GDP UPDATE
October 2016
McIlvaine Company
TABLE OF
CONTENTS
The U.S. economy appears to be growing at its fastest pace
in two years, buoyed by firm consumer spending, stronger exports and
positive—though still modest—business investment.
But the sharp acceleration in growth during the third
quarter will only bring overall gains for 2016 back in line with the lackluster
pace of expansion seen since the recession ended more than seven years ago.
Economists now estimate the current quarter could post
annualized growth of 3% or more based on some upbeat figures.
The latest projections came after the government released
its latest gauge of second-quarter gross domestic product, showing growth at a
1.4% inflation-adjusted annual rate after the first quarter’s 0.8% pace.
Despite the better reading, the growth rate for the first
half of the year is just above 1%. That is a sharp slowdown from the expansion’s
2.1% average annual rate, which itself is the weakest of any period of growth
since 1949.
Separate Commerce Department data showed an increase in
goods exports for August and supported the view that a prolonged slump for
inventory investment appears to be ending.
As a result, several economists upgraded their projections
for third-quarter growth. J.P. Morgan Chase economists lifted their projection
to a 3% growth rate, from 2%. Macroeconomic Advisers raised its third-quarter
forecast to 3.1% from 2.8%. RBC Capital Markets also raised its forecast to 3.1%
from 2.8%, following the latest data.
All three projections would be the fastest growth rate
since the third quarter of 2014.
“Growth is a lot stronger than it looks” based on
first-half GDP figures, said Scott Brown, chief economist at Raymond James &
Associates. “We’re still seeing a pretty strong jobs market, we expect wage
growth to pick up, and gasoline prices are relatively low. That’s all a pretty
good backdrop.”
The paring down of inventories has been a drag on economic
growth for five straight quarters. That is an unusually long downturn at time
when the broader economy has been expanding. Economists don’t expect the cycle
to persist into the second half of 2016.
A measure of economic growth that excludes inventory
effects, real final sales of domestic product, rose at a much healthier 2.6%
pace in the second quarter.
Another drag on growth late last year and earlier this
year, business investment, turned positive in the second quarter after the
recent revisions. A measure of business spending, nonresidential fixed
investment, rose at a 1% rate versus the prior estimate of a 0.9% decline. The
upward revision was due to a much smaller decline in structures investment than
previously estimated, and an increase in intellectual property investments.
Spending on intellectual property like software and
research and development rose at the fastest pace in nearly a decade.
Investments in intellectual property suggest businesses still have a positive
longer-term outlook, even if factors such as a strong dollar and uncertainty
surrounding the U.S. election have delayed some capital investments, said Chad
Moutray, chief economist at the National Association of Manufacturers.
“You can always delay a bit building a new building or
buying equipment, but you still have to focus on longer-term objectives,” he
said. “If we can just get past this hump, things can grow a little better.”
Private economists expecting better growth in the second
half of the year are in line with the Federal Reserve’s view. Fed policy makers
project the economy to grow at a 1.8% pace for all of 2016, implying a modest
second-half pickup.
“Growth was weak in the first half of the year, we’re
seeing definite evidence that the economy is now expanding more strongly,” Fed
Chairwoman Janet Yellen said last week. Improved economic growth and progress in
the labor market “have strengthened the case for an increase in the
federal-funds rate,” she said. The central bank has held its benchmark interest
rate steady since December.
Details of the revised GDP report showed consumer spending,
which accounts for about two-thirds of total output, rose at a 4.3% pace in the
spring, compared with an earlier estimate of growth at a 4.4% annual rate. Last
quarter’s gain was still the largest increase in household outlays since late
2014.
The change in private inventories was a smaller drag on
growth than previously estimated, due to a larger contribution from farm
inventories last quarter.
Growth in exports, which add to GDP, outpaced gains for
imports, which subtract from domestic output, during the last quarter. As a
result, trade contributed a slightly better 0.18 percentage point to overall
growth in the second quarter. Trade was a significant drag on growth during
2015, a year in which the dollar strengthened against many foreign currencies.
Government spending declined at a 1.7% rate in the second
quarter, compared with a prior estimate of a 1.5% drop. It was the largest
decrease in government spending since the fourth quarter of 2013, due to
pullbacks at state and local levels.
