GDP FORECAST
UPDATE
October 2012
McIlvaine Company
TABLE OF CONTENTS
The global economy has deteriorated further since the last International Monetary Fund quarterly forecasts in July and it is unclear whether the current slowdown is a bump in the road to recovery or signals that the global economy is headed for a longer-term contraction.
“The answer depends on whether European and U.S. policymakers deal proactively with their major short-term economic challenges,” the IMF said in the latest World Economic Outlook report that downgraded economic predictions virtually across the board.
Those downgrades come even though the report assumes that U.S. and European leaders follow through on the action needed. “If they do not, the forecast will likely be disappointed once again.”
The IMF downgraded its global growth estimate for this year by 0.2 percentage point to 3.3% from its July estimates and lowered its forecast for growth in 2013 to 3.6% from 3.9% in July.
“Looking ahead, no significant improvement appears in the offing,” it said in the report.
The U.S. growth estimate for this year was raised 0.1 percentage point to 2.2%, but lowered by the same amount for 2013 to 2.1%.
Growth estimates for the euro area were cut 0.1 percentage point this year to -0.4% and for next year by 0.5 point to a mere +0.2%.
However, growth could “deteriorate very sharply” if two main assumptions do not materialize, the IMF said.
The first is that European policymakers take more action to adjust economies at the national level while further integrating the euro area, including the establishment of a single banking supervisory mechanism.
The second assumption is that the U.S., once the presidential election is over, policymakers successfully avoid the fiscal cliff and make progress on plans to return the U.S. to fiscal sustainability.
“The recovery is forecast to limp along in the major advanced economies, with growth remaining at a fairly healthy level in many emerging market and developing economies,” the report noted. “Leading indicators do not point to a significant acceleration of activity, but financial conditions have recently improved in response to euro area policymakers’ actions and easing by the Federal Reserve.”
Growth in Asia will continue to ease on the heels of a slowdown in China, the IMF said, and Japan’s economy is likely to slow sharply as the effects of rebuilding of earthquake-damaged areas wear off.
The problem of high government debt in many countries existed before the financial crisis but the need to address it has been brought forward from the long- to the medium-term by the vulnerabilities exposed by the crisis, the IMF said.
“Important questions remain about how the global economy will operate in a world of high government debt and whether emerging market economies can maintain their strong expansion while shifting further from external to domestic sources of growth,” the IMF said.
The companion Global Financial Stability Report noted that the global financial system is more vulnerable than it was in the spring, despite a general market rally over the summer.
“Confidence in the global financial system remains exceptionally fragile,” it said.
“Financial conditions are likely to remain very fragile over the near term because implementing a solution to the euro area crisis will take time and the U.S. debt ceiling and fiscal cliff raise concerns about the U.S. recovery.”
The U.S. economy is likely to post growth of about 2% this year and next, but only if policymakers "live up to expectations" and avoid the excessive tightening implied in the so-called fiscal cliff, according to the International Monetary Fund.
In its quarterly World Economic Outlook, the IMF added one-tenth to the growth forecast for this year, bringing it to 2.2% from 2.1% in the July WEO, but trimmed one-tenth from the 2013 forecast to 2.1%.
But the IMF warned that "Both external and domestic downside risks to the outlook remain elevated. In the United States, it is imperative to avoid excessive fiscal consolidation (the fiscal cliff) in 2013, to raise the debt ceiling promptly, and to agree on a credible medium-term fiscal consolidation plan."
The fiscal cliff includes the obligatory across-the-board spending cuts in early 2013 as part of an earlier budget deal, the expiration of the already-extended Bush-era tax cuts, and the need to raise the government debt ceiling.
The IMF estimates that in the "extreme" case, the fiscal cliff could result in a fiscal withdrawal of more than 4% of GDP in 2013 -- about 3 percentage points of GDP larger than the fiscal adjustment assumed under the baseline. Growth would stall in 2013 with the full materialization of the cliff."
And the report warned that the impact "would inflict large spillovers on major U.S. trading partners and also on commodity exporters."
The main external risk to the U.S. economy remains the potential for "a further escalation of the euro area crisis," the WEO said.
The report cautions that risks to the global economy have "risen appreciably," are higher than in previous reports, and "risks for a global slowdown are alarmingly high."
The WEO said the expected global recovery "could be set back if European and U.S. policymakers fail to live up to expectations," but noted that "it could also be stronger if they deliver on their commitments."
