domestic product, rose 0.46% in July from the previous month, according to the central bank’s seasonally adjusted index, after contracting a revised 0.25% in June. The increase was in line with the 0.50% median forecast in a Bloomberg survey of 11 analysts.
Central bank President Alexandre Tombini cut the benchmark interest rate a half point to 12% on Aug. 31, after raising it at the previous five policy meetings, citing a “substantial deterioration” in the global economy. Traders are betting the central bank will cut the rate to 11% by the end of the year, according to Bloomberg estimates based on interest rate futures.
Activity was up 1.66% from the same month a year ago, according to the non-seasonally adjusted series.
President Dilma Rousseff today said that she hopes Latin America’s biggest economy will grow “a little more” than 4% this year, more than analysts are forecasting.
“We’re going to make an effort for growth to reach 4% and a little more,” she told reporters in Brasilia. “We’re counting on a resurgence in the last quarter.”
Economists lowered the growth forecast in the latest central bank survey. They now expect growth to slow to 3.56% this year, down from a forecast of 4% at the start of June. Last year the economy expanded 7.5%, its fastest pace in more than two decades.
Brazil’s growth rate will lag that of Russia, India and China, the other so-called BRIC countries, between 2011 and 2014, according to forecasts from the International Monetary Fund.
Consumer prices rose 7.23 percent in the year through August, exceeding the 6.5 percent upper limit of the central bank’s target range for a fifth straight month. The bank targets inflation of 4.5%, plus or minus two percentage points.
The Chinese Academy of Sciences has published the country's first quality assessment system for GDP for its 31 provincial level regions. For the first time in Chinese history, Gross Domestic Product does not only refer to the sheer numbers of economic growth rate.
GDP is assessed on five criteria under the new system, including local economic growth, social development, environmental protection, people's living standard and government management.
The capital Beijing enjoys the highest GDP ranking for its environmental protection and treatment of pollution. The country's economic hub Shanghai ranks second. The city gets full marks for living standards. Eastern China's Zhejiang Province ranks third.
Provinces with fast economic growth rate do not necessarily use their GDP better. Beijing and Shanghai's economic growth rate are both below the national average. While provincial regions like Qinghai Province enjoy the fastest economic growth rate, they rank among the bottom on the quality list.
The Indian Prime Minister's Economic Advisory Council (PMEAC) lowered the economic growth projection for the current fiscal to 8.2% from 9% earlier, citing the uncertain global outlook, high domestic inflation and subdued industrial performance.
The PMEAC, in its Economic Outlook for 2011-12, also said inflation will remain around 9% until October and thereafter, it would ease to 6.5% by the end of March, 2012, indicating that the RBI may continue with its tight monetary policy for some more months to come.
"The projected growth rate of 8.2%, though lower than the previous year, must be treated as high and respectable, given the current world situation," PMEAC Chairman C Rangarajan told reporters in New Delhi.
The RBI has already hiked benchmark rates 11 times since March, 2010, as part of its efforts to tame inflation.
Rangarajan, who had earlier presented the report to Prime Minister Manmohan Singh, said India's agriculture output is projected to grow at 3% in 2011-12, with a favorable monsoon on the cards, as against 6.6% witnessed in the previous fiscal.
Underlining the weak performance by industry, he said the sector is likely to grow by 7.1% in 2011-12, as against 7.9% in 2010-11, due to a slowdown in investment and the weak business sentiment.
"Domestic industries are uncertain about their investments, because they feel, right or wrong, something is not moving... Surely foreign investors will be doubly
conscious," PMEAC member Saumitra Chaudhuri said.
The services sector, which accounts for over 50% of the GDP, has, however, been projected to grow at 10% this fiscal compared to 9.4% in the previous fiscal.
Explaining the reasons for the downward revision of the growth forecast, Rangarajan said, "We have looked at what is happening in the US and Europe, which have an impact on Indian economy... International situation has not improved since February, 2011. It has rather deteriorated... the current international environment is not conducive for rapid growth."
In February this year, the PMEAC had projected that the Indian economy would grow at 9% this fiscal. Rangarajan said: "To keep the economy growing at 9%, it is important to increase the fixed investment rate."
The economy was growing at over 9% before the global economic crisis pulled down the rate to 6.8% in 2008-09. After recovering from the slowdown, it recorded a growth rate of 8.5% in the 2010-11 fiscal.
The PMEAC's projection for 2011-12 is higher than the 8% growth forecast made by the Reserve Bank in its annual monetary policy, but it is lower than the government's target of 8.5%.
Giving priority to controlling inflation, the PMEAC said, "The RBI will have to continue to follow a tight monetary policy till inflation shows definite signs of decline."
The RBI has already hiked benchmark rates 11 times since March, 2010, as part of its efforts to tame inflation. To contain inflation, Rangarajan said there is a need for policy intervention at different levels.
