GDP UPDATE
November 2016
McIlvaine Company
TABLE OF
CONTENTS
The global
GDP is forecast to grow at 2.8% in 2017, a very modest improvement from 2.5% in
2016, a research group said recently.
Although a
projected stabilization in energy and commodity prices may lift resource-rich
economies up a little next year, the medium-term trend continues to be dominated
by weaker growth in key inputs, notably investment and labor supply, the
Conference Board said in its Global Economic Outlook 2017.
In the
short term, geopolitical tensions, policy uncertainty, financial market
volatility, and rapid changes in technology will pin the world economy to a
slow-growth path, the report said.
As for the
downside risks to the U.S. 2017 growth outlook, the report said a new
administration will "face the challenge of managing a dual-speed economy which
is largely driven on the plus side by consumer spending, fueled by stronger
household balance sheets, and on the minus side by weak business investment."
Asked
whether Donald Trump's victory in the U.S. presidential election will
significantly change global economic outlook, the group's chief economist for
North America, Gad Levanon, said it increases uncertainty but does not alter the
bottom-line growth picture as of now.
He said
fiscal policy measures such as tax cuts and infrastructure investments may
provide some growth upside for the United States in the short term.
"But
they're likely to have only a minor impact on an economy that is beginning to
reach full capacity and facing the prospect of impending interest rate
increases, which may reduce the appetite to invest," he added.
The group
believed the Trans-Pacific Partnership and the Transatlantic Trade and
Investment Partnership are almost certainly dead, but new approaches to trade
agreements and negotiations might need to evolve.
For other
parts of the world, the Euro Area GDP is projected to dip further to 1.4% in
2017, down from 1.5% in 2016.
The UK GDP
is forecast to grow only 0.8% in 2017, down from 1.7% this year. For Japan, the
figure is estimated to fall to 0.6% next year, from 0.9% in 2016, according to
the report.
The
economy grew in the third quarter at the fastest pace in two years, aided by a
spike in soybean and other U.S. exports and a rebound in the size of inventories
companies keep on hand for sale.
The
government said gross domestic product, the official scorecard for the economy,
expanded at a 2.9% annual clip from July through September. That’s a marked
improvement from the first half of the year when the U.S. grew just barely over
1%.
Economists
surveyed by MarketWatch had predicted a 2.9% advance.
The
acceleration in growth, along with a steady pace of hiring, is expected to prod
the Federal Reserve to raise a key U.S. lending rate in December. Even if the
central bank does act, interest rates for all kinds of goods such as mortgages
and auto loans are likely to remain quite low for an extended period.
In the
third quarter, the economy was buffeted again by diverging forces Consumers
increased spending by a moderate 2.1%, exports posted the biggest increase in
almost three years and businesses restocked warehouse shelves after a rare
decline in inventories in the spring.
Yet higher
imports, a second straight decline in how much builders spent to construct new
housing and less investment in business equipment tempered results.
“Bottom
line, the U.S. economic expansion remains resilient, yet unremarkable,” said Sam
Bullard, senior economist at Wells Fargo Securities.
That theme
is expected to carry through to the end of the year. Economists polled by
MarketWatch forecast a 2.4% increase in GDP in the fourth quarter that runs from
October through December.
The
driving force behind the improved third-quarter performance was a 10% spike in
exports, helped by a temporary boom in U.S. soybean shipments after a poor
harvest in South America. Soybeans may have accounted for one-third of GDP
growth in the fall, estimates Ian Shepherdson, chief economist at Pantheon
Macroeconomics.
Much of
that gain could unwind in the fourth quarter, however.
Imports
also rose, but by a much smaller 2.3%. A smaller trade deficit boosts GDP.
Firms
restocked warehouse shelves in another boost to GDP. The value of inventories
rose by $12.6 billion in the third quarter after a $9.5 billion decline in the
second quarter.
