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World Economy Review - December 2009

LIKE their peers overseas, Australian economists see the recovery from the world financial crisis and the recession it caused taking place on two quite distinct growth paths. The developed Western world that created the debt-funded, asset-pricing boom and bust is expected to grind its way upward, as unemployment, excess capacity, subdued demand and debt in the public and private sectors continue to weigh heavily.
And what used to be called the Third World will grow much more quickly, led by the four ``BRIC`` economies Goldman Sachs identified as the emerging new industrial powers - China, Brazil, India and Russia, ranked by size (Goldman rearranged the initials to produce the acronym).
The largest of the four and the fastest growing is China, and its quick rebound from two quarters of sub-par growth in the six months to March 2009 is the crux of the survey`s forecast for global growth of 2.75 per cent this calendar year, or 3.25 per cent excluding the survey group`s two biggest bears, Monash University`s Jakob Madsen and University of Western Sydney`s Steve Keen. The group sees China`s economy expanding by a little more than 9 per cent this calendar year, slightly below the global consensus forecast of 9.6 per cent.
And while the survey does not include specific forecasts for India, Brazil and Russia, the global consensus is that they too will outpace the developed economies, growing by 7.6 per cent, 4.6 per cent and 3.5 per cent respectively, producing average BRIC growth of 7.6 per cent, strongly up from growth of under 5 per cent in 2009.
In contrast, those surveyed by The Age see the US economy growing by only 2 per cent this year, after it contracted by about 2.4 per cent in 2009 (Excluding Madsen and Keen, the forecast is slightly bolder at 2.4 per cent).
The other developed northern hemisphere economies will grow even more slowly: more than 700 economists surveyed by the Consensus Economics group forecast growth of 1.4 per cent in Japan, 1.2 per cent in Europe, and 1.2 per cent in Britain.
This two-speed recovery could continue for some time. Growth in China, in particular, is positive for the world, and the Australian economy is particularly well placed to benefit from Chinese demand for commodities that also pushes up commodity prices.
But the BRIC story is unfolding rather than complete. Based on International Monetary Fund numbers for 2008, the BRIC economies accounted for a combined 22.6 per cent of global economic output, compared with 52.4 per cent for the struggling developed economies: Europe and Britain (25.4 per cent), the US (20.7 per cent) and Japan (6.3 per cent).
The Western world is still crucial to a full global recovery, in other words. And in all the Western economies the big question is still whether the recovery from the crisis has been purchased by huge fiscal and monetary stimulus, or just rented, with the eviction notice looming as the stimulus fades.
The pointers are mixed. Australia`s latest national accounts reveal, for example, that household disposable income fell by 1.6 per cent in the September quarter, after growing by 11.2 per cent in the previous three quarters under the influence of interest rate and government spending stimulus that is now fading.
On the other hand, household wealth is rising again, as the sharemarkets continue to recover, and as home prices stay high. It rose by 17.1 per cent in the September quarter to a two-year high, the biggest quarterly improvement in 17 years.
The results of the new year sales now under way will be another pointer, but The Age survey points to a spending hit as the stimulus eases. At the predicted 2.64 per cent growth clip this year (2.85 per cent excluding the bearish Madsen and Keen), Australia`s economy will be running about 1 percentage point below its potential.

