GDP FORECAST UPDATE
April 2013
McIlvaine Company
The picture of the American economy has improved -- looking forward and backward.
Economic output in last year's fourth quarter was revised slightly higher, putting the nation's growth rate for all of 2012 at a modest 2.2%.
The Commerce Department has said that U.S. gross domestic product, or total goods and services produced, expanded at an annual rate of 0.4% in the fourth quarter, after adjusting for inflation. That is down from 3.1% in the third quarter, but better than the 0.1% real GDP growth in the government's previous estimate of fourth-quarter activity.
The weakness in the fourth quarter output was exaggerated by an unusually big drop in federal defense spending and a sharp reduction in inventory accumulation. Real personal spending actually picked up a bit in the fourth quarter, and housing and nonresidential investments both saw strong gains.
Corporate profits grew by a healthy 2.3% in the fourth quarter from the previous quarter. And consumers' after-tax incomes surged at year's end along with dividend and bonus payments, ahead of expected tax increases, the Commerce data show.
Since the recovery officially began in mid-2009, the underlying growth rate of the economy has been a little above 2%, considered by many economists as sluggish given the deep recession. But this year's opening quarter is looking much better.
Despite the fiscal head winds of higher payroll taxes and government spending cuts, the U.S. economy is set to grow 3.5% in the first quarter, according to a new forecast by the Organization for Economic Cooperation and Development, a group of mainly advanced economies.
The OECD cited the Federal Reserve's stimulus policy, saying that "monetary easing appears to be feeding through to the real economy as household consumption has picked up and the housing sector has begun to rebound."
Many private economists are not quite that bullish, uncertain about the effects of higher taxes on consumer spending, which accounts for 70% of American economic activity.
The latest OECD forecast sees U.S. GDP growth in the second quarter slipping back to 2% as fiscal spending cuts weigh on the economy.
Still, the near-term outlook for the U.S., as well as some other major economies, has brightened in recent weeks.
The OECD predicted that Japan's economy, the world's third largest, would expand 3.2% in the first quarter, thanks to fiscal and monetary stimulus. Germany, the fourth-biggest economy, is expected to rebound as well, with its GDP advancing 2.3% in the first quarter, even as several other major Eurozone countries remain stuck in the mud.
China, the world's second-largest economy behind the U.S., is likely to grow well above 8% in the first half of this year, the OECD said.
China's annual rate of economic growth likely nudged higher in the first three months of 2013 versus the last quarter of 2012, with fixed asset investment and factory output growth in double digits cementing a mild rebound, according to a Reuter’s poll.
Evidence of a second successive quarter of rising year-on-year growth will further reinforce the view of investors that China's government has successfully engineered a recovery from 2012's 13-year low of 7.8% that is gaining traction.
Meanwhile with the annual rate of consumer inflation expected to ease to 2.4% from February's 10-month high of 3.2%, the urgency for policymakers to begin tightening monetary conditions at an early stage in the recovery cycle is reduced.
"We estimate GDP grew at a faster year-on-year pace of 8.1% in Q1," analysts at China International Capital Corp (CICC) wrote in a note to clients, outlining their calls for the March data cycle.
That is above the 8.0% consensus of 19 economists polled by Reuters and is driven largely by expectations of a stronger than anticipated contribution to growth of real estate sales.
CICC analysts calculate that property sales will contribute about 1 percentage point more to growth in Q1 than in Q4 last year, offsetting slowing growth in wholesale, retail and other industries.
Retail sales growth has been curtailed in recent months since the government launched an internal austerity drive at the end of last year, designed to cut down excessive banqueting and gift-giving that is often linked to corruption.
Economists in the Reuters poll expect retail sales to have expanded by 12.5% in March, slightly higher than the 12.3 rate seen in the combined January-February period, but still around 2-3 percentage points lower than typically seen through 2012.
Fixed asset investment, closely tied to real estate transactions, has seen a gentle upswing since around the middle of last year when China's Communist Party government decided to take action to underpin economic growth hit by faltering demand for the country's exports.
Gross exports account for around a third of economic output in China and a drop off in orders as the United States and the European Union - the country's two biggest customers - dealt with their own economic problems was felt through the Chinese factory sector.
Fixed asset investment is forecast to have expanded at an annual pace of 21.3% year-to-date in March, a whisker higher than the 21.2% pace in the first two months of 2013.
The downside risks to economic growth, however, are similarly tied to real estate, investment in which was worth 13.8% of GDP in 2012 and directly impacts around 40 other business sectors in the economy.
Rising real estate prices, alongside rising fixed asset investment, have sparked concerns that home costs could start to spiral out of control and lead the government to declare that a raft of measures to calm frothy prices must be strictly enforced.
That has led investors to start fretting that tighter property policies could constrain the overall economy.
That is a significant risk given that construction was the main driving force behind a rise in the fast-growing services sector of the economy in March, according to a survey of purchasing managers.
The real estate crackdown was one of the key reasons cited by Bank of America/Merrill Lynch in late March when it cut its Q1 annual growth forecast to 7.9% from 8.3%.
