World Economy Review - October 2008

The world economy will slow sharply this year and next, with the United States likely sliding into recession reflecting mounting damage from the most dangerous financial jolt in more than a half-century. The International Monetary Fund, in a World Economic Outlook released Wednesday, slashed growth projections for the global economy and predicted the United States - the epicenter of the financial meltdown - will continue to lose traction.
The IMF now projects that the global economy, which grew by a hardy 5 percent last year, will lose considerable speed, slowing to 3.9 percent this year. It is forecast to weaken even more - to just 3 percent - next year, marking the worst showing since 2002. In the past, the IMF has called global growth of 3 percent or less the equivalent to a global recession. In the United States, the economy, which grew by 2 percent last year, is projected to slow to 1.6 percent this year. Growth would screech to a virtual halt in 2009, barely budging at just 0.1 percent. That would mark the worst showing since 1991, when the country was pulling out of a recession.
Looking at other countries, Germany`s growth will slow to 1.8 percent this year, down from 2.5 percent last year. France`s growth will weaken to just 0.8 percent, compared with 2.2 percent in 2007. Britain`s economy will see growth taper to 1 percent, down from 3 percent last year. Canada`s growth will tail off to 0.7 percent this year, from 2.7 percent last year. In Japan, growth will cool to just 0.7 percent, from 2.1 percent last year. Global powerhouses China and India will see growth clock in this year at a robust 9.7 percent and 7.9 percent, respectively. Even if those projections prove correct, they would still mark downgrades from their blistering performances last year. Russia`s economy should grow by a brisk 7 percent this year, down from 8.1 percent last year. Inflation around the world remains high, driven up by surging energy and food prices through much of this year.

