World Economy Review - October 2013

Global growth is still in low gear and the drivers of growth are shifting, says the IMF`s latest World Economic Outlook (WEO) report. The IMF forecasts global growth to average 2.9 percent in 2013 - below the 3.2 percent recorded in 2012 - and to rise to 3.6 percent in 2014.
Much of the pickup in growth is expected to be driven by advanced economies. Growth in major emerging markets, although still strong, is expected to be weaker than the IMF forecast in its July 2013 WEO Update. This is partly due to a natural cooling in growth following the stimulus-driven surge in activity after the Great Recession. Structural bottlenecks in infrastructure, labor markets, and investment have also contributed to slowdown in many emerging markets.
“This transition is leading to tensions, with emerging market economies facing both the challenge of slowing growth and changing global financial conditions,” said Olivier Blanchard, the IMF`s chief economist and head of the Research Department.
Indeed, these growth transitions, combined with an approaching turning point in U.S. monetary policy, have led to new challenges and risks. In particular, long-term interest rates in the United States and many other economies have increased more than expected. Although the U.S. Federal Reserve recently decided to not slow the pace of its asset purchases yet and capital outflows from emerging markets have subsided somewhat, bond yields remain well above levels of early May. And there is a distinct risk that financial conditions will tighten from their current, still supportive levels.
In the United States, the projections are based on the key assumption that the ongoing shutdown in the federal government will be short-lived and the debt ceiling will be raised on time. Growth is expected to rise from 1,5 percent this year to 2,5 percent in 2014 driven by continued strength in private demand, which is supported by a recovering housing market and rising household wealth.
In the euro area, policy actions have reduced major risks and stabilized financial conditions, although growth in the periphery is still constrained by credit bottlenecks. The region is expected to gradually pull out of recession, with growth reaching 1 percent in 2014.
In Japan, fiscal stimulus and monetary easing under the authorities` new policy package - the so-called Abenomics - has enabled an impressive rebound in activity. But the expected unwinding of fiscal stimulus and reconstruction spending together with consumption tax hikes will lower growth from 2 percent this year to 1,25 percent in 2014.
In China, growth is projected to decelerate slightly from 7,5 percent this year to 7,25 percent in 2014. Policymakers have refrained from stimulating activity amid concerns for financial stability and the need to support a more balanced and sustainable growth path.
Overall, growth in emerging market and developing economies is expected to remain strong at 4,5-5 percent in 2013-14, supported by solid domestic demand, recovering exports, and supportive fiscal, monetary and financial conditions. Commodity prices will continue to boost growth in many low-income countries, including those in sub-Saharan Africa. But economies in the Middle East and North Africa, Afghanistan, and Pakistan region will continue to struggle with difficult economic and political transitions.