Economy of The United States

The U.S. economy grew at the fastest pace in two years during the third quarter, but the revised annual growth rate of 2.2% was much slower than initially reported, the Commerce Department estimated Tuesday. U.S. real gross domestic product increased for the first time since the spring of 2008, boosted by higher consumer spending, a rebound in investments in homes, a slower pace of inventory reduction, more exports, and robust government spending. Economists surveyed by MarketWatch were expecting only a minor revision to 2.7% in the third estimate. The revisions to third-quarter GDP were in three major areas: Business investment, consumer spending, and inventories.
U.S. industrial output rose firmly in November as the manufacturing sector extended a recovery that economists hope will help turn around the ailing labor market. Production climbed 0.8 percent, the Federal Reserve said on Tuesday, well above forecasts for a 0.5 percent gain. The strides were powered in part by the automotive sector, and came despite a sharp drop in utility output. Capacity utilization, the amount of the nation`s industrial capacity being put to use, rose to 71.3 percent in November from a revised 70.6 in October, its highest level since last December but still well below the long-range average. The October production figure was revised to no change from an 0.1 percent gain. The data were the latest to confirm the U.S. economy is rebounding from its worst recession since the 1930s, helped by very low interest rates and a heavy dose of government stimulus.
The US trade deficit with the rest of the world dropped unexpectedly in October, by 7.6 percent, as a surge in exports offset a small increase in imports, official data showed. The goods and services trade gap totaled a seasonally adjusted 32.9 billion dollars, down from a revised 35.7 billion dollars in September, the Commerce Department said. Most analysts had forecast the deficit would rise to 36.8 billion dollars. On an annual basis, the overall deficit narrowed 8.1 percent in October. Exports increased 2.6 percent to 136.84 billion dollars. Imports rose 0.4 percent from September, to 169.78 billion dollars, the highest level since December 2008.
The consumer price report for November was calming on most financial markets despite the rise in the headline number. Both the headline and core numbers were much less inflationary than yesterday`s scary PPI numbers. Headline consumer price inflation jumped 0.4 percent in November after gaining 0.3 percent the month before. The November headline matched the consensus forecast. Core CPI inflation-in contrast with yesterday`s core PPI run up-eased to 0.0 percent (no change) after a 0.2 percent increase in October. The consensus had called for a 0.1 percent rise.
The headline number was boosted mainly by a 4.1 percent surge in energy costs after a 1.5 percent gain in October. Gasoline was up 6.4 percent, following a 1.6 percent gain the month before. Food price inflation was soft in November with a 0.1 percent rise-the same as in October. Within the core, declines in shelter indexes offset increases in costs for new and used motor vehicles, medical care, airline fares, and tobacco. Shelter costs declined 0.2 percent in the latest month, led by a 1.5 percent drop in lodging away from home. Owners` equivalent rent dipped 0.1 percent. Hotels-including resorts-continued to engage in heavy discounting. High unemployment is keeping rent soft in general.
Year-on-year, headline inflation increased to plus 1.9 percent (seasonally adjusted) from minus 0.2 percent in October. The core rate was unchanged in November at up 1.7 percent. On an unadjusted year-ago basis, the headline number was up 1.8 percent in November while the core was up 1.7 percent.
Unemployment sat at 10% in November, well above its level of 4.9% in December 2007, according to the Bureau of Labor Statistics. Some 15.4 million U.S. workers are unemployed, and the number who have been jobless for 15 weeks or longer has been steadily rising.

Economy of The European Union

GDP increased by 0.4% in the euro area (EA16) and by 0.3% in the EU27 during the third quarter of 2009, compared with the previous quarter, according to first estimates released by Eurostat, the Statistical Office of the European Communities. In the second quarter of 2009, growth rates were -0.2% in the euro area and -0.3% in the EU27. Compared with the third quarter of 2008, seasonally adjusted GDP declined by 4.1% in the euro area and by 4.3% in the EU27, after -4.8% and -5.0% respectively for the previous quarter.
In October 2009 compared with September 2009, seasonally adjusted industrial production fell by 0.6% in the euro area (EA16) and by 0.7% in the EU272. In September production increased by 0.2% and 0.1% respectively. In October 2009 compared with October 2008, industrial production declined by 11.1% in the euro area and by 10.2% in the EU27.
The first estimate for the euro area1 (EA16) trade balance with the rest of the world in October 2009 gave a 8.8 bn euro surplus, compared with -1.2 bn in October 2008. The September 20092 balance was +0.9 bn, compared with -6.0 bn in September 2008. In October 2009 compared with September 2009, seasonally adjusted exports fell by 0.2% and imports by 2.2%.
The first estimate for the October 2009 extra-EU27 trade balance was a 3.8 bn euro deficit, compared with -18.3 bn in October 2008. In September 20092 the balance was -11.1 bn, compared with -24.5 bn in September 2008. In October 2009 compared with September 2009, seasonally adjusted exports rose by 0.2%, while imports fell by 1.0%.
Euro area annual inflation was 0.5% in November 2009, up from -0.1% in October. A year earlier the rate was 2.1%. Monthly inflation was 0.1% in November 2009. EU annual inflation was 1.0% in November 2009, up from 0.5% in October. A year earlier the rate was 2.8%. Monthly inflation was 0.2% in November 2009.

