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World Economy Review - September 2008

The global economy faces its most difficult test in many years with growth slowing sharply as high commodity prices put pressure on inflation, a senior International Monetary Fund official said. IMF first deputy managing director John Lipsky said global growth was set to slow further in the second half of 2008, and continued financial sector strains were a major risk to the chances of recovery in 2009, on top of high oil prices. Commodity prices remained high and volatile, bringing risks of knock-on inflation effects, but recent sharp falls in oil prices should lessen short-term inflation pressures in the developed world, he told a conference. Central banks in advanced economies could afford to keep interest rates on hold. In regions with high real rates, they could look out for easing price pressures which would allow them to loosen policy later, he said. "Against the backdrop of protracted financial strains and dramatic surges in commodity prices, the global economy is confronted with its most difficult set of circumstances in many years," he said. "The good news is, we are only three to six months from the bottom, when the upturn begins."
Lipsky said the IMF was still reviewing its forecasts, which are due to be updated in its World Economic Outlook next month. But the fund saw global growth slowing from 5 percent in 2007 to about 3 percent late in 2008, reaccelerating towards 4 percent in 2009. The IMF`s last forecasts in mid-July were for global growth of 4.1 percent in 2008 and 3.9 percent in 2009. A G20 source told Reuters last month that these would be downgraded to 3.9 percent this year and 3.7 percent in 2009. Lipsky said the 2009 pickup would be driven by an unwinding of the effects of the past 50 percent increase in oil prices and a bottoming in the U.S. housing sector. Oil traded at a five-month low below $105 per barrel on Tuesday. In the United States, the IMF expected growth of about 1 percent in 2008 on a fourth-quarter-on-fourth-quarter basis, recovering gradually to about 1.5 percent in 2009, Lipsky said. This calculation was different from the annual growth rates forecast in its headline projections, he stressed. In mid-July, the IMF forecast U.S. growth of 0.3 percent in 2008 and 1.9 percent in 2009 on a Q4/Q4 basis, with full-year growth seen at 1.3 percent in 2008 and 0.7 percent in 2009. In the euro area, the IMF projected growth on a Q4/Q4 basis at about 0.75 percent in 2008 and about 1.5 percent in 2009, from 1.3 percent and 1.7 percent respectively in mid-July.
Lipsky said that although the IMF expected commodity prices to remain high in real terms, slower growth and cheaper oil should help to contain inflation pressure in advanced economies. "Thus, policymakers can afford to keep rates on hold in the face of elevated headline inflation, while watching closely for signs of easing price pressure that would permit a more accommodative stance in economies with relatively high real interest rates," he said. The European Central Bank held rates at 4.25 percent last week but is expected to cut them in mid-2009 and the Bank of England`s next move is also likely to be a cut. The U.S. Federal Reserve is expected to stay on hold for now, after cutting rates in the past year. Lipsky said that in emerging markets inflation pressures were growing while real interest rates remained low and some central banks may be "behind the curve" with their monetary policy. "Policies in these instances need to be tightened, lest central banks run the risk that hard-won policy credibility could be eroded. In some cases, allowing greater exchange rate flexibility would provide room for operating a more independent monetary policy." The IMF saw growth in emerging and developing economies of just over 6 percent in 2008 on a Q4/Q4 basis, broadly in line with the IMF`s mid-July outlook.

