World Economy Review - February 2008

The recent growth in the U.S. economy has depended on the American consumer to stimulate demand; economic vitality has been supported by consumer spending. However, rising energy costs, increasing unemployment and subprime mortgage credit crunch problems call into question the consumer`s contributions to future economic activity. Despite these issues, we enter 2008 with a world economy that is increasingly integrated and not solely dependent upon the United States. The following are a few thoughts about globalization, the economy and recession:
The U.S. economy has always been the engine for economic growth globally. But increasingly, emerging and developing markets are assuming a greater role in sustaining economic growth. Countries such as China and India are recognizing that domestic economic demand is also an engine of growth and are lessening their demand on export-driven economic growth. Where this transition will leave the U.S. economy in 2008 is not clear, but it is evident that the increased demand for U.S. products abroad will create a strong growth factor domestically.
BusinessWeek reports that in the past 10 years, growth in the U.S. economy declined from 3 percent annually to 2.6 percent, while global growth has increased from 3.2 percent to 4.4 percent — both trends that are expected to continue in 2008. In addition, a significant portion of U.S. export growth has come from the faster-growing emerging markets, with U.S. goods shipped to emerging markets increasing from 38 percent to 45 percent in the past two years. In China, U.S. exports have increased 25 percent each year for the past five years.
Much of this U.S. export growth is being fueled by domestic demand abroad versus historical, export-driven growth. In 2008, exports will provide a positive boost to U.S. economic growth — even as U.S. demand for consumer goods slows and imports decrease.
Economists generally think that a smaller 2008 trade deficit will contribute to economic growth. While imports continue to rise for the moment, the rate of that increase will slow as domestic spending drops. Due to the trade gap, exports need to grow 60 percent faster than imports just to remain even. The drop in the dollar`s relative value contributes to the trend as exports are cheaper and imports more expensive. An increasingly integrated global marketplace makes protectionism less likely and less desirable as a policy option.
Foreign trade is a bright spot for growth in 2008. It will add one-half to three-quarters of a percentage point to real GDP growth in 2008. This will be the second year of transition to a more balanced global economy. In trade, the declining global value of the U.S. dollar is a positive, making U.S. goods more price competitive overseas. However, the counter is that the decline in the dollar has also created inflationary pressures as the cost of imports increase. On a trade-weighted basis, the dollar`s 24 percent decline since early 2002 was the result of its being at an unusually high, overvalued level. The dollar had risen 72 percent from 1992 to 2002; even now, it remains 42 percent above the 1985 peak.
A challenge to the declining dollar is the decline in purchases of U.S. long-term securities by foreigners. Despite a narrowing of the trade gap the U.S. still needs some $60 billion per month from overseas to finance the trade imbalance. But that, coupled with the downward trend in the dollar`s value, does not mean our dollar is about to lose its role as the dominant currency in the global economy. Abu Dhabi`s $7.5 billion infusion of capital into Citigroup is a reminder that there is a lot of foreign capital; it is also an endorsement of the dollar in the long run.
Globalization is certainly a positive economic force, but the question remains: will the world`s leading economy head for recession in 2008? Of 54 economists polled at year`s end by BusinessWeek, only two believed we would enter a recession in 2008. However, all 52 votes for no recession depended upon further rate cuts by the Federal Reserve. The challenge ahead for the Fed is to balance inflationary pressures and growth. The new global economy is a factor that enters into the equation for 2008 in a way that it never has historically, making the Fed`s efforts to balance even more difficult. Thus, with data arriving daily, the jury is still out on a U.S. recession in 2008 by most accounts. But most think it will feel like one, no matter what the verdict. (Evansville Business Journal).