Businesses
also increased investment in structures such as new plants or office space by
5.4% — the largest gain in two years — but spending on equipment was weak again.
It fell 2.7% to mark the fourth straight decline.
Consumer
spending, which accounts for two-thirds of the economy, grew more modestly in
the third quarter after a heady 4.3% gain in the spring that was viewed as
unsustainably high. Consumers have powered the economy over the past few years.
Government
spending, in a bit of a surprise, rose 0.5%, mostly at the federal level.
Inflation
as measured by the PCE price index, meanwhile, rose at a 1.4% annual rate.
“Core” inflation climbed at a 1.7% rate if the volatile food and energy
categories are stripped out.
The
Canadian economy expanded 0.2% in August, in line with expectations, fueled by a
third straight month of growth in the mining, quarrying and oil-and-gas sector.
Canada’s
gross domestic product, or the broadest measure of goods and services produced
in an economy, rose to 1.68 trillion Canadian dollars ($1.25 trillion) in August
from July, according to Statistics Canada. That matched market expectations,
according to economists at Royal Bank of Canada.
July’s GDP
figure was revised to show growth of 0.4%, down from an earlier estimate of a
0.5% increase, the data agency said. Despite the previous month’s downgrade, the
August expansion is likely to bolster expectations for a strong third-quarter
rebound after a second-quarter contraction of 1.6%.
The Bank
of Canada is expecting Canada’s economy to grow at a 3.2% annualized pace in the
third quarter.
The August
advance puts the quarter on track to match the central bank’s estimate, Bank of
Nova Scotia economist Derek Holt said.
TD Bank
economist Brian DePratto said the Canadian economy appears to be getting “back
to normal” after several months of uneven growth related to wildfires in
northern Alberta earlier this year. He said August could be a preview for the
modest pace of expansion that is likely in store for Canada over the longer
term.
”Perhaps
unexciting, this would be a welcome change from the slow and fairly uneven pace
of growth that has been typical of the past 18 months,” Mr. DePratto said in a
note.
August
growth was led by a 1.4% increase in mining, quarrying and oil and gas
extraction. Oil and gas extraction rose 0.9%, as production in northern
Alberta’s oil patch returned to normal following wildfires in the region earlier
this year, Statistics Canada said.
Over all,
the output of the country’s goods-producing industries grew 0.7% in August,
while service-producing industries were roughly unchanged.
Utilities
rose 2.4%, corresponding with warmer-than-usual weather in much of eastern and
central Canada. The manufacturing sector, which policy makers hoped would
benefit from a relatively weaker Canadian dollar and U.S. economic growth, was
up 0.3% in the month.
The
construction sector advanced 0.5%, led by gains in residential building
construction. While the overall real estate, rental and leasing sector was
roughly unchanged in August, real estate agencies and brokers recorded a 3.2%
drop, or their largest monthly decline since January 2015. Activity was notably
lower in British Columbia, Statistics Canada said, after a new 15% tax on
foreign home buyers came into effect in the city of Vancouver.
Offsetting
the August gains were a 0.2% decline in retail sales and a 0.2% drop in the
finance and insurance sector, the data agency said.
The August
GDP data come two weeks after the Bank of Canada kept its policy rate unchanged
at 0.5% and lowered its economic outlook on weaker-than-expected investment
levels and non-resource exports. The central bank now expects growth of just
1.1% this year, followed by an increase to 2.0% in both 2017 and 2018.
Japan’s
economic growth handily beat expectations in the July-September period,
expanding for a third straight quarter as exports recovered, but weak domestic
activity cast doubt on hopes for a sustainable economic recovery.
Government
data underscored a potentially fragile export-reliant economic recovery just as
Republican Donald Trump’s shock victory in the U.S. presidential election was
adding to uncertainty over the global economic outlook.
The
economy expanded by an annualized 2.2% in the third quarter, faster than the
0.9% increase markets had expected, following a 0.7% increase in April-June,
Cabinet Office data showed on Monday.
