GDP UPDATE
February 2013
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The Commerce Department reported that GDP declined in the fourth quarter, at an annualized rate of 0.1%. That is the first time that economic output has fallen since the second quarter of 2009, the end of the Great Recession. It is also a significant decline from the third quarter's 3.1% annual growth.
The decline was primarily led by a decline in national defense spending, as well as a decline in private companies' inventories, both of which fell at a rate of well over 1%.
Still, a few areas saw positive growth, such as consumer spending and nonresidential fixed investment, a category that includes business investment in buildings, machinery, and software. Spending on new homes and renovations also boosted the figures, indicating that the housing turnaround is continuing.
The news of a reversal in GDP growth may create fears of a double-dip recession, but one quarterly decline in GDP does not a recession make; it takes two straight quarters of decline to technically constitute a recession. And the report does not really show that the economy is suddenly in poor health, says one expert. Rather, it appears that two large factors—spooked businesses plus a tight-fisted Defense Department—simply coincided to create this decline.
"The first decline in GDP growth in 3 1/2 years is never a good sign but forget the number: It says nothing about the state of the economy," says Joel Naroff, president and chief economist of Macroeconomic Advisors, in a commentary this morning.
"The combination of declining defense spending and rapidly falling inventories reduced growth by 2.6 percentage points and those two negatives are not likely to be repeated, especially at the pace seen last quarter."
Naroff points out that consumer spending was not weak in the fourth quarter, and that businesses continued to spend on fixed investment, both signs that growth remains stable.
Another expert agrees: "Under the hood, we see solid growth in both consumption and investment and as a result, private spending was humming along," says Justin Wolfers, a nonresident fellow at the Brookings Institution, in an E-mail. "Last quarter's decline in U.S. GDP was all about inventories (which subtracted 1.3 percentage points from growth), as well as sharp cuts in defense spending. Neither of these is expected to persist."
While the economy may still have some solid fundamentals, economic growth is likely to remain soft throughout the first half of 2013, said Mark Zandi, chief economist at Moody's Analytics, in a call with reporters this morning.
Further government cutbacks are likely, whether from the sequester cuts scheduled for March 1 or whatever deal Congress manages to strike to avoid those cuts. In addition, American workers are still digesting the end of the 2% payroll tax cut, which expired at the start of this year, Zandi says.
"It's hard to see the economy really kicking into a higher gear until we're further down the line and have more of a chance to digest the tax increases and the spending cuts that are coming," Zandi said.
In addition, this is the Commerce Department's first estimate of fourth-quarter growth. There are still two more revisions to come, meaning that the figure could be revised upward.
Chile’s economy grew 4.7% in December from the year earlier, beating estimates made by analysts on gains in the service and retail industries, the central bank said.
The median estimate of 16 analysts surveyed by Bloomberg was for the economy to expand 3.7% in December. The economy as measured by the central bank’s Imacec index, a proxy for gross domestic product, rose 1.2% in December from the previous month on a seasonally-adjusted basis, the bank said.
December’s growth brings expansion for the whole of last year in the world’s top copper producer to 5.6%, according to calculations made by Bloomberg based on central bank data. Growth was driven by investment and domestic demand, which pushed up retail sales and imports even as industrial production stagnated and export growth weakened.
“The recent pattern of growth driven by domestic demand had resulted in a widening of the current account deficit which, as previously noted, if it continued and expanded, could become a factor of greater external vulnerability,” the central bank board said.
Policy makers have kept the key rate at 5% for 12 straight monthly meetings, giving Chile the highest borrowing costs among major rate-setting Latin American nations behind Brazil.
GDP expanded 5.7% in the third quarter from the previous year, led by a 13% increase in investment and 6.4% gain in private consumption, according to central bank data.
The current account deficit widened to 7.4% of GDP in the third quarter from 4.9% in the year-ago period. Imports grew 2.5% in the third quarter while exports contracted as Chileans stepped up purchases of foreign-made durable and consumer goods, the bank said.
Economists surveyed in January 2012 by the central bank had expected the Chilean economy to expand just 4% for the whole year after GDP climbed 6% in 2011.
Peru’s GDP is expected to expand 6.3% by the end of 2013, maintaining the dynamism shown in 2012, said Banco de Credito (BCP), the country's largest bank.
This way, the bank reaffirmed its 2012 Peru’s growth forecast, following the country’s GDP expansion of 6.8% in November 2012, which was above estimates.
The bank said that its 2012 growth forecast of 6.3% may be even higher.