Residential fixed investment, including home building and
improvements, fell at an unrevised 7.7% pace in the second quarter. Before last
quarter, residential investment had been a driver of economic growth since 2014.
Corporate profits after tax, without inventory valuation
and capital consumption adjustments, rose 5.6% from the prior quarter, up from a
previous estimate of a 4.9% increase in the second quarter. That measure most
closely matches profits as reported on company balance sheets.
The profit measure was down 1.7% from the second quarter of
2015.
A before-tax measure of profits, which includes inventory
and capital adjustments, fell 0.6% in the second quarter, versus the
earlier-estimated decline of 1.2%. The measure, intended to be more in line with
output gauges, was down 4.3% from a year earlier.
Profits at U.S. corporations have been stressed in recent
years by the strong dollar, which makes U.S.-made products more expensive for
foreign customers, and low oil prices that have hammered the domestic energy
industry.
The dollar and oil prices have stabilized in recent months,
but margins could be squeezed going forward by weak global growth, rising labor
costs and other forces.
South America's combined gross domestic product is expected
to decrease 2.2% in 2016, mainly due to Venezuela's economic crisis in which an
8% contraction is projected.
The United Nation's Economic Commission for Latin America
and the Caribbean reports that, overall, the Latin American and Caribbean GPD is
expected to decrease 0.9% in 2016.
Of the 33 countries reported in ECLAC's projections, just
Argentina, Brazil, Ecuador, Venezuela, Trinidad and Tobago, and Suriname, which
-- at 4% -- will have the second-largest shrink in GDP following Venezuela, are
expected to see GPD decreases in 2016.
"In view of the current economic downturn, ECLAC again
affirms that the region needs a progressive structural change with an
environmental big push to drive development based on equality and environmental
sustainability," ECLAC said in a statement. "Public and private investment
policies need to be coordinated across different areas to reshape patterns of
production, consumption and energy, based on learning and innovation."
ECLAC projects the Latin American and Caribbean combined
GPD will see a 1.5% increase in 2017. Venezuela's GDP is the only one in the
region expected to decrease in 2017, at 4%.
The countries predicted to see the most economic growth are
the Dominican Republic, Panama and the island nation of Saint Kitts and Nevis,
which will see GDP increases of 6.5, 5.4 and 4.7, respectively.
Australia is forecast to enjoy at least another two years
of solid economic growth, extending a quarter of a century without recession and
dodging the deflation that dogs so many of its rich world peers.
The latest Reuters poll found analysts expect Australia's
A$1.6 trillion ($1.2 trillion) of gross domestic product (GDP) to expand by 2.9%
this year, unchanged from the July poll.
Growth was seen at 2.8% next year and 2.9% in 2018, a
result that would see Australia capture the Netherlands' crown for the longest
run without a recession.
Surging export volumes, record low interest rates and an
historic boom in home building have already underpinned growth of 3.3% in the
year to June.
A recent revival in the value of commodity exports also
promises to boost company profits, national income and tax receipts in coming
months. Surging prices for coal alone could eradicate the country's trade
deficit and add 2 percentage points to nominal GDP.
The worst also seems to be over for a long slump in mining
investment, which subtracted a huge 1.6 percentage points from GDP growth in the
year to June.
Policymakers at the Reserve Bank of Australia (RBA) believe
three quarters of the mining downturn has now passed and its drag on growth will
greatly diminish for here on.
"The Australian economy's output performance, in aggregate,
has been resilient in what remains a challenging environment," said Westpac
senior economist Andrew Hanlan. He is tipping economic growth of 3% for both
2016 and 2017.
"That said, downside risks persist. World growth is
sluggish, and global financial sector vulnerabilities remain."
At home, jobs growth has turned sluggish and heavily
weighted to part time work, restraining wage growth and adding to downward
pressure on inflation.
Analysts forecast consumer price inflation would run at
just 1.2% for 2016 as whole, well under the RBA's target of 2 to 3%.
Yet they also expected it to pick up to 2.1% next year and
2.4% for 2018, a welcome outcome that would eliminate the need for more rate
cuts.
The National Bureau of Statistics (NBS) is expected to
release China's GDP growth data for the third quarter amid questions about
whether the economy has stabilized.
