GDP FORECAST UPDATE
September 2012
McIlvaine Company
TABLE OF CONTENTS
The U.S. economy fared slightly better than initially thought in the second quarter, but the pace of growth remained too slow to shut the door on further monetary easing from the Federal Reserve.
Gross domestic product expanded at a 1.7% annual rate, the Commerce Department said in its second estimate as stronger export growth offset a pull-back in restocking by businesses wary of sluggish domestic demand.
That was up from last month's 1.5% estimate and in line with economists' expectations. The economy grew at a 2.0% pace in the January-March period.
The report also showed that after-tax corporate profits unexpectedly rose at 1.1% rate after sinking 8.6% in the first quarter.
While the composition of economic activity was fairly favorable, growth remains well below the 2-2.5% rate required every quarter to hold the unemployment rate steady, which could compel policymakers at the U.S. central bank to offer additional stimulus.
Speculation the Fed would loosen policy further had been dampened by a pick-up in job growth and a rebound in retail sales in July, but other data on business spending and inflation supported more action.
Chairman Ben Bernanke could offer more clarity in the near-term outlook for monetary policy when he gives a speech at the Kansas City Fed's high-profile gathering in Jackson Hole, Wyoming.
The jobless rate rose to 8.3% in July from 8.2% the prior month. The weak economy could be a stumbling block to President Barack Obama's quest for a second-term in office in November.
First-quarter economic growth was revised up to show strong export growth, despite slowing global demand. Trade contributed 0.32 percentage points to GDP growth instead of subtracting a third of a percentage point, as previously reported.
That helped to offset the drag from inventories. Business inventories increased $49.9 billion instead of $66.3 billion and subtracted 0.23 percentage point from GDP growth in the April-June period. However, the careful management of stocks can be a boost to the economy in the third quarter.
Excluding inventories, GDP rose at a 2.0% rate rather than 1.2%. In the first quarter, final sales of goods and services produced in the United States increased at a 2.4% pace.
There were also upward revisions to growth in consumer spending, which was bumped up to a 1.7% pace from the previously reported 1.5%. That was a step-down from the 2.4% pace recorded in the first quarter.
Investment in the construction of nonresidential structures was stronger than previously reported. But growth in business investment in equipment and software was lowered to a 4.7% pace, the slowest since the third quarter of 2009, from 7.2% previously.
Spending by businesses on equipment and software has slowed sharply from a peak of 18.3% in the third quarter of last year.
That appears to have intensified early this quarter, with a measure of business spending plans falling sharply in July. The pullback likely reflects worries of deep government spending cuts and higher taxes scheduled to kick in at the start of 2013, as well as troubles from the debt crisis in Europe.
Growth in spending on homebuilding was cut to an 8.9% rate from 9.7%. The decline in government spending was not as deep as previously reported with defense outlays falling at a 0.1% rate instead of 0.4%.
Though consumer spending was revised up, inflation pressures remained muted.
A price index for personal spending rose at an unrevised 0.7%, the slowest pace since the second quarter of 2010. It rose 2.5% in the first quarter.
A core measure that strips out food and energy costs advanced at an unrevised 1.8% pace, slowing down from 2.2% in the prior quarter.
Chile's central bank raised its 2012 forecast for economic growth and cut its projection for inflation, based on the assumption that no short-term changes in the bank's benchmark interest rate of 5% would occur. The bank forecast 2012 economic expansion at between 4.75% and 5.25%, in its much awaited quarterly Monetary Policy Report (IPoM). That is above the 4% to 5% economic growth range projected in the last IPoM, issued three months ago.
The bank's IPoM also cut its 2012 inflation expectations to 2.5% from a previous 2.7%.
Chile has been prepping its small, export-dependent economy for a slowdown on the back of ebbing global demand, but domestic demand, labor markets and economic activity have so far proven more robust than expected.
While lower inflation could give the bank more room to cut interest rates, the bank kept to its wait-and-see stance.
"The rate is within a range considered neutral, which gives flexibility to wait for the concrete effects (of external woes) on the Chilean economy to become clearly visible," the bank said in its report.
