GDP UPDATE
September 2016
McIlvaine Company
TABLE OF
CONTENTS
U.S.
economic growth in the second quarter was slightly lower than originally
estimated, but one measure of corporate profits rose for a second straight
quarter.
The
Commerce Department said gross domestic product increased at a 1.1% annual rate
in the spring, compared to its earlier estimate of 1.2%. The economy got a boost
from consumers whose spending rose a revised 4.4% but that was offset by weak
business investment and a rise in imports.
Businesses
cut fixed investment by 2.5% in the second quarter, while inventories fell by a
revised $12.4 billion, the first decline since 2011. Imports were revised to
show a 0.3% increase after an earlier estimate of a 0.4% decline.
“U.S.
businesses remain under pressure from global weakness and other forces,” The
Wall Street Journal said, noting that corporate profits have been stressed in
recent years by the strong dollar.
In the
second quarter, pre-tax corporate profits, with inventory valuation and capital
consumption adjustments, fell 1.2%, marking the fifth decline in the past six
quarters. After-tax adjusted profits were down 2.4%.
But
after-tax, unadjusted profits rose 4.9% to $1.627 trillion after an 8.9% gain in
the first quarter. “The weakness in earnings has largely been confined to energy
and manufacturing, especially export-intensive businesses,” MarketWatch said.
“Financial and service-oriented companies that employ the vast majority of
Americans are doing better.”
The
downward revision to GDP in the second quarter reflected larger declines than
had been previously estimated for residential construction and spending by state
and local governments. But economists are expecting stronger growth in the third
quarter, with the goods trade deficit narrowing sharply and residential
construction rising in July.
The
Atlanta Federal Reserve is currently forecasting third-quarter GDP rising at a
3.4% rate while forecasting firm Macroeconomic Advisers is predicting a 3.1%
gain.
“The
second quarter GDP report was disappointing, but growth should bounce back in
the third quarter,” Stuart Hoffman, chief economist at PNC Financial Services,
told MarketWatch.
India's
economic growth likely lost some momentum in the April-June quarter on cutbacks
in domestic and global demand, a Reuters’ poll showed.
The poll
also found that economists expect the newly-passed goods and services tax (GST)
will take time to have an impact on gross domestic product growth.
For
April-June, the median forecast of 40 economists was for GDP growth of 7.6% from
a year ago, slower than the 7.9% in the previous quarter.
The slower
pace would still be rapid, by any standard. China reported 6.7% annual growth
for April-June, and the Philippines posted 7.0%.
Much of
India's slowdown was attributed to slumping demand. On an annual basis, the
country's exports fell for 18 consecutive months until June, when they finally
rose. Business surveys have pointed to slowing foreign and domestic demand.
The latest
reform from the government, the goods and services tax, should transform the
country into a common market and is widely expected to add up to two percentage
points to the GDP growth pace after implementation.
But the
median forecast of 13 economists who answered an extra question on the tax
change was that GST will have no major addition to the country's GDP during the
fiscal year starting April 2017, when the measure is slated to take effect.
The
standard rate for GST of more than 17-18% "could be negative for the services
economy, which is more than 60% of GDP," said Abhishek Upadhyay, economist at
ICICI Securities.
"Net
impact may be negative initially, even as medium term impact will be undoubtedly
positive," he said.
But in the
fiscal year 2018-19, GST is expected to increase the GDP growth rate by 0.75
percentage points.
"Near-term
costs may exceed the benefits, though investment ramp-up and streamlining
benefits will follow," said Vishnu Varathan, economist at Mizuho.
Japan's
economy failed to grow on a quarterly basis during the April-June period, with
gross domestic product (GDP) growth coming in at zero and missing already
subdued forecasts.
On an
annualized basis, GDP expanded 0.2%, slowing dramatically from the 1.9% spike in
the first three months of the year.
A Reuters’
poll of economists had predicted an annualized increase of 0.7% and a quarterly
rise of 0.2%.
Market
reaction was muted. The benchmark Nikkei equity index was down 0.2% in early
trade; the data were released just prior to market open. The dollar-yen pair
initially spiked as high as 101.41, from around 101.19 just prior to the
release. At 8:43 a.m. HK/SIN, the pair was at 101.31.
Private
consumption, which makes up around 60% of GDP, edged up 0.2% on-quarter, slowing
from the previous quarter's 0.6% growth. Meanwhile, domestic demand's
contribution to GDP was 0.3 percentage point.
"Japan's
economy is likely to achieve a recovery driven by private demand though the
government must be mindful of risks such as slowing emerging market growth and
uncertainty over the fate of Britain's exit from the European Union," Reuters
quoted the country's economy minister Nobuteru Ishihara as saying.
Some
temporary factors, such as the fall in tourism following two deadly earthquakes
in April, were behind the weakness in private consumption, Ishihara added.
"There's
been quite a lot of strength in the yen, economic uncertainty and a bounce in
oil prices, so it’s not surprising that [Japan] is barely growing. That's been
the average growth rate for the past five years," Mark Jolley, equity strategist
at CCB International Securities, told CNBC's Squawk Box.
