GDP UPDATE
November/December 2011
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
The U.S. economy will continue its slow growth next year and joblessness will remain high, according to a survey released by the National Association for Business Economics.
“Economists responding to the latest NABE Outlook Survey expect moderate economic growth through 2012, with little likelihood of another recession or an outbreak of inflation,” said NABE Outlook Survey Chair Shawn DuBravac, chief economist at the Consumer Electronics Association.
In the survey, those who responded expect inflation-adjusted gross domestic product, known as real GDP, to grow at 2.5% in the final quarter of 2011 and 2.4% in 2012.
Unemployment, the group said, is expected to decline slightly next year from its current 9% level. Business spending and housing starts are expected to continue to rise. “Corporate profits and stock prices are predicted to strengthen. But the panel remains concerned about debt-related issues in Europe,” the NABE said.
Highlights from the report:
Bank of America Merrill Lynch has cut its India GDP growth estimate for FY13 by 30 basis points to 7.2% citing "a deteriorating global environment" with hopes of G3 recovery fading.
In the event of double dip recession in the U.S., it expects India to remain the second growth haven after China. "Even so, domestic demand should set a floor to growth at 6%, somewhat lower than FY09's 6.7%," it said. With fiscal deficit widening to 8.3% of GDP from FY08's 4.5%, it sees headroom for pump priming exhausting.
2011 is currently forecast to deliver negative GDP growth of -0.5%. However, with the inventory rebuild and infrastructure spend after the earthquake of March 2011, GDP for 2012 is estimated to show growth of 2.2%.
When compared to China at more than 8.5% this seems rather insignificant, however, with the eurozone expected to grow by just 0.3% next year, and the US 1.8%, the number for Japan becomes more significant. We are cognizant that simple numbers do not equate to stock market returns, however, historically the Topix has rebounded positively when the growth outlook turns upwards.
Japan’s new Prime Minister, Mr. Noda, has highlighted the need for the country to embrace more cooperative trading terms with its trading partners. Recent news has been focused on whether Japan will join the Trans-Pacific Partnership (TPP). For exporters this is seen as vital to their competitiveness.
Singapore's economy grew faster than previously estimated in the third quarter, but the government warned that the pace of expansion next year may slow significantly, given the current global economic uncertainties. The Ministry of Trade and Industry (MTI) said the island nation's economy expanded 1.9% in the quarter that ended September from the previous three months in seasonally adjusted, annualized terms, compared with a 1.3% expansion estimated last month. From a year earlier, the economy expanded 6.1%, faster than the 5.9% growth reported earlier.
"Global economic conditions are expected to remain subdued in 2012, with the outlook clouded by increased uncertainty and financial volatility," the ministry said in a statement.
It projected that the economy is likely to grow 1% to 3% next year and added that the numbers don't factor in downside risks to growth, such as that of a worsening debt situation or a full-blown financial crisis in the advanced economies.
"Should these risks materialize, growth in the Singapore economy in 2012 could come in lower than expected," the MTI said.
Singapore's export-dependent economy is likely to face greater headwinds in the October-to-December quarter, with some economists warning of a contraction as global demand remains lackluster.
Separately, the International Enterprise Singapore cut its forecast for Singapore's non-oil domestic exports growth in 2011 to 2%-3%, from 6%-7% previously. For 2012, the government agency expects non-oil domestic exports to grow 3%-5%.
The latest set of data and assessments by Singapore indicates that export-dependent nations like South Korea and Taiwan are also likely to face challenges in coming months, as demand for their goods from advanced economies may remain weak.
"Although resilient domestic demand in emerging Asia will provide some support to global demand, it will not fully mitigate the effects of an economic slowdown in the advanced economies," the MTI said.
Output in the manufacturing sector rose 12% in the third quarter from a year earlier, while the services and the construction sectors grew 3.7% and 0.3% on year, respectively.
Thailand's National Economic and Social Development Board cut its full-year growth forecast following data that showed the country's economy grew at a slower-than-expected pace in the third quarter, and due to expectations that the impact of the country's worst floods in decades will cause a contraction in the final quarter.
The weak growth data and dim economic outlook have also raised the chance that the Bank of Thailand will lower its benchmark interest rate at its next policy meeting.
"The third-quarter growth data is quite disappointing. This makes it almost definite that the central bank will deliver a rate cut at the upcoming policy meeting," said Pornthep Jubandhu, macroeconomic analysis manager at Siam Commercial Bank.
