GDP UPDATE
July 2011
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
The U.S. GDP grew 1.9% in the first quarter of 2011, down from the 3.1% during the fourth quarter of 2010 and considerably lower than the 3.7% growth in the first quarter of 2010. However, the quarterly increase marks the 7th consecutive quarter of GDP growth, according to figures released by the U.S. Bureau of Economic Analysis.
Economist Jeff Collins, who conducts data collection and analysis for The Compass Report, said higher energy prices, the “drag” of government debt problems in Europe and continuing weakness in the housing sector are just a few of the reasons behind slower GDP growth.
“That’s pretty mediocre growth, especially coming out of a recession,” Collins said of the GDP number.
Collins said the housing sector could be a drag for at least another two years, especially if rules are adopted that raise the financial bar on home lending standards.
Michael Pakko, chief economist and state economic forecaster with the Institute for Economic Advancement at the University of Arkansas at Little Rock, said the GDP report reflects “lackluster growth.”
The revised GDP data show slightly higher growth in the first quarter than previously reported. However, this doesn't necessarily bode well for ongoing economic growth,” Pakko said. “The data updates were attributable to a downward revision in imports and an upward revision to inventory investment. Both of these changes imply weaker final demand than the previous data had indicated.”
Pakko said the first quarter numbers reflect “continued weakness in construction activity,” with investments in residential and non-residential construction falling by 0.46 percentage points. He also said declines in government spending at all levels contributed to the GDP decline.
Although Collins’ predicts economic growth will continue to be “mediocre,” he doesn’t see another downturn.
“The economy is slowing, but it doesn’t mean it will turn negative,” he said.
The GDP grew at an annual rate of 2.9% in 2010, -2.6% in 2009 and 0% in 2008.
Collins’ prediction of slow growth going forward is supported by the analysis of 44 economist forecasters surveyed by the Federal Reserve Bank of Philadelphia.
“Growth in the U.S. economy looks a little slower now than it did three months ago,” noted a statement from the Philadelphia Fed. “Our panelists expect real GDP to grow at an annual rate of 3.2% this quarter, down from the previous estimate of 3.5%.”
Real GDP is expected to grow 2.7% in 2011, down from the forecasters previous prediction of 3.2%. In 2012, the forecasters predict GDP will grow 3%. The GDP growth will fall to 2.8% in 2013, and grow to 3.3% in 2014, according to the forecasters. The 2012-2014 GDP predictions were all lower than previous expectations.
The forecasters also provided the following predictions on the annualized U.S. jobless rate:
2011: 8.7%
2012: 8.1%
2013: 7.5%
2014: 7%
As with the GDP forecasts, the forecasters see slower job growth numbers than in their previous estimates.
The BEA report provided the following detail on first quarter 2011 GDP:
Bovespa futures fell signaling the stock index may snap a five-day rally, amid speculation Brazil’s economic growth is cooling after economists cut their forecasts for gross domestic product expansion.
Bovespa futures slipped 0.2% to 64,110. The real weakened 0.2% to 1.5590 per dollar. The Bovespa rose, posting its biggest weekly gain in almost a year, after a manufacturing index unexpectedly rose in the U.S. and traders in Brazil pared bets for higher borrowing costs.
“Markets should continue to focus on credit and labor market trends to get a better sense of the monetary policy prospects,” David Beker, an analyst at Bank of America Corp. in Sao Paulo, wrote in a note to clients. “Demand remains strong.”
Economists covering Brazil cut their predictions for 2011 GDP growth for a second straight week. The economy will expand 3.94% this year, according to the median forecast in a July 1 central bank survey of about 100 economists published today. That compares to a previous estimate of 3.95%.
Economists also cut their estimates for inflation this year and next. Consumer prices will rise 5.10% next year, down from a 5.15% forecast the previous week. Prices, as measured by the IPCA index, will rise 6.15% this year, the survey found, from 6.16% previously.
