GDP UPDATE
May 2011
McIlvaine Company
TABLE OF CONTENTS
Growth in the U.S. economy lagged in the first quarter of the year, as gas and food prices rose and unemployment dropped only slightly. Total economic output for the country grew by 1.8% in the quarter, the Commerce Department said, marking a significant slowdown from the fourth quarter of 2010, when growth was at 3.1%.
Economists had estimated growth of about 2%, so the actual numbers – which might still be revised – were slightly lower than anticipated. “While the continued expansion is encouraging, clearly, faster growth is needed to replace the jobs lost in the downturn,” Austan Goolsbee, chairman of the Council of Economic Advisers, said in a statement following Commerce’s release of the numbers.
“We will continue to work with Congress to find ways to reduce spending, so that we can live within our means and focus on the investments that are most likely to help grow our economy and create jobs – investments in education, infrastructure, and clean energy,” Goolsbee added.
Federal Reserve Chairman Ben Bernanke said at his first-ever press conference that the slowdown is viewed as “transitory” by most members of the Federal Open Market Committee, which guides monetary policy. But, he added, there may be “possibly just a bit less momentum in the economy” than there had been.
The drop in gross domestic product is largely the result of decreased government spending, falling exports and higher commodity prices, the Commerce Department said.
After growth of 0.5% in January, new data from Statistics Canada showed that Canadian gross domestic product shrank unexpectedly in February for the first time in five months.
While analysts had expected GDP to be flat for the month, data showed it took a dip of 0.2%, dragged down by manufacturing and wholesale trade.
But there were other weak points as well. Below, we take a look at what held back economic growth for the month of February.
Weak trade:
• The drop in the goods sector and in industries like manufacturing and wholesale trade is directly tied to a weak trade story.
• “Areas closely tied to international trade exerted the largest drag on economic growth in the month,” Diana Petramala, economist at TD Economics, said in a note. “February’s weak performance was tied to a 1.6% and 1.0% decline in manufacturing and wholesale output respectively. Not unrelated to the weak trade story, transportation and warehousing also declined a significant 0.7%.”
U.S. Economy:
• Directly tied to weak trade was the dull economic performance of Canada’s biggest trading partner, the U.S., in the first quarter.
• “Much of the weakness in Canadian economic activity in February can be explained by the sharp slowdown in U.S. real GDP growth in the first quarter of this year,” Ms. Petramala said.
Strong Canadian Dollar:
• The strength of the Canadian dollar, although not nearly as strong in February as it is now, contributed to some of the weak data.
• Economists Derek Holt and Karen Cordes Woods of Scotia Capital, however, point out that the Canadian dollar’s strength is a lagged effect, and its true damage to Canadian economic growth will be felt later on.
Service Sector:
• The service sector remained flat month-over-month in February, so it did not directly contribute to lower GDP — but didn’t help boost it either.
• Wholesale trade, public administration and transportation — all components of the service sector — saw declines for the month.
• Weakness however was offset by stronger retail trade, which grew 0.6%, and stronger professional and financial services, which grew 0.3% and 0.2% month-over-month, respectively.
Goods Sector:
The federal government is providing $6.6 billion to assist recovery efforts following the summer of disasters which hurt people and communities plus the budget bottom line. The weather events knocked an estimated half a percentage point off GDP growth and adding in earthquakes in Japan and New Zealand, that rises to 0.75 percentage point.
The budget overview says disasters were expected to directly reduce real production by $9 billion, with the Queensland coal industry losing an estimated $6 billion alone. Agricultural production losses were estimated at $1.9 billion, adding about a half percentage point to inflation.
The government says infrastructure rebuilding will provide an important platform for economic recovery with the Commonwealth providing $5.4 million to the states for rebuilding infrastructure such as roads, bridges and public buildings.
All up, the federal government is providing $6.6 billion to support disaster recovery. That's coming from the $22 billion in budget savings with the bulk, $4.7 billion going to help those in Queensland hard hit by record floods.
