GDP UPDATE
April 2014
McIlvaine Company
TABLE OF CONTENTS
Organization for Economic Cooperation and Development (OECD)
Real people helped drive U.S. economic growth in the fourth quarter of last year. But the jury of economists is out on whether consumers will continue coming out.
Data released by the Bureau of Economic Analysis shows that real GDP — which measures output produced in the United States — grew at an annual rate of 2.6% in the fourth quarter of 2013. The third — and final — estimate is up 20 basis points from the 2.4% second estimate BEA put out in February, but still below the 3.2% advance estimate released in January. The figure shows fourth quarter growth relative to the third quarter, when real GDP increased 4.1%.
The improved estimate, BEA explained in a release, reflects larger than previously estimated personal consumption expenditures but a largely consistent economic picture. Consumption gains were partially offset by smaller than previously estimated private investment in inventories and intellectual property products.
Stocks initially picked up slightly following the release before slipping into the red, while the 10-year Treasury note yield was down all along.
“It was a trade-off between consumption and investment,” points out Dan North, chief economist at Euler Hermes North America which provides export and trade credit insurance. North is pleased to see the consumer coming out a little bit stronger. But he doesn’t expect the trend to continue into the first quarter of 2014 thanks to the severe winter weather. People aren’t likely to buy a car from a lot covered in snow, for example.
Looking beyond Q1, North expects a bounce back to around 2.8% GDP growth due to pent up demand, but cautions people from taking this as a sign the economy is outperforming. “We’ve had a significant drop off,” he notes. Growth will be “pay back for previous weak performance.” He also notes that personal income, which BEA measures in a separate report, hasn’t grown in several months, making it unlikely consumer demand will pick up in the months ahead.
From the fourth quarter of 2012 to the fourth quarter of 2013 real GDP gained 2.6%. Averaged across the four quarters of last year real GDP added 1.9% in 2013 from 2012. Full year-over-year growth is compared to 2.8% in 2012.
Joseph Lake, U.S. analyst for The Economist Intelligence Unit, is somewhat more optimistic. Writing in a note on the results, “Consumer spending reached 3.3% in the final quarter of 2013, the fastest rate for several years, a reflection of the improvement in the underlying economic fundamentals, and this bodes well for the remainder of this year. This is an important, encouraging trend as consumer spending accounts for almost 70% of the economic activity and, generally, tends to power the rest of the economy.”
Lake expects the U.S. economy to grow by 3% in 2014, the fastest rate of expansion since 2005. He however points out, “Nonetheless, the US is not on the verge of a boom. GDP growth of 3% would be the fastest rate since 2005; it is still well below the average of 4% in the 1990s.”
Areas that contributed to the increase over the prior quarter included exports and fixed investments outside residential. This was partially offset by lower federal government spending, residential fixed investments and a downturn in private inventory investment. The rate was also negatively impacted by an increase in imports.
Even in January Canada’s economy had a bit of spring in its step, suggesting the first quarter may not be as bad as feared.
Gross domestic product expanded 0.5% in the month, snapping back from December’s loss, when a major ice storm in Ontario exacted a steep toll on the economy. And the economy is expected to gain further traction in the months ahead as U.S. growth strengthens and boosts demand for Canadian exports.
“Underlying growth in the economy appears slightly better than expected,” according to BMO Capital Markets chief economist, Douglas Porter. Although a severe winter is widely expected to have weighed on growth in the first three months of 2014, slowing from the 2.9% annualized rate in the fourth quarter of 2013, some economists are revising their projections higher after January’s GDP data.
CIBC World Markets marked up its first-quarter GDP forecast by 0.2 percentage points to an annualized 1.8%, and said it’s confident any the slowdown was due to bad weather and not underlying weakness in the economy. Although that projection is far below the Bank of Canada’s 2.5% forecast, the central bank’s projection was issued in January, and Governor Stephen Poloz has since flagged softer growth. On March 18, Mr. Poloz said he couldn’t rule out interest-rate cuts, but most economists say it’s more likely that the central bank will stay in neutral gear and hike rates next year.
“I don’t believe that’s a high probability at all,” Mr. Porter said of looming rate cuts.
Although U.S. Federal Reserve Chairwoman Janet Yellen said the U.S. economy is “still considerably short” of its inflation and employment goals, Mr. Porter said her remarks do not “necessarily hit at the heart of how fast the [American] economy is starting to grow now.” And that, he said, is a key reason to be optimistic about Canadian economy.
Uruguay's gross domestic product grew 4.6% in the fourth quarter of 2013 compared with the same period a year earlier and 2.0% from the third quarter, the central bank said.
The South American nation's economy grew 4.4% in 2013 as a whole, the bank said. Investors expected a 3.95% expansion.
