GDP UPDATE
December 2013
McIlvaine Company
TABLE OF CONTENTS
(1.) The U.S. probably expanded faster in the third quarter than initially estimated and weekly jobless claims likely rose a bit, according to economists polled by MarketWatch. Gross domestic product for the July-to-September period is forecast to be revised up to 3.2% from 2.8%, largely because inventories rose even faster than the preliminary report showed. Jobless claims, meanwhile, are predicted to increase to 325,000 in the week ended Nov. 30 from 316,000 in the prior week.
(2.) Austrian school economist Mark Skousen has labored mightily for a quarter of a century to persuade the Bureau of Economic Analysis (BEA) to publish a better measure of economic activity in the United States, and beginning in April, the BEA will start publishing the country’s Gross Output — the GO.
Said Skousen, “Starting [in] 1990, I have made the case that we needed a new statistic beyond GDP that measures spending throughout the entire production process, not just final output. GO is a move in that direction — a personal triumph 25 years in the making.”
Ever since the establishment of the international monetary system at the Bretton Woods Conference in 1944, the Gross Domestic Product (GDP) has informed and driven monetary policy, often with unintended and unhappy consequences. By misreading economic activity, interventionist politicians and economists have implemented policies that have later turned out to be too little too late or, more recently, way too much. The GO, on the other hand, measures intermediate economic activity at all stages of production, from raw materials to the retail outlet.
As Skousen explained, “While GDP is a good measure of national economic performance, it has a major flaw: in limiting itself to final output, GDP largely ignores or downplays the “make” economy — that is, the supply chain and intermediate stages of production needed to produce all those finished goods and services.
“This narrow focus of GDP has created much mischief in the media, government policy and boardroom decision-making….
“Since consumer spending [under GDP analysis] represents 70% or more of GDP … the media naively concludes that any slowdown in retail sales or government stimulus is necessarily bad for the economy….
“In short, by focusing only on final output, GDP underestimates the money spent and economic activity generated at earlier stages in the production process….
“Using GO as a more comprehensive measure of economic activity, spending by consumers turns out to represent around 40% of total year sales, not 70% as commonly reported.
“Spending by business … is substantially bigger, representing over 50% of economic activity.”
This aligns better with common-sense economic theory as well, that production precedes consumption, not the other way around. GO will also show that the real size of the U.S. economy isn't $16.8 trillion as is commonly acknowledged, but will come in at nearly twice that figure when it is released in April, according to Skousen.
Even so, with the update in place, GO will still leave out enormous parts of the economy, and will fail to measure the unmeasurables, such as quality of life, speed of information via the Internet, and caring for children at home by parents. It will fail to differentiate between “wasteful” spending — i.e., foreign wars and consequent loss of life and limb and destruction of property and war matériel — and “productive” spending. It will fail to measure the potential advantage of obtaining a college degree, or the disadvantage of taking up smoking.
It will count legal fees, repairing of property damage, and medical expenses as positives instead of negatives. It will allow for such silliness as counting the value of a new home being built, as well as the cost of razing it following a flood or a hurricane. It will count disasters as positives and imports of superior goods from abroad (instead of buying inferior ones locally) as negatives. It will continue to count borrowing as a good thing no matter how it is spent or by whom: individuals or governments.
It will no doubt fail to measure the value added by 3-D printing at home, or pleasure gardening, or time off spent taking the kids to the zoo. How will it ever measure the enormous gains in time efficiency through the amazing development of transistors, where 100 million of them can now fit on the head of a pin, or a Nvidia graphics chip that powers a personal computer that contains seven billion of them? How will the GO measure the nearly trillion-fold gain in communications in fiber optic wire over copper wire just since 1971? How will the GO even begin to account for economic transactions that take place on the Internet using the Bitcoin? What about the black market or the grey market — the underground economy?
How will the GO attempt to measure the ability of such technical advances to allow individuals to develop themselves more fully through art, work, commerce, science, or community volunteering? Indeed, as Bret Swanson noted at TechPolicyToday.com, this vast improvement of communication technology “expands freedom and multiplies possibility.... Information leads to the next adventure, the next discovery.”