It marked
the third straight quarter of expansion.
“Exports
recovered, but private consumption and capital expenditure are weak. The economy
isn’t as strong as the 2.2% makes it seem,” said Hidenobu Tokuda, senior
economist at Mizuho Research Institute.
“There are
risks from China and Trump’s trade policies. We need to continue to pay
attention to downside risks,” Tokuda said, echoing the concerns of policymakers.
The
preliminary reading for gross domestic product (GDP) translated into a quarterly
expansion of 0.5% in the third quarter, versus a 0.2% gain expected by
economists.
External
demand – or exports minus imports – added 0.5 percentage point to GDP, due to a
bounce in exports from the prior quarter, and falling imports caused by yen
gains, oil price declines and weak domestic demand.
It marked
the biggest contribution since April-June 2014 as exports grew 2.0%, the fastest
gain in a year, helped by potentially one-off factors such as a boost in
shipments of smartphone parts.
Private
consumption, which accounts for roughly 60% of GDP, rose 0.1%, unchanged from
the second quarter, partly as typhoons and bad weather undermined consumer
spending. It adds to concerns that the benefits of Prime Minister Shinzo Abe’s
Abenomics stimulus drive are yet to spread to households – as seen in tepid
annual wage rises.
“Some
weakness can be seen in the current economy, but employment and wages are
continuing to improve and moderate economic recovery is continuing,” Economy
Minister Nobuteru Ishihara said in a statement.
“Economic
downturns in China and emerging markets in Asia are downside risks to our
country’s economy. We need to pay attention to these risks as well as to
uncertainties in the global economy and fluctuations in financial markets.”
Capital
expenditure, a key component of GDP, was flat, following a 0.1% decline in the
second quarter, with worries about the global outlook and renewed yen gains
weighing on business investment.
Underlining flagging inflation, the GDP deflator fell 0.1% in July-September
from the same quarter a year ago, the first annual decline since
October-December 2013, the data showed.
The
Philippine economy grew 7.1 percent in the third quarter from a year ago,
supported by growth in the services, industry and farm sectors.
Annual growth in the second quarter was 7.0%.
Economists
polled by Reuters had forecast the economy would expand an annual 6.7% in the
September quarter, while the government had expected growth in the 6.3-7.3%
range.
The
Ministry of Trade and Industry (MTI) will release the third quarter economic
survey of Singapore.
The report
will give the final growth figures for the economy for the July-September
quarter, including detailed information on sectoral performance, sources of
growth, inflation, employment and productivity.
The
advance estimate of third quarter gross domestic product (GDP) released on Oct
14 showed Singapore's economy grew a meagre 0.6% from a year ago, sharply lower
than economists' median forecast of 1.7% growth.
Compared
to the previous quarter, the economy contracted by 4.1%, the biggest slump since
2012.
Since
then, MAS forecasters have downgraded their economic projections for this year
and next, expecting 2016 growth to come in at the lower end of their 1 to 2%
forecast, and "only slightly higher" in 2017.
Samsung’s
Note 7 crisis and Hyundai’s worst-ever strikes nearly wiped out a rise in
factory output.
South
Korea’s economic growth is expected to hit the central bank’s 2.7% forecast this
year, with third quarter GDP data showing the economy would have grown faster
were it not for the setbacks suffered by Samsung Electronics
SSNLF -12.28% and Hyundai
Motor HYMTF -1.31% .
“When you
take away the effects from Samsung and Hyundai, third-quarter growth was
considerably better than expected,” said Chung Kyu-il, a director at the Bank of
Korea, although he did not give a figure for the amount of growth lost.
Gross
domestic product rose a seasonally adjusted 0.7% over July-September versus the
second quarter, the Bank of Korea estimated, ticking down from a 0.8% quarterly
rise.
With
growth on track, the central bank is more likely to observe than act on monetary
policy while looking out for a pending U.S. Federal Reserve rate hike expected
by year-end.
