GDP INDUSTRY FORECAST
UPDATE
February 2012
McIlvaine Company
TABLE OF CONTENTS
Investment in residential property will grow more than double the rate of gross domestic product in 2012, according to analysts at Bank of America Merrill Lynch. A modest gain in residential construction this year should provide a small jolt to the economy.
Analysts forecast housing starts to average 710,000 per quarter, a 15% gain from 2011 when starts averaged about 620,000. The gain should translate to a 5% increase in residential investment — double that of GDP growth forecasts.
"At first blush, this seems startling," BofAML analysts said. "But, since the level of construction has fallen to such low levels, a large percentage point gain still implies a fairly small amount in units or dollars."
The Federal Reserve estimates GDP will grow between 2.2% and 2.7% this year, while Capital Economics estimates GDP will grow only 1.5% in 2012, with residential investment contributing 0.1% to that total.
Because residential investment only makes up a 2.2% share of the economy, it will only add 0.1% of growth to 2012 GDP, based on BofAML's forecast. A 0.6% contribution requires a 20% rise in residential investment, which would only occur by housing starts shooting up to 1.2 million by the end of the year. An increase in construction, even if it is small, will create jobs.
Since the start of the housing collapse, the construction sector shed nearly 2.3 million jobs, accounting for about a quarter of the total job loss during the recession. The labor market started to recover in mid-2009, but the housing sector continued to shed jobs until the end of 2010.
The analysts forecast 85,000 construction jobs will be added this year and nearly 200,000 in 2013. But January's employment figures show that 21,000 construction jobs have already been created, of which 2,500 were residential construction jobs and 6,400 were nonresidential.
Before the employment data came out last week, BofAML analysts said because less labor-intensive multifamily building and renovations will drive most of the gain in residential construction, it won’t create as many jobs initially.
"Construction job cuts were not as severe as the drop in expenditures, which suggests that companies also reduced hours in addition to headcount," analysts said. "When activity picks up again, the number of hours worked will recover, delaying hiring," they said.
Realtors, furniture stores and building material stores should feel a spillover from the rise in construction employment, creating another 25,000 jobs in 2012 and 60,000 in 2013.
"All in, our model suggests housing-related jobs will account for 8% of jobs this year and about 20% next year," the analysts concluded.
"This will help reduce the stubbornly high bucket of long-term unemployment and underpin confidence. A virtuous cycle can start to develop, but it will be gradual."
Growth in South America’s sixth-largest economy accelerated for the first time in four months in December, 2011, as the government rolled out stimulus spending to counter waning global demand for its metal and manufacturing exports. Though inflation eased from a two year-high of 4.74% last month, the central bank won’t lower rates unless Europe’s debt turmoil intensifies, said Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal.
“They’re not going to cut rates with inflation so far outside the target’s upper bounds,” Alvarez said in a phone interview from New York, referring to the country’s inflation target of 1% to 3%. “A crash in Europe would have to develop before they’d cut.”
Peru unveiled plans in November to spend as much as $3.5 billion to shore up domestic demand on concern recession in Europe could spread to China and the U.S., the Andean nation’s top trading partners.
The economy expanded faster than expected in December as the government pumped up investment in public works, Finance Minister Miguel Castilla said.
Castilla said the government may revise its forecast for 2011 economic growth, to about 7% from 6.8%.
Public investment jumped 39% to a record 500 million soles ($186 million) last month from a year earlier, according to the Finance Ministry. The government is targeting a 30% increase this year to compensate for slowing spending by companies.
The Peruvian sol has strengthened 0.3% since the end of December to 2.6880 per U.S. dollar, according to Deutsche Bank AG’s local unit.
The yield on the nation’s benchmark 7.84% sol- denominated bond due August 2020 has fallen 10 basis points, or 0.1 percentage point, this year to 5.65%, according to prices compiled by Bloomberg.
Though the global outlook has improved since the start of the year, anti-mining protests in Peru may deter investment and damp domestic demand, said Felipe Hernandez, an analyst at RBS Securities Inc. in Stamford, Connecticut.
Newmont Mining Corp (NEM) suspended its $4.8 billion Minas Conga gold project in November after two weeks of protests that sometimes became violent. Opponents to what would be the country’s biggest-ever investment project resumed street protests Feb. 1.