A new economic outlook report paints a bleak future for the province, forecasting that New Brunswick's average GDP growth will be tied with Nova Scotia's for the lowest in Canada in the next few years.
The Canadian economy overall is heading to a slower growth trend after a strong 18 months of recovery, according to a provincial trends report released recently by Scotia Economics. The trend will be more pronounced in New Brunswick, which is expected to trail the country in year-over-year GDP growth and employment growth over 2011 and 2012.
The report projects that New Brunswick will have an average 1.9% GDP growth over 2011 and 2012, well below the national average of 2.6%. Last year, New Brunswick had a 3.3% GDP growth, just above the national average.
"The province experienced a pretty strong year in 2010," said Alex Koustas, an economist with Scotia Economics.
"I guess one of the biggest stumbling blocks right now is the employment or the labor market is proving to be quite sluggish. The high Canadian dollar is putting some pressure on a few segments in New Brunswick's economy, so overall the province is facing a bit of a challenge from that."
It's not all bad news for the province, though, as the resource sector is expected to be a key driver of growth in the long-term.
Potash prices and production have rebounded, according to the report, and production should more than double when the Sussex potash mine expansion is completed.
The province's potential for shale gas production would also be a boon, Koustas said.
"While things are a bit slower in the near-term, there is some long-term potential in the province."
China's gross domestic product growth could fall below 9% in the third quarter, Xinhua news agency reported recently, citing Song Li, deputy director of the National Development and Reform Commission's economic research institute.
Official Chinese targets routinely underestimate growth, but Premier Wen Jiabao in February said the official target for average GDP growth over the next five years will be 7% annually, down from a target of 7.5% in the past half decade.
China's GDP rose 9.7% from a year earlier in the first quarter, down marginally from the 9.8% growth in the fourth quarter of 2010. China has tightened its monetary policy and taken measures to tamp down inflation this year.
The current trend in consumption is stable but foreign trade faces greater uncertainty, and the Japan nuclear crisis could trigger a global pullback in nuclear energy, causing tight energy supply in the next three to five years, the report said. With that background, China's economy still has room to slide further, the report added
Lakshmi Puri, Assistant Secretary-General of UN Women, said “India’s growth rate can make a quantum jump of 4.2% if women in the country get equal opportunity in the core sectors of the economy.”
Puri, on the sideline of releasing the UN body’s first global report on women, said that women constitute half the population in India and they may make huge contributions in taking India’s growth rate to greater heights.
She further said, “We arrived at the figure (of 4.2%) following studies by our South Asia group.”
In the report, the world body complimented India for its “vibrant democracy and progress made to ensure gender equality but deplored minuscule percentage of representation of the fair sex in judiciary.
“India significantly lags behind the rest of the world, with women making up just three per cent of judges.
The report, however, complimented India’s Panchayati Raj institutions saying over a million women are actively participating in matters of local governance, policy formulation and decision making in these bodies.
In this context, Puri hoped that India’s Parliament will pass the Women Reservation Bill, providing for 33% reservation for the fair sex in Parliament and state assemblies.
“I hope the Women’s Reservation Bill will cross all the hurdles soon. It is a landmark bill which will help women’s empowerment to a great extent,” said Puri.
The World Bank retained its previous forecast of a 5% gross domestic growth rate for the Philippines for 2011. It likewise kept the 5.4% economic expansion forecast for next year.
The bank, in its quarterly updated, explained its outlook to strengthening of investments, private consumption and services sector this year. Besides services, the bank identified the outsourcing, manufacturing, construction, mining, agriculture and merchandise sectors are growth drivers for the Philippine economy.
However, the World Bank warned of smaller-than-expected remittances from overseas-based Filipino workers because of a stronger peso and weaker labor markets abroad, particularly in the U.S. and Europe.
Despite projections of growth rate patterns for the country, the bank warned of structural weaknesses in the Philippine economy, particularly widespread poverty and joblessness.
