GDP UPDATE
July 2014
McIlvaine
Company
TABLE OF
CONTENTS
The latest data shows the U.S. economy contracted
significantly more than previously estimated in the first quarter of this year.
The Bureau of Economic Analysis released its third and
final estimate of real gross domestic product for the first three months of
2014. The release showed output in the U.S. declining at an annual rate of 2.9%.
This is relative to fourth quarter 2013, when real GDP grew 2.6%.
The final number is also down from BEA’s negative 1% second
estimate released last month and even more sharply from its first estimate that
showed GDP growing 0.1%. While this makes Q1 the economy’s worst since Q1 2009,
the heart of the recession, economists were anticipating the further downward
revision.
“The bad weather in much of the U.S. in early 2014 was a
significant drag on the economy, disrupting production, construction, and
shipments, and deterring home and auto sales,” wrote PNC Senior Economist Gus
Faucher in a note out prior to the release. “But data show growth rebounding in
the second quarter, with improvements in home and auto sales and residential
construction.”
The major stock indices slipped into the red as the opening
bell approached but quickly returned to positive territory. This seems to
indicate that investors were also writing off the contraction as temporary.
In an interview following the release Stephen Auth, Chief
Investment Officer at Federated Investors, called the revision “pretty
incredible” but says that underlying trends have shown improvement that has
simply been “masked” by the weather. He expects second quarter GDP growth to
come in north of 4% and continual market gains.
The revision, BEA explained in a release, was largely due
to a smaller than previously estimated increase in personal consumption and
larger than previously estimated decline in exports. The 2.9% decrease in real
GDP reflected the negative contribution from exports as well as declines in
private inventory investment, both
residential and nonresidential, fixed investment and lower local government
spending. The rate was also negatively impacted by an increase in imports but
partially offset by an increase in federal government spending (the first in a
year and a half) and in personal consumption.
The price index for gross domestic purchases — which
measures prices paid by U.S. residents — increased 1.3% in line with the prior
estimate and compared to 1.5% growth in the fourth quarter. Real personal
consumption expenditures increased by 1%, down sharply from the 3.1% second
estimate and from the increase of 3.3% in the fourth quarter.
The Brazilian government reduced its economic growth
forecast for this year to 1.8% from 2.5%, a prediction that remains well above
market economists' estimates.
The government raised its inflation forecast to 6.2% in
2014 from a previous estimate of 5.6%, according to a fiscal report released by
the planning ministry.
The Brazilian economy should grow just 0.97% this year,
according to a central bank weekly survey of economists.
Peru’s Gross Domestic Product (GDP) is set to post a 5%
growth in the second half of the year as it is foreseen by economic agents from
within the country and abroad, Credit Suisse Investment Bank has said.
The said expansion would be explained due to the positive
effects of the growth-boosting economic measures released by the Ollanta Humala
administration aimed at dynamizing the economy.
Juan Lorenzo Maldonado, Credit Suisse’s chief economist for
Peru, projected a 5% increase for the nation’s production activity by the second
half of 2014, fueled by key sectors such as mining, manufacturing and
construction.
“We had foreseen a 4.3 expansion by year-end, a forecast
which means an annual average growth of 3.3% in the first half,” the analyst
said in statements to El Peruano official daily.
The Zurich-based bank noted that the low performance of
Peru’s mining sector is associated with secondary supplies issues as well as to
the domestic demand.
“Nevertheless, it is expected an enhancement of the
country’s mining output in the next months, as new large-scale projects are
likely to be operating at full capacity,” he noted.
Likewise, Maldonado stressed his optimism with regard to
the improvement in the construction industry performance which has been driving
a stronger economic growth over the last years.
Furthermore, Credit Suisse underlined that acceleration in
public expenditure will back civil infrastructure works starting the second half
of the year.
1) HSBC raised
its 2014 GDP forecast from 7.4% to 7.5%, surprised by the strong recovery
especially in June. Monthly fixed asset investment and industrial production
grew by 17.9% and 9.2% respectively, compared with 16.9% and 8.8% in May.