A neutral interest rate, in theory, should neither spur nor curb economic growth, all other factors being equal.
The rate will likely be held for an eighth month running at the bank's monetary policy meeting in September, and in three months, but it is seen being cut to 4.75% within six months, the bank's fortnightly poll of traders showed.
"While a slowdown is expected, this year's growth won't be below 5%," said Felipe Jaque, economist with BBVA Chile in Santiago. "A slowdown will be implicit as of December."
Next year, growth in the world's No. 1 copper producer is seen slowing to between 4% and 5%, and inflation is expected to pick up to around 3%, which is the midpoint of its target range, the bank's IPoM report said.
The bank said it considered that the Chilean peso's real exchange rate was ranging on the low end of levels consistent with its long-term fundamentals. In Chilean financial parlance, a "lower" rate for the Chilean peso implies a strengthened peso since buying dollars cost less in Chilean peso terms.
The real exchange rate is a measure used by the central bank in part to gauge competitiveness of Chilean exports. The peso has strengthened about 8% against the U.S. dollar this year.
"The current level of the real exchange rate is located beneath its average over the last 15 to 20 years and on the lower end of values coherent with its long-term fundamentals," the bank said.
The peso, which was trading near flat at 480.90 per dollar, did not react to the bank's report, traders said.
The central bank also raised its view for domestic demand, which has been a pillar of Chile's economy, to 5.6% growth this year from a previous forecast of 5.2%.
The central bank held to its outlook for global copper prices in 2012 at $3.55 per pound and for 2013 at $3.40 per pound. COMEX copper for December delivery rose 1.20 cents to settle at $3.4690 per pound. Chile mines about one-third of copper produced globally, which accounts for more than half of its total export revenue.
Chile's economy has also been boosted by wood pulp, wine and fruit exports as well as a booming retail sector.
Goldman Sachs has cut its growth forecasts for China, citing recent weaker key economic data from the world's second-biggest economy, unexpectedly soft exports as the global backdrop worsens and domestic structural challenges.
The investment bank cut its forecast for this year's economic growth to 7.6% from 7.9% and for 2013 to 8.0% from 8.5%.
"The economy has stabilized at a subdued rate of growth in recent months, as construction-related activities decelerated further and global demand weakened," Goldman Sachs analysts wrote in a note to clients.
"We believe the deterioration in cyclical indicators and weaker-than-expected exports are headwinds that will keep the economy softer than expected in the next few quarters."
Beijing's once-a-decade leadership transition this year, and resulting lags in implementation, might delay stimulus spending in the near term, the analysts said.
China's transition to an economy driven more by domestic demand and less by exports and investment has been slow, Goldman Sachs said.
"Consumer demand has benefited from income growth, but the savings rate will stay high for structural reasons," the report said. "Investment demand is likely to be more subdued due to the rise in capital intensity in the last few years."
In view of fragile economic recovery, Plan panel has decided to lower annual average economic growth rate to 8.2% in the 12th Five Year Plan (2012-17) from 9% envisaged earlier.
"The panel will propose the annual economic growth rate target of 8.2% for the 12th Plan. The issue will come up for discussion at the meeting of the Full Planning Commission, to be presided over by the Prime Minister," a source privy to the development said.
As per the proposal, the Commission would aim to achieve Gross Domestic Product ( GDP) growth rate of 9% in the terminal year (2016-17) of the 12th Plan.
Once, the full Planning Commission approves the growth target, it would be vetted by the Union Cabinet and then it would be placed before the country's apex decision making body National Development Council (NDC) for final approval.
The NDC is headed by the Prime Minister with all chief ministers and union cabinet ministers on board. It is the final authority to finalize the five-year policy document.
In Approach paper to the 12th Plan, approved last year by the NDC, the Commission had envisaged 9% annual average growth rate during the five-year period. The target is now being lowered in view of the global problems.
Showing persistent sluggishness, India's economy grew by 5.5% in the April-June quarter, mainly on account of poor performance of manufacturing, mining and farm sectors.
The gross domestic product (GDP) had expanded by 8% in the April-June quarter of 2011-12.