Economy of The United States

The U.S. economy expanded at an annual rate of 0.6% in Q4 2007, below the consensus estimate, as activity in construction and consumer spending declined, The U.S. Commerce Department announced. Economists surveyed by Bloomberg News had expected the economy to grow at a 0.7% annualized rate in Q4 2007. The economy grew at a 4.9% pace in Q3 2007, the Commerce Department said. For 2007, the economy grew at its weakest pace in five years, with GDP increasing at an inflation-adjusted 2.2%. GDP increased 2.9% in 2006. In 2007 the nation`s GDP totaled $13.84 trillion, not adjusted for inflation. In Q4 2007, a stronger performance in trade offset sub-par performances in consumer spending, business investment, residential investment, and inventories.
U.S. January industrial production avoided a recessionary foray below zero, managing a second small monthly increase, the Federal Reserve reported. The output of U.S. factories, mines and utilities rose 0.1%, the same as the revised December growth and right on the number analysts were expecting. February`s capacity utilization rate also held steady, at 81.5% for the third month in a row. Manufacturing avoided negative territory in January, with no change in production following a revised 0.2% gain in December. A 1.3% drop in motor vehicles and another drop in housing-related products were offset by gains in computers and other business equipment and in non-durable goods. Utilities benefited from cold-weather demand with output rising 2.2%. Mining fell 1.8% as oil and gas well drilling declined. Year-over-year U.S. industrial production was up 2.3%.
Federal Reserve chairman Ben Bernanke told Congress that weak US economic growth may prompt the central bank to cut short-term interest rates further if needed. Bernanke said "downside risks" to growth were buffeting the world`s largest economy, but stressed the Fed was ready to unleash fresh rate cuts if economic momentum is threatened, despite heightened inflation worries. "It is important to recognize that downside risks to growth remain," Bernanke said in remarks prepared to support the Fed`s semiannual economic report to Congress. "The FOMC (Federal Open Market Committee) will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," the Fed chairman told the House Financial Services Committee. Bernanke said a multiyear housing market slump and a financial market credit crunch were threatening growth and had created a "distinctly less favorable" economic picture. In a bleak appraisal, the Fed chairman said consumer spending appeared to have slowed "significantly" and that other reports in recent weeks "suggest sluggish economic activity in the near term."
A weekly gauge of future U.S. economic growth fell in the latest week, and even though its annualized growth rate has reached readings seen in a recession, there might still be a chance to reverse it, a research group said. The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 132.3 in the week of Feb. 15 from 133.1 in the prior week, which was revised from 133.4. The index fell due to higher interest rates and slower housing, offset in part by a rise in money supply and stock prices, said Lakshman Achuthan, managing director at ECRI. The index`s annualized growth rate plunged to minus 10.2 percent from minus 9.2 percent, reaching its lowest reading since the week of Oct. 26, 2001, when it was minus 11 percent. "With WLI growth deep in negative territory, due mainly to weakness in the financial and construction sectors, the U.S. economy is on the verge of a recession," said Achuthan. "However, due to unusual factors affecting the manufacturing sector, it may still be possible for quick stimulus to avert a recession."

Economy of The European Union

Eurozone quarterly GDP rose 0.4% in the fourth quarter of 2007, down from the previous period`s 0.8% increase but marginally higher than the consensus 0.3% increase. Annual GDP rose 2.3% in Q4 compared to forecasts for a 2.2% increase and previous 2.7% gain. All individual euro-members experienced quarter-over-quarter GDP gains in the fourth quarter, with Germany growing by 0.3%, Spain by 0.8%, Portugal by 0.7% and France by 0.3%. On the other hand, Portugal`s economy contracted in the third quarter, shrinking 0.1% quarter-over-quarter, while Germany, France and Spain had all witnessed GDP expansion during the same period, growing 0.7%, 0.8% and 0.7% respectively. Growth in the Eurozone GDP is expected to be between 1.6 and 1.8 pct in 2008.
Euro Zone`s industrial production has declined on the month in December for its second month in a row, although the fall has been softer than the one posted in the previo9us month, according to data by Eurostat. In December, Euro Area`s industrial production has fallen 0.2% while it has risen 1.3% compared to December 2006. Figures from November have been revised, the monthly reading up to -0.4% from -0.5% estimated previously, while the yearly reading has been revised to a 3.1% increase from the 2.7% previously released.
On the month, production of energy increased by 0.5% in December, while intermediate goods production increased by 0.3% and durable goods remained practically unchanged. On the negative side, both, non-durable consumer goods and capital goods decreased 0.1%. Production of energy has been also the main contribution for the yearly figure, posting a 4.4% rise followed by a 2.3% increase on capital goods, and the 0.2% increase on the intermediate goods production. All these increases have been partially offset by the 4.2% fall in durable goods production.
The euro zone unemployment rate for January was recorded at 7.1%, in line with the expected reading and unchanged from the previous month`s figure. December`s reading was revised down from 7.2%. Germany`s unemployment rate fell to 7.6% in January, down from December`s rate of 7.8%. The unemployment rate in France also fell in January, dropping to 7.8% from December`s 7.9% rate. Spanish unemployment, on the other hand, rose in January to 8.8% from 8.7% while the Netherlands, Malta and Luxembourg were unchanged from December to January, with unemployment rates at 2.9%, 5.8% and 4.6% respectively.
Confidence in the eurozone economy slipped in February to the lowest level in over two years, due largely to a gloomy services sector, an EU survey showed. The European Commission`s eurozone economic sentiment indicator slid in February to 100.1 points in the eurozone and 100.2 points in the full 27-member European Union, well down from the 101.7 and 103.3 levels in January. The long-term average is 100, a level not seen since December 2005.
The confidence indicator was released alongside record inflation and unemployment figures. Eurozone inflation hit a record-high point of 3.2 percent in January.

