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World Economy Review - October 2010

International Monetary Fund Chief Economist Olivier Blanchard said Thursday the IMF still expects global growth of 4% to 5% this year and next, correcting comments he made in an interview earlier in the day. In remarks earlier, Blanchard had said world economic growth this year and next would be 3% to 4%. However, speaking in London Thursday evening, Blanchard said he had "made a mistake." "The number was just not right. It`s actually 4%-5% so I want to correct it," he said. "There has been no change in the forecast, just a slip of the tongue."
Blanchard praised the Federal Reserve decision to embark on a second round of quantitative easing, saying, "yes, I think it is worth doing" because of the substantial risks the U.S. economy faces. He said the direct impact may prove modest, with U.S. Treasury yields perhaps falling "about 10 to 20 basis points" and other borrowing rates falling less than this. However he said the "psychological effects" may be more effective, lifting inflation expectations and thereby reducing the risk of a deflationary cycle." He said "it`s very important that people continue to expect inflation."
He also said quantitative easing could result in some U.S. dollar depreciation and would likely contribute to the already huge capital inflows into emerging economies--something he said the Fed needed to take into account. Speaking on the global economy, Blanchard predicted that Japan "has a very tough time ahead of it," but that Germany`s growth may allow it to pull "away from the pack."
Blanchard said that the rebalancing of the economy is progressing "too slowly," with U.S. net exports unlikely to pick up much further and the Chinese trade surplus unlikely to shrink. He said significant rebalancing of the global economy--with emerging economies, like China, shifting toward greater domestic demand and currency appreciation, and the U.S. and other advanced economies exporting more--is key to a sustainable recovery.
Blanchard said ideally, emerging nations would allow some of the "explosion" of capital inflows push their currencies higher. However, he said the IMF agreed that there is a risk of "excessive" capital inflows that would be unhealthy. In that context, "it makes sense for countries to use macro-prudential tools and capital controls," he said.
On the U.S., Blanchard painted a bleak picture, saying that not only were net exports unlikely to rise much but that he also does not expect the U.S. housing market to "pick up any time soon." He said the high unemployment rate in the U.S. is causing "enormous problems" in a country unused to it. On Europe, Blanchard said the financial and sovereign debt challenges remain "substantial risks" but that the real economy is performing better than expected. He said fiscal consolidation in Europe and other advanced economies is going to be "a very tough slog."

Economy of the United States

The U.S. economy remains mired in a sluggish recovery, unable to grow fast enough to create the masses of jobs needed to bring down unemployment. Gross domestic product, the broadest measure of the goods and services produced by the economy, rose at an inflation-adjusted annual rate of 2% in the third quarter, up from 1.7% in the second quarter, the government said.
Businesses increased investment in equipment and - for the first time in more than two years - in buildings. Consumer spending accelerated, marking its strongest growth since late 2006, though much of the added spending went for imports. Much of the third-quarter growth came from businesses building inventories, an unsustainable source of growth. Exports of goods and services grew at a 5% pace, but imports rose 17.4%. Residential construction plunged in the wake of the expiration of the home-buyer tax credit. State and local government spending contracted, as it has in six of the past eight quarters. Business spending on equipment and software jumped 12% in the third quarter, the GDP report showed, well below the nearly 25% pace of the second quarter - but still a sign that businesses are cautiously retooling.
Business spending on structures rose 3.9%, the first increase since the second quarter of 2008. Inventories grew by $115.5 billion, accounting for 1.4 percentage points of the 2% gain in GDP. Meanwhile, wages continue to grow slowly. The Labor Department said that its employment cost index, a broad measure of salaries and benefits, increased 0.4% in the third quarter, down from 0.5% in the second quarter. The cost of benefits, which accounts for about a third of the measure, increased faster than growth in wages and salaries.
Industrial production slipped 0.2% in September following an unrevised 0.2% gain in August. The drop in September was below market expectations for a 0.2% increase. The capacity utilization rate dipped to 74.7% in September from the upwardly revised 74.8% (previously reported as 74.7%) level in August.
The dip in industrial production in September marks the first decline in the series in 15 months after hitting a recession low in June of 2009. Manufacturing output fell 0.2% in the month, reflecting the earlier reported 0.2% drop in the index of aggregate manufacturing hours worked, which was despite a 0.5% rise in the motor vehicle component following a sizeable 6.3% decline in August. Mining production rose for a third consecutive month, climbing 0.7% following 1.6% and 0.9% increases in August and July, respectively. Utilities output fell a sizeable 1.9% in September following a 1.4% drop in August as this component continues to unwind some of the weather-related gains recorded earlier in the summer.
The United States trade deficit widened sharply in August as the politically-sensitive gap with China climbed to an all-time high, putting pressure on the White House to take a tougher line on trade issues, including the yuan. The Commerce Department said yesterday the deficit in August increased 8.8 per cent to US$46.3 billion ($60 billion). The 2.1-per-cent rise in imports to US$200.2 billion overwhelmed a 0.2-per-cent rise in exports to US$153.9 billion. The deficit with China rose 8.2 per cent to US$28 billion, surpassing the old record of US$27.9 billion set in October 2008.
The Consumer Price Index for all urban consumers increased by 0.1% on a seasonally adjusted basis in September. This came in a report today from the U.S. Bureau of Labor Statistics which showed that over the last 12 months the all items index increased by 1.1% before seasonal adjustment. Increases in food prices and a rise in the cost of fuel were the reasons for the rise this month. The index for items other than fuel and energy was unchanged, as it was the previous month.