Most analysts estimate GDP growth was 6.7% in the third
quarter, according to a Bloomberg report.
The central government set the GDP growth target in 2016 at
a range from 6.5% to 7% instead of a specific figure, the first time in two
decades that China has specified an annual growth target range.
Singapore's growth in the third quarter badly missed
expectations, potentially signaling weakness around the region.
The city-state's gross domestic product (GDP) grew 0.6
on-year in the third quarter, well off forecasts for 1.7% growth from a Reuters
poll and the weakest reading since 2009, during the global financial crisis.
GDP also contracted 4.1% on-quarter, compared with a
Reuters poll forecast for 0.3 % growth.
"Singapore being a small open economy, basically we are
like a harbinger," Selena Ling, head of treasury research and strategy at OCBC,
told CNBC's "Squawk Box". "You can expect the next few weeks when we get third
quarter growth numbers coming out from the rest of the Asian economies, probably
you'll see weaker than expected numbers as well."
She called Singapore's data "pretty grim," noting that even
the most bearish forecast hadn't called such weak figures.
Despite the weak data, Singapore's central bank, the
Monetary Authority of Singapore (MAS) kept its monetary policy unchanged with a
neutral bias for the currency.
Rather than using interest rates, the MAS, which has
official policy-setting meetings just twice a year, sets its monetary policy by
adjusting an undisclosed trading band for the currency based on a basket of
currencies weighted to reflect trade levels with the city-state.
In the wake of the GDP data and the MAS' inaction, the
Singapore dollar fell to its lowest level since early March. The U.S. dollar was
fetching as much as S$1.3887 by mid-day Friday, up from levels as low as
S$1.3770 earlier in the session.
OCBC's Ling said external factors dragged on Singapore's
growth.
"Ahead on the horizon, you do have some risk events like
U.S. elections. You also have a possible FOMC rate hike in December. So these
are pretty big external factors," she said. "The China slowdown story is still
on-going so you do have renewed concerns about how much of the softness in terms
of the Chinese manufacturing export pattern is going to drag on regional trade
growth as well."
She noted that the World Trade Organization (WTO) had
already downgraded global trade forecasts for 2016 and 2017. The WTO has
projected global trade would register its fifth straight year of sub-3 percent
growth, citing shifting exchange rates and falls in commodity prices.
The slowdown was already evident in China's trade figures.
Data released recently showed China's exports tumbled 10.0% in dollar terms in
September and imports fell 1.9%, coming in well below forecasts from a Reuters
poll for a 3.0% fall in exports and a 1.0% rise in imports.
Azerbaijan's gross domestic product shrank by 3.9%
year-on-year in January-September, Interfax news agency quoted the State
Statistics Committee.
Economic growth slowed to 1.1% last year from 2.8% in 2014,
well below official forecasts, because of low oil prices and the devaluation of
the national manat currency.
The country forecasts 1.8%d GDP growth in 2016.
The 'non-observed' economy - comprising both underground
and illegal activities - was worth €211 billion in 2014, accounting for 13$ of
the country's entire GDP.
This data comes from Istat, which revealed that the value
of the non-observed economy had increased by €5 billion since the previous year,
when it contributed 12.9% of the total GDP.
The bulk of the money comes from the underground economy,
which contributed €194 billion (12% of the GDP) last year, while illegal
activity brought in around €17 billion.
Between 2011 and 2014, the value of the unobserved economy
has steadily risen to 13 from 12.4% of the total GDP.
The biggest chunk (46.9%) is down to companies
under-declaring their income, while a further 36.5% comes from illegal labor.
Eight percent comes from illegal activities, including prostitution, drug
dealing and bribery.
Luxembourg GDP has risen by 4.4% in Q2 2016 compared to the
same quarter in 2015. Growth compared to Q1 is up 1.6%, according to Statec.
The value added by financial service providers and
insurance companies represented an increase of 1.3%, while there was an increase
of 2.9% for the trade, transportation, hospitality and catering sector. GDP
increased by 7.9% in ICT and 2.4% in construction.
Statec has revised its annual growth calculation from 2015:
1.7% instead of 5.3% for Q3, and 2.1% instead of 3.6% for Q4.
