GDP FORECAST
UPDATE
July 2012
McIlvaine Company
TABLE OF CONTENTS
The U.S. economy slowed as expected in the first quarter, but a less robust pace of consumer spending and export growth than previously estimated could dampen the economic outlook for the current period.
Gross domestic product increased at a 1.9% annual rate, the Commerce Department said in its final reading, unchanged from its estimate last month. That was in line with economists' expectations.
However, when measured from the income side, the economy grew at a 3.1% pace in the first quarter, up from 2.6% in the previous quarter.
The tepid first-quarter pace of GDP growth was a step-down from the October-December period's 3.0% rate.
It also reflected a slightly less sturdy accumulation of inventories by businesses and slower pace of investment in equipment and software than previously estimated.
Consumer spending, which accounts for about 70% of U.S. economic activity, increased at a 2.5% rate in first quarter, rather than the previously reported 2.7% pace.
There are signs that consumer spending slowed in the second quarter, with retail sales falling in April and May.
Business inventories increased $54.4 billion, instead of $57.7 billion, adding only 0.10 percentage point to GDP growth compared with 0.21 percentage point in the previous estimate.
Excluding inventories, the economy grew at a revised 1.8% rate in the first quarter, rather than 1.7% and up from 1.1% in the fourth quarter.
Exports grew at a 4.2% rate instead of 7.2%.
While the careful management of inventories could be a boost to second-quarter growth, the mild downward revision to consumer spending underscores the loss of momentum in the economy that has been evident in weak hiring and slowing factory activity.
Second-quarter growth is forecast around 2%, but with global demand cooling amid Europe's debt woes and an uncertain fiscal policy path at home forcing households to be cautious, even that estimate might be too optimistic.
Business spending on equipment and software was revised down to show a 3.5% growth rate instead of the previously reported 3.9%. Anecdotal evidence suggests the pace softened in the second quarter.
The drag from the revisions to consumer spending, equipment and software, exports and inventory accumulation was offset by upward revisions to investment in residential and nonresidential structures.
Import growth was lowered by 3.4 percentage points to a 2.7% rate. While that supported growth during the quarter, it was a sign of weakening domestic demand.
Government spending fell at a 4.0% rate, instead of the previously reported 3.9%.
The department also revised after-tax corporate profits to a 5.7% rate of decline instead of 4.1%.
That was still the biggest decline since the fourth quarter of 2008 and reflected the end of a special tax bonus that allowed U.S. companies to accelerate the depreciation of assets.
For the eighth consecutive week, Brazil's financial market decreased its projected growth figure for this year's gross domestic product (GDP) from 2.18% to 2.05%, according to the results of a Brazilian Central Bank Focus poll.
The new rate comes a week after the Central Bank announced that its 2012 GDP growth forecast had decreased from 3.5% to 2.5%, reported Xinhua.
Until last month, the financial market expected a GDP growth rate higher than last year's 2.7%.
The industrial sector has been the most affected by this year's deceleration, with scarce growth of 0.39% in 2012, though a recovery of 4.3% is expected in 2013.
The economic growth forecast for 2013 stayed at 4.2%, according to the Focus poll.
The 2012 inflation forecast fell for the seventh consecutive time to 4.93%, while that for 2013 stayed at 5.5%. In both cases, the rates fell within the official target rate of 4.5%, with a two-point margin.
Ecuadorian economy rose 4.84% in the first quarter compared with the same period of last year. The government expects growth of 5.35% for this year, but economist sees lower growth.
China's consumer price index grew around 2.5%, while gross domestic product grew either 7.5% or 7.6% in the first half of 2012 compared with year-earlier levels, a government researcher has said.
Speaking at an economic forum at Tsinghua University, Chen Dongqi, vice director of the academy of macroeconomic research under the National Development and Reform Commission, called for more active government policies--especially monetary policies--and more efforts such as tax cuts to boost Chinese exports and support economic growth.
China's economy didn't bottom out in the second quarter of this year, Mr. Chen said. He added that a reasonable level of investment should be ensured for infrastructure projects such as high-speed railways.
Although infrastructure investment shouldn't be as aggressive as during the 2008 global financial crisis, it should at least be at a "normal level," he said.
Mr. Chen said the government should ensure there is sufficient investment to meet genuine demand in the property market as a slowing economy has weighed on investment growth there.
However, Yao Jingyuan, a senior researcher at the State Council, or cabinet, and former chief economist for China's National Bureau of Statistics, said at the same event that there wasn't much room for more active monetary policy, citing China's high level of M2 money supply. M2 is the broadest measure of money flowing through the banking system.
Mr. Yao also called on the Chinese government to break up monopolies, which he said was a major obstacle to innovation.
The Philippine economy in the second quarter likely performed better than the 6.4% output in the first three months of the year, Malacañang said.
Factors that drove growth in the first quarter seemed present in the second quarter, Presidential Communications Development and Strategic Planning Office head Ricky Carandang said in a press briefing.
