GDP UPDATE
June 2011
McIlvaine Company
TABLE OF CONTENTS
The IMF cut its forecast for global economic growth recently, albeit slightly. The organization expects global GDP to rise this year by 4.3%, down from its previous 4.4% estimate. “The global economy, hit by slowdowns in Japan and the United States, is expected to reaccelerate in the second half of the year, but growth remains unbalanced and concerted policy action by major economies is needed to avoid lurking dangers,” the IMF advises.
The IMF added that a lack of political leadership in dealing with the debt crisis and the budget showdown in the United States could create major financial volatility in coming months.
“You cannot afford to have a world economy where these important decisions are postponed because you’re really playing with fire,” said Jose Vinals, director of the IMF’s monetary and capital markets department.
Faced with the bruising headwinds of high unemployment, weak manufacturing and an otherwise listless economy, Goldman Sachs has slashed its forecast for gross domestic product. The firm cut its second-quarter GDP outlook to 2% from 3%, a stunning blow for an economy expected to be well on the path to recovery following the financial crisis of 2008 and 2009.
From a policy standpoint, Goldman said it does not expect the subpar growth to change the Federal Reserve's plans to end quantitative easing later this month. However, Goldman economist Sven Jari Stehn acknowledged that "the deterioration in economic activity, on its own, would call for fresh monetary easing."
The primary thing keeping the Fed from going to another round of easing — or QE3 in market jargon — is that, while the economy languishes, inflation actually is rising more than expected, he said.
"The Federal Open Market Committee is therefore stuck between a rock (slow growth) and a hard place (higher inflation)," Stehn wrote in a research note to clients. "We expect Chairman (Ben) Bernanke to indicate at the FOMC press conference that there is little prospect of either monetary tightening or monetary easing anytime soon."
Goldman's move comes amid a week of disappointing manufacturing indicators from both the Philadelphia and New York Feds that compounded market fears over debt contagion from Greece and other peripheral Eurozone nations. The International Monetary Fund also has reduced its GDP forecast from the US, cutting its view to 2.5%.
On the bright side, Stehn wrote that the firm still expects economic activity and GDP to pick up later in the year, though the bar has been raised.
"At this point, we still expect a bounceback in Q3 and beyond, but will need to see significant improvement in the data over the next few weeks to maintain that view," he said.
From the Fed's perspective, Stehn said the central bank remains within a "zone of inaction" that requires negative real interest rates — in this case about negative 0.6 percent when comparing inflation to interest — until a more robust recovery can be declared.
More Fed easing, or QE3, would come only if unemployment increases 1.25 percentage points from its current 9.1%, while inflation also would have to ease and drop 1 percentage point from its current 3.6% annualized rate.
The Fed's easy money policies, which have pushed its balance sheet past the $2.5 trillion mark, are cited by some economists as a key factor in the current rise in inflation.
"Our analysis therefore suggests that larger surprises than those seen in recent weeks are needed for the FOMC to move out of its zone of inaction," Stehn said. "We conclude that the unexpected weakness in growth and uncertainty about the effect of temporary factors will keep policy and, most likely, policy communication unchanged for the foreseeable future."
But for Bernanke, explaining Fed policy has become even trickier.
"Most likely, he will be 'balanced' by emphasizing both the disappointment in the activity indicators and the higher inflation data," Stehn said. "So the press conference is unlikely to be pleasant for either the chairman or his audience."
Goldman Sachs raised its outlook for Argentina's economy a second time this year after the government reported torrid growth in the first quarter. The investment bank now expects gross domestic product to expand 7.7%, up from its previous forecast of 6.8%.
"At this stage we are maintaining our 3.2% real GDP growth forecast for 2012," Goldman Sachs economist Alberto Ramos said in a report.
Previously, Argentina's President Cristina Fernandez said that GDP will grow between 7.5% and 8% this year.
GDP surged a higher-than-expected 9.9% in the first quarter, according to official data.
The economy looks set to log its second consecutive year of elevated growth following what most private sector economists say was a recession in 2009 owing to the global financial crisis. Favorable terms of trade for Argentina's grains and manufactured goods coupled with buoyant domestic demand thanks to government spending and low unemployment have fueled enviable levels of economic growth. However, high growth has been accompanied by annual inflation that is widely believed to be entrenched north of 20%.
