GDP UPDATE
June 2013
McIlvaine Company
TABLE OF CONTENTS
Real gross domestic product (GDP), the total output of goods and services in the U.S., increased at an annual rate of 2.4% in the first quarter of 2013, the Bureau of Economic Analysis announced.
This is the first revision for Q1 GDP and a slight decrease from original estimates of an annual growth rate 2.5%.
“With the second estimate for the first quarter, increases in private inventory investment, in exports, and in imports were less than previously estimated, but the general picture of overall economic activity is not greatly changed,” the report reads.
“The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, residential fixed investment, nonresidential fixed investment, and exports that were partly offset by negative contributions from federal government spending and state and local government spending,” the report adds.
Imports, a subtraction in the calculation of GDP, also increased according to the report.
The increase in Q1 GDP – unlike Q4’s paltry 0.4 – was driven by accelerations in private inventory investment, PCE, decreases in fed spending, and an upturn in exports that were “partly offset by an upturn in imports” and a “deceleration in nonresidential fixed investment.”
Real personal consumption expenditures increased 3.4% in the first quarter, compared with an increase of 1.8% in the fourth, the report notes.
Consumer spending accounts for roughly 70% of all economic activity in the U.S. (as measured by the gross domestic product).
Durable goods went up by 8.2%, compared with Q4’s increase of 13.6%. Nondurable goods went up by 2.2%, compared Q4’s increase of 0.1%. Services increased 3.1%, compared with an increase of 0.6%.
“Just as the financial crisis triggered an atypical recession, the recovery cycle is unusual,” Mr. Poloz said in prepared remarks for the House of Commons Finance Committee. “We need to see the reconstruction of Canada’s economic potential, and a return to self-sustaining, self-generating growth.”
Mr. Poloz’s remarks were broad, offering little insight on whether he will push for a shift in the central bank’s current policy stance. He called the central bank’s inflation target “sacrosanct” and echoed long-standing central bank doctrine the exchange rates should be determined by market forces.
There is a view among some market participants that Mr. Poloz could take a different view on the dollar than his predecessor, Mark Carney, whose tenure at the Bank of Canada ended on the weekend. Mr. Poloz, who was leading Canada’s export finance agency when he was selected to lead the central bank, has boasted of visiting some 70 executives in 2012. That closeness to exporters has caused some to wonder if the new central bank governor might have more sympathy for their concerns about a stronger currency.
If that’s true, it wasn’t evident. Mr. Poloz said the exchange rate has little impact on the sales because those are determined by contracts between buyer and seller. If the exchange rate changes in the meantime, the “only thing that changes is the amount of money the company gets,” in other words, profit margins, Mr. Poloz said.
The committee hearing offered the first opportunity for financial markets to assess Mr. Poloz, a surprise choice over Tiff Macklem, the No. 2 at the Bank of Canada who had built a sterling reputation as one of Canada’s most effective performers during the financial crisis. When Finance Minister Jim Flaherty introduced the new governor of the Bank of Canada last month, he offered no detailed explanation of why he had determined that Mr. Poloz was best suited for the job.
Questions from Conservative members of Parliament offered a clue. Brian Jean from Alberta and Cathy McLeod from British Columbia remarked on Mr. Poloz’s experience at Export Development Canada, which he joined in 1999 as chief economist, rising to chief executive in 2011. “I can’t think of anyone better suited for the job,” said Mr. Jean. “You’re quite a success story.”
The opposition members on the committee were more demanding.
Nova Scotia Liberal Scott Brison questioned the appropriateness of Mr. Poloz’s war reconstruction analogy, as the economic surge that followed the Second World War was the result of heavy government spending and a boom in manufacturing.
Toronto’s Peggy Nash, the New Democratic Party finance critic, put the new Bank of Canada governor on the spot by asking him about a provision in Mr. Flaherty’s omnibus budget legislation that would give the cabinet a veto over hiring decisions at Crown corporations, including the Bank of Canada.
Ms. Nash is concerned the measure could compromise the central bank’s independence. Mr. Poloz said it wouldn’t.
“The short answer is no,” Mr. Poloz said when Ms. Nash asked him if he shared her concern. Mr. Poloz called the central bank a “team player” that is “part of the family of the public service,” and said there is a “separation between administrative independence and policy independence.” Ms. Nash asked if the Bank of Canada should be exempted. “The Bank of Canada is answerable to Parliament like any other agency,” he said. “Personally, I don’t see a need for an exemption.”
