GDP UPDATE
July 2015
McIlvaine Company
TABLE OF
CONTENTS
Real gross
domestic product (GDP) edged down 0.2% at an annual rate in the first quarter of
2015, according to the third estimate from the Bureau of Economic Analysis. This
report reflects an upward revision of 0.5 percentage point to overall GDP
growth. The slower first quarter follows a solid increase of 3.6% at an annual
rate during the second half of 2014. Over the past four quarters, GDP rose 2.9%.
First-quarter growth was likely affected by a number of transitory factors
including unusually severe weather, the West Coast ports dispute, and various
measurement issues. A decline in net exports was another important contributor
to weak GDP growth. Indeed, net exports subtracted nearly 2 full percentage
points from quarterly GDP growth. Furthermore, structures investment subtracted
about 0.6 percentage point from GDP, reflecting reduced oil drilling in the wake
of last year’s decline in oil prices. Despite the decrease in GDP, real gross
domestic income—an alternate measure of economic output—increased 1.9% at an
annual rate in the first quarter.
The upward
revision to first-quarter GDP was spread across many components of economic
output. Personal consumption expenditures contributed 0.2 percentage point to
the upward revision with improvements in estimates of both goods and services
consumption. Private investment contributed another 0.3 percentage point with a
mix of small upward revisions to structures investment, intellectual property
investment, inventories, and residential investment. State and local government
investment contributed the remaining 0.1 percentage point to the upward
revision. Exports and imports saw offsetting revisions, leaving net exports
essentially unrevised on balance.
Most of
the first-quarter slowdown in business investment is explained by reduced
drilling and mining activity following last year’s large oil price decline.
Business fixed investment declined 2.0% at an annual rate in the first quarter
after growing 6.2% over the four quarters of 2014. More than half of that gap is
explained by the 49 percent annualized first-quarter decline in mining
exploration, shafts, and wells, which includes petroleum drilling. Despite the
large impact on first-quarter growth, mining and drilling comprised only 7% of
business fixed investment in 2014. Other structures investment beyond mining and
drilling—which is also sensitive to energy prices, but less so—also declined,
explaining roughly another tenth of the business investment slowdown. Equipment
investment and intellectual property investment rose in the first quarter, but
more slowly than their recent trend. These other categories explain about one
quarter of the slowdown in business fixed investment.
Canada’s
economy shrank for the fourth straight month in April as slumping crude-oil
prices continued to weigh on the economy.
Gross
domestic product, or the broadest measure of goods and services produced in the
economy, fell 0.1% in April from the previous month, Statistics Canada said,
following a 0.2% decline in March. Market expectations were for a 0.1% increase
in April, according to economists at Royal Bank of Canada.
The weak
performance had some economists suggesting the Bank of Canada will be forced to
cut interest rates again. The central bank cut its benchmark overnight target
rate by a quarter of a percentage point to 0.75% in January, but has since then
maintained a neutral stance on monetary policy based in part on the expectation
the economy would rebound fairly quickly from weakness in the first quarter.
April’s
reading was closely watched, given that it kicked off the second quarter, a
period widely expected to show signs of recovery in the Canadian economy after
it took a hit from sharply lower oil prices in the first quarter. GDP fell 0.6%
on an annualized basis in the first three months of 2015 as business investment
plunged in response to slumping crude-oil prices.
Some
economists suggested GDP could contract in the second quarter as a whole. Two
consecutive quarters of contraction would fit the definition of a recession used
by many economists.
“The
slight fall in GDP in April, coupled with the weak handoff from the prior
quarter, leaves us facing the probability that Q2 GDP could also be negative,”
CIBC World Markets Inc. said in a note.
A report
from Desjardins Capital Markets said the decline in GDP in April called into
question the economy’s ability to post growth of 1.8% in the second quarter as
expected by the Bank of Canada. That means the amount of slack in the economy is
even larger than believed, “making a [Bank of Canada] rate cut very probable at
its next meeting,” Desjardins said.
The
Canadian dollar edged lower after the data were released, and was recently worth
about 80.4 U.S. cents compared with 80.7 U.S. cents.
The data
prompted some gains in Canada’s bond market, with the yield on the benchmark
two-year bond dropping to 0.517% from 0.575% just before the report. The market
as a whole rebounded from earlier losses after the report, and is outperforming
the U.S. Treasury bond market.
Statistics
Canada said mining, quarrying and oil and gas extraction contracted 2.6% in
April, marking the sixth-consecutive month of declines. Wholesale trade rose
1.6% in the month, while manufacturing output fell 0.2%.
