GDP UPDATE
January 2012
McIlvaine Company
TABLE OF CONTENTS
The US economic grew at a slower pace than previously estimated in the third quarter, after a sharp drop in healthcare spending, but weekly unemployment figures fell to the lowest level in three and a half years.
Spending on durable goods was stronger than previously estimated, indicating household appetite to buy remains healthy.
Gross domestic product grew at a 1.8% annual rate in the third quarter, according to the Commerce Department’s final estimate, down from the previous estimate of 2.0%.
Spending on healthcare dropped by $2.2bn (£1.4bn) but spending on durable goods was stronger than previously estimated, indicating household appetite to buy remains healthy.
Even as much of the rest of the world is slowing down and a mild recession is forecast in Europe next year, the US economy has remained resilient.
The jobs market is improving, households continue to spend, home building is picking up and factory output is expanding, putting the economy on course for at least a 3% growth pace in the fourth quarter. That would be the fastest pace in 18 months.
In the weekly jobs figures, new claims for unemployment benefits fell by 4,000 to 364,000 people last week, the lowest level since April 2008. Economists polled by Reuters had forecast claims rising to 375,000.
Despite the downward revision in the GDP forecast, the third quarter's growth is still a step-up from the April to June period's 1.3%.
A jump in gasoline prices had weighed on consumer spending earlier in the year, and supply disruptions from Japan's big earthquake and tsunami in March had curbed auto production.
The government revised consumer spending to a 1.7% growth rate from 2.3% because of adjustments to healthcare services, in particular nonprofit hospitals.
Spending on durable goods was, however, revised up to a 5.7% pace from 5.5%.
Export growth was stronger than previously estimated, rising at a 4.7% rate instead of 4.3%. Imports increased at a much faster 1.2% rate rather than 0.5%
In a summary of its 2012 monetary program, the central bank said gross domestic product will likely expand between 4.5% and 7.5%. That is slightly higher than the 5.1% growth forecast in the federal government's 2012 budget.
Argentina faces a less favorable economic backdrop going into 2012 amid sluggish demand for its industrial exports to Brazil and a slowdown in global economic activity in general.
The country's trade surplus will likely fall to $8.9 billion next year, the central bank said.
"The greatest source of uncertainty in the monetary program is related to the sovereign debt crisis and risks to financial systems in advanced economies, especially the euro zone," it said in a statement.
Annual inflation as measured by the national statistics agency's heavily questioned consumer price index will likely slow to 9.2% next year, the central bank said. Indec, as the agency is known, said its CPI was up 9.5% on the year at the end of November. However, most private-sector economists say inflation is probably running between 20% and 25% a year due to lax fiscal and monetary policy, a booming economy, and growing money supply.
A 25% increase in the minimum wage earlier this year and 12-month inflation expectations that are firmly anchored at 25% suggest inflation is higher than what official data indicate.
Investors pulled more than $18 billion out of the country in the first nine months of the year on fears that galloping inflation will eventually force authorities to weaken the peso at a faster rate to keep exports competitive.
The peso closed nearly unchanged at ARS4.3035 to the U.S. dollar on the MAE local foreign-exchange wholesale market, bringing its year-to-date loss to 7.6%.
Brazil’s economy may expand 4% to 5% this year, Finance Minister Guido Mantega said in an article in O Estado de S. Paulo.
Brazil may also cut interest rates, as long as it doesn’t result in higher inflation, he said.
Colombia’s economy expanded at the fastest pace since 2006 in the third quarter, putting the country in a better position than its neighbors to weather a European debt crisis that’s curbing appetite for riskier assets.
The 7.7% surge exceeded all 30 analyst estimates in a Bloomberg survey, whose median forecast was for 6%annual growth. Since the series began in 2000, gross domestic product expanded at the current pace only once before, in the final quarter of 2006. GDP expanded 1.7% from the second quarter, the statistics agency said in Bogota.
Colombia’s economy is gaining strength, while growth cools in other investment-grade rated countries like Brazil and Chile, as a result of a surge in spending on infrastructure and record foreign direct investment. GDP is expected to expand 4.5% next year, more than the 3.7% forecast for the rest of Latin America in a report by the United Nations.
