GDP UPDATE
August 2015
McIlvaine Company
TABLE OF
CONTENTS
U.S. economic growth accelerated in the second quarter as a pick-up in consumer
spending offset the drag from soft business spending on equipment, suggesting a
steady momentum that could bring the Federal Reserve closer to hiking interest
rates this year.
Gross domestic product expanded at a 2.3% annual rate, the Commerce Department
said recently. First-quarter GDP, previously reported to have shrunk at a 0.2%
pace, was revised up to show it rising at a 0.6% rate.
The revision to first-quarter growth reflected steps taken by the government to
refine the seasonal adjustment for some components of GDP, which economists said
left residual seasonality in the data, as well as new source data.
The Fed has described the economy as expanding "moderately" while upgrading its
view of the labor market and saying housing had shown "additional" improvement.
The Fed's assessment left the door open for a possible hike in interest rates in
September, which would be the first rise since 2006.
While second-quarter GDP growth was a bit below economists' expectations for a
2.6% rate, the growth composition pointed to firming fundamentals.
A measure of private domestic demand, which excludes trade, inventories and
government expenditures, increased at a 2.5% rate after rising at a 2.0% pace at
the start of the year.
Growth in the second quarter was boosted by consumer spending as households used
some of the windfall from cheaper gasoline in late 2014 and early this year to
go shopping. The strengthening labor market also encouraged consumers to loosen
their purse strings.
Consumer spending, which accounts for more than two-thirds of U.S. economic
activity, grew at a 2.9% rate from a downwardly revised 1.8% pace in the first
quarter. Consumer spending was previously reported to have increased at a 2.1%
rate at the start of the year.
The saving rate fell to 4.8% from 5.2%.
A firming housing market also supported the economy in the second quarter, as
did exports, and state and local government spending.
However, the energy sector continued to weigh on growth as it struggles with the
lingering effects of deep spending cuts by oil-field companies like Schlumberger
and Halliburton in the aftermath of a more than 60% plunge in crude oil prices
last year.
Business spending on structures fell at a 1.6% rate after stumbling 7.4% at the
start of the year. Equipment spending fell at a 4.1% rate.
Spending on mining exploration, wells and shafts plunged at a 68.2% rate, the
largest decline since the second quarter of 1986. This category dropped at a
44.5% pace in the first quarter.
But there are signs that the energy spending rout might be nearing an end. Data
showed U.S. energy firms added 21 oil rigs last week, marking the third increase
over the past 33 weeks.
Schlumberger said it believed the North American rig count may be bottoming and
that a slow rise in both land drilling and completion activity could occur in
the second half of the year.
Exports rebounded in the second quarter, despite a strong dollar, while imports
rose moderately. That left a smaller trade deficit that added 0.13 percentage
point to GDP growth.
Inventory investment slowed after the first quarter's brisk pace. Businesses
accumulated $110.0 billion worth of merchandise, down from $112.8 billion in the
first quarter. While inventories did not add to second-quarter GDP growth, that
is good news for the remainder of the year.
With oil prices having risen during the second quarter and consumer spending
having picked up, inflation pressures accelerated sharply.
The personal consumption expenditures price index rebounded at a 2.2% rate, the
fastest since the first quarter of 2012, after falling at a 1.9% rate at the
start of the year. Excluding food and energy, prices increased at a 1.8% pace.
Canada’s economy sank further into contraction in May, shrinking for a fifth
straight month as the oil shock takes its toll on the energy producing nation.
The five-month decline marks the longest slump since the 2008-2009 recession,
and virtually guarantees output shrank for a second straight quarter. The
reading vindicates Bank of Canada Governor Stephen Poloz’s July 15 decision to
cut borrowing costs for a second time this year.
“This was a very disappointing print and opens up the downside risk to the Bank
of Canada’s forecast,” said David Tulk, chief macro strategist at
Toronto-Dominion Bank, adding the slump is looking even deeper than a technical
recession, defined by economists as two consecutive quarterly declines in
output. “The breadth of declines are starting to increase.”
Gross domestic product fell 0.2% during the month, bringing the reduction since
the start of the year to 0.8%. Economists surveyed by Bloomberg News projected
no change in May output.
To avoid a second-quarter contraction, the economy would have had to expand at
least 1% in June, something that hasn’t happened in more than a decade, the
agency said.