The strong recovery was largely driven by government
policies. State-owned bank lending picked up strongly; fiscal spending grew by
almost 25% in both May and June, up from an average of 8% from January through
April. HSBC believes China’s GDP growth could exceed its 7.5% forecast if more
easing comes over the next few months. “Policies, particularly fiscal policy,
will likely be more supportive in 2H as it is traditionally the spending
season,” wrote HSBC economists Qu Hongbin and Julia Wang.
China’s property sector continues to be the main downside
risk, says HSBC, but “our baseline case remains that policymakers can offset the
negative impact given that they have a broad range of policy tools at their
disposal.”
In June, property prices in 55 out of 70 cities surveyed
fell, up from 35 cities in May and just 8 in April. Local governments have been
taking steps to prop up real estate markets, using measures such as abolishing
local resident purchase requirements
2) Last week,
China again matched its GDP forecast on the button. But this didn’t really tell
us much, other than that Beijing will keep credit rolling to make its number.
If we are going to start with the numbers as a given, we
really need another way of making some sense of this giant economy.
What would help is to remember the starting point. Think of
China’s economy as a large, overweight person who just can’t commit to a new,
healthier lifestyle.
Instead of embarking on much debated reform, China just
can’t resist another helping of easy money.
In such circumstances, we should not be monitoring an
enlarged waistline every quarter as a sign of progress, but rather as sign of
further fragility as more debt is piled on.
There is plenty evidence China’s giant size is unhealthy.
For starters, there is the degree of overcapacity in
industries ranging from steel to aluminum to the infamous ghost cities of
uninhabited apartment blocks. Then there are the unpleasant side effects of this
growth, such as degradation of the environment and food sources, and some of the
choking pollution that has seen whole cities grind to halt.
The problem is that China keeps growing as long as the
money keeps flowing. No one has ever said, “No! You have had enough.”
When more money is needed, loans are rolled over not
repaid. When state banks ran low on funds, a whole new backstreet-shadow-banking
industry mushroomed, where money came with fewer questions asked.
You can take your pick of evidence that China’s growth has
relied on overindulging on unhealthy levels of debt. But one new statistic that
caught my eye — and puts China’s size and debt in perspective — comes in author
Joe Zhang’s new book on China’s state capitalism.
Zhang calculates that despite having an economy about half
the size of the U.S. at current exchange rates, money supply (on a broad
measure) is already about 61% bigger. And there is little sign of
belt-tightening, with China’s credit balance still compounding at an annual rate
of 13%-14%.
This credit path might seem self-destructive, but it also
comes with a salutary side effect: an enormous property boom. This did not just
inflate GDP numbers, but also brought feel-good asset wealth through rocketing
land values.
So depicting China’s latest progress report as an accident
waiting to happen hardly looks like a stretch.
No less than former prime minister Wen Jiabao called the
Chinese economy increasingly “unstable, unbalanced, uncoordinated and ultimately
unsustainable.” He said this while in power, first in 2007, and then repeating
similar remarks four year later.
Despite this, Beijing has found it nearly impossible to
give up its fixation with the “size matters” approach to economic management.
Once again, there was more evidence in last week’s data
that old bad habits remain — credit is again being shoveled out the door.
China’s broad aggregate of credit, total social financing,
hit 1.97 trillion yuan ($317 billion) in June. It is up from 1.4 trillion yuan
in May, and almost double the figure from a year earlier.
The break-down of this new lending also has an unhealthy
look about it. Growth was mainly down to a surge in short-term bills and funds
financing, which suggests money is being used to put a bandage over the earlier
borrowing binge, rather than fund new fixed-asset investment.
Barclays writes that it expects a significant amount of the
new funds dispersed in June were used to pay interest or fund working capital,
given the economy’s high leverage.
