GDP UPDATE
May 2015
McIlvaine Company
TABLE OF
CONTENTS
Japan
If you were feeling a bit of déjà vu recently look no further
than the latest reading of U.S. economic growth for the cause. Like the initial
estimate of first quarter 2014 GDP, the first reading says the economy grew in
Q1 2015 — but very, very, very slowly.
The Bureau of Economic Analysis released its advance estimate
of real gross domestic product for the first quarter of this year— covering
January, February and March. The release showed output in the U.S. increasing at
a rate of 0.2%. This is a huge deceleration from the fourth quarter 2014 when
real GDP gained 2.2%. Economists on average were anticipating growth of 1% in
Q1.
Last year the GDP reading was ultimately revised to negative
2.1% then economic growth rebounded sharply in the second (4.6%) and third (5%)
quarters.
“We believe weakness was grossly exaggerated and there will be
significant catch-up in Q2, but, of course, that remains to be seen,” wrote High
Frequency Economics’ Jim O’Sullivan, who had anticipated 1.3% growth, in a note
following the release. “Apart from fundamental slowing and normal volatility,
possible factors include harsher-than-usual winter weather, port delays and
seasonal adjustment problems relating to Q1 specifically. More fundamentally,
lower oil prices account for the plunge in the mining component of business
investment in structures, although we think the positive effects of lower oil
prices will ultimately offset the negative effects. ”
Similarly, RBS’ Michelle Girard wrote, “Despite the sharp
deceleration in Q1, we remain upbeat about the outlook for growth in the U.S. We
expect the economy will rebound in Q2 and beyond, similar to last year.
Consumption and housing have already shown signs of a rebound. Trade is
normalizing as port disruptions wane. In the second half of 2015, the negative
drag from business investment associated with the collapse in oil prices will
wane and should be more than offset by the positive boost to growth from lower
energy costs (as the models have long predicted).”
Also similar to a year ago many economists and investors are
pointing to snowy winter weather as the root of the weakness. Other factors
holding back growth this time around may have included the strong dollar,
pressure on the energy sector from lower oil prices and dock worker strikes on
the West Coast that disrupted that flow of trade.
The meager growth reflects positive, though slowing, personal
consumption expenditures and positive private inventory investment but declines
in just about every other metric. This includes lower nonresidential fixed
investment, lower state and local government spending and fewer exports.
Meanwhile imports, which negatively impact GDP, increased.
The price index for gross domestic purchases — which measures
prices paid by U.S. residents — decreased 1.5%, compared to 0.1% decrease in the
fourth quarter. Excluding food and energy prices, however, the price index
increased 0.3% in Q1 and 0.7% in Q4. Real personal consumption expenditures
increased 1.9% compared with a 4.4% increase last quarter.
International Monetary Fund has lowered its outlook for
Canadian economic growth.
It describes Canada’s recent performance as “solid” but says
the risk to its growth has been increased by an unusually large drop in oil
prices, weaker business investment in the energy sector and lower employment
growth
The latest projection from the Washington-based agency calls
for the Canadian economy to grow 2.2% in 2015, down from the January estimate of
2.3%.
Canada is expected to outperform Japan and countries that use
the euro, but lag behind the United States and the United Kingdom.
The IMF estimates in a report that the American economy will
grow 3.1% this year and the U.K’s real gross domestic product will grow by 2.7%.
The IMF also predicts the 18 countries that use the euro will
expand 1.5% in 2015, up from a January forecast of 1.2%. The fund forecasts that
Japan will grow 1.0% this year, versus an earlier forecast of 0.6%.
Exports have been touted as a savior of the economy, with
Canadian exporting set to rise on the lower dollar.
But the World Bank rhas since ported that the outlook for
exports may not be so rosy.
Global trade only grew by 2.8% in 2014, according to its
latest estimate. It expects 3.3% growth in global trade this year and 4.0%
growth in 201
In a separate report, the World Bank predicted a further
slowdown in China until the end of the year and said that would hurt commodity
exporters, such as Canada.
The headwinds facing the world economy, including lower oil
prices and a high U.S. dollar, pose risks to East Asia’s globally-integrated
economies, the bank said in its analysis.
“The recovery in high-income countries continues to be slow
and uneven, and a downturn in the eurozone and Japan would weaken global trade,”
it said.