Rampant inflation has led unions to demand salary increases of around 30% this year alone. It also threatens to undermine the competitiveness of exporters in the manufacturing sector due to rising costs and the appreciation of the peso.
Argentina's peso has firmed in inflation-adjusted terms versus the US dollar because the central bank has been weakening the currency at a much lower rate than inflation.
The Fernandez administration has largely closed the door on cooling the economy to tame inflation, saying the solution is to boost the supply of goods and services.
"Beyond entrenched high inflation, the erosion of external competitiveness during 2010-2011 is another difficult issue the next administration will have to face, which, if not properly handled, could generate a hard, rather than a soft, landing of the economy in 2012," Ramos wrote.
The International Monetary Fund said Friday it edged upward its 2011 growth forecast for Canada, which is now expected to outperform the U.S., its largest trading partner. Among the Group of Seven members, Canada is expected to trail only Germany in terms of economic expansion.
In an update to its world economic outlook, the Washington-based institution said Canada's gross domestic product is set to advance 2.9% in 2011, up from the previous 2.8% forecast. The upgrade means Canada will expand at a faster pace than the U.S. economy. The IMF cut its 2011 U.S. outlook to 2.5%, from its previous 2.8% call.
The Bank of Canada, which has kept its benchmark interest rate unchanged at 1% since last September, has also forecast a 2.9% advance for 2011.
Germany is set to lead all advanced economies, the IMF said, with 3.2% growth in 2011, an upgrade from the previous 2.5% call. Collectively, developed markets are set to record average annual growth this year of 2.2%, compared to the 6.6% gain for emerging markets.
The Canadian forecast remained unchanged for 2012, with a 2.6% GDP advance penciled in.
Canada was the first economy among the G7 to move from recovery to self-sustaining expansion. The country recorded a 3.9% annualized gain in the first quarter of 2011. But recent tepid economic indicators have led analysts to downgrade their second-quarter expectations, with annualized growth now seen close to 1% for the April-to-June period. The Bank of Canada had forecast a 2% advance.
The central bank and other economists say Canada will have to lean heavily on business investment and exports to drive GDP growth, as households are largely tapped out due to record-high debt loads.
Peru’s central bank lowered its 2011 economic growth forecast amid concern President-elect Ollanta Humala’s plans to increase mining taxes will hamper foreign investment.
Peru’s economy will expand 6.5% this year, down from a forecast of 7% growth three months ago, due in part to a slowdown in construction and manufacturing activity, central bank President Julio Velarde told reporters in Lima.
Private investment is slowing as Humala has said he plans to introduce a mining windfall tax that could make Peru’s mines less competitive. Mining projects will account for almost half the $47.5 billion of private investment expected in Peru from 2011 to 2013, Velarde said. Mine expansions probably won’t be delayed if the new government sticks to pledges to introduce a “reasonable” increase in tax and that it is approved in the first two to three months of the new congressional session, he said.
“We’re assuming that these investment projects for the most part will be seen through and the uncertainty about the mining windfall tax won’t last very long,” Velarde said.
The central bank expects 2011 private investment to rise 10%, compared with a March 18 forecast of 15%. Public investment will climb 3.3%, after surging 27% last year.
Mining companies will seek to hold talks with Humala’s government as they see the proposed tax slowing investment in the industry, according to Oscar Gonzalez Rocha, Chief Executive Officer of the Andean country’s biggest copper producer, Southern Copper Corp.
Velarde said that he has not discussed his future at the central bank with Humala, though he’ll “think about it” should the winner of Peru’s June 5 election ask him to stay on at his post beyond July 28.
Velarde said he expects the annual inflation rate to be about 3% this year though he added it could be as high as 3.05%. There’s a risk that higher international grain prices could rise and push up domestic food costs, he said.
The central bank left its benchmark rate unchanged at 4.25% June 9, the first pause in six months, after consumer prices fell last month. Inflation was “very low” in the first two weeks of June, Velarde said. Future increases in the benchmark rate will depend on inflation data, he said.
“The rate is very close to the neutral level, if not already neutral. We’ll see what happens with inflation,” he said.