Economy of The United States

The U.S. economy officially shrunk as the country`s gross domestic product in the third quarter turned negative on higher number of consumers cutting down on spending, according to a report. The latest report by the Commerce Department released Thursday showed that the U.S. gross domestic product dropped to a seasonally adjusted 0.3 percent annual rate in the third quarter, but remained within the estimated decline of 0.5 percent by the market analysts on Wall Street. Nonetheless the decline is the biggest drop in the GDP figure since during July through September of 2001, when the U.S. economy shrunk by 1.4 percent. The report added that it is a preliminary estimate of the third quarter.
The economy mainly contracted due to negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software. Imports, which are a subtraction in the calculation of GDP, decreased. The positive contributions that prevented the economy from further declining include federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Some of the analysts said the data reflects that the economy is in recession as credit crisis further deepens with collapsing of larger firms like Lehman Brothers Holdings Inc. and consolidation of Washington Mutual Co. during the quarter.
Excluding food and energy, core consumer inflation increased by 2.9 percent in the third quarter, compared to the second quarter rise of 2.2 percent, the report showed. The real consumer spending, which accounts for about 70 percent of the country`s total gross domestic product (GDP), moved down by 3.1 percent in the third quarter on an annual basis, after increasing by 1.2 percent in the second quarter. The consumer spending slipped to the lowest level since its steepest decline of 8.6 percent in the second quarter 1980. Real exports of goods and services increased by 5.9 percent, compared to its rise of 12.3 percent in the second quarter; while imports dropped 1.9 percent in the quarter from 7.3 percent drop in the prior quarter. Equipment and software dropped by 5.5 percent, compared with a decrease of 5.0 percent. Real residential fixed investment slipped by as much as 19.1 percent, compared with a decrease of 13.3 percent. Federal government consumption expenditures and gross investment surged by 13.8 percent in the third quarter, compared with an increase of 6.6 percent in the second quarter. National defense outlays increased 18.1 percent, compared with an increase of 7.3 percent in the previous quarter; while nondefense increased 4.8 percent, compared with an increase of 5.0 percent. The U.S. economy had increased by 2.8 percent pace in the second quarter of this year.
Industrial production in the U.S. fell in September by the most in almost 34 years as hurricanes and an aircraft strike combined with the credit crunch to weaken manufacturing. The 2.8 percent decrease in production at factories, mines and utilities exceeded forecasts and followed a revised 1 percent decrease in August, the Federal Reserve said today. For the third quarter, output fell at an annual rate of 6 percent, the biggest decline since 1991.
Last month`s Gulf Coast hurricanes accounted for 2.25 percentage points of the decline in industrial production, and a strike at Boeing Co. accounted for most of the rest of the drop, the Fed said. Frozen credit markets and higher borrowing costs will force consumers and companies to further trim purchases of expensive items such as cars and machinery. Last month`s decline in output was the biggest since December 1974. Industrial production was forecast to fall 0.8 percent after a previously reported 1.1 percent drop, according to the median estimate of 73 economists surveyed by Bloomberg News. Projections ranged from a gain of 0.1 percent to a drop of 2.8 percent.
Factory output, which accounts for about four-fifths of industrial production, fell 2.6 percent after a 0.9 percent decrease the prior month. Utility production rose 2.2 percent after dropping 3.1 percent. Mining output, which includes oil drilling, decreased 7.8 percent, after no change in August. Oil production operations and other facilities were shut down because of Hurricane Ike, which made landfall on the Gulf Coast of Texas on Sept. 13, less than two weeks after Hurricane Gustav struck Louisiana.
Capacity utilization, which measures the proportion of plants in use, fell to 76.4 percent from 78.7 percent the prior month. Industrial capacity utilization was estimated to fall to 77.9 percent according to the Bloomberg survey median, from an originally reported 78.7 percent in September that was the lowest level in almost four years. Motor vehicle and parts production increased 1.9 percent following an 11.3 percent drop the prior month, the report said. Production of consumer durable goods, including automobiles, furniture and electronics, fell 0.7 percent.
The Nation`s international deficit in goods and services decreased to $59.1 billion in August from $61.3 billion (revised) in July, as imports decreased more than exports. Exports decreased to $164.7 billion in August from $168.1 billion in July. Goods were $117.6 billion in August, down from $120.8 billion in July, and services were $47.1 billion in August, down from $47.3 billion in July. Imports decreased to $223.9 billion in August from $229.4 billion in July. Goods were $188.5 billion in August, down from $194.9 billion in July, and services were $35.3 billion in August, up from $34.4 billion in July. For goods, the deficit was $70.9 billion in August, down from $74.1 billion in July. For services, the surplus was $11.8 billion in August, down from $12.8 billion in July.
The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in September, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The September level of 218.783 (1982-84=100) was 4.9 percent higher than in September 2007.
Nonfarm payroll employment declined by 159,000 in September, and the unemployment rate held at 6.1 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and retail trade, while mining and health care continued to add jobs.
Credit-market deterioration in the second half of September is enough to push the U.S. economy into recession, forecasters for the National Association for Business Economics say in their latest survey. The 48 economists in the NABE panel say gross domestic product will decline 1.1% this quarter and 0.5% in the first quarter of 2009 if credit conditions don`t improve by year end. The survey was taken last Wednesday and Thursday as a follow-up to a NABE poll of its forecasters in mid-September. In the earlier survey, the panel said GDP would increase 0.1% - essentially flat performance - in the current quarter and a 1.3% increase next year according to the median view of forecasts. The weak credit markets also mean higher unemployment. The jobless rate would hit 7% by mid-2009 under current conditions, compared to the 6.4% estimated in the initial survey, the panelists said. For 2009, the NABE follow-up survey last week said the government`s $700 billion rescue plan “would blunt much of the economic decline that might otherwise develop.” Real GDP growth in 2009 would be about 0.75 percentage point lower next year without the government`s plan, and the unemployment rate at the end of next year would be half a percentage point higher. In addition, stock prices - measured by the S&P 500 - would be 10% lower by the end of this year than they`d be if no plan were in place, the panel said.

