GDP UPDATE
June 2015
McIlvaine Company
TABLE OF
CONTENTS
Kyrgyzstan
1. Real
gross domestic product (GDP) fell 0.7% at an annual rate in the first quarter of
2015, according to the second estimate from the Bureau of Economic Analysis. The
decline follows an increase of 3.6% at an annual rate during the second half of
2014. First-quarter growth was likely affected by a number of factors including
especially harsh winter weather in the first quarter (see point 3) and a spike
in personal saving (see point 4). A decline in the trade balance was another
major contributor, partially reflecting the continued drag on U.S. exports from
the slowdown in foreign growth. Indeed, net exports subtracted nearly 2 full
percentage points from quarterly GDP growth. Structures investment subtracted
about 0.7 percentage point from GDP, likely reflecting reduced oil mining in the
wake of last year’s decline in oil prices.
Real
private domestic final purchases (PDFP) — the sum of consumption and fixed
investment — rose 1.2% at an annual rate in the first quarter, a faster pace
than overall GDP. Real PDFP growth is generally a more stable and
forward-looking indicator than real GDP, as it excludes volatile components like
inventories, net exports, and government spending. PDFP is a better predictor of
next-quarter GDP than GDP itself. The year-over-year growth rate of PDFP rose
this quarter to 3.4%.
2. The
entire downward revision to first-quarter GDP can be accounted for by downward
revisions to two especially volatile components of economic output: inventory
investment and net exports. Inventories and net exports subtracted a combined
1.1 percentage points from annualized GDP growth relative to the Bureau of
Economic Analysis’ first estimate. At the same time, business investment added
0.2 percentage point more than originally estimated. Other small revisions to
the contributions of personal consumption expenditures and residential
investment offset one another.
3. Over
the past decade, first-quarter GDP growth has averaged a considerably slower
pace than the other three quarters. Economists have debated whether this gap
reflects a problem with the algorithms used to seasonally adjust GDP data
(“residual seasonality”), especially harsh winter weather in recent years, or
noise. The seasonal adjustment process should remove the growth effects of
“normal” winter weather, but particularly harsh winters will still reduce
seasonally adjusted output. And weather in the first quarter was especially
harsh: Q1 was only the fourth quarter in 60 years on record with three or more
snowstorms sufficiently severe to be rated by the National Climatic Data
Center’s Northeast Snowfall Impact Scale (NESIS). The historical relationship
between weather and first-quarter growth suggests that weather may have reduced
annualized growth by about a full percentage point this quarter, and by about
0.6 percentage point on average over the past decade. That effect accounts for
much, but not all, of first-quarter underperformance since 2005.
The debate
so far over the cause of first-quarter underperformance has tended to treat
residual seasonality and weather effects as analytically distinct explanations.
However, to the extent that worsening winter weather is part of a long-term
trend rather than a random occurrence, changing weather patterns may be related
to residual seasonality. A seasonal adjustment algorithm should adjust for
effects of normal weather within a particular quarter—and to the extent that
global climate change leads to a new “normal” for weather, seasonal adjustments
will eventually catch up. Indeed, first-quarter underperformance (defined as the
difference between GDP growth in the first-quarter and the rest of the year) has
tended to increase over the past ten years, in parallel with intensifying winter
weather.
4.
Consumers have so far saved most of their windfall gains from last year’s energy
price decline. Since June, national average gasoline prices have fallen more
than $1 per gallon, providing the equivalent of about a $700 tax cut per
household. Looking over the past year, energy consumption as a share of
disposable personal income has declined by 1.1 percentage points, leaving more
space in consumer checkbooks to save and spend. To date, however, households
appear to have put most of those gains in the bank, as the personal saving rate
has risen by 0.6 percentage point over the past four quarters. Just over the
last quarter, the personal saving rate rose 0.8 percentage point—an unusually
large increase that is at the 88th percentile of historic increases.
Historically, the personal saving rate has tended to revert to its short-term
mean; temporary spikes like this one do not usually persist. If the saving rate
returns to normal levels with continued growth in real disposable personal
income and no major resurgence in gasoline prices, personal consumption growth
is likely to increase. If the saving rate returns to its previous level by the
end of 2015, consumer spending would grow at a nearly 4% annual rate for the
final three quarters of the year. If the saving rate remains constant at the new
higher level, consumer spending growth would also pick up somewhat to a 2.5%
annual rate for the final three quarters of the year. Given the current
forecasts for growth in disposable personal income, the saving rate would have
to rise by another 0.4 percentage point by the end of the year to continue the
1.8 percentage point annualized growth rate in Q1.
