World Economy Review - August 2009

The International Monetary Fund has revised up its forecast for economic growth this year and next in major industrialized economies and worldwide. The IMF now forecasts the world economy will shrink by 1.3% in 2009, a shade less than its earlier forecast of 1.4% contraction, before growing by 2.9% in 2010, revised up from the 2.5% it expected in April. The figures, which had been due to be published next week, support comments made by Mr Dominique Strauss Kahn MD of IMF, when he said that economic recovery would be sluggish and warned against unwinding recent economic stimulus packages too quickly. For advanced economies, the IMF predicted 3.7% contraction this year, slightly less than the 3.8% previously forecast, and then growth of 1% in 2010, up from an earlier 0.6%. The forecasts are broadly in line with revised forecasts for the second half of 2009 released by the Organization for Economic Cooperation and Development.
The IMF upgraded its 2009 forecasts for the United States, euro zone, Japan and Germany, with its estimated contraction reduced to 5.3% from 6.2%. But it worsened its 2009 outlook for Britain, seeing 4.5% contraction instead of 4.2%. For 2010, forecasts for all the above economies were revised up, with the exception of Japan`s growth, which was left unchanged at 1.7%. The IMF is questioning whether the world`s economic recovery is sustainable. Olivier Blanchard, the director of the research department at the IMF, says that rapidly increasing debt on top of already large fiscal deficits could stall the nascent recovery.
The start of a muted recovery was confirmed by the Organization for Economic Cooperation and Development (OECD) today with an estimate that the GDP of the OECD area has stabilised. Following a fall of 2.1% in the previous quarter, developed countries GDP fell by 0.002% over the second-quarter.
GDP for the seven largest developed countries fell by 0.1%. However, the rate masks considerable variations between different countries, from a 0.9% increase in Japan to a 0.8% decline in Britain. America`s GDP fell by 0.3%, adding to hopes that it is about to escape recession, while France and Germany recorded positive growth rates of 0.3%.

Economy of The United States

US GDP contracted by 1.0% in the second quarter of 2009, unrevised from its first reading as upward revisions to exports, residential fixed investment, PCE and government spending were equally offset by downward revisions to private inventory investment and to nonresidential fixed investment, the Commerce Department reported.
Economists were expecting second quarter GDP to be revised down to -1.5% on the back of an even sharper downward revision to inventories than what was actually recorded. In Commerce`s first estimate, private inventories reduced second quarter GDP by .83 percentage points. Yet in it`s second report today, inventories reduced total growth by a sharper 1.39 percentage points. Non-residential fixed investment also further ate into GDP than originally reported, cutting 1.15 percentage points from total growth compared to the 0.94 percentage point cut first estimated. In today`s report, non-residental spending fell 10.9%, compared to 8.9% in Commerce`s first report. Real final sales of domestic goods were also revised down to a 1.2% decline from the 1.5% drawback initially reported.
These downward revisions were equally offset by an upward revision to exports, from a 7.0% decline to a 5.0% decline, a revision that cut .22 percentage points less from GDP. The cut-back in personal consumption was also tempered in today`s report, from 1.2% to 1.0%. This cut growth by .19 percentage points less than first reported. Residential fixed investment was upwardly revised from a 29.3% decline to a a 22.8% decline, reducing its downward impact on GDP by .22 percentage points. Government spending increased 6.4% in the second quarter, up from the 5.6% rise first reported. This added 1.27 percentage points to growth, .15 percentage points more than what it contributed in the first estimate. The core Personal Consumption Expenditures (PCE) price index - important to Federal Reserve policymaking because it strips out volatile food and energy prices - was unchanged in the second quarter at a 2.0% increase. U.S. industrial production rose for the first time in nine months in July as a federal “cash-for- clunkers” program spurred demand for cars and automakers completed mid-year overhauls of their factories. The 0.5 percent increase in output at manufacturers, mines and utilities was more than forecast and followed a 0.4 percent drop in June, Federal Reserve data showed today in Washington. Capacity utilization, the proportion of factory volume in use, rose from its lowest level since record-keeping began in 1967.
Industrial production was forecast to rise 0.4 percent after a previously reported 0.4 percent decline the prior month, according to the median estimate of 71 economists surveyed by Bloomberg News.
Capacity utilization increased to 68.5 percent in July from a revised 68.1 percent the prior month. Economists track plant operating rates to gauge factories` ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher.
U.S. factory output, which accounts for about four-fifths of industrial production, rose 1 percent after a 0.6 percent decrease the prior month. Motor vehicle and parts production surged 20 percent after slumping 2.4 percent the prior month, the report said.
Utility production decreased 2.4 percent, Fed report showed. Mining output, which includes oil drilling, rose 0.8 percent.
Excluding automobiles, industrial output dipped 0.1 percent, depressed by the slump in utilities. Production of business equipment increased 0.5 percent. Output of computers and electronics rose 0.6 percent, signaling companies are beginning to boost investments. Production of consumer durable goods, including automobiles, furniture and electronics, increased 7.4 percent. The nation`s unemployment rate grew to 9.7 percent in August - the highest level since 1983 - as non-farm payrolls shed 216,000 jobs. That number is lower than the 276,000 jobs lost in July and bested the predictions of economists surveyed by Dow Jones Newswires, who expected a jobs decline of 233,000 during August. Still, the mixed employment data has many concerned that the U.S. economy is facing a long and slow recovery from the recession that began in December 2007. The economy has lost more than 7 million jobs since then.
Although job losses continued in many of the major industry sectors in August, the declines have moderated in recent months, the U.S. Bureau of Labor Statistics said. The nation`s unemployment rate reached 10.1 percent in June 1983.