“There is no sugar-coating this one,” Doug Porter, chief economist at Bank of
Montreal, said in a note to investors. “While we believe the five-month string
of declines is likely to end in the next monthly report, that’s cold comfort
following a run of disappointment.”
The report is a setback for Prime Minister Stephen Harper, who is poised to
formally kick off an election campaign and is running on his economic
stewardship.
The latest growth numbers show that China's economy is trundling along,
expanding at a pace that is slightly faster than analysts expected.
Gross domestic product expanded by 7% in the second quarter, compared to the
same period last year, according to data released by China's National Bureau of
Statistics.
While the growth rate is slightly faster than the 6.9% figure expected by
economists, it matches the 7% GDP growth rate from the first quarter, as well as
Beijing's growth target for the full year.
Markets dropped in China after the numbers came out -- stocks lost 3% in
Shanghai and 4.2% in Shenzhen.
There's no question about it: After years of breakneck growth, China's economy,
the world's second-largest, is now slumping. Economists expect to see 6.95%
annual GDP growth this year, and even slower expansion at 6.5% in 2016,
according to a CNNMoney survey.
"We do anticipate that Beijing will stay on the accommodative track for monetary
and fiscal policies, despite improved growth prospects," wrote Credit Suisse's
Dong Tao in a research note.
China's central government has already cut interest rates three times this year
-- most recently, just two weeks ago. Experts say the rate cut came earlier than
expected, likely as a defense against a worrying stock market plunge over recent
weeks.
Another rate cut is expected in the second half of the year, along with a
reduction in the amount of cash that banks are required to keep on reserve.
"With the drag from the structural slowdown in property and heavy industry now
easing, we think that growth is on track to slow only gradually over the course
of the next few years," wrote Julian Evans-Pritchard at Capital Economics.
Maintaining a bullish stance on the Indian economy, Japanese brokerage Nomura
projected an 8% GDP growth for the current fiscal year while retaining its
Sensex target at 33,500 by December.
"We are of the view that India is in the initial stages of business cycle
recovery," Nomura India Chief Economist Sonal Varma told reporters here.
"We are expecting growth at around 8% in FY16 versus 7.3% in FY15," she added.
Expecting the business cycle to pick up in the coming two quarters, Varma noted
that a number of factors such as policy efforts from both the RBI and government
support the projections for higher growth.
Government forecast GDP to grow at 7.8% in FY16, while RBI pegs it at 7.6 %.
Falling cost of capital, cyclical and structural improvement in growth, a
positive terms-of-trade shock are some of the reasons identified for positive
outlook towards the capital markets, she added.
Indonesia's gross domestic product (GDP) grew 4.67% in the second quarter of
2015, lower than 2014's second quarter figure of 5.03% and 4.72% growth in the
first quarter of 2015, the country's statistics bureau said.
The Q2 GDP growth is its slowest since 2009 and Indonesia's economy grew 4.7%
during the first half of 2015.
Head of the Indonesia's statistics bureau, Suryamin, said that household
spending slowed year-on-year, growing 4.97% compared to 5.1% on the second
quarter of 2014. "The economic slowdown is not only happening in Indonesia, but
also in US, China and Singapore," he said.
Indonesia's annual economic growth has been slowing in recent years, with GDP
growth of around 5.7% in 2013 and 5.02% in 2014. The government has targeted a
5.7% GDP growth for 2015.
Standard Chartered Bank expects Malaysia’s economy to grow 4.2% year-on-year
(y-o-y) for the second quarter of 2015 (2Q15), lower than the gross domestic
product (GDP) growth of 5.6% in 1Q15, due to the impact of the goods and
services tax that was implemented in April.
In a note, the bank said consumer and business sentiment had probably weakened
in 2Q15 compared with the preceding quarter, but manufacturing and mining
production were likely stronger in 2Q15 due to positive net external demand.
“Malaysia registered an average trade surplus of RM6 billion, versus RM7.1
billion in 1Q15, likely making a positive net export contribution to growth and
supporting the current account surplus in 2Q15,” said Standard Chartered.
Going forward, the bank expects a modest rebound in GDP growth in the latter two
quarters of 2015, but said if growth slows significantly below 4%, Bank Negara
Malaysia is expected to loosen monetary policy to boost growth.