Economy of Asia

The Japanese economy grew 0.9 percent in real terms in the fourth quarter, or at an annualized rate of 3.7 percent, buoyed by brisk capital investment and consumer spending, the Cabinet Office said. In addition, rising demand from emerging markets such as China lifted Japan`s exports, helping the world`s second-largest economy expand for the second straight quarter. The growth was ahead market expectations. Ten economists polled by Thomson Financial News were looking at 0.4 percent expansion for the quarter and an annualized pace of 1.5 percent, on average. Gross domestic product for the third quarter was revised down to show a rise of 0.3 percent compared to the 0.4 percent growth reported in December. Annualized, GDP grew 1.3 percent, slower than the 1.5 percent growth announced earlier. GDP in nominal terms, or before adjusting for inflation, rose 0.3 percent in the fourth quarter and at an annualized rate of 1.2 percent. The GDP deflator, which measures the degree of deflation, fell 1.3 percent from a year earlier, after declining by a revised 0.6 percent in July-September.
Japan`s industrial production in January fell 2.0% from the previous month but was up 2.5% from the previous year. Industries that mainly contributed to the decrease were: Electronic parts and devices , Transport equipment and General machinery, in that order. The Minister of Economy, Trade and Industry said that commodities that mainly contributed to the fall were: Large passenger cars, Metal oxide semiconductor IC (Memory) and Digital cameras, in that order. Factory production is expected to fall a further 2.9% in February before rising up 2.8% in March, the ministry said.
Japan`s unemployment rate was unchanged at 3.8 percent in January from the previous month, in line with market expectations, as the medical sector, as well as transportation and the wholesale and retail sectors hired more workers, government data showed. Economists had expected the jobless rate to come in at 3.8 percent in January, according to the median estimate of Thomson-IFR Markets. The unemployment rate fell to a low of 3.6 percent last July, the lowest level since February 1998.
Japan`s consumer prices rose for a fourth month in January, matching the fastest pace in more than nine years, as companies passed on higher costs of oil, wheat and soybeans. Core consumer prices climbed 0.8 percent from a year earlier, the same rate as December, the statistics bureau said today in Tokyo. The median estimate of 46 economists surveyed by Bloomberg News was for a 0.9 percent increase.

Economy of Russia

Russian industrial output grew 4.8 pct year-on-year in January, the Federal State Statistics Service (Rosstat) said. Analysts forecasted growth of 4.9 pct. However, this was well below the 8.4 pct year-on-year industrial growth seen in January 2007. Compared with December, industrial production fell 14.1 pct. Russia`s industrial production rose 6.3% in 2007, year on year, Rostat said. The figures surpassed preliminary forecasts that suggested the figure would reach around 4-5%. Russian manufacturing, which posted a 4.4% growth in 2006, showed a 9.3% rise last year. Experts say that the overall growth indicates that Russia successfully coped with the "first wave" of the U.S. subprime loan crisis in August 2007 and ensuing global downturn. Deutsche Bank forecasts 6.2% growth in industrial production, with GDP reaching 7% in 2008.
Russia`s trade surplus stood at $152.8bn in 2007, which is 6.49 percent lower than a year earlier, the Russian Federal Customs Service reported. Meanwhile, Russia`s foreign trade jumped 25.8 percent to $552.2bn compared to 2006, including trade worth $469.8bn with countries outside the CIS (up 25.5 percent) and $82.4bn with the CIS (up 27.4 percent). Russia`s exports amounted to $352.5bn (up 17 percent), including $299.9bn worth of goods exported to countries outside the CIS up (15.8-percent increase), and $52.6bn worth of goods sold to the CIS ( 24.3-percent rise). Imports totaled $199.7bn, up 44.9 percent from the previous year, including $169.9bn worth of goods received from countries outside the CIS (up 47.2 percent), and $29.8bn (up 33.4 percent) from the CIS.
Russia`s GDP could grow by 7.0% in 2008 instead of the planned 6.6%, while food prices are unlikely to follow last year`s trend of sharp increases, Finance Minister Alexei Kudrin said. Speaking in Japan at a meeting of finance ministers from the G7 group of industrialized nations plus Russia, Kudrin said Russia had a good chance of keeping inflation within 8.5% in 2008. According to Russia`s statistics service, the country`s GDP grew 8.1% in 2007. In the past five years, the Russian economy has grown at an annual rate of 7% plus, except for 2005, when GDP expanded 6.4%. In 2006, GDP grew 7.4%. Inflation in Russia stood at 11.9% in 2007, exceeding the government`s initial target of 8% for last year. Inflation in 2006 was 9%, in line with government targets.