The local
currency is around 16% higher against the greenback year-to-date, according to
Reuters’ data.
Jolley
attributed the market's high expectations for GDP growth to Japanese data
generally exceeding expectations over the past three months.
"As long
as Japan is growing between zero and one%, that's a fabulous result. From the
equity market's point of view, as long as you have broad stability in the
economy, that will keep people reasonably comfortable with Japanese equities, so
this is as good as you can expect," he said.
Recently,
government estimates indicated the world's No.3 economy would miss its nominal
GDP goal of 600 trillion yen ($5.7 trillion) in fiscal 2020, with Tokyo now
expecting nominal GDP of 551 trillion yen instead, Reuters reported. The
downgrade comes despite aggressive massive monetary and fiscal stimulus from
Prime Minister Shinzo Abe's economic program, dubbed "Abenomics," which had
aimed to kick start the long-moribund economy out of a decades-long deflationary
slump.
Last week,
the government announced a stimulus package worth $278 billion in hopes of
increasing GDP growth by 1.3%, Reuters said.
But some
banks were skeptical on whether the package would be effective.
"Although
the Japanese government has unveiled a fiscal stimulus package this month to
invigorate growth, the actual effects could be very limited, given that fresh
spending in the package is of similar size as in the previous years," DBS said
in a recent note.
Current
data reinforced hopes for more monetary stimulus. The combination of weak
growth, a strong yen and moderating underlying inflation increases the pressure
on the Bank of Japan (BOJ) to ease further, according to Capital Economics.
Earlier
this month, the central bank pledged to increase purchases of exchange-traded
funds (ETFs) but kept interest rates steady at the close of its two-day meeting,
confounding expectations for hefty stimulus.
"Inflation
expectations remain poorly anchored, and the prospect of a prolonged period of
below-target price gains raises the risk that expectations will move further
away from the 2% inflation target. As such, we still expect the BOJ to announce
additional stimulus measures at next month's meeting, though the scale of any
further easing may turn out to be disappointing," said Marcel Thieliant, senior
Japan economist at Capital Economics, in a note.
Taiwan
raised its 2016 economic growth outlook, after three cuts in a row, hoping
demand from China and its other major markets will pick up ahead of the year-end
shopping season.
Gross
domestic product (GDP) should grow 1.22% this year, the Directorate General of
Budget, Accounting and Statistics said, faster than 1.06% growth it had forecast
previously.
The
government had cut the forecast three times before, in May, February and
November, as stubbornly weak global demand battered the export-reliant economy.
“The
higher revision is because exports and consumption in the first half were
slightly better than expected,” the statistics agency said in a statement.
“H2 export
momentum will pick up by quarter gradually, bolstered by expected demand for new
consumer electronics gadgets.”
Traditionally, Taiwan’s exports are bigger in the second half of the year due to
shipments of electronics items before Christmas. But some economists say the
anticipated launch of a new iPhone model and stronger demand may not deliver the
same bang for Taiwan’s exporters as in the past.
The
government has reason to be a bit more optimistic. Second-quarter GDP returned
to year-on-year growth for the first time in a year, while exports in July
increased for the first time in 18 months.
The
economy grew a revised 0.70% in the second quarter from a year earlier, in line
with a preliminary estimate of 0.69% growth, the agency said.
On a
seasonally-adjusted and annualized basis (SAAR), the economy grew a revised
0.23% in the April-June quarter, compared with preliminary growth of 0.15%.
Taiwan’s
central bank in June trimmed interest rates for the fourth consecutive meeting,
while saying that stimulus and economic restructuring were also needed to revive
the economy. Some analysts expect another rate cut by year-end.
The
Philippines outshone larger peers to emerge as Asia's fastest-growing economy
during the second quarter. Sustaining that pace may prove more difficult.
Annual
growth hit a three-year high of 7% during the April-June period, according to
government data, building on a 6.9% spike in the first three months of the year.
The second-quarter performance was better than China's 6.7 annual % expansion.
India, which is yet to report figures for the comparable period, boasted Asia's
fastest annual growth for the first three months of the year at 7.9%.
That may
be as good as it gets for the Philippines for this year, analysts say.
Growth in
the June quarter was bolstered by seasonal factors such as election-related
spending and budget front-loading. This boost should now fade.
"This
particularly strong growth rate was a result of the high infrastructure spending
and strong domestic demand that benefited from election-related spill overs,"
Sian Fenner, lead Asia economist at Oxford Economics, told CNBC's Street Signs.
"But this kind of growth rates can't be maintained."
For the
third quarter, she sees gross domestic product (GDP) rising 6.3%, which should
see 2016 GDP growth come in at 6.3%, an estimate shared by HSBC. Australia and
New Zealand Bank (ANZ) was more pessimistic, anticipating a full-year spike of
6.1%. The economy grew by 5.8% in 2015.