The World Bank estimates China will grow 7.1% in 2015, and
6.9% in 2017, a more moderate pace than it has set in the past decade as its
demand for lumber, metals and other raw goods helped power the Canadian economy.
Is it time to start panicking about China’s debt? If you
believe Beijing won’t support the municipalities that have overdosed on credit
over the last few years, then absolutely. But overall, China’s federal level
debt remains low, bank’s remain strong despite higher non-performing loans on
the balance sheet, and yet we still get a total debt to GDP ratio of a whopping
282%.
First, a little comparison. The U.S. total debt to GDP, which
includes household and corporate debt, is 331.7%. The economy has not imploded
because of that, though there are plenty of people out there with books and
newsletters to sell who say it is only a matter of time. They might be right.
The same holds for China.
McKinsey Global Institute blamed China’s debt burden on a
credit bubble which began in earnest in 2009. Back then, China was trying to
plug up the holes left by the U.S. and European financial crisis. China is
export dependent. When its two biggest clients fell because of its own credit
bubble, China did what all economies do in crisis — stimulate, stimulate, and
stimulate some more.
McKinsey says local debt is the biggest problem. Central
government debt is still low, at around 64% of GDP. That gives the government
room to — well, stimulate some more. The central bank is currently running its
own mini-QE program, which has helped the stock market beat the MSCI Emerging
Markets Index by a landslide year-to-date.
China’s bank debt is still in fair shape, but rising bad loans
from muni lenders and real estate developers means there is “more pain to come.”
It is worth noting here that Beijing has been allowing more
for bankruptcies to take place. Companies that are part of China’s oversupply
problems are being allowed to go belly up. While that potentially opens up a
major can of worms in the job market, so far it does not appear that the
unemployment rate is leading to civil unrest.
Of course, China being China, the media probably won’t learn
about it until things are starting to boil.
Now for the good news on China debt. Household debt in China
is very low. Like most Asian societies, Chinese love to save and invest.
Standard Chartered estimated that China credit has peaked. The
debt to GDP ratio is stabilizing, the bank said in a report to clients. Chinese
companies have an estimated $1 trillion in foreign debts as of the end of 2014,
compared to $308 billion for Brazilian corporates and $196 billion for Indian
firms.
The McKinsey report, titled “Debt and (Not Much)
Deleveraging”, was released in February.
Since the bursting of the U.S. housing bubble, global debt —
led by China — has increased by $57 trillion as of the second half of 2014. That
means it’s even higher today. All of the growth has come from governments and
central bank stimulus. The compounded annual growth rate of debt was 5.8%
between 2000 and 2007 for governments. It rose to 9.3% between 2008 and 2014,
while banks cut their debt three-fold, and global household debt growth fell
four-fold.
The McKinsey report showed that China led all emerging markets
and was ahead of most developing markets in terms of an increase in total debt
to GDP over a seven year period ending in the first half of 2014. Only Portugal,
Greece, Singapore and Ireland saw their debt burden increase, but that is mainly
due to massive corrections in economic output.
Over that same seven year period, India, Romania, Egypt,
Argentina, Saudi Arabia and Israel all deleveraged.
India's economy grew an estimated 7-7.5% last fiscal year and
will keep growing this year, but the government will have to invest more in
agriculture to keep up the momentum, according to finance minister, Arun Jaitley.
Economists polled by Reuters last month pegged India's 2014/15
economic growth at 7.4% and 7.8% for the current year in terms of standard gross
domestic product (GDP). Using a controversial new way of measuring GDP, India's
statistics office has said the economy has overtaken China as the world's
fast-growing major economy, at an annual 7.5% in the fourth quarter of the
fiscal year that ended on March 31.
With Indonesia's growth numbers in the spotlight this week,
doubts are growing over President Joko Widodo's ability to stimulate the economy
as the country faces the prospect of a severe slowdown.
Investors are bracing for a weak first-quarter gross domestic
product (GDP) report, which could show growth falling below 5%, Daiwa Capital
Markets estimated, worse than 2014's 5% increase, a five-year low.
"On-the-ground channel checks suggest severe growth
deceleration with various sectors experiencing declines of 30-90% on year. From
brick sellers to diamond shops, the adverse impact of the slowdown appears to be
widespread," Daiwa said in a report. An economic rebound isn't likely until the
third-quarter, judging by seven straight months of shrinking manufacturing
activity, it said.
