GDP FORECAST
UPDATE
December 2012
McIlvaine Company
TABLE OF CONTENTS
The U.S. economy grew at a 2.7% annual rate from July through September, much faster than first thought. The strength is expected to fade in the final months of the year because of the impact of superstorm Sandy and uncertainty about looming tax increases and government spending cuts.
The Commerce Department said yesterday that growth in the third quarter was significantly better than the 2% rate estimated a month ago. And it was more than twice the 1.3% rate reported for the April-June quarter.
The main reason for the upward revision to the gross domestic product was businesses restocked at a faster pace than previously estimated. That offset weaker growth in consumer spending.
GDP measures the nation’s total output of goods and services — from restaurant meals and haircuts to airplanes, appliances and highways.
Most economists say economic growth is slowing to below 2% in the current October-December quarter. That’s generally considered too weak to rapidly lower the unemployment rate.
Paul Ashworth, chief U.S. economist at Capital Economics, said companies are likely restocking more slowly now. Businesses typically cut back on restocking when they think consumers will spend less. Consumer spending drives 70% of economic activity.
Economists cite two reasons for the anticipated weakness in consumer and business spending. Superstorm Sandy halted business activity along the East Coast in late October and November. And spending might weaken in the final weeks of the year if lawmakers and Obama fail to reach a deal to avoid the “fiscal cliff.” That’s the name for sharp tax increases and spending cuts that would occur in January without a deal.
A separate report showed the negative impact of superstorm Sandy is starting to fade. The number of Americans seeking unemployment benefits fell 23,000 to a seasonally adjusted 393,000, the Labor Department said. It was the second straight drop after Sandy had driven applications to 451,000 three weeks ago.
Brazilian stocks slipped after data showed Latin America's largest economy grew far slower than expected in the third quarter, though shares of electric utilities gained.
Brazil's economy expanded just 0.6% in the third quarter from the second quarter, according to government data released recently. That was half the pace expected by analysts and below all forecasts in a Reuter’s poll.
"It was horrible, the number was half of what everyone was expecting, just very bad," Jankiel Santos, chief economist with BES Investimento in Sao Paulo.
The Canadian economy grew at the slowest pace in over a year in the third quarter, undershooting the market and the Bank of Canada's already modest forecasts, hurt by deterioration in net exports and shrinking business investment in housing and engineering structures.
The data validate Bank of Canada Governor Mark Carney's assessment that rate hikes are "less imminent."
The handoff into the final three months of the year reflected by September's monthly gross domestic product was also weaker than expected, and likely not enough to meet the Bank of Canada's 2.5% growth forecast for the period.
Gross domestic product decelerated to an annualized 0.6% increase in the third quarter--the slowest since the economy shrank in the second quarter of 2011--from 1.7% in the prior three months, which was revised down from the previously estimated 1.9%. Growth, which was underpinned by consumer spending and inventory accumulation, lagged far behind the U.S. where GDP expanded an annualized 2.7%.
The consensus call was for Canadian GDP to grow an annualized 0.8% in the quarter, according to a report from Royal Bank of Canada. The central bank's forecast was 1.0%.
Monthly GDP in September was flat, versus the consensus call for a 0.1% gain.
The Canadian dollar weakened slightly after the data, with the U.S. dollar up to C$0.9947 from C$0.9942 just before the release. There was no immediate change in bond prices.
This is the last key economic indicator before the central bank's rate decision, where it's widely expected to hold the benchmark overnight rate at the 1.00% level it's stood at for more than two years. The Bank of Canada, the only one in the G-7 contemplating higher borrowing costs, is also likely to reiterate rate hikes will likely be required "over time."
Net trade weighed on growth in the third quarter as exports were down 2.0%, the most since the second quarter of 2009--signaling the impact of slowing global growth--while imports grew 0.4%.
Worryingly, business investment, which the central bank has highlighted as a key driver of growth through the next couple of years, proved to be a drag on GDP. Business investment in housing declined 0.9%, sharper than the 0.1% drop the prior quarter, a sign of a slowing housing market. Total investment in non-residential structures, such as investments in oil rigs, and machinery and equipment dropped 0.6%, the first decline since the second quarter of 2009, an indication of uncertainty as businesses hold on to cash while they wait to see how the U.S. deals with the fiscal cliff.