In the U.S., as in the rest of the world, "Monetary policy needs to remain accommodative while the government and household sectors continue to consolidate their balance sheet positions," the report said.
And despite the early signs of stabilization, the housing market, the IMF said, "more must be done to reduce the rate of foreclosures and remove impediments to the transmission of low long-term policy rates to mortgage rates.
"In this regard, the recent measures by the Federal Reserve on additional quantitative easing and the extension of its low-interest-rate guidance until mid-2015 were timely in limiting downside risks," the WEO said.
When Credit Suisse said back in June that Brazil’s economy would grow by just 1.5%this year, Guido Mantega, finance minister, described the prediction as “a joke”.
But having revised his own forecast down from 4% to 2.5%, Mantega may have to take Credit Suisse more seriously. The latest weekly survey of market economists from Brazil’s central bank puts GDP growth at 1.57%.
It makes seven straight weeks of falling predictions of GDP growth for 2012, expected to be 2% at the beginning of August. Brazil’s economy grew by just 2.7% last year after clocking up growth of 7.5% in 2010.
Especially galling – given recent announcements of fresh stimulus measures for industry – will be the survey’s prediction of a slump in industrial production this year of 1.92%. The government has tried all manner of stimuli to get industry moving again, to little effect.
Global conditions being as they are, it is hard for any country to achieve much improvement in manufacturing these days. But other countries in Latin America (Chile, Peru, Mexico) are growing more quickly than Brazil, partly on the basis of more open, less protectionist policies. Brazil’s reluctance to go down that path is starting to cost it dearly
Chilean economists have raised their forecast for inflation in 11 months on an improved outlook for economic growth this year, according to a central bank survey.
Policy makers will keep the key interest rate unchanged at 5% for at least 23 months, according to the survey. While policy makers are working under the base scenario that borrowing costs will remain unchanged in the short term, they are ready to adapt if circumstances warrant a change, bank President Rodrigo Vergara said.
“The probability of extreme events occurring abroad hasn’t declined and could have very significant consequences,” Vergara told an economic forum in Santiago. “The policy board carefully is following the evolution of the external and internal macroeconomic scenario and its impact on inflation.”
Chile’s economy expanded 5.3% in July from the previous year after climbing 5.4% in the first six months of 2012. Consumer prices rose 0.2% in August, less than forecast by analysts surveyed by Bloomberg. Analysts today forecast 0.6% inflation in September.
China's annual economic growth probably slowed for a seventh straight quarter in the July-September period to the weakest level since the depths of the global financial crisis, a Reuters poll showed, reinforcing the case for further policy stimulus.
The median forecast of 26 analysts is for China's economy to expand 7.4% in the third quarter from a year earlier, down from 7.6% in the second, and the slowest expansion since the first three months of 2009, when growth slid to 6.6%.
The survey result was broadly in line with a Reuter’s poll conducted last month, which showed that growth in the world's second-largest economy will slow further in the third quarter before regaining some momentum in the final quarter as the impact of earlier policy easing steps fully kick in.
"We expect the third-quarter GDP growth to weaken further from Q2 as the impact from a mix of policy measures that have been rolled out since the second quarter might be delayed towards the end of the year," said Lian Ping, chief economist at the Bank of Communications in Shanghai.
"The government is likely to step up its policy fine-tuning, but we don't expect any aggressive policy steps," he said.
Under the banner of policy fine-tuning, the People's Bank of China cut interest rates twice in June and July and lowered banks' reserve requirement ratio (RRR) three times since late 2011.
Meanwhile, the National Development and Reform Commission (NDRC), the country's top economic planner, has been fast-tracking infrastructure projects to bolster investment growth -- a key driver of economic expansion.
Fixed-asset investment is expected to have risen 20.2% in the January-September period from a year earlier, unchanged from the first eight months but down from around 25% seen for most of last year.
Consumption is also expected to hold steady, with retail sales in September forecast to expand 13.2% from a year earlier. Growth in factory output is estimated to edge up slightly to 9.0% from August’s 8.9%.
China's economic growth is expected to weaken to 7.8% this year, the International Monetary Fund said as it warned of risks to emerging Asia if the euro zone crisis worsens and the United States does not avoid its "fiscal cliff".
Premier Wen Jiabao has repeatedly assured investors that China's economy is on track to meet the official growth target of 7.5% set for 2012.
China will keep monetary policy flexible and pre-emptive to support activity in an economy still facing relatively big downward pressure, central bank governor Zhou Xiaochuan said.
