GDP UPDATE
March 2014
McIlvaine Company
TABLE OF CONTENTS
Markets and economists are responding to news that real gross domestic product grew less than previously estimated in the fourth quarter with a yawn.
Data from the Bureau of Economic Analysis shows that real GDP — which measures output produced in the United States — grew at an annual rate of 2.4% in the fourth quarter of 2013. The second estimate is down 80 basis points from the 3.2% advance estimate BEA put out in January. The figure shows fourth quarter growth relative to the third quarter, when real GDP increased 4.1%.
The lowered fourth quarter estimate, explained BEA in a release, reflects smaller than previously estimated growth in personal consumption expenditures. There were also downward revisions to business investment in inventories and exports, as well as state and local government spending. These were partially offset by an upward revision to business fixed investment and inflation.
Stocks were trending up following the release. Joseph Lake, U.S. analyst for The Economist Intelligence Unit, wrote in a note on the results that the downward revision, “was widely expected and does not alter the big picture that the US is continuing to slowly recover from the financial crisis.” Adding, “Consumer spending, while revised downwards from the original estimate, still grew by its fastest pace in almost two years, a reflection of the improvement in the underlying economic fundamentals, which bodes well for 2014.”
Areas that contributed to the increase over the prior quarter included exports and fixed investment outside residential, as well as inventory investments from the private sector. The gains were partially offset by lower federal government spending and residential fixed investments. The rate was also negatively impacted by an increase in imports.
In a note on the report Jim O’Sullivan, chief U.S. economist at High Frequency Economics, pointed out that the results were close to the 2.5% consensus. “While 2.4% is fairly sluggish,” he wrote, “it was despite more adverse than usual weather at the end of the quarter and the government shutdown at the start. The shutdown directly subtracted 0.3 points from the growth rate through the government spending component, but there were likely other effects as well.”
Although weather is expected to depress first quarter 2014 results, O’Sullivan expects at least a 3% growth trend this year. PNC Chief Economist Stuart Hoffman, and Senior Economist Gus Faucher agree that weather will weigh on first quarter sales of consumer durable goods, especially cars and construction. But despite the cold weather, growth picked up in the second half of the year. Growth averaged 3.25% in the second half of 2013 versus 1.8% in the first half.
However they concluded, “With less drag from fiscal policy, a pickup in business investment, continued recovery in the housing market, better global growth with recovery in Europe, and moderate gains in consumer spending, real GDP growth for all of 2014 will be about 2.9%.”
From the fourth quarter of 2012 to the fourth quarter of 2013 real GDP gained 2.5%. 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.
Brazil’s 2013 GDP and fourth quarter growth surprised to the upside, wiping out rumors of a technical recession.
Fourth quarter growth came in at 0.7% compared to the same period last year and GDP ended the year at 2.3%, up from previous estimates of 2%.
“Brazil avoided a technical recession, but I don’t see things picking up yet,” says Craig Botham, an emerging markets economist at Schroders, a $415 billion asset management firm in London. Botham’s baseline scenario is for 1.8% GDP growth this year. That’s due to a mix of factors, China being one of them. The European Union could conceivably pick up demand to make up for some of China’s slack going forward, but the main problem in Brazil right now is the domestic economy.
“We have budget cuts coming, and tighter monetary policy still to contend with,” Botham says. Brazil’s Central Bank raised interest rates to 10.75% last night. A drought early in the year will also hurt the country’s all important farming sector. The country is the second largest soybean exporter after the United States. And Brazil’s consumers have higher debts and higher interests rates that have economists like Botham forecasting less spending.
Even FIFA World Cup soccer coming to town in June, a narrative that once had investors bullish on Latin America’s biggest economy, is no longer a reason to feel bullish on Brazil.
“FIFA won’t have a huge impact on GDP. It will have some impact, but much less than people expect,” Botham says.
Growth in the fourth quarter was mainly due to the services sector, which saw quarterly growth of 0.7%. Agriculture was flat and industrial production dropped by 0.2% as expected. The Brazilian Institute for Geography and Statistics, or IBGE, said the country recorded a 0.9% drop in manufacturing output, a 0.1% decline in mining and no growth at all in construction. Oddly, this in a country that is supposed to be building roads, power plants and infrastructure for FIFA and the 2016 Summer Olympics in Rio de Janeiro.
Thanks to runaway inflation, now a bit more under control, Brazilian companies have been slow to invest.
