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World Economy Review - November 2008

Many advanced economies are in or nearing recessions of a magnitude not experienced since the early 1980s, the Organization for Economic Cooperation and Development warned November 25th as it called for aggressive economic stimulus measures. The developed economies face a protracted recession and a sharp increase in unemployment, the OECD said in its twice-yearly Economic Outlook.
The organization projected that member economies would decline in 2009 by 0.4 percent over all, after growth of 1.4 percent this year. It forecast that growth would return in 2010, with advanced economies growing a combined 1.5 percent. The OECD also called on governments to take aggressive fiscal policy measures, as "current conditions of extreme financial stress have weakened the monetary transmission mechanism." But it warned that once a recovery starts to take hold, governments must "begin promptly to unwind the macroeconomic stimulus in place to prevent inflationary pressures from gaining a foothold."
The OECD said that the U.S. economy would shrink 0.9 percent next year, after posting growth of 1.8 percent this year. The economy will grow 1.6 percent in 2010, the organization said. The euro zone economy will contract next year by 0.6 percent, after a 3.4 percent increase in 2008, the organization said, with 1.3 percent growth in 2010. The organization warned that the housing market decline in European markets appeared to have further to go.
Growth in Japan will remain just positive, rising 0.3 percent next year, after 1.4 percent growth this year, the OECD said, but the economy will shrink 0.1 percent in 2010. It warned that "with persistent economic slack and anemic wage growth," deflation could return to Japan by mid-2009. The organization said the economic downturn would also be severe in Britain, Hungary, Iceland, Ireland, Luxembourg, Spain and Turkey.
The organization said its forecasts were based on the assumption that "the extreme financial stress since mid-September will be short-lived, but will be followed by an extended period of financial headwinds through late 2009, with a gradual normalization thereafter," and that exchange rates and the oil price remain at their recent levels. It said the main downside risks included the possibility that financial markets would remain under pressure, that more financial institutions might fail and a chance that emerging market economies would be hit harder.

Economy of The United States

U.S. Gross domestic product, the output of goods and services produced by property located in the U.S, has declined in the third quarter of the year, according to preliminary estimates by the Department of Commerce. The GDP estimate for the third quarter of 2008 shows a 0.5% decline, down from the 0.3% decline previously estimated the decline reflects negative contributions from Personal Consumption Expenditures, residential fixed investment, and equipment and software, partially offset by positive contributions from federal government spending, private inventory investment, exports, non-residential structures, and state and local government spending. Imports, which subtract from the GDP, have declined. The price index for gross domestic purchases has increased 4.7% in the third quarter, down from the 4.8% increase in the previous quarter. Real Personal Consumption expenditures have decreased 3.7% in the third quarter, after a 1.2% increase in the previous quarter.
U.S. industrial production rebounded by a stronger-than-expected 1.3 percent in October after a downwardly revised September drop that was the biggest fall in more than 62 years, according to a government report that is likely to reinforce fears of a recession. The Federal Reserve on Monday attributed the October output rebound to a return to production of energy and chemical facilities shut down by Hurricanes Ike and Gustav in September. These storm-related effects added 2 percentage points to output in October, so without them, industrial production would have fallen by around 0.7 percent, according to the Fed. Compared with a year ago, October`s industrial output fell 4.1 percent. Economists polled by Reuters had expected October industrial output to rise 0.2 percent in October, following an initially reported 2.8 percent fall in September. But the Fed revised the September fall to 3.7 percent - making it the steepest drop since a 5.0 percent decline in February 1946 as World War II production ended. Meanwhile, total capacity utilization edged higher to 76.4 percent from a downwardly revised 75.5 percent in September. The 1.3 percent rebound in October output was the sharpest increase since a matching rise in October 1999. October`s manufacturing output rose 0.6 percent after a revised 3.7 percent fall in September, while October mining output rose 6.1 percent after an 8.5 percent fall in September. Utility output rose 0.4 percent in October after a 2.4 percent rise in September.
According to the latest figures released by the US Labour Department, 240,000 jobs were lost in October, which is the tenth consecutive month that the US labour market has suffered. The jobless rate now stands at 6.5 percent which is the highest rate in 14 years with 1.2 million jobs lost in 2008, although this is still within economist estimates of 8 percent.
The state of the labour market is currently deteriorating faster, as it was predicted that 159,000 jobs would have been lost in September but the true figure is nearly double that. In the last ten months alone, 1.2 million people have lost their jobs and with 284,000 jobs lost in September, the labour market is gaining negative momentum.
US consumer prices plunged a record 1% in October amid an accelerating global financial crisis, government data show. The decline in the Labor Department`s consumer price index was the steepest since the department launched the indicator in February 1947 and exceeded analysts` consensus forecast of a 0.8% fall. The prior record was a 0.9% decline in July 1949. The core consumer price index, excluding food and energy prices, slipped 0.1%. On a 12-month basis, headline inflation fell to 3.7% from a 4.9% annual rate in September.