“Colombia’s growth momentum is much stronger than anywhere else in the region,” Alberto Ramos, an economist at Goldman Sachs Group Inc. in New York, said in a phone interview. “If a crisis comes it will hit Colombia as it’s in a position of cyclical strength.”
Colombia’s peso bonds fell, sending yields higher, after the report. The yield on the nation’s 9.25% bonds due in May 2024 rose six basis points to 6.18% at 11:31 a.m. in Bogota, according to the stock exchange.
Construction
Growth in the third quarter was helped by a break in heavy rains and deadly flooding, clearing the way for the government to complete work on several road, energy and mining projects.
GDP expanded a revised 5.1% in the second quarter, the national statistics agency said in a report. Construction and mining activity each jumped more than 18% in the July-September period from a year ago, today’s GDP report showed.
The strong growth has helped lower unemployment, which at 9% is still the highest among major economies in Latin America. It’s also shielded the economy against a third-quarter drop in commodity prices as the benchmark West Texas intermediate crude fell 17% and the S&P GSCI Index of 24 raw materials fell 12%. Oil, coal and coffee account for about two-thirds of Colombia’s exports by revenue.
‘Magnificent News’
“This is magnificent news,” President Juan Manuel Santos said in a message posted on his Twitter account. Finance Minister Juan Carlos Echeverry in a statement compared Colombia’s economy to “a table standing on many legs” as growth is driven by a diverse range of industries, everything from construction to transportation.
After this report Goldman Sachs raised its forecast for growth this year to 5.7%, up from 5.3% previous. Growth should ease next year to about 4% before accelerating again in 2013 to 5.1%, Ramos said.
“Other business cycles like in Chile and Brazil were maturing early in the year and now are on the downward part of the cycle, said Ramos. “You didn’t see a V-shaped recovery in Colombia, so they’re in great shape.”
Brazil’s economy contracted in the third quarter for the first time since 2009, and is expected to grow this year at less than half the 7.5% pace seen in 2010. Growth in Chile and Peru also slowed in the July-September period.
Faster growth may reignite concern about inflation, forcing investors to increase bets that the central bank will raise borrowing costs “sooner rather than later,” said David Moreno, a fixed-income analyst at Bogota-based brokerage Cia. de Profesionales de Bolsa SA.
Rate Outlook
Annual inflation slowed more than expected in November, to 3.96%, after breaching the upper limit of the bank’s target range in October for the first time since 2009. Colombia targets inflation of 2% to 4%.
“Investment in the mining sector has helped a lot, consumer confidence is at high levels and inflation is relatively under control,” said Julian Marquez, an analyst at Bogota-based brokerage Interbolsa SA.
The Singapore economy shrank for the second time in three quarters, signaling it may slip into a technical recession, as a slump in manufacturing output and a slowdown in external demand hurt exports.
Advance estimates showed gross domestic product fell an annualized 4.9% in the fourth quarter of last year from the previous three months, when it climbed a revised 1.5%, the Ministry of Trade and Industry said.
Manufacturing output plunged 21.7% quarter-on-quarter.
The economic crisis facing Singapore's key trading partners took its toll on the island nation's small economy as the sovereign debt crisis in the euro zone and weak growth in the US economy crimped demand for goods and services. The contraction in the fourth quarter capped a year when Singapore's growth eased to 4.8% after a record 14.5% expansion in 2010.
Singapore will face "an environment of slow growth" for at least two years, said Deputy Prime Minister Tharman Shanmugaratnam, on the sidelines of a national productivity event recently.
Rather than introduce short-term fiscal measures, Mr. Tharman said the Government will help companies and workers to upgrade for the long-term with more intensive schemes - something it will address in the coming Budget.
"So it means that we will focus our minds on preparing for the upgrading of the economy. Upgrading not just to get around a one year slowdown but upgrading so as to get beyond what we are doing in new products, new services, new quality of jobs. That's a comprehensive effort across the economy and the government is focusing its mind on it," said Mr Tharman.