When Robert F. Kennedy addressed students at the University of Kansas in 1968, he said:
“The gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.
It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country.
It measures everything, in short, except that which makes life worthwhile.”
A weaker-than-expected pace of economic growth during the September quarter won't be enough to prompt another interest rate cut early next year, a senior economist says.
Gross domestic product (GDP) grew by 0.6%, following a 0.7% pace in the June quarter, Australian Bureau of Statistics (ABS) figures released recently showed.
The figure was below market expectations of a 0.7% increase and sparked a fall in the Australian dollar of more than half a US cent to US90.75c.
Commonwealth Bank’s chief economist, Michael Blythe, said the Reserve Bank of Australia (RBA) was more likely to try and talk down the high local currency rather than embark on another interest rate cut as a result of the disappointing GDP.
"The interest rate sensitive parts of the economy are moving the way they want – not as clear as it could be in this data," he said. “We'll hear them continuing to talk about the need for a lower currency to help with the growth transition."
GDP growth was 2.3% in the year to September in seasonally adjusted terms, the ABS data showed. A survey of 13 economists had indicated an expected 2.5% annual growth.
Blythe said construction weakness was a major factor.
"The construction numbers are a bit weaker ... but we've got an economy that's still going ahead but, obviously, at a well-below trend type pace," he said.
National Australia Bank senior economist David de Garis said the figures showed that the non-mining section of the economy was still quite weak.
"The complexion of growth does not tell a compelling story that the domestic economy has accelerated. In fact, it has remained quite soft," he said.
"We had good contribution from net exports and we've seen iron ore exports really starting to accelerate, but the domestic economy and consumer spending has been soft."
Domestic final demand, a measure of total spending in the economy, rose 0.4% in the quarter, following 0.9% rise for the year to September.
De Garis said the figures would keep in place the possibility of a central bank interest rate cut in the new year.
"The RBA certainly wouldn't be revising up their [economic growth] forecasts at all based on what they've seen today," he said.
Japan's economy expanded at a slower pace than initially estimated in the third quarter of 2013, according to the government, sparking concern that the government's "Abenomics" policy mix may fail to help the nascent recovery gain momentum.
The world's third-biggest economy grew at an annualized rate of 1.1% in the three months through September in inflation-adjusted terms, downgraded from preliminary data against the backdrop of a downward revision to capital spending.
The July-September growth in real gross domestic product, the total value of goods and services produced at home, corresponded to a 0.3% gain from the previous quarter, posting the fourth straight quarter of increase, the Cabinet Office said.
The government said in the initial report, released Nov. 14, that the nation's economy expanded an annualized real 1.9% in the July-September period, following a revised 3.6% rise in the April-June period.
The latest figure suggested Japan's economy has been largely supported by public investment, not private sector growth, strengthening the view that the planned 3-percentage-point sales tax hike next April to 8% may weigh on consumer spending and investment, in turn dampening domestic demand.
Prime Minister Shinzo Abe's government has pledged to prevent the tax hike from hurting the economy by steadily implementing a 5.5 trillion yen economic stimulus package and a 1 trillion yen in tax cuts to boost investment and encourage companies to raise wages.
During the third quarter, corporate capital spending, which Abe's Cabinet views as key to economic recovery, was flat from the previous quarter, downwardly revised from the 0.2% rise reported in the preliminary data.
Private consumption, accounting for around 60% of Japan's GDP, was slightly upgraded to 0.2% growth from a 0.1% climb.
Exports fell 0.6% and imports rose 2.2%, the same as in the initial report.
Imports have been rising as demand for natural gas and oil has been growing from utility companies for fossil fuel-based power generation as an alternative to nuclear power in the wake of the Fukushima nuclear crisis in March 2011. Japan depends on imports for more than 90% of its energy needs.
Public investment jumped 6.5%, unchanged from the initial report, on the back of massive fiscal spending, the second of the three arrows of "Abenomics," along with the first, comprising aggressive monetary easing, and the third, an economic growth strategy aimed at invigorating private-sector investment.
