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World Economy Review - February 2011

Sharply rising oil prices could prove a drag on global economic recovery this year, the International Energy Agency (IEA) warned. With oil already topping the $100 per barrel mark as political instability in the Middle East adds to upwards pressure from rising commodity prices, the worldwide "oil burden" is set to hit 4.7 per cent of total economic output this year, up from 4.1 per cent in 2010.
"The combination of higher prices, emerging inflationary pressures and instability in the Middle East is not a healthy one," the IEA`s monthly oil report said. "Under current assumptions for global GDP, oil price and oil demand, the global oil burden could rise to 4.7 per cent in 2011, getting close to levels that have coincided in the past with a marked economic slowdown."
The IEA also increased its forecast of global demand for oil in 2011 to 89.3 million barrels per day, its fifth increase in as many months, as economic growth recovers, particularly in emerging economies such as China.
Separately, the Organization of Petroleum Exporting Countries in its Oil Market Report, February 2011, said the world economic growth in 2011 "remains unchanged at 3.9 per cent," noting that it had previously revised it up to 3.9 per cent in January from the 3.8 per cent initial projection.
Consequently, the report said the United States economy "is now expected to expand by 2.9 per cent and the Euro-zone raised to 1.4 per cent. Growth for developing countries remain almost unchanged, with China growing at 8.8 per cent and India at 8.5 per cent in 2011." However, the report said, "despite increased activity in the manufacturing sector, which has led to a broad-based improvement in global sentiment, significant challenges remain. "The extraordinary sovereign debt levels, rising inflation rates, combined with the possibility of overheating in developing countries, constitute concerns that might influence the 2011 growth trend.".
Meanwhile, the World Bank has published an optimistic forecast for the African continent. It is projecting output growth of 5.3% in 2011 and 5.7% in 2012 compared to 4.7% in 2010 and 1.7% in 2009. The recovery is a return to the buoyant growth rate which prevailed before the global financial crisis.

Economy of the United States

The United States economy sped up slightly at the end of last year but the acceleration was slower than previously believed as consumers spent less than first estimated by the government, while trade made a smaller contribution to growth. Gross domestic product in the world`s largest economy rose at an inflation-adjusted annual rate of 2.8 per cent in the fourth quarter, according to the government`s second estimate. The Commerce Department data was below expectations, with economists having forecast GDP to be revised up to a 3.3 per cent growth rate from the first estimate of 3.2 per cent. US GDP climbed by 2.6 per cent in the third quarter and 1.7 per cent in the second.
After having risen 1.2% in December, industrial production decreased 0.1% in January 2011, the Federal Reserve reported on Feb. 16. In the manufacturing sector, output increased 0.3% in January after an upwardly revised gain of 0.9% in December. Excluding motor vehicles and parts, factory production rose 0.1% in January.