Falling
prices in China are helping to mask a significantly worse economic slowdown than
official figures suggest.
An
analysis of nominal gross domestic product growth rates shows that the Chinese
economy slowed from quarterly year-on-year expansion of nearly 20% in 2011 to
just 5.8% growth in the first quarter of this year.
In
contrast, national output fell from 9.5% to 7% over the same period using
inflation-adjusted real GDP growth rates, indicating a much smoother and more
gradual “soft landing” for the world’s second-largest economy.
The cause
of the much sharper fall in nominal growth rates is due to the end of steady
inflation, which persisted from the late 1990s until a few years ago, when
producer prices started to fall and consumer prices began growing at a much
slower pace.
“Depending
on how you measure it, China is already in deflation,” said John Zhu and Izumi
Devalier, two HSBC economists, in a report published last week. “Producer prices
have been in sustained and deep deflation for over three years. CPI [consumer
price indices] inflation in China is now also falling to multi-year lows.”
Hit by
falling profits and much slower nominal growth rates, Chinese listed companies
are reporting much worse revenue growth than their American or Japanese
counterparts.
Except for
a brief period during the financial crisis, China’s official “GDP deflator”,
which is used to adjust nominal GDP to strip out the effects of inflation and
calculate real GDP, has been in positive territory for nearly two decades.
It has
almost always resulted in headline real GDP growth that is lower than nominal
GDP growth.
But the
GDP deflator turned negative in the first quarter of this year, which helped to
flatter nominal GDP growth of 5.8% and provide a headline real GDP growth figure
of 7%, which is also Beijing’s official growth target for this year.
“A lot of
the arguments over whether China’s official growth rate of 7% is real or not
actually miss the point that the nominal GDP growth rate has fallen from more
than 20% to less than 6% in the first quarter, which is a much more dramatic
slowdown that many people realize,” said Chen Long, China economist at Gavekal
Dragonomics in Beijing.
Nominal
growth rates are more important for individual companies since economy-wide
inflation, or deflation, does not affect them all equally.
Revenue
growth for companies listed in mainland China, which excludes volatile energy
and financial stocks, closely matches the trend in nominal growth rates over the
last decade.
Average
revenue growth for listed companies slumped from nearly 30% expansion in the
first quarter of 2011 to just 0.7% in the first quarter.
“The
slowdown in nominal GDP is consistent with what the listed companies are
reporting,” said Rodney Jones, founder of Wigram Capital and former head of
Asian research for Soros Fund Management. “Growth of just 0.7% from a year
earlier in the first quarter is significantly lower than the revenue growth rate
we are seeing in either the US or Japan.”
The first
quarter figure represents the worst performance for listed companies since the
depths of the 2008-09 financial crisis.
By
contrast, Chinese equities have been caught in a raging bull market. In spite of
a 13% decline last week the benchmark Shanghai Composite Index is still up by
more than 125% from a year ago.
Chinese
investors hold shares for an average of only four weeks, according to Gavekal
Dragonomics research, suggesting that many are not overly concerned with the
long-term fundamentals, such as revenues or profits, of listed companies.
The
University of Hong Kong has downgraded its estimate for the city's economic
growth to 2% in the second quarter of this year from 2.4% previously because of
poor external demand and economic turmoil overseas.
The Apec
studies program of the Hong Kong Institute of Economics and Business Strategy at
the university also blamed the city's possible slower growth on the long-lasting
effects of a stronger US dollar, to which the Hong Kong dollar is pegged.
With the
uncertainty of mainland China's slowdown, the delayed resolution of Greece's
debt crisis and the uncertain timing of a much talked about rise in interest
rates in the United States, Hong Kong's economy is expected to grow moderately
this year, the university said.
It
predicted economic growth would taper off further to 1.7% in the three months to
September 30, from the same period last year.
For the
full year, it expected the city's real gross domestic product to grow 2%- below
the 2.5% for last year but within the government's prediction of a 1 to 3% rise.
"Stalled
external demand continues to cloud Hong Kong's economic performance," said Dr
Wong Ka-fu, principal lecturer of economics at the university.
Despite an
increase in local consumption, growth is expected to be weighed down 1.2
percentage points by falling external demand, HKU said.
Raymond
Yeung Yue-ting, senior economist at ANZ in Hong Kong, warned uncertainties
caused by Greece's debt crisis might lead to continued volatility in global
stock markets and dampen Hongkongers' spending in the coming months, further
dragging down the local economy. "There isn't any economic boost like last
year's strong sales of new mobile phones," he said.