But the central bank, fearful of a flare-up in property prices and consumer inflation, has in recent weeks refrained from cutting interest rates or RRR, opting to inject short-term cash into money markets to help ease credit strains.
Some analysts expect the central bank to lower the RRR ahead of next month's Communist Party congress -- where a new generation of leaders will be unveiled.
"In the run up to the party congress, we expect the government to focus on creating a conducive policy environment for the power handover. As such, we believe the government will likely cut RRR in the days or weeks ahead, as the most important signal in the mild stimulus cycle," analysts at Mizuho said in a research note.
Indian growth may weaken to a decade-low this year after investment stalled, the International Monetary Fund said, as it called for interest rates to remain unchanged until the nation’s high inflation rate eases.
Gross domestic product will rise 4.9% in 2012, the Washington-based lender said in its World Economic Outlook report, less than a July forecast of 6.1%. The expansion will accelerate to 6% next year, helped by improving overseas markets and a boost to confidence from a recent government policy revamp.
“The outlook for India is unusually uncertain,” the IMF said. “Monetary policy should stay on hold until a sustained decrease in inflation materializes.”
India’s government began the policy overhaul in September to boost the economy and avert a credit-rating downgrade, snapping months of political gridlock. The steps to curb expenditure on subsidies, contain a fiscal deficit and permit more investment from abroad triggered a surge in the rupee and buoyed stocks.
“There is an urgent need to reaccelerate infrastructure investment, especially in the energy sector, and to launch a new set of structural reforms, with a view to boosting business investment and removing supply bottlenecks,” the IMF said. “Structural reform also includes tax and spending reforms, in particular, reducing or eliminating subsidies, while protecting the poor.”
Budget Deficit
The government’s recent policy changes are “very welcome,” the fund also said. Its forecast for economic growth in 2013 compares with an estimate of 6.5% in July.
Indian inflation probably accelerated to 7.68% in September, according to a Bloomberg News survey before a report due Oct. 15. The Reserve Bank of India has left interest rates unchanged since a cut to 8% from 8.5% in April, the first reduction since 2009.
India’s overall fiscal deficit may widen to 9.5% of gross domestic product in 2012, compared with a projection of 8.3% in April, according the IMF’s figures. The shortfall will be 9.1% next year, higher than April’s estimate of 8.2%. The gap was 9% in 2011, the IMF said.
The government’s policy changes began with a 14% increase in diesel prices to restrain expenditure on compensation for below-cost sales. The administration also said it will pare the supply of subsidized cooking gas.
While such steps are “significant,” underperforming tax revenues and demand for more social spending because of a below- average monsoon season are among obstacles to narrowing the fiscal shortfall, according to the fund.
“Achieving the downward deficit path laid out in the 2012/13 medium-term budget will require further measures, including sustainable subsidy reform,” it said.
India’s rupee has strengthened about 6% against the dollar since the nation started the policy revamp, paring its decline in the past year..
Japan’s territorial spat with China may cause the Japanese economy to contract this quarter and hasten a current account slide as exports decline and Chinese tourism to Japan drops off, according to a JPMorgan report.
The dispute will knock 0.8 percentage point off Japan’s gross domestic product in the October-December period, according to JPMorgan Securities Japan Co. economists Masaaki Kanno and Masamichi Adachi. They now estimate fourth-quarter GDP will contract 0.8% from the previous quarter, compared with a previous estimate of no growth.
The squabble over islands claimed by Asia’s two largest economies imperils a $340 billion trade relationship ahead of China’s power transition and a possible general election in Japan this year. Carmakers are hardest hit, with Mazda Motor Corp. (7261) deliveries in China last month falling 35%.
“As its global role has increased, China has become much more important in Japan’s international trade,” Kanno and Adachi wrote. “While there remains a lot of uncertainty ahead and the risk of the dispute escalating cannot be ruled out, we assume that it will diminish in two quarters under the new governments in both countries.”
JPMorgan joins Morgan Stanley and BNP Paribas AS in predicting Japan’s economy will shrink for two consecutive quarters through the end of December.
The worst diplomatic crisis between the two countries since 2005 may also accelerate a deterioration in Japan’s current account surplus, the JPMorgan economists said, predicting the excess could disappear before the end of 2014. This compares with its estimate in January that the nation would begin posting a deficit in the first quarter of 2015.