By contrast, household spending on goods and services grew 0.9%, the strongest gain since 2010.
Meanwhile, business inventories more than doubled to 12.11 billion Canadian dollars ($12.20 billion) from C$5.86 billion in the second quarter.
Nominal GDP, the broadest measure of the tax base, grew 0.7%, over three times faster than the pace in the second quarter.
Chile’s Congress approved the 2013 budget proposal, raising spending by 5% above inflation and potentially adding to pressure on the central bank to raise interest rates as the current account gap widens.
The bill will now go to President Sebastian Pinera for final approval after a clause on regulations for vaccinations was removed, the government’s Budget Office said in an e-mailed response to questions.
Authorities will be tempted to expand expenditure more than planned ahead of elections in November 2013, and as the economy is forecast to grow 4.8%, economist Jorge Selaive said. With state spending stimulating growth, the onus falls on the central bank to moderate internal demand and narrow the current account gap, he said.
“Monetary policy will have to be more restrictive because fiscal policy is being very expansive,” Selaive, chief economist at Banco de Credito e Inversiones (BCI), said by phone from Santiago. “The central bank will have to start taking charge of this current account deficit.”
Chile had a current account gap equivalent to 7.4% of gross domestic product in the third quarter, compared with a 2.7% deficit in the second quarter and 0.3% surplus in the first. Imports grew 2.5% in the third quarter from the year before, while exports fell 3.4%.
Fiscal spending will rise 6.3% in 2012 as the economy expands a little faster than 5%, Budget Office Director Rosanna Costa told reporters. Public spending expanded 3.3% in 2011, when GDP climbed 6%.
Policy makers have kept their benchmark interest rate unchanged at 5% for 10 straight months following a cut in January that surprised economists. Analysts surveyed by the central bank expect borrowing costs to remain at 5% through next year before rising to 5.25% by December 2014.
China‘s GDP for 2012 will meet the official target rate of 7.5%, Commerce Secretary Chen Deming told reporters in Beijing.
China’s all-important exports have been relatively flat, but perking up over the last quarter thanks, in part, to emerging markets and the U.S. Industrial production is on the rise and with it, corporate profits.
That 7.5% figure has been bantered around in official circles all year. Last year, in fact, Premier Wen Jiabao said that China’s new growth trajectory was more like 7%. The market should not be surprised. The days of double digit growth are over, as the Chinese economy slowly becomes more open and inwardly focused, as opposed to the export driven, low wage economy that helped it grow at such a break neck pace.
Moreover, the government is intent on keeping stimulus spending under wraps. That doesn’t mean Beijing is not spending money on big projects like roads and bridges. This is still very much a command and control economy. But it is not increasing fixed asset investment, keeping it hovering around 20% growth quarter over quarter.
In the first three quarters, China’s economy has grown 7.7% from a year ago. Over the last six months, the iShares FTSE China Xinhua 25 (FXI) exchange traded fund has outperformed the MSCI Emerging Markets index. FXI is up 12.55% over the period to the index average of 11.19%. Year-to-date, however, FXI is still behind the eight ball, underperforming the MSCI EM by 3 percentage points.
But China is staging a comeback, albeit one without a lot of bells and whistles.
According to Bank of China, the latest data shows that in October corporate profits climbed 20.5% year-over-year & sales grew 11.1% on the year. Producer prices have been falling since late 2011, and many companies dependent on costly commodity inputs have seen those costs drop. And now some Chinese manufacturers are benefiting from those materials they purchased at lower prices. As industrial profits increase, shares of Chinese companies should start to appreciate, helping out patient portfolio investors who have been hard pressed for gains in broad China funds like FXI.
The Gross Domestic Product (GDP) grew at 5.3% versus 5.5% in the first quarter of the current financial year. An ET Now poll had estimated a growth rate of 5.3%. The consensus estimates of the poll range between 5% and 6%.
The economy extended its long slump keeping it on track for its worst year in a decade and underscoring the urgency of politically difficult reforms to spur a revival.
According to the released data, the GDP at factor cost at current prices in Q2 of 2012-13 is estimated at Rs 21,83,794 crore, as against Rs 19,23,173 crore in Q2, 2011-12, showing an increase of 13.6%.