Economy of The United States

US economy has run at a faster pace from April to June than in the first three months of the year, although not as fast as expected by the analysts, according to data released by the US Commerce Department. Real Gross Domestic Product has grown at a 2.8% pace in the second quarter of the year, up from the 0.9% increase posted in the first quarter, although preliminary estimations had advanced a 3.3% GDP growth in the quarter. This economic acceleration comes, mainly from exports, real personal consumption expenditures, non-residential structures, federal government spending, and state and local government spending, partially offset by negative contributions on private inventory investment, residential fixed investment, and equipment and software. The Price Index for Gross Domestic Purchases has increased 4.2% in the second quarter, up from the 3.5% increase posted in the first quarter. Excluding food and energy, the Core GDP Price index has grown at a 2.2% pace, the same as in the first quarter. Personal consumption expenditures rose 1.2% in the second quarter, up from the 0.9% increase posted in the first quarter.
Industrial production in the U.S. fell in August by the most in almost three years as the slowdown in consumer spending prompted automakers to cut back. The 1.1 percent decrease in production at factories, mines and utilities was more than forecast, Federal Reserve figures showed. Car output slumped 12 percent, the most in a decade, and declines ranged from semiconductors to building supplies. Industrial production was forecast to drop 0.3 percent, according to the median estimate of 68 economists surveyed by Bloomberg News. July`s reading was revised down to a 0.1 percent gain from the 0.2 percent previously estimated.
The Fed`s production report also showed that capacity utilization, which measures the proportion of plants in use, decreased to 78.7 percent, the lowest level since October 2004. Capacity was estimated to fall to 79.6 percent, according to the Bloomberg survey median. Factory output, which accounts for about four-fifths of industrial production, dropped 1 percent after a 0.1 percent increase the prior month, the report showed. Production at utilities fell 3.2 percent, reflecting a cooler August than usual, economists said. Mining output, which includes oil drilling, decreased 0.4 percent.
Consumer inflation fell for the first time in nearly two years due to declines in energy, transportation and housing costs, the Labor Department said. Overall prices fell 0.1%, as expected by economists polled by Thomson Reuters IFR Markets. Core inflation, which strips out volatile food and energy prices, rose 0.2% as expected. Overall inflation is up an unadjusted 5.4% in the 12 months ending in August, down from the 5.6% reported for July. Core inflation has risen an unadjusted 2.5% over the last 12 months.
The US unemployment rate soared to 6.1 percent in August as workers lost 84,000 jobs, the highest level of job losses in the past five years. The unemployment figure increases come in the midst of the last weeks of the presidential campaign. US workers have witnessed rises in job loss for eighth consecutive months with June and July seeing a total of 58,000 job losses, the Bureau of Labor Statistics reported.
The bureau said the figures indicate that the world`s largest economy is encountering a recession and a clear signal for the Federal Reserve to take serious countermeasures. A total of 605,000 personnel have lost their jobs since January and 2.2 million people have become unemployed over the past 12 months. Officials at the Federal Reserve say there is a weak possibility that the rate of job loss will be reduced later this year but also forecast the economy will continue to slow for the rest of 2008.

Economy of The European Union

The euro-zone economy grew at the slowest year-on-year pace in almost five years in the second quarter of 2008, while it was also confirmed that the area`s quarterly performance was the weakest since records began. European statistics agency Eurostat Wednesday said year-on-year economic growth in the 15 countries that share the euro was just 1.4% compared with a 2.1% gain in the first quarter of the year. This was a downward revision from the original estimate of a 1.5% increase and is the lowest level of growth since a 1.2% gain in the third quarter of 2003.
The 0.2% quarterly contraction reported in the preliminary release was confirmed. That was the first contraction since records began in the first quarter of 1995 and compared with an increase of 0.7% in the first quarter of the year. The downward revision to the annual growth rate was unexpected as economists surveyed by Dow Jones Newswires had forecast that both the quarterly and year-on-year measures would be unrevised from the preliminary reading. The weakness was led by household expenditure, which posted its weakest performance since records began, declining 0.2% on the quarter and rising just 0.4% on the year. In the first three months of 2008, household expenditure was flat on the quarter and grew 1.2% in year-on-year terms.
Exports also declined on the quarter by 0.4% in April through June, a huge drop from the 1.8% gain reported in between January and March. On the year, exports grew at a weaker pace of 3.6% compared with a 5.4% gain in the first quarter, Eurostat said. Among the three major euro-zone economies, German growth contracted 0.5% on the quarter between April and June, while in France and Italy economic growth slipped 0.3% in the same period. Despite the weakness reported here the European Central Bank - which meets Thursday - is widely expected to keep key interest rates on hold at 4.25% until the end of year as inflation remains at a high level of 3.8%. Eurostat also reported that in the broader 27-country European Union, the economy contracted 0.1% on the quarter and grew 1.6% on the year.
Eurostat, the statistical office of the European Union released a report on industrial production for July, showing a 0.3% monthly drop compared to the 0.2% decline in the previous month. The decline was in-line with the expectations of economists. Annually, industrial output declined by 1.7% in the euro area. Production of energy rose 0.2% from the previous month, while output of capital goods, intermediate, durable consumer goods and non-durable consumer goods declined in the month.
Eurozone inflation appears to be on a clear downward trend after dropping again in September, but not enough to change the widespread view that the European Central Bank will keep its main interest rate on hold this month. Reflecting oil and other commodity price falls, annual inflation in the 15-country region fell for the second consecutive month, from 3.8 per cent in August, to 3.6 per cent in September, according to a flash estimate by Eurostat, the European Unions statistical office.
But inflation remains far above the ECBs target of an annual rate below but close to 2 per cent, and ECB policymakers have warned that at times of financial stress, it is still more important to keep inflation under control. The ECB sees eurozone prices as less flexible than in the US, justifying a tougher monetary policy stance, especially with crucial wage negotiations looming in the German engineering sector. As a result, financial markets expect the ECBs main interest rate to be left at 4.25 per cent when its governing council meets on Thursday. A first cut in official borrowing costs is not expected until December or early next year.