On the other hand, BCP said Peru’s Central Reserve Bank (BCRP) kept the reference rate of December at 4.25%, considering that inflation is within the target range and it is expected to converge to 2% at the end of 2013.
China’s official 7.8% economic growth for 2012 may have overstated expansion by twice the real rate, and is only now headed for a “legitimate” 8% gain, Eaton Corp. (ETN) Chief Executive Officer Sandy Cutler said.
Based on indicators such as consumer consumption and electric power usage, China’s gross domestic product probably grew 3% to 4% last year, Cutler said in a telephone interview. Growth is accelerating now that China is past the distractions from its leadership change, he said.
“That’s what we and so many multinational companies have been feeling there in China for the last year and a half, the economy really hasn’t been growing at 7 or 8%,” Cutler said. “If we could get back to an 8% growth rate in China for 2013, that would be a pretty darn good year.”
His skepticism about the data echoes complaints from economists such as Li Wei of Standard Chartered Plc in Shanghai that China had inflated third-quarter growth before the November congress where the ruling Communist Party had its decennial transfer of power. Cutler runs a manufacturer that got more than half its 2012 revenue of $16.3 billion from outside the U.S.
Mark Williams and Qinwei Wang, economists with Capital Economics Ltd. in London, wrote in October that China’s third-quarter economic growth of 7.4% was “implausible.” Standard Chartered said in October its analysis indicated the economy expanded 6.5% in the quarter.
China’s government reported that GDP growth decelerated from 9.3% in 2011 and 10.4% in 2010. Xi Jinping became Communist Party general secretary in November.
China tended to “tamp down” reported GDP expansion as it ran at 12% or more in 2006 and 2007, Cutler said. The government boosted the official tally after slowing growth to quell inflation, said Cutler, 61, whose businesses at Eaton include hydraulic equipment, aerospace parts and drive trains for trucks.
“Coming out of the 2008 recession when they had this huge stimulus program, the economy got really hot and they had to cool it off,” Cutler said in an interview following Eaton’s quarterly earnings report. “Now that the new government has been seated, you’re more likely to see the preconditions for more growth in China.”
China’s economy is likely to gain strength as the year unfolds, Cutler said. Orders for hydraulic parts from construction-equipment makers are beginning to pick up, he said.
In the U.S., housing and non-residential construction will help drive economic growth of about 2%, Cutler said. Eaton, which completed the purchase of Cooper Industries Plc on Nov. 30, sells electrical equipment for home and commercial construction, giving it a good glimpse into future demand, Cutler said.
India's economic growth rate this fiscal year is estimated to be a poor 5%, the lowest in a decade, on account of a weak performance by the manufacturing, agriculture and services sectors, according to the Central Statistics Office (CSO). This comes on a day when Planning Commission Deputy Chairman Montek Singh Ahluwalia said the 8% growth target for the 12th Plan (2012-17) stays.
In 2002-03, the GDP had grown at 4%. Since then, the Indian economy has been expanding at over 6%, the highest rate being 9.6% in 2006-07.
The latest estimate of 5% is the worst of all growth projections issued by the government and the Reserve Bank of India. Last month, the RBI had pared its GDP growth estimate for the fiscal year ending in March to 5.5%, the worst since 2002-03.
The 5% estimate for the entire fiscal year means that the pace of economic expansion has slowed sharply in the second half of 2012-13, given that GDP growth in the April-September period stood at 5.4%.
"The numbers are disappointing," said C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council. He added that the number may be revised upwards when more data for the second half of the financial year comes in.
"CSO's growth estimate is below what the Finance Ministry had expected," Finance Ministry officials said, adding that they are keeping a watch on the situation, and that the Ministry will continue appropriate measures to revive growth.
India's agriculture output is expected to grow 1.8%, while the manufacturing sector is seen growing at an estimated 1.9% in the current fiscal year that ends on March 31, 2012, the CSO said.
India's economy grew at 6.2% in the last fiscal year, revised data from the government showed.
"Five per cent GDP growth for the full year is more in tune with reality. The industrial sector downturn has extended beyond anyone's expectation. In the first eight months of the year, for almost six months the manufacturing output has been negative. Exports have been continuously declining, non-food credit growth is slowing while agricultural sector performance has also been sub-optimal," said Rupa Rege Nitsure, chief economist, Bank of Baroda.
"After the government started showing a firm resolve to put things in place in mid-September, the series of data that has been released is also reflecting sustained deterioration across various growth indicators," she added.
Chief Statistician T.C.A. Anant told NDTV that the CSO's estimates are based on data until December and that the estimates are not a future projection of economic trends.