Economy of The European Union

Euro area (EA15) GDP declined by 0.2% and EU27 GDP was unchanged in the second quarter of 2008 compared with the previous quarter, according to second estimates from Eurostat, the Statistical Office of the European Communities. In the first quarter of 2008, growth rates were +0.7% in the euro area and +0.6% in the EU27. In comparison with the same quarter of the previous year, seasonally adjusted GDP grew in the second quarter of 2008 by 1.4% in the euro area and by 1.7% in the EU27, after +2.1% and +2.3% respectively in the previous quarter.
In the second quarter of 2008 and among the Member States for which seasonally adjusted GDP data are available, Slovakia (+1.9%) recorded the highest growth rate compared with the previous quarter, followed by Poland (+1.5%) and Lithuania (+1.0%).
In August 2008 compared with July 2008, seasonally adjusted industrial production grew by 1.1% in the euro area (EA15) and by 0.5% in the EU27. In July production fell by 0.2% and 0.1% respectively. In August 2008 compared with August 2007, industrial production decreased by 0.7% in the euro area and by 1.1% in the EU27.
The first estimate for the euro area (EA15) trade balance with the rest of the world in August 2008 gave a 9.3 bn euro deficit, compared with +1.5 bn in August 2007. The July 20082 balance was -2.0 bn, compared with +5.3 bn in July 2007. In August 2008 compared with July 2008, seasonally adjusted exports fell by 0.6% and imports by 1.0%. The first estimate for the August 2008 extra-EU271 trade balance was a deficit of 27.2 bn euro, compared with -16.1 bn in August 2007. In July 20082, the balance was -21.5 bn, compared with -13.3 bn in July 2007. In August 2008 compared with July 2008, seasonally adjusted exports and imports both fell by 2.3%.
The euro area (EA15) seasonally-adjusted unemployment rate stood at 7.5% in September 2008, stable compared with August. It was 7.3% in September 2007. The EU27 unemployment rate was 7.0% in September 2008, compared with 6.9% in August. It was 7.0% in September 2007. Eurostat estimates that 16.710 million men and women in the EU27, of which 11.691 million were in the euro area, were unemployed in September 2008. Compared with August 2008, the number of persons unemployed increased by 32 000 in the EU27 and by 52000 in the euro area. Compared with September 2007, unemployment went up by 132000 in the EU27 and by 507000 in the euro area.
Inflation in the euro zone fell to 3.2 per cent in October, continuing its slide from record highs as oil prices tumble, the EU statistics agency said. Eurostat also said the unemployment rate held steady at 7.5 per cent in September, a sign that the economic slowdown has not yet forced companies to shed jobs. Lower yearly inflation, down from 3.6 per cent in September, gives the European Central Bank more room to reduce borrowing costs next week, which might help ease lending as the 15-nation economy slows. The ECB has insisted that tackling high inflation is its main priority. High fuel and food prices have kept inflation far above the ECB`s guideline of just under 2 per cent for the past year.
The UK economy shrank by 0.5% in the third quarter. This dire economic performance in the three months to September 30 will heighten fears of a painful rise in UK unemployment, particularly given signs that conditions have become even worse going into the fourth quarter.
The 0.5% fall in gross domestic product reported by the Office for National Statistics was the worst quarter-on-quarter drop since the final three months of 1990, and equates to an annualized rate of contraction of 2.0%. The City had projected a quarter-on-quarter contraction of 0.2% during the three months to September.

Economy of Japan and China

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.
Japanese industrial output in September rose for the first time in two months, but the uptick is likely to be short-lived amid slowing global demand, the government said. Industrial production in the month rose a stronger-than-expected 1.2 percent from August, when it fell 3.5 percent, according to the Ministry of Economy, Trade and Industry. Economists surveyed by Kyodo news agency had forecast an average 0.3 percent gain.
A boost in production by manufacturers of general machinery, transport equipment and electronics parts and devices helped push the figure into positive territory, the data showed. However, the government described industrial output as on a "moderately downward trend" and projects output to tumble in the months ahead. It expects production to fall 2.3 percent in October and 2.2 percent in November.
Japan`s inflation expanded 2.3 percent year-on-year in September due to surging fuel and food prices, marking a 12 consecutive monthly rise for the core Consumer Price Index (CPI), the government report said. Japan`s core CPI, which excludes prices for fresh food but includes those for fuel, read 102.6, compared with the gauge of 100 for the base year of 2005, said the Ministry of Internal Affairs and Communications in a preliminary report. Core CPI for Tokyo, which is deemed as the leading indicator of prices across Japan, went up to 101.8 in October, a 1.5 percent rise on the previous year.
Unemployment in Japan decreased slightly in September, according to data from the government released. The nation`s seasonally adjusted jobless rate hit 4.0 percent, down from 4.2 percent in August. Most economists had forecast the jobless rate to stay at 4.2 percent. September`s jobs-to-applicants ratio was 0.84, meaning there were 84 available jobs for every 100 applicants. The figure was the lowest since August of 2004, and compared to analysts` estimates of 0.85 and below the 0.86 level reported in August. The government also said the number of new job offers decreased 13.4 percent from one year earlier. The figure registered a 21.3 percent decline in August.
Japan`s economy is on track to another GDP decline in the third quarter with a decline in net exports and weakness in consumption spending. Consumption spending remains anemic, falling 4% year-over-year in August. Business confidence remains depressed pointing to sustained weakness in business investment spending.
According to the National Bureau of Statistics China`s gross domestic product grew 9.9%YoY to CNY 20.16 trillion in the first three quarters of this year. According to the Bureau the growth rate was 2.3 percentage points lower than the same period of last year, or 0.5 percentage points lower than the first quarter of this year. The GDP growth was 10.6% for the first quarter, 10.1% for the second quarter and 9% for the third quarter.
Mr Yao Jingyuan Chief Economist of NBS told Xinhua that the GDP growth for the January to September period was still higher than the 9.8% average for the past three decades. He said that given the ongoing global economic slowdown, China`s GDP growth for the first three quarters is a hard-earned achievement. He added that it was achieved on the basis of the current macro-control efforts".
The total GDP for the January to September period included CNY 2.18 trillion generated by the primary sector up by 4.5%, CNY 10.11 trillion by the secondary sector up by 10.5% and CNY 7.87 trillion by the tertiary sector up by 10.3%. The growth rates for the primary sector was 0.2 percentage points higher than the year-earlier level, but that for the secondary and tertiary sectors were 3.0 percentage points and 2.4 percentage points lower respectively.