Credit Suisse downgraded China’s GDP outlook from 8.9% to 8.5% for next year, and from 8.8% to 8.7% this year due to consistent inflation, slowing growth, and continued tightening. Its banking sector was also given a severe downgrade, dropping to “Underweight” after previously being “Overweight”, with Credit Suisse citing concerns about the alarmingly high debt-to-GDP ratio.
Hong Kong’s gross domestic product (GDP) went up 7.2% in real terms in the first quarter of 2011 from a year earlier, compared with the 6.4% increase in the fourth quarter of 2010, the city’s Census and Statistics Department announced.
According to the department, analyzed by constituent sector and on a year-on-year comparison, net output in all the service activities taken together increased by 7.0% in real terms in the first quarter of 2011 from a year earlier, compared with the 6.4% growth in the fourth quarter of 2010.
Net output in the import and export, wholesale and retail trades sector increased significantly by 14.0% in real terms in the first quarter of 2011 from a year earlier, faster than the 9.1% increase in the fourth quarter of 2010. The accelerated growth was attributable to the strong growth momentum of external trade regained in the first quarter, the department said.
Net output in the transportation, storage, postal and courier services sector increased further by 9.3 in real terms in the first quarter of 2011 from a year earlier, after the 6.6% growth in the fourth quarter of 2010. The strong growth in this sector was in tandem with the thriving trading activities, it said.
Net output in the financing and insurance sector grew by 12.6% in real terms in the first quarter of 2011 from a year earlier, following the growth of 13.8% in the fourth quarter of 2010. This reflected the continued buoyancy in financial activities, according to the department.
Japan made a slight upward revision of its first-quarter economic performance recently, but the latest figures still show the severest contraction in two years, highlighting the huge impact on the economy of the March 11 earthquake and tsunami.
The upward revision was also smaller than expected, prompting some investors to sell the yen for the dollar and the euro on expectations that the Bank of Japan may keep its monetary policy looser than other major central banks for a longer time to underpin the fragile economy.
Japan's gross domestic product shrank at a price-adjusted annual pace of 3.5% in the January-March period, after a revised 2.9% drop in the previous quarter, the Cabinet Office said.
That's better than the preliminary reading issued three weeks ago of a 3.7% decrease, and reflected the government's findings that private-sector inventories didn't fall as much as previously estimated in the first quarter.
But the latest figure fell short of forecasts for a revised 3% drop. Also, the contraction was still the sharpest since a global financial crisis-induced 18% decline in the first quarter of 2009, and marked the second straight quarterly fall, meaning for many observers that the economy was at least technically in a recession.
"It is appropriate to think that the Japanese economy has fallen into a brief recession, given that the economy is now certain to contract for one more quarter and that the magnitude of its latest drop is significant," said Yoshimasa Maruyama, a senior economist at Itochu Corp.
Faced with economic woes and a public call for stepped-up efforts to rebuild the disaster-stricken northeast, Japanese officials will likely stay under increasing pressure to consider more stimulus measures despite the nation's debt-ridden finances and the Bank of Japan's already loose monetary policy.
Finance Minister Yoshihiko Noda has said he is considering compiling an extra budget in July—the second in the current fiscal year that started in April, following a ¥4 trillion ($50.06 billion) disaster-relief budget enacted last month. Analysts expect the new package may be worth ¥10 trillion or even more in real spending.
The central bank is also expected to discuss a possible expansion of its ¥3 trillion lending program aimed at spurring growth in what it sees as high-potential industries when its decision-making policy board meets next week.
Still, economists say any contraction in the April-June period would be softer based on expectations that the government will spend more on reconstruction efforts, quake-crippled supply chains will improve, and businesses will boost investment to repair facilities damaged by the disaster.
Mr. Maruyama tipped the annualized contraction to be 1.8% in that quarter, while Dai-Ichi Life Research Institute chief economist Toshihiro Nagahama said he expects a drop of around 1%.
Many observers also expect Japan's economy will recover in the latter half of the year. The 187-member International Monetary Fund said Wednesday it "expects economic activity in Japan to bounce back from the twin disasters starting in midyear, as supply constraints ease and reconstruction spending accelerates."