Still, it’s not like Brazilian companies have given up. Public and private companies increased investments by 6.3% last year.
The surprising GDP numbers were due primarily to exports which got a boost from a much weaker currency. The Brazilian real is down 19.25% in comparison to the dollar over the last 12 months.
Despite slowdowns in China and Europe, Brazil’s top two trading partners, Brazil is still finding a home for its commodities and manufactured goods. It exported $2.17 billion worth of goods to China in January compared to $1.7 billion in January of 2013. Last year’s total exports to China hit a record breaking $46 billion. Even iron ore shipments to China have risen both in price and in tonnage. Brazil shipped over $1.28 billion worth of iron ore to China in January compared to $1.05 billion in January 2013.
Exports to the European Union have slipped somewhat, with January bringing in $3 billion compared with the $3.1 billion last January. Moreover, E.U. shipments have declined in value over three years. Last year Brazil sold $47.7 billion worth of goods to the E.U., down from $49 billion in 2012 and $53.1 billion in 2011.
A stronger E.U. will be good for Brazil, providing China does not retreat.
Closer to home, economists expect monetary tightening in Brazil to be drawing to an end. The effect of rising interest rates, however, will be felt in Brazil for most of the year.
Economic growth in Canada exceeded expectations in the final three months of 2013, recording its biggest annualized gain in over two years as household consumption picked up steam to offset weakness in business investment.
Canada's gross domestic product expanded 2.9% annualized in the fourth quarter, according to Statistics Canada. Market expectations were for 2.6% growth, according to a report from economists at Royal Bank of Canada.
The latest result follows third-quarter GDP expansion of 2.7%, and thus marks the strongest six-month performance for the Canadian economy since the second half of 2011.
The last time the Canadian economy grew at an annualized rate of 2.9% or higher was in the third quarter of 2011, when activity surged following the impact from a tsunami in Japan and forest fires in western Canada.
The data agency also revised GDP data for the first and second quarters of 2013, which now indicate the economy grew at a faster pace than previously believed. For all of 2013, Canadian GDP expanded 2%.
The fourth-quarter performance emerges even though the economy contracted 0.5% in December on a month-over-month basis, marking the biggest monthly decline since the recession in 2009. The decline comes after five consecutive monthly advances. The data agency said weakness in December was broad-based, with manufacturing, retail and wholesale trade, and construction posting notable decreases.
The report provides evidence that the Canadian economy is beginning to climb out of a slump that began in late 2011, and might be starting to benefit from a pick-up in strength in the U.S. market.
Households were the economic engine in the fourth quarter, as their consumption advanced 0.8%, led by spending on electricity, gas, and clothing and footwear. In the previous three-month period, household consumption rose 0.6%.
Inventories were another positive. Firms added 15 billion Canadian dollars ($13.47 billion) to non-farm inventories in the fourth quarter, compared with a C$4.5 billion increase in the third quarter.
Business investment fell 0.5% in the quarter following a 0.3% increase in the previous three-month period. Business investments in residential and non-residential structures were lower. However, the decline was offset by an increase in spending on productivity-enhancing machinery and equipment—the first such advance following three straight quarterly declines.
Net trade was a small positive contributor to economic growth in the October-to-December period. Exports rose 0.4%, after a flat reading in the previous quarter, while imports advanced 0.2% after a decline in the July-to-September period. However, the terms of trade, measured by export prices relative to import prices, weakened in the quarter.
Fourth-quarter nominal GDP, or the tax base from which governments draw their revenue, rose 0.8%, after a 1.3% gain in the previous three-month period. Employee compensation rose 1.1%, following a 0.7% gain in third quarter, and the household savings rate climbed slightly to 5%. The household debt-service ratio, or the share of income required to meet financing requirements, declined for a fifth straight quarter to 7.06%, or the lowest level since 1990 according to the data agency's records.
Recently released data show that real GDP in India grew at a year-over-year rate of 4.7% in Q4-2013. Although the outcome was in line with the consensus forecast, it marks the seventh consecutive quarter in which GDP has grown at a sub-5 percent rate. The days of very robust economic growth that characterized the middle years of the last decade are clearly a thing of the past.
Although output in the service industries accelerated, suggesting that growth in consumer spending likely remained solid in the fourth quarter, growth in the agricultural and utility sectors slowed. The downshift in construction—growth slowed from 4% in Q3 to nearly 0% in Q4—may reflect the effects of monetary tightening by the Reserve Bank of India (RBI), while the contractions in the mining and manufacturing sectors illustrate the continued challenges faced by Indian industry.