"While consumer spending and business investment slowed and exports fell, public investment bolstered the economy," Koya Miyamae, senior economist of SMBC Nikko Securities Inc., said. "As the effectiveness of the first arrow has been waning, the economic growth has depended on the second arrow."
Takeshi Minami, chief economist at the Norinchukin Research Institute, said consumption is expected to grow toward the end of this fiscal year ending March ahead of the tax increase, but the economy may become "sluggish" in the next fiscal year with income effectively declining.
In nominal terms, or unadjusted for price changes, the country's economy grew 0.3% quarter-on-quarter in the third quarter of this year, downgraded from a 0.4% increase in the preliminary data.
For the three months through September, domestic demand pushed the GDP up by 0.7 percentage point, but external demand, or net exports, took 0.5 percentage point off it
Mayanmar will soon collect detailed data on the activities of private sector companies for the first time, in order to give more reliable figures for the output of the country’s economy, officials said.
Myanmar has been using the same approach to measure gross domestic product (GDP) since 1968, a time when Gen Ne Win’s regime ran a disastrous planned economy.
But the country’s economy is now under heightened international scrutiny since free market reforms and the removal of some economic sanctions have fed optimism among investors. According to International Monetary Fund estimates, based on Myanmar government data, GDP was US$55.3 billion for the 2012-13 fiscal year, and was expected to grow to $59.4 billion in 2013-14.
To give a more reliable picture of the economy, the government, with help from the United Nations Development Program (UNDP), is about to begin collecting up surveys from all private sector business, according to Aung Myint Than, director of the Ministry of National Planning and Economic Development’s (MPED) planning department.
Aung Myint Than said the nationwide survey was the first step toward a System of National Accounts—the internationally agreed method of measuring economic activity—which will take into account the activity all businesses, of any size, registered in Myanmar.
He said the survey this month would address a severe lack of information on the private sector, which now accounts for 90% of all enterprises in Myanmar.
“We have to change our GDP approach from the potential approach to the expenditure approach. So, we need a lot of data from private sector,” he said. “As the economic system changes, the role of private sector will develop more in the near future.”
A pilot survey conducted in May by the Central Statistical Committee, under MPED, took stock of the number of private sector businesses in the country. Questionnaires about economic activity were distributed to businesses and they must submit their answers to MPED between Dec. 9 and Dec. 20.
“We asked about 100,000 businesses and firms to test our questionnaire,” said Aung Myint Than. “We can approximate capital information, intermediate consumption and depreciation this way.”
Khin Khin Thu, assistant director of MPED’s branch office in Rangoon’s Southern District, said training was underway for local officials on how to collect the data.
But with such a large amount of data to be collected, the government is relying on companies to willingly provide their data.
“The willingness to give actual data is essential, so the challenges ahead for the survey we cannot estimate,” she said, adding that it would take some time to finalize the data once it is collected.
Southern Rangoon, which is the least commercial part of the city, has 500 business, while the northern, western and eastern sectors of the city have at least 8,000 enterprises each, Khin Khin Thu said.
Austria's economy expanded in the third quarter after stagnating in the previous three months, according to final data released by the Austrian Institute of Economic Research (WIFO).
The gross domestic product increased 0.2% quarter-on-quarter in the third quarter after zero growth in the second quarter.
Export growth accelerated to 0.4% quarter-on-quarter in the third quarter from 0.3% in the second quarter. Imports also grew at a faster pace of 0.2%.
Private consumption grew 0.1% quarter-on-quarter, while government spending rose 0.4%. Gross fixed capital formation increased 0.2% from the second quarter.
Year-on-year, GDP increased 0.5%, down from the preliminary estimate of 0.7% expansion. The economy stagnated in the three months to June in year-on-year terms.
Revised gross domestic product (GDP) data for Q3 are still disappointing, though not as much as the previous estimate, but the GDP structure shows there is a chance economic performance will improve in the coming quarters, analysts polled recently by CTK said.
The Czech Statistical Office released a revised GDP figure for Q3. Adjusted for price and seasonal effects, the economy contracted by 0.1% on the quarter, which is 0.4 percentage point less than in the previous estimate. Annual fall reached 1.3%, against a 1.6% contraction estimated by the CSU in November.