Besides, the economic growth in the January-March quarter last fiscal was at nine-year low of 5.3%.
The economic growth rate in 2011-12, the terminal year of 11th Plan, slipped to nine-year low of 6.5%.
During the 11th Plan, the average annual economic growth rate has been estimated at around 8% as against the target of 9%.
South Korea's economy grew at a slower pace than initially estimated in the second quarter as the deepening euro-zone debt crisis hit exports at a time of cooling consumption, adding to pressure on the central bank to ease monetary policy further to underpin growth.
Gross domestic product rose a seasonally adjusted 0.3% in the second quarter from the previous quarter, the Bank of Korea's revised data showed. The reading is slightly lower than the central bank's preliminary estimate in July of a 0.4% expansion, and is only a third of the 0.9% growth posted in the first quarter.
The economy—Asia's fourth-largest—expanded 2.3% in the second quarter from a year earlier, marking the weakest growth since a 1% rise in the third quarter of 2009. The revised figure was also lower than the BOK's estimate in July of a 2.4% expansion.
The revised data showed economic activity fell in almost every sector of the economy in the April-June quarter, leaving policymakers in a bind over how to balance the threat from Europe's debt crisis against the need to preserve fiscal and monetary firepower for any deeper global slowdown.
Finance Minister Bahk Jae-wan said the government will unveil a new stimulus package to boost public spending. But he has said drawing up an extra budget now is out of the question as the country needs to preserve its fiscal health.
"South Korea will surely face difficulties over the next one to two years," as its economy heavily relies on overseas conditions, said Minister of Knowledge Economy Hong Suk-woo, who's in charge of the country's exports, at a media briefing Thursday.
Analysts said they expect weakness in overseas and domestic demand to continue to pressure the central bank to cut its policy rate as early as next week, following a surprise quarter-percentage-point cut to 3.0% at the rate review in July—the first easing in more than three years.
"The latest data suggest that the anticipated recovery might not be coming in the third quarter. We expect exports to recover moderately in the final quarter of this year along with incremental gains in Chinese demand," said Goldman Sachs Economist Kwon Goo-hoon.
Mr. Kwon cut his forecast for Korea's 2012 GDP growth to 2.6% from 3%.
Central bank Gov. Kim Choong-soo has said the central bank expects increasing downside risks to its 2012 GDP growth forecast of 3.0%, which was revised down in July from its earlier projection of a 3.5% rise.
The newest data showed exports, which account for about half of GDP, declined 1.4% on quarter in the second quarter, reversing a 2% rise in the first quarter.
Private consumption, one of the main growth engines, gained a mere 0.4%, easing from the previous quarter's 1.1% rise.
Separately, finance ministry data showed sales at the country's top three department store chains fell 6.1% in August from a year earlier, extending their on-year decline for the third consecutive month.
Vietnam would strive to keep its annual economic growth for the whole of this year at 5.2%, well below earlier government targets of 6.0-6.5%, following economic instability, low credit growth and high inventory, the government said.
Prime Minister Nguyen Tan Dung has asked ministries and provincial authorities to try to keep inflation this year at 7%, also below an initial target of 9%, according to a government statement.
Strong exports limited the euro zone's economic contraction in the second quarter of this year despite falling investment, inventories and private consumption that point to output shrinking overall in 2012.
The EU's statistics office Eurostat confirmed that gross domestic product in the 17 countries using the euro fell 0.2% quarter-on-quarter. It revised the year-on-year fall to 0.5% from a previously reported 0.4%.
The debt crisis that began in Greece nearly three years ago has crushed Europe's efforts at recovery from the 2008/2009 global financial crisis, probably sending the bloc into recession for the second time in just three years.
"Weakness is the name of the game," said Joost Beaumont, a senior economist at ABN AMRO in Amsterdam. "We see another contraction in the third quarter because domestic demand will be hit by fiscal consolidation, rising unemployment, tight credit conditions and the high uncertainty of the euro zone crisis."
The euro zone would already be in a technical recession, were it not for flat output in the first three months of the year, after a 0.3% quarterly contraction in the last quarter of 2011.