Chung
added that fourth quarter growth will also be affected by Samsung’s decision to
drop its fire-prone Galaxy Note 7 smartphone, although the economic impact from
lost manufacturing was nearly all reflected in the third quarter.
Manufacturing overall fell 1.0% in the third quarter, with Samsung’s smartphone
crisis and the worst-ever strikes at Hyundai Motor nearly wiping out the second
quarter’s 1.2% rise in factory output.
Despite
the strikes ending, there will not be an immediate jump in manufacturing in the
fourth quarter, BOK director Chung said, although the bank’s forecast will be
achievable as long as sequential GDP growth hits 0.1% or higher next quarter.
ING
economist Tim Condon said calls for monetary easing may shift to seek fiscal
expansion as central bank rate cuts have resulted in heavy household debt
growth, reduced consumption, and inventories piling up at manufacturers.
Most
analysts see another rate cut early next year, but Kim Doo-un at Hana Financial
Investment said today’s data would encourage the central bank to keep rates on
hold in the near term.
The median
forecast in a Reuters survey of 19 analysts was for South Korea to post growth
of 0.6% in the third quarter in sequential terms.
In annual
terms, GDP rose 2.7% in the third quarter, down from a 3.3% rise in the second
quarter and marking its slowest growth since April-June of 2015.
Construction investment saved Q3 growth as expected, rising 3.9% in sequential
terms and picking up from 3.1% growth in the June quarter. Construction jumped
4.4% over the same period, speeding up from a 1% gain in the second quarter.
Services
rose 1% in the September quarter from the previous three-month period, also
better than a 0.6% gain in the second quarter, thanks largely to government
efforts to launch nationwide retail sale events to pry open wallets.
Capital
investment slipped 0.1%, down from 2.8% growth in the previous quarter.
The Bank
of Korea cut its policy interest rate by 25 basis to 1.25% in June, its eighth
cut since starting this easing cycle in mid-2012. The government has been
churning out supplementary budgets nearly every year since then to help keep the
economy afloat.
A slow but
constant growth of GDP has been noticeable over the last three months in all of
Europe, showed Eurostat data.
For the
first time in years, not even a single economy reported a decrease in GDP.
On the
contrary, all economies marked growth of between 0.1% and 0.8%, compared to the
second quarter of 2016.
The data
showed that Bulgaria and Portugal were the best performing economies with 0.8%
growth of GDP, followed by Cyprus, Holland, Slovakia and Spain with 0.7%.
German and
French growth slowed down to 0.2%, while that of the UK increased to 0.5%.
Belarus’s
president has said the country’s gross domestic product (GDP) will decline by 2%
for 2016.
President
Alyaksandr Lukashenka said in Minsk that he expects the economy to grow in 2017.
Belarus’s
GDP declined 3.9% in 2015. The Eurasian Development Bank has forecast a decline
of 2.6% for 2016, while the International Monetary Fund predicts a 3% fall.
Lukashenka
also told reporters he plans to meet with Russian President Vladimir Putin in
late November. Earlier, Moscow announced a planned visit by Lukashenka toward
the end of the month.
Lukashenka
said "lots of problems" were complicating relations with Moscow.
"Regrettably, nothing new has been done [in 2016]," he said. "Negative aspects
outweigh [the positive]."
He added,
however, that Minsk and Moscow must "present a united front" to defend their
interests in the international arena.
German GDP
data for the third quarter of 2016 came in below expectations.
The
economy only rose at a 0.2% rate between June and September, which was well
below the 0.4% forecast, and lower than the relatively high 0.4% in the previous
quarter.
The Q3
result showed a yearly growth rate of 1.5%, which was well below the 3.1% of the
previous Q3.
Positive
results came mainly from the domestic quarter whilst a slowdown in exports was
the main source of weakness.
“The main
drag came from the external sector with rising imports and shrinking exports.