Economy of The European Union

GDP declined by 0.1% in the euro area (EA16) and by 0.3% in the EU27 during the second quarter of 2009, compared with the previous quarter, according to flash estimates published by Eurostat, the Statistical Office of the European Communities. In the first quarter of 2009, growth rates were -2.5% in the euro area and -2.4% in the EU27. Compared with the same quarter of the previous year, seasonally adjusted GDP decreased by 4.6% in the euro area and by 4.8% in the EU27 in the second quarter of 2009, after -4.9% and -4.7% respectively in the previous quarter.
In June 2009 compared with May 2009, seasonally adjusted industrial production fell by 0.6% in the euro area (EA16) and by 0.2% in the EU27. In May production grew by 0.6% in the euro area and remained stable in the EU27. In June 2009 compared with June 2008, industrial production declined by 17.0% in the euro area and by 15.6% in the EU27. These estimates are released by Eurostat. In June 2009 compared with May 2009, production of non-durable consumer goods increased by 0.2% in the euro area, but fell by 0.1% in the EU27. Capital goods dropped by 0.3% in the euro area, but grew by 0.4% in the EU27. Intermediate goods declined by 0.5% and 0.4% respectively. Production of energy decreased by 1.1% in the euro area, but rose by 0.4% in the EU27. Durable consumer goods fell by 4.2% and 3.9% respectively. In June 2009 compared with June 2008, production of non-durable consumer goods fell by 2.2% in the euro area and by 2.4% in the EU27. Production of energy decreased by 9.0% and 4.2% respectively. Capital goods declined by 21.9% in the euro area and by 20.5% in the EU27. Intermediate goods dropped by 22.2% and 21.3% respectively. Durable consumer goods fell by 24.9% in the euro area and by 21.8% in the EU27.
Annual inflation in the euro zone remained negative and stayed at minus 0.2 percent in August, the European Union (EU)`s statistics bureau Eurostat estimated. It is the third consecutive month that eurozone inflation has been in negative territory under pressure from the global economic crisis, but the August inflation index shows it is falling more slowly than in July when eurozone inflation registered a drop of 0.7 percent, a sign that the worst of the crisis may be over. The sharp fall in inflation in recent months has been attributed to retreat of world oil prices and the worsening economic situation. Companies have been forced to cut prices for survival in the face of a slump in consumption amid the worst recession since the Great Depression in the 1930s. The index has stayed well below the 2 percent ceiling that the European Central Bank (ECB) prefers as the limit for maintaining price stability, arousing concern of deflation in the euro zone. The ECB has warned that eurozone annual inflation rates would temporarily stay negative around the middle of this year, before returning to positive territory by the year end.
Euro zone unemployment hit a 10-year high of 9.5 percent in July and is seen rising further before a nascent economic recovery supports the job market, denting hopes that consumer spending will boost growth. The jobless rate in the 16-country euro currency area climbed to its highest since May 1999 as the number of people without work rose by 167,000 from June to 15.09 million, the European Union`s statistics office said. The July unemployment level compared with June`s 9.4 percent and was in line with market consensus. In the whole European Union of 27 member states, unemployment rose to 9.0 percent of the workforce from June`s 8.9 percent, increasing by 225,000 to 21.794 million people.