At a time when poor rain-fed harvests have weighed on
economic growth in Morocco during 2016, the Kingdom’s economy is expected to see
better days, with an estimated Gross Development Product (GDP) of up to 3.5% in
2018, up from 1.5% in 2016, according to a report by the World Bank.
Data piled up by the World Bank Economic Monitor for the
Middle East and North Africa (MENA) said economic activity in Morocco is
expected to rebound in 2017 following a sharp economic nosedive in 2016.
In the short term, Morocco’s GDP growth should slow down to
1.5% in 2016 as the full impact of the fall 2015 drought unwinds, it added.
The report, which was prepared by a team led by Shanta
Devarajan, also said agricultural GDP is projected to contract by 9.5% in 2016
before re-bounding by 8.9% in 2017.
Non-agricultural GDP growth is expected to hover around 3%
in the absence of more decisive structural reforms.
In line with the government’s commitment, the fiscal
deficit should be further reduced to 3% of GDP in 2017, which should also
feature an enhanced central and local Governments’ budget design and
implementation for better public service delivery and efficiency consistent with
the new Organic Budget Law, the report further read.
MENA Monitor economists estimated that over the medium
term, Morocco should be able to speed up its economic growth while upholding
macroeconomic stability.
The strong performance of the newly developed industries
(automobile, aeronautics and electronics) and the expansion of Moroccan
companies in Western Africa are potentially creating the conditions for Morocco
to lift its position in global value chains.
However, economic outlooks and the consolidation of its
macroeconomic stability gains over the medium term depend on the pursuit of
sound macroeconomic policies and the enhancement of structural reforms so as to
step up productivity gains, trim down youth unemployment, boost female labor
force participation, and curtail further poverty and inequalities, World Bank
economists further stated.
Looking ahead, assuming the full implementation of a
far-reaching reform agenda following the autumn 2016 parliamentary elections,
growth could reach 4% over the medium term, with inflation kept at around 2%,
MENA Monitor highlighted.
However, the spatial inequalities are likely to persist in
the absence of targeted policies that address the multitude of challenges faced
in the lagging regions of the country.
According to the World Bank Mena Monitor, economic activity
slowed to 1.4% in the second quarter of 2016 (vs. 4.2% during the same period
last year), as a result of a 12.1% contraction in agricultural production, while
growth outside the agriculture sector remained sluggish at around 2.5%.
While the overall unemployment rate has hovered around 9%
in recent years, the rate among urban youth is much higher and reached 38.8% in
June 2016.
With the successful liberalization of petroleum prices
(gasoline and diesel) and other fiscal consolidation efforts since 2013,
Morocco’s fiscal deficit has been on a downward path and the external current
account has improved significantly.
Based on performance since the beginning of the year,
Morocco is expected to reduce its fiscal deficit to 3.5% of GDP in 2016. This
would be the result of strong revenue performance and the continued reduction in
consumption subsidies.
Boosting the economy’s competitiveness, speeding up growth
and employment, bolstering fiscal shock absorbers and leveraging the political
stability constitute the key challenges for Morocco.
Morocco’s fairly beefy economic performance in recent years
has marked itself as one of a kind in the MENA region, compared to very poor
economic attainments in such unemployment-stricken countries as Egypt, Algeria,
and Tunisia.
However, Morocco has yet to churn out its economic output
and competitiveness assets to further carve out a place for national market on
the world’s larger economic stage.
The recently initiated National Strategy for Employment,
aimed at setting up 200,000 new jobs per annum and trimming down unemployment to
3.9% in ten years, will require intrinsically and extrinsically-motivated
reforms to secure a striving labor market.
MENA’s puny growth performance over the past few years is
attributed to a bundle of reasons, most notably governments’ resort to austerity
procedures.
The crisis comes also at a time when ongoing tension in
war-torn Syria, Iraq, Libya and Yemen are wreaking havoc on national markets.
In addition, the finger has been pointed at the terrorist
attacks, with investment in tourism reaching dark figures over the past couple
of years.
Bringing an end to inter-regional conflict and quelling
vehement extremism remain a top priority for the MENA region. The findings of
the World Bank economic outlook, suggest that socio-economic policies can help
deter the propagation of terrorism. Bringing an end to violence through economic
investment remains therefore a paramount challenge for Morocco and the entire
MENA region.