Economy of the United States

The U.S. expanded by a 2.8% annual pace in the third quarter, the biggest increase in a year and a half, aided by a large buildup in business inventories and an improved trade picture, the government said. Economists polled by MarketWatch had forecast 2.3% growth. Yet consumer spending, the main engine of the U.S. economy, slowed to a 1.5% increase from 1.8% in the second quarter, indicating the economy entered the fourth quarter with little momentum. Business investment also weakened, up just 1.6% vs. a 4.7% gain in the second quarter. And federal spending fell for the fourth straight quarter, down 1.7%.
On the positive side, investment in the housing sector remained strong with a 14.6% increase and exports outpaced imports. Exports rose 4.6% vs. a preliminary 1.9% increase in imports. Business inventories, meanwhile, jumped by $86 billion in the third quarter, as companies restocked warehouse shelves at the fastest rate in six quarters. Such a large buildup, however, could be partly unwound in the final three months of 2013 and act as a drag on growth. Inflation as measured by the PCE index increased at a 1.9% annual rate and the core rate that excludes food and energy rose by 1.4%.
The nation`s industrial output returned to prerecession levels for the first time last month, though weak gains in the manufacturing sector highlighted the sector`s slow recovery. Industrial production - a measure of output at U.S. factories, utilities and mines - increased a seasonally adjusted 0.6% in September from the prior month, the Federal Reserve said. The gain, driven largely by rebounding utility use, pushed overall output back to its 2007 average for the first time since the recession.
Capacity utilization, a measure of slack across industrial firms, rose 0.4 percentage point to 78.3%. That marked the highest level in five years. The recovery of the nation`s industrial sector, after a deep decline during the recession, reflects strengthening domestic and global demand.
Manufacturing, the largest component of industrial production, increased just 0.1% in September, slower than August`s 0.5% gain. Utility output rose 4.4% during the month, following declines in the previous five months. Mining output, the third component of industrial production, increased 0.2% during September and is 6.6% above year-earlier levels.
Increased automotive and machinery output led September`s manufacturing improvement, which offset a decline in nondurable production including food processing and chemicals. Factory output tumbled during the recession, then rose fairly rapidly in the early part of the recovery. But the pace of gains has slowed over the past year. During the third quarter, manufacturing expanded at a 1.2% annual pace. That is an improvement from a second-quarter contraction but still lags behind gains recorded the previous three years.
The report showed a 2% gain in September for motor vehicle manufacturing, a category up 11.3% from a year earlier. Auto sales have been strong in recent years as Americans are replacing cars they held on to during the recession. Defense and space-equipment output advanced 0.4% in September, the second consecutive monthly gain. The category is rebounding after weak performance earlier in the year due to federal budget cuts known as the sequester.
The U.S. trade deficit widened slightly in August as exports slipped, suggesting trade will probably not be much of a boost to growth in the third quarter. The Commerce Department said the trade gap nudged up 0.4 percent to $38.8 billion. July`s shortfall on the trade balance was revised to $38.6 billion from the previously reported $39.15 billion. Economists polled by Reuters had expected the trade deficit to edge up to $39.5 billion in August. The three-month moving average of the trade deficit, which irons out month-to-to month volatility, fell to $37.3 billion in the three months to August from $39.0 billion in the prior period.
Exports of goods and services dipped 0.1 percent to $189.2 billion in August. However, exports of automobiles and parts hit a record high. While imports were flat overall, the amount of goods imported from China was the highest since November 2012. The weak import growth is consistent with sluggish domestic demand.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index increased 1.2 percent before seasonal adjustment.
The energy index rose 0.8 percent in September and accounted for about half of the seasonally adjusted all items increase. All the major energy component indexes rose in September. The food index was unchanged, with declines in the indexes for fruits and vegetables and for nonalcoholic beverages offsetting increases in other indexes.
The index for all items less food and energy rose 0.1 percent in September, the same increase as in August. The shelter and medical care indexes also advanced and accounted for most of this increase. The indexes for new vehicles and for airline fares rose as well, while the apparel and recreation indexes declined.
The all items index increased 1.2 percent over the last 12 months; this was the smallest 12-month increase since April. The index for all items less food and energy has risen 1.7 percent over the last year with the shelter and medical care indexes both up 2.4 percent. The food index has risen 1.4 percent, while the energy index has declined 3.1 percent.
Total nonfarm payroll employment rose by 148,000 in September, and the unemployment rate was little changed at 7.2 percent, the U.S. Bureau of Labor Statistics reported. Employment increased in construction, wholesale trade, and transportation and warehousing.
The unemployment rate, at 7.2 percent, changed little in September but has declined by 0.4 percentage point since June. The number of unemployed persons, at 11.3 million, was also little changed over the month; however, unemployment has decreased by 522,000 since June.
Among the major worker groups, the unemployment rates for adult men (7.1 percent), adult women (6.2 percent), teenagers (21.4 percent), whites (6.3 percent), blacks (12.9 percent), and Hispanics (9.0 percent) showed little or no change in September. The jobless rate for Asians was 5.3 percent (not seasonally adjusted), little changed from a year earlier.