The government has already made an advance payment of more than $2 billion to Queensland. That includes $206 million to local governments to restore utilities and transport infrastructure and pay for the labor needed to rebuild. More than $950 million is going to areas of far north Queensland hit by Cyclone Yasi.
The Commonwealth has made more than 700,000 disaster relief payments to people in urgent need of food, clothes and shelter. Sixty-one thousand people have received the Disaster Income Recovery Subsidy to replace lost income.
Budget papers say the government is ready to provide a $500 million advance payment to assist Victoria which was also hard hit by floods.
China's first-quarter gross domestic product expanded at a faster-than-expected rate of 9.7% from the year-earlier period, while the consumer price index for March also climbed a faster-than-estimated 5.4%, according to official figures released recently. Retail sales for March also beat expectations, rising 17.4% from the year-ago period, while urban fixed-asset investment for the January-to-March period increased 25%. The data were all stronger than markets estimated and reaffirmed the strength of the Chinese growth engine, but also kept worries alive that further monetary tightening from Beijing could be coming soon. According to estimates compiled by Reuters, economists expected first-quarter GDP to rise 9.5%, while March CPI was seen climbing 5.2%.
Concerned over high headline inflation, Planning Commission has raised doubts over clocking the targeted 9% economic growth in the current fiscal.
"We may not hit 9% (economic growth rate in 2011-12). Six per cent is the rate of inflation which we should be willing to accept this fiscal," Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters.
The government and the Planning Commission had earlier projected a growth rate of 9 % during 2011-12, up from 8.6% in the previous fiscal.
Referring to the rise in headline inflation to 8.98% in March from 8.31% in February, Ahluwalia said, "inflation has been a concern. It has not come under control as much as I had hoped. There is need to use fiscal and monetary policy to get rid of supply constraint wherever they exist."
Referring to growth prospects in the current fiscal, he said, it may be difficult to achieve 6% farm sector growth expected to be recorded during 2010-11.
"There is no chance for agriculture to grow at 6% this fiscal, it may probably grow at 3%", he said.
He pointed out, "Even to stay at 8.6% GDP growth this fiscal, industry will have to do much better. Now industry has done about 7.8% in 2009-10 (so far till February end)".
According to the latest data, the index of industrial production for April-February last fiscal stood at 7.8% and the factory output dipped to 3.6% in the month of February as compared to 3.9% in January.
Exuding confidence of maintaining growth momentum this fiscal, Ahluwalia said, "Between 8.6 to 9% (GDP growth this fiscal) there is no big deal. I think the down side of 9% is more relevant", he said adding it will not be "way off" (the 9% mark).
Indonesia's economy continued to expand robustly in the first quarter, supported by rising investments, exports and healthy consumption, the government said, raising the possibility that the central bank may tighten monetary policy. The official statistics agency said that Southeast Asia's largest economy grew 6.5% in the quarter ended March compared with the year-earlier period, and 1.5% from the previous quarter. The year-to-year figure was roughly what analysts expected, while the quarter-to-quarter growth was slightly slower.
The first-quarter strength was slightly slower than the 6.9% year-to-year expansion in the fourth quarter, which was a six-year high. Indonesia's fourth-quarter growth is usually higher because the government disburses most of its budget during the last quarter of the year. The figures aren't seasonally adjusted.
"Despite [coming in] lower than market expectation, GDP growth in the first quarter can still be considered as robust," said Standard Chartered economist Eric Alexander Sugandi. "We still retain our full-year GDP growth forecast for 2011 at 6.5%."
The government said that in the first quarter, investment grew 7.3% from a year earlier and exports gained 12.3%, while household consumption rose 4.5%. Government spending grew 3%, with imports expanding 15.6% amid increasing economic activity.