All told, the difference between a mean reverting saving rate and a
rising saving rate is about 0.8 percentage point for GDP growth for the four
quarters of 2015.
5. Gross
domestic income (GDI)—an alternate indicator of economic output that would equal
GDP absent measurement error—grew an estimated 1.4% at an annual rate in the
first quarter, faster than estimated GDP. Over the last four quarters, real GDI
grew 3.6%, as compared with the 2.7% growth in real GDP over that period. GDP
gauges overall activity by measuring the final expenditures of households,
businesses, governments, and trading partners in a given time period, while GDI
measures the incomes generated during that production process. If we had perfect
information, the two measures would equal one another: they are conceptually
identical as a measure of economic activity. But because the data underlying
each are gathered from different sources, they often differ substantially in
practice due to measurement error. This quarter, although GDP fell at a 0.7%
annualized rate, GDI rose at a 1.4% annualized rate. This 2.1 percentage point
gap reflects the inherent uncertainty underlying measures of aggregate output,
and underscores the importance of focusing on multiple data sources and longer
term trends. Some economists track the average of the two measures as a more
stable gauge of activity, a measure BEA will start reporting in July. The
average of GDP and GDI rose 0.3% at an annual rate in the first quarter. While
combining information from GDP and GDI can help reduce measurement error about
what actually happened in the current period, PDFP (see point 1) may provide a
better indication of growth in future periods because it omits noisy economic
developments.
Brazil’s
economy shrank in the first quarter, a bad start to the year for President Dilma
Rousseff, who is under pressure to cut spending and raise taxes even as a
recession looms.
The
contraction, 0.2% in the first quarter from the last quarter of 2014, was less
than the 0.5% forecast by economists consulted by The Wall Street Journal.
The
better-than-expected result is little consolation for Ms. Rousseff, who faces a
year of weak economic growth and a likely recession amid high interest rates,
high inflation, tax increases and unpopular budget cuts. Ms. Rousseff was
re-elected at the end of last year, and has had to reverse several of her
previous economic policies to try to correct the results of her first
government.
“Despite
better-than-expected first quarter numbers, looking ahead, we have a very
negative scenario,” said Flavio Serrano, an economist at BES Investimento. “We
already have retail and industry numbers in the second quarter that are very
negative. In civil construction we have very bad numbers, moreover consumer
confidence is very low.”
Brazil’s
gross domestic product shrank 1.6% in the quarter from the same period a year
earlier, according to the country’s statistics agency. Mr. Serrano forecasts a
fall in GDP of 1.5% this year, down from a previous estimate of a decline of 1%.
Ms.
Rousseff’s government last week said it would cut 69.9 billion reais ($22
billion) in spending already budgeted for this year as it tries to narrow its
budget deficit and maintain the country's coveted investment-grade credit
rating. Ms. Rousseff’s efforts led to a 1.3% decline in government spending in
the first quarter, a reduction that is rippling through other parts of the
economy.
Bills for
government contracts aren’t being paid on time, and from October 2014 to April
of this year, about 293,000 workers in the construction industry were laid off,
according to Jose Carlos Martins, the president of Brazilian construction sector
trade group CBIC.
“The way
things are going so far, there will be a huge negative impact on us this year,
on the construction sector in Brazil,” he said. “There’s a lot of bad news for
the construction sector, and the worst is that we don’t see any sign of
recovery, we don’t see any light at the end of the tunnel.”
Unemployment has been rising in recent months, after several years of hovering
near record lows, as Ms. Rousseff’s previous economic program of tax cuts and
stimulus measures targeted at the car industry and other big employers are cut
back or canceled. The jobless rate hit 6.4% in April, the statistics agency said
last week, from 6.2% in March and 4.9% in April of last year.
Higher
inflation and interest rates are also reducing shoppers' purchasing power,
contributing to a 1.5% decline in consumer spending in the first quarter from
the fourth reported in Friday’s GDP figures.
“Families
just don’t have any way to increase their spending, which represents more than
60% of GDP,’’ said Pedro Paulo Silveira, an economist at the TOV Corretora
brokerage in São Paulo.
Companies
have been cutting back on their investing amid weak confidence in the economy,
and in the case of Petroleo Brasileiro SA, as a continuing investigation into
corruption at the state-controlled oil company has forced it to reduce its
ambitious investment program. Business investment fell 1.3% in the first quarter
from the fourth, the statistics agency said.
The recent
GDP report also contained a few bright spots. Brazil is one of the world’s
agricultural superpowers, and the sector outperformed the rest of the economy in
the first quarter with an expansion of 4.7% from the fourth quarter of last
year.
