GDP FORECAST
UPDATE
December 2014
McIlvaine Company
TABLE OF
CONTENTS
Stronger
demand for services could drive the United States GDP growth rate higher,
causing many investment banks to turn bullish just as U.S. stocks see a wide
selloff.
Service
industry revenue rose 5% year-over-year in the third quarter of 2014, far above
analysts’ expectations. Economists are attributing the surprise surge to greater
discretionary purchasing power amongst American consumers as oil prices fall.
The news caused analysts at JP Morgan to upgrade GDP expectations from 4.3% to
4.4%, while Barclays raised their expectation from 4.1% to 4.2%.
Economists
believe that domestic demand is strengthening in the United States, which is
more than offsetting weak demand abroad. If the diverging trend between American
and global demand continues, analysts believe more investors could seek to buy
U.S. equities and debt, which could have a number of ripple effects that in turn
will cause asset and debt prices in the U.S. to surge further.
The
dynamic has already bolstered the U.S. Dollar, which continued to post gains in
this week’s trading.
Services
demand was broadly positive, but varied greatly from sector to sector. Amongst
employer firms, accounting, tax preparation, and payroll service sectors saw the
largest gains, rising 10% year-over-year in the third quarter after rising 8.8%
in the previous quarter. The acceleration is largely attributable to a falling
unemployment rate, more churn in the labor market, and broader investment in
human capital throughout the American economy. Employment services also saw a
strong gain, with a 6.5% year-over-year rise in the third quarter after gaining
6.1% in the second quarter of 2014.
Hospital
services also saw a healthy acceleration in demand, as hospital revenue rose 6%
year-over-year in the third quarter from 4.9% in the previous quarter.
Additionally, transportation and tourism saw strong gains in demand, while
publishing; including software publishing, broadcasting, and cable industries
saw year-over-year declines. The steepest falls in revenue were from natural gas
distribution, which declined 14% year-over-year, and central bank operations,
which fell 8.6% year-over-year.
While
services demand are rising, analysts say that upward revisions to wholesale
inventories and construction spending in recent reports could indicate an
overall economic expansion far beyond expectations. Several bankers released
optimistic macroeconomic notes to investors on Wednesday, even as stocks sold
off broadly.
To
contrast banker enthusiasm, early morning trading saw a broad selloff in U.S.
stocks that was much deeper than seen in the rest of the world, except in Japan
where shares slid over 2%. At the same time, volatility of the S&P 500 as
measured by the VIX spiked over 9% in Wednesday trading.
As stock
traders lowered their risk profiles, bond traders indicated a bearish view of
future inflation and economic growth, despite the revision to services demand.
Long-term U.S. Treasuries rose. The 10-year Treasury yield fell 16 basis points
to 2.21% and the thirty-year fell 21 basis points to 2.86%, indicating that
growth was likely to remain weaker than previously expected, and risks of a rate
hike from the Federal Reserve remain low.
For 2014,
10-year Treasury yields have fallen over 26%, with bond prices rising
accordingly. Oil futures also fell, with WTI crude oil futures sliding 3.8% to
$61.40.
Venezuela's economy shrank by 4.2% in the first three quarters of 2014, an
adviser to the country's main opposition group said, after almost a year of
official silence about the state of the OPEC nation's economy.
The
central bank has not published any GDP data for this year and has not revealed
inflation figures since August's 63.4% 12-month reading, spurring criticism that
President Nicolas Maduro is hiding bad economic news.
"The
central bank has not given figures but I'm going to give them to you," Jose
Guerra, a former central bank director who now works as an adviser to the
opposition's Democratic Unity coalition, told a news conference.
"GDP
dropped by 4.4% in the first quarter, 4.4% in the second quarter and 3.5% in the
third quarter," he said, yielding a drop of 4.2% for the first nine months of
the year.
Venezuela's economy grew 1.3% in 2013.
Guerra
said the 2014 data was discussed at a central bank board of directors meeting,
but did not say how he got it.
He served
as the central bank's head of economic research but left in 2005, protesting
interference by then President Hugo Chavez's government.
The
central bank did not immediately respond to an email seeking comment. The
information ministry, which handles media requests for the finance ministry,
also did not immediately respond to an email requesting comment.