Expectations are rife that second quarter growth will approximately hit 6.5%, the Palace official noted.
“Pag tiningnan niyo po ‘yung agriculture output in the first quarter, it grew by about one% net. I am told by (Agriculture) Secretary Proceso Alcala that the second quarter figures are most likely going to be higher than that,” Carandang told reporters.
Government spending, which the administration started revving up last December, continued to accelerate well into the second quarter, the Palace official added.
“We’re seeing some confidence that second quarter growth could be very strong,” said Carandang.
“I think many people were surprised when we hit 6.4,” he said. “Nobody thought we would go above six percent except for some of our economic managers.
“So I don’t think our economic managers would be surprised kung tumama tayo ng 6.4, 6.5 again. I don’t think the President would be surprised either,” Carandang added.
Socioeconomic Planning Secretary Arsenio Balisacan earlier revealed that economic managers decided to stick to their GDP growth targets of 5% to 6% for the rest of the year, and 6% to 7% for 2013.
They decided to remain conservative due to the foreign debt situation in Europe and the low income earned from electronic exports, Balisacan noted.
European countries buy about 13% of Philippine exports and account for 17% of overseas Filipino remittances
French Finance Minister Pierre Moscovici recently said the government would lower its economic growth forecasts for 2012 and 2013 given the worsening economic climate.
In an interview with Le Figaro newspaper, Moscovici said the government would reduce its 2012 forecast to at least 0.4% from 0.7% when its revised budget was presented to the cabinet.
"As for 2013, everybody knows that we won't reach 1.7%. (So) betting on a range between 1 to 1.3%...seems more credible," he said.
The International Monetary Fund forecast German GDP growth of 1.0% this year and 1.4% next year.
"Several conditions are now in place in Germany for a domestic demand-led recovery," the IMF explained, pointing to robust job creation, strong wage growth and low interest rates.
"Fiscal consolidation is on track," the report stated. The IMF forecast the public deficit to fall from 1.0% of GDP last year to 0.7% this year and 0.4% next year. Public debt is seen rising from 81.2% of GDP in 2011 to 82.2% in 2012 and falling back to 80.2% in 2013.
German HICP inflation is seen slowing from 2.5% last year to 2.2% this year and 2.0% next year.
"The strength of German banks has improved but vulnerabilities remain," the report observed. "While German banks are generally meeting the minimum levels of required regulatory capital and have ample liquidity, they remain highly leveraged, dependent on wholesale funding, have low capital quality and profitability, and some institutions are significantly exposed to the euro area periphery."
Some large international financial institutions have substantial cross-border operations and significant counterparty risk exposures related to their large derivative portfolios, the IMF remarked.
The Fund cautioned that Germany's near-term outlook is clouded by downside risks, including a sharp intensification of the Eurozone debt crisis and potentially weaker global growth prospects.
"The main priorities in the period ahead will be to manage the transition to domestic demand-led growth, secure financial stability, and address the challenges posed by the euro area crisis in conjunction with European partners," the IMF insisted.
The Fund called on Germany "to continue to work with its European partners to outline clearly and concretely the further efforts needed to enhance the broader European response to the ongoing crisis."
Furthermore, the IMF urged Germany "to implement policies to spur domestic demand growth, which will have important beneficial spillover effects in the euro area and globally."
Hungary is aiming to dramatically expand its economy and double economic output over the coming 15 to 20 years, according to Economy Minister Gyorgy Matolcsy.
In what Mr. Matolcsy described as a new era, Hungary has to grow 5% to 6% a year to achieve the target–a gross domestic product of 200 billion euros. Mr. Matolcsy pointed to neighboring Austria–with about 8.5 million people compared to less than 10 million in Hungary–as the positive example with its annual GDP of 290 billion euros.
“This seems like a play of imagination today,” Mr. Matolcsy said, adding he finds the goal distinctively realistic.
For 2012, the government expects a stagnating economy whereas the central bank’s latest projection shows contraction of 0.8%.
Mr. Matolcsy’s ambitious hopes also include substantially lower public debt, below 50% of GDP. The central bank’s latest statistics showed public debt was at 79% of GDP.
“This will be a huge success,” Mr. Matolcsy said of the debt reduction plan.
Mr. Matolcsy’s vision is for Hungary to significantly increase its manufacturing. Mr. Matolcsy also envisioned an “export offensive,” in which Hungary can explore new markets.
“We must hold on to the west, while opening to the east,” Mr. Matolcsy said about the combination of Hungary’s traditional markets in Europe with Arab and Asian countries that it is now trying to establish closer ties with.
Mr. Matolcsy’s remarks prompted skeptical reactions throughout Hungarian media and also among the political opposition.
His optimism not only for the more distant but also near future was also shown in an interview in June with CNN, where he declared, “The crisis is over,” and stressed that the Hungarian economy would see robust growth next year.
“The Hungarian fairy tale or the Hungarian example will be a successful one in a year’s time,” he told CNN.