Finance Minister P Chidambaram said the Gross Domestic Product (GDP) of the country will grow by a little over 6% in the fiscal year 2013-14 and the revenue targets would be met. He also noted that the revenue growth of the FY 2012-13, which stands at 16.7%, was "commendable".
Singapore's economy probably stalled in the first quarter of 2013, hurt by a sharp contraction in manufacturing that offset improved performances by services and construction.
According to the median estimate of economists polled by Reuters, the city-state's GDP likely expanded by 0.2% in January to March from a year ago, slowing from the 1.5% growth recorded in the last three months of 2012.
On a annualized quarter-on-quarter basis, Singapore's GDP probably grew by 1.0% after seasonal adjustments, down from 3.3% in October-December.
Bank of America's Southeast Asia economist Chua Hak Bin said ongoing government measures to make it harder for employers to recruit low-cost workers from abroad has hurt Singapore's manufacturing sector more than services, as seen from the weak industrial production figures for January and February.
Bulgaria cut its economic growth forecast for this year to 1% because of low domestic consumption and high unemployment.
The economy will expand 1.8% in 2014 and 2.9% in 2015 after growing 0.8% in 2012, the Finance Ministry in Sofia said in its three-year fiscal plan published on its website. The previous government, which resigned on Feb. 20 after protests against high utility bills turned violent, had forecast economic growth of 1.2% under a pessimistic scenario and 1.9% under an optimistic one.
President Rosen Plevneliev appointed an interim government led by Marin Raikov on March 12 to organize and hold early elections on May 12. Bulgaria survived the euro-area debt crisis without borrowing from abroad and sustained tight spending policies, which led to anti-austerity protests.
This year’s forecast is based on “declining domestic consumption observed at the end of 2012, which will continue in the beginning of 2013, as well as on expectations of increased exports” as the European economy recovers in the second half of the year, the ministry said.
Unemployment is expected to rise this year to more than 13% and fall to 12.8% in 2014, the ministry said. The number of jobless people rose to 12% in February, according to the Employment Agency.
The interim government raised this year’s budget deficit forecast to 1.4% of gross domestic product from 1.3%, after a gap of 0.5% in 2012, the ministry said. The shortfall is forecast at 1.3%in 2014, 1% in 2015 and 0.8% in 2016.
The country plans to sell domestic bonds worth as much as 1.3 billion lev ($864 million) a year from 2014 to 2016 to finance the budget, public infrastructure projects and repay debt, the ministry said.
The next government will need to sell bonds on global markets to redeem $1.08 billion in global bonds due in 2015, according to the ministry. Bulgaria’s public debt was 17.6% of GDP in 2012.
Bulgaria’s average inflation will slow to 1.8 next year from 2.4 in 2012. Foreign direct investment is estimated at 1.578 billion euros ($2.1 billion) this year, after 1.48 billion euros in 2012, the ministry said.
“The priority of the interim Cabinet in terms of fiscal and budget policy is to guarantee financial stability and the long-term sustainability of public finances,” the ministry said.
Estonia raised next year’s economic-growth forecast as exports in the newest euro-area member resume their expansion and wage growth boosts domestic demand.
Gross domestic product will probably expand 3.6% in 2014, more than last August’s 3.4% forecast, the Finance Ministry, based in the capital, Tallinn, said in an e- mailed outlook. It kept this year’s projection at 3%.
Estonia, which adopted the euro in 2011, has weathered Europe’s debt crisis as Swedish and Finnish demand for its electronics and wood products helped its economy recover from a 20% contraction in the wake of Lehman Brothers Holdings Inc.’s 2008 demise. GDP expanded 3.2% last year, the European Union’s third-fastest pace behind Latvia and Lithuania.
The budget deficit will probably widen to 0.5% of GDP this year from a preliminary 0.3% in 2012, the Finance Ministry said. That’s less than the 0.7% shortfall set in this year’s budget. The gap may be 0.1% in 2014, the ministry said.
Consumer prices will probably rise an average 3.4% this year, less than the 3.5% advance seen in August and last year’s 3.9% increase, according to the ministry. Inflation may slow to 2.8% next year, in line with the previous forecast, it said.
The rebasing of Nigeria's GDP, which is expected to increase the estimated size of Africa's second largest economy by around 40%, is likely to be delayed until next year, the head of the statistics bureau said recently.
The recalculation will enable Nigeria to join the ranks of middle-income countries and put it much closer in size to South Africa, the continent's most developed economy. It will also make it an even bigger draw for foreign investors seeking a slice of Africa's fast growth rates.
But several deadlines to implement the changes have been missed, with the latest being the fourth quarter of this year.
"It is unlikely that even the target of the last quarter (this year) we will make it," Director General of the National Bureau of Statistics (NBS) Yemi Kale told Reuters.
"I underestimated how much work needs to be done ... I think everyone understands that this is very, very crucial and has to be done properly," Kale said when explaining the delay.
Most governments overhaul gross domestic product calculations about every five years to reflect changes in output and consumption, such as mobile phones and the Internet. Nigeria has not done so since 1990.
The rebasing is expected to add about 40% to Nigeria's GDP, which would boost the economy of Africa's top oil producer from roughly $250 billion, to around $350 billion.