This takes us to perhaps the most important reason
authorities find it hard to stomach credit rationing — the vulnerable state of
the property market. Most commentators now agree that property is pivotal to
China’s growth outlook.
Previously, the mantra was that Beijing must keep to its
target growth rate to meet its job-growth target. The reality is it is now much
more about keeping the property pyramid intact.
Not only is the funding of provincial governments heavily
dependent on land sales, by some estimates half of Chinese banks’ loans books
include some sort of property collateral.
This explains why there is such a fixation with the health
of China’s property market.
Yet despite the re-appliance of the credit pedal, signs are
growing that the downturn in the property market is gathering pace.
A record number of mainland Chinese cities posted a
downturn in prices last month. New home prices fell in 55 of the 70 major cities
monitored by the National Bureau of Statistics, against 35 in May.
The problem for Beijing is this is one sector that is too
big to backstop.
The ultimate prognosis is that this patient needs a major
lifestyle change. Granted, some progress has been made tackling pollution and
corruption, but this is not enough.
Rather than more growth and spending, China needs a diet of
some European-style austerity
Japan's government downgraded growth outlook for the fiscal
year 2014, citing weak exports and subdued demand after the sales tax hike in
April.
The Council on Economic and Fiscal Policy, the top advisory
panel, said the real gross domestic product will grow 1.2% in the fiscal year
ending March instead of 1.4% estimated in January.
The Bank of Japan last week projected 1% GDP growth for the
current fiscal 2014 and 1.5% for the next fiscal year.
Further, the Cabinet Office forecast overall consumer
prices, including fresh food and energy, to rise 1.2% in 2014/15. The estimates
exclude the effect of the sales tax increase.
South Korea's economy likely posted its weakest growth in
more than a year in the June quarter, with a deadly ferry accident hitting
consumption and offsetting a modest recovery in exports.
The trade-reliant economy had earlier this year benefited
from a pick-up in the global economy, but domestic demand has softened since the
ferry sinking in mid-April that has taken a toll on its services industries and
tourism.
The Bank of Korea is confident the second quarter will
prove to be the trough for Asia's fourth-largest economy, but the government is
less sanguine. It has promised to take action to prop up the property market,
while some investors have priced in an interest rate cut as early as next month.
The economy is estimated to have grown a seasonally
adjusted 0.7% in the April-June period on quarter, the slowest since a 0.6% rise
in the first quarter of 2013, according to the median forecast from a Reuters
survey of 27 analysts.
South Korea's economy grew 1.1% in the third quarter of
2013 and 0.9% each in the following two quarters on a sequential basis. The
government views growth of around 1% a quarter as an optimal pace.
"The slowdown deepened since the capsizing of the Sewol,
led by the private consumption and service-sector activity, while construction
spending and corporate investment were also weak," said Lee Seung-hoon,
economist at Samsung Securities.
The ferry sank on April 16, killing more than 300 people in
the country's worst maritime accident in two decades. That has led to massive
cancellations of tour contracts across the country, badly affecting all
businesses serving tourists.
Consumer spending was already hurt by a depressed property
market, high household debt and slowing job growth. A slowdown in China and some
other major economies have also prompted companies to cut spending on investment
and new employment.
Stimulus Steps
To bolster the economy, the government plans to announce
stimulus measures that Finance Minister Choi Kyung-hwan has said would focus on
lifting the property market and increasing public spending, although he ruled
out a supplementary budget.
Last year, the government rolled out around $5 billion in a
supplementary budget spending bill while the central bank cut the policy
interest rate by 25 basis points.
Stimulus measures, which have been relied on in recent
years to support flagging growth, could help quicken a turnaround which some
economists expect to take hold in the third quarter.
Exports grew 3.3%in the second quarter from a year earlier,
accelerating from 1.7% in the first quarter, although import growth also
quickened to 3.2% from 2.0%, customs agency data showed.
The central bank expects momentum to pick up and has
estimated growth of 3.8% for the whole of this year, up from 3.0% in 2013.
