World Economy Review - August 2011

The global economy has entered a "new danger zone," World Bank President Robert Zoellick warned in Sydney on Sunday (August 14th). "There is a convergence of some events in Europe and the United States that has led many market participants to lose confidence in economic leadership of some of the key countries," Zoellick said.
Addressing members of the Asia Society at an annual dinner in Australia`s largest city, he said the turbulence on the world financial markets this month has undermined investors` confidence. "What`s happened in the past couple of weeks is there is a convergence of some events in Europe and the United States that has led many market participants to lose confidence in economic leadership of some of the key countries," Zoellick said.
Stock and bond markets plunged into turmoil amid warnings that the debt crisis which has ravaged Greece, Portugal and Ireland is now spreading to two much larger Eurozone economies, Italy and Spain. Also stoking fears was the decision by Standard and Poor`s to downgrade the credit rating of the United States from triple A to double A plus.
France, the second largest economy among the 17 EU nations using the euro as their currency, was also the subject of rumors last week about its credit rating. "I think that those events combined with some of the other fragilities in the nature of the recovery has pushed us into a new danger zone. And I don`t say those words lightly," Zoellick said.
The World Bank chief stressed the need for strong action to appease market players. "It would be important that the primary economic actors take steps both short and long term to restore confidence," he said, calling on European leaders to enact structural reforms aimed at increasing productivity, job creation and free trade.
The Eurozone faces more serious problems than the United States, and decisions by governments and central banks often come "a day late", the World Bank chief said. If debt-laden countries, such as Greece and Portugal, are unable to show the prospects for growth, then the crisis in the Eurozone is likely to continue, Internet-based business wire service RTTNews quoted Zoellick as also noting.
Meanwhile, billionaire philanthropist George Soros suggested over the weekend that both southern European countries should leave not only the Eurozone, but the EU as well. "I think that the Greek problem has been sufficiently mishandled by the European authorities that this may well be the best solution," he told German magazine Spiegel in an interview, whose English translation was published on Monday. "Europe, the euro and the financial system could survive Greece leaving. It could survive Portugal leaving."

Economy of the United States

Real gross domestic product (GDP) increased at an annualised rate of 1.0% in the second quarter of 2011 after increasing 0.4% in the first quarter, according to estimates released today by the Bureau of Economic Analysis. The second quarter growth rate was revised down a 0.3 percentage point from the advance estimate released in July.
The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, exports, personal consumption expenditures (PCE), and federal government spending that were partly offset by negative contributions from state and local government spending and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.
The acceleration in real GDP in the second quarter primarily reflected a deceleration in imports, an upturn in federal government spending, and an acceleration in nonresidential fixed investment that were partly offset by decelerations in PCE and in exports and a downturn in private inventory investment.
Industrial production advanced 0.9 percent in July. Although the index was revised down in April, primarily as a result of a downward revision to the output of utilities, stronger manufacturing output led to upward revisions to production in both May and June. Manufacturing output rose 0.6 percent in July, as the index for motor vehicles and parts jumped 5.2 percent and production elsewhere moved up 0.3 percent. The output of mines advanced 1.1 percent, and the output of utilities increased 2.8 percent, as the extreme heat during the month boosted air conditioning usage. At 94.2 percent of its 2007 average, total industrial production for July was 3.7 percentage points above its year-earlier level.
The capacity utilization rate for total industry climbed to 77.5 percent, a rate 2.2 percentage points above the rate from a year earlier but 2.9 percentage points below its long-run (1972-2010) average.
The U.S. trade deficit unexpectedly widened to its highest levels in nearly three years in June as exports slowed and the nation`s economic growth stalled. The deficit expanded to $53.1 billion, or 4.4. percent, in June, from $50.8 billion the prior month — the largest gap since October 2008, the Commerce Department reported.
Exports fell 2.3 percent to $170.9 billion, the second straight monthly drop and the biggest decline since January 2009, with demand for American products waning overseas as several nations face budget crises that are roiling the global markets. The decrease in exports took place in industrial supplies and materials and foods, feeds and beverages.
Imports dropped 0.8 percent to $223.9 billion as crude oil prices dropped and oil imports decreased 4.3 percent to $38.2 billion, with the average price falling to $106 a barrel from $109 in May, the first decline in prices in nine months, according to the Commerce Department. The decrease in imports were in industrial supplies and materials, automotive vehicles, parts and engines, capital goods and consumer goods, while there were increases in foods and feeds, and beverages hit a record in June.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index increased 3.6 percent before seasonal adjustment.
The gasoline index rebounded from previous declines and rose sharply in July, accounting for about half of the seasonally adjusted increase in the all items index. The food at home index accelerated in July and also contributed to the increase, as dairy and fruit indexes posted notable increases and five of the six major grocery store food groups rose.
The index for all items less food and energy increased as well, though the 0.2 percent increase was slightly smaller than the two previous months. The shelter index accelerated in July, and the apparel index again increased sharply. In contrast, the index for new vehicles was unchanged after a long string of increases. The index for household furnishings and operations was flat in July as well, and the recreation index declined slightly.
The 12 month change in the all items index remained at 3.6 percent for the third month in a row. The change in the index for all items less food and energy continued its upward trend, rising to 1.8 percent in July, with the shelter and apparel indexes contributing notably to the acceleration. The energy index has risen 19.0 percent over the past year.