Japan’s exports fell 5.8% in August from a year earlier, the third straight monthly decline, with shipments to China, its largest trading partner, dropping 9.9% and those to the European Union slumping 22.9%.
Mitsubishi Motors Corp. (7211) reported Chinese sales slumped 63% in September from a year earlier, while the Yomiuri newspaper that Toyota Motor Corp.’s deliveries in China fell 50% from August.
The dispute has caused cancellations of 40,000 seats on All Nippon Airways (9202) flights between the two countries, the airline said last month. JPMorgan said it is assuming a 70% decline in the number of Chinese tourists visiting Japan this quarter, compared with the average first-quarter figures in 2011 and 2012, lowering receipts by 67 billion yen ($852 million), or 38% of the expected decline in exports.
China’s economy may also be adversely affected, as the unrest may prompt Japanese companies to accelerate the diversification of investment and trade in Asia away from the nation, the JPMorgan economists said. More than 5,000 affiliates of Japanese companies operated on the mainland as of the end of March 2011, employing 1.6 million people, according to a Japanese trade ministry report.
The International Monetary Fund raised its forecast for economic growth in Sub-Saharan Africa next year as the world’s poorest region benefits from rising commodity prices.
Gross domestic product will expand 5.7% in 2013, the fastest pace after developing nations in Asia, up from 5% this year, the Washington-based lender said in its World Economic Outlook report. In July, the IMF predicted 5.3% growth for next year.
“Export diversification has reduced exposure to weak demand from advanced economies,” the IMF said. “High commodity prices have supported the region’s commodity exporters and boosted investment in resource extraction.”
The Standard & Poor’s GSCI gauge of 24 commodities has increased 11% in the past four months as central banks from the U.S. Federal Reserve to the European Central Bank pledged to keep borrowing costs low and bolster their economies to prevent another global recession.
While sub-Saharan Africa has become less dependent on Europe and the U.S. to sell its goods, the debt crisis in the euro-area and slower economic growth still pose a risk to trade, the IMF said.
“Risks to the outlook remain high, primarily because of global uncertainties,” it said. “If the euro-area crisis escalates further and global growth slows further, sub-Saharan Africa’s prospects will be less favorable.”
The IMF’s growth estimate is higher than the World Bank’s prediction of 5.2% expansion in the region in 2013, up from 4.8% this year. Investment in Africa, including capital flows and foreign direct investment, will probably drop to $36.6 billion this year from $42.4 billion in 2011, the Washington-based lender said in its Africa’s Pulse report.
Inflation in the region will slow next year to an average of 7.1% from 9.1% this year, according to the report.
South Africa, the continent’s biggest economy, will probably expand 3% next year from 2.6% in 2012, the IMF said. Fiscal and monetary authorities have limited room to spur economic growth, it said.
Finance Minister Pravin Gordhan has pledged to rein in the budget deficit to 3% of gross domestic product by 2015 from 4.5% this year. The Reserve Bank’s benchmark interest rate is at 5%, the lowest level in more than 30 years.
“This constraint is particularly acute on the fiscal side, where fiscal space will shrink further in a global slowdown,” the IMF said. “Under such a scenario, the authorities may need to rely more heavily on countercyclical monetary policy to cushion the economy against adverse spillovers.”
Nigeria, the continent’s largest oil producer, will probably expand 7.5% next year, the fastest pace among the region’s petroleum producers, according to the IMF. Kenya, the biggest economy in east Africa, is forecast to grow 5.6% in 2013, more than the 5.1% estimate for this year, the lender said.
An indicator of Finland's total national output increased at a slower pace in July, data released by Statistics Finland showed.
The trend indicator of economic output increased a working-day adjusted 0.3% year-on-year in July, slower than the revised 0.5% gain seen in June. The revision to the June data was caused by the benchmarking of data to quarterly accounts and changes in the compilation methods, the agency said.
Primary production, which refers to agriculture, forestry and fishing, is estimated to have fallen 3% year-on-year. Meanwhile secondary production comprised of manufacturing and construction increased by around 2%. At the same time, service production is estimated to have remained unchanged from the previous year.
Sequentially, the seasonally adjusted trend indicator advanced 0.4% in July, the agency said.
Greece's public debt may be even higher than previously feared in 2020, three senior European officials said recently.
The officials said debt could be as high as 150% of gross domestic product by 2020 under a distressed economic scenario, up from a projection of 146% GDP in March and way above the 120% GDP mark described as "sustainable" according the International Monetary Fund's analysis.