Britain’s vast services sector defied gloomy expectations
to continue growing after the Brexit vote and the economy was expanding faster
than previously thought in the run-up to the referendum.
The first official figures on how the biggest sector of
Britain’s economy fared after the decision to leave the EU, showed services
output rose 0.4% in July, improving on June’s growth of 0.3%.
That was at odds with business surveys of the sector, which
includes government services, retail and banking. They had suggested it suffered
an initial slump after the referendum before rebounding in August. But the
Office for National Statistics said there was little sign of a referendum blow.
“Despite some very weak indicators appearing in the
immediate aftermath of the referendum, estimates gathered by ONS from more than
23,000 firms now suggest that the services sector – which accounts for
three-quarters of the economy – in fact grew strongly in July,” said the
statistics office’s head of GDP, Darren Morgan.
“Further information also suggests that the whole economy
also grew slightly more strongly in the months before polling day than
previously thought.
“Together this fresh data tends to support the view that
there has been no sign of an immediate shock to the economy, although the full
picture will continue to emerge.”
As part of data released, the ONS revised up its estimates
for GDP growth in the second quarter to 0.7% from 0.6% previously. It was still
a slowdown compared with the first quarter however, when the economy grew by
0.8%.
Consumers continued to drive much of the growth in the
second quarter, but there were renewed signs households were eating into savings
to fund their spending.
The savings ratio – the share of households’ income they do
not spend – fell to its lowest since the onset of the financial crisis in 2008.
But business investment grew by more than previously thought in the quarter,
suggesting companies were not as nervous about spending before the referendum as
economists had feared.
“The UK started the year in a position of economic
strength, and we can see today that this momentum has continued in the services
sector – the largest part of our economy,” he said in a statement.
“We want to build on this strength as we forge a new
relationship with the EU and deliver an economy that works for all.”
The figures will cast doubt on whether the Bank of England
will follow through on hints at another interest rate cut before the end of the
year.
Amid downbeat signals on the referendum’s impact on
business and consumer sentiment, its monetary policy committee (MPC), led by
Governor Mark Carney, cut official borrowing costs to 0.25% and expanded the
Bank’s electronic money printing program in August. They signaled at the time
and again this month that rates could be cut further to 0.1%.
Reacting to the latest data, Samuel Tombs, at the
consultancy Pantheon Macroeconomics said: “The jump in services output in July
is the clearest sign yet that the Brexit vote has not pushed the economy into a
recession.”
He predicted that growth would still slow in the third
quarter, the months of July to September, probably to about 0.5%. But that may
not be enough of a deterioration to prompt more Bank of England action.
“Since the MPC expected GDP growth to slow to 0.2% in the
third quarter, considerable doubt is now cast over whether the MPC with cut
interest rates again in November,” Tombs added.
Alan Clarke, head of European fixed income strategy at
Scotiabank, said much would depend on the official estimate of third quarter GDP
growth released at the end of October. Growth of just 0.1% would prompt more
action from the MPC, growth of 0.4% or more would make policymakers sit tight.
“Sadly we fear that growth will be in that awkward middle ground of 0.2-0.3%
which makes calling the next move tricky,” he added.
Despite the stronger-than-expected services data, the ONS
warned against reading too much into one month’s figures and economists
highlighted potential challenges ahead for the UK as it embarks on Brexit
negotiations.
Some drew attention to the latest figures on the UK’s
trading position released with the GDP report. The current account deficit
widened from £27bn in the first quarter to £28.7bn in the second, or 5.9% of
GDP. The current account deficit reflects Britain’s trade gap with the rest of
the world and the shortfall between money paid out by the UK and money coming
in.
The British Chambers of Commerce said the latest figures
underscored how trade was a big drag on growth for the UK even before the vote
to leave the EU.
“The pick-up in growth in the second quarter is likely to
be as good as it gets for some time, with the mounting economic and political
uncertainty weighing heavily on the UK’s near-term growth prospects,” said Suren
Thiru, the group’s head of economics.
McIlvaine Company
Northfield, IL 60093-2743
Tel:
847-784-0012; Fax:
847-784-0061
E-mail:
editor@mcilvainecompany.com
Web site:
www.mcilvainecompany.com