Economy of The European Union

The economy of the euro zone slipped into recession for the first time in the third quarter, the European Union`s statistics agency said, as the financial crisis continued to depress manufacturing activity and consumer demand. The economy in the 15 countries that use the euro shrank 0.2 percent in the third and second quarters from the quarter before, further stoking expectations that the European Central Bank will cut interest rates to try to limit the damage.
The weakness in the third quarter was particularly marked in Germany and Italy, both of which have entered a recession with gross domestic product contractions of 0.5 percent from the previous quarter after a similar decline in the second period. France`s economy grew 0.1 percent. Spanish GDP also fell, by 0.2 percent, posting the first quarterly decline since 1993. Dutch GDP was flat, after also stagnating in the second quarter. Outside of euro countries, British growth was down 0.5 percent after a flat reading the previous quarter. Compared with the quarter a year earlier, GDP grew 0.7 percent in the euro zone and 0.8 percent for the 27 countries of the European Union. But economists said that a further contraction in euro zone GDP this quarter seems virtually assured and that the downturn is likely to endure well into next year.
Industrial production in the eurozone dropped by 1.6 percent in September, compared with the previous month, the European Union (EU)`s statistics bureau Eurostat said. The monthly index increased by 0.8 percent in August, according to revised figures. In September, production of non-durable consumer goods fell by 0.4 percent. Production of energy dropped by 0.8 percent. Capital goods declined by 1.8 percent. Durable consumer goods fell by 2.5 percent and intermediate goods decreased by 2.6 percent.
Figures showed that industrial production in Germany, the biggest economy within the euro zone, dropped sharply by 3.7 percent in September after a strong recovery of 3 percent in the previous month. France, the second largest, dropped by 0.5 percent following a decrease of 0.4 percent in August. Compared to September 2007, the eurozone industrial production decreased by 2.4 percent. In the broader EU with 27 member states, industrial output also declined by 1.1 percent in September monthly. Year on year, it was down by 2.1 percent. Among those EU members whose data were available, industrial production rose in 11 and fell in nine month on month. Slovakia recorded the highest monthly increase of 5.7 percent, while Germany registered the largest drop.
Eurozone annual inflation slumped from 3.2 per cent in October to 2.1 per cent this month, the lowest since August 2007, according to separate figures released by Eurostat, the European Unions statistical office. It was the biggest monthly fall in inflation since the launch of the euro almost a decade ago. Eurozone inflation peaked at 4 per cent in July, the same month as the ECB raised its main interest rate by a quarter percentage point to 4.25 per cent. Since the collapse of Lehman Brothers in mid-September the central bank has hurriedly reversed its strategy, slashing official borrowing costs by half a percentage point in early October and again this month.
Joblessness in the 15-country region soared by 225,000 in October, adding to evidence that the recent oil price shock, which sent inflation soaring, has given way to a deep and protracted recession. At 7.7 per cent, Octobers eurozone unemployment rate was the highest for almost two years.
The European Commission forecasts that the aggregate budget gap of the euro countries would rise to 1.8 percent of gross domestic product in 2009 from 1.3 percent seen this year and to 2.0 percent in 2010, unless policies change. They also supported the Commission`s estimate that euro zone economic growth would slow to a mere 0.1 percent next year from 1.2 percent expected in 2008 in the wake of the financial crisis. The economy of the euro zone is to shrink 0.1 percent in quarterly terms in the fourth quarter, it said, and warned that further worsening in financial markets could push the euro zone into outright recession.