Eurostat said a fall in household consumption subtracted 0.1 percentage point from the final quarterly GDP figure and shrinking investment and inventories took away 0.2 percentage points each, compared with the previous three months.
Strong exports, however, added 0.6 percentage point which, after the negative contribution of imports, left the net result from trade at a positive 0.2 percentage point.
With the Chinese economy slowing and the U.S. economy struggling to build a solid recovery, the euro zone cannot rely on exports to pull it out of the downturn, however.
"Leading indicators continue to point, in broad terms, to more of the same in the third quarter, though with a risk of the external sector softening in line with recent evidence of weakness in manufacturing activity globally," Ken Wattret, a euro zone economist at BNP Paribas, wrote in a note to clients.
Most economists see the euro zone, which generates 16% of global economic output, shrinking by at least 0.3% this year. A recovery may only come in mid-2013.
In its latest assessment, the Paris-based organization for Economic Cooperation and Development said that Europe's problems were also "dampening global confidence, weakening trade and employment and slowing economic growth".
The euro zone's biggest hurdle is that Europeans' ability to spend and drive a recovery has been devastated by government layoffs, budget cuts, record joblessness and stubbornly high inflation pushed up by world oil prices.
Data showing a fall in retail sales in July and a contraction in the euro zone's service sector in August, showed the extent of the weakness.
Recession is already a reality for much of southern Europe while Germany and France, the bloc's two largest economies, are starting to feel the malaise as Spaniards and Italians buy fewer of their products.
GDP contracted in Belgium and Finland and stagnated in France, as the problems of the indebted Mediterranean weigh.
"The core is no longer immune to the euro zone crisis," ABN AMRO's Beaumont said.
Retail sales fell sharply in Germany in July and confidence among European consumers fell to a 38-month low in August, which bodes poorly because just over half of the euro zone's economy is generated by domestic spending.
Led by France, EU leaders agreed at a summit in June to inject 120 billion euros ($151 billion) into the European economy to counterbalance public sector layoffs and cuts in spending to bring budget deficits down to sustainable levels.
The European Central Bank cut interest rates to a record low of 0.75% in July to cut the cost of borrowing for families and businesses, but neither the bank's move nor the EU's "growth pact" is likely to overcome the downturn.
Latvia’s economy will expand at a faster pace after the Baltic nation adopts the euro as higher exports stoke incomes, a central bank official said.
The currency will boost investment and trade, according to Uldis Rutkaste, deputy head of monetary policy at the bank. Credit ratings will also improve, saving about 900 million euros ($1.1 billion) in borrowing costs over the next decade, he said in an interview with Latvijas Radio.
“The euro maybe won’t make everyone rich overnight,” Rutkaste said. “But in the next few years after its introduction, people will feel it in their wallets.”
Latvia got a 7.5 billion-euro bailout in 2008 after its second-biggest bank needed rescuing, credit markets froze and a property bubble burst. Gross domestic product, which plunged more than 20% in 2008 and 2009, has risen for two years and advanced 5.1% from a year earlier in the second quarter, outpacing the rest of the 27-member European Union.
Latvia is rated at the lowest investment grade by the three major ratings companies, equal to Azerbaijan, Croatia and Iceland
Swiss government officials and economic forecasters may cut their predictions for growth this year after gross domestic product unexpectedly fell in the second quarter.
The BAK Basel Institute, Bank Sarasin, Zuercher Kantonalbank, UBS AG (UBSN) and the State Secretariat for Economic Affairs might lower their 2012 forecasts after a government report showed that GDP fell 0.1% from the first quarter, when it rose 0.5%, less than the 0.7% previously reported. That’s the first drop since the third quarter of 2011, when the Swiss National Bank imposed a franc ceiling to help protect the economy.
SNB President Thomas Jordan yesterday reiterated his commitment to defend the franc ceiling with the “utmost determination” amid signs the economy is faltering as the euro area’s deepening slump and waning global growth erode export demand. Bruno Parnisari, head of the state secretariat’s economic policy, said in an interview the government may need to cut its 2012 outlook in new projections.