On the industrial production (IP) figures for June, the bank forecasts a 4.7%
y-o-y expansion, slightly higher than the 4.5% increase seen in May.
“Mining production likely supported the headline print. It grew 9% y-o-y in May,
supported by an 18.8% increase in crude oil production. June IP was likely
supported by resilient externally oriented production as China’s growth
stabilized in the month,” it said.
For the latter half of the year, Standard Chartered expects muted IP growth, in
view of dampened global growth.
Singapore's final second-quarter gross domestic product likely contracted 4.6%
from the previous quarter on an annualized basis, in line with the government's
earlier estimate, a Reuter’s poll showed.
The median forecast in a Reuter’s survey of 11 economists also showed that GDP
probably expanded 1.5% in the April-June quarter from a year earlier, less than
the 1.7% in the advance estimate.
Expectations for a slight downward revision to second-quarter GDP growth had
grown after data last month showed that industrial production in June shrank
4.4w% from a year ago, driven by a slide in marine and offshore engineering
output and weakness in electronics and pharmaceuticals production.
Taiwan in the second quarter didn’t come close to reaching the government’s GDP
growth forecast issued only in May, underscoring pressure from the easing
expansion in mainland China’s economy and inventory build-up in the electronics
industry.
Taiwan’s GDP rose by 0.64% in the three months to June, less than a projected
increase of 3.05% issued in May, the Cabinet’s statistics office said.
A 9.8% drop in exports in the second quarter dragged down GDP and
manufacturing, the government said.
Visitors from China, an important source of growth for Taiwan’s tourism
industry, fell 2.7% in second quarter from a year ago, the first decline more
than three years.
Taiwan’s benchmark stock index eked out a 0.2% rise yesterday, but has fallen 7%
in the past month. Shares in Hon
Hai Precision, the big supplier to Apple led by billionaire Terry Gou, declined
by 0.2%.
The GDP increase was the smallest in three years.
The 0.64% gain compared with an increase of 3.87% in the second quarter
of last year and 3.37% in the first quarter of 2015 versus a year ago.
Taiwan’s economic prospects are likely to be an issue in the upcoming
presidential election in January. Incumbent Ma Ying-jeou from the relatively
China-friendly Kuomintang or Nationalist Party isn’t allowed to seek a third
term, and opposition leader Tsai Ing-wen currently tops polls.
Beijing claims Taiwan as a province, and closer economic ties in the past
two decades have eased political differences between the two sides.
The Czech National Bank (ČNB) improved its GDP growth estimate for this year to
3.8% from the previous 2.6% and downgraded its estimate for next year to 2.8%
from May's 3.2%, according to a presentation ahead of the bank's press
conference.
The ČNB expects lower inflation — 1.6% in Q3 next year and 1.8% in the last
quarter of 2016, while its previous forecast put the values at 2% and 2.1%,
respectively.
The need for significant monetary easing continues, the ČNB said in the
presentation.
“From this point of view, the recent firming of the crown is an unfavorable
factor tightening monetary conditions and delaying fulfillment of the inflation
target,” the ČNB said.
According to the new forecast, meeting the 2% inflation target will be
sustainable as of the beginning of 2017.
ČNB governor Miroslav Singer said that the Bank Board had no serious debate
about negative interest rates.
Some economists have speculated recently that interest rates below zero could be
another step the ČNB would take as part of monetary easing.
“Those expecting a more pronounced
statement on the current exchange rate from the ČNB governing board had to be
disappointed,” said Akcenta analyst Miroslav Novák.
“Should we use one word to characterize today's meeting, it would be caution,”
he added.
The ČNB is not worried about the currency that is currently traded at stronger
levels or growing international reserves, he said, adding that the crown's
reaction to the outcome of the meeting was minimal.
Singer refused to specify the size of the intervention in July.
The crown is trading near 27 Kč per euro in the past few days.
The ČNB is not answering questions about its possible interventions in the
market.
A few days ago, however, it said that it intervened in the market on Friday,
July 17, which was its first action since November 2013.
“In fact the intervention regime is
automatic,” Singer said. The governing board rather paid attention to the fact
how long the bank did not make any currency interventions, he added.
The central bank sees risks to the estimated development as almost balanced.
“Moderate anti-inflation risks may be caused by falling oil prices,” said
Singer.