The recent data showed business investment fell 1.3% from the previous quarter, worse than a preliminary 0.9% decline, while public investment fell 1.4% instead of a preliminary 1.3%.
But the impact of these figures was more than canceled out by an upward revision to inventories, which the Cabinet Office said shaved 0.4 percentage point off the quarterly GDP rate instead of a preliminary 0.5 point.
Other GDP figures were unchanged. Consumer spending fell 0.6% quarter-to-quarter. Exports rose 0.1%, while imports slipped 0.3%. Government expenditure climbed 0.2%.
Compared with the previous trimester, the first-quarter GDP was down 0.9%, unrevised.
New Zealand Prime Minister John Key Monday said his government estimates recent earthquakes in the country will cost between 8% and 9% of national output.
"On our estimates this is the single biggest impact of any natural disaster on any developed economy we can find," Key told reporters. "It is going to cost in the order of 8-9% of GDP, round about NZ$25 billion dollars, so it's a very major event."
The Chief Executive Officer (CEO), of the Millennium Challenge Corporation (MCC), a US State agency, Mr Daniel W. Yohannes has predicted that Africa’s gross domestic product could be in the region of $2.6 trillion in the next decade.
“McKinsey, a leading global consulting firm, reported that Africa’s collective GDP is now $1.6 trillion” said Daniel W. Yohannes adding “By 2020, it could be $2.6 trillion.”
Mr Yohannes, who made the observation in a speech he delivered at the 2011 African Growth and Opportunity Act (AGOA) Forum in Lusaka, Zambia, underscored the point that six out of the world’s ten fastest growing economies during the last decade were in sub-Sahara Africa.
“And over the next five years, predictions suggest that the average African economy will outpace its Asian counterpart”, he told African exporters, and government officials at the forum.
According to him, signs show that Africa’s economies are poised for dramatic growth.
However, the African Development Bank (AfDB) in its 10th African Economic Outlook (AEO) report has indicated that Africa’s economic growth is forecast to decline to 3.7% in 2011, compared to growth of 4.9% in 2010 due to recent events happening in North Africa plus other factors.
The 2010 figure was an improvement on the 3.1% rise in 2009, which had been depressed by the global economic crisis. But Mr Yohannes still argues that the number of households with discretionary income is projected to rise by 50% over the next 10 years.
He indicated that foreign direct investment (FDI) into the region surged from $9 billion in 2000 to $62 billion in 2008 which is “almost as large as the flow into China, when measured relative to GDP”.
He noted many sectors in sub-Sahara Africa such as agriculture, consumer products, and telecommunications have the potential for significant growth in the years ahead.
In order for Africans to realize their dreams, Mr. Yohannes urged African governments to take ownership, assume responsibility, and be accountable for their development and prosperity which can create sustainable environments for growth that will open up opportunities for investment and trade.
“We know that for Africa to develop, it has to participate more fully in the global marketplace.”
He said one of the reasons that Africa has lagged behind is because it has not developed its capacity to trade, within the continent or with the wider world.
“Consider that intra-African trade accounts for only 10% of total exports”, he said.
By eliminating import duties for nearly 6,500 products, the MCC Boss said AGOA created new possibilities for African businesses and entrepreneurs—recognizing that the private sector, not the government, is the most dynamic engine of growth.
According to Mr Yohannes, in 2010, “imports to the United States under AGOA grew by 31%. Compared to AGOA’s first year in 2001, they grew by 438%.”
He added “Even without oil and mineral-related products, we have made progress…We saw an 18% increase last year in non-energy, non-mineral imports.”
In a related development, the United States Trade Representative Ron Kirk announced during the forum, a new Obama Administration initiative to build trade capacity called the African Competitiveness and Trade Expansion (ACTE) initiative.
The ACTE, Mr Kirk said will provide $120 million over four years to build on the success of Africa’s regional trade hubs and help African nations to realize AGOA’s full potential.
Croatia's gross domestic product (GDP) contracted 0.8% in the first quarter year-on-year, according to the State Statistics Bureau. In a preliminary report last month the bureau said the first quarter contraction was 0.9%.
The government's full-year forecast is for economic growth of 1.5% in 2011 after two years of recession. The central bank foresees a recovery of 1.0%, while most analysts' forecasts lie between those figures.