Economy of the European Union

GDP increased by 0.2% in both the euro area (EA17) and the EU27 during the second quarter of 2011, compared with the previous quarter, according to flash estimates published by Eurostat, the statistical office of the European Union. In the first quarter of 2011, growth rates were +0.8% in both zones. Compared with the same quarter of the previous year, seasonally adjusted GDP increased by 1.7% in both zones in the second quarter of 2011, after +2.5% in both zones in the previous quarter.
In June 2011 compared with May 2011, seasonally adjusted industrial production fell by 0.7% in the euro area (EA17) and by 1.2% in the EU27. In May production rose by 0.2% in both zones. In June 2011 compared with June 2010, industrial production increased by 2.9% in the euro area and by 1.7% in the EU27. These estimates are released by Eurostat, the statistical office of the European Union.
In June 2011 compared with May 2011, production of durable consumer goods fell by 2.5% in the euro area and by 2.2% in the EU27. Capital goods decreased by 1.5% and 2.9% respectively. Intermediate goods declined by 0.6% in the euro-area and by 1.3% in the EU27. Non-durable consumer goods dropped by 0.5% and 0.8% respectively. Production of energy fell by 0.4% in the euro area, but gained 0.8% in the EU27. Among the Member States for which data are available, industrial production fell in fifteen, rose in five and remained stable in the United Kingdom. The largest decreases were registered in Denmark (-5.8%), Portugal (-3.5%), Finland (-3.3%) and Slovenia (-2.7%), and the highest increases in Latvia (+4.1%) and Lithuania (+3.7%).
In June 2011 compared with June 2010, production of capital goods grew by 7.0% in the euro area and by 5.0% in the EU27. Intermediate goods increased by 3.3% and 2.3% respectively. Non-durable consumer goods rose by 1.2% in the euro-area and by 0.5% in the EU27. Durable consumer goods fell by 2.7% and 4.1% respectively. Production of energy decreased by 5.1% in the euro area and by 4.6% in the EU27. Among the Member States for which data are available, industrial production rose in thirteen and fell in eight. The highest increases were registered in Estonia (+23.7%), Latvia (+15.2%), Lithuania (+10.3%), the Czech Republic (+7.4%) and Germany (+7.0%), and the largest decreases in Greece (-13.2%), the United Kingdom (-5.3%) and Denmark (-3.3%).
The first estimate for euro area (EA17) trade with the rest of the world in June 2011 gave a 0.9 bn euro surplus, compared with +0.7 bn euro in June 2010. The May 2011 balance was +0.2 bn, compared with -4.9 bn in May 2010. In June 2011 compared with May 2011, seasonally adjusted exports fell by 4.7% and imports by 4.1%. The first estimate for the June 2011 extra-EU27 trade balance was a 12.2 bn euro deficit, compared with -11.1 bn in June 2010. In May 2011 the balance was -12.3 bn, compared with -16.0 bn in May 2010. In June 2011 compared with May 2011, seasonally adjusted exports fell by 4.8% and imports by 3.8%.
Euro area annual inflation was 2.5% in July 2011, down from 2.7% in June. A year earlier the rate was 1.7%. Monthly inflation was -0.6% in July 2011. EU annual inflation was 2.9% in July 2011, down from 3.1% in June. A year earlier the rate was 2.1%. Monthly inflation was -0.5% in July 2011.