The
Philippines held a general election in May that saw former Davao City Mayor
Rodrigo Duterte win by a landslide vote. The campaign-spending limit for each
presidential and vice-presidential candidate was capped at 543.64 billion
Philippine pesos ($11,757,013), with Duterte spending nearly 400 million pesos
in total, local media reported.
"It's no
secret that candidates spend quite a bit during the elections in the form of
political ads, rallies, and events ... Many government offices also tend to
front-load a lot of their expenditures early in the year prior to the election
ban," said Fenner.
Indeed, a
breakdown of the GDP data showed public construction and government consumption
grew by 27.8 and 13.5%, respectively.
"A
government in transition, slowdown in public-private partnership project
activities and capex peaking in the first half of the year could result in
domestic demand settling for slower pace in the second half," explained Jun
Trinidad, Citi economist.
Continued
declines in net exports are also an obstacle, with June export sales dropping
11.4% on-year. Sluggish global trade is the culprit here as demand from the U.S.
and Europe remains weak, according to Ferner.
Anticipated weakness in the agriculture sector could also be an issue.
Growth in
the second quarter was actually pulled down by a contraction in agriculture
output, and that could continue in the near-term amid challenging meteorological
conditions with the onset of the weather phenomenon known as La Nina,
Incalcaterra noted.
"Although
agricultural GDP makes up an increasingly smaller share of GDP, it employs a
disproportionately large chunk of the labor force, and output from the sector
weighs heavily on inflation," he explained.
Germany's
economy continued to expand in the second quarter but the pace growth eased as
estimated.
Gross
domestic product climbed 0.4% quarter-on-quarter, in line with preliminary
estimate, and slower than the 0.7% expansion seen in the March quarter.
The
positive contributions to growth came from the balance of exports and imports.
Exports
advanced 1.2%, while imports slid 0.1% sequentially, providing the strongest
contribution to GDP growth in the reference period, +0.6 percentage points.
Domestic
demand showed mixed signals. Household spending gained 0.2 % and government
expenditure grew 0.6%.
However,
capital formation declined compared with the first quarter. Fixed capital
formation in machinery and equipment dropped 2.4% and in construction by 1.6%
from the first quarter.
On a
yearly basis, GDP advanced 1.8%, slightly slower than the first quarter's 1.9%
increase.
The
price-adjusted GDP moved up 3.1% in the second quarter of 2016, which was the
largest increase in five years. The annual growth figures also matched
preliminary estimate published on August 12.
The
contraction of the Greek economy in the first half of the year has turned out to
be greater than originally estimated. The revised data released by the Hellenic
Statistical Authority (ELSTAT) recorded a bigger drop in gross domestic product
on an annual basis, which will make it even more difficult for the government to
meet the fiscal targets set for this year.
Using
previously unavailable data, ELSTAT has now calculated that first quarter GDP
declined by 1% and not 0.8% year-on-year, while in the April-June period it fell
by 0.9% and not 0.7% as originally thought. That was the fourth consecutive
quarter with a GDP contraction.
Consumer
spending fell 1.9% in the second quarter on an annual basis, exports of goods
and services contracted 11.4% (with goods increasing 2.98% and exports dropping
26.5%), while imports declined 7.1% Gross capital investments posted a 7%
increase.
On a
quarterly basis, consumer expenditure dropped 0.2 percent from the first
quarter, investment rose 1 percent, exports fell 1 percent and imports shrank
0.4 percent, ELSTAT data showed.
New
Democracy financial affairs coordinator Christos Staikouras said: “The downward
revision of the GDP estimate by ELSTAT for the second quarter of 2016 confirms
that the Greek economy is crawling into recession, ever deeper, for a fourth
quarter in a row. Greece is now the only economy in the European Union to have
been in recession over the last year.”
The
economy in Spain grew 0.8% between April and June this year.
This is
0.1% more than the figure forecast by both the National Statistics Institute
(INE) and the Bank of Spain.
It’s also
a fairly surprising result since there is still only an acting government in
place, who is not allowed to adopt any new measures at the moment in order to
fuel activity.
With this
new set of statistics for the second quarter of this year, Spain’s GDP has risen
for the last four consecutive quarters. In all three previous quarters, GDP had
risen by 0.8% each time.
Much of
this is attributed to an increase in household consumption and greater
investment, which saw a quarterly rise of 0.7% and 1.3% respectively.
With
regards to the annual GDP, at the end of the second quarter this registered at
3.2%, 0.2% less than in the previous quarter.
With an
annual growth of 3.2%, this makes 10 consecutive quarters of positive growth
from the previous year, with the last five quarters registering a growth of more
than 3%.
Exports
during the second quarter of 2016 grew 3% annually, from 3.8% to 6.8%, while
imports also increased 1.2% to register at 6.6%.
Despite
the good performance in the sectors of industry, agriculture and construction
during the first three months of the year, figures were slightly down annually
between April and June. For the services sector, however, the opposite applied,
with an increase of 3.6% from last year.
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