The manufacturing sector grew an annual 0.8% during the quarter while the agricultural sector growth rose 1.2%. The mining sector exhibited a growth of 1.9% versus a meager 0.1% quarter-on-quarter. The construction sector also grew at 6.7% versus 6.3% year-on-year.
Mining and quarrying sector, however, showed some improvement and recorded a growth of 1.9% during the quarter, as against a contraction of 5.4% in the second quarter of 2011-12.
The economic growth in the first six month of this fiscal (April-September) is 5.4%, lower than 7.3% growth clocked in the year-ago period.
In the July-September quarter, trade, hotels, transport and communications segment also witnessed lower pace of growth at 5.5% compared to 9.5% expansion in the same quarter in year ago.
The growth rate of electricity, gas and water supply also dipped to 3.4% in the second quarter, from 9.8% witnessed in the same quarter of 2011-12.
The construction sector expanded by 6.7% in Q2 of 2012-13, compared to 6.3% in the same period last year.
Growth rate of services sector, including insurance and real estate, stood at 9.4% in the second quarter, against 9.9% recorded in same quarter last fiscal.
Commenting on the data, Venugopal Dhoot said that the 5.3% GDP growth rate was expected. RBI has taken some steps to induce growth, he added.
Economists forecast that the FY13 fiscal deficit will overshoot the government target of 5.3%. High current account deficit will continue to impact the rupee.
The Philippine economy posted its fastest quarterly growth rate in two years, accelerating by 7.1% in the third quarter of 2012, bolstered by higher year-on-year expansion across all sectors.
The National Statistical Coordination Board announced that the country’s gross domestic product (GDP) expanded at a faster pace compared to the 3.2% growth during the same period last year.
It is also the fastest quarterly increase since the third quarter of 2010 when the economy grew by 7.3%.
“The beyond expectation third quarter growth was driven by the services sector with the robust performances of transport, storage and communication, financial intermediation, and real estate, renting & business activities supported by the five consecutive quarters of sustained accelerated growth of the industry and the seemingly weather- tolerant agriculture sector,” NSCB secretary general Jose Ramon Albert said.
With the first quarter growth of 6.3% and the revised second quarter GDP of 6%, the expansion of the economy for the first nine months of the year stood at 6.5%.
“Once again, the third quarter performance was way above the market’s median forecast of 5.4%,” National Economic and Development Authority (NEDA) director general Arsenio Balisacan said.
The NEDA chief said that the Philippine economy posted the fastest growth in the ASEAN region during the third quarter, followed by Indonesia with 6.2%, Malaysia with 5.2%, Viet Nam with 4.7%, Thailand with 3%, and Singapore with 0.3%.
On the other hand, China posted a 7.7% GDP growth for the period.
“The economic expansion continues to be broad-based, as almost all sectors posted higher year-on-year growth rates,” Balisacan said.
On the supply side, the services sector made the biggest contribution to growth, expanding by 7% from last year. It accounted for 58% of GDP.
“This was led by trade, which grew by 7% in the third quarter of 2012. Real estate also posted strong expansion, as major players including Ayala Land. SM Prime Holdings and Megaworld posted double-digit revenues in terms of real estate and rent of commercial spaces,” Balisacan said.
The NEDA chief also said that the vibrant tourism sector which catered to around 3.1 million tourists as of September 2012 led to the 5.3% growth in other services, as revenues of restaurants and hotels increased during the quarter.
Industry meanwhile posted the fastest growth among the three major sectors as it grew by 8.1%, while the agriculture sector posted an increase of 4.1%.
On the demand side, household spending contributed more than half of the growth.
“This was supported by slower movement of prices, as headline inflation averaged 3.5% from July to September 2012, and the continuous improvement in consumers’ confidence,” Balisacan said.
“The steady inflow of remittances from overseas Filipinos, which grew by 4.2% in peso terms, also contributed to the higher household spending,” the NEDA chief said.
Household final consumption expenditure contributed 4.3 percentage points to the third quarter GDP growth. It expanded by 6.2% from the previous year.
Construction posted the fastest growth in the expenditure side, expanding by 24.8%, a reversal of the 8.6% contraction during the same period last year.
“Both private and public construction registered more than 20% growth rates during the said period. We have previously noted that a major driver of this growth is the demand for office space due to the strong outlook of the BPO sector. Also, favorable economic conditions led more individuals to purchase residential properties,” Balisacan said.