"Indonesia is in dire need of some growth," added Credit
Suisse said in a recent note. "The question is, what can the government do to
stimulate growth? And, just how effective such a policy will be?"
It's a concern reflected in the stock market, with the Jakarta
Composite dropping more than 6% as poor results from index heavyweights sparked
growth concerns. Stocks, however, managed to rebound more than 1% soon after.
With net foreign outflows of over $1 billion since mid-March
and year-to-date losses of nearly 3%, the benchmark is now one of the world's
worst-performing indexes.
Japan
Japan's economy was expected to post a second straight quarter
of moderate growth in January-March, led by a pickup in exports and business
investment, a Reuters poll found, pointing, if realized, to a steady recovery
from recession after last year's sales tax hike.
Annual expansion of 1.5% in gross domestic product (GDP) would
match the rate of growth in October-December, translating into a quarterly
increase of 0.4%, unchanged from the prior quarter, the Reuters poll of 22
economists found.
Subdued growth could be a source of concern for policymakers
counting on consumer spending, backed by increased corporate profits and higher
wages, to help sustain a virtuous growth cycle and defeat nearly two decades of
deflation.
"The economy shows no signs of accelerating due mainly to
private consumption, which would rise only slowly," said Yoshiki Shinke, chief
economist at Dai-ichi Life Research Institute.
"The economy is slow-going despite expected (positive) effects
from cheap oil prices. I'm particularly concerned about struggling private
consumption."
Private consumption, which accounts for roughly 60% of GDP,
was expected to register a quarterly gain of 0.2%, slowing from a 0.5% rise in
October-December.
Consumers tightened their purse strings as the sales tax hike
boosted prices across the board, outpacing salaries and curbing real incomes,
hurting household purchasing power.
Capital spending was seen to rise 0.8%, after sliding for
three straight quarters through October-December as companies have been hesitant
to boost spending on plant and equipment given the uncertain economic outlook.
External demand was seen as likely to shave 0.1% point off GDP
growth. A weak yen helped boost exports, but imports outpaced exports, resulting
in a slightly negative external contribution.
Ministry of Finance data due on May 13 at 0850 JST (May 12,
7.50 p.m. EDT), is expected to show the current account surplus rising to 2.0601
trillion yen ($17.18 billion) in March, exceeding 2 trillion yen for the first
time since Sept 2010, helped by income gains and an improving trade balance.
On May 15, 0850 JST (May 14, 7.50 p.m. EDT) Bank of Japan data
is expected to show wholesale prices fell 2.1% in the year to April, the first
drop since March 2013, partly as effects of the sales tax hike taper off.
On the month, the corporate goods price index (CGPI), which
measures the prices companies charge each other for their goods and services,
was forecast to rise 0.1%, the poll found.
RHB Research expects Malaysia's real gross domestic product
(GDP) growth to expand by around 6% in the first quarter (1Q) of 2015, improving
on the 5.8% in the fourth quarter of last year.
In a note, the research house said industrial activities were
stronger in the 1Q, suggesting that economic activities remained resilient in
the early part of the year, driven by higher crude oil production despite a
sharp fall in prices.
"These were reinforced by a slight pick-up in the growth rates
of manufacturing production and electricity output during the period," it added.
Meanwhile, RHB Research said domestic demand is expected to
grow at a more moderate pace of 5% this year, slower than the 6% growth in 2014.
"This is constrained by lower oil prices and implementation of
the Goods and Services Tax, as well as the impact of earlier policies on
controlling rising household debt and property speculation," it added.
On the global economy outlook, RHB said, not withstanding
headwinds as well as challenges, it is estimated to expand at a faster pace in
2015 and will likely sustain the growth of Malaysia's exports and manufacturing
sales in the period ahead.
Pakistan’s gross domestic product is expected to grow by 5.7%
in 2015, according to a report in the prestigious magazine The Economist.
Pakistan was placed at fifth position of G20 and BRICS nation
with GDP growth rate of 5.7% this year.
According to the list, India tops the list for growth of 7.6%
while China is at second place with 6.9% GDP growth.
Philippines was placed at third spot with 6.7% GDP growth
followed by Vietnam with 6.2%.