Indeed, the entire economy continues to face challenges. Inflation remains elevated at nearly 9% at present, and the large current account deficit, which is roughly 4% of GDP at present, contributed to the loss of investor confidence and nose-dive in the currency last summer. This sharp depreciation—the rupee plunged 20% against the U.S. dollar between May and August 2013—likely will prevent a marked decline in CPI inflation in the near term because currency depreciation tends to lift import prices.
Japan's economy remained stuck in first gear in the fourth quarter, raising questions over the government's ambitious turnaround plan.
Japan's economy grew at an annual rate of 1% in the final three months of 2013, according to the Cabinet Office. The growth was much slower than the 2.8% figure expected by economists.
On a quarterly basis, Japan's gross domestic product increased by 0.3%. Net exports were particularly weak, as the number of goods coming into the country grew more quickly than exports.
After a brief dip into negative territory, the Nikkei closed 0.6% higher.
The poor results come just months before a sales tax increase is scheduled to take effect and likely dent consumer spending. The results also raise questions over the strength of Japan's recovery.
Prime Minister Abe has increased government spending and installed a central banker who is not afraid to use aggressive monetary policy.
The idea is that the measures -- known as Abenomics -- will end years of deflation, leading to more robust growth for the world's third largest economy.
Since the central bank announced its stimulus plan in April, the yen has fallen 27% against the dollar and helped Japanese manufacturers compete against international rivals.
A falling currency lowers the price of a country's exports, making them more attractive to international buyers by undercutting competitors. The strategy should boost Japan's flagship brands and give them a reason to raise wages.
Results so far have been mixed. Wages have not gone up by much, and promised structural reforms have been difficult to implement.
Abe's government has proposed measures that would make the labor market more flexible, encourage immigration, bring nuclear power plants back online and draw more Japanese women into the workforce.
Most of those ideas have, so far, gone nowhere.
Should growth continue to stagnate, attention may turn back to the Bank of Japan, which could come under pressure to increase the size of its stimulus program in an effort to support the economy.
Kasikorn Research Center (K-Research) warned the country's GDP will register at a mere 2% if a new functional government is not set up in the first half of this year. However, the 2% growth is based on an absence of political violence, said deputy managing director Pimonwan Mahujchariyawong, noting the growth could be cut by 0.5 percentage points if violence does occur.
The research house is maintaining its current economic growth projection at 3% this year. K-Research wants to wait and see if a clearer picture emerges in the next two months before making an economic review as several legal cases against caretaker premier Yingluck Shinawatra and her cabinet are expected to conclude in March and April.
Earlier, CIMB Thai Bank warned Thailand could slip into a recession in the second quarter for the first time since the global financial crisis, while Somchai Sujjaponse, the Fiscal Policy Office's director-general, said 2014GDP growth will likely slip below 2% if exports slump.
Bank of Thailand director Don Nakornthab said the country's GDP growth could dip below last year’s 2.9% if the political stalemate persists throughout the year, while an economic recession is possible in the first half only if the situation becomes increasingly violent.
"The merger of the three protest sites into one should help retail business operators around the previous sites, but it will not benefit the overall economy as the political conflicts are lingering," said Mrs Pimonwan.
If the caretaker government revokes the state of emergency, it should bolster the country’s tourism industry in terms of both numbers of foreign visitors and revenue, she said.
But K-Research, a research house under Kasikornbank, ruled out a potential recession, saying growth could improve in the second quarter, largely underpinned by exports. It forecast the country's shipment growth at 5% this year.
SCB Economic Intelligence Center (SCB EIC), a research unit of Siam Commercial Bank, was less optimistic, predicting growth of 2.4% this year, assuming export growth of 5%.
The prolonged political strife is the main risk pressuring the country’s economic expansion.
Domestic consumption and investment could be adversely affected by political uncertainties.
The two research houses also differed on their forecast of the Monetary Policy Committee's policy rate decision.
K-Research predicts the central bank’s rate-setting committee will leave the rate unchanged at 2.25% at the March 12 meeting, while SCB EIC forecasts half a percentage point cut to 1.75%, then maintaining the rate throughout this year.
Belgium's economy grew at a slightly faster pace in the final three months of 2013 than originally reported, with gross domestic product expanding 0.5% on the quarter, and 1.0% from the year-earlier period, the central bank said.