The central bank revised its third-quarter growth figures to -0.9% over the second quarter from -0.7%.
Morgan Stanley has maintained its forecast on China's economic growth this year at 7.2% as a slowdown in the first quarter seems likely.
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Helen Qiao, Morgan Stanley's chief greater China economist, is cautious on the economic outlook due to uncertainties in the global recovery.
Morgan Stanley estimated the increase of China's gross domestic product (GDP) for 2014 at 7.1% last September, and raised it to 7.2% two months later.
The projection was mainly based on weak demand. "External demand recovery will not be significant," Qiao said, "and financial tightening in the last quarter of 2013 will likely weigh on domestic demand growth."
The economy has shown signs of shrinkage in growth since the beginning of the year. The HSBC manufacturing purchasing managers' index (PMI), a key measure of factory activity, registered an eight-month low in March, while the official PMI reading saw feeble growth.
Research institutions started to lower their estimates for the Jan-March period last month. Economists from both China International Capital Corporation and the Bank of Communications gave an estimate of 7.3%.
Despite grim market sentiment and increasing downward pressure, Qiao sees no need to read too much into poor economic indicators, or be overly pessimistic about prospects for the full year.
Things may look up after March, she said.
Qiao expects the global economy to continue its slow recovery this year, while developed nations will overtake emerging markets as major contributors.
The Indian economy is expected to grow 5.5% in 2014-15 on the back of improved performance in industry and services and will inch up to 6% in 2015-16 as external demand improves due to the strength in advanced economies, the Asian Development Bank said recently. The 5.5% estimate is slightly lower than its previous forecast of 5.7% growth.
The government moves to open up some of the structural bottlenecks that have impeded industry and investment is also likely to have an impact on overall growth, the ADB said in its latest outlook. However, it cautioned that economic recovery would be a long haul.
"Economic recovery would have to be led by improved investment and consumption, but the prospects do not appear promising at this stage. Elevated inflation, a tight monetary stance, and a weak currency will continue to constrain spending. Further, fiscal austerity is likely to be an additional drag on growth," the ADB said.
It said the Cabinet Committee on Investment has cleared projects worth $89 billion or 4.8% of GDP and this is likely to provide some traction towards resolving issues with some of the stalled projects. It said that better growth prospects in the US and the euro area will likely bolster external demand, as will competitiveness gains from currency depreciation.
ADB said a favorable monsoon is assumed to help agriculture grow at close to its trend rate of 3%. However, some global weather agencies have reported the increased chance of a weak El Nino in 2014, which could reduce rainfall in India and suppress agriculture growth.
Consumer price inflation is expected to ease below the double digit rates witnessed in recent years but will continue to be high. Record production of food grains in FY2013 will help soften food prices, ADB said.
Separate data showed the manufacturing sector under some stress. According to HSBC's India PMI, growth in the manufacturing sector eased on the back of weaker growth in output and a slowdown in order flows from domestic clients.
HSBC Global Research is maintaining its Gross Domestic Product (GDP) growth forecast for 2014 and 2015 at 5.2% and 5.0%, respectively, saying the pickup in growth will be boosted by positive net exports.
"This year's expansion may appear to be faster than 2013's 4.7%, but sequential growth each quarter should actually be slower.
"We expect average quarterly growth of 0.9% over 2014 versus a 1.2% average for 2013 and a trend pace of 1.1%," the research firm said in a note.
HSBC also said the recovery cycle in Malaysia's exports would be underpinned by higher shipments for both manufactured products and commodities.
Growth, however, would likely be modest, given HSBC's view for modest recovery in the United States and Europe, as well as, stable growth in China.
But, it will likely still outstrip the rise in imports, where gains should be tempered by a noticeable weakening in domestic demand, it added.
Domestic slowdown would likely reflect the impact government fiscal consolidation efforts have on both public and consumer expenditure.
Hike in subsidized fuel prices last September coupled with further fiscal consolidation this year should result in Malaysia's deficit narrowing further to 3.5% of GDP against the 3.9% registered last year.
"As evident by cuts to sugar, fuel and electricity subsidies over the past few months and plans to restructure the revenue base through a 6% Goods and Services Tax in April 2015, the government remains committed to fiscal consolidation," it added.
On inflation, HSBC expected it to average around 3.2% this year, assuming no changes to fuel prices, and this was in line with Bank Negara Malaysia's forecast of between 3.0 and 4.0%.
According to ADB, the expected global economic recovery and the consequences of ongoing domestic economic restructuring will shape economic trends in Singapore in the forecast period.
With export of goods and services equivalent to twice of GDP, the economy will benefit from improved external demand.
