World Economy Review - February 2007

The International Monetary Fund said the world economy should hold up well in the face of a slowing U.S. economy and should grow by a solid 4.9 percent this year. China`s economy logged blistering growth of 10.7 percent in 2006 - the most since 1995. It is expected to slow somewhat to 9.8 percent this year, according to the country`s central bank.
Brian Bethune, economist at Global Insight, predicted China`s growth would have to slow much more - to around 6 percent or less - to precipitate major economic turmoil. "It would take a major slowdown to upset the Chinese applecart", - he said.
Economists put the odds of a U.S recession this year at about one in five. "It is very rare that business cycles die of old age. It is usually some shock that leads to recession," - said Carl Tannenbaum, chief economist at LaSalle Bank and president of the NABE.
The economy`s last recession in 2001 was preceded by the bursting of a stock market bubble in 2000 that wiped out trillions of dollars in paper wealth. Then came the 2001 terror attacks. The shock this time could come from the housing slump and from the surge in delinquencies and foreclosures for "subprime" borrowers - people with weaker credit records who are considered higher risks especially those who have adjustable-rate mortgages.
"While the probability of a recession is low, it does highlight that the economy will be vulnerable to any shock in 2007. It is worth thinking about and preparing for," - said Mark Zandi, chief economist at Moody`s Economy.com.
Meanwhile, Russia`s economics ministry said it has reduced its GDP growth forecast for 2007 to 6.1% from 6.2%, and for 2009 to 5.9% from 6%. The Economic Development and Trade Ministry also said it has left its GDP growth forecast for 2008 and 2010 unchanged - 5.9% and 6.1%, respectively. It also said inflation in Russia will be at 6.5-7.0% in 2008, 6.3-6.8% in 2009, and 5.8-6.5% in 2010.

United States Economy

Despite a dip below the 50-point level in January, economic activity in the manufacturing sector grew in February with the Institute for Supply Management`s PMI index hitting 52.3 for the month, the group reported Thursday. In January the PMI index registered a seasonally adjusted 49.3. According to ISM officials, any reading above 50 indicates the manufacturing economy is generally expanding; any reading below 50 indicates it is generally contracting.
The Conference Board Consumer Confidence Index, which had marginally increased in January, improved in February. The Index now stands at 112.5 (1985=100), up from 110.2 in January. The Present Situation Index increased to 139.0 from 133.9. The Expectations Index edged up slightly to 94.8 from 94.4 last month.The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households.
Industrial production in the U.S. fell last month by the most in more than a year as companies delayed orders and makers of autos and building materials reduced stockpiles. Production at factories, mines and utilities dropped 0.5 percent after a 0.5 percent December increase, the Federal Reserve said. Capacity utilization, which measures the proportion of plants in use, declined to 81.2 percent in January from 81.8 a month earlier. The decrease suggests a diminishing threat of production bottlenecks that can lead to faster inflation. Manufacturing, which accounts for about four-fifths of the industrial production, fell 0.7 percent last month after rising 0.8 percent the prior month. Excluding autos, factory production fell 0.4 percent, after increasing 0.8 percent in December.

Economy of Eurozone

The seasonally adjusted RBS/NTC Manufacturing PMI (Purchasing Managers` Index) rose for the first time in four months in February, up marginally to 55.6 from the 11-month low of 55.5 seen in January. The latest reading indicated an improvement in business conditions for the twentieth consecutive month. The Economic Sentiment Indicator (ESI) increased in both the EU and the euro area in February. The indicator increased by 1.3 points in the EU and by 0.5 of a point in the euro area, to 112.0 and 109.7 respectively.
Consumer confidence index improved in both the EU and the euro area. In both areas, the indicators remained on an upward trend and stand well above their long-term averages.
Economic growth in the eurozone would be at 2.5 percent of GDP in 2006 and was expected to see a further upturn, Bank of Spain said. The eurozone economy is currently enjoying the strongest growth since the turn of the century, pumping unexpected revenues into government coffers. Real GDP in the eurozone decelerated slightly in Q3 2006 (0.5%) after the strong increase registered in H1. The prospects for economic growth remain however positive. Real GDP is expected to rise by 0.7% in Q4 2006, followed by 0.3% in Q1 2007 and 0.5% in Q2.
Industrial production should continue to expand, but at lower rates, owing to the expected slackening in world trade. Domestic demand is bound to exhibit resilience. Consumption should remain robust after a temporary slowdown in Q1 2007 associated with the German VAT hike. Investment should expand at a constant but still strong rate. On the technical assumption that oil prices stay within a range of USD 60-65 per barrel of Brent and that the dollar/euro exchange rate fluctuates around 1.30, consumer price inflation is expected to jump, reflecting the VAT rise in Germany, to 2.1% in Q1 2007 before decreasing to 1.7% in Q2.