Economy of Japan

Japan`s GDP contracted for the third quarter in a row in Q2. It fell by 1.3% q/q AR (consensus: -2.5%, Danske Bank: -1.9%) compared with a 3.6% q/q AR contraction in Q1. The contraction was solely due to a supply-driven decline in exports. Net exports subtracted close to 4pp q/q AR from GDP growth in Q2. Domestic demand on the other hand actually managed to expand 0.9% q/q AR in Q2, albeit this was slightly less than we expected.
The increase in demand has largely been satisfied by the continued increase in Japan`s imports and companies continuing to cut inventories, albeit inventories dropped substantially less than in Q1. Hence, inventories added close to 2pp q/q AR to GDP growth in Q2. The resilient Japanese imports in the wake of the earthquake have been quite remarkable. Japan`s imports improved 0.5% q/q AR in Q2 after increasing a solid 6.1% q/q AR in Q1. Hence, the expected sharp drop in Japan`s imports in the wake of the earthquake has never materialised, suggesting that the direct negative impact on demand outside Japan from the earthquake has actually been quite modest, because the lack of domestic supplies has to a large degree been substituted with increased imports.
Japan`s industrial output grew a seasonally adjusted 3.8 percent in June from the previous month, revised slightly downward from a preliminary 3.9 percent rise as a result of additional data not available in the earlier report, the industry ministry said. The reading represents the third straight month of increase, helped by strong output by automakers amid a recovery of the supply chain of components that was disrupted after the devastating March 11 earthquake and tsunami.
An official at the Economy, Trade and Industry Ministry attributed the downgrade partly to a 3.1 percent fall in the output of foods and tobacco products, whose data were not available when it published the preliminary report on July 29. The index of production at factories and mines stood at 92.6 against the base of 100 for 2005. According to the revised data, the index of industrial shipments climbed 8.1 percent to 94.3, revised from an 8.5 percent rise, and that of industrial inventories fell 2.8 percent, unchanged from the preliminary report, to 100.8.
The seasonally adjusted trade balance, which has turned negative since the disaster in March, slightly improved in July to JPY 130.5 billion. In July, merchandise exports increased by only 0.8% in nominal terms and 0.3% in real terms. The improvement was largely due to the reconstruction of production capacity and the easing of supply chain disruptions. On the demand side, international trade is clearly losing momentum. According to the latest CPB Worldtrade Monitor, the trade momentum (three month rate of change) declined to 0.9% in May from 1.1% in April. Moreover, the OECD leading indicator signals turning points in the growth cycles or even slowdowns in activity in almost all major economies. Japanese exporters are even double disadvantaged as they are also confronted by a rapid appreciation of the yen. In July, the yen was 2.8% higher from a year earlier. However, as the Japanese economy is in deflation, the yen does not seem to be so overvalued in real terms.
Merchandise imports fell in July by 0.4% in nominal terms, but rose by 6.8% in real terms. The sharp rise in real imports is partly related to the production disruptions following the earthquake/tsunami. Moreover, as several nuclear power stations were knocked out by the event, the electric power companies had to import more fossil fuels. However, the energy bill was alleviated by the fall in oil prices on world markets and the appreciation of the yen. Crude oil prices (WTI) were 15% lower in July from their peak in April.

Economy of Russia

Russia`s GDP grew 3.8% in January-July, the Economic Development Ministry said in a monitoring report late Monday. Annualized GDP growth in July amounted to 4.2%. The country`s economic growth accelerated in July, with seasonally adjusted GDP reaching 0.4%, up from 0.2% in June, the ministry said. This growth was achieved primarily on the strength of performance in construction and retail trade. A fall was registered in industrial production, including mineral resource production, and processing industries.
Russia`s economy grew by 3.7% in the first half of the year compared to the same period in 2010, preliminary data from the Federal Statistics Service showed Wednesday, coming in below official expectations despite months of strong oil prices. The Economy Ministry last month forecast growth of 3.9% for the first six months of the year. Prices for oil--Russia`s chief export--stayed elevated in the period, prompting the country to raise the average oil price on which its 2011 budget is based, to $105 per barrel from $81 per barrel. Fixed investment also came in lower than expected, that data showed. It rose by 7.9% in the year to July, compared with an analyst forecast for an 8.8% increase.