Economists generally anticipate the current 3.50% rate to be cut by 0.25 percentage point, but some bond-market participants have started to price in the possibility of 0.50-percentage-point rate reduction in recent trading sessions.
The development board, the government's economic planning agency, said gross domestic product expanded 0.5% in the July-September period compared with the previous quarter, and grew 3.5% year-on-year as manufacturing, especially in the automobile and electronics sectors, returned to normal after disruptions caused by Japan's March earthquake and tsunami.
The median forecast of six economists polled earlier by Dow Jones Newswires was for GDP to have expanded 1.55% quarter-on-quarter, and 4.4% year-on-year.
Revised figures for the April-June period showed Thailand's GDP was flat compared with the previous quarter but grew 2.7% year-on-year.
The severe flooding has knocked off 0.7 percentage points from third-quarter growth, which could have risen 4.2% from a year earlier, board secretary-general Arkhom Termpittayapaisith said. He added that the full effect of the disaster would be realized in the fourth quarter and would likely cause a year-on-year contraction of 3.7%.
The board previously forecast year-on-year growth for the October-December period to be 5%.
The agency estimates the flooding to have caused 200 billion baht-300 billion baht of damage. Accordingly, it has slashed its full-year economic growth forecast to 1.5% from 3.5%-4%.
It projects GDP growth for next year to be 4.5%-5.5%, due in part to rebuilding activities and a low base effect.
"Since September, Thailand has been severely hit by the flooding, which has had a widespread impact," Mr. Arkhom said. "It has disrupted the operations of several plants in industrial estates in Ayutthaya and Pathum Thani provinces, and affected supply chains, transportation and logistics."
He said he expects factories in seven industrial estates in central Thailand that were inundated by flood waters to resume production in late January to early February.
"Recovery of the manufacturing sector, particularly for companies located in the flooded areas, may be delayed, and that is likely to limit economic growth in the first quarter [of next year]," he said.
German and French economic growth rebounded in the third quarter on stronger consumer spending, even as the region braces for a recession sparked by an escalating sovereign debt crisis.
Gross domestic product in Germany, Europe’s largest economy, rose 0.5% from the second quarter, when it increased 0.3%, the Federal Statistics Office in Wiesbaden revealed. The French economy, Europe’s second- biggest, expanded 0.4% after contracting 0.1% in the previous period. The growth data were in line with the median forecasts in Bloomberg News surveys of economists.
Germany and France may succumb to the debt crisis in the fourth quarter as growth falters across the euro region, their largest export market. The Spanish and Belgian economies stalled in the three months through September, while Portugal’s contracted for a fourth straight quarter. French bond yields have jumped almost 1 percentage point in two months, and Italy’s borrowing costs last week surged above 7%, the level that triggered bailout requests from Greece, Portugal and Ireland.
“With France and Italy seemingly drowning in the maelstrom of the debt crisis, the German economy has lost its immunity,” said Carsten Brzeski, a senior economist at ING Group in Brussels. “Austerity measures in France and Italy will also hurt German exporters.”
The economy of the 17-nation euro region probably expanded 0.2% in the third quarter, the median of 39 forecasts in a Bloomberg survey shows.
The European Commission cut its 2011 and 2012 euro-area forecasts recently to 1.5% and 0.5% from 1.6% and 1.8% respectively. EU Economic and Monetary Affairs Commissioner Olli Rehn said the recovery “has come to a standstill.”
The German statistics office revised up second-quarter growth from an initially reported 0.1%. It said household spending was the main driver of growth in the third quarter, with company investment in plant and machinery also making a positive contribution. Rising exports were offset by imports so that net trade barely impacted on GDP. Construction activity declined somewhat in the quarter, the office said.
In France, consumer spending gained 0.3% in the third quarter and investment increased 0.4%. Net trade contributed 0.1% to growth.
“The third quarter is the calm before the storm,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “Most indicators and the escalation of debt crisis suggest the economy is heading for a serious contraction.”
German business confidence fell to a 16-month low in October, unemployment rose for the first time in more than two years and factory orders dropped for a third month in September, recording the longest streak of monthly declines since the collapse of Lehman Brothers Holdings Inc.
Heidelberger Druckmaschinen AG announced last week that it will cut employees’ working hours in the second half of the year. Wincor Nixdorf AG is currently considering such a move.
Chancellor Angela Merkel’s economic advisers forecast that German growth will slow to 0.9% next year from 3% in 2011. France’s economy will expand 0.6% in 2012 after growing 1.6% in 2011, according to the European Commission.