In its initial estimate, the central bank said Belgium's GDP had climbed 0.4% on the quarter and 0.9% on the year.
For the year as a whole, the Belgian economy expanded 0.2% after contracting 0.1% in the previous year.
Economic growth was supported by domestic demand, in particular household consumption, which rose 0.6% from the previous quarter. Government consumption was stable. Exports fell 0.4%.
Earlier this year, Belgian Prime Minister Elio Di Rupo said his country was on track to reach European Union goals to lower its government debt and budget deficit after a political crisis led to two years of reforms, adding that political instability could flare up again after national elections scheduled to be held in May.
It was the third quarter of growth since the end of an 18-month recession, the longest period of contraction to affect the single currency area.
It has now managed three consecutive quarters of growth as the wider economy responds to the calmer conditions that now prevail in the region's financial markets.
But it is still distinctly sluggish; certainly not robust enough to be likely to make much of an impact on the serious jobs problem suffered by some countries.
The best that can be said is that unemployment has stabilized. Nor is the growth strong enough to dispel the growing concern that the eurozone might be heading for deflation (falling prices).
Economic activity is still 2.7% below the peak it reached in 2008, before the full onset of the financial crisis.
There is one small landmark in the new data - the Italian economy managed to grow for the first time since mid-2011. But the rate was even more feeble than the Eurozone average.
The figures from Eurostat, the EU's statistics office, also showed that during 2013, GDP contracted by 0.4% in the Eurozone, but increased by 0.1% in the EU as a whole.
"The eurozone's recovery has moved up a gear," said Chris Williamson, chief economist of Markit.
"Not only has the pace of growth picked up to the fastest since the second quarter of 2011, but the recovery is also becoming more broad-based, encompassing core and so-called 'periphery' countries alike."
Earlier, French government figures indicated the country's economy grew by 0.3% in the last three months of 2013.
The INSEE statistical office also reported that growth was zero in the third quarter of 2013, revised up from an initial estimate of a 0.1% contraction.
The figures mean that the world's fifth-largest economy escaped falling back into recession.
Over the whole of 2013, the French economy grew by 0.3%.
The German economy also notched up higher growth in the October-to-December period.
The country's GDP expanded by 0.4% in the final quarter of 2013, after seeing growth of 0.3% in the previous three months, according to the federal statistics office, Destatis.
German manufacturers like Playmobil continue to help the eurozone economy
Destatis said the figures were boosted by exports and capital investment, but there were "mixed signals" from domestic demand, with a drop in household spending.
According to preliminary figures, Germany's economy grew by 1.3% in 2013, the statistics office said.
In general, the German figures were better than analysts had been expecting.
"Germany remains the economic stronghold of the eurozone," said economist Carsten Brzeski of ING.
"In fact, this morning's data was one of those positive surprises the eurozone has seen too seldom over the last few quarters. Let's hope it won't be the last one."
Italy’s fiscal deficit came in at 3% of gross domestic product last year, bang on the European Union’s ceiling for the second year running and in line with Rome’s most recent target.
The economy contracted by 1.9% in 2013, slightly more than the government’s forecast of -1.8%, following a GDP fall of 2.4% in 2012, slightly revised from -2.5%, national statistics bureau ISTAT reported.
Italy emerged from its longest post-war recession with marginal growth of 0.1% in the fourth quarter of 2013. Weak growth is expected to continue this year.
Most analysts expect growth of around 0.5% this year, about half the government’s official target of 1.1%.
Italy’s public debt, the highest in the eurozone after Greece’s, rose to a new record of 132.6% of GDP in 2013, ISTAT said, up from 127% the year before.
That was slightly below the most recent government target of 132.9%.
New Prime Minister Matteo Renzi has promised rapid and radical reform to tackle Italy’s weak economy and surging unemployment.
Slovenia finished February on a surprise high, with news that the economy in the fourth quarter of 2013 expanded by 2.1% year-on-year – the first three months of growth after eight consecutive quarterly declines.
The late upturn, however, proved insufficient to pull the year’s performance into positive territory. Grim data earlier in the year – the first three months was -4.6% compared to 2012 – meant the economy in 2013 contracted by 1.1%. Still, that’s a whole lot better than the 2.5% slump in output for 2012.