The comments suggest Mr. Poloz is inclined to mind his business, unlike Mr. Carney, whose charisma and stature on the international stage could cause him to eclipse his political masters. When Guy Caron, a NDP member of Parliament from Quebec, asked Mr. Poloz about what the Bank of Canada’s role would be at the Financial Stability Board, the international body of financial regulators that Mr. Carney leads, the new Canadian central bank chief didn’t really have an answer.
That could change in time. Mr. Poloz’s focus in recent years has been on facilitating Canadian exports, not overhauling the global financial system. And on this subject he had specific thoughts.
Mr. Poloz described a sequence of events that will lead to the restoration of Canada’s full economic potential. “It will require more than just the ramping up of production,” he said. First, international demand for the goods and services Canada produces must recover. That will encourage more exports, which in turn will bolster confidence. Investment then will increase: companies will expand and new ones will be created.
“This sequence might already be underway,” he said. “We are now seeing signs of recovery in some important external markets, notably the United States and Japan, and there is continued growth in emerging markets.”
James Rajotte, the Alberta Conservative who leads the finance committee, liked what he heard.
“He’s firmly committed to monetary policy, continuing the policy of the Bank of Canada of the past in terms of its inflation targeting rate,” Mr. Rajotte said in an interview after the hearing.
Mexico’s economy will grow 2.96% this year, according to the median estimate in the central bank’s monthly survey published today, compared with the 3.35% estimated in the previous poll. Brazil economists cut their growth forecast for a third week to 2.77 percent, according to the central bank’s weekly survey of about 100 analysts.
Growth in the two economies that make up almost two thirds of Latin America’s gross domestic product slowed in the first quarter as exports weakened and domestic demand remained sluggish. Mexico’s central bank will probably cut interest rates for a second time this year, while Brazil is raising rates as inflation accelerates, said Marcelo Salomon, the co-head of Latin America economics at Barclays Plc.
“We’re more optimistic with Mexico than Brazil, because Mexico is on the right track with structural reforms that will unleash better growth,” Salomon said in a telephone interview in New York. Moreover, “if growth is softer the central bank could cut for cyclical reasons.”
Mexican President Enrique Pena Nieto has pledged to pass laws this year to boost private investment in the state owned-oil industry and to increase tax collection in efforts to double the nation’s growth rate.
Economic Growth - Mexico’s economy grew 0.8% in the first quarter from the year earlier, the weakest pace since 2009 and compared with the 1.1% median estimate of economists surveyed by Bloomberg. Brazil’s GDP expanded 1.92% over the same period, below the 2.3% forecast by analysts.
Barclays reduced its forecast for Brazilian growth this year to 2.5% from 3% previously, while keeping its estimate for Mexico unchanged at 3.3%, Salomon said. Barclays expects Mexico’s central bank to cut its key rate by 50 basis points to 3.5% in September after policy makers slashed borrowing costs by half a point in March.
Mexico’s economy will expand 3.98% next year, according to the survey released today, while Brazil is forecast to grow 3.4%.
Australia's economic growth was sluggish in the March quarter, and that pace is likely to continue as the peak in mining investment looms.
Gross domestic product (GDP) grew by 0.6% in the first three months of the year, the Australian Bureau of Statistics said, below the market forecast of 0.8%.
The annual pace of growth was 2.5%, the first time it was below 3% since the last quarter of 2011.
There is evidence from the data that Australia's mining boom is moving into a new phase.
In recent years, a lot of mining and resource projects have been under construction, which was the main driver of economic growth.
That boom is expected to peak sometime in the next 12 months, but those new projects will start production and there will be a lift in exports.
It is also hoped there will be a lift in other sectors of the economy like home construction and retail spending, helped by the falling Australian dollar and lower interest rates.
JP Morgan chief economist Stephen Walters said the contribution from mining investment in the March quarter was fading with output in the mining state of Western Australia diving.
Economic growth got a boost from a lift in mining exports, helped by a temporary rise in commodity prices and a small lift in consumer spending.
"In fact, without the big boost from net exports, the economy would have contracted last quarter," Mr Walters said.
"The lack of acceleration in output growth last quarter will be unwelcome news for policy makers keen to see activity outside mining lift.