Mining and
petroleum also stood out, with expansion of 3.3% from the previous three months.
Mining giant Vale SA posted record iron ore production in the first quarter, and
state-controlled oil company Petróleo Brasileiro, or Petrobras, also increased
output.
Colombia
Finance Minister Mauricio Cardenas reported the results from the fiscal rule
committee regarding long-term oil prices and potential GDP growth in coming
years.
These are
the key inputs to determine how much the nominal fiscal deficit could deviate
from the structural fiscal deficit target each year, while allowing the
government to be in compliance with the fiscal rule.
According
to Minister Cardenas, the committee sees the long-term price of Brent crude oil
at $85.6 in 2015 and $81.5 in 2016.
Potential
GDP growth, on the other hand, was estimated at 4.4% for both years.
Under
these conditions, analysts believe that the government could have a nominal
fiscal deficit of around 3.5% of GDP in 2016, which would be consistent with a
2.1% of GDP structural deficit target.
Cardenas
also said that the nominal deficit target for 2015 will be 3.0%, up from a
previous estimate of a 2.8% target.
India,
with an expected growth rate of 7.5% this year, is set to surpass China and for
the first time is leading the World Bank's growth chart of major economies.
China is
projected to grow at 7.1% this year.
Developing
countries are now projected to grow by 4.4% this year, with a likely rise to
5.2% in 2016, and 5.4% in 2017, the report said.
In China,
the carefully managed slowdown continues, with growth likely to moderate to a
still robust 7.1% this year.
In India,
which is an oil importer, reforms have buoyed confidence and falling oil prices
have reduced vulnerabilities, paving the way for the economy to grow by a robust
7.5% rate in 2015, the report said.
Basu said
"slowly but surely" the ground beneath the global economy is shifting.
"China has
avoided the potholes skillfully for now and is easing to a growth rate of 7.1%;
Brazil, with its corruption scandal making news, has been less lucky, dipping
into negative growth," he said.
The main
shadow over this moving landscape is of the eventual US liftoff, he noted.
Growth in
South Asia is expected to continue firming to 7.1% this year, led by a cyclical
recovery in India and supported by a gradual strengthening of demand in
high-income countries.
The
decline in global oil prices has been a major benefit for the region, driving
improvements in fiscal and current accounts, enabling subsidy reforms in some
countries, and the easing of monetary policy, the report said.
In India,
new reforms are improving business and investor confidence and attracting new
capital inflows, and should help raise growth to 7.5% this year, the report
said.
In
Pakistan, remittances are expected to remain solid, and manufacturing and
service sectors should continue to recover.
However,
growth is expected to remain moderate, reflecting ongoing energy constraints,
the report said.
According
to the report, developing countries face a series of tough challenges this year,
including the looming prospect of higher borrowing costs as they adapt to a new
era of low prices for oil and other key commodities, resulting in a fourth
consecutive year of disappointing economic growth this year.
"Developing countries were an engine of global growth following the financial
crisis, but now they face a more difficult economic environment," said World
Bank Group President Jim Yong Kim.
US
economic recovery is continuing and interest rates remain low in other major
global economies. However, there are considerable risks around this expectation,
the report argues.
Japan's
gross domestic product (GDP) growth was revised sharply higher in the first
quarter, data showed, however doubts remain over whether the momentum can be
sustained.
GDP rose
an annualized 3.9% in the first quarter, higher than the preliminary reading of
a 2.4% increase, and up from 1.5% in the October-December period.
On a
quarter-on-quarter basis, the economy grew 1%, higher than the initial reading
of 0.6%, and up from 0.4% in the previous three months.
The upward
revision mostly reflects better-than-expected capital spending, which rose 2.7%
on quarter, far higher than the 0.4% preliminary estimate.
"Overall,
the GDP report was quite solid – you're looking at strength in capital
expenditure, private consumption and residential investment. These are positive
signs that the recovery is on track," said Izumi Devalier, Japan economist at
HSBC.
Japanese
stocks showed only a muted reaction, with the benchmark Nikkei 225 up 0.3% in
early trade. The yen, meanwhile, slipped 0.1% against the dollar.
The data
follows supportive comments over the weekend from government spokesman Yasuhisa
Kawamura, who said the economy was "returning to a growth orbit" on the
sidelines of the Group of Seven (G7) summit.
Kyrgyzstan's economy has demonstrated steady growth in January to May, 2015.
The GDP amounted to 140 billion soms (approximately $2.36 billion) in the first
five months of this year, which is up by 6.9% compared to last year.