“This fourth quarter expansion comes as what you might call ‘an expected surprise’, but a surprise nonetheless – one that came earlier than expected,” Luka Oreskovic, principal of Eastbridge Strategies, a London-based CEE-focused policy advisory, told beyondbrics.
The Slovene economy has suffered a protracted recession virtually since the 2009 sluimp. There have been only “brief spurts in growth” in 2011, Oreskovic points out.
“It has finally rebounded as investment and economic activity throughout Europe has continued along the path of recovery and growth, which has increased Slovenia’s traditionally strong, though recently troubled, export sector,” he says.
The Slovene Statistical Office said the fourth quarter recovery was boosted by gross fixed capital formation, a broad measure of investment, which jumped by 5.9%, itself lifted by an 11.1% surge in gross fixed capital formation in construction – a sector devastated by the downturn in 2009.
Exports increased by 3.7%, slightly down compared to the previous quarter, while imports increased by 4.9%.
It all sounds hopeful, but are ordinary Slovenes, many of whom despair at the corruption and cronyism exposed amongst their political ‘elite’ in recent years, feeling these green shoots of recovery?
Not yet. Household consumption in the final quarter was unchanged compared to 2012, according to the statistics. This appears to be borne out by some anecdotal evidence.
Certainly, Slovenes were not tucking into bigger Christmas turkeys if the fourth quarter results at Perutnina Ptuj, the region’s largest poultry processor, are anything to go by.
“Our sales in Slovenia in Q4 2013 were on 99% compared to Q4 the year before, so our figures do not show a recovery directly,” Nada Krajnc, a board member at Perutnina, told beyondbrics.
They surely have not been taking more holidays, at least not at home. Domestic tourism was down last year by 3.4% in terms of overnight stays, more or less cancelling out the benefit from a rise in foreign traffic of 2.8%.
Andreja Tavcar, who runs a family hotel on the outskirts of Ljubljana, said that her bookings at the end of last year were good, helped by the Eurobasket international basketball competition in September. However, increased VAT rates had acted to temper demand.
Worse still, the first two months of 2014 were “very bad”, she says.
“It is getting better now, we have more business guests in March, but the first two months were dead. I heard that economy grew, so say the statistics, and I hope we’ll be getting out of recession soon, but for now it doesn’t feel like it, not to ordinary people.”
The Office for National Statistics (ONS) confirmed that the economy grew by 0.7% in the quarter, unchanged from its previous estimate. However, its estimate for growth in 2013 as a whole was cut to 1.8% from the initial reading of 1.9%.
The ONS said business investment in the fourth quarter rose 2.4% from the previous three-month period. Business investment was also up 8.5% from a year earlier.
Other factors helping growth in the final quarter of 2013 included a 0.4% rise in household spending and a similar contribution from net trade, as the balance between imports and exports improved.
Recent business surveys have suggested that the recent upturn in the UK economy has continued into 2014.
David Kern, chief economist at the British Chambers of Commerce, said the latest ONS figures were "positive news" and would underpin business confidence. But he added it was now "important to improve the quality of Britain's recovery".
"While it is encouraging that consumer spending is growing, we need to rely more on investment and net exports. These figures show a small move in the right direction, but there is still more to do."
Neil Prothero, deputy chief economist at manufacturers' organization EEF, said the "key question" for 2014 was whether companies were feeling confident to translate "investment intentions to concrete action".
"Next month's Budget must send out a powerful signal that government will continue to act on delivering a competitive business environment that will give the private sector confidence to invest," he added.
The recent recovery in the economy has raised the question of when the Bank of England will raise rates from their current historic low of 0.5%. Recent comments from Bank of England policymakers have indicated that rates will rise in the first half of 2015.
David Miles, member of the Bank of England's Monetary Policy Committee (MPC), told the BBC that interest rates would not rise in the next few months, adding the MPC was "not in a hurry" put rates up.
He said: "It may be that sometime next year might be the right time [to raise interest rates]. It is difficult to predict in advance."
The rise would be very gradual, when it did occur, he said.
After the recent experience of falling real wages, Mr. Miles said that as the economy continued to recover, wages would rise faster than inflation.
"It has been an extraordinary period, an extremely painful period, which has lasted five years, with people's incomes falling," he said.
McIlvaine Company
Northfield, IL 60093-2743
Tel: 847-784-0012; Fax: 847-784-0061
E-mail: editor@mcilvainecompany.com
Web site: www.mcilvainecompany.com