Opposition
leaders say currency controls that stimulate capital flight and frequent state
takeovers of private businesses have weakened the country's productive capacity.
Officials
have blamed economic problems including soaring inflation on violent opposition
protests earlier this year.
The
economic woes, greatly exacerbated by the recent slump in oil prices to
five-year lows, have spurred concerns Venezuela might default on foreign debt
obligations.
Bonds fell
sharply recently, with the benchmark global 2027 dropping 2.1% to a bid price of
48.646 with a yield of 20.887%.
Maduro has
insisted the country will make all its debt payments and notes the ruling
Socialist Party has never defaulted on its commitments to foreign creditors.
Default
concerns have nonetheless pushed the spreads on Venezuelan bonds to the highest
of any emerging market nation.
Venezuelan
debt on average pays 23 percentage points more than comparable U.S. treasury
bills - more than quadruple the spread of Iraq and triple that of Argentina,
which is in default due to a legal battle with creditors.
Investors
will keep an ear to the ground as China's policymakers gather in Beijing for the
country's Central Economic Work Conference (CEWC) – a closed-door annual meeting
that sets economic priorities for the coming year.
Dates for
the meeting have not been officially announced, but the meeting is expected to
kick off on December 16, according to Ta Kung Pao - a Hong Kong-based newspaper
with ties to the mainland government. The meeting usually lasts 2-3 days.
A key
issue for the CEWC will be setting next year's gross domestic product (GDP)
growth target, viewed as an important signal of policy intentions.
While the
targets are typically made public in March during the National People's
Congress, they are occasionally leaked to local media shortly after the meeting.
As growth
appears set to fall towards the lower-end of this year's "about" 7.5% target,
Beijing is widely expected to propose a target of 7.0% – the lowest in a decade.
"The new
leadership has proposed the concept of an economic 'new normal', which we
understand to encompass slower but more balanced growth and increased reforms.
We firmly believe that the top leadership is willing to accept slower but more
sustainable growth," said Chang Chun Hua, China economist at Nomura.
"Moreover,
support for a lower growth target has recently gained momentum in policy
circles," said Hua.
During
October's China Academy of Social Science conference, participants - many of
whom were from government ministries - expressed the view that a target of 7.0%
for 2015 would be appropriate for China's long-term potential growth, Hua said.
Mark
Williams & Julian Evans-Pritchard, economists at Capital Economics expect the
"about caveat" will be added to the 7.0% growth target once again to ensure
policy flexibility.
"Even
better, though admittedly less likely, would be for policymakers to drop the
target altogether while perhaps maintaining their rhetoric of 'keeping growth
within a reasonable range'," Williams and Evans-Pritchard.
"This
would give policymakers greater flexibility without them being seen to be
cutting their growth target in response to downward pressure on the economy,"
they added.
In
addition to setting the growth target, policymakers will also discuss other
macro targets - including inflation and money supply - and lay out reform
priorities.
Nomura
expects the CPI inflation target to be lowered to 3.0% from 3.5% in 2014 due to
lower commodity prices and weaker domestic demand.
However,
the bank says the target for money supply growth may be held steady at 13% so
that monetary policy can be more accommodative.
Meanwhile,
on the reform front, policymakers are expected to pledge to accelerate the pace
of various reforms including state-owned enterprise reform, rural land reform
and interest rate liberalization among others.
India's
GDP growth is likely to recover in the next financial year, 2015-16, and may
surpass China's growth by 2016-17, according to Hemant Kanawala, head of equity
at Kotak Life Insurance.
"The
Indian GDP is likely to recover in FY16. We are expecting that growth will
recover above 6% next year and by CY16 (Calendar Year 2016) or FY17 India is
likely to surpass GDP growth of even China. India is likely to emerge one of the
fastest growing economies among the emerging markets," he said.
India's
growth has been stuck at sub-5% for the last two fiscals - its worst ever
performance in 25 years. While China's economy grew by 7.7% in the last fiscal,
India grew at 4.7%.
"The
expectation is Chinese growth will come off...for FY17 or CY16, which investors
globally see, Indian GDP is likely to be in the range of 7% whereas China is
likely to go below that as of now, this is what the current estimates suggest,"
he said. (Watch Video)
The
Reserve Bank of India or RBI sees India's GDP growth at 5.5% in FY15. The World
Bank pegs it at 5.6%.