Government spending also grew at a faster pace this year at 12%, compared to the 8.9% expansion last year.
The Aquino administration has set a full year target of 5 to 6% for 2012. The government expects that the full-year GDP growth goal for the year will be exceeded.
“We are well on our way of surpassing our target for this year,” Balisacan said.
“We will face the fourth quarter not only with utmost optimism but also with careful vigilance, especially noting the challenges ahead,” Balisacan said taking note of external issues such as the Euro crisis and the slow recovery of the US economy.
Gabon's economy will expand by 7% in 2013, supported by double-digit growth in the non-oil sector, the energy-exporting country's economy minister told Reuters.
"We have 7% for three years - 2011, 2012, 2013," Luc Oyoubi said.
"For 2013, we think that oil will decline, but non-oil GDP will certainly be very high, still more than 10%."
That estimate is far more optimistic than the one given by the International Monetary Fund, which last month predicted Gabon's economic growth slowing to 2.3% next year from an expected 5.6% in 2012.
Oyoubi, however, said the non-oil economy was expanding strongly thanks to the government's infrastructure program which includes building roads and housing and he said that would push overall growth to 7%.
Gabon issued a $1 billion Eurobond in 2007, one of the few sub-Saharan African countries to do so, but the minister said the government had not yet decided whether to return to global capital markets next year.
Oil accounts for 45 percent of the former OPEC member's GDP. With an estimated population of just 1.5 million, Gabon has one of Africa's highest per capital GDP levels.
Italy's economy will shrink more than the government projects next year and the fiscal deficit will be far above target, the OECD said recently, underscoring the problems facing whoever wins March's national election.
The Paris-based Organization for Economic Co-operation and Development forecast the euro zone's third-largest economy will shrink by 1% in 2013, cutting its previous forecast of a 0.4 % contraction made in May.
Mario Monti's technocrat government forecasts a marginal decline of just 0.2% and the OECD said the deeper recession would take a heavy toll on the prime minister's efforts to consolidate public finances.
Italy has been in recession since mid-2011, weighed down by tax hikes which have stifled demand, and the OECD said gross domestic product (GDP) would shrink 2.2% this year, more than its May forecast for a 1.7% GDP fall.
Monti's fiscal tightening has hit growth but failed to cut the budget gap as planned.
This year's deficit will come in at 3% of GDP, the OECD said, compared with Monti's 2.6% target, which he revised up from 1.7% just two months ago.
"Fiscal consolidation of nearly 3% of GDP this year weakened domestic demand and private consumption has been falling at the steepest rate since the Second World War," the report said.
In the next two years the gap between the report's projections and Monti's widen further, with the OECD seeing a deficit of 2.9% in 2013 and 3.4% in 2014, compared with the government's goals of 1.8% and 1.5%.
"Should the OECD projection be realized, further fiscal tightening in 2014 would be necessary to achieve the planned debt reduction path," the report said.
Rome wants its debt burden, the second largest in the euro zone after Greece's, to fall to 119.9% of GDP in 2015 from a targeted 126.4% this year.
Despite the difficult outlook, the OECD praised Monti's efforts since he took office a year ago when Italy risked a Greek-style debt crisis and said his reforms, notably of the labor market, should eventually help lift the economy out of a decade of stagnation.
It said the government that succeeds Monti's must "maintain the course" on structural reforms and fiscal consolidation.
"Backing off either would damage market sentiment and growth," it warned.
Real gross domestic product (GDP) eased to 1.2% in the third quarter, the lowest since the second quarter of 2009, Statistics South Africa (Stats SA) said recently.
"The seasonally adjusted real GDP at market prices for the third quarter of 2012 increased by an annualized rate of 1.2% compared with an increase of 3.4% (revised from 3.2%) during the second quarter of 2012," Gerhardt Bouwer executive manager for national accounts at Stats SA said.
Market expectation was that South Africa's economy would grow by 1.5%.
The figure at 1.2% was worse than what was anticipated by the market who expected GDP to come in lower due the recent strike action in mining.
In the third quarter mining and quarrying contracted by 12.7% after showing growth of 30.9% in the second quarter.
"People think that because of what happened [in mining] you will see the direct effect immediately," explained Bouwer, adding that the mining industrial action started at the end of the quarter.