The output of durable goods moved up 0.6% in January. A large gain was recorded in the index for motor vehicles and parts; smaller increases were recorded for many other industries, including fabricated metal products, machinery, computer and electronic products, aerospace and miscellaneous transportation equipment, furniture and related products, and miscellaneous manufacturing. Output decreased for wood products; nonmetallic mineral products; primary metals; and electrical equipment, appliances, and components.
Nondurable manufacturing declined 0.1% in January after having advanced 1% in December. The decline in production in January reflected decreases for food, beverage, and tobacco products; textile and product mills; printing and support products; and petroleum and coal products.
The U.S. trade gap widened to a three-month high in December, driven largely by rising commodities prices. The trade balance, which measures the difference between the nation`s imports and exports, grew to a $40.6 billion deficit in December, up from $38.3 billion in November, the Commerce Department said.
That number was roughly in line with analysts` estimates, and represents the highest level since September 2010. Exports totaled $163 billion in December, a rise of $2.8 billion from the month before, and imports totaled $203.5 billion, or $5.1 billion more than in November. For the year overall, the U.S. trade deficit fell much deeper into the red, to a whopping $497.8 billion, up from the $375 billion trade deficit in 2009.
With energy prices in the U.S. showing another notable increase in the month of January, the Labor Department released a report showing that total consumer prices increased by a little more than expected for the month. The report showed that the consumer price index rose by 0.4 percent in January, matching the revised increase seen in December. Economists had expected consumer prices to increase by 0.3 percent compared to the 0.5 percent growth originally reported for the previous month.
A continued increase in energy prices contributed to the slightly bigger than expected increase in consumer prices, with energy prices rising by 2.1 in January after surging up by 4.0 percent in December. The increase in energy prices was due in large part to a 3.5 percent increase in gasoline prices. Food prices also rose by 0.5 percent in January after edging up by just 0.1 percent in December. The Labor Department noted that the food at home index rose 0.7 percent, the largest increase since 2008.
Excluding the jump in energy prices as well as the increase in food prices, core consumer prices edged up by 0.2 percent in January after rising by 0.1 percent in December. Core prices had been expected to inch up by 0.1 percent.
While the increase in core prices was relatively modest, it still marked the biggest increase since a matching increase in October of 2009. The core price growth was partly due to a 1.0 jump in apparel prices, while prices for transportation services and medical care commodities also rose by 0.6 percent and 0.5 percent, respectively.
Compared to the same month a year ago, total consumer prices were up by 1.6 percent in January compared to the 1.5 percent year-over-year growth seen in December. Core consumer prices rose at an annual rate of 1.0 percent in January, reflecting an acceleration from the 0.9 percent growth seen in the previous month.
U.S. unemployment dipped below 9 percent last month, as private employers added the most jobs since April. The U.S. Labor Department released its monthly employment report Friday, showing the U.S. economy picked up a net total of 192,000 jobs in February. That brings the U.S. jobless rate to 8.9 percent - the lowest in nearly two years and another sign that the US recovery is picking up steam.