Investors
expect FY16 GDP in the range of 6-6.5%, Mr Kanawala said. "But the exact GDP in
March 16 is likely to be between 6.5-7%," he added.
The
International Monetary Fund or IMF expects China's growth to slow down to 6.5%
sometime in 2016, while the World Bank sees China's growth slide to 7.1% in
2016.
Kotak
expects the Reserve Bank of India (RBI) to lower interest rates next year, which
it believes will propel growth.
"If
inflation remains lower, then there will be greater ability of RBI to lower
interest rates, which is one of the first requirements for the economy to
recover and grow faster," Mr Kanawala said.
Wholesale
inflation in October cooled to a 5-year low of 1.77%, helped by fall in food and
fuel prices; while retail inflation eased for the third straight month to 5.52
%.
Faster
clearance of projects which are stalled and reforms on land and labor will be
the key to India's growth recovery, Kotak said.
Japan’s
economy shrank more than previously estimated in the third quarter, contracting
1.9% as capital spending declined and private consumption remained weak.
The
economy has now contracted for two consecutive quarters, a common definition for
recession, the data confirmed, less than a week before general elections that
Prime Minister Shinzo Abe has framed as a referendum on his economic policies.
Last
month, the government estimated that gross domestic product contracted 1.6%
during the July-September period. Soon after, Mr. Abe cited the weak economy in
saying he would delay a second increase in the nation’s sales tax, and called a
snap election in search of a mandate.
In recent
days, though, many economists had predicted that the third-quarter contraction
would actually turn out to be smaller than initially estimated—or perhaps be
revised to flat or a slight expansion—after the Ministry of Finance reported
late last month that capital spending by businesses rose 3.1% during the
quarter, compared with a previous estimate of a 0.2% decline. Business
investment accounts for around 14% of GDP.
But
capital spending turned out to be weaker than the ministry’s estimate when
taking into account smaller businesses, declining 0.4%, indicating that even as
Japan Inc. reports record profits and the stock market hits multiyear highs, the
benefits of “Abenomics” haven’t reached everyone.
Financial-service companies, for example, haven’t followed through with
investments in retail services after a tax-free investment account for
individuals was launched in January. Many individual investors remain inactive
as the Nikkei Stock Average has hit a series of seven-year highs.
The
economy will likely expand in the fourth quarter, helped by a sharp decline in
oil prices, said Kenji Yumoto, an economist with the Japan Research Institute.
Still, consumers’ wages aren’t keeping pace with inflation, he noted.
“Declining
real income amid a weaker yen suggests the recovery will likely lack strength,”
he said.
Private
consumption, the most important pillar of the economy, remains anemic, rising
just 0.4% in the third quarter from the second, as consumers continue to stagger
following a sales tax increase in April and a decline in the yen of more than
30%, which has raised the cost of imports.
The
downbeat consumer mood was most evident in weak sales of big-ticket items such
as houses and automobiles. Residential investment and consumption of durable
goods both fell sharply for two consecutive quarters.
The
government also revised its growth figures for the second quarter, saying the
economy contracted 6.7% instead of the initially reported 7.2%. It also lowered
first-quarter growth to 5.8% from 6.7%.
Another
recent unexpected figure was the nation’s current-account surplus, which was a
strong ¥833.4 billion ($6.9 billion) in October. However, a weak yen and
overseas investment income masked a large trade deficit due to weak exports.
However,
there is no guarantee that the corporate investment income will be repatriated
to Japan, where it can benefit the domestic economy, said Shuji Tonouchi, senior
economist with Mitsubishi UFJ Morgan Stanley Securities.
Still,
some economists expect GDP to rebound and grow by around 3.3% in the fourth
quarter. The question is whether such growth will be sustained next year.
Mr. Abe is
asking voters to stay the course, saying strong corporate profits generated by
the weaker yen will eventually translate into higher wages and more investment,
creating domestic employment.
An opinion
poll by the Nikkei this month showed that only 33% of the public are in favor of
Abenomics, compared with 51% against it. But Mr. Abe’s Liberal Democratic Party
is still expected to win a landslide in the absence of a powerful opposition.