Economy of Asia

The Japan`s economy grew 1.2 percent in real terms in the October-December period, an annualized rate of 4.8 percent, according to a preliminary government report. The quarterly rise marks the eighth straight quarterly increase since the January-March period in 2005, the Cabinet Office report showed. A rebound in consumer spending, which plunged in the summer due to cooler weather, and strong investment in plant and equipment is believed to be behind the rise, suggesting the economy was being boosted by domestic demand.
The nominal GDP, which reflects price changes, increased 1.2 percent for the last quarter compared with the previous quarter, and 5 percent at an annualized rate. The quarterly rise was the first increase in the last two quarters. The figures also indicated that the situation in which real growth rates exceed nominal growth rates, resulting from a drop in price levels, had ended after eight successive quarters since the October-December period in 2004.
China`s economic growth is expected to fall to 9.6% this year from 10.7% last year amid a mild slowdown in exports, the World Bank said. Export growth is likely to decline to 20% this year, from 24% in 2006. "A resilient world economy means that export demand prospects remain good, although less buoyant than in 2006", - the report said. The World Bank said productivity growth meant exporters would probably be able to continue absorbing the effect of a rising currency and the gradual lowering of export tax rebates. Investment, a main engine of growth in the world`s fourth largest economy in recent years, is unlikely to slow drastically in early 2007, while consumption should grow solidly.

Economy of Russia

Russia`s national statistics body said that the country`s gross domestic product grew by an estimated 6.7%, year-on-year, in 2006, to 26.621 trillion rubles ($1.002 trillion). Inflation in Russia stood at 9% in 2006.
The Russian GDP Indicator, produced by NTC Research for VTB Bank Europe, pointed to a further marked rate of economic growth at the start of 2007. The indicator posted 7.4 percent, slightly above the average annual rate of growth signaled during 2006 which, at 7.3 percent, was the highest calendar average since 2000. However, the indicator signaled a slowdown in growth for the third successive month from the 2.5-year peak of 7.8 percent registered last October.
Russia`s industrial production index stood at 108.4 percent in January 2007 (compared to the same month a year ago) against 104.4 percent in January 2006, the Russian Industry and Energy Ministry`s documents state. The acceleration in industrial production growth in January is attributed chiefly to a considerable increase in the manufacturing industry (117.3 percent against 104.1 percent in January 2006). Manufacturing expanded amid a relatively small advance in mining (104.2 percent against 100.9 percent in January 2006) and a decline in the generation and distribution of electricity, gas, and water.
The industrial production index is calculated for the following entities: mining and processing companies, as well as electric power, gas and water generating and distributing enterprises, based on the dynamics of 730 of the most important commodities. Industrial production growth is forecast to reach 4.2 percent in 2007, up from 3.9 percent in 2006.
Russia`s economics ministry said it has reduced its GDP growth forecast for 2007 to 6.1% from 6.2%, and for 2009 to 5.9% from 6%. The Economic Development and Trade Ministry also said it has left its GDP growth forecast for 2008 and 2010 unchanged - 5.9% and 6.1%, respectively. The ministry said direct foreign investment in Russia by 2010 could grow 41.9% on 2006, to $44 billion.
"The volume of direct foreign investment in 2006 was $31 billion, and it could grow to $44 billion by 2010," the Economic Development and Trade Ministry said on its Web site in its scenario for the country`s social and economic development until 2010. It also said inflation in Russia will be at 6.5-7.0% in 2008, 6.3-6.8% in 2009, and 5.8-6.5% in 2010.