Economy of the European Union

GDP increased by 0.3% in the euro area (EA16) and by 0.2% in the EU27 during the fourth quarter of 2010, compared with the previous quarter, according to second estimates released by Eurostat, the statistical office of the European Union. In the third quarter of 2010, growth rates were +0.3% in the euro area and +0.5% in the EU27. Compared with the fourth quarter of 2009, seasonally adjusted GDP increased by 2.0% in the euro area and by 2.1% in the EU27, after +1.9% and +2.2% respectively.
During the fourth quarter of 2010, household final consumption expenditure increased by 0.4% in the euro area and by 0.3% in the EU27 (after +0.1% and +0.2% respectively in the previous quarter). Gross fixed capital formation declined by 0.6% in the euro area and by 0.8% in the EU27 (after -0.1% and +0.4%). Exports grew by 1.8% in both zones (after +2.2% in both zones). Imports rose by 1.1% in the euro area and by 1.4% in the EU27 (after +1.4% and +1.6%).
In December 2010 compared with November 2010, seasonally adjusted industrial production fell by 0.1% in both the euro area (EA16) and the EU27. In November 2010 production rose by 1.4% and 1.2% respectively. In December 2010 compared with December 2009, industrial production grew by 8.0% in the euro area and by 7.7% in the EU27. Compared with 2009, the average production index for 2010 increased by 7.1% in the euro area and by 6.7% in the EU27.
In December 2010 compared with November 2010, production of energy grew by 2.4% in the euro area and by 1.7% in the EU27. Capital goods rose by 0.7% and 0.8% respectively. Non-durable consumer goods fell by 0.3% in the euro area and by 0.2% in the EU27. Durable consumer goods decreased by 1.0% and 0.1% respectively. Intermediate goods declined by 1.3% in both zones. Among the Member States for which data are available, industrial production rose in ten, fell in nine and remained stable in Germany and the Netherlands. The highest increases were registered in Slovenia (+4.2%), Portugal (+3.8%) and Estonia (+1.3%), and the largest decreases in Latvia (-1.9%), Ireland (-1.7%) and Denmark (-1.3%).
In December 2010 compared with December 2009, production of capital goods grew by 14.8% in the euro area and by 14.5% in the EU27. Intermediate goods increased by 7.8% and 7.9% respectively. Production of energy rose by 5.8% in the euro area and by 3.8% in the EU27. Durable consumer goods gained 2.1% and 1.8% respectively. Non-durable consumer goods grew by 1.9% in the euro area and by 2.5% in the EU27. Industrial production rose in all Member States for which data are available, except Greece (-5.2%), Malta (-3.1%) and Spain (-0.1%). The highest increases were registered in Estonia (+38.4%), Ireland (+16.9%), Latvia (+15.7%), Lithuania (+14.2%) and Germany (+11.8%).
The first estimate for the euro area (EA16) trade balance with the rest of the world in December 2010 gave a 0.5 bn euro deficit, compared with +3.2 bn in December 2009. The November 2010 balance was -1.5 bn, compared with +2.7 bn in November 2009. In December 2010 compared with November 2010, seasonally adjusted exports fell by 0.4% and imports by 1.1%. The first estimate for the December 2010 extra-EU27 trade balance was a 10.5 bn euro deficit, compared with -2.9 bn in December 2009. In November 2010 the balance was -15.4 bn, compared with -7.7 bn in November 2009. In December 2010 compared with November 2010, seasonally adjusted exports fell by 0.3% and imports by 0.4%.
During 2010, euro area trade recorded a surplus of 0.7 bn euro, compared with +16.6 bn in 2009. The EU27 recorded a deficit of 143.3 bn in 2010, compared with -108.1 bn in 2009. Euro area annual inflation is expected to be 2.4% in February 2011 according to a flash estimate issued by Eurostat, the statistical office of the European Union.
Euro area annual inflation was 2.3% in January 2011, up from 2.2% in December 2010. A year earlier the rate was 0.9%. Monthly inflation was -0.7% in January 2011. EU3 annual inflation was 2.7% in January 2011, unchanged compared to December 2010. A year earlier the rate was 1.7%. Monthly inflation was -0.4% in January 2011.
The euro area (EA17) seasonally-adjusted unemployment rate was 9.9% in January 2011, compared with 10.0% in December 2010. It was 10.0% in January 2010. The EU27 unemployment rate was 9.5% in January 2011, compared with 9.6% in December 2010. It was 9.5% in January 2010.
Eurostat estimates that 23.048 million men and women in the EU27, of whom 15.775 million were in the euro area, were unemployed in January 2011. Compared with December 2010, the number of persons unemployed fell by 43 000 in the EU27 and by 72 000 in the euro area. Compared with January 2010, unemployment rose by 99 000 in the EU27 and remained nearly stable in the euro area.