Economy of the European Union

The euro zone clocked a quarterly growth of 0.3 percent in the second quarter of 2013, the same as a previous estimate published on Sept. 4, and rebounding from a decline of 0.2 percent in the first quarter, driven by improved household consumption and increased investments in fixed assets, a third estimate published by Eurostat showed.
In the 27-member European Union, excluding Croatia, which joined the bloc on July 1, the gross domestic product grew 0.3 percent on a quarterly basis, revised down from an earlier estimate of 0.4 percent, after a decline of 0.1 percent in the first quarter.
However, on a yearly basis, GDP fell by 0.6 percent in the 17-nation euro zone in the second quarter, compared to a decline of 1.2 percent in the first quarter. In the EU, GDP dropped 0.2 percent, after a decrease of 0.8 percent in the first quarter.
Among EU nations for which data are available for the second quarter of 2013, Portugal (1.1 percent) recorded the highest quarterly growth, followed by Germany, Lithuania, Malta and the U.K. (all 0.7 percent). The largest declines were seen in Cyprus (1.8 percent), Slovenia and Italy (both 0.3 percent).
In August 2013 compared with July 2013, seasonally adjusted industrial production grew by 1.0% in the euro area (EA17) and by 0.5% in the EU28, according to estimates from Eurostat, the statistical office of the European Union. In July industrial production fell by 1.0% and 0.6% respectively. In August 2013 compared with August 2012, industrial production dropped by 2.1% in the euro area and by 1.6% in the EU28.
In August 2013 compared with July 2013, production of capital goods grew by 2.4% in the euro area and by 1.4% in the EU28. Intermediate goods increased by 0.9% and 0.8% respectively. Durable consumer goods rose by 0.8% in the euro area, but fell by 0.9% in the EU28. Non-durable consumer goods gained 0.5% in the euro area and decreased by 0.3% in the EU28. Energy increased by 0.4% and 0.2% respectively.
Among the Member States for which data are available, industrial production rose in thirteen and fell in ten. The highest increases were registered in Portugal (+8.2%), Malta (+7.2%) and the Czech Republic (+4.7%), and the largest decreases in Estonia (-3.5%), Sweden (-2.8%) and Latvia (-2.0%).
In August 2013 compared with August 2012, production of durable consumer goods fell by 6.1% in the euro area and by 3.9% in the EU28. Energy dropped by 3.0% and 4.1% respectively. Intermediate goods decreased by 2.8% in the euro area and by 1.4% in the EU28. Non-durable consumer goods declined by 1.8% in both zones. Capital goods fell by 1.4% in the euro area and by 0.7% in the EU28.
Among the Member States for which data are available, industrial production fell in fourteen and rose in nine. The largest decreases were registered in Sweden (-7.9%), Greece (-7.5%), Ireland (-5.9%) and Italy (-4.6%), and the highest increases in Romania (+6.0%), Slovakia (+4.3%) and the Czech Republic (+4.2%).
The first estimate for the euro area (EA17) trade in goods balance with the rest of the world in August 2013 gave a 7.1 billion euro surplus, compared with +4.6 bn in August 2012. The July 2013 balance was +18.0 bn, compared with +13.8 bn in July 2012. In August 2013 compared with July 2013, seasonally adjusted exports rose by 1.0% and imports by 0.2%. These data are released by Eurostat, the statistical office of the European Union.
The first estimate for the August 2013 extra-EU28 trade balance was a 2.8 bn euro deficit, compared with -14.9 bn in August 2012. In July 2013 the balance was +10.3 bn, compared with +1.2 bn in July 2012. In August 2013 compared with July 2013, seasonally adjusted exports rose by 0.3% while imports fell by 1.1%.
Euro area annual inflation is expected to be 0.7% in October 2013, down from 1.1% in September, according to a flash estimate from Eurostat, the statistical office of the European Union. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in October (1.9%, compared with 2.6% in September), followed by services (1.2%, compared with 1.4% in September), non-energy industrial goods (0.4%, stable compared with September) and energy (-1.7%, compared with -0.9% in September).
The euro area (EA17) seasonally-adjusted unemployment rate was 12.2% in September 2013, stable compared with August. The EU28 unemployment rate was 11.0%, also stable compared with August. In both zones, rates have risen compared with September 2012, when they were 11.6% and 10.6% respectively. These figures are published by Eurostat, the statistical office of the European Union.
In September 2013, 26.872 million men and women were unemployed in the EU28, of whom 19.447 million were in the euro area. Compared with August 2013, the number of persons unemployed went up by 61 000 in the EU28 and by 60 000 in the euro area. Compared with September 2012, unemployment rose by 978 000 in the EU28 and by 996 000 in the euro area.
Among the Member States, the lowest unemployment rates were recorded in Austria (4.9%), Germany (5.2%) and Luxembourg (5.9%), and the highest in Greece (27.6% in July 2013) and Spain (26.6%). Compared with a year ago, the unemployment rate increased in sixteen Member States, fell in eleven and remained stable in the Czech Republic. The highest increases were registered in Cyprus (12.7% to 17.1%) and Greece (25.0% to 27.6% between July 2012 and July 2013). The largest decreases were observed in Latvia (15.6% to 11.3% between the second quarters of 2012 and 2013) and Estonia (10.0% to 8.3% between August 2012 and August 2013).