The report recommended a steady focus on reforms and for additional resources to bring the Philippines onto a more inclusive growth path.
The World Bank’s forecasts are lower than the Philippine government’s projection of a 7 to 8% yearly GDP growth rate for the country from 2011 through 2016.
Finance Minister Bahk Jae-wan ruled out South Korea's economy posting a quarterly decline in the foreseeable future despite recent signs of a slowdown in some of the world's major economies.
"I have never thought about it," Bahk told reporters, when asked if he expected Asia's fourth-largest economy to post a quarterly decline in gross domestic product in the third quarter.
"Japan will likely post a fast rebound and China, although inflation pressures will build, will enjoy sound growth," he added.
The central bank has forecast economic growth of 4.1% for this year.
The Bank of Thailand is widely expected to raise its benchmark rate, the one-day repurchase rate, by a quarter of a point to 3.25% at its meeting on July 13, which would be the eighth increase since July last year
French economic activity is likely to remain subdued in the near term, with industry stagnant and the services losing steam, the Bank of France said, citing the results of its monthly business survey.
The central bank revised down yet again its projection for GDP growth in 2Q to show a marked slowdown to 0.2% from the 0.4% projected last month. Last month, the national statistics Institute Insee also forecast 2Q growth of 0.2%.
Factory-gate prices have slowed and service charges are tending to stabilize, the Bank of France noted.
Its survey indicates that industry output contracted in June "due to the weaker performance of the automotive, equipment manufacturing and other industrial goods sectors." Capacity utilization declined from 81.1% in May to 80.2%, more than retracing the previous upturn to stand nearly two points below the long-term average.
The bank's sector climate indictor, based on the latest three months' results, unexpectedly fell another four points in June to a 19-month low of 99 after a six-point slide since March. Most analysts had expected little or no change but were split on the direction.
While industry order books were still considered above normal levels, the assessment was less favorable than in recent months, and finished goods stocks were slightly above target.
Still, firms' outlook for overall production in July bounced back 10 points after an 18-point downturn to land at -1, which the central bank interpreted as "stable". Only the auto industry remained in negative territory, while most other sectors expected modest to sustained expansion, led by other transport equipment, machine tools and several intermediate goods branches.
France's services sector, which far outweighs industry as a share of activity, appears to be holding up better. Still, the BoF's survey suggests that the slowdown in June will continue in July, as the activity outlook index slipped another point to +7 after an eight-point downturn in June. The sector climate indicator also shed one point to 99, returning to the level at the end of last year after reaching a high of 103 in May.
Near-term prospects are mixed across the services, with a modest decline expected in auto repairs and administrative services and moderate to buoyant growth foreseen elsewhere.
Poland’s central bank may raise rates at least once more this year to “fine tune” monetary policy after it cut economic growth forecasts through 2013.
Narodowy Bank Polski left its seven-day interest rate at 4.5%, the highest since 2008, and lowered its 2012 growth outlook to a range of 1.9% to 4.5% from the March forecast of 2.3% to 4.8%.
The central bank paused its monetary-tightening cycle even after inflation accelerated to 5% in May, double its target, as it seeks gauge whether four rate increases this year will tame consumer-price growth. Policy makers may still raise borrowing costs further, Governor Marek Belka said.
“The central bank will be on hold in the coming months to assess whether the slowdown is really under way and whether inflation is falling,” said Piotr Kalisz, chief economist at Citigroup Inc.’s Warsaw-based unit. “This is not the end of the tightening cycle because inflation will remain above the target this year and next year. But we simply expect fine tuning.”
The latest rate decision matched the expectations of all 32 economists surveyed by Bloomberg.
“The council doesn’t rule out monetary policy tightening if prospects worsen for inflation returning to the target,” the central bank said after the decision. “This is the key sentence” of the statement, Belka said
The current pause is “supported by the new inflation and GDP projections as well as the government’s plan to cut state spending,” the central bank said.