Bank International Indonesia economist Juniman said the government needs to boost its spending later this year to reach its 6.4% economic growth target for the full year. Mr. Juniman, who like many Indonesians uses only one name, is concerned that Indonesia's export growth could be slowed by the recent disasters in Japan, one of Indonesia's largest export markets. He said vehicle sales here will also likely fall this year due to disruptions to the production of vital components in Japan.
Mr. Juniman expressed concern that the rising energy subsidies that the government has to shoulder could limit its capacity to increase spending on infrastructure projects needed to accelerate economic growth.
Meanwhile, HSBC economist Wellian Wiranto said the country's strong household consumption figure suggests Bank Indonesia needs to tighten monetary policy further. Mr. Wiranto said the consumption offers the central bank a policy-tightening comfort zone. "Moreover, the strength of consumption also tells us that price pressures will hardly go away on their own given the demand-side push."
Indeed, year-to-year core inflation, which better reflects real demand, has been accelerating steadily, reaching 4.62% in April from 4.28% in December, although headline inflation has been easing since February.
Bank Indonesia has been reluctant to raise interest rates, with only one quarter-percentage-point increase in February, as it doesn't want to further attract short-term capital inflows. Instead, the central bank has allowed the rupiah to appreciate to help contain imported inflation.
"While the central bank has been allowing rupiah appreciation to lean into imported inflation, not all price pressures in the economy are imported," said Barclays Capital economist Prakriti Sofat.
The government also said the unemployment rate fell to 6.8% as of February from 7.41% a year earlier. Over the same period, the work force grew to 119.4 million from 116 million, it added.
Goldman Sachs Group Inc. economists lowered their forecasts for Japan's gross domestic product for the 2011 calendar year, now seeing a contraction after previously forecasting a gain.
Japan's GDP will shrink 0.2% this year and expand 2.6% in 2012, according to the latest predictions by Tokyo-based Goldman economists Naohiko Baba and Chiwoong Lee. The analysts had previously seen a 0.7% gain for this year and 2.3% growth in 2012.
The reasons for the changes are a reduced outlook for exports because of supply-chain disruptions, deferred capital spending and housing investment and an upward revision to public spending, Goldman said.
Reconstruction after the Canterbury earthquakes is likely to eat up about 7.5% of 2011 GDP, according to the International Monetary Fund. The IMF's estimates that the rebuild in Christchurch will cost about $15 billion, which makes it a heavier burden on the national economy than Japan's 1995 Kobe quake (6.5%) and Chile's big quake last year (2%), as well as the recent Japan quake.
''While the scale of damage from the recent Japan earthquake is still uncertain, it is likely to be less than the Canterbury earthquakes as a percent of GDP,'' the IMF's latest report on New Zealand said.
The $15b cost is comprised of $9b for residential buildings, $3b for commercial buildings and $3b for infrastructure.
In the near term, the quakes have slowed activity, cutting an estimated two percentage points off economic growth this year with real GDP growth projected at 1% in 2011. The quakes have disrupted economic activity, reduced wealth and weakened confidence, the IMF said.
''The earthquakes destroyed assets equal to about 2 – 3% of the nation's productive capital stock, and will have temporarily reduced potential output,'' it said.
However growth is forecast to rise to 4% next year, led by reconstruction. Aftershocks, demolition and land stabilization work suggest that reconstruction won't start until later this year or early next year. IMF staff assume four fifths of residential and infrastructure rebuilding will be completed by 2016, while commercial rebuilding continues beyond this.
Christopher Legg, the IMF's executive director for New Zealand, said the impact of the quakes on the national balance sheet will be much more muted due to foreign reinsurance flows of around $10b.
''As a result, the economy and financial system has remained resilient.''
Although business and consumer confidence declined sharply following the February quakes, confidence has since rebounded and disruption of economic activity is confined to the Canterbury region.
''At this stage, the disruption to the economy is expected to ease progressively over the next six months,'' Legg said.
The report also warned that economic risks were tilted to the downside, including a faltering of emerging Asia's rapidly growing demand for commodities and a possible rise in long-term interest rates. It also said the New Zealand dollar was slightly over-valued and that housing also seemed over-priced.