Economy of Latin America

Mexico`s economic growth probably slowed to 1.7 percent in the third quarter as the global credit crisis weakened the manufacturing and construction industries, the Finance Ministry said. The economy grew 2.8 percent in the second quarter, and the government forecasts growth of 2 percent for all of 2008, the ministry said in a report. Mexico had a budget surplus of 13.9 billion pesos ($1.09 billion) in September and a 139.9 billion- peso surplus in the first three quarters of 2008, the e-mailed report said.
Mexico created 340,667 new formal jobs in the first three quarters of the year, the report said. Exports grew 12.1 percent in the third quarter from last year, while oil exports increased 32.3 percent during that period, it said. Industrial production fell 1 percent in July and August, while agricultural activity grew 0.3 percent during that period, the Finance Ministry`s report said.
The government forecasts the economy will grow 1.8 percent next year, while the central bank predicts the economy will expand 0.5 percent to 1.5 percent in 2009. Morgan Stanley forecasts no growth in 2009, while JPMorgan Chase & Co. sees growth at 0.3 percent for that period.
The economy of Brazil is slowing as credit dries up, commodity prices fall and consumers cut spending. Bradesco Corretora, the research arm of Brazil`s largest non-state bank, predicts growth in 2009 may slow to 2.2 percent, less than half this year`s estimated 5.2 percent rate.
September`s industrial production report, to be published Nov. 4, may provide more evidence of a slowdown. In August, output dropped a surprise 1.3 percent from July after adjusting for seasonal factors, the biggest decline this year.

Economy of Russia

The official said GDP growth in Russia from January to September 2008 was 7.7 percent, higher than the 7.6 percent growth for the same period last year. But Russia`s GDP growth in September 2008 was only 0.4 percent compared to 7.0 percent in August 2008. Russia`s economic growth may decelerate in the medium term compared to the forecast, said Deputy Economy Minister Andrei Klepach. He noted, however, that if most problems are solved now, there will be no sharp slowdown. As reported earlier, Russia`s GDP growth is expected to reach 7.8 percent in 2008, 6.7 percent in 2009, and 6.6 percent in 2010, according to the Economy Ministry`s current forecast. Meanwhile, The International Monetary Fund revised Russia`s 2008 GDP growth forecast from 7.1% to 7.0% and raised its inflation projection for the country from 13.8% to 14.0% amid the ongoing global financial crisis. "In Russia, the growth forecast for 2008 reflects a stronger-than-expected performance early in the year, rising terms-of-trade gains, and a longer-than-expected fiscal stimulus package. But growth is set to weaken appreciably, reflecting slowing world demand and tightening financial conditions," the IMF said in its latest World Economic Outlook. According to the IMF, GDP growth in Russia is expected to fall to 5.5% and inflation ease to 12% in 2009.
Russia`s industrial production index stood at 105.4 percent in January-September 2008 compared with the same period of the previous year, the Federal State Statistics Service (Rosstat) said in a statement. In September alone, the index reached 106.3 percent compared to September 2007, whereas in August 2008 it amounted to 101.4 percent against the same month a year earlier. The primary sector saw only a small increase of 0.5 percent in January-September, while manufacturing industries enjoyed a 7.7-percent rise, and the production and distribution of electricity, gas, and water grew 4.3 percent.
Depending on the oil price, Russia`s GDP will grow 5.7-7.1 percent in 2009, the Russian Central Bank said. According to the bank`s report, foreign trade conditions for Russia are expected to deteriorate in 2009-2011, compared with the previous three-year period. This environment will restrict Russia`s economic growth and curb inflation. The slowing of growth in the production of goods and services, which began in 2008, will continue in 2009, in accordance with forecasts. "The slowing of growth in demand expected in 2009 in countries that are the leading importers of Russian goods, the slowing of growth in consumer prices in countries that are the leading suppliers of goods to Russia, and also the possibility of declines in the prices of raw materials in line with world market trends, will affect the Russian economy by restricting economic growth and curbing inflation," the Central Bank said. According to the International Monetary Fund, Russia`s GDP in 2009 will grow by 5.5 percent. Inflation in Russia in 2009 will remain high, at 12%, the IMF said. The IMF also said inflation in Russia in 2009 would be the highest in Europe except for Ukraine. Meanwhile, the Russian government and the Central Bank have set the task of cutting inflation to 7.0-8.5 percent in 2009, 5.5-7.0 percent in 2010 and 5.0-6.8 percent in 2011.