Kelvin Lau
Gin-yip, economist and strategist at the Hong Kong branch of Bank of
Communications, pointed out that the Hong Kong economy had been growing steadily
within the range of 1 to 3% for several years.
"Despite a
downward trend, Hong Kong's economy is unlikely to take a dive," he said, adding
that employers were still hiring.
HKU
expected the job market to stay tight in the near future, with the unemployment
rate rising from 3.2% last quarter to 3.3% this quarter.
India’s
GDP crossed the $2-trillion mark in 2014, according to data released by the
World Bank in Washington. After taking 60 years to reach the $1-trillion mark,
India added the next trillion in just seven years.
The World
Bank data also show that India’s gross national income per person rose to $1,610
(around Rs. 1 lakh) a year during 2014 from $1,560 the previous year. An
analysis by The Hindu found that it would take India a little more than a decade
to rise from its current ‘lower middle income’ category to the ‘upper middle
income’ level.
India’s
growth rate, at 7.4% in 2014, makes it the fastest growing major economy along
with China’s, which is a whopping $10.4 trillion in size. The Indian economy, at
$2.06 trillion, has almost doubled in size since the financial crisis hit the
country in 2008, and has more than quadrupled from the start of this millennium.
Despite
its increase in per capita gross national income (GNI), India has remained in
the ‘lower middle income’ category ($1,046-$4,125). Using the World Bank’s data,
The Hindu extrapolated from India’s average annual growth rate in per capita GNI
over the last decade — of 8.9% — and found that it would become an ‘upper middle
income’ country ($4,126-$12,735) in 2026, a little more than a decade from now.
This will put it in the category China occupies now.
China,
however, with a per capita GNI of $7,380 and an average annual growth in this
parameter of 15.6%, will leave the ‘upper middle income’ category by 2018 to
become a ‘high income’ country like the U.S., the U.K., Germany and Japan. It
will take India till 2039 to reach that level, at the assumed growth rate.
The World
Bank’s data on gross national income per capita — the total value added by all
producers within the country, plus income received from citizens working abroad,
divided by the population of the country — show Bangladesh, Kenya, Myanmar,
Tajikistan, Mongolia, Paraguay, Argentina, Hungary, the Seychelles and Venezuela
have shifted their income categories for the better. For example, Bangladesh,
Kenya, Myanmar, and Tajikistan are now ‘middle income’ countries from being ‘low
income’ nations.
Gross
national income measures the total value added by all citizens of a country,
whether in India or abroad. Gross domestic product (GDP), on the other hand, is
the total value of a country’s production and services within its boundary,
whether by its nationals or foreigners.
“While we
need to measure development progress in different ways, income-based measures,
such as GNI, remain the central yardstick for assessing economic performance,”
said Kaushik Basu, World Bank Chief Economist and Senior Vice-President.
“Our
latest data show that in terms of this indicator, the world’s economic geography
has changed a lot. In 1994, 56.1 per cent of the world’s population — 3.1
billion people — lived in the 64 low-income countries. In 2014, this was down to
8.5 per cent, or 613 million people living in 31 countries. Over the last one
year itself, four nations crossed over to the lower-middle income category,” he
said.
The World
Bank downgraded its GDP growth forecast for Indonesia on), forecasting Southeast
Asia's largest economy to grow by 4.7% this year, the lowest forecast for the
country since 2009.
The World
Bank said the country's private consumption, which represents 55% of Indonesia's
GDP, is expected to continue to weaken further.
Lower car
and motorcycle sales, lower consumer sentiment and monthly trade data provided
strong signals that private consumption softened in the second quarter.
The World
Bank's flagship quarterly report said fixed investment growth is less than
projected owing to lower than expected public capital spending.
It said
persistent lower commodity prices and tighter credit conditions have not changed
substantially since Q1 2015.
In
addition, uncertainty remains high with respect to financing conditions such as
the Federal Reserve interest rate policy.
Morocco's
economy grew 4.3% year-on-year in the second quarter of 2015 year-on-year, up
from 4.1% in the previous three months, due to higher agricultural output, the
country's planning agency said recently.
Cereal
production jumped 64%, helping push up overall agricultural output by 15.1%
after a year-on-year 12.5% rise in the first quarter, the agency said.
Morocco is
on course to harvest a record cereal crop of 11 million tons this year after
favorable rainfall.