Germany's economic growth eased in the spring after a strong start to the year, the Bundesbank said recently.
The economy experienced no economic momentum from private spending. The strong 'catch-up effects' pushed the economic growth during the first quarter. The growth is likely to be weak in the second quarter, the bank added.
Bundesbank upgraded Germany's 2011 growth estimate to 3.1% from 2.5%. But it would again slow to 1.8% next year.
The bank also said the labor market situation continued to improve in Germany.
The National Bank of Hungary (NBH) has released its baseline inflation and gross domestic product projections of the Inflation Report. It has trimmed its CPI estimate for 2011, but raised its for next year, while it has lower GDP estimates both for 2011 and 2012 than it had in the March IR.
The Monetary Council, which has left the central bank's base rate unchanged for the fifth month in a row, said it "may be necessary to maintain interest rates at their current level over a sustained period in order to meet the target for CPI inflation by the end of 2012."
According to a report published by Global Finance, Qatar was ranked first on the richest countries list with a per capita GDP income totaling USD 90.149 thousand. Qatar is followed by Luxemburg, Norway, Singapore, Brunei, America, Hong Kong, Switzerland, Netherlands and Australia. Kuwait, the UAE, Bahrain, and Oman ranked 14, 18, 33, and 36 respectively.
The rankings are based on per capita GDP and purchase power parity, a measure that economists typically use to look at an individual’s wealth when comparing differences in the cost of living and economic power between countries. The ranking affirms that Qatar has succeeded in rising from the 182nd place to first in the world, surpassing Luxembourg.
Qatar has launched 5 year development plan to increase investments to USD 125 billion. USD 60 billion will be invested in infrastructure, including preparing the country to host the World Cup of Soccer in 2022.
Mr Yousef Hussain Kamal finance minister of Qatar said that the economy is expecting growth of 18% to 20%. Such high growth levels are expected to continue up until the 2022 World Cup events. However, a concern is that the growth will increase the risk of inflation to 2007-2008 levels.
Qatar holds the third biggest reserve of natural gas after Russia and Iran. Qatar has been successful in attracting Western companies, especially the US, to improve the gas industry through the employment of modern technological methods.
Switzerland's economic growth may weaken in 2012, mainly due to strong franc and weaker global economic trend, according to the KOF Institute. Releasing its summer forecasts, the institute said that Swiss economy may grow 1.9% next year, slower than the 2.8% expansion in 2011.
The reason for slower growth is the strong franc as well as the weaker global, and in particular European, economic trend, the report said. Meanwhile, the robust economic activity this year is supported by higher exports and stable consumption.
The rate of growth predicted for this year remains unchanged from the previous spring forecast. KOF, however, said that the current assessment of economic development includes a considerable increase in the growth of transit trade and weaker trends for the rest of the economy.
The institute said that inflation is still not an issue in Switzerland. The KOF expects a rate of inflation of 0.7% for 2011. Due to the slightly weaker franc, inflation is projected to uptick next year.
On the labor market, the report noted that the employment will continue increasing. The increase in employment will be relatively low in the current year at 0.8%, while it will become more pronounced in 2012.
The KOF foresees an unemployment rate of 3.1% this year and 2.7% the next, with the rate of decline tapering off during the period.
The International Monetary Fund raised its 2011 forecast for economic growth in Tajikistan to 6.0% due to higher prices for the country's exports, but warned against the effect of high commodity prices on inflation.
The IMF had previously forecast Tajikistan's gross domestic product (GDP) would grow by 5.8% this year. Government data should show the economy expanded by 6.5% year-on-year in the first quarter of 2011.
"Growth has been buoyed by high prices for Tajikistan's key exports, as well as a continuing recovery of inward remittances, which support domestic trade and services," the IMF said in a statement released after a visit by its mission.
Tajikistan, a mountainous republic bordering Afghanistan and China, is the poorest of the 15 former Soviet states. More than 47% of its 7.5 million people live on less than $2 a day, according to World Bank data.
The country relies heavily on remittances from approximately 1 million of its citizens abroad. Migrant workers sent home $2.2 billion last year, or 39.3% of Tajikistan's GDP.
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