Economy of Japan

The Japanese Gross Domestic Product fell by 0.3% in the December quarter 2010, according to the preliminary estimation, beating expectations of a 0.5% decrease. This result follows a 1.1% increase over the September quarter 2010. The GDP annualized dropped 1.1% against -2.1% expected; the GDP deflator fell 1.6 against -1.5% forecasted.
Industrial production in Japan jumped a seasonally adjusted 2.4 percent in January compared to the previous month, the Ministry of Economy, Trade and Industry said in a preliminary report on Monday, rising for the third straight month. That was well below expectations for an increase of 4.0 percent following the revised 3.3 percent increase in December.
On an annual basis, industrial production climbed 4.7 percent - again missing expectations for a 6.0 percent increase following the revised 4.9 percent gain in the previous month. In spite of the data, the ministry maintained its assessment of industrial production, saying that it "continues to shows signs of an upward movement."
Industries that contributed to the increase include transport equipment, general machinery and iron and steel. Commodities that contributed to the increase include passenger cars and semiconductor products machinery. According to the survey of production forecast, production is expected to increase 0.1 percent in February and 1.9 percent in March. Industries that contributed to the increase in February include general machinery, iron and steel, and paper and pulp. Industries that contributed to the increase in March include transport equipment and electrical machinery.
Shipments in January increased 1.1 percent on month, rising for the third straight month. It showed an increase of 3.2 percent on year. Industries that contributed to the increase include transport equipment, iron and steel, and fabricated metals. Inventories in November increased 4.7 percent on month, rising for the second straight month. They were up 7.3 percent on year. Industries that contributed to the increase include information and communication and transport equipment. The Inventory Ratio in January was up 0.7 percent on month and 1.2 percent on year.
Japan saw a merchandise trade deficit of 471.4 billion yen in January, the Ministry of Finance said, falling into the red for the first time in 22 months. The reading came as a shock to analysts, who had been expecting a surplus of 49.3 billion yen following the downwardly revised surplus of 725.9 billion yen in December.
Japan had a trade surplus of 260.236 billion yen with all of Asia, down 52.8 percent on year. Japan posted a trade deficit of 303.339 billion yen with China, up an annual 131.0 percent. The trade surplus with the United States was 288.128 billion yen, up an annual 21.7 percent, while the surplus with the European Union was 63.189 billion yen, down 31.3 percent on year. Exports were much weaker than expected, rising just 1.4 percent on year to 4.971 trillion yen - well shy of expectations for a 7.4 percent increase following the downwardly revised 12.9 percent gain a month earlier.
Exports to Asia rose just 0.4 percent on year to 2.729 trillion yen, but still climbing for the 15th consecutive month. Exports to China alone rose just 1.0 percent on year to 928.826 billion yen, but still also rising for the 15th straight month. Exports to the United States rose an annual 6.0 percent to 752.902 billion yen, rising for the 13th straight month. Exports to the European Union declined 0.7 percent on year to 575.899 billion yen, contracting for the first time in three months.
Imports came in much higher than expected, rising for the 13th straight month to 12.4 percent on year to 5.442 trillion yen versus forecasts for an 8.1 percent rise following the 10.6 percent gain in the previous month. Imports from Asia rose 14.0 percent on year to 2.469 trillion yen, while imports from China alone climbed an annual 17.2 percent to 1.232 trillion yen. Imports from the United States eased an annual 1.9 percent to 464.774 billion yen, while imports from the European Union collected 5.0 percent on year to 512.710 billion yen.
The adjusted trade balance also missed forecasts by a mile, coming in at a surplus of 191.8 billion yen. That compared to forecasts for a surplus of 712.0 billion yen following the downwardly revised surplus of 579.9 billion yen in December.
Japan`s core consumer price index fell 0.2% from a year earlier in January, the government said Friday, marking the 23rd straight month of decline and giving a sign that deflationary pressures persist, despite higher commodity prices. The median forecast of economists surveyed by Dow Jones and the Nikkei was for a 0.3% decline in the core CPI, excluding volatile fresh food prices. The government said higher prices for gasoline and kerosene - often used for home heating - were the main reasons for the slightly higher figure. The nationwide price index fell 0.4% in December.
The unemployment rate in Japan was steady at a seasonally adjusted 4.9 percent in January, the Ministry of Internal Affairs and Communications said on Tuesday, unchanged from the previous month and matching forecasts. The number of unemployed persons in January was 3.09 million, a decrease of 140 thousand or 4.3 percent on year. The number of employed persons in January was 62.04 million, a decrease of 90 thousand or 0.1 percent.
The job-to-applicant ratio came in at a two-year high of 0.61 - topping expectations for a reading of 0.58 after showing 0.57 in December. The participation rate was 58.9 percent.