Poland has pledged to cut the budget deficit to less than the European Union limit of 3% of gross domestic product next year from 7.9% in 2010.
While predicting faster price growth this year, the inflation rate will be within the target range of 1.5% to 3.5% next year, according to the central bank forecast. For 2013, the bank lowered its outlook to 1.8% to 3.4%, from the March estimate of 2.1% to 3.7%.
The central bank is “giving a clear signal that slowing economic growth, accompanied by tighter fiscal policy, should help bring inflation toward the target,” said Monika Kurtek, chief economist at Bank Pocztowy in Warsaw. Kurtek said she doesn’t expect another rate increase.
Further tightening in Poland may be prompted by European Central Bank rate increases, which could weaken the zloty by narrowing the rate differential and reducing investor appetite for Polish assets, Kalisz said.
ECB President Jean-Claude Trichet signaled the bank may raise rates again in coming months after increasing its benchmark by 25 basis points to 1.5% today. Euro-region rate setters are concerned oil-driven inflation and faster economic growth will stoke wage demands.
In Poland, corporate wage growth slowed in May from a 16- month high. Pay rose 4.1% from a year earlier, compared with 5.9% in April, the Central Statistical Office. Employment growth slowed for a third month, dropping to 3.6 percent.
The central bank risks an “overshoot” if it continues to raise interest rates, Andrzej Bratkowski, a member of the rate- setting Monetary Policy Council, said in a recent interview.
“We think that they’ll have to raise rates again and raising rates will bring inflation back to target,” said Tatha Ghose, an economist at Commerzbank AG in London. “We won’t have too many more rate hikes.”
Turkish assets rose as improving global risk appetite supported emerging markets, even though better-than-expected May industrial output data raised fears Turkey's surging economy may be overheating.
Global markets were higher as investors expected a strong U.S. jobs data later in the day.
Turkey's industrial output rose 8.0% on the year in May, slowing slightly from April's growth rate but exceeding a consensus forecast, signaling attempts to cool the economy are still largely ineffective.
The median forecast in a Reuters poll of 14 analysts was for growth of 7.15% after an 8.3% expansion in April.
"Although second-quarter GDP growth is likely to be flat following a stronger-than-expected first quarter GDP reading, there are signs suggesting that economic activity in the third quarter will be reasonably strong ... Turkey is set to experience robust GDP growth this year, intensifying overheating concerns," said Ilker Domac, regional head of economics at Citigroup.
"With the general elections behind us, the focus turns to the nature of the likely package to be introduced by the new government, as the central bank continues to maintain its dovish stance."
Concerns the economy is overheating, doubts over the central bank's reluctance to raise interest rates despite strong growth and a weak global backdrop have all weighed on Turkish assets this year. The lira has lost around 6% of its value to the dollar since the start of 2011.
Analysts had speculated that only a rate hike would help the currency to regain momentum. However, a drop in inflation this month reduced the likelihood of any imminent rate hike -- adding to the lira's weakness although it boosted bonds.
U.K. economic growth slowed to a virtual standstill in the second quarter, supporting the case for the Bank of England to maintain record-low interest rates, the National Institute of Economic and Social Research said.
Gross domestic product expanded 0.1%, the group, whose clients include the Bank of England and the U.K. Treasury, said in an e-mailed statement in London. Government data show the economy effectively stagnated over the fourth and first quarters.
“One-off events” in April depressed growth in the second quarter, Niesr said, referring to consecutive long weekends to mark Easter and the royal wedding and to the supply disruptions caused by the Japanese earthquake. The Bank of England held the key interest rate at a record low of 0.5% to aid the recovery.
“Even accounting for these factors the underlying rate of growth is still likely to be weak,” Niesr said. “These figures do not provide a picture of economic growth that would support a tightening of monetary policy at this juncture.”
Niesr said GDP rose 0.5% in the three months through May.
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