It recommended monetary policy would need to be tightened to contain inflationary pressure and a return to fiscal surpluses by 2014/15 of earlier if feasible, despite the costs of the quakes.
As much as 7% growth of Gross Domestic Product (GDP) is needed for the absorption of the increasing labor force in the country, according to draft strategy “Pakistan: Framework for Economic Growth”, prepared by the Planning Commission. The draft says that maximization of opportunity for all citizens is its goal so that they can obtain a better life though their hard work and ingenuity.
Pakistan's population until recently was growing at 3% annually and is now growing at an annual rate of about 2%, it said adding as a result of the previous rapid population growth, labor force is expected to grow at about 3.2% annually over the coming years.
"To absorb this addition to the labor force, GDP should grow at a rate of around 7% annually and this growth must be sustained in the coming years," it added.
The growth strategy seeks generation of opportunities everywhere-employment and entrepreneurial (self-employment) opportunities.
The strategy aims not only to increase investment in the country, but also to make investment more productive. In addition, it proposes special programs to support key parts of the population, such as the youth, who suffer disproportionately from unemployment.
The strategy also encourages the improvement of productivity by, for example, increasing competitiveness in the market by easing the entry and exit of firms.
Additionally, the strategy proposes measures, such as a reform of the restrictive zoning laws, which have impeded the growth of domestic commerce and hampered the role of cities as generators of economic growth.
The aggregate of such programs would vastly improve the investment climate, reduce the cost of doing business, thus increasing the profitability of enterprises and encouraging them to expand.
The strategy has enumerated challenges faced by Pakistan which includes decades long struggle with stabilization arising from unsustainable fiscal policies; pressures of demography; legacy of economic distortions from previous policies; battering from external events, including the earthquake in 2005, the flood in 2010, and a continuing war against terror; low and declining productivity; and heightened expectations of the population for a better life from a democratic government.
French activity in the services grew at a sustained pace in April and is likely to remain dynamic in the near term, while the expansion in industry will remain more subdued, according to the Bank of France, citing the results of its monthly business survey. As a result, the central bank forecast a modest slowdown in GDP growth in 2Q to 0.5% from the 0.7% it projected last month for 1Q. The national statistics Institute, Insee, and most analysts expect 1Q growth to come in slightly weaker.
Prices continued to rise in industry and picked up in the services in April, the Bank of France noted.
Its survey suggests that industry output expanded in all main sectors in April except for automobiles, electronics and high tech. But capacity utilization slipped 0.2 point to the February level of 80.3%, still nearly two points below the long-term average.
The bank's sector climate indicator, based on the latest three months' results, unexpectedly fell three points in April to a four-month low of 107. Most analysts had also expected little change on the month but were split on the direction.
Industry order books contracted slightly in April, the central bank said. Nevertheless, firms' outlook for production improved in all branches except for agriculture, led by an expected rebound in transport equipment and especially in electronics and machinery. By contrast, the factory PMI for April had signaled a pick-up in output growth to the fastest pace in over a year (60.0) and a recovery in orders (56.7). Insee's own sector survey was even more upbeat.
According to the Bank of France survey, growth in the services was bolstered by the transport and computer and information branches. Here the sector activity indicator sustained a more modest correction, slipping back one point to February's level of 102.
Service providers' outlook for the near term improved in most branches except for transport, storage and publishing. A pick-up is expected in the computer and information branch and in professional services.
Insee's April services survey had signaled a modest slowdown in recent activity but a slight improvement in near-term prospects. The April PMI poll was remarkably promising, pointing to the fastest expansion in activity (62.9) and new business (63.4) in over a decade.
The German Banking Association (BDB) expects German GDP to grow by just under 3% this year despite growing risks and burdens for the economy.
"The German economy is still very robust," the association said in its monthly report.