Full-year GDP fall will reach around 1.5% this year and next year the economy will expand by 2%, analysts said.
"Below the cap the picture is positive," said Ceska sporitelna analyst Martin Lobotka.
"The revision eased the GDP contraction but economic development in the third is disappointing and shows that the way out of recession is harder than expected," said Patria Finance chief economist David Marek.
According to him, the GDP fall widened the gap between the real development of the economy and its capacity.
Conseq chief economist Petr Zahradnik said this data prove forex interventions by the central bank were a legitimate step.
"(Interventions) may help accelerate exports, restrict unnecessary imports and boost domestic demand and response from domestic producers," said Zahradnik.
The structure of the economic development gives a reason for optimism, said Raiffeisenbank analyst Vaclav France. Firms are importing inputs and raising their inventories which after some time might increase the country's economic output, said France.
"The economy should be in positive territory in the last quarter," said Marek Drimal, an analyst with Komercni banka.
"We think that industry in particular should post a decent growth as it brought a disappointment in the third quarter, the construction sector might stabilize and agriculture might further benefit from a good harvest this year," Drimal said.
GDP should get a boost from rising consumption ahead of the expected price hikes caused by the interventions against the crown.
In the light of industry and retail statistics, the new GDP data look more reliable, UniCredit Bank analyst Pavel Sobisek said.
"Economic trends are obviously turning upwards," he said. "Recovery is advancing as expected - from foreign to domestic demand. We can see a satisfactory GDP growth in the last quarter of the year compared with the third quarter," said Sobisek.
Hosting the World Expo 2020 will add at least 1.5 percentage points per year to Dubai’s real gross domestic product (GDP) growth over 2014-2020, leading to annual growth of 5.5%, according to Institute of International Finance (IIF) a Washington based association of 450 global banks and financial institutions.
“The official figure shows World Expo 2020-related spending of Dh88 billion ($24 billion) over 2014-2020. However, a significant portion of the spending on infrastructure projects would still have taken place as part of Dubai 2020 vision. Most of the planned spending is expected to be financed by additional borrowing, leading to further increase in the already high debt,” said Garbis Iradian, Deputy Director of Institute of International Finance.
The IIF’s projections show that Dubai’s debt will increase from $142 billion (Dh521 billion) in 2012 to $168.5 billion by 2020. The debt-to-GDP ratio, however, is expected to decline from 106% of GDP in 2012 to 70% by 2020, assuming annual real GDP growth of 5.5%, and GDP deflator (CPI inflation) of 2%. Although declining, a debt-to-GDP ratio of 70% by 2020 is still considered to be very high.
The IIF expects some amount of Federal and Abu Dhabi government support to the Expo related expenditures. “This support could be in the form of extending a significant portion of the debt maturities falling due in 2014-2017. There is large bunching of maturities in the coming two years, including a $20 billion facility for the Government of Dubai maturing in 2014, and about $10 billion of debt maturing in 2015 related to Dubai World’s debt restructuring of 2011,” said Iradian.
For additional funding, the IIF expects the Dubai government to tap global capital markets in the coming years as financing from local banks is constrained by the recent limits set by the Central Bank of the UAE on bank lending to state governments and government-related-entities (GREs).
Dubai’s sovereign CDS spreads have continued to narrow to around 200 basis points (bps) most recently, as compared to 225 bps at end-2012, and 445 bps at end-2011. Additionally the government could encourage private sector participation in some of the projects (including hotels), in the form of public private partnership and could raise resources through asset sales.
Bank of America Merrill Lynch estimates that given that Expo construction work would start in 2016, fiscal room to accommodate the additional spending without jeopardizing debt dynamics could have sensibly increased by that time. “The Dubai government’s policy is to cover current expenditures with current revenues, and to borrow to cover capital spending. This suggests the incremental Expo-related investment needs will likely require further borrowing,” said Jean-Michel Saliba Mena Economist at Bank of America Merrill Lynch.
France's economy is set to gather steam toward the end of 2013 and will grow by 0.5% on the quarter in the final three months of the year, the Bank of France said on recently in its second of three estimates.