Government officials have held talks with communities in three other mining regions in the last month to stem spreading unrest. Though business sentiment has improved after President Ollanta Humala revamped his Cabinet in December to better deal with the protests, investor confidence won’t return to levels seen prior to his election in June so long as the Conga project remains on hold, said Hernandez.
Business confidence rose in January for the first time in three months, according to a central bank survey.
A separate survey by the bank showed economists forecast that the economy will expand 5% this year, compared with 5.3% in the previous month’s survey. Inflation expectations for 2012 declined to 2.9% from 3%.
Consumer prices fell the most in 15 months in January as the cost of food and bus fares eased.
Annual inflation slowed to 4.23% from December, and will continue to decelerate this year, creating leeway for the central bank to ease its monetary policy stance to shore up demand, said Roberto Flores, the head of research at Inteligo SAB, a Lima-based brokerage.
“Deflation could mean the economy is being held back by political noise,” said Pedro Olaechea, president of the National Society of Industries, in an interview in Lima. “We’re more worried by the political noise surrounding investment than we are by a default in Greece.”
The Reserve Bank of Australia lowered its forecasts for economic growth and inflation this year citing faltering global growth, and said there is scope for more monetary easing if needed. The central bank now expects the economy to grow 3.5% during the year ending June 2012, slower than the previous prediction of 4%.
The downgrade reflects the weaker outlook for global economic growth, with the uncertainty about the European situation expected to weigh on household and business spending decisions, RBA said in its latest Statement on Monetary Policy.
In the year to December 2012, headline inflation will be 3% compared to 3.25% projected earlier.
The headline inflation outlook for the 12 months to June 2012 was lowered to 1.75% from 2%. Underlying inflation is projected at 2.25%, slightly weaker than the previous forecast of 2.5%.
The bank said that the current inflation outlook provides scope for easier monetary policy should demand conditions weaken materially. RBA kept the cash rate unchanged at 4.25% during its February meeting after delivering two consecutive rate-cuts towards the end of last year.
For December 2012, the annual GDP is forecast to grow 3% - 3.5%. Economic growth for the year ending June 2013 is forecast to be between 3% - 3.5% percent, unchanged from the previous projection.
The RBA expects the pipeline of mining investment projects and solid growth in resources exports to continue to support growth. However, growth outside the mining sector is expected to remain below trend over the forecast period.
A disorderly outcome of the sovereign debt problems in Europe remained the major downside risk for the global economy, it said. Risks to the outlook for China and other economies in Asia appear to be skewed slightly to the downside, according to the central bank.
China's economic expansion would be cut almost in half if Europe's debt crisis worsens, a scenario that would warrant "significant" fiscal stimulus from the nation's government, the International Monetary Fund (IMF) said. Based on the IMF's "downside" forecast for the global economy, China's growth could drop by as much as 4% points from the fund's current projection, which is for 8.2% this year, the organization said in a report by its China office in Beijing.
CRISIL Research has come out with its report on "Growth slips below 7% in FY 12" based on the advanced GDP estimates for the current fiscal put out by the Central Statistical Organization, Government of India.
India's GDP growth for the first time after the global crisis of 2008 will slip below 7%. Central Statistical Organization (CSO) has pegged GDP growth for FY12 at 6.9%. As the GDP growth during first-half of FY12 stands at 7.3%, GDP growth in the second half will be lower than the first half. Hit by the global headwinds and high interest rates industry is expected to grow at 3.9% in FY12. However, services sector growth is expected to do well and is pegged at 9.4% for FY12. On the demand-side, due to high interest rates and poor sentiments both consumption and investment growth is expected to decline but the decline will be more pronounced in case of investment growth which is expected to fall from 7.5% in FY11 to 5.6% in FY12. Lower GDP in FY12 clearly is an outcome of a combination of domestic (policy log-jam, high interest rates, stubborn inflation) and global (sovereign debt crisis in EU) factors. Going forward though we expect inflation and interest rates to ease, global environment still looks uncertain. Hence, we expect GDP in FY13 to grow at 7.0%.
Agricultural output growth is expected to decline to 2.5% in FY12 from 7.0% in FY11, mainly due to high base of last year. In absolute terms though agricultural output is expected to reach record levels as after kharif now even rabi harvest is likely to be good.
Plagued by high interest rates and slowing economy, manufacturing sector growth is expected to decline to 3.9% in FY12 from 7.2% in the previous quarter. On the other hand, mining sector which faced regulatory hurdles and also ban on iron ore mining in a few states is expected to witness a contraction of 2.2% in FY12 as compared to 5.0% growth in FY11. However, electricity sector did rather well and is expected to record a growth of 8.3% in FY12 as compared to 3.0% in FY11.