On the other hand, the tighter labor market will weigh on growth, with 1.8% unemployment and on a downward trend and vacancies far exceeding job seekers.
On balance, GDP is forecast to grow by 3.9% in 2014, near the upper bound of the government’s forecast of 2%–4%, and by 4.1% in 2015.
Ghana’s central bank will probably keep its benchmark interest rate unchanged to help support growth in the West African economy after tightening monetary policy at an emergency meeting two months ago.
Governor Kofi Wampah will maintain the key rate at 18%, according to five of the nine economists surveyed by Bloomberg.
The rest predicted an increase of between one and two percentage points.
Ghana is struggling to curb inflation that’s surged to a four-year high, fuelled by a currency that lost a fifth of its value against the dollar last year.
Policy makers raised the key rate by 200 basis points on February 6, a day after introducing limits on the use of dollars in the economy.
That didn’t stop Fitch Ratings from lowering Ghana’s debt outlook last week to negative from stable, five months after downgrading the rating by one level to B.
The interest rate will be kept unchanged to “create a balance between currency stability and domestic growth,” Gaimin Nonyane, an economist at Ecobank Group in London, said in an e-mailed response to questions.
“While there are strong reasons for further tightening, a hike in the policy rate will have negative implications for both gross domestic product growth and the government’s debt-servicing costs.”
Growth in West Africa’s largest economy after Nigeria is projected to slow to 4.8% this year from 5.5% in 2013, according to the International Monetary Fund.
Inflation began accelerating last year after the government scrapped subsidies on gasoline and diesel and raised water and electricity prices.
A weaker cedi has boosted import costs, pushing the inflation rate to 14% in February.
Investor sentiment toward Ghana has slumped since last year as the government struggled to rein in a fiscal deficit that reached 10.9% of GDP in 2013.
Real gross domestic product (GDP) growth rate in the Organization for Economic Cooperation and Development (OECD) area slowed to 0.5% in the fourth quarter of 2013 from 0.7% the previous quarter as the buildup in inventories in Europe seen in the third quarter unwound.
“Destocking reduced GDP growth by 0.1 percentage point in the fourth quarter. The contribution from private consumption picked up to 0.4 percentage point, with rebounding net exports contributing a further 0.2 percentage point,” the OECD said in a release made available to The Jakarta Post.
“The contribution from gross fixed capital formation fell marginally to 0.1 percentage point from 0.2 percentage point in the previous quarter.”
In all major European economies, destocking weighed down on growth, in part unwinding large buildups seen in the previous quarter.
In the United Kingdom, the main contributor to its GDP growth of 7% was a rebound in net exports, which stood at 1.0 percentage point. Investment and private consumption also provided positive contributions of 0.3 and 0.2 percentage points, respectively. However, significant unwinding of the stocks buildup in the previous quarter dragged down overall GDP growth by minus 0.8 percentage point.
Qatar's economic growth accelerated to 6.5% in 2013 as a pick-up in construction and inflows of foreign workers ahead of the 2022 soccer World Cup offset easing oil production, data has shown.
Analysts polled by Reuters in January had expected growth to slow to 5.7% in 2013 and 5.5% this year from 6.2% in 2012.
An expansion of Qatar's gas facilities helped fuel breakneck growth averaging 17% a year between 2006 and 2011, but the economy slowed in 2012 as the gas expansion ended and works on a raft of mega projects were slow to start.
Qatar is the world's top liquefied natural gas exporter.
Overall economic growth slowed in the final quarter of 2013 due to a sharp fall in the hydrocarbon sector, which accounts for more than half the $202 billion economy, but other sectors continued to expand rapidly.
"It's a very encouraging data set. The headline number may have weakened a little as hydrocarbon activity eased, but non-oil performance remained very strong and that's what is driving the economy forward," said Simon Williams, chief economist for the Middle East and North Africa at HSBC.
Non-oil gross domestic product jumped 10.4% between October and December, slightly slower than a revised 10.9% increase in the previous quarter, preliminary data from the Qatar Statistics Authority showed.
"The high growth in the fourth quarter of 2013 is the result of a double-digit rise seen mainly in construction, trading, hospitality and financial sectors coupled with (an) over 12% jump in the country's population," the authority said.
Overall GDP growth slowed to 5.6% year-on-year in October-December from an upwardly revised 6.9% in the previous quarter. It decelerated on a quarterly basis to 0.6 percent in the final quarter from 3.4 percent in July-September.
Output from the oil and gas sector fell 1.1% year-on-year in the fourth quarter nearly reversing a 1.4% rise in the previous three months. That helped put the overall annual rate in the final quarter of 2013 at the lowest level since the third quarter of 2012, the data showed.