Thailand's
economy may expand by less than 1% in 2014 due to weak exports and slow
government spending, according to Finance Minister Sommai Phasee.
"This
year's growth may not be 1%," Mr Sommai said.
"Exports
are slow and may even contract. Disbursement is still very slow."
The
government of Southeast Asia's second-largest economy has already trimmed its
outlook four times this year as the country struggles to recover from months of
political turmoil that slowed tourism and hurt consumer confidence.
Just over
a year ago, the government forecast growth of 4.0-5.0% for 2014.
Malta's
Individual Consumption decreased slightly in 2013 and saw its GDP increase by a
similar margin, according to a Eurostat report
.
The report
uses Actual Individual Consumption (AIC) as a measure of material welfare of
households. In 2013, AIC per capita expressed in Purchasing Power Standards
(PPS) varied from 49% to 136% of the EU28 average across the Member States.
Actual
Individual Consumption consists of goods and services actually consumed by
individuals, irrespective of whether these goods and services are purchased and
paid for by households, by government, or by non-profit organizations. In
international volume comparisons of consumption, AIC is often seen as the
preferable measure, since it is not influenced by the fact that the organization
of certain important services consumed by households, like health and education
services, differs a lot across countries.
The
highest level of Actual Individual Consumption per capita in the EU28 was
recorded in Luxembourg, at more than 35% above the EU28 average. Germany and
Austria were around 20% above the average and Denmark, Finland, Sweden, the
United Kingdom, the Netherlands, Belgium and France recorded levels between 10%
and 15% above the average, while Italy was on the average.
In
Ireland, Cyprus and Spain levels were up to 10% below the EU28 average, while
Portugal, Greece and Malta were between 10% and 20% below. Lithuania, Slovenia,
Poland, the Czech Republic and Slovakia were between 20% and 30% below the
average, while Estonia, Latvia, Hungary and Croatia were between 30% and 40%
below. Romania was just under 40% below the average, while Bulgaria was around
50% below the average.
These
data, published by Eurostat, are based on revised purchasing power parities, and
the latest GDP and population figures. They cover the 28 EU Member States, three
EFTA Member States, five candidate countries and one potential candidate
country.
Gross
Domestic Product (GDP) is a measure of economic activity. In 2013, GDP per
capita expressed in PPS ranged between 45% of the EU average in Bulgaria and
257% in Luxembourg.
The
Purchasing Power Standard (PPS) is an artificial currency unit that eliminates
price level differences between countries. Thus one PPS buys the same volume of
goods and services in all countries. This unit allows meaningful volume
comparisons of economic indicators across countries. Aggregates expressed in PPS
are derived by dividing aggregates in current prices and national currency by
the respective Purchasing Power Parity (PPP). The level of uncertainty
associated with the basic price and national accounts data, and the methods used
for compiling PPPs imply that differences between countries that have indices
within a close range should not be over-interpreted.
The Irish
economy remains on course to grow by around 4.7% this year despite a slowdown in
gross domestic product growth in the third quarter, Finance Minister Michael
Noonan said.
"GDP rose
by 4.9% in the first nine months of the year and therefore we are on target to
meet our 2015 Budget forecasts," Noonan said after the central statistics office
reported quarter-on-quarter growth slowed to 0.1% in the third quarter from 1.1%
in the previous quarter.
Portugal’s
economy may grow at the fastest rate in 2015 since before the financial crisis
if oil prices don’t rebound, according to Economy Minister Antonio Pires de
Lima.
Gross
domestic product may expand more than 2% next year, exceeding the government’s
1.5% forecast, barring a rally in the price of oil, Pires de Lima said. That
would be the fastest pace since 2007.
The
country’s 2015 budget used a forecast of $96.70 a barrel for next year’s Brent
crude oil prices. Brent for January settlement rose 1% recently to $66.84 a
barrel, 30% below that forecast, after reaching a five-year low the previous
day.
“If we buy
oil 20% below the budget, that would mean our economy would grow more than 2%
instead of 1.5%, and our trade account and capital account will have a surplus
of 4% instead of 2%,” Pires de Lima said in an interview at Bloomberg
headquarters in New York.