Services have been the most resilient sector of the Indian economy and the same is once again demonstrated by its performance in FY12. It is expected to grow at 9.4% in FY12. Within services, trade, transport and communication grew the fastest at 11.2% in FY12 as against 11.1% in FY11.
Hit by high inflation and decline in demand in interest-sensitive sectors, private final consumption expenditure, the largest component of aggregate demand, is expected to moderate to 6.5% in FY12 from 8.1% in FY11.
Japan's economy likely shrank in the final three months of last year, contracting for the fourth quarter in the past five as the effects of the strong yen, weak overseas demand and flooding in Thailand put the brakes on a nascent recovery.
The figures are expected to show real gross domestic product shrank 1.6% on an annualized basis in the three months ended Dec. 31, according to the median forecast of 10 economists surveyed by Dow Jones Newswires. The most pessimistic forecast said GDP contracted 2.1%, while the most optimistic predicted the economy shrank 0.6%.
Japan's economy--the world's third-largest--grew 5.6% in the previous quarter, rebounding on a surge in exports and production as supply chains were restored following the March 11 earthquake, tsunami and nuclear disasters that devastated the country's northeast.
That welcome burst of growth in the third quarter, however, ran into strong headwinds in the final three months of 2011 as global demand sagged amid worries about Europe's sovereign debt crisis. The yen hit a record high against the U.S. dollar, which traded at Y75.31 on Oct 31, while flooding in Thailand damaged facilities at Japanese manufacturers such as Honda Motor Co. that have production bases there.
"Exports had driven up growth in the July-September period, but the strong yen and a slowdown in overseas economies compounded by the negative impact of the Thai floods were the main factors behind minus growth" in the fourth quarter, Taro Saito, senior economist at NLI Research Institute, wrote in a report.
Consumer spending, which accounts for more than half of Japan's economy, is expected to have slowed in the fourth quarter from the third when demand for televisions boosted spending ahead of the country's switch to digital broadcasting, economists said.
Norio Miyakawa of Mizuho Research & Consulting forecasts that consumer spending will slow to growth of 0.2% in the fourth quarter, compared with 0.7% in the third.
Economists forecast that Japan's economy could rebound in the first quarter of 2012, buoyed by demand related to disaster reconstruction and signs of strength in the United States. A still uncertain outlook for the global economy, however, and continued strength in the yen, which remains close to a record high against the dollar, remain risk factors.
Austria’s economy may continue to stagnate in the first half of this year, according to the Wifo economic research institute, which compiles gross domestic product figures for the Alpine republic’s government.
“Economic growth probably slowed again in the fourth quarter of 2011” as “weak development in the euro area reduced foreign impulses” on the Austrian economy, the Vienna-based institute said in an e-mailed statement.
“The future development is considered less favorable than the current situation,” Wifo said. “This suggests a continuation of stagnation in the first half.”
Estonia's GDP growth slowed to 4.0% year-on-year in the fourth quarter, lower than analysts expected, with the economy contracting in quarter-on-quarter terms for the first time since the start of 2010, according to the statistics office.
In seasonally-adjusted terms, the economy contracted 0.8% in the fourth quarter compared with the third, as exports stalled in the last months of 2011. In the June-Sept period, the economy grew 1.2% from the previous quarter.
"The growth of exports for manufacturing decelerated abruptly in the fourth quarter of 2011 primarily due to the decrease in the export of computers, electronic and optical products," the statistic office said.
In the third quarter of 2011, GDP grew 8.5% year-on-year. The slower 4.0% pace in the fourth quarter compared with a median estimate of 6.1% in a Reuters poll of analysts.
Annualized growth for full-year 2011 was a brisk 7.5% compared with 2.3% in 2010.
Estonia's finance ministry said in September 2011 that it expected the country's GDP to grow 3.0% in 2012.
The Greek economy is forecast to contract between 4% and 5% this year, a government source said recently, citing figures from a draft memorandum on Greece's new international bailout addressed to the International Monetary Fund.
The fall in gross domestic product is far greater than the 2.8% foreseen in the 2012 budget presented last November.
Economists polled by Reuters in late January projected Greece's economy would contract by 3.7% this year.