The French central bank pointed to rising production in industry as it raised its quarterly growth view from the 0.4% of its first estimate. The Insee statistics office still sees growth at 0.4% in the fourth quarter.
In the 3rd quarter of 2013, GDP at constant prices has increased by 4.5% (seasonally non-adjusted data), as compared to the 3rd quarter of 2012, while, in comparison with the 2nd quarter of 2013, it has grown by 1.3% (seasonally adjusted data). In comparison with nine months of 2013, GDP in nine months of 2013 has risen by 4.2% (seasonally non-adjusted data).
Saudi Arabia's gross domestic product grew 3.19% in the third quarter of 2013 in current prices compared with a 2.7% rise in the previous three months, the Central Department of Statistics reported.
The GDP value rose from SR675.19 billion in the third quarter of 2012 to SR696.7 billion. During the same period the GDP rose by 3.05% in real prices, the department said.
In the public sector the GDP fell by 18.52% to SR102.6 billion in current prices, compared to the same period in 2012. However, in real prices it showed a growth of 2.43%.
The private sector, on the other hand, achieved a growth of 6.53% in current prices in the third quarter of 2013 to reach SR244.08 billion compared to the figure of previous year, SR229.13 billion.
The construction and building sector and downstream industries showed big growth at the rate of 9.76% and 7.87% respectively. In stable prices, the sector’s growth rose by 3.31%.
The Kingdom’s oil sector grew by 9.54% to SR344.35 billion, compared to SR314.36 billion. In stable prices, the growth was 3.05%, the report said.
Finance Minister Ibrahim Al-Assaf has predicted that Saudi Arabia would achieve a GDP growth of 3.6% in 2013 down from 5.1% in the previous year. He attributed the decrease to slower oil output.
However, he believed that the economy would grow by 4.4% next year. The Kingdom’s inflation remains in check at 3.6%, the minister pointed out. A 9.6% surplus is expected in the current budget.
The department also pointed out the demand in local market rose by 2.17% to SR530.45 billion in current prices, with total government spending on consumption reaching SR141.19 billion, 17.67% less than the amount of the previous year (SR171.49 billion). At the same time, capital spending rose by 16.07% to SR185.14 billion compared to SR159.5 billion in the previous year.
“Oil is the one pushing the headline numbers, but there is an evident moderation in the nonoil sector," John Sfakianakis, chief investment strategist at Masic, told Reuters, while commenting on the department’s report.
The $711 billion Saudi economy, which has been pegging its currency, the riyal, to the US dollar for decades, grew 5.7% year-on-year in the third quarter of 2012 and 5.1% in all of last year.
Quarter-on-quarter, Saudi real GDP grew 1.1% in July-September 2013, reversing the same decline in the previous quarter, according to a Reuters calculation based on the official data. Performance of the top Arab economy is closely linked to energy prices, crude oil output and government spending, which has been growing strongly in the past years.
“The figures reflect the high level of spending in 2012. There was also a degree of disruption caused by labor market policies in the third quarter of this year," Paul Gamble, director, sovereign group at Fitch Ratings in London, told Reuters.
Demand in the South African economy slowed in the third quarter, with growth in gross domestic expenditure, which includes spending by consumers, the government and businesses, easing to 1.9% from 2.7% in the previous three months, the central bank said.
The UK’s surprise economic recovery looks on course to continue as Chancellor George Osborne raised his forecast for UK growth over the next few years.
Delivering the Autumn Statement, Osborne raised GDP expectations for 2013 to 1.4%, well above the 0.6% predicted by the Office for Budget Responsibility (OBR) in March.
Looking further ahead, he also raised GDP forecasts for 2014 from 1.8% to 2.4%.
However, 2015's forecast was revised down from 2.3% to 2.2%.
Further out, he said 2016's 2.7% annual growth had been revised to 2.6%, while 2017's 2.8% forecast was cut to 2.7%
Osborne said the UK was seeking a "responsible recovery" but said much more needed to be done.
"Britain's economic plan is working but the job is not done," he said. "We will secure the economy for the long term."
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