German industrial companies will find it “difficult” to maintain output over the next six months amid weaker demand, the Bundesbank said in its latest monthly report. “Businesses have again scaled back their expectations and the inflow of new orders, especially from abroad, has lessened noticeably” it said.
Finland's economic growth quickened in the third quarter, preliminary data from Statistics Finland showed. The volume of gross domestic product rose 0.9% during July to September from a quarter ago. The statistical office trimmed the second quarter growth to 0.1% from 0.6%. The downward revision largely reflects the revisions in the value added of the electrical and electronics industry.
On a yearly basis, working-day adjusted GDP grew by 2.7%, faster than the revised 1.9% expansion seen in the second quarter.
In the third quarter, the volume of exports grew by 2.4% from the previous quarter but contracted by 2.7% from twelve months ago. Imports decreased by 1.7% from the previous quarter and by 7.1% year-on-year.
At the same time, private consumption advanced 0.5% sequentially and by 3.2% from the prior twelve months. Investments went up by 1.6% from the previous quarter and by 4.2% year-on-year.
A planned debt swap with private bondholders can reduce Greece's 2012 budget deficit by more than a third from this year's level to 5.4% of GDP if it goes ahead as planned, a final budget draft showed recently. Under the guidance of its international bailout lenders, the European Union and the International Monetary Fund, Athens is struggling to rein in its public debt and fiscal deficit to avoid bankruptcy and a possible exit from the euro.
Part of that effort is a plan to cut Greece's privately held debt load in half, which the budget draft said would entail swapping 200 billion euros ($270 billion) in existing bonds with 70 billion euros in new paper and a 30 billion euro payment in cash to creditors who take part.
Excluding the effects of the debt swap, the budget draft predicted the country's fiscal gap would fall to 6.7% of gross domestic product next year, from 9% in 2011.
"After a historical course of steady increase of public debt, now this will be reversed," Finance Minister Evangelos Venizelos told lawmakers as he presented it to parliament.
"Now the course is that of reducing public debt and removing the burden from Greeks' backs."
Lawmakers will begin debating the budget draft at committee level promptly and will then be approved by a plenary session of parliament at a date yet to be set.
Parliament approved a new national unity government led by technocrat Prime Minister Lucas Papademos in a vote of confidence. Venizelos kept the portfolio he had held in the previous Socialist administration.
The new cabinet is aiming for a primary budget surplus -- with revenues exceeding spending when debt maintenance costs are excluded -- next year so it can start chipping away at its debt load which, without the swap deal, is estimated to reach almost 200% of gross domestic product next year.
To do that, Papademos's government must tackle rampant tax evasion, start selling off billions of euros worth of inefficient public companies and lay off public workers - all reforms planned but never executed by its Socialist predecessor.
The budget also forecast that a recession expected to enter a fifth year in 2012 would slow to an economic contraction of 2.8%, versus an expected 5.5% this year.
Norway's economy grew more than expected in the third quarter, according to Statistics Norway.
The mainland Norway's gross domestic product grew 0.8% sequentially in the third quarter, better than the expected 0.7% rise, but down from the 1.3% expansion in the second quarter.
Production of goods, and in particular the production of electricity, contributed strongly to the increase.
The overall GDP for Norway climbed at a faster pace of 1.4% following the second quarter's 0.5% increase. Economists were expecting the sequential growth to rise to 0.8%
Poland’s economy grew faster than economists forecast in the third quarter as investment accelerated and a weaker zloty helped boost exports.
Gross domestic product rose 4.2% from a year earlier compared with a 4.3% increase in the previous three months, the Warsaw-based Central Statistics Office said. That’s above the 4% median estimate of 30 economists surveyed by Bloomberg.
The European Union’s largest eastern nation, the only member of the 27-member bloc to dodge recession in 2009, has remained resilient even as the debt crisis in the neighboring euro region threatens to damp demand for its exports. Still, Poland isn’t immune to slower growth among its main trading partners and its economy will probably weaken into 2012, according to London-based HSBC economist Agata Urbanska.
“Investment growth held up strong but domestic-demand growth decelerated, dragged down by a contraction in public consumption,” Urbanska wrote in a note to clients. The stronger-than-expected growth “does not moderate the downside risks to the economic growth in the coming quarters.”
Sales at Unilever Polska slowed this year for the first time, “but this is not a drama as Poland is for us one of the best markets in the region,” Sanjay Dube, the company’s president, told Bloomberg Business Week this week.