The risks to growth in the first quarter of this year are "definitely more negative than positive for now", said UOB senior economist Alvin Liew. UOB expects overall GDP growth to slow to 2.5$ this year.
Singapore had narrowly averted a technical recession in the third quarter, largely because of a surge in biomedical production.
Most analysts expect the economy to continue contracting in the first quarter of this year, resulting in a technical recession which is defined as two consecutive quarters of negative GDP.
Singapore's economy grew 1.5% in the third quarter on a seasonally adjusted and annualized quarter-on-quarter rate, following a contraction of 5.9% in April-June.
With the economy slowing and inflation high, some economists now say the Monetary Authority of Singapore is expected to maintain its current policy stance of a gradual appreciation of the Singapore dollar.
On a year-on-year basis, Singapore's economy grew by 3.6% in the fourth quarter
Thai exports fell 13.1% in November from a year before after severe floods forced hundreds of factories to close and the central bank said even its sharply reduced GDP growth forecast was in doubt as a result.
Imports fell 1.9% from a year before and Thailand was left with a small trade surplus of US$0.22bil on the month, according to central bank data.
The flooding, which started in the north of the country in July, moved slowly south and forced seven huge industrial estates to close in October. It inundated parts of Bangkok but the heart of the capital was eventually spared.
Data earlier this week showed factory output in November was almost a half lower than a year before because of the flooding and, together with current figures, will add to the pressure for another interest rate cut in January.
The severe floods appear to have hurt both domestic demand and exports and we think that should continue to be reflected in the December numbers,” said Usara Wilaipich, an economist with Standard Chartered Bank in Bangkok.
“This backdrop should provide the BOT with enough justification to adjust its policy rate further,” she added.
While hinting at the prospect of another cut, Bank of Thailand Governor Prasarn Trairatvorakul has insisted that rates are not now on a downward trend after nine increases from mid-2010 to tackle inflation and the authorities are optimistic the economy will rebound in 2012.
The central bank has forecast GDP growth of just 1.8 % this year, before the floods it had expected 4.1% and now it says even the latest forecast might not be met, but it did not expect the economy to contract. Its data showed private investment was 1.3% lower in November than a year before and consumption also took a hit from the floods, falling 1.6%.
The central bank expects the trade-dependent economy to bounce back next year, forecasting growth of 4.8% thanks to post-flood spending by both industry and government.
The Sri Lankan economy may expand 8% this year as the island’s central bank strives to contain price pressures while supporting growth, Governor Ajith Nivard Cabraal said.
“Our priority is inflation,” Cabraal said in Colombo in his annual monetary policy speech. Agriculture, tourism and construction will be the main drivers of the expansion in gross domestic product, he said.
Sri Lanka’s central bank left interest rates unchanged for an 11th month in December, saying rising food supplies will help damp inflation as it joined neighbors from India to Indonesia in holding borrowing costs to shield growth. The island devalued its rupee by about 3% in November to spur exports as Europe’s fiscal crisis threatens to sap demand for Asian goods.
The rupee’s exchange rate is competitive and Sri Lanka has to maintain stability in the currency, Cabraal said. While gross foreign-exchange reserves were at a “comfortable” level of $6 billion at the end of 2011, the nation is feeling some balance of payments pressure, he also said.
The $50 billion Sri Lankan economy expanded 8.3% in 2011. Inflation, which held at close to 5% in December, may be 5% to 6% in 2012, he said.
Germany's DIW economic research institute has lowered its 2012 GDP growth forecast for Germany to +0.6% from the +1.0% it had projected in October.
At the start of the year, GDP might even shrink somewhat, the Berlin-based institute projected. "There are a lot of signs that Germany will slip into a recession for a short time," DIW economist Simon Junker said.
However, the institute expects growth to pick up again by this summer. For next year, DIW expects GDP growth of 2.2%.
The forecast, however, hinges on the assumption that Eurozone governments will get the sovereign debt crisis under control over the next several months. If the crisis persists, then DIW expects a negative spiral of rising unemployment and falling demand. This could lead to a marked recession in Germany, the institute warned.