Portugal,
which exited a three-year, 78 billion-euro bailout from the European Union and
International Monetary Fund in May, 2014, is targeting 1% economic growth this
year.
The
government is forecasting export growth will rebound to 4.7% next year from this
year’s 3.7%, with import growth slowing to 4.4% from 4.7%, Pires de Lima said.
Oil prices 20% below the budgeted level would shave about 3 billion euros from
the country’s import bill, he said. It would “slightly” reduce the deficit from
the current forecast of 2.7% of GDP, after an estimated 4.8% this year.
The
European Central Bank’s policy of near-zero interest rates is also creating
conditions for an improving economy in Portugal and elsewhere, said Pires de
Lima, a 52-year-old former chief executive at a brewer and a beverage company.
Pires de
Lima said he doesn’t foresee an increase in interest rates soon. By keeping
rates low, the ECB is “contributing that way to a recovery of investment, which
is really what the euro zone is demanding right now, especially Portugal and
other southern European countries,” he said.
The ECB
left its main refinancing rate unchanged at 0.05.
Pires de
Lima praised ECB President Mario Draghi for focusing on the danger of falling
prices. “The problem right now in Europe is not having too much inflation, it’s
deflation,” he said. “Quantitative easing is for sure something that should be
considered.”
The euro’s
9.9% slide against the dollar this year will contribute to export growth next
year, Pires de Lima said.
“It will
take some time to feel the difference in our exports,” he said. “It will help,
for sure, especially in sectors where price still matters, the traditional
sectors.”
Portugal
sends an increasing share of exports to countries that don’t use the euro, 30%
in 2013 compared with 18% in 2000. Within the euro zone, a greater emphasis on
consumption in the more prosperous economies would aid recovering economies such
as Portugal’s, Pires de Lima said.
“It would
be quite important for the Portuguese economy that the main European economies,
like Germany and France, to increase their consumption, especially Germany,” he
said. Germany and France are Portugal’s biggest export markets after Spain.
Turkey’s
economic growth slowed in the third quarter as falling borrowing costs failed to
spur domestic demand and agricultural output contracted.
Gross
domestic product grew 1.7%, the slowest pace since 2012, compared with a revised
2.2% during the previous three months, according to official data. The median
estimate in a Bloomberg survey of 18 analysts was 2.8%. Seasonally-adjusted
output rose 0.4% from the previous quarter.
Central
bank Governor Erdem Basci blamed the weaker-than-anticipated data on
agricultural output, which contracted 4.9%. Household consumption, which makes
up two-thirds of the Turkish economy, grew 0.2% from a year ago compared with
0.5% during the previous quarter.
“The
weakness of domestic demand is likely to lead to further pressure on the central
bank from the government to loosen monetary policy,” William Jackson, senior
emerging markets economist at London-based Capital Economics said in a note.
Inflation, which accelerated to almost double the central bank’s 5%-target in
November, “means rate cuts are unlikely,” he said.
Basci,
speaking at a news conference in Ankara today, said real and nominal interest
rates are near record lows. The central bank has kept the benchmark one-week
repurchase rate unchanged at 8.25% since August after partially reversing a rate
increase in January.
The focus
of Turkish policy makers this year has been to bolster exports while reining in
domestic demand, Basci said. Geopolitical problems in Turkey’s export markets in
the Middle East and weak growth in Europe therefore overlapped with an era of
weak domestic demand and have weighed on GDP, he said.
The
short-term interest rates that the bank uses as policy tools have little impact
on the willingness of private businesses to invest, Basci said, suggesting that
the bank will be in no hurry to cut rates to spur growth. Corporates will find
it less costly to borrow for investment only after the central bank curbs
inflation and strengthens its credibility, he said.
“Growth is
not at levels that we desire. We also want Turkey to grow faster,” Basci said.
“We are trying to grow in a more balanced way and the track record so far is
good.”
When
compared with the previous quarter, the “underlying picture of GDP does not look
that weak,” Selim Cakir, an economist at Turk Ekonomi Bankasi AS in Istanbul,
said by e-mail.
The lira
gained 0.2% to 2.2621 a dollar at 1:40 p.m. in Istanbul, reversing earlier
losses. The yield on the government’s 10-year local-currency bonds fell two
basis points to 8.12%.
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