"We should use foodgrains in the public distribution system (PDS) to moderate food prices," he said. It is also important for fiscal policy to contain demand pressure and ensure that the fiscal deficit does not exceed the budgeted level, he added.
For 2011-12, the PMEAC forecast a fiscal deficit of 4.7%, which is inclusive of a 0.1T off-Budget liability, for the Centre, and 2.1% for states.
"Revenue may be equal to the budgeted level, but expenditures need to be checked," Rangarajan said. Stating that materialization of Goods and Services Tax (GST) and the Direct Taxes Code (DTC) would play a key role in the medium-term, he said the government needs to increase efforts for revenue collection and reduce tax arrears.
The PMEAC report also said that capital flows this fiscal were likely to rise to $72 billion from $61.9 billion in 2010-11.
Foreign direct investment (FDI) inflows, according to the advisory panel, might touch $ 35billion this fiscal, up from $23.4 billion in 2010-11. However, the FIIs are likely to infuse just $14 billion in FY'12, less than half of the $30.3 billion they pumped into the country in the previous fiscal.
Commenting on the current account deficit (CAD), Rangarajan said: "Given our growth needs, a moderate trade deficit and CAD are inevitable. To finance the CAD, foreign investment flows need to be promoted. However, CAD (should be) contained below 2.5% of GDP."
Referring to the proposed Food Security Bill, he said availability of foodgrains should be considered while promising legal entitlements.
Efforts, he added, should be made to reform the PDS, as well as introduce smart cards and unique identification numbers to ensure that the intended benefits reach the poor and needy.
Among the key concerns for the economy, the PMEAC said there was a need to bridge the growth disparity between states and take policy initiatives on contentious issues concerning the power sector, land acquisition and environmental clearances for industrial projects.
The states, Rangarajan said, also need to revise power tariffs, reduce Aggregate Technical and Commercial losses and focus on non-conventional energy.
Inflation in Nigeria, Africa’s biggest oil producer, stayed near the limit of a central bank target and the economy expanded 7.72% in the second quarter, keeping pressure on the bank to raise interest rates.
The inflation rate fell for a second month to 9.3%, the lowest level in more than three years, from 9.4% a month earlier, Yemi Kale, head of the National Bureau of Statistics told reporters in Abuja, the capital.
“Much of the improvement in headline consumer price inflation can still be explained by the positive influence of domestic food prices, and this should continue in the months ahead,” Razia Khan, the London-based head of African economic research at Standard Chartered Bank Ltd., said in an e- mailed note to clients.
The central bank raised its benchmark interest rate on July 26 for the fourth consecutive time as it sought to stabilize the naira and slow inflation to below its 10% target. The bank is determined to make sure inflation remains under control, Governor Lamido Sanusi said recently.
With fiscal policy contributing to “excessive liquidity conditions” and plans by the state-owned Asset Management Corp. of Nigeria to increase debt issuance, even a pause in inflation “is unlikely to be the end of Nigeria’s tightening cycle,” Kahn said.
Nigeria’s economy, the second-biggest in sub-Saharan Africa after South Africa, expanded 7.72% in the second quarter, compared with 7.69% a year earlier, Kale said. Growth was driven by the non-oil sector, which expanded 8.82%, he said.
Crude oil production rose to an average of 2.45 million barrels a day in the second quarter, compared with 2.35 million barrels a year earlier, boosted by less violence in oil- producing areas, Kale said.
The European Commission maintained its forecast that Poland’s economy will expand by 4% this year in its autumn interim forecast for the European Union’s seven largest member states.
Economic growth will slow on a quarterly basis to 0.6% in the third quarter and 0.5% in the fourth quarter from 1.1% in the first and second quarters, the Commission said in an e-mailed statement.
“The deteriorating global outlook is expected to further drag down exports and consumer and producer confidence, translating into more sluggish employment growth towards the end of 2011,” the statement said. “Moreover, easing of real wage growth is expected to limit the potential for a further rebound on private consumption.”
Poland’s inflation rate will reach 3.7% for the full year, according to the harmonized index of consumer prices, below the Commission’s spring forecast of 3.8%. Price growth “is expected to gradually ease to around 3.5%” in the fourth quarter as food and fuel prices ease and domestic and external demand slow, the Commission said.
A European Commission (EC) and International Monetary Fund (IMF) joint team estimates that Romania has met all performance criteria set for late June, the Romanian authorities implementing the policies in the program..
For 2011 a GDP growth of around 1.5% is expected, while in 2012, the team forecasts a growth of 3.5 to 4%, depending on the growing domestic demand, including better absorption of EU structural funds. Also, it is anticipated that the inflation will decrease, but will remain above the inflation target for 2011 set by the Romanian National Bank, estimating a decline of 3.5% in 2012.