"The fall in production of crude oil, besides closing down of few LNG trains for maintenance (in) the third quarter 2013, is the primary cause of this decline," the authority said.
Non-oil growth in Qatar is likely to stay strong this year, with pressure on the government to step up works on an estimated $140-$200 billion worth of pre-World Cup tournament projects that include a new airport, roads, railways and stadiums. That could push up costs and create bottlenecks.
"This is still the easy part of the cycle, but as these high rates of growth continue over 2014 and into next year, I expect to see inflation start to rise significantly. Asset prices are also likely to pick up further," Williams said.
The International Monetary Fund warned in March that large public investments in Qatar entail a possibility of overheating in the near term and overcapacity in the medium.
Last month, sources familiar with government policy told Reuters that Qatar was likely to reschedule about 15% of its planned building projects for coming years.
Inflation in the Gulf Arab state of 2.1 million has been holding below 3% since July 2013 but economists expect it to climb to 3.9% in 2014 and 4.2% percent in 2015.
Russia's gross domestic product (GDP) grew by 2% year-on-year in the fourth quarter of 2013, the Federal Statistics Service said, up from growth of 1.3% in the third quarter.
The statistics service confirmed its preliminary estimate of GDP growth in 2013 as a whole at 1.3%.
Turkey's economy grew faster than expected in 2013 at a rate of 4.0% compared to the previous year, the Turkish Statistics Institute (TurkStat) data recently showed.
Turkey's annual gross domestic product (GDP) in 2013 reached 122.3 billion Turkish Lira at constant prices, or about 58.2 billion U.S. dollars, reaching a year-on-year growth of 4.0%, the TurkStat data showed.
Turkish per capita GDP also increased to 10,782 dollars at current prices in 2013.
Analysts attributed the faster economic growth mainly to the solid recovery in domestic demand in 2013 and a surprisingly strong fourth quarter performance when the economy expanded by 4.4%.
Earlier in the year, the Turkish government forecast the 2013 growth to be 3.6% and 2014 growth to be 4.0% percent in its medium-term program.
The British Chambers of Commerce (BCC) announced in mid-March that it expected UK GDP to reach pre-2007 levels by this summer, a quarter earlier than originally expected. Furthermore, the outlook for 2015 has also been bumped up, with GDP increasing from an expected 2.4% to 2.5%, and is predicted to remain stable – holding onto this rate throughout 2016.
The immediate impact of this optimism will, of course, be the long-awaited rise in interest rates, which has been at a record low of 0.5% for the past five years. The BCC has predicted that the rates are likely to rise in Q3 2015, but will only be nudged up to 0.75%, and will step up incrementally by 0.25% each quarter until it reaches 1.5% in H2 2016. However, it would appear that the BCC's outlook is conservative, as the wider consensus around the base rate is that it will rise to 1% in Q3 2014, and then up to 2-2.5% in the following 12 months.
The question on many private equity practitioners' minds will be the impact of the rate rise on outstanding debt held by portfolio companies. According to Gary Edwards of Investec's growth and acquisition finance team, the levels of restructuring seen in 2013 (which accounted for more than 80% of debt transactions across Europe) are likely to continue throughout 2014 in anticipation of the increase: "Private equity will need to deal with debt structures before the [interest] rate increases."
The sense of confidence and enthusiasm for the UK economy has been grabbing headlines for several months. However, according to a recent report by KPMG, there were fewer domestic and cross-border M&A deals during 2013 than even 2012 or 2011. This means that despite GDP improvements, in terms of M&A activity, the number of deals recorded in 2013 was the lowest level since records began in 1987. When looking solely at private equity activity over recent years, average aggregate deal volumes for early-stage, expansion and buyout transactions have remained stable. According to unquote" data, in 2012, the monthly average of these deals was 42.4. This monthly average deal volume figure dropped slightly to 41.4 in 2013. So far in 2014, the year started with a bang, with deal volume coming in at 45, although this slipped to 34 deals in February.
So, while UK businesses are more confident today, and household consumption is on the rise (one of the key reasons for bumping up GDP forecasts), overall M&A volumes are depressingly low, and rather than bucking the trend and investing against the cycle, from early-stage to buyout, the asset class is recording steadily shrinking deal volumes.
Edwards believes the expected rise in interest rates will create more optimism, making the UK "an emotional economy". He predicts that after the second increase, when interest rates reach 2-2.5%, the confidence and belief in the UK economy will turn into conviction. "This conviction brings emotional behaviors when making decisions over the next 12 months."
This dogmatic stance towards the UK is likely to generate more deal activity. However, the attractive company valuations enjoyed by the asset class in recent years will quickly fall away and GPs must ensure a disciplined approach to new investment as competition for quality assets is set to soar.
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