Poland’s industrial output as measured by value grew 6% from a year ago in the third quarter, the office reported. KGHM Polska Miedz SA more than tripled third- quarter profit as the copper producer, which sells two thirds of its output abroad, benefited from higher prices for the metal and the weaker zloty.
The Organization for Economic Cooperation and Development this week upgraded its 2011 growth forecast for Poland to 4.2% from a May projection of 3.9%. Still, market consensus is moving toward 2012 growth of less than 2%, according to Citibank Handlowy’s chief economist Piotr Kalisz, who sees 1.9% expansion.
“Unfortunately, the scenario of deep recession in the euro region means there’s a risk our forecast may shift even lower,” he wrote recently in an e-mailed note.
Portuguese Finance Minister Vitor Gaspar said his country’s economy is estimated to contract 3% next year.
The European Commission, the European Central Bank and the International Monetary Fund said in a recent statement about the second review of Portugal’s financial aid program that the country’s gross domestic product was forecast to contract 3% next year. The European Commission also forecast the Portuguese economy will shrink 3% next year.
Portugal’s GDP is forecast to shrink 1.6% this year, Gaspar said at a parliamentary commission in Lisbon. The government, on Oct. 17, said it forecast GDP would shrink 2.8% in 2012 after a contraction of 1.9% this year.
According to the forecast by the Ministry of Economic Development, on the basis of 2011 economic growth in Russia it will reach 4.2%. A significant increase in growth rates, compared to the first six months, in the second half of 2011 is required to make this prediction come true. According to preliminary estimates, Russia’s GDP increased by 4.1% in January-September 2011 against the same period of last year. Earlier, the statistics service reported that in the first six months the country’s economic growth made up 3.7% over the same period in 2010..
GDP growth was largely driven by a dramatic increase in the volume of agricultural products. During the first nine months its recovery in this sector was 16%. At the same time, industrial output in January-September increased by 5.2% over the same period in 2010, while freight transport increased by 3.8%.
Saudi Arabia's economy is expected to grow by 5.1% in 2012 despite the unpredictable economic situation in advanced countries, a new report has revealed.
"As a result of a wide variety of trading partners to which Saudi Arabia exports its products, it will have a foreign currency reserve valuing 2 trillion Saudi riyals," the report said, adding that the gross domestic product (GDP) will grow by 5.1% in 2012.
On the credit situation of banks, the Riyad Capital report said: "Bank budgets have improved considerably after the passage of six quarters from the period for getting rid of high-risk assets."
According to the report, the fall in interest rates caused some problems to the banking sector in general. However, the banks tried to increase their revenue by revising their lending portfolios, the report pointed out.
Riyad Capital said an increase in personal banking would help banks achieve a balance between risks and revenues. However, a fall in the issuance of government bonds poses a challenge to the country's banking system, it said.
"The European debt crisis will limit investment options and force banks to follow a conservative policy... followed in the past," it added.
Slovenia’s economy unexpectedly contracted in the third quarter as export growth lost pace and construction failed to recover. Gross domestic product shrank 0.5% from a year earlier, compared with revised growth of 0.8% in the second quarter, the statistics office in the capital, Ljubljana, said on its website. Economists expected GDP to rise 0.8%, the median of seven estimates in a Bloomberg News survey showed.
Slovenia’s export-dependent economy is sliding into a recession with demand for its goods in Europe waning as governments carry out austerity measures to tackle the worsening sovereign-debt crisis. Europe, where Slovenia sends about two-thirds of all exported goods, may also enter a “deep recession,” Capital Economics said.
“It’s a negative surprise as I expected a drop only in the next quarter,” Radivoj Pregelj, an analyst at lender Abanka Vipa d.d. said in an e-mail. “This doesn’t bode well for next year as forecasts aren’t promising.”
Exports rose an annual 5.6% in the third quarter from a year ago, down from an 8.5% pace in the second quarter, the statistics office said. Construction, which powered the expansion before the financial crisis that started in 2008, fell again in the third quarter, declining just under 20% from a year earlier.
Slovenian GDP will expand 1% this year and slow to a 0.3% pace in 2012, the Paris-based Organization for Economic Cooperation and Development said in a recent report. The central bank, which in October forecast 1.3% growth in 2011, said risks from the debt crisis may jeopardize the estimate.
“This will make the next government’s task to reduce the deficit even more difficult,” Michal Dybula, an economist at BNP Paribas in Warsaw, said by phone. “The new Cabinet can either inflate the deficit even further and risk the increase in risk premiums, or cut it more boldly to allay investors’ concern over debt.”