In the first quarter, GDP likely increased by up to 1%, the BDB estimated. In the further course of the year, quarterly growth rates will likely slow to around 0.5%, it predicted.
Risks are coming from inflation, the BDB observed. Signs are increasing that rising production costs are being passed on to consumers. Annual inflation rates are likely to reach 3% by autumn, it forecast, projecting average inflation this year of 2.5%.
The BDB expects the European Central Bank to raise interest rates from the current 1.25% to 1.75% or even 2% by the end of the year.
Commenting on the sovereign debt crisis in the Eurozone, the BDB warned that a restructuring of Greek debt must come only as a last resort. "Moreover, to prevent the negative impact from a restructuring, it can and must be carried out on a voluntary basis," the association stressed.
The Irish government cut its economic growth outlook for this year and for 2012 and forecast deeper-than-expected budget spending holes amid the country's debt crisis, but said it was still on track to have its finances under control by the European Union deadline of 2015.
Gross domestic product will increase this year by just 0.8%, down from the 1.7% rate it forecast in December, and will grow 2.5% next year, down from the 3.2% rate previously forecast, as stronger-than-expected exports fail to offset the "significant headwinds" from weaker-than-expected consumer spending, the finance ministry said.
For the period 2013-15, the Irish economy is forecast to grow by 3% a year on average.
The finance ministry also projects a government budget deficit of 10% of gross domestic product this year, up from the 9.4% shortfall forecast in December, and expects a deficit of 8.6% of GDP in 2012, up from the previously forecast deficit of 7.3% of GDP.
Still, the ministry said the budget deficit would be reduced to below 3% of GDP by the end of 2015, as required by the terms of the deal Ireland struck last November for EUR67.5 billion in bailout loans with the EU and the International Monetary Fund.
However, it warns of even deeper spending cuts from 2013 if the deficit target is to be met.
Amid its worst-ever debt crisis, Ireland was forced to tap expensive bailout loans when markets became spooked at the costs to the government of rescuing the banking system and refused to lend it and the Irish banks more money.
The new forecasts update the country's EU Stability Program and are being submitted to the European Commission, the finance ministry said.
It sees the country's overall debt burden peaking at 118% of GDP in 2013, then declining but remaining fairly high for the foreseeable future.
The ministry said Ireland's aim remains returning to the markets for funding, based on its "credible fiscal" program and growth outlook. "Clearly, external factors, particularly developments at European level will also have a role in this regard," it said.
"Overall, the short-term picture emerging is one of an export-led, but relatively jobless, recovery," the ministry said, projecting the jobless rate will peak this year at 14.4%.
Italy cut its economic growth forecasts for the coming years but Prime Minister Silvio Berlusconi said his country's public debt is sustainable thanks to low private debt levels and his administration's pension reforms. Italians themselves hold more than half of their country's sovereign debt, a higher level than found in other major European Union nations, Berlusconi added in a press conference after a cabinet meeting in Rome.
The cabinet approved the Economic and Financial Document, a budget planning blueprint, which projected economic growth of 1.1% this year and 1.3% in 2012, down from last September's forecasts of 1.3% and 2.0% respectively. Italian gross domestic product is expected to grow 1.5% in 2013 and 1.6% in 2014.
Despite the slower growth, the budget deficit should decline as previously planned and agreed with EU authorities, with the budget deficit narrowing to 3.9% of gross domestic product this year, 2.7% in 2012, 1.5% in 2013 and a rough balance in 2014, according to the document.
Italy's public debt should peak at 120% of GDP this year, drop slightly to 119.4% next year and to 117% in 2013.
The document also provided data to support Berlusconi's claims about private debt levels. Italian household debt is only 44.4% of GDP, compared to a European average of 82.3%, while non-financial corporate debt is 84% of GDP, compared to a European average of 121%, according to the document. And some 56% of Italy's outstanding public debt was held by resident investors as of last June, compared to figures of 31% and 48% for France and Germany, respectively, the document said.