Pakistan’s GDP is expected to grow by 4.7% in 2016 whereas
India’s expected GDP growth rate for 2016 is 8.1%
.
The country’s industrial production increased by just 0.9%
since last year whereas India’s production jumped by 5.0% since 2014.
Investors can expect mostly upbeat data from Eastern European
markets this week, despite the potential contagion from recession in Russia and
financial crisis in Greece, according to Capital Economics.
Russia, Bulgaria, the Czech Republic, Hungary, Poland, Romania
and Slovakia are scheduled to report first quarter GDP figures this week. The
Russian economy likely contracted by around 3% year over year, with inflation
hurting consumer spending. “But industry has held up reasonably well, which has
prevented an even sharper fall in output,” Capital Economics writes. For central
and southern Europe, Capital Economics sees an expansion in output of 3% year
over year for the region, compared with 2.7% in the fourth quarter of 2014.
Capital Economics adds:
“There has been very little evidence, so far at least, that
the recession in Russia and renewed problems in Greece have had any impact on
activity in the region … At a country level, we think that Hungary and Poland
were the region’s best performers. We have penciled in GDP growth of 3.3% y/y in
both countries, which would roughly be in line with the fourth quarter’s
outturn. Elsewhere, we think growth in the Czech Republic accelerated to around
2.0% y/y in the first quarter, from 1.4% y/y in the fourth quarter, and would
highlight that the chance of an upside surprise here is high.
As for Russia, Capital Economics expects preliminary first
quarter GDP contraction due to the toll from “low oil prices, last year’s ruble
crisis and Western sanctions.”
The slump in consumer-facing sectors was probably the biggest
drag on growth in Q1 as households’ real incomes collapsed on the back of
soaring inflation. Retail sales contracted by 6.9% y/y in real terms over the
first three months of the year. Investment in productive capacity was also hard
hit, falling by 6.1% y/y in Q1
The French economy is expected to grow 0.3% in the second
quarter, the Bank of France's monthly business confidence survey showed.
The survey by the central bank forecasts the eurozone's second
largest economy will expand 0.3% in the second quarter compared with the first
quarter as business sentiment rose in manufacturing, service and construction.
In April, the Bank of France slightly raised its estimate for
first-quarter economic growth, forecasting the French economy to grow 0.4% in
the first quarter from a previous estimate of 0.3% growth.
The April survey showed that business sentiment in
manufacturing rose to 98 from 97 in March, where 100 is the long-term average.
In services, sentiment rose to 95 from 94 in March and in construction to 92
from 91 a month earlier.
Norway's right-wing minority government recently said it would
increase its spending of "oil cash" slightly from the country's sovereign wealth
fund to counter an expected slow-down in economic growth, as its oil sector
continues to tighten its belt amid lower prices.
"The drop in oil revenues will challenge our ability to
restructure," said Minister of Finance Minister Siv Jensen, as she presented a
revision of the 2015 government budget that was launched in October, well before
the oil-price lows in January. "We should strengthen the economy's ability to
grow."
The government now expects Norway's mainland gross domestic
product, which excludes oil and gas production and is seen as a measure of the
country's underlying performance, to grow 1.3% in 2015, compared with a 2.0%
growth forecast given in October.
Norway expects to spend a record 168.8 billion kroner ($22.45
billion) of its saved-up oil wealth this year, or 2.6% of the value of its $890
billion sovereign wealth fund.
"In the short term, the oil fund shields government budgets
from lower oil prices," Ms. Jensen said.
UK GDP grew by 0.4% in the three months ending in April
compared to 0.3% growth in the three months ending in March 2015, according to
the National Institute of Economic and Social Research.
The think tank said it expects “the slight softening” of GDP
growth experienced in the first quarter of this year to be “temporary”.
Estimates of GDP from the NIESR suggest that the UK economy
will grow 2.5% in 2015, which is down from the 2.8% projected three months ago.
The NIESR also expects the growth rate to come down to 2.4% in
2016.
Earlier in May, the think tank said in a statement: “We expect
growth to rebound through the remainder of this year. This will be driven
largely by consumer spending, supported by the positive terms of trade effect
from the sharp fall in oil prices.”
It also said the level of prices will fall slightly for the
most part of 2015 and unemployment to fall to about 5.25% at the end of 2015.
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