CSO's advance estimate lowered the growth in agriculture and allied activities to 1.8% in 2012-13, compared to 3.6% 2011-12. Mr Anant said there was likely to be some revisions in the agricultural growth numbers.
Manufacturing growth is also expected to drop to 1.9% in this fiscal year from 2.7% last year.
According to the advance estimates, the services sector, including finance, insurance, real estate and business services sectors, is likely to grow by 8.6% this fiscal year against 11.7% in the last fiscal year.
However, growth in the mining and quarrying is likely to be slightly better at 0.4%, compared to contraction of growth of 0.6% a year ago.
The construction sector is also likely to grow by 5.9% in 2012-13 against 5.6% last year.
According to the CSO's advance estimates, growth in electricity, gas and water production is likely to decline to 4.9% in 2012-13, from 6.5% in 2011-12.
During the current fiscal year, the trade, hotel, transport and communication sectors are projected to grow by 5.2%, as against 7% last fiscal.
Overall, the 5% growth in the advanced estimates is lower than what experts have been forecasting.
Yesterday, the International Monetary Fund (IMF) said that the Indian economy would grow by 5.4% in 2012-13, but should pick up to 6% in the next fiscal year.
The Indian economy expanded by 8.4% in both 2010-11 and 2009-10, while growth in 2008-09 was 6.7%.
The Indonesian economy expanded by 6.11% on-year in the fourth quarter, slowing from the 6.17% increase in the third quarter from a year earlier, the official Central Statistics Agency said.
Indonesia's gross domestic product contracted by 1.45% in the fourth quarter from the third, compared with 3.21% growth in the third quarter from the second.
Economic activity in the country typically slows down in the last quarter compared with the third quarter due to many public holidays.
The agency said Indonesia's GDP growth slowed to 6.23% for the full year from a 6.5% expansion in 2011.
The median forecast from 13 economists polled by Dow Jones Newswires was for the fourth quarter GDP to grow 6.20% from a year earlier, while the median full-year forecast from 10 of the 13 economists is for 6.29% compared to a year earlier.
Japan's economy likely grew slightly in October-December, 2012, the first expansion in three quarters, a Reuter’s poll recently showed, with solid private consumption and post-quake reconstruction demand helping to pull the country out of a mild recession.
The pace of falls in the nation's capital spending probably slowed down and the negative contribution of exports to the economy is expected to have eased in the last quarter, according to the poll.
Gross domestic product (GDP) is expected to have expanded 0.1% in the final quarter last year from the previous quarter, the poll of 21 economists showed, following a 0.9% contraction logged in July-September.
That would translate into an annualized increase of 0.5%.
The gain in GDP would come after weak global demand sent the export-reliant economy to two straight quarterly contractions.
"Monthly economic indicators suggest the economy has already bottomed out and it is showing a recovery," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
Private consumption, which makes up about 60% of the economy, probably rose 0.5% in October-December, the poll showed, as cold weather boosted sales of winter clothing and heating appliances. Also, falls in auto sales after the end of government subsidies for fuel-efficient car purchases likely eased.
Capital spending is projected to have fallen 1.8% in the last quarter from a 3.0% drop in the third quarter last year, according to the poll.
"The movement of rebuilding homes in the disaster hit areas has been spreading in a wider area. Housing investment performed firmly," said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute, referring to construction after a devastating earthquake and tsunami in 2011.
Weak external demand probably shaved 0.1 percentage points off the quarter's economy, compared from a 0.7 percentage points negative contribution in July-September.
Analysts forecast Japan's economy will grow moderately this year, helped by a global economic rebound and Prime Minister Shinzo Abe's aggressive monetary and fiscal policy.
Malaysia’s gross domestic product growth will reach 5% or more in 2012, surpassing the projected target of between 4.5% and 5%, said Second Finance Datuk Seri Ahmad Husni Hanadzlah.
Ahmad Husni also said that the fiscal deficit is expected to touch 4.5%, exceeding the full-year target of 4.7%, given the federal government’s prudent spending and increasing revenue.
“The Economic Transformation Program, including the strategic reform initiatives which are part of our revenue, has managed to increase revenue and, as a result, decrease the deficit,” he told reporters at the inaugural Treasury Economic Forum 2013.
In the first three quarters of last year, Malaysia’s economy expanded by 5.3%, Ahmad Husni said, adding that many foreign leaders were impressed with the country’s economic management.
“Many countries want to know how we did it. Some countries have already sent their team to learn how we came up with a very comprehensive development plan particularly the transformation program,” he said.
In another development, the minister said the government has decided that registration for the 2.0 1 Malaysia People’s Aid will close on March 15 to ensure every eligible applicant obtains the aid in line with its objectives.