Kazakhstan’s economy expanded 6.9% from a year earlier in the first four months of the year, Asel Torgautova, an official at the state statistics agency, said by phone from the capital, Astana.
The growth figure was first announced by Prime Minister Karim Massimov on his Twitter account.
Kazakhstan increased its economic growth forecast to 7% this year and 6.9% in 2012 after gross domestic product expanded 7% in 2010, Economic Development and Trade Minister Kairat Kelimbetov said at a cabinet meeting in Astana. Growth will average 7% through 2015, he said.
The central bank in January estimated Kazakhstan’s economy would expand as much as 6% this year. President Nursultan Nazarbayev has ordered that the economy must grow at least 7% annually through 2015, Kelimbetov said last month.
The Polish government approved a draft budget aimed at cutting its fiscal deficit below the European Union limit next year as economic growth accelerates, boosting tax revenue. The central government shortfall in 2012 will be capped at 35 billion zloty ($13.2 billion), compared with 40.2 billion zloty this year, the government press office said. The draft budget assumes economic growth of 4% in 2012, with an average inflation rate of 2.8%.
“Further fiscal consolidation is essential,” Prime Minister Donald Tusk said at a press conference in Warsaw after the cabinet approved the preliminary budget 10 weeks earlier than last year. “We want to avoid embroiling the budget in election-year quarrels.”
The preliminary budget bill forecasts expenditures of 327.7 billion zloty and revenue of 292.7 billion zloty, the statement said. The government estimates revenue from sales of state assets will reach 10 billion zloty in 2012, down from 15 billion zloty planned for this year.
Tusk, who faces general elections this autumn, is depending on rising GDP and zloty gains to keep public debt from breaching a legal limit of 55% of economic output, which would trigger mandatory austerity measures. Finance Minister Jacek Rostowski said today the government is trying not to “stall the economy” as it cuts the budget gap.
Poland is on line to meet its aim of narrowing the general government deficit, which includes shortfalls for local and central governments, along with the social security and health-care systems, to 2.9% of GDP next year, Rostowski said. That would bring Poland’s fiscal deficit in line with the EU’s 3% limit next year.
The UK economy will continue to recover during 2011, but economic growth will be patchy and slow, the CBI warned today. In its latest economic forecast, the CBI predicted that the GDP would grow by 1.7% this year, with growth of 2.2% expected in 2012. However higher inflation than was previously forecast is anticipated due to the volatile commodity prices.
Strong net exports and business investment are expected to make important contribution to driving the economy forward, but squeezed budgets, weak wage growth, high inflation and public spending cuts continue to keep the pace sluggish. Unemployment is also expected to peak at 2.62 million in Q4 of 2011 and remain high throughout next year.
Ian McCafferty, CBI chief economic adviser, said: “The recovery continues to be choppy and lacking in vigor. What remains striking is how little we expect the pace of growth to accelerate in 2012, and that it will be far less robust than we’d normally expect in the second and third years of a recovery.”
“Of particular concern are rising commodity prices, which are putting more intense upward pressure on inflation.”
The combination of higher inflation and VAT, weak wage increases, higher mortgage interest rates, and ongoing concern over unemployment has kept the consumption outlook subdued. Household spending is forecast to grow more slowly than previously thought, at 0.2% in 2011 and 1.1% in 2012.
The latest figures from the Insolvency Service show that this has helped fuel a rise in retail insolvencies - increasing 70% from Q4 2010 to Q1 2011.
Barry Knight, Head of Retail at finance and business advisors Grant Thornton UK LLP, said: “The high street has been struggling over the last few months with many retailers reporting some of their worst months on record.”
“Many high street retailers have tried to restructure their company by disposing of some physical outlets in a bid to retain some value and save the business on the back of poor trading. This trend has been exacerbated by the move to online shopping. I expect this to continue and it is likely that the numbers of company voluntary arrangements (CVAs) will increase in the sector in the coming months.”
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