Ireland’s economy contracted by 1.9% in the third quarter, far worse than expected, as global economic turmoil dented export growth, according to official data released recently. The poor performance raises the stakes for the government in meeting fiscal and debt targets set under a bailout from the European Union and International Monetary Fund.
Ireland was the worst performing economy in the euro zone in the third quarter apart from Greece, which no longer publishes seasonally adjusted figures. That marked a stunning reversal of fortune from the second quarter, when it was the second-best in class after Estonia.
Ireland’s quarterly gross domestic product data are notoriously volatile due to the inclusion of the earnings of Irish-based multinationals. Analysts said the country should still achieve full-year G.D.P. growth this year, the first since 2007, but below the 1% forecast by the government.
G.D.P. “is probably below the 1% this year,” said Austin Hughes, chief economist at KBC Bank. “In terms of next year it just emphasizes the difficulty we have.”
The contraction in G.D.P. on a seasonally adjusted basis was far worse than forecasts of a 0.5% fall by seven economists polled by Reuters.
Held up as a role model for other indebted euro zone nations, deteriorating prospects for Irish growth threaten to undermine its efforts to become the first country to emerge from an E.U.-I.M.F. bailout in 2013.
Ireland’s international lenders have warned that growth could deteriorate in the months ahead if Ireland’s main trading partners slide into recession.
Gross national product, seen by some economists as a more accurate indicator of the state of the economy because it strips out the earnings of Irish-based multinationals, was down 2.2% in July-September, disappointing expectations for a flat performance.
The data shows exports are struggling to compensate for a domestic economy still stuck in the doldrums due to an unprecedented housing crash and prolonged austerity measures, including €3.8 billion, or $5 billion, of fiscal adjustments in its budget earlier this month.
Ireland’s current account surplus came in at €850 million compared to a surplus of €1.18 billion in the same period last year.
Second quarter G.D.P. growth was revised to 1.4% from 1.6% previously.
Ireland this month cut its G.D.P growth forecast for 2012 to 1.3% from 1.6%, the second downgrade in a month, in line with 11 economists polled by Reuters at the start of the month.
Italy's government is sticking to its forecast of a 0.4% fall in gross domestic product in 2012, a government source told Reuters, banking on a better scenario than that painted by some private forecasters recently.
"Exports are holding up rather well and manufacturing is stabilizing. The good performance of the German economy helps and also the latest U.S. data are not bad," the source said.
The source said new government incentives may spur private investments in Italy but that private consumption remained a deeply sore point.
"2012 is going to be a disaster for disposable income. Salaries are frozen, inflation is not going down and taxes are higher."
The government forecast a 0.4 contraction in Italy's 2012 GDP at the beginning of December when it approved a 33 billion euro austerity package.
In mid-December, Italy's main employers' lobby Confindustria slashed its 2012 forecast for the country's economy to a 1.6% contraction. A few days later, Milan-based think-tank REF forecast a 1.5% fall in Italy's 2012 GDP growth.
The Italian economy is expected to have grown by a meager 0.6% in 2011.
The Sultanate’s economy is expected to grow at 7% for the second consecutive year, while the inflation rate in 2012 is expected to remain at the 2011 level of 4%, according to HE Darwish Bin Ismail Al Balushi, Minister Responsible for Financial Affairs.
Unveiling the details of the annual budget, Darwish Al Balushi, said the oil and gas revenues constituted 81% of the total revenues, whereas the current and capital revenues constitute 19% thereof.
The oil revenues were calculated on the basis of average price of $75 per barrel and average daily production of 915,000 barrels per day, he said.
Regarding the deficit, he said it was estimated at 1.2 billion rials, which is 5 per cent of the GDP. The deficit will be covered from the means of funding approved in the budget including the issuance of development bonds to the domestic market amounting to 200 million rials.
Lower crude production and prices will likely depress Saudi Arabia’s GDP growth by more than half in 2012 while inflation and the current account balance in the world’s dominant oil power will recede.