Economy of Japan

Japan`s economy slid into a recession for the first time since 2001, the government said Monday, as companies sharply cut back on spending in the third quarter amid the unfolding global financial crisis. Government officials and economists warned that the world`s second-largest economy could contract further in coming months. Japan`s economy shrank at an annual pace of 0.4 percent in the July-September period after a declining an annualized 3.7 percent in the second quarter. That means Japan, along with the 15-nation euro-zone, is now technically in a recession, defined as two straight quarters of contraction. The result was worse than expected. Economists surveyed by Kyodo News agency had predicted gross domestic product would gain an annualized 0.1 percent.
Japan`s Economy Minister Kaoru Yosano said following the data`s release that "the economy is in a recessionary phase." But the worst may be yet to come, especially with dramatic declines in demand from consumers overseas for Japan`s autos and electronics gadgets. Hurt also by a strengthening yen, a growing number of exporters big and small are slashing their profit, sales and spending projections for the full fiscal year through March. Compared to the previous quarter, GDP shrank 0.1 percent, the Cabinet Office said. Business investment - a main driver of Japan`s six-year economic recovery since 2002 - dropped 1.7 percent from the previous quarter. At its last meeting, the Bank of Japan cut its key interest rate for the first time in more than seven years, lowering it to 0.3 percent, joining central banks around the world in trimming borrowing costs.
Japan`s industrial production decreased 3.1% month-on-month in October, showing a decrease for the first time in two months, the Ministry of Economy Trade and Industry said Friday. That was steeper than the expected fall of 2.5%. Year-on-year, output was down 7.1%, faster than 6.6% fall economists had expected. The decrease follows 0.2% rise in September.
Japans inflation slowed for a second month in October as oil and commodity prices tumbled, providing relief to cash-strapped households in a recession. Consumer prices excluding fresh food rose 1.9 percent from a year earlier, slower than the 2.3 percent pace in September, the statistics bureau said today in Tokyo. The result matched the median estimate of 33 economists surveyed by Bloomberg News.
Separate reports showed the unemployment rate unexpectedly fell to 3.7 percent in October from 4 percent as people stopped looking for work. Household spending declined 3.8 percent, the eighth consecutive drop.

Economy of Russia

Russia`s GDP amounted to 7.5 percent in January-October and 5.9 percent in October 2008 compared to the same month of 2007, the Economy Ministry said in a monitoring report on the current economic situation in Russia. Meanwhile, GDP edged down 0.4 percent in October against September. The ministry attributed the decrease to slower growth of industrial production, particularly that of processing industries, as well as capital investment and construction rates.
Industrial production grew 4.9 percent in January-October 2008 compared to the same period a year earlier, the Russian Federal State Statistics Service (Rosstat) reported. In October alone, output grew 0.6 percent, down from 2.8 percent during the previous month. As reported earlier, industrial production growth stood at 6.3 percent in September for a 12-month period from the same month in 2007, and 5.4 percent for the year to date in 2008, down from 6.6 percent for the same period of the previous year. The government earlier projected a full-year industrial output growth of 5.2 percent in 2008, based on data provided by the Economy Ministry. According to Rosstat, output rose 0.5 percent in the primary sector in January-October 2008, 7.1 percent in manufacturing, and 4.1 percent in electricity, gas, and water production and distribution. Meanwhile, oil production (with gas condensate) fell 0.6 percent to 406m tonnes, natural gas output increased 1.4 percent to 540bn cubic meters, and power generation went up 4.1 percent to 851bn kilowatt-hours.
Russia`s inflation stood at 0.9 percent for October, and 11.6 percent for the year to November, according to the Federal State Statistics Service (Rosstat). For reference, Rosstat cited 2007 figures: 1.6 percent for October, and 9.3 percent for ten months. The base consumer price index which excludes changes in prices for products induced by seasonal or administrative factors ran up to 101.3 percent in October, and 111.5 percent for the year to November. Despite the general price rise, however, gasoline prices sank 1.5-2.5 percent depending on the grade. So far, the Russian authorities have stuck to their official inflation forecast of 11.8% for 2008 although the government and the Central Bank have conceded that consumer price growth is likely to hit 13% this year. Most analysts predict inflation to hit 13-14% in 2008. The Russian authorities are planning to adjust their 2008 inflation forecast in November, taking into account the need to shore up liquidity in the domestic financial market by injecting billions of U.S. dollars into the economy.
Unemployment in Russia grew by 1.7%, to 4.624 million people in October, according to the state statistics service, Rosstat. However, the number of formally registered jobless people keeps declining. The Healthcare and Social Development Ministry, the Russian Union of Industrialists and Entrepreneurs and trade unions have agreed to meet weekly to exchange information and select struggling companies in non-financial sectors requiring urgent assistance.
Until last week, official estimates said the liquidity crisis was not affecting the labor market. In early November, Deputy Healthcare Minister Maxim Topilin said with conviction that they were not expecting employment layoffs to be higher than statistical average. The reduced working week at industrial giants KamAZ, GAZ or MMK had been long planned according to him. However, the Independent Trade Unions Federation said business activity was plummeting in various sectors of the national economy, including metals, construction, engineering and the automobile industry, and that settlements were delayed under contracts including state orders (in the light industry and in radio electronics). As a result, companies resort to shortening working hours or cutting personnel. And yet, the number of people registered as unemployed keeps decreasing, to 1.245 million in October from 1.552 million at the beginning of this year. - 01.12.2008 21:50