"We expect the recent sluggish, sub-trend pace of output growth to more or less be sustained over the remainder of this year and next as the economy struggles to transition seamlessly to a post mining investment boom world.
Mr. Walters is forecasting annual economic growth to be 2.5% in 2013 and 2.75% in 2014.
Commonwealth Bank senior economist Michael Workman said the economy would have gone backwards in the March quarter without the contribution from net exports.
"Today's relatively soft growth figures will support the calls for another Reserve Bank of Australia interest rate cut in coming months," he said.
"The good news story is the strong lift in resource export volumes after record investment.
"Retailers benefited in the quarter, while services providers felt left out.
"New dwelling investment is partly responding to lower rates, but alterations and additions spending is not."
The RBA last cut the cash rate at its board meeting in May, to a record low of 2.75%, after making four reductions in 2012.
Most economists are expecting another rate cut before the end of 2013.
Global brokerage Morgan Stanley said the Indian economy has come out of the trough and will grow at 6% in the current fiscal.
Sounding bullish on the stock markets, it pegged the Sensex target at 23,000 by December.
"We are confident that the economy has come out of the furrow, though the recovery will be gradual beginning the second half, and will close the fiscal at 6%," Morgan Stanley Asia Pacific economist Chetan Ahya said.
He has based his optimism on the recovery in exports which have been rising since January, apart from the election-related spends that will help drive consumption. He also pointed to the positive vibes since September last, which could help revive investments.
He said while exports constitute 20% of the GDP, consumption chips in with a high 55%, hence the optimism of a gradual recovery.
It can be noted that the government has pegged 6.1-6.7% growth this fiscal, while the RBI has pegged it at a low 5.7%, and many private agencies have projected it between 5.6 and 6%. Last fiscal the economy hit a decadal low of 5.025%.
On the market, which is trading at only 15 times the PE, the brokerage said, it is bullish on the Sensex, which will close the calendar at 23,000 points.
"We see the Sensex sniffing at 23,000 by December and we are bullish on cyclicals and a bit averse to defensives like consumer staples. We are also overweight on financial sector scrips such as private banks and the entire energy sector as the government has let the market realize the prices of petrol and diesel," Morgan Stanley India managing director Ridham Desai said.
However, Desai warned that one of the biggest worries for the market is the rising share of the FII holdings in frontline stocks in particular and the market in general.
Explaining the rationale for this, he said, the problem will come if the foreign liquidity starts tapering off, which is sure to happen if the US withdraws the stimulus.
He said FIIs currently own at 2.5% of the market (market capitalization) which is within the safe zone. "But the ideal is 2% of the m-cap." It can be noted that FIIs pumped in $31 billion worth into the domestic equities last fiscal and nearly $13 billion so far in 2013.
However, he was soon to add that in 2004 and 2007-08 this was more than 4%, and pointed out that everyone saw what happened to the market then.
However, he noted that as of now, the global liquidity is very comfortably skewed to the country, adding the problem with the market is on the sentiment side due to forthcoming polls and the domestic liquidity issues and not valuation which is comfortable at 15 times the PE (price to earnings ratio) now.
On his expectation from the Reserve Bank, Ahya said, the problem is that banks are not bringing down their lending rates despite the RBI cutting rates by 125 bps since January.
And the key reason for this is the high retail or consumer inflation, which is forcing people to park money elsewhere and not in banks, which is also well reflected in the below par deposit growth.
On the rate cut front, he said the June 17 review will be a non-event and sees only 25-50 bps reduction in the repo rate through the fiscal.
According to a recent report, Moody's expects Singapore's real GDP growth to recover only slowly, to 3% in 2013 and 3.5% in 2014, from 1.3% in 2012.
Moody's report says that last year's GDP growth, which was the slowest since the economy contracted by 1% in 2009 during the global financial crisis, was dragged down by weak demand in the European Union, Singapore's largest export destination.
"On inflation, the report says that rise in prices in 2013 should moderate slightly and average close to 4% from an average of 4.6% in 2012. Moody's further expects nominal wage increases to outpace inflation in 2013, which should lend support to private consumption," it said.
Czech economic output declined the most in four years in the first quarter as businesses curbed inventories and exporters stopped supporting the economy, deepening the country’s record recession.
Gross domestic product fell 1.1% from the previous quarter, more than the preliminary estimate of a 0.8% contraction, the statistics office in Prague said in a statement. GDP fell 2.2% from a year ago, the worst performance in more than three years.