In 2011, Romania meets the budget deficit target of 4.4% of GDP (in cash terms), and less than 5% of GDP in terms of commitments (ESA), shows the EC and IMF release on the evaluation mission in Romania. In the first semester, Romania’s VAT and excise revenues have exceeded estimates, but the non-tax revenues were disappointing. The Romanian Government remains committed to reducing the general government deficit below 3% by 2012, in terms of both cash and in terms of commitments. Better revenue collection, cost optimization, including better targeting of social assistance to poor and vulnerable in society, stringent control of spending and other measures will be essential to achieve the objective, is pointed in the IMF and EC release.
The World Bank cut Russia's gross domestic product (GDP) growth forecast by 9% to 4.0%, saying lower commodity prices and increased global economic risks will hinder expansion.
"With heightened external risks because of the slowdown in the United States and the European Union, the sovereign debt crisis in Europe and attendant decline in oil prices, we now expect Russia's real GDP to grow 4% in 2011," the World Bank said in a statement.
Its previous forecast was for 4.4% growth this year.
Earlier, the International Monetary Fund (IMF) said it was keeping its 4.8% GDP growth forecast for Russia for this year, also reiterating its call for a tighter monetary policy.
The World Bank also warned Moscow that it must make fiscal adjustments to reduce vulnerability to oil price shocks, echoing concerns voiced recently by Standard and Poor's and Fitch Ratings.
The World Bank, following official revisions by the Russian government to its 2012-2104 budget, now sees the budget deficit at 1.6%of GDP next year.
"However, we believe that significant downside risks are associated with global demand and highly volatile oil prices and new expenditure pressures from the planned modernization of the army, spending on infrastructure, and additional social spending, especially during the election period," the World Bank said in the statement.
It said that if oil prices were to fall to $60 per barrel next year and there were no countervailing fiscal measures, the budget deficit would widen to 5.3% of GDP and the economy would also enter a recession
South Africa could grow only 0.8% in the third quarter and by 1.7% in the fourth quarter, implying that the country is not likely to enter into recession, Peter Attard Montalto, economic analyst at Nomura International forecasts.
South Africa's growth faltered to 1.3% in the second quarter from 4.5% in the first quarter.
Nomura kept its forecast for 2011 GDP growth unchanged at 3.1% but revised slightly downwards its 2012 growth forecast to 3.4% from 3.5%.
"Risks to this year are strongly skewed to the downside however, especially if recent weak manufacturing numbers become a trend lower and we have negative growth in the third quarter," Attard Montalto said.
South African growth was in a "precarious" position and entering "a more difficult" second half, Attard Montalto suggested, adding that the situation "could well be aided by rate cuts".
"Rate cuts would help these areas dampened by sentiment cuts, such as durable goods consumption," he said.
Attard Montalto said their main concern going forward was that with such heightened uncertainty in second half of the year and potentially an even worse labor market dynamic, durable goods consumption would contract, while services would stagnate further.
Current spending by government, which was low in the second quarter, was expected to become more supportive in future.
The National Bureau of Statistics (NBS) has said that although Tanzania has recorded notable achievements in real Gross Domestic Product (GDP), it has to ensure the economy remains stable.
Briefing reporters after he had released the second 2011 quarterly GDP report, NBS director of economic statistics Morrice Oyuke said Tanzania’s GDP had so far increased at the rate of 6.7% in the second quarter of 2011 compared to 7.2% in the second quarter of last year.
He noted that despite the increased growth rate, citizens still suffered from economic hardships due to an increase in the population growth and power woes.
He said electricity activities had increased by 3.1% compared to 10.0% (quarterly GDP) of last year, saying a decline by 6.9% was due to a shortage in rainfall, especially in hydro-dam areas and the servicing of gas turbines during the period.
Moreover, the report showed that the agricultural sector registered a growth rate of 3.5% in the second quarter of this year compared to 2.9% of last year.
According to the report, during the period under review there was enough rainfall, especially in Rukwa and Ruvuma regions and farmers heeded advice given by agricultural extension officers in the choice of seeds.
A growth rate of 0.7% was recorded in the fishing industry during the second quarter of this year compared to 1.9% in a corresponding quarter of last year.
NBS attributed the small increase mainly to demand for fish in both local and foreign markets.
Furthermore, mining and quarrying activities recorded a growth rate of 5.8% in the second quarter of this year. This growth rate was due to a slight increase in gold, diamond and tanzanite production.
A decline by 1.3% in the manufacturing industry was due to power blues in the country, which affected manufacturing establishments.
The sector recorded a growth rate of 6.2% in the second quarter of this year compared to 7.5% last year.
In the service industry, the report recorded a 6.0% in the second quarter of this year compared to last year’s 9.6%, attributing the 3.6% decline was due to a slight increase in traded domestic manufactured goods and imports of merchandised goods in the period under review.
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