“We know the cost of food has increased, that’s why we give this incentive to the people who are eligible. At the same time, it indirectly helps increase consumption in our country, boosting domestic demand and contributing to economic growth,” he said.
Earlier in his speech, Ahmad Husni said “Najibnomics” is a set of economic policies that deliver, namely Government, Economic and Political Transformation Programs which are consolidated under the National Transformation Policy.
He said it is a series of mutually-supporting fiscal, administrative and infrastructural policies and measures, including the various transformation programs that deliver a tangible and effective impact to the people and the business community.
The final step in Malaysia’s transformation journey is to introduce the Social Transformation Program, which the prime minister himself described as the biggest challenge, he said.
Ahmad Husni said “this comprehensive change in our society will take a longer time to be achieved” and researchers as well as thinkers are formulating ideas to map out this inevitable change.
The State Bank of Pakistan has warned that the fiscal deficit of 8.5% last year (FY-12) is not sustainable and could push the country towards a debt trap as the public debt-to-GDP ratio has reached 62.6%.
The annual report for FY-12 released by the bank rejected the government’s expectations for higher economic growth and low fiscal deficit for the current fiscal year, FY-13.
It said the real Gross Domestic Product grew by 3.7%in FY-12, less than the target of 4.2%.
“The target GDP growth of 4.3% for FY-13 appears optimistic; we think Pakistan will grow at about the same rate as it did last year, 3.7%.”
The report sees the fiscal deficit for FY-13 much higher than the target set by the government. “While the government hopes to achieve a fiscal deficit target of 4.7% of GDP, we think a range of 6-7% is more realistic.”
Although the increase in fiscal spending contributed to commercial activity, it did so at the cost of pushing Pakistan’s budget deficit to 8.5% of GDP.
“The size of the fiscal deficit is not sustainable as it is contributing to inflation; squeezing out private investment; impacting the balance sheet of commercial banks; and could push the country into a debt trap.”
The report said the transfer payments were another heavy item on the fiscal side. With income support programs like the Watan Card and Benazir Income Support Program, direct outreach was deemed necessary to alleviate the suffering from the floods in FY-11.
“Another fiscal drain is the weak financial position of public sector enterprises (PSEs). Direct support to Pakistan Railways, Pakistan Steel Mills, PIA and others PSEs, amounted to Rs33.8 billion in FY-12,” the report said.
The economy underperformed but this outcome was expected given the energy shortages; security concerns; and floods in two consecutive years, the report said, adding that the growth was more broad-based compared to FY-11, as it was evenly distributed across agriculture, industry and the services sector.
The SBP cautioned over higher consumption during FY-12. “It is important to realize that over-dependence on consumption makes growth unsustainable, especially when the country’s investment rate has been falling.” During FY-12, the investment-to-GDP ratio reached a low of 12.5%, due to security concerns; energy constraint; excess capacity with the manufacturing sector; the fiscal spillover on the balance sheet of commercial banks and concerns about sector-specific policies.
The report said the subsidies turned out to be more than three times the target, but this included Rs391 billion that was spent to consolidate the PSEs’ debt, especially in the power sector. “Excluding subsidies, the fiscal deficit narrows to 6% of GDP.”
This reflects higher-than-target expenditures, including debt-servicing.
“The fiscal devolution has not been as smooth as anticipated.”
The report said the country’s domestic debt increased by Rs1.6 trillion (year-on-year growth of 27%) during the year, and the public debt-to-GDP reached 62.6%.
The shift of this debt towards the shorter-end has not only increased the debt-servicing burden on the country, but has also intensified the rollover and interest rate risks.
These debt dynamics, together with persistence in primary and revenue deficits, indicate that Pakistan could move into a debt trap, said the report.
“On a final note, we would stress the urgent need to embark on structural reforms in the energy sector, PSEs and public finances,” it said.
Bahrain’s travel and tourism sector is on track to contribute 17.4% to GDP by 2021, according to the World Travel and Tourism Council (WTTC).
The country’s proximity to Saudi Arabia along with multi-billion dollar infrastructure plans including a 40-kilometre causeway link to Qatar, expansion of the international airport in 2015 and the upcoming opening of luxury and midscale hotels will all contribute towards a 4.5% rise in GDP from BHD 1.5 billion (US $3.97 billion) or 16.5% of GDP in 2011, to BHD 2.3 Billion ($6.16 billion) or 17.4% of GDP by 2021.