This is consistent with our analysis which suggest a slow but persistent
slowdown in UK demand for German exports partially accounted for by EURGBP
strength,” says Olga Tschekassin at Barclays.
Although
the outlook for German growth in Q4 is better than it was for Q3, Barclays'
caution against getting too optimistic.
Whilst
sentiment and survey data remain strong, with positive results in the ZEW survey
of financial professionals (which rose 7.6 in November) and the Ifo Business
confidence survey, survey data is not as accurate a predictor as ‘hard’ economic
data.
Fears that
the weak pound will continue to exert a negative demand effect on German exports
to the UK will continue to act as a headwind against growth in the heavily
export-dominated German export economy.
The
significance of the UK as a market for German exports should not be
underestimated.
“Our
analysis suggests that the current account exposure of Germany to the UK, mostly
via trade, has risen to a staggering 1.7% of German GDP, or 20% of Germany’s
overall current account surplus,” says Tchekassin.
The
significance is particularly marked in the automobile sector, where the UK
accounts for 13% of German exports.
“At
product level, road vehicles are by far the largest export group with the
product balance surplus amounting to EUR25bn – approximately 50% of the
bilateral goods trade surplus.
“13% of
all German road vehicle exports went to the UK in 2015, which means that the UK
is a major market for the German automotive sector,” said the Barclays report.
Based on
Barclays' economic forecasts, that the UK will sustain a 7.6% decline in
investment in 2017 due to uncertainty around the triggering of Article 50.
The impact
of such a scenario, “would additionally diminish the demand for German
investment goods exports and have a significant negative effect on German GDP
growth,” says Barclays' Olga Tchekassin.
To
conclude, the impact on the German economy of Brexit is likely to be equal to a
substantial headwind to growth.
Much of
the extent of the damage will be dictated by the GBP/EUR exchange rate, which if
it rises to 1.25, will help mitigate the ill effects of Brexit on German exports
substantially.
However,
given the risk of political uncertainty in the Eurozone and the rise of the
right during a year with many elections in key Eurozone states, there is a good
chance the exchange rate could remain subdued at around 1.15.
As such,
given an average exchange rate of 1.1500 for GBP/EUR (current level 1.1577)
during 2017, the combination of the persistently weak Pound and the fall in
investment in the UK would have a serious negative effect on German base-line
GDP growth of 0.7%.
“Econometric evidence suggests, in our baseline scenario (assuming UK domestic
demand stagnation and GBPEUR of 1.15), that this would reduce to about 1%, and
hence mechanically reduce German GDP by about 0.7%, by the end of 2017. Brexit
is therefore not likely to leave Germany, and the euro area, unharmed,” ended
the Barclays report.
This is
important dynamic to consider when heading into Brexit negotiations and it could
help explain this week's softening rhetoric on the issue of immigration and
single market access by German Chancellor Merkel.
A British
exit from the European Union that left trade with the bloc governed by World
Trade Organization rules would knock around 3.5% off Ireland’s gross domestic
product within a decade, an Irish government report estimated on Monday.
Ireland is
widely seen as the EU economy with most to lose from Brexit and the government
has cut its economic growth forecasts for 2016 and 2017 by 0.7 and 0.4
percentage points as a result of Britain’s June vote to leave.
The report
by the Department of Finance and the Economic and Social Research Institute
estimated that a “hard Brexit” under WTO rules would leave Ireland’s
unemployment rate 1.9 percentage points higher and wages 3.6% lower within a
decade than if Britain did not leave.
A “soft
Brexit” that left Britain within the tariff-free European Economic Area
alongside Norway and Iceland would leave Irish GDP just over 2% lower a decade
after the exit than it would have been had Britain stayed in the EU.
The
authors of the report, which relied on models produced by Britain’s National
Institute of Economic and Social Research, said the hit to Ireland’s economy
could be worse than that to Britain under certain scenarios.
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