The $217 billion economy has shrunk for six straight quarters, the longest recession since records began in 1996, as Europe’s debt crisis curbed demand for exports and eroded spending by households and businesses. The slump has tamed inflation and pushed the central bank to cut rates to effectively zero, sparking a debate among policy makers about whether to weaken the koruna with interventions.
“The data showed two faces of the Czech economy,” Pavel Sobisek, the chief economist at UniCredit Bank Czech Republic, said in an e-mail. “One shows a further deepening of the recession in its sixth quarter, making it one of the worst in Europe. The other shows the end of a decline in private consumption and an increase in households’ interest in durable goods.”
The Czech koruna weakened 0.3% to 25.790 to the euro after the data were published, the fifth worst daily performance among the biggest emerging-markets currencies tracked by Bloomberg.
Foreign trade and its contribution to total output showed an “important change” in the first quarter as it no longer had a positive effect on GDP development, the statistics office said in the statement.
Consumption - Household demand rose 1.6% from the previous quarter and government spending increased 0.8%, according to statistics office’s data.
With the increase in household and state consumption as well as investments, the decline in inventories is “the only explanation of the worse quarterly reading,” said Petr Dufek, an analyst at CSOB AS, the Czech unit of KBC Groep NV.
“Even though the first-quarter results are really very negative, considering the causes we don’t see them as tragic or devastating,” Dufek said. “The Czech economy is approaching a stabilization phase, after which the first signs of recovery may be visible near the end of the year.”
While a moderate economic revival should begin in the second quarter, GDP will stagnate “at best” this year, the Finance Ministry said in an update of its fiscal outlook published last week.
After cutting investment and raising taxes to narrow the budget deficit since taking power in 2010, Prime Minister Petr Necas’s government agreed in April to target a wider shortfall than initially planned in 2014, when elections are next held, to boost growth.
The second official estimate of the eurozone's first quarter economic activity continued to show a decline, Eurostat said recently.
The GDP for the 17-member currency region was unchanged from the previous month's estimate, which pegged the economy as shrinking by 0.2% compared to the fourth quarter of 2012.
The GDP for the 27-member European Union showed a 0.1% contraction.
The quarter follows fourth-quarter declines of 0.6% and 0.5% in the eurozone and the EU, respectively.
From a year prior, the GDP in January through March was 1.1% in the eurozone and 0.7% in the EU.
With the continued decline, the current recession has lasted for six consecutive quarters, which is longer than the recession of 2008-2009.
None of the four largest eurozone economies made headway in the first quarter. In Germany, the GDP fell 0.3%. In France it dropped 0.4%. In Spain and Italy, the economies shrank 2% and 2.3%, respectively.
The economy in Britain rose 0.6% in the quarter, but Britain isn't a part of the region that shares the euro as currency.
The GDP also rose in Bulgaria (0.4%), Estonia (1.2%), Latvia (5.6%), Lithuania (4.1%), Poland (0.5%), Romania (2.2%), Slovakia (0.8%) and Sweden (1.7 %).
Hungary’s recovery from a recession was hampered by plunging investment and shrinking industry, statistics office data showed.
Gross domestic product rose 0.7% from the previous three months in the first quarter, expanding for the first time since 2011, according to the statistics office, confirming its preliminary estimate. GDP shrank 0.9% from the first three months of 2012, also matching the initial reading.
While agriculture expanded 12.3% from a year earlier and construction grew 4.2%, benefiting from a low base, according to statistician Pal Pozsonyi, fixed capital formation, an indicator of investment, declined 5.6% and industry contracted 3.2%. Household consumption fell 1.2%.
“Regarding future growth prospects, the continuation of the decline in investments can’t be seen as too encouraging,” Orsolya Nyeste and Zoltan Arokszallasi, Budapest-based economists at Erste Bank AG, said by e-mail. They forecast 0.2% growth for 2013.
Prime Minister Viktor Orban, who faces elections in 2014, has sounded an optimistic tone on Hungary’s economy outlook, saying May 30 that it’s “one of the most promising in Europe.” GDP growth may reach 1% this year, according to the premier, whose forecast exceeds the government’s 0.7% projection and the European Union’s 0.2% estimate.
Biggest Contributions - Agriculture and construction output contributed most to GDP in the first quarter, according to the statistics office, rising 27.6% and 1.5% from the previous quarter as industrial production fell 2.5%. Exports rose 3.3% from the previous three months and 1.3%from a year ago.