Over the course of the Lonmin Marikana strike, the other two larger platinum producers had continued to produce, said Bouwer. Lonmin is the third largest platinum producer.
Stats SA would not be drawn on whether the recent strikes seen in the South African economy would lead to a worse GDP reading in the fourth quarter.
According to Stats SA, the main contributors to the increase in economic activity were the finance, real estate and business services and general government services (each contributing 0.4%); the agriculture, forestry and fishing industry, the manufacturing industry and the wholesale , retail, motor trade, and catering and accommodation industry (each contributing 0.2%).
The unadjusted real GDP at market prices for the third quarter of 2012 increased by 2.3% compared with the third quarter of 2011.
In the first nine months of 2012, the South African economy grew 2.6% compared to the corresponding period in 2011.
Nedbank economists said it was widely expected that the economy stalled in the third quarter.
The slower pace was mainly due to a sharp drop in mining production caused by the wildcat strikes in the platinum and gold mining industries over August and September. However, the pace of economic activity in most sectors slowed noticeably over the quarter. Weaker global demand weighed on the manufacturing sector, while softer domestic spending contained the upside for retailers and other services," said Nedbank of the data released by Stats SA.
The bank said the outlook for 2013 remains uncertain with a weak and a vulnerable world economy will continue to undermine the mining and manufacturing sectors.
"Today's GDP figures reflect two realities: first that economic growth remains too subdued, second that the sources of momentum are too narrow and increasingly unsustainable. Production and exports are faltering, while spending and imports continue to increase.
"These imbalances are visible in a bulging trade deficit and a widening current account deficit, which is starting to weigh on the rand. If the current pressure on the rand is sustained, the outcome will be higher inflation in 2013 and beyond.
"While the disappointing growth rate suggests relatively easy monetary policies, the best way to support the economy without aggravating current imbalances and the rand's vulnerability is probably to maintain a neutral stance for as long as possible. We therefore still expect interest rates to remain unchanged until late 2013," said the bank.
At the latest Monetary Policy Committee (MPC) meeting, Governor Gill Marcus said that the central bank had revised downwards GDP growth for 2012 to 2.5% down from 2.6% due mostly to the continued global slowdown and domestic events including labor unrest.
Britain's gross domestic product for the third quarter has been unrevised by the Office for National Statistics, with growth confirmed at 1%.
The ONS confirmed the strongest rise in household spending in more than two years helped drive the UK's dramatic bounce back to economic growth between July and September.
The second estimate includes figures on the spending side of the economy for the first time, which revealed that the Olympics and Paralympic Games helped household spending grow by 0.6%, the strongest rate since the second quarter of 2010.
The unchanged headline GDP figure remains the fastest rate of quarterly growth in five years and marked the end of the longest double-dip recession since the 1950s.
GDP is seen as a broad measure for the health of the total UK economy.
Although the headline figure was unrevised, it was still largely driven by one-off factors and is unlikely to alter the view that the underlying health of the economy is much weaker.
The third quarter had one more working day than the previous quarter, due to the Queen's Diamond Jubilee, the ONS said.
Looking further ahead, growth is expected to fall back sharply between October and December amid a series of weak purchasing managers' surveys for services, manufacturing and construction industries.
Construction growth was revised downward from -2.5% to -2.6%
Bank of England governor Sir Mervyn King recently warned that output could even shrink in the fourth quarter.
The economy remains 3.1% below its peak in the first quarter of 2008, the ONS said.
And fourth-quarter output was cut from flat growth to a decline of 0.1%, although this was due to methodology rather than revisions to previous quarters.
The second estimate saw output in the construction sector revised from a 2.5% decline to a steeper drop of 2.6%, while industrial production was downgraded from 1.1% growth to 0.9%.
The services sector grew at 1.3% - unchanged from the previous estimate - as ticket sales for the Olympics and Paralympics were booked in the third quarter.
Elsewhere, new figures revealed an improvement in the UK's trade position during the third quarter with imports falling 0.4% and exports rising by 1.7% when compared with the previous quarter.
However, the rise in exports can partly be attributed to higher spending by foreign tourists during the Olympics as this spending is recorded as an export.
Meanwhile, the Organization for Economic Co-operation and Development has said it expects the UK's national output to shrink by 0.1% this year.
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