Forecasts by the Riyadh-based Jadwa Investments showed GDP growth in the largest Arab economy would dive to 3.1% in 2012 from 6.8% in 2011 and all GDP components are expected to slow down.
The oil sector is an exclusion as it will record negative growth of 3.3% in 2012 because of an expected decline in prices and the Kingdom’s output.
“Economic growth in Saudi Arabia is forecast to fall to 3.1% in 2012, from 6.8% in 2011. This sharp decline is because oil production is expected to drop after a large rise in 2011,” Jadwa said in a 15-page report on Saudi Arabia’s economic outlook for 2012.
“High government spending will continue to be the engine of the non-oil economy, supported by greater bank lending.”
The report noted that public investment spending is budgeted at a new all-time high and forecast that total government expenditure will be equivalent to 36% of GDP, compared to an average of 30.1% over the five years to 2008. It said this would be a huge stimulus to the economy.
“The impact of government spending across the sectors of the economy is likely to be different in 2012 than in 2011. In 2011, bonuses for public-sector employees stimulated very high growth in consumer spending, benefiting the wholesale and retail industries, importers and local producers of consumer goods,” it said.
“With the bonus unlikely to be repeated in 2012, we expect construction companies and producers of associated goods, raw materials and services to be the main gainers from the high level of government spending.”
Jadwa said high public spending is also psychologically important for the private sector, adding that government packages announced in the first quarter of 2011 reassured businesses and consumers about the country’s commitment to support the economy and gave banks more confidence in the lending environment.
“This willingness and ability to support the economy will be important in 2012 as events outside the Kingdom are dampening sentiment and have the potential to damage the economy,” it said.
“The main economic risk is from the situation in the Eurozone. The fluid regional political situation will continue to make foreign investors wary and hit the sales of companies that export to the region. It also brings the risk of stock market and oil price volatility.”
A breakdown showed the non-oil private sector would grow by around 4.1% in 2012 compared with as high as 8.7% in 2011.
Government services will swell by nearly 5.2% against 6.7% in the previous year while growth in all other sectors will be lower.
The report showed inflation in Saudi Arabia, which controls over a quarter of the world’s oil, is expected to fall to an average of 4.4% owing to an easing of price pressures from outside of the Kingdom.
“We think there will be some local inflationary pressure as a result of the high level of consumer and government spending,” it said.
It expected rental inflation to decline as more properties enter the market, but noted that it has been rising in recent months owing to higher consumer disposable income, which should mean that the drop will not be large.
In a previous study, Jadwa projected inflation in Saudi Arabia to ease slightly in 2011 despite a surge in prices in most components of the consumer index because of strong domestic demand.
The rate edged up to around 5.3% in 2010 from 5.1% in 2009 after recording its highest annual rate of 9.9% in 2008, when all other Gulf oil producers reeled under soaring inflation rates because of the weakening dollar, high global food prices and other factors.
Jadwa forecast inflation in 2012 at 4.9%, which it considered as high compared with the rates in neighboring Gulf countries this year.
Turning to Saudi Arabia’s external fiscal position, Jadwa said lower oil export earnings would push down the country’s current account surplus by nearly $77bn to $82bn in 2012 from $159.5bn in 2011.
It projected lower crude prices and output would depress Saudi Arabia’s oil revenue to $229bn in 2012 from a record high of $302 billion in 2011.
“We expect a large fall in the current account surplus in 2012 because of lower oil export revenues. The surplus is forecast to decline to 14.9% of GDP from 27.6% of GDP in 2012,” it said.
According to the study, remittances of foreign workers in Saudi Arabia will remain the main source of outflows from the invisibles accounts. It said the huge amount of construction work will necessitate a continued inflow in foreign workers.
“Despite measures to increase the number of nationals in the private sector, we think that the total number of foreign workers will rise and their remittances will approach $30bn in 2012.”
Chairman of the All-Ukrainian Union of Economy Scientists Oleksandr Kendiukhov predicts real GDP growth in 2012 at 3.9% compared with 2011.