That brings it very close to South Africa's currently $385 billion economy. And, with a growth rate of over 6% a year, compared with 3% in South Africa, Nigeria may eventually overtake its rival to seize the top spot.
Some economists warn that a sharp increase in the size of Nigeria's economy will mean slower growth.
"You'd expect that the bigger the economy, the slower the growth ... but I don't think it is as easy as that," Kale said.
"Regardless of what our GDP is ... we are still going to be small enough to produce even sharper growth rates."
Sectors like telecommunications, construction, hotels and entertainment should get a greater weighting after rebasing but agriculture, which currently makes up around 40% of GDP and 60% of jobs, is likely to decrease in influence.
"Growth in agriculture is ... largely subsistence, largely labor intensive, so there is a limit to how much you can grow. We know that capital intensive technology probably generates more output than labor intensive technology," Kale said.
He said the oil and gas sector, which contributes around 80% of government revenues, is expected to maintain a similar weighting of around 15%.
A larger estimated economy would most likely boost interest in Nigerian stocks, especially goods companies looking to unlock the consumer potential of Africa's most populous country.
It will also improve Nigeria's debt to GDP ratio, currently around 16%. But Nigeria's tax revenues, seen as woeful for a country of this size, will look even smaller.
Foreign aid donors may also find it harder to justify giving support to Nigeria if it becomes a middle-income state.
Despite roaring growth rates, 61% of Nigerians - or 100 million people - still live in absolute poverty.
"It is very clear that middle-income is growing, it is very clear that consumption is improving. The major problem is ensuring that this is broad based," Kale said.
Russia's economy expanded by a less-than-expected 1% in the first quarter of 2013, which is likely to force a cut in the growth forecast for the full year, Economy Minister Andrei Belousov said recently.
"The results of the first quarter seem to be worse (than expected)," Belousov told journalists on the way to Hanover as part of an official visit, adding that growth in gross domestic product in the first quarter was probably around 1%.
He said the ministry would cut the 2013 GDP forecast to below 3% in a conservative scenario or to around 3.2% in an optimistic one.
The ministry had earlier estimated the economy was likely to grow by 3.6% this year. It warned at the end of March that it would probably cut its GDP forecast for 2013.
"I can say for sure that in our (new) forecast for 2013 we will cut estimates for exports of natural gas, (and) investment estimates will be lowered. Consequently, the pace of GDP growth will also be lowered," Belousov said.
President Vladimir Putin said inflation is likely to exceed 6.3% this year, surpassing an economy ministry forecast of up to 6%.
Putin spoke hours after Belousov said the ministry would keep its 5% to 6% inflation forecast for the year, counting on a slowing rate in consumer price rises in the coming months. Annual inflation came in at 7% in March.
"Looking at it now, we can reach 5.8% to 6% for the year," Belousov added, echoing estimates by the Russian central bank. But Putin said in Hanover that inflation would be "slightly bigger" than 6.2% to 6.3%.
Consumer prices often stabilize or fall in the summer months, when supply of fruit and vegetables increases.
Spain will revise down its economic growth forecast for 2013 and seek more time from the European Union to reduce its budget deficit as recession cuts deeper than previously expected, a government source told Reuters.
Spain's gross domestic product (GDP) will be forecast to shrink by 1%, rather than 0.5%, the source said, adding that the government intended to shift emphasis to growth rather than deficit reduction.
Span is negotiating with the European Commission for more time to bring its deficit within 3% of GDP, something it is currently expected to do by 2014, the source said.
Spain will increase its 2013 deficit target to 6% of GDP, from an existing forecast of 4.5%. The figures on growth and the deficit could still vary by one or two decimal points, depending on the outcome of talks with the Commission, the source said.
The Spanish government is now trying to balance control of state finances with more growth-oriented policies, the source said.
"We're looking into finding a middle way. In this respect, having some leeway on the deficit targets would be a good message to send to the markets."
If the country is given one extra year, the deficit-cutting path will be 6% of GDP in 2013, 4.5% in 2014 and 3% in 2015, the source said, adding this was the most likely outcome of the negotiations.
If it is given two extra years, the deficit target for 2013 would then be slightly higher than 6% and the path would be significantly eased to reach the 3% target in 2016, the source explained.
Spain reported a deficit of 6.98% of GDP in 2012, excluding the cost of propping up its ailing banks, missing its EU-agreed target, of 6.3%, for the second year in a row.
Although the softer deficit targets might allow more room for pro-growth policies, the new goals will add pressure to Spain's already tough funding program for this year as the government will have to finance the higher budget gap.
Spain may still be over-estimating its growth potential as the Bank of Spain, the European Commission and the International Monetary Fund expect the economy to contract by around 1.5% this year.
The source said the program of reforms for the next three years that Madrid will send to the Commission along with the new figures will invalidate those forecasts.
The document will include a renewed commitment to deepen the reform of the public pensions system, create an independent fiscal authority and take new steps on economic liberalization.
Madrid hopes these measures will boost activity and help the economy grow by 1% in 2014, the source said.
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