The ČNB forecasts stable interest rates that will be maintained at the current
very low levels. It will continue using the exchange rate as a monetary policy
tool until the end of 2016.
The bank board said it will not end the forex intervention regime earlier than
in the second half of 2016.
“The crown's rate will be Kc27 per euro
or it will stay weaker at least until mid-2016,” Singer said.
The economy will slow down next year as one-off factors seen this year will fade
away. The recent currency gains will be another reason behind the slowdown, said
Singer.
The economy will expand by 2.8% in 2017, the ČNB said.
In a new macroeconomic forecast, the Finance Ministry improved significantly its
estimate of GDP growth this year - to 3.9%. A surprising 4% annual GDP growth in
the first quarter was behind the improvement.
The good Q1 result has made also other institutions improve their estimates.
They predict economic growth of over 3% this year.
Sanctions linked to the Ukraine crisis could end up costing Russia 9% of its
gross domestic product, the International Monetary Fund said recently. Russia's
economy is showing signs of stabilization after slumping under pressure from
Western financial sanctions and Russian counter-measures.
Low international prices for its oil exports have added to pressure on the ruble
and government finances.
"The effects of sanctions in terms of external access to financial markets and
new investment technology will linger," the Fund said, summing up the findings
of a mission in May.
Last year Western countries imposed restrictions that limit international
financing for major Russian banks and energy companies, and also high-tech
exports to the energy sector. Russia retaliated by banning imports of most
Western food products.
The Fund estimated the immediate effect of sanctions and counter-sanctions had
been to wipe between 1 and 1.5% off GDP, rising to 9% over the next few years.
These model-driven results were subject to significant uncertainty, it
cautioned.
The IMF also forecast "weak" economic growth of around 1.5% annually in the
medium term. Russia's economy was growing around 7% a year before the 2008
global financial crisis.
"Slow-moving structural reforms, sluggish investment and adverse population
dynamics are all part of the picture," it said, reiterating its long-standing
advice for Russia to reduce the role of the state in the economy, protect
property rights and boost competition.
Russia would nevertheless return to economic growth next year as a weaker ruble
boosted competitiveness, external demand increased and domestic financial
conditions normalized, the IMF said.
It predicted 0.2% growth next year following a 3.4% contraction this year, in
line with its previous forecasts.
Inflation was seen slowing to around 12% by the end of this year and 8% by the
end of next year - more pessimistic than the central bank's forecast of 7% by
mid-2016.
The IMF said the central bank's policy of gradually reducing its main interest
rate in line with underlying inflation was appropriate, but the pace of
reductions needed to be "prudent".
It supported limited fiscal stimulus this year, but added: "An ambitious and
credible medium-term fiscal consolidation program is necessary to adjust to
lower oil prices."
The IMF recommended revising Russia's fiscal rule, which links government
spending to the historical oil price, so that the recent oil price fall could be
more quickly reflected.
The Fund also said such fiscal adjustment would be hard to achieve if Russia
indexes pensions next year at a cost of 1.1% of GDP. Russia typically indexes
pensions but has yet to decide whether to do so next year.
"Detailed fiscal measures will also be critical for the credibility of the
consolidation program," the IMF said.
The British economy grew by 0.7% over the past three months, according to
figures released by the National Institute of Economic and Social Research
(NIESR).
Figures from the London-based economic think-tank showed that growth in
Britain's GDP in the three months ending in July was 0.7%, the same as in the
three months ending in June.
Compared to the same three month period in 2014, this implies a year-on-year
growth rate of 2.7%, which is consistent with NIESR's released quarterly
forecast of 2.5% growth in GDP in 2015.
NIESR's economic forecast came on the same day as the central bank, the Bank of
England, released its quarterly inflation report, which predicted growth of 2.8%
for 2015.
Jack Meaning, research fellow at NIESR and co-author of the forecast, told
Xinhua, "This shows that growth will remain reasonably strong."
"It's also indicative that the Bank's (BOE) assessment is probably on the right
lines. They are expecting growth in the second half of the year to keep up and
that is why our estimate for the year as a whole is staying at 2.5%," said
Meaning.
The BOE's rate-setting Monetary Policy Committee revealed that it would continue
to hold the Bank Rate at 0.5%, and Meaning said he continued to expect the first
interest rate increase to come in February, 2016.
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