Orban sacrificed growth in his first two years in office to bring the budget deficit within the EU limit of 3% of economic output and remove the threat of cuts in funding from the 27-member bloc. Measures included Europe’s highest bank tax and extraordinary corporate levies on industries such as energy, damaging lending and investment.
The European Commission last month recommended allowing Hungary to exit budget monitoring for fiscal offenders for the first time since 2004, a move Orban said was a validation of his economic policies. Hungary’s business environment has “constantly deteriorated in the last three years due to a series of measures including restrictions on investors and an unstable regulatory framework,” the commission said.
Portugal’s economy shrank for a 10th quarter in the three months through March as investment dropped and the government cut spending.
Gross domestic product declined 0.4% from the fourth quarter, when it fell 1.8 %, the Lisbon-based National Statistics Institute said on its website today. The institute had said in a preliminary report that GDP dropped 0.3% from the fourth quarter. Output dropped 4% from a year earlier, the biggest annual contraction since the first quarter of 2009.
Prime Minister Pedro Passos Coelho is battling rising joblessness as he cuts spending and raises taxes to meet the terms of a 78 billion-euro ($102 billion) aid plan from the European Union and the International Monetary Fund. Coelho recently announced measures intended to generate savings of about 4.8 billion euros through 2015 that include reducing the number of state workers.
Exports rose 2.6% in the first quarter from the previous three months. Imports slumped 2.5% in that period and household spending slipped 0.7%. Investment declined 9.7% from the fourth quarter and government spending decreased 1.1 %.
Britain has managed to avoid a triple dip recession after official figures revealed that the economy grew by 0.3% in the first three months of the year. But City of London analysts warned that the economy was still weak and insisted that it is premature to hail the growth of the beginning of a sustained recovery.
The GDP expansion, which came as a deep relief for George Osborne, was powered by a relatively robust performance from the UK's dominant services sector where output increased by 0.6% on the previous quarter. The Chancellor said the figures were evidence that the economy was healing. "Despite a tough economic backdrop, we are making progress" he said. "By continuing to confront our problems head on, Britain is recovering and we are building an economy fit for the future."
Yet, despite the growth in the last quarter, the figures from the Office for National Statistics showed that the level of UK GDP remains 2.6% below its peak in the first quarter of 2008. Other economies such as Germany and the US have already recovered all the ground they lost in that crisis.
And there were warnings from City experts that the UK economy is by no means out of the woods. "The recovery still faces significant obstacles ahead, with households still experiencing falling real pay and policymakers still struggling to get bank lending to rise" said Vicky Redwood of Capital Economics. Simon Wells, an economist at HSBC, said that the numbers "don't necessarily mean that the UK has turned the corner".
Labor called the 0.3% expansion "lacklustre" and urged Mr. Osborne to change course. Shadow Chancellor, Ed Balls, said: "Our economy is only just back to where it was six months ago and continues the picture of flatlining. David Cameron and George Osborne have now given us the slowest recovery for over 100 years."
Nevertheless, the quarter's growth, which was higher than most estimates from City experts, will ease the pressure on the Chancellor who has come under unprecedented pressure recently to ease his austerity program. The International Monetary Fund recommended last week that the Chancellor should slow his planned program cuts in order to support the recovery. Rob Carnell of the banking group ING said that, with the economy now registering some growth, Mr. Osborne can "allow himself a moment of smugness". A team from the IMF will arrive in London next month to carry out the Fund's annual health check of the UK economy and there are expected to be tense negotiations with the Treasury over the Coalition's fiscal policy. These figures are likely to strengthen the Chancellor's hand in those negotiations.
Industrial production over the quarter rose 0.2%, benefiting from North Sea oil output coming back on stream after disruption at the end of last year. The construction sector, however, contracted by 2.5%, as building firms were hit by the freezing winter. Yet the ONS said that snowfall and cold weather in the first three months of the year had, overall, had a "limited impact" on GDP growth.
The positive figure follows a GDP contraction of 0.3% in the final quarter of 2012. A further successive quarter of negative growth would have seen Britain in its third recession since the 2008.
The Chancellor's official forecaster, the Office for Budget Responsibility, expects the UK economy to grow by 0.6% in 2013. That might be revised upwards slightly in light of yesterday's robust figure.
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