Agriculture accounts for more than 15% of the Moroccan economy.
The trade
balance deficit fell 13.4% as world oil prices fell and Moroccan exports
improved, the agency said. The kingdom is one of the biggest energy importers in
the region.
Non-agricultural sector growth was 2.1% higher from a year ago and the agency
said the pace of growth would be steady in the third quarter with an expected
GDP rise of 4.7%.
The
central bank and the government said growth would reach 5% for the full year.
The agency forecasts 4.3%.
The
Turkish economy is expected to expand between 2 and 2.5% this year, falling far
short of a government target of 4%, after a June election failed to produce a
single-party government, government officials said.
The
heightened political uncertainty, including the possibility Turkey will fail to
form a coalition government and instead hold a snap election, is suppressing
investment, the economy officials told Reuters on condition of anonymity.
The euro
zone crisis, as well as violence across Turkey's borders in Syria and Iraq, were
also hampering investment, they said. Domestic consumption has been restrained
due to politics, as Turkey held three elections - regional, presidential and
parliamentary - since March 2014.
"Looking
at the current situation, growth may be about 2%; growth of 2.5% would be a good
rate," one senior official said. Even if measures to boost investor confidence
are taken, growth would still only be 3%, he said.
Gross
domestic product (GDP) grew 2.3% in the first quarter, according to Turkish
Statistical Institute.
Turkey's
medium-term plan outlined a target of 4%.
Another
official said that depending on the result of coalition talks between political
parties, which are due to formally start this week, GDP could still increase by
3%, while 2% is a "more pessimistic" expectation.
Turkey
enjoyed rapid growth of 9.2% and 8.8% in 2010 and 2011, but it slowed sharply to
2.9% in 2014, which economists have blamed on a lack of structural reforms to
add more value to production, as well as stresses in the country's main export
markets of Europe and the Middle East.
The lira
firmed to 2.69 from 2.71 earlier in the day. The main BIST 100 share index rose
0.81 percent to 81,876.19 at 1215 GMT. The benchmark 10-year government bond
yield traded at 9.47%.
Falling
exports are likely hindering growth. The medium-term plan had targeted exports
of $173 billion by year end, but Economy Minister Nihat Zeybekci said last week
they would reach $158.5 billion.
Romania’s
government spending represented less than 35% of the GDP last year, according to
European Union’s statistical office Eurostat.
By
comparison, government spending accounted for almost half of the GDP in the EU
(48.1%), ranging from 57% in Finland, France and Denmark, to less than 35% in
Romania or Lithuania.
In all EU
member states, social protection was the most important area of government
spending. Its share varies from 28.6% of the total government expenditure in
Cyprus to 44.4% in Luxembourg. Romania’s government spent about a third of its
money (32.6%) on social protection.
More than
a quarter of the public spending went on pensions (25.1%), one of the highest
rates in Europe. Economic expenses had the second biggest share in Romania’s
public spending, some 17.5%. Only Greece and Slovenia, which bailed out their
banks had higher shares for economic expenses.
Romania
ranks third in the EU for money spent on ‘public order and safety’ with a 6.3%
share of the total government expenditure, after Slovakia (8%) and Bulgaria
(7%). However, Romania is third to last for the education’s share in the total
government expenditure, with 8.1%. Only Greece (7.6%) and Italy (8%) have lower
rates.
The Office
of Budget Responsibility (OBR) has revised downwards its forecast of UK gross
domestic product (GDP) growth in 2015 to 2.4%.
This is
slightly lower than the OBR's previous forecast, made in March, of 2.5% GDP
growth in 2015. Chancellor George Osborne blamed lower forecasts on slower
global growth, in his Budget statement.
The OBR's
forecast for 2016 was unchanged at 2.3%.
'The UK is
growing faster than any other advanced economy,' he said, in the first wholly
Conservative Budget since 1996.
He also
said that current budget deficit as a percentage of GDP is expected to be
reduced to 3.7% this year and 2.2% in 2016/17. It was 10.2% of national income
in 2010.
'Britain
has turned the corner and left the age of irresponsibility behind,' he said.
He
predicted that a current budget deficit surplus would be reached by 2019/20.
Osborne
said the situation in Greece has shown the need to move ahead with his program
of spending cuts.
'If a
country does not take control of its borrowing, the borrowing takes control of
the country,' he said.
He also
announced a new productivity plan that had been put together with help from Jim
O'Neill, the former Goldman Sachs chief economist who has been made a Treasury
minister.
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