Inflation ratio rose by 1.2% in the country, according to the head of the
statistical information in National Statistical Committee, Chinar Turdubaeva.
The increase in GDP was ensured through the development of service, industry and
agriculture sectors.
The service sector had the largest contribution to the GDP, holding over 51% of
overall figure. The industry and agriculture sectors held 20 and 9%
respectively, while the building sector amounted to 6 percent.
Turdubaeva noted that the industrial production increased by 21.5% to 76 billion
soms ($1.29 billion) in this period.
In this regard, she stressed the important role of the Kumtor gold mine,
operated by a Toronto-based company.
The gold ore production increased by 21.5% to 38.4 billion soms (approximately
$0.65 billion) in January to May, 2015 as compared to 2014.
The gold mine industry could rise due to expansion of precious metals
production.
There was fixed a decline in some industry spheres such as textile industry,
manufacture of clothing and footwear leather and other leather products, which
saw a 41.5% drop in production. Electrical equipment industry decrease by 20%,
electricity by 11.7%, manufacture of food, and beverages and tobacco products by
6.1 percent.
The construction industry improved its indices by 2.2 times in his period due to
investments into agriculture, forestry and fisheries facilities.
The EBRD has already allocated over 570 million euros to finance 120 projects in
various sectors of the economy in Kyrgyzstan since the beginning of cooperation
in 1992.
GDP growth in the Kyrgyz Republic is expected to decline to 3.0% in 2015 from
3.6% in 2014, according to the EBRD. The slowdown reflects sharply lower
remittances from Russia and more difficult export environment due to recession,
depreciation of the Russian ruble and sharply slower growth in Kazakhstan, the
country’s main trading partner and a source of remittances.
Kumtor gold mine is the largest gold mine in Central Asia, having produced more
than 9.9 million ounces of gold between 1997 and the end of 2014. Last year,
Kumtor’s gold production was 567,693 ounces.
Turkey’s
economy outperformed expectations year-on-year in Q1 recording year-on-year GDP
growth of 2.3%.
It is a
welcome post-election boost for the government, after voters stripped the AK
party of its absolute majority.
It may
stop some traders who have been selling off their Turkish stocks as well,
despite the uncertain political outlook that has been driving prices down.
Shares
regained some ground, as did the lira, which has fallen 15% against the dollar
this year.
One
economist warned GDP growth was maintained by a consumer spending spurt that
sapped domestic savings and fed a growing current account deficit, negative
arguments brushed aside by the finance minister who insisted Turkey’s
fundamentals were “sound”.
April’s
Industrial production did beat forecasts, but May’s exports were down 18%.
A
protracted political crisis in Romania would threaten to slow the European
Union’s fastest economic growth, according to Prime Minister Victor Ponta, who
faced a no-confidence motion.
As the
government seeks to maintain the first quarter’s 4.3% annual expansion in gross
domestic product, it needs stability to push through with its stimulus plan,
Ponta said in an interview in Bucharest. The fiscal easing, designed to kick in
next year, needs parliamentary approval by the end of June, he said.
As in its
forecast of March, KOF expects a brief recession in Switzerland that will be
over in the second half of the year. Due to the strong Swiss franc and the
relative weakness of the global economic development, GDP growth will remain low
at 0.4%. In contrast, the economic situation in Europe is now looking better
than it has for a long time. In the medium term, this will also give the Swiss
economy a boost. GDP is expected to grow by 1.3 % in 2016
Britain's
economy has bounced back after a disappointing start to 2015, a report shows.
Gross
domestic product – the total size of the economy – increased by 0.6% in the
three months to the end of May.
The
figures, from the National Institute of Economic and Social Research (NIESR),
suggest the recovery has picked up pace again following growth of just 0.3% in
the first quarter of the year.
NIESR,
which is forecasting growth of 2.5% for the year as a whole, said it expects the
Bank of England to start raising interest rates in the first quarter of 2016.
Rates have been frozen at a record low of 0.5% since March 2009.
The report
from NIESR came as official figures from the Office for National Statistics
showed industrial production rose by a better-than-expected 0.4% in April.
But within
production, which includes oil and gas extraction and mining and quarrying among
other industries, factory output fell 0.4%, fuelling fears that British
manufacturers are being hit by the strong pound and weak demand.
Chris
Williamson, chief economist at Markit, said: 'A slump in factory output in April
represents a very disappointing start to the second quarter and casts doubt on
widespread expectations that the economy is picking up speed after the sluggish
start to the year.'
But Samuel
Tombs, senior UK economist at Capital Economics, was more upbeat. He said: 'We
remain optimistic that GDP growth could rebound strongly in the second quarter
of this year.'
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