“The risk for the full-year forecast has increased,” Parnisari said by telephone from Bern. The June forecast of 1.4% growth “seems a little bit optimistic at this stage. Up to August, we don’t have any clear signs of economic improvement.”
Economists had forecast growth of 0.2% in the second quarter, the median of 16 estimates in a Bloomberg News survey showed. From a year earlier, GDP rose 0.5%, less than the 1.6% economists had expected. First-quarter annual GDP growth was revised to 1.2% from 2%.
The third quarter of 2011 was also revised lower to show a contraction, followed by an expansion of 0.4% in the subsequent three months, suggesting the franc ceiling of 1.20 versus the euro introduced in September to stem a surge in the currency to a record helped stabilize the economy.
“Switzerland has weathered the crisis relatively well, but not as well as previously thought,” said Alexis Koerber, a senior economist at the BAK Basel Institute, which will lower its 2012 growth forecast from 1.5%. “It could be difficult” to reach growth of more than 1%, he said.
Swiss gross fixed capital formation including construction spending stalled in the second quarter after rising 0.2% in the previous three months, the GDP data showed. Exports of goods excluding precious metals, jewelry and antiques dropped 0.7% after falling 0.5% in the first quarter.
In the 17-member euro area, the destination for about two thirds of Swiss exports, the economic slump is deepening with at least five nations in recession and Germany showing increasing signs of slowdown. Euro-area manufacturing output shrank more than initially estimated in August, economic confidence slumped and German unemployment increased.
Elsewhere in the world, economies are also cooling, clouding Swiss export prospects. U.S. manufacturing probably teetered between growth and contraction in August, with the Institute for Supply Management’s factory index seen at 50 after 49.8 in July, according to a Bloomberg survey. The ISM will release the report at 10 a.m. New York time.
In Japan, a government report showed capital spending rose 6.6% in the second quarter from a year ago, below the 7.8% estimate in a Bloomberg survey. That prompted economists to cut forecasts for Japan’s second-quarter GDP, initially reported at an annualized 1.4% gain.
U.K. construction unexpectedly contracted in August as new orders dropped at the fastest pace since April 2009, Markit Economics said. The report is adding to evidence that Britain’s recession extended into the third quarter.
“The second half of the year will be weaker than the first,” said Alessandro Bee, an economist at Bank Sarasin in Zurich, who may cut his 2012 GDP forecast of 1.3%. “Europe is in recession and Asia isn’t doing too well either. Domestic demand continues to support the economy.”
Swiss consumer spending rose 0.3% from the first quarter, when it advanced 0.9%, today’s report showed. Government spending increased 1%, while imports of goods and services advanced 0.2%.
So far, Swiss indicators for the second half of the year are showing mixed signs. While the KOF economic indicator climbed to a one-year high in August, manufacturing output contracted for a fifth straight month. Exports dropped for a second month in July and the UBS consumption indicator weakened.
The SNB forecast in June that the economy would expand about 1.5% this year. Jordan said yesterday the franc ceiling remains the “best policy” at the moment.
“The critical take away from this data is that there will be no shift in the SNB currency policy any time soon,” said Peter Rosenstreich, chief foreign-exchange strategist at Swissquote Bank SA in Geneva. “Obviously the SNB recognizes that in these difficult times, a strong currency will make growth challenging for the export-driven economy.”
The Organization for Economic Cooperation and Development predicted the U.K. economy will contract this year as it cut its forecast because of the persistence of the euro-region crisis.
Gross domestic product will shrink 0.7% this year instead of the previously predicted expansion of 0.5%, the OECD said in a report. The forecast doesn’t account for likely growth shifts following the additional Diamond Jubilee bank holiday in June or the London Olympic Games last month, the Paris-based organization said.
Prime Minister David Cameron this week pledged to stick to his fiscal squeeze as he reorganized his government after a deepening recession hurt poll ratings. The continuing turmoil in the euro area is sapping demand for exports, while budget cuts are hurting confidence at home.
“The loss of momentum at the Group of Seven level may persist throughout the latter half of this year, with the recession in the euro area and associated trade and confidence headwinds enduring,” the OECD said.
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