Slovenians will elect a new government in December to replace the outgoing administration of Prime Minister Borut Pahor. The new Cabinet will need to tackle the worsening fiscal position, which prompted Standard & Poor’s, Moody’s Investors Service and Fitch Ratings to lower the country’s credit score one level, starting in September.
Slovenia’s deficit is estimated to narrow to 5.7% of GDP this year from 5.8% in 2010, according to the European Commission. Public debt, which has doubled since 2007, will widen to 45.5% of GDP this year and reach 50% in 2012, the EU’s executive arm said.
Consumer prices in Slovenia rose 2.7% in November from a year earlier, the same pace as the previous month, and 0.3% in the month. Retail sales rose 1.8% from a year earlier and 0.8% in the month, the statistics office said.
Switzerland’s economy grew at the slowest pace in more than two years in the third quarter as companies cut spending and exports slumped.
Gross domestic product rose 0.2% from the second quarter, when it increased 0.5%, the State Secretariat for Economic Affairs in Bern said. That’s the slowest pace since the second quarter of 2009. Economists forecast a gain of 0.1%, the median of 20 estimates in a Bloomberg News survey showed. Exports of goods and services fell 1.2% and investment including construction slipped 1%.
Switzerland’s economy is cooling as the franc’s 7% ascent against the euro over the past year undermines foreign sales just as global growth weakens. The KOF economic barometer dropped to the lowest in more than two years in November and Swiss central bank Vice President Thomas Jordan said last month the economy “is entering a difficult phase, with a very low and possibly even slightly negative growth rate.”
“Switzerland came off lightly in the third quarter, but the worst is yet to come,” David Kohl, deputy chief economist at Julius Baer Group in Frankfurt, said by telephone. “The country’s export-led economy won’t be able to decouple from the euro-area slowdown and will slide into recession.”
In the year, the economy expanded 1.3%, down from 2.2% in the second quarter, today’s report showed. The state secretariat had previously reported a second-quarter expansion of 0.4% from the first quarter.
Private consumption spending gained 0.1% in the third quarter, unchanged from the previous three months, this report showed. Imports fell 0.2% from the second quarter, when they declined 0.7%.
The Swiss economy may grow 1.8% this year and 0.8% in 2012, the Organization for Economic Cooperation and Development said, calling currency developments the main threat to growth. The Paris-based group had previously projected gross domestic product to rise 2.5% in 2012.
Holcim Ltd. (HOLN), the world’s second-largest cement maker based in Jona, Switzerland, said last month third-quarter profit fell on rising energy costs and the strength of the franc. Credit Suisse Group AG (CSGN), Switzerland’s second-biggest bank, last month announced further job cuts to lower costs.
“Swiss GDP growth in the second half of this year looks likely to be very disappointing,” Dirk Schumacher and Adrian Paul, analysts at Goldman Sachs Group Inc. (GS), said in a note. “While the franc has admittedly depreciated when compared with the summer, it still remains overvalued,” weighing on exports.
Zambia's economy should grow at a pace of 6.9% next year due to a strong maize harvest, healthy copper exports and a step-up in infrastructure investment from the new administration of President Michael Sata, according to a Reuters poll.
However, the poll of 10 analysts showed the growth outlook for this year was 6.8% - unchanged from last quarter's survey.
"Zambia's high-grade copper deposits, strong private investment and emerging agricultural exports should help underpin strong growth," said Gregan Anderson, economist at London-based consultancy Business Monitor International.
Inflation is seen remaining in single digits, helped mainly by strong harvests keeping a lid on the price of maize, the southern African nation's staple food.
The poll showed that inflation was expected to average 9% this year before slowing to 7.9% next year.
"Food accounts for 50% of the consumer basket and projections are that continued increases in the maize harvest should have a positive effect on CPI, keeping it within single digits," said Fred Mulenga of Zanaco, a government-owned bank.
The budget deficit is expected to widen to 5.1% of output next year from 3.5% this year -- wider than a government forecast of 4.3% for 2012 outlined in this month's budget.
"The fiscal deficit is projected to increase as the government increases spending on new infrastructure projects," Mulenga said.
Finance minister Alexander Chikwanda unveiled an expansive 2012 budget, with big increases in social spending and farming subsidies to be paid for by a rise in mineral royalties and a debut $500 million Eurobond.
Mining companies have expressed deep reservations about the doubling of copper ore royalties to 6%, although the World Bank said the hikes would not affect the industry at the current level of copper prices.
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