Italy has fallen into an economic "abyss", employers' lobby Confindustria said recently, slashing its growth outlook for the euro zone's third largest economy and projecting big overshoots of its deficit targets.
The dire economic outlook underscores the pressure on Prime Minister Mario Monti to bring home more pro-growth policies and a mechanism to limit soaring borrowing costs from a European Union summit in Brussels.
Confindustria estimated the economy would contract by 2.4% in 2012, compared with a December forecast for a 1.6% fall. Gross domestic product would fall 0.3% next year, compared with a previously forecast 0.6% increase.
"We're in the abyss," Luca Paolazzi, head of Confindustria's research unit, commented as he presented the new forecasts.
"We're not in a war, but the economic damage caused so far is equivalent to a conflict, and the most vital and valuable parts of the Italian system have been hit: manufacturers and the young generations," he said.
The deeper-than-expected contraction will slow Italy's deficit reduction, with the budget shortfall seen at 2.6% of GDP in 2012 and 1.6% in 2013, far worse than the government's forecasts.
In December, Confindustria put next year's shortfall at just 0.1% of GDP.
In April, the government pushed back its balanced budget target a year to 2014, saying its 2013 deficit would be 0.5%, a third of what Confindustria recently forecast.
The main parties backing Monti's unelected government suggested that either Italy should push its balanced budget target back further, or the EU should allow some spending, like that on infrastructure, to be excluded from the calculation.
The severe recession that started during the second half of last year was worsened by austerity measures that Monti passed in December to accelerate deficit reduction and restore investor confidence in Italy's 1.95-trillion-euro debt.
Tax Burden
The higher taxes, estimated at an extra 24 billion euros for this year alone, have eroded Monti's approval rating from more than 70% when he took office to 33%, in an SWG poll published last week.
Confindustria said tax revenue was "accelerating strongly" this year. The tax burden is rising and will reach 54.2% of GDP in 2012, when adjusted to take account of tax evasion, three percentage points more than 2011, employers said.
As taxes rise, Italian consumer spending is falling. April retail sales dropped 1.6% from a month earlier, the steepest fall in eight years.
Consumer spending fell 1.0% in the first quarter, when GDP declined 0.8%. Consumer confidence plunged in June to its lowest level since the series began in January 1996, according to statistics office ISTAT's monthly series.
Italian debt will jump to 125.7% of GDP this year from 120.1% in 2011, and edge up marginally to 125.8% in 2013, Confindustria said.
If Italy's contributions to the euro zone bailouts are stripped out of the debt calculations, the country's debt would be 122.6% this year and 122.2% next year, it said.
Qatar's economy grew 6.9% year-on-year in inflation-adjusted terms in the first quarter helped by a jump in the construction industry, according to the Gulf Arab state's statistics authority.
The world's biggest exporter of liquefied natural gas also saw its real gross domestic product rising by 3.0% in January-March compared with the previous three months, the Qatar Statistics Authority said citing preliminary data.
Latest comparable growth rates for the final quarter of 2011 are not available, the authority said, as it has been revising the GDP data for 2011 and 2010.
In March it originally reported GDP growth of 14.75% year-on-year for October-December 2011, which it revised to 14.8% in the following month. It put the quarter-on-quarter expansion at 4.6% in April.
Qatar expects its economic growth to slow to 4.5% in 2013, the weakest rate in a decade. The weakening global growth outlook and the euro zone debt crisis pose a risk to the OPEC member as they are affecting oil prices, it added.
It saw real GDP growth falling sharply to 6.2% in 2012 from a revised 14.1% last year as the impact of decades of expansion in its gas output levels off.
Analysts polled by Reuters in March forecast real GDP growth of 6.6% for 2012.
Oil and gas output, which accounts for around 58% of Qatar's economy, increased 4.6% on an annual basis in constant prices in the first quarter, edging up just 0.6% quarter-on-quarter, the data showed.
Construction, where activity is picking up ahead of the planned 2022 World Cup soccer tournament, saw output rising 6.1% year-on-year. But it soared by nearly 22% from the previous quarter, largely outpacing all other sectors.
Qatar, which has avoided the social unrest that rocked the Arab world last year, plans to boost government spending by 27% to $49 billion in the fiscal year that began in April.
It plans to invest about $130 billion in its non-hydrocarbon sector in 2012-2018. Infrastructure spending should average more than 10% of GDP ahead of the World Cup.
The Turkish economy grew at a slower pace in the first quarter of 2012, data from the Turkish Statistical Institute shows. The gross domestic product rose 3.2% year-on-year in the first quarter. A lower growth rate was last recorded in the third quarter of 2008, when the GDP was up 0.9%.
In the final quarter of 2011, the GDP was up 5.2% year-on-year. On a calendar adjusted basis, the GDP grew 2.3% year-on-year in the first quarter of 2012.
On a seasonally and calendar adjusted basis, GDP rose 0.2% quarter-on-quarter in the first three months of the year.
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