Governor Lee Ju-yeol, however, said this month that downside risks were
increasing.
Lee has not given any clear guidance on the direction of
interest rates but the government's repeated calls for urgent action by policy
authorities has prompted investors to price in high chances of an interest rate
cut as early as August.
German gross domestic product stalled in the second quarter
as geopolitical concerns weighed on industrial output and construction weakened
after a weather-induced boom in the first three months of the year, the
Bundesbank said.
The warning, contained in the central bank's monthly
bulletin, is an indication that the euro zone will struggle to improve on the
first quarter's meager growth rate.
Germany accounts for about 30% of the bloc's GDP. During
the first quarter, euro zone GDP expanded just 0.8% at an annualized rate, or
0.2% on a quarterly basis, despite annualized growth of 3.3% in Germany.
Excluding Europe's largest economy, the euro zone economy will have contracted
slightly in the first quarter.
"Considering that the service sector is likely continued to
expand, the real, adjusted gross domestic product (in Germany) was likely
unchanged from the first quarter," the Bundesbank said. "Geopolitical tensions
are reflected not only in weaker future indicator surveys, but also in ebbing
demand for interim goods."
The German statistics agency is expected to release
preliminary second quarter GDP data on Aug. 14. The Bundesbank report didn't
provide an estimate for growth in the second half of the year.
Based on April and May figures, factory production and
construction have each fallen compared with the first quarter. Yet there are
some caveats that may have exaggerated this weakness. Some of the
weather-induced construction gains in the winter were likely borrowed from
activity that would have occurred in the spring. In addition, many German
workers took bridge vacations after mid-week holidays during the second quarter,
resulting in fewer days worked, the Bundesbank said.
To date, the Bundesbank has forecast German economic growth
of 1.9% this year, up from a projection of 1.7% in December. In March, the
Bundesbank said second-quarter growth this year would be considerably below that
of the first quarter.
Other large euro members such as France and Italy appear
unlikely to have picked up the slack from weaker GDP in Germany during the
second quarter.
French industrial production fell in April and May on a
monthly basis, while it fell sharply in Italy, by 1.2% on the month, in May.
Garanti Bank has improved its economic growth forecast for
this year from 2.6% up to 2.9%, in its most recent quarterly macroeconomic
report, following higher-than-expected results in Q1 and the overall positive
outlook for Romania's economic development.
The bank expects industrial output growth to temper in the
remaining quarters of 2014. Meanwhile, after the contraction seen in Q1 and the
weak results of 2013, the construction sector announces a comeback.
As regards exports, they are expected to witness a slowdown
this year, once the effects of the exceptional production of transport equipment
and tools for export in 2013 fade away.
'As for imports, we anticipate an acceleration following
the recovery of domestic demand. However, while looking at the whole picture,
all these elements shouldn't influence significantly the current account deficit
estimated to hover around 1.1% of the GDP in 2014, while being 100% covered from
foreign direct investments,' said the abovementioned release.
'There are still chances in the next interval of foreign
capital inflows, both in the short and in the long run, backed by the favorable
dynamics of liquidities seen in the developed countries, which determined
Garanti Bank to adjust its forecast for the leu-euro exchange down to 4.45 at
year-end from the initial 4.55,' the report of the bank also showed.
Moreover, the bank's experts claim that loans in local
currency should remain the engine of lending in the next interval, while the
recovery of the domestic demand should come to gradually reflect in the
financing sector, but this depends on the sustainability of consumption in the
remaining quarters of the year.
The Bank of Spain recently revised up its economic growth forecast for this year and next and said it now expected Gross Domestic Product to expand by 1.3 % in 2014 and by 2.0% in 2015, from 1.2% and 1.7% previously.
The central bank also said in its monthly economic bulletin
that the Spanish economy had likely registered a 0.5% growth quarter-on-quarter
between April and June after a 0.4% expansion in the first three months of 2014.
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