Economy of Japan

Japan`s Gross Domestic Product (GDP)registered an annualized 3.0 percent decrease in real terms in the April-June quarter, down from a 2.4 percent fall in the preliminary report, the Cabinet office said. In nominal terms, the Japanese economy went down 0.8 percent from the previous quarter, or 3.3 percent on an annualized basis, in the second quarter of 2008, the government body said. GDP is the total market value of the goods and services produced domestically during a specific period of time. Real GDP figures are adjusted for changes in the value of money or assessed by purchasing power.
Japan`s industrial production rebounded in July as demand in Asia helped exporters withstand a slump in shipments to the U.S. Factory output gained 1.3 percent from June, the Japanese government said. Japan`s output gap, a gauge of the economy`s supply and demand balance, was revised down to minus 0.4 percent for the April-June quarter, a research report by a Cabinet Office economist showed. That would mean supply exceeds demand in the economy, indicating weak inflationary pressure from the demand front. But annual inflation hit a decade high in July due largely to high fuel and food prices. Central banks see the output gap as an important variable for determining monetary policy as they try to balance growth, employment and inflation by tweaking interest rates. The downward revision to the output gap from an initial estimate of minus 0.2 percent -- the first negative reading in nearly two years -- was due to a revision to second quarter gross domestic product (GDP) data released on Sept. 12.
Japan`s consumer-price inflation exceeded 2 percent for a second month as companies passed on costs of food and other daily necessities. Core prices, which exclude fresh food, climbed 2.4 percent in August from a year earlier, the same pace as July, the statistics bureau said today in Tokyo. The median estimate of 33 economists surveyed by Bloomberg News was for a 2.4 percent increase. The fastest inflation in a decade won`t spur an interest- rate increase by the Bank of Japan because prices gains are likely to moderate as oil costs drop. Policy makers will probably keep the key rate at 0.5 percent, the lowest in the industrialized world, as it monitors the effect of the global financial crisis on Japan`s shrinking economy.
Japan`s unemployment rate rose to 4.2 percent in August from 4.0 percent in July, adding to fears of a recession in Asia`s biggest economy, official figures showed. The figure was worse than average market forecasts for a jobless rate of 4.1 percent.
The unemployment rate for men rose to 4.3 percent from 4.0 percent while the rate for women stayed flat at 3.9 percent, figures from the internal affairs ministry showed. The number of unemployed people increased by 230,000 from a year earlier to a total of 2.72 million. The labour ministry said in a separate report that there were only 86 job opportunities for every 100 job seekers. It was the ninth straight month that the number of job hunters exceeded the number of job offers.

Economy of Russia

In the first half of 2008 Russias real gross domestic product (GDP) grew 8% against the same period a year ago, the Federal Statistics Service (Rosstat) reported. In H107 GDP increased 7.8% y-o-y. Meanwhile, in nominal terms Russias H108 GDP reached Rub 19,112.8 bln in current prices. In the second quarter of 2008 real GDP growth equaled 7.5% compared to April-June 2007. The countrys Q208 GDP totaled Rub 10,274.7 bln in current prices. In the January-March quarter of 2008 GDP rose 8.5% against the year-earlier period.
Russia`s industrial production grew 5.3 percent in January-August 2008 compared to the same period a year earlier, the Federal State Statistics Service (Rosstat) said in a statement today. In August 2008, the industrial production index stood at 104.7 percent against August 2007 and 99.1 percent in comparison with July 2008. The primary sector saw only a small increase in industrial production (up 0.2 percent) in the first eight months of 2008 compared to the same period of 2007, while the figure climbed 7.6 percent in the manufacturing sector. Power, gas, and water production and distribution rose 4.2 percent, whereas oil output (including gas condensate) inched down 0.7 percent to 325m tonnes. Natural gas production edged up 1.2 percent to 434bn cubic meters, and energy output went up 4.1 percent to 680bn kilowatt-hours. The production of passenger cars and trucks jumped 19 percent and 6.9 percent, respectively.
The International Monetary Fund cut its growth forecast for Russia and said it had told Moscow not to intervene on the equity market or use its national wealth fund to give loans to commercial banks. While it saw no systemic risk to the banking system from the global financial market turmoil, the IMF cut its 2008 growth forecast to 7.1 percent from 7.8 percent, and its 2009 forecast to between 6 percent and 6.5 percent from 7.3 percent. "The less favourable external environment and the downturn in Russian financial markets will cause some weakening in GDP growth," said Poul Thomsen, the deputy director of the European department of the IMF. "But Russia is well positioned to avoid a sharp and lasting reduction in growth, provided the policy response is appropriate and timely," he added. He said the IMF`s 13.8 percent inflation forecast for 2008 was "subject to more uncertainty" in the current environment. The IMF sees net capital inflows into Russia of between zero and $15 billion in the full-year 2008, down from a record of more than $80 billion seen last year. - 02.10.2008 21:09:08