In addition, the expert said at the end of next year inflation rate will be 9%, the gross external debt will reach 78% of GDP, while public and publicly guaranteed debt will be 42% of GDP.
He also noted that in 2012 Ukraine will enjoy economic stability, with the exception of the last months of the year.
At the same time, at the end of 2012 - first half of 2013, a second wave of the global economic crisis is likely to start and, according to experts, it may cover the whole of Ukraine.
As UKRINFORM reported, in accordance with the state budget for 2012 adopted by the Parliament on December 22, this year's nominal GDP in Ukraine will be 1.5 trillion UAH. GDP growth is envisaged at the level of 3.9% with a consumer price index of 7.9% and a producer price index of 9.4%.
The first week of the New Year has provided a snapshot of the likely GDP outcome in the UK for the fourth quarter.
Manufacturing, construction and the vital UK services sector have all released their latest purchasing managers index (PMI) statistics showing levels of economic activity in December, the final month of the fourth quarter.
The news has been mixed. The manufacturing sector continued its decline of the past six months and will not give a positive boost to GDP in the final quarter of 2011. December saw an improvement on November with activity levels reaching 49.6, up from November’s 47.7, but was still below 50, the point at which activity is judged as growing in the sector.
The index has been below 50 for all three months of the fourth quarter. However, factory gate prices rose at their lowest level in 26 months.
Rob Dobson, Senior Economist at Markit said, “Over the fourth quarter as a whole, producers reported their worst performance since the second quarter of 2009. Manufacturing will therefore likely be a drag on the economy in the closing months of the year.”
Howard Archer, Chief UK & European Economist at IHS Global Insight said: “Some limited good news for the UK economy at the start of 2012, with the purchasing managers’ survey for the manufacturing sector unexpectedly indicating that overall activity essentially stabilized in December after appreciable declines in both November and October.”
However, there was better news in the construction sector of the UK economy with Markit/CIPS indicating in its latest survey that all sub sectors registered growth in the sector and there was a rise in both employment and new business.
The rise in output continued into its 12th month, though Markit reported in its purchasing managers’ index (PMI) that business confidence remains muted. The index rose to 53.2 in December, up from 52.3 in November. The index is above 50 which indicates growth but is below the series average.
Sarah Bingham, Economist at Markit and author of the UK Construction PMI said: “PMI data signaled a positive end to 2011 for the UK construction sector, with output rising again on the back of another increase in new business. The survey suggests that the sector should make a positive contribution to the economy in the final quarter of the year, helping avoid a possible slide back into contraction.”
Mr. Archer said: “It is welcome news to see any evidence that part of the economy is growing at the moment. However, signs that construction output expanded in the fourth quarter of 2011 does not hugely dilute concern that GDP could have contracted. The construction sector only accounts for 7.6% of GDP.”
Meanwhile the services sector, the biggest contributor to the UK economy and the area that has the greatest effect on GDP has shown marginal increases in activity in October and November. Figures released for December show that this growth accelerated and will allow the Chancellor, George Osborne to breathe a small sigh of relief.
The index rose to 54 from 52.1 in November and could help the UK stave off recession by influencing the final quarter GDP reading of 2011 into positive territory. Either way, the three PMI indexes for manufacturing, construction and the services sector could have been a lot worse.
Activity and new work increased as has been the trend for much of 2011. However, panelists surveyed reported that the outlook for the sector in 2012 will be challenging due to the risks from the euro debt crisis and austerity measures in the UK.
Chris Williamson, Chief Economist at Markit said: “The December survey rounds off a reasonable fourth quarter for the service sector, which is likely to again provide the main stimulus to overall economic growth. Looking ahead, however, companies grew increasingly worried about the coming year, suggesting that the upturn may prove short-lived as we move into 2012.”
Mr. Archer said: "The December purchasing managers’ survey provides some much needed, welcome news for the struggling UK economy. Given the dominant role of the services sector, the appreciable pickup in activity to a five-month high in December indicated by the purchasing managers significantly boosts hopes that the economy managed to avoid contracting in the fourth quarter, and could even have eked out marginal growth."
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