Economy of Asia

Japan`s economy grew at a much slower rate than previously thought in the third quarter, fresh data showed, as the country struggles to emerge from a crushing recession weighed by a soaring yen. The world`s number two economy expanded at an annualized rate of 1.3 percent in the July-September quarter, sharply down from the original estimate of 4.8 percent, the Cabinet Office said. It meant the economy -- which early this year emerged from its worst post-war recession -- expanded just 0.3 percent in the three months, compared with the initial estimate of 1.2 percent. The revision came as capital investment, the amount companies spend, was revised down to reveal a contraction of 2.8 percent from an original estimate of 1.6 percent growth, the Cabinet Office said.
Prime Minister Yukio Hatoyama admitted the difficulty of navigating the economy out of deep stagnation and stressed the benefits of a new government stimulus package announced Dec 8th. His government announced a fresh stimulus package worth 274 billion dollars, with 80 billion dollars in direct spending, that includes environmental programmes, assistance for small businesses and help to local communities. Hatoyama has been criticised as being too slow to act, with the latest package seen as likely to have only a limited effect on the economy. Private economists on average expected the revised data to show annualised growth of 2.7 percent, with most saying the original estimate was too high.
Japan`s economy has struggled as the yen strengthens against the greenback -- with it hitting a 14-year high around 84 to the dollar -- hurting exporters by making their products expensive and reducing overseas earnings when converted back into yen. The government last month declared the nation was in deflation, while consumer spending remained weak.
Japanese industrial output rose for a ninth straight month in November, according to data issued Monday. The Ministry of Economy, Trade and Industry`s industrial production index rose 2.6% from October to a seasonally adjusted 88.3, beating a 2.4% forecasted rise from a survey reported by Reuters. The index measures production against the base year of 2005. On year, however, the index was still down an unadjusted 3.9%, the ministry said. Transport equipment and general machinery led the rise, the data showed. The ministry`s manufacturing forecast survey, meanwhile, tipped industrial production to rise 3.4% in December and to 1.3% in January.
Japan`s unemployment rate rose to a seasonally adjusted 5.2% last month, from 5.1% in October, according to the Internal Affairs Ministry`s Statistics Bureau. The result, which matched separate forecasts from analyst surveys by Dow Jones Newswires and Kyodo News, was still below the peak of 5.8% recorded in July.
November`s core consumer price index -- which excludes volatile fresh-food prices -- dropped 1.7% from a year earlier, also in line with forecasts but marking the ninth straight fall. Month on month, the core CPI was down 0.2%. Stripping out all food and energy prices, the CPI was down 1% from a year earlier and down 0.1% from October. Deflation has been a major concern for Japan, and prompted the central bank earlier this month to announce emergency measures to help support prices.
The Statistics Bureau also said that average spending for households of two or more -- a key economic metric -- rose 2.2% in November from a year earlier. The gain, however, was driven by the fall in prices, as household spending was flat in nominal terms.

Economy of Russia

Russia`s seasonally adjusted gross domestic product (GDP) fell 9.1% in January-November, Deputy Economic Development Minister Andrei Klepach told reporters on Wednesday. Russia`s seasonally adjusted GDP grew 0.8% on the month in November, he also said. The country`s industrial output rose 2.4% in November, Klepach said, reporting a revised estimation. The Federal State Statistics Service said Tuesday that Russia`s industrial production increased 2% on the month in November, but fell 12% on the year in January–November.
According to preliminary data, Russia`s GDP increased 1.9 percent in the fourth quarter of 2009 compared to the same period of the previous year. This information, based on the Economic Development Ministry`s report, is contained in the government`s documents prepared for the cabinet meeting. According to the document, GDP rose 1.1 percent in Q3 and 1.9 percent in Q4 2009. Meanwhile, the country`s GDP inched up 0.8 percent against October of this year thanks to the seasonal and calendar factors. As reported earlier, deputy Economic Development Minister Andrei Klepach announced that the ministry expected GDP to rise 3.1 percent in 2010, 3.4 percent in 2011, and 4.2 percent in 2012.
Russia`s industrial output in November increased for the first time since October 2008 at an annual rate of 1.5 percent, the Federal State Statistics Service (Rosstat) said on Dec 15th. Industrial output also rose compared to October, by 2 percent, Rosstat said. The November result beat analysts` prediction that industrial production would fall 2.5 percent from the same month last year, the Interfax news agency reported. Rosstat said agriculture, which gained year-on-year 4.9 percent in November, drove the growth. But the sector slipped 1.8 percent in the first 11 months of this year. The Russian economy, heavily dependent on energy resources, has been mired in a deep economic downturn after commodity prices collapsed late last year. Russian Prime Minister Vladimir Putin forecast early December that Russia`s gross domestic product would shrink by 8.5 to 8.7 percent this year, and its industrial production would tumble 13 percent.
Inflation is expected to be just below 9% in 2009, one of the lowest readings in Russian post-Soviet history. The economy ministry predicts inflation of up to 7.5% in 2010, a post-Soviet record.

www.ereport.ru - 05.01.2010 12:42:42