Economy of Russia

(Source -

Russia`s GDP growth, current account balance, and fiscal deficit all exceeded expectations in 2010, but it is inflation that dominates policy makers` attention. As prices rise further, driven largely by causes outside of the government`s control, inflation could become a political problem. At the same time, policy makers are delaying needed economic reforms out of fear of inciting protests in the run-up to elections.
Russia`s economic performance in 2010 - 4 percent GDP growth, according to Rosstat`s preliminary estimate - pleased the government. It exceeded the Ministry of Economics` December projection of 3.8 percent and, though the estimate is preliminary (it will be revised three times, starting this month), future revisions will not point to lower growth: Russia has entered its pre-election cycle and the government needs all of the positive developments it can get.
In reality, however, Rosstat`s estimate is questionable. First of all, it does not match existing data, which shows that GDP grew by 3.7 percent over the first three quarters of last year and would therefore require fourth quarter growth to exceed 5.5 percent (q/q) or 23 percent (annualized) to meet the projection. Second, Rosstat highlights inventory growth as the main contributor to economic growth last year, estimating that it contributed 3.8 of the 4 percent. Though inventory growth is a normal part of economic recovery, this figure is hard to believe, particularly with sectors like construction still in decline.
Rosstat`s estimate also rests on strong and stable investment growth (approximately 10 percent (y/y)) over all of 2010. However, this number contradicts data gathered by regional bodies which shows that large and medium enterprises cut investment by 10 percent in 2010 (according to the most recent data, investment dropped by 5.5 percent (y/y) in January) - and is inconsistent with the acceleration of capital outflows that occurred in the second half of last year.
In addition, Rosstat claims that all of the investment growth went to the grey sector," which in this case refers to the companies that do not provide data for Russia`s statistics, which rely on surveys rather than panels. All large companies and many medium-sized companies provide data, while some medium-sized and most small companies do not. Rosstat uses different methods to evaluate the groups.
But, if this were the case, the grey sector`s share of overall investment would have risen from a stable 30 percent in 2000-2008 to 50 percent in 2010, and structural change cannot occur so instantaneously.
GDP growth notwithstanding, the rising oil price - which grew from $72.50/barrel in the first half of 2010 to $89.50/barrel in December - is feeding the government`s optimism about the economy. Last year, the growing oil price boosted government revenues by approximately 1.35 percent of GDP and brought the deficit down to 4.1 percent of GDP, below the Ministry of Finance`s September estimate of 5 percent of GDP.
Russia`s current account balance, which looked potentially unsustainable in the middle of last year, also benefited from the oil price increase. Helped by slowing import growth - 25 percent or less (y/y) in October-December, down from 35-40 percent in mid-2010 - the current account balance strengthened from only 1.6 percent in the third quarter to a very secure 3.5 percent in the fourth quarter. (Historically, currency devaluation has generally followed a current account surplus of less than 1.5 percent of GDP in Russia, suggesting that any balance below that is unstable.)
Despite this good news, last year`s significant increase in inflation disappointed Russian authorities. The consumer price index (CPI) reached 8.8 percent in 2010, exceeding the 5.5 percent the government had deemed feasible at the end of the summer. The CPI has continued to rise this year and could reach 10 percent (y/y) this month.
High inflation in an election year may become a significant political problem as it increases the pressure on government spending and promotes public dissatisfaction. This is particularly true now, given that the four main factors behind the increase - drought followed by a poor harvest, world food price growth, price indexation, and tax and tariff increases - are outside of the central bank`s control.
Last summer, a severe drought in Russia hit harvests of key products such as potatoes, grain, buckwheat, and sunflowers. Their prices soon rose rapidly - buckwheat prices grew by 20 to 30 percent each month until Russian companies signed large import contracts with Chinese producers in October. The poor harvests only compounded the spillover effect of world prices - which recently passed 2008 peaks - on imported foods, such as flour, sunflower-seed oil, milk, and sugar, which hit consumers` wallets as well.
The government`s annual indexation of certain prices and tariffs - gas and electricity for the corporate sector, and gas, electricity, utilities, and transport for households - also pushed up prices. Higher gas prices translate into higher electricity, utilities, and transport costs, and therefore have a particularly pronounced effect on the economy. With Russia aiming to gradually raise domestic gas prices to European levels (minus transportation costs), gas indexation has pushed inflation up by 20 percent for corporations and 15 percent for households.
Tax increases, enacted as part of the fiscal consolidation plan, have likely also led to higher prices. The combined payroll tax rate rose from 26 percent generally and 14 percent for small enterprises last year to 34 percent for both this year. Gas excises also increased by 48 percent. These changes - which amount to 2 percent of GDP - were announced last summer, and no doubt many companies have increased prices in an attempt to shift the burden to consumers.
The effects of the price indexation and tax increases will likely wane by March, as they have historically, but food prices - which comprise nearly 40 percent of Russia`s consumer basket - will continue to pressure inflation at least until May, when the new year`s harvest will become clearer. If food price inflation reaches 22 percent in May - up from 14.2 percent in January - as it did in May of 2008 and other prices follow their 2010 paths, annual inflation could grow to 13 percent by May.
Not surprisingly, Russian leaders are worried about inflation, especially as elections approach. Prime Minister Vladimir Putin held two meetings with oil companies and threatened to toughen antitrust prosecution unless they reduced gas prices. In another meeting, he demanded that regional governors keep utility price increases at or below 15 percent (the average increase in the country). President Dmitri Medvedev also publicly stated his concern about the high prices of goods and services at Moscow airports and tasked the Prosecutor General Office with investigating them. - 06.03.2011 17:10