“While its GCC neighbors remain the Kingdom’s primary source market, government commitment to infrastructure upgrades supported by growing international hotel brand presence, is sending out a clear message that tourism in Bahrain is getting back on track,” said Reed Travel Exhibitions portfolio director Mark Walsh during an Arabian Travel Market (ATM) 2013 road show event held in the Gulf Kingdom.
The 78-room Marriott International Residence Inn opened in Bahrain in late 2012, which is soon to be followed by the Marriott Renaissance Bahrain Amwaj Island in 2013, the 260-room Wyndham Grand Manama, expected to open in Bahrain Bay by the end of 2013 and the 50-storey JW Marriott in 2016.
Denmark's economy shrank by 0.4% in 2012, the central bank estimated in a monetary review released recently, as both households and the corporate sector are "still consolidating".
However, the review said, domestic demand will pick up and GDP is projected to grow by 1.3% in 2013 and 1.8% in 2014.
Denmark currently has an unemployment rate of 4.8%, which the review said is contributing to low wage inflation and helping to improve competitiveness. As domestic demand increases, the central bank said, employment will recover.
"The current level of unemployment has not led to higher structural unemployment or a permanent reduction in the labor force," the review said.
French Finance Minister Pierre Moscovici said the government believed it could reach its 2013 economic growth target of 0.8%.
Mr Moscovici told France 2 television that he is maintaining the target ahead of the publication of the European Commission's eurozone economy forecasts, expected on Feb 22.
"We will have discussions," Mr Moscovici said. "If we will need to adapt, we will adapt. But I am confident about the French economy."
Mr Moscovici also said that although the euro has stabilized, it may have become too strong. "The euro is stable, it is strong, perhaps too strong in some respects," he added.
The euro has been rising against the currencies of major trading partners, driven partly by relief that the euro project seems less fragile, but has prompted concerns about exports from eurozone countries.
Mr Moscovici said the government would disclose "within two to three weeks" a redrafted version of its proposal to tax the wealthy, which he said would be imposed on households rather than individuals.
In a setback to the government's push to make the rich contribute more to cutting the public deficit, France's Constitutional Council in December rejected a plan to hit incomes over one million euros (S$1.7 million) with a 75% tax rate.
The council said the tax was unfair as it would hit married couples where only one partner earned above €1 million, but would not affect couples where each earned just under a million euros.
The bank now expects the Italian economy to shrink 1% this year, which is much worse than the earlier projection of 0.2% contraction. Gross domestic product likely declined just over 2% in 2012, the bank said in its latest economic bulletin.
The bank expects a modest return to growth in the second half of 2013 that could lead to growth in 2014.
Inflation should continue to ease during this year due to weak demand and low cost pressures, the bank said. Credit conditions remain tight and the non-performing loans have increased significantly, the bank noted.
The general government borrowing requirement, net of disposals and loans from the European Financial Stability Facility, will be around 3% of GDP in 2012 versus 3.9% in 2011, the bank said. Public finances are expected to improve further in 2013-14 despite a weak economy. The debt to GDP ratio is expected to start falling in 2014, the bank added.
Poland’s economy grew at a rate of 2.0% in 2012, according to preliminary estimates released by the Central Statistical Office (GUS) last week. The figure represents a significant slowdown from 2011, when Poland’s gross domestic product grew by 4.3 %. GUS said that the biggest reason behind the growth was an increase in net exports, while domestic demand and investments were not as strong as in previous years.
GUS hasn’t yet released official GDP growth figures for the fourth quarter of last year, but analysts said the preliminary annual figure likely meant that the Polish economy grew by about 1% in Q4. In Q1, Poland’s GDP grew by 3.6%, in the next quarter it decelerated to 2.3%, and in Q3 it fell again to 1.4%. The last time GDP growth was lower than that was in the second quarter of 2009, when economic growth reached just 1%.
A worrying trend for economists is Poland’s rapidly dropping consumer spending, which was widely seen as one of the main engines driving the country’s economy as it rode out the 2009 financial crisis as the only EU country not to go into recession.
“Even though investments contracted in Q4 less considerably than we had feared (by only 0.4% y/y), the decline of consumer demand at the end of the year (-1 % y/y) is a major disappointment and may herald a lower consumption path in the upcoming quarters,” economists at Bank Zachodni WBK said in an e-mailed statement.
The economists said that they expect the economic cycle to bottom out in the first quarter of this year, followed by a gradual recovery with no threat of high inflation.
“Although the GDP data were better than we expected, their general message is dovish due to really weak consumption,” they added. The data justify two further interest rate cuts in February and March by the National Bank of Poland’s Monetary Policy Council, they said.
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