The IMF has revised its projections of the crucial figure upwards following a worse-than-expected recession in Greece and despite a EUR100 billion ($130 billion) restructuring of Greece's privately held debt earlier this year.
Greece's troika of creditors, the European Union, the European Central Bank and the IMF, are currently reviewing the country's performance under its second bailout. Representatives from the three institutions were in Luxembourg to brief euro-zone finance ministers on the state of play in Greece and two euro-zone officials said the troika institutions were at odds over growth projections for the country in the coming years, leading to an internal dispute over what that crucial ratio would be in the future.
The IMF can't, by statute, continue funding a program if a country's debt isn't deemed "sustainable" based on macroeconomic analysis. According to several euro-zone government officials and EU officials, the IMF is pressing for euro-zone countries and the ECB to shoulder more of the burden of helping the country, potentially relieving it of some debts under an "Official Sector Involvement", or OSI, program.
The ECB has already said it can't roll over or take losses on its holdings of Greek government bonds as that would constitute government-debt financing and go against its mandate. Euro-zone finance ministers have also said there can be no fresh funding for Greece, just additional time for it to meet its fiscal targets.
Greece has been waiting since June to receive its next, EUR31.5 billion tranche of aid, which can't be disbursed before a review of the program and a fresh debt-sustainability analysis are compiled by the troika experts. Greek Prime Minister Antonis Samaras said in an interview that the country would run out of cash in late November without the aid.
Ireland’s GDP will jump by 0.8% this year before stabilizing to a healthy 1.5% growth in 2015, it has been forecast.
However, Merrion Stockbrokers economist Alan McQuaid's latest quarterly economic outlook expects the jobless figure to reach 14.8% by the end of 2012. And he said that the budget deficit will fall within the EU/IMF bailout target for this year.
Ireland is well positioned in goods and services that are holding up despite the downturn -- in particular pharmaceuticals. But until domestic consumption and investment pick up, the prospects for a durable recovery remain bleak, he said.
The International Monetary Fund said in its fiscal monitor report that the country's deficit would reach 7% of GDP in 2012 and 5.7% in 2013, compared with European Union-agreed targets of 6.3% of GDP this year and 4.5% of GDP next year.
Spain replaced Greece, Portugal and Ireland as the epicenter of the euro zone debt crisis after it missed its budget targets by a wide margin in 2011.
The government has pledged to rein in the public finances but overspending regions and the recapitalization of a banking sector crippled by bad debts from a decade-long property bubble is making the task difficult to achieve in the short run.
Madrid said last week the public deficit would reach 7.4% in 2012 but that would include one-off elements from the recapitalization of the banks that the European Commission has agreed not to take into account when assessing Spain's efforts.
Economy Minister Luis de Guindos reiterated that Spain would meet the targets and said there was no need for additional measures despite a deepening economic contraction.
The government has based its budget plan for next year on a recession of 0.5% while the IMF forecast a recession of 1.3% in the country in 2013.
Under current policies, Spain would not return below the EU ceiling of 3% of GDP until 2017 and its debt-to-DGP ratio would hit 90.7% in 2012 and 96.9% in 2013, the IMF also said in the report.
That takes into account a full disbursement of the 100-billion-euro European credit line Spain sought in June to prop up its lenders.
Madrid said last month it expected to tap only around 40 billion euros. But that would still put the debt at around 84.7% of GDP in 2012 and 90.9% of GDP in 2013.
The U.K. economy grew at its fastest pace in five years in the third quarter after a rebound from one-off disruptions in the prior three months, the National Institute of Economic and Social Research said.
Gross domestic product rose 0.8%, compared with 0.1% in the quarter through August. That’s the fastest expansion for a calendar quarter since the third quarter of 2007.
Underlying growth was weaker than suggested by the headline number, Niesr said. Stripping out distortions stemming from June’s extra public holiday for Queen Elizabeth II’s Diamond Jubilee, it measured the economy’s pace of expansion as closer to between 0.2% and 0.3%.
“The strength of the figure for the three months to September is largely an artifact of special events,” it said. “Economic growth is expected to be at a significantly slower pace in the coming quarters.”
Fitch Ratings cut Ukraine’s 2012 economy growth forecast to 0.5% from 2.4% in July, Kommersant-Ukraine newspaper reported, citing Charles Seville, the sovereign-ratings director at Fitch.
Fitch also cut the country’s 2013 GDP growth forecast to 3% from 3.5%, according to the Kiev-based newspaper.
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