The International Monetary Fund may cut its forecast that Hungary will grow by 0.3% this year, the fund's country representative said recently.
But Iryna Ivaschenko didn't reveal the new forecast, saying the body was in the process of assessing the issue.
The IMF based its projection on a stronger outlook for euro-zone growth, Ivaschenko said at an event organized by the American Chamber of Commerce in Budapest. The government forecasts growth of 0.5% this year.
"Hungary is still growing below the central and eastern European Union average... the bad news is that it has never recovered from the financial crisis," Ivaschenko said.
The modification is likely to become necessary as the euro zone's growth and growth outlook has slowed significantly because of the debt crisis. Hungary is a small and open economy, which is highly integrated into the euro zone. Therefore, Hungary is vulnerable to such a slowdown because exports are its sole source of growth, Ivaschenko said, especially its exports to Germany.
"When Germany sneezes Hungary will catch a cold," the official said.
Hungary is facing headwinds in other areas as well, Ivaschenko stressed, such as very weak domestic demand, a huge drop in gross fixed capital formation, high public debt, a faster pace of deleveraging by banks and dependence on external funding.
"To the tune of €35-40 billion in gross terms needs to be rolled over annually," Ivaschenko said.
The concerns are especially important as Hungary prepares for official talks with the European Union and the IMF on a financial package. The country intends to use the proposed credit line as a safety net to secure investors' confidence in the country.
Although Ivaschenko said risk related to Hungary, both internal and external, remains elevated, the government is stressing it has ample resources to finance itself from the markets. But with the country no longer rated as investment-grade after the three major rating firms downgraded it to junk status, Hungary needs to reaffirm its position on the bond market.
The IMF official also said Hungary needs to focus on the right budget structure this year, admitting it is already very ambitious and very tight. "The key issue is its structure, and sustainability," Ivaschenko said.
Hungary also needs to take on reforms. Despite the fact they're time-consuming, they would contribute to growth in the long run, Ivaschenko said.
Bank of Italy Director General Fabrizio Saccomanni said current Italian government bond yields are offsetting the negative effects of austerity measures on the nation’s gross domestic product.
“At the current levels” of bond yields, “the effects on GDP of the latest austerity plan have already been compensated for,” he told reporters at a briefing in Rome.
Italy’s GDP will probably fall between 1.2% and 1.5% this year, Saccomanni said, calling his forecast “less pessimistic” than the International Monetary Fund’s prediction for a 2.2 contraction in Italy’s economy.
This year’s recession will weigh on Italian banks’ revenue and increase their credit risks, Saccomanni said, even as recent capital increases have improved lenders’ finances.
“The capital increases, carried out before and after the recommendations of the European Banking Authority, have improved the soundness of the main banks,” he said.
Saccomanni reiterated the central bank’s forecast that Italian debt will start falling next year.
Latvia’s economy expanded at the slowest pace since the first three months of 2011 in the fourth quarter as manufacturing and export growth slowed.
Gross domestic product rose 5% from a year earlier, the statistics office in the capital, Riga, said in a preliminary estimate. That’s less than a median estimate of 5.2% in a Bloomberg survey of eight economists. GDP expanded 0.8% on the quarter.
The Baltic nation’s economy has been growing for two years after a debt-fueled property bubble burst, export markets closed and lending tightened, erasing almost a quarter of GDP. The International Monetary Fund cut its forecast for Latvian growth this year to 1.5% as turmoil in the euro area curbs export and manufacturing growth.
Industrial output in the last three months of the year decreased a quarterly 0.5% and exports fell in November a monthly 2.4%.
The country ended a €7.5 billion ($10 billion) lending program from a group led by the European Commission and the IMF in December.
The U.K. economy contracted in the three months to January, supporting the case for the Bank of England to boost its bond-purchase program, the National Institute of Economic and Social Research (NIESR) said.
Gross domestic product probably fell 0.2%, compared with a contraction of the same amount in the fourth quarter, according to NIESR.
While the estimates don’t confirm that the U.K. is in a recession, they suggest no growth since October 2011, NIESR said. The Bank of England increased its target for bond purchases by 75 billion pounds ($119 billion) to 325 billion pounds today to shield the economy from turmoil in Europe.
“There are significant downside risks to the U.K.’s outlook this year, not least those associated with the evolution of the euro-area crisis,” NIESR said. “A further round of quantitative easing appears necessary in order to boost demand in the short term.”
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