Economy of Asia

The world`s second-biggest economy grew by 0.9pc in the second quarter – bringing to an end a year of severe recession, official figures showed. From the year earlier GDP of Japan grew 3.7 percent. The news means three of the seven G7 members which have now published statistics are expanding again. However, economists warned both that the fast pace of growth in the second quarter was unlikely to be sustained and that Japan still had many more years of expansion before it makes up for the output lost during the past year.
Japan`s bounce owes a large part to its massive programme of fiscal stimulus, in which the Government boosted spending and cut taxes, at the cost of around 4pc of gross domestic product. The Government figures showed that exports grew by 6.3pc during the quarter while private consumption grew 0.8pc.
Fears rally is over as shares tumble However, much like France and Germany, Japan`s nominal gross domestic product, which also takes into account the prices of goods, still fell by 0.2pc, since during the period prices dropped by 1.1pc. As such, the figures do little to dispel continuing concerns that the world remains close to a deflation trap as the weight of falling asset prices depresses growth. Unemployment is still high and rising even in economies which have recovered their growth. In Japan, the jobless rate has risen to a six-year high of 5.4pc.
Japan`s factory output rose for the fifth straight month in July as manufacturers gained confidence in the country`s nascent recovery.
Industrial production in the world`s second largest economy climbed 1.9 per cent from the previous month and "continues to show an upward movement," the Ministry of Economy, Trade and Industry said Monday in a closely watched report. The results beat a 1.6 per cent rise forecast in Kyodo news agency`s survey of economists. Strong gains among companies making transport equipment and steel products fueled the increase.
Japan`s economy emerged from a yearlong recession in the second quarter, lifted by a rebound in exports as governments around the world infused their economies with stimulus money. Manufacturers expect factory output to continue climbing in the months ahead, the ministry said. It predicts industrial production to rise 2.4 per cent in August and 3.2 per cent in September. Unemployment in Japan rose to a record high and consumer prices dropped at an unprecedented pace last month, adding to fears that the country`s economic recovery is already stalling under the grip of deflation.
Just two weeks after Japan emerged from its worst recession in half a century, its internal affairs ministry said that the jobless rate rose to 5.7% in July from 5.4% a month earlier. Core consumer prices fell 2.2% as concern mounted that the world`s second biggest economy is caught in a deflationary spiral. Unemployment, at its highest level since records began in 1953, surpassed the previous record of 5.5% in April 2003 and was expected to rise as high as 6% next year. Japan`s consumer prices fell at a record pace in July, adding to signs that deflation will hamper a rebound from the nation`s worst postwar recession.
Consumer prices excluding fresh food declined 2.2 percent from a year earlier after dropping 1.7 percent in the previous month, the statistics bureau said today in Tokyo. It was the sharpest decrease since the survey began in 1971.
Japan is once again facing deflation, a sustained bout of falling prices that plagued the economy for a decade until 2005. Stemming the declines and sustaining a recovery will be a challenge for the winner of this weekend`s general election.
Surpassing even recent upgraded forecasts, China has reported GDP growth in the 2nd quarter of 7.9%, relative to 6.1% in Q1. Forecasts for the full year include the International Monetary Fund at 7.5%, Goldman`s at 8.3% and the Chinese government`s own estimate of 8.0%. Responding to the news, other economists scrambled to improve their targets for this year and 2010. Also announced were strong increases in industrial output 10.7% better in June, year-on-year whilst fixed asset investment jumped more than 30% in H1 2009 relative to the same period a year earlier. The Chinese economy has enjoyed substantial fiscal and monetary stimulus during 2009 which has attracted significant investment, partly due to the paucity of attractive big-ticket opportunities elsewhere globally. The stimulus has effectively off-set the loss of export generated revenue due to reduced demand from key trading partners. The news follows the confirmation of China, for the first time, reaching $2 trillion in reserves.
UBS economist Wang Tao too raised GDP projections for 2009 (from 7.5% to 8.2%), but pointed out that inflation expectation had risen and increasing concerns about asset market bubble and future non-performing loans had already led to the central bank stepping up its sterilisation operations and stricter enforcement of existing regulations on bank lending. "In the coming months, we expect these types of targeted adjustment in policies to continue as the government tries to avoid large volatilities in the economy."

Economy of Russia

Russia`s GDP declined by 9.3% in July 2009 year-on-year and 10.2% in the first seven months of the year, a deputy economics minister said. However, Andrei Klepach said the economic slump has now ended, and that the economy is showing signs of revival. According to Economics Ministry data, investment increased 0.3% in July from June, taking into account the seasonal factor, but fell by 18.9% year-on-year. "Although the revival is not yet stable or intense, this is a major positive development, which means that the recession is now over, with slight growth emerging," the official said.
However, he said it would take Russia several years to overcome the consequences of the crisis, and bring production volumes back to pre-crisis levels. Russia`s trade surplus halved to $9 billion in July 2009 against last July`s $8.7 billion, according to ministry data. The ministry has estimated that Russian exports in July stood at $25 billion against $24 billion in June, but fell by 47.2% against last July`s $47.3 billion. The ministry`s forecast for inflation is 0.3%-0.4% in August. The statistics service Rosstat put inflation at 0.6% in July, and 8.3% since the start of the year.
Industrial output in Russia shrank by 10.8 percent in July from a year before but rose by nearly 5 percent compared to a month earlier, the Federal Statistics Service reported August 17th, suggesting the worst of the recession is over. The yearly rate of decline in manufacturing was the slowest this year after a 12.1 percent drop in June, when the sector showed its first signs of stabilization. Russia`s economy shrank by 10.1 percent in the January-June period, but some analysts believe it has passed the worst of its economic downturn, with investment and retail sales figures in particular showing improvement. Russia is weathering its first recession in a decade as oil prices - the backbone of its economy - slumped and many foreign investors fled the country.