Economy of the European Union

In August 2010 compared with July 2010, seasonally adjusted industrial production grew by 1.0% in the euro area (EA16) and by 0.8% in the EU27. In July production rose by 0.1% in both zones. In August 2010 compared with August 2009, industrial production increased by 7.9% in the euro area and by 7.5% in the EU27.
The first estimate for the euro area (EA16) trade balance with the rest of the world in August 2010 gave a 4.3 bn euro deficit, compared with -2.8 bn in August 2009. The July 2010 balance was +6.2 bn, compared with +11.9 bn in July 2009. In August 2010 compared with July 2010, seasonally adjusted exports rose by 1.0% and imports by 1.8%.
The first estimate for the August 2010 extra-EU27 trade balance was a 17.3 bn euro deficit, compared with -12.4 bn in August 2009. In July 20102 the balance was -6.2 bn, compared with +0.5 bn in July 2009. In August 2010 compared with July 2010, seasonally adjusted exports fell by 0.1%, while imports rose by 1.3%.
Euro area annual inflation is expected to be 1.9% in October 2010 according to a flash estimate issued by Eurostat, the statistical office of the European Union. Euro area annual inflation was 1.8% in September 2010, up from 1.6% in August. A year earlier the rate was -0.3%. Monthly inflation was 0.2% in September 2010. EU3 annual inflation was 2.2% in September 2010, up from 2.0% in August. A year earlier the rate was 0.3%. Monthly inflation was 0.2% in September 2010.
The euro area (EA16) seasonally-adjusted unemployment rate was 10.1% in September 2010, compared with 10.0% in August. It was 9.8% in September 2009. The EU27 unemployment rate was 9.6% in September 2010, unchanged compared with August4. It was 9.3% in September 2009.
Eurostat estimates that 23.109 million men and women in the EU27, of whom 15.917 million were in the euro area, were unemployed in September 2010. Compared with August, the number of persons unemployed increased by 71 000 in the EU27 and by 67 000 in the euro area. Compared with September 2009, unemployment rose by 0.656 million in the EU27 and by 0.424 million in the euro area.

Economy of Japan and China

Japan`s government says industrial production fell for the fourth straight month in September. Factory output was down 1.9 percent from the previous month following a 0.5 percent fall in August, due to lower production from makers of cars and electronic devices. Companies surveyed by the Ministry of Economy, Trade and Industry expect output to keep falling this month. They forecast a 3.6 percent fall in October before rising 1.7 percent in November.
Japan reported a balance of trade surplus equivalent to 797 Billion JPY in September of 2010. Japan`s exports grew at the slowest pace this year in September, a sign the country is losing its chief engine for growth as demand abroad tempers. Imports climbed 9.9 percent from a year earlier.
Japan`s consumer prices fell for a 19th month as the yen`s advance makes imports cheaper and a slowing economy erodes demand. Consumer prices excluding fresh food declined 1.1 percent in September from a year earlier, the statistics bureau said today in Tokyo. That compares with a median 1 percent drop forecast by 26 economists surveyed by Bloomberg News. The Bank of Japan maintained its projection that core prices will increase in the year starting April 2011 and said those gains will accelerate in fiscal 2012.
Japan posted a seasonally adjusted unemployment rate of 5.0 percent in September, the Ministry of Internal Affairs and Communications said - beating forecasts for an unchanged rate of 5.1 percent from August. The number of unemployed persons in September was 3.40 million, a decrease of 230,000 of 6.3 percent from the previous year. The number of employed persons was 63.09 million, an increase of 140,000 or 0.2 percent from the previous year. The participation rate was 60.2 percent.
China`s annual gross domestic production (GDP) growth has slowed to 9.6 per cent in the third quarter, coming in slightly above market forecasts. According to China`s National Bureau of Statistics (NBS), GDP growth slowed compared to the 10.3 per cent economic expansion in the second quarter. Economists had forecast third-quarter growth of 9.5 per cent.
NBS says China attributed the slowing pace of economic growth to a volatile domestic and international environment. Chinese consumer prices rose by 3.6 per cent in the year to September, the highest reading since October 2008. Economists say the lift in prices was mostly due to an increase in commodity and food prices as a result of widespread flooding. Food prices rose by 8 per cent over the year.

Economy of Russia

Russia`s economy expanded 0.2 percent in September from the previous month adjusted for seasonal factors, Economy Minister Elvira Nabiullina said. Gross domestic product increased an annual 1.8 percent last month, showing the country is emerging from a pause in growth, she told reporters in Moscow today. Capital investment rose 0.9 percent in September, fueling the recovery, she said.
Russia is emerging from last year`s 7.9 percent GDP contraction, the biggest on record, as higher commodities prices and domestic consumption fuel growth. The economy may expand less than the government`s official 4 percent estimate this year as global growth remains subdued, Finance Minister Alexei Kudrin said on Oct. 20.
Retail sales fell in September as inflation accelerated after the anomalous summer weather, according to Nabiullina. Consumer-price growth won`t exceed 0.6 percent this month, she said today. Nabiullina`s deputy Andrei Klepach said on Oct. 20 that inflation may reach a monthly 0.7 percent in October.
Prices advanced 0.8 percent in September from the month before as food prices rose after Russia`s drought hobbled agricultural output, according to the Federal Statistics Service. Retail sales fell 1.9 percent from the previous month as disposable income declined, the statistics office said. - 05.11.2010 14:56:37