Economy of Japan

After two quarters of pacesetting growth among the world`s leading economies, Japan is likely to see a sharp slowdown in its expansion in the July-September period, as stalling exports and weaker consumer spending weigh on the economy.
Gross domestic product likely expanded by 0.4% during the quarter from the previous one, or at an annualized pace of 1.7%, according to a median forecast of 12 economists surveyed by The Wall Street Journal. Preliminary GDP data for the quarter will be released Nov. 14. The estimate is less than half the annualized 3.8% increase in the April-June quarter and the 4.1% gain during the January-March period.
Industrial production in Japan climbed a seasonally adjusted 1.5 percent in September compared to the previous month, the Ministry of Economy, Trade and Industry said in preliminary reading - reversing the previous month`s contraction. The headline figure was slightly below forecasts for an increase of 1.8 percent following the 0.9 percent decline in August.
On a yearly basis, industrial production jumped 5.4 percent - just shy of expectations for an increase of 5.5 percent following the 0.4 percent decline in the previous month. For the third quarter of 2013, industrial production gained 1.8 percent on quarter.
Upon the release of the data, the METI`s assessment of industrial production was that it continues to show an upward movement. Industries that contributed to the increase in September included transport equipment, electronic devices and communications equipment. Commodities that contributed to the increase included large passenger cars, active matrix LCDs and small passenger cars.
According to the survey of production forecast in manufacturing, production is expected to increase 4.7 percent in October and decrease 1.2 percent in November.
Industries that contribute to the increase in October include business oriented machinery, communications equipment and electrical machinery. Industries that contribute to the decline in November include business oriented machinery, electrical machinery and communications equipment.
Japan posted a record 15th straight monthly trade deficit in September, as growth in exports slowed. Exports last month rose 11.5% from a year earlier, the Finance Ministry reported Monday, slipping from a 14.7% gain in August and missing a forecast 16.1% increase tipped in a Dow Jones Newswires survey of economists. Imports rose 16.5%, up from a 16% increase the previous month, as high energy prices continued to take a toll on the Japanese trade account. The results put September`s trade deficit at 932.2 billion yen ($9.5 billion), narrowing slightly from August`s ¥960.3 billion and roughly in line with the ¥936.9 billion projection in the Dow Jones Newswires poll. Japanese exports to China extended their gains, rising 11.4%, while those to the U.S. improved by almost 19%, and European Union-bound shipment adding 14.3%.
Japan`s inflation rate edged further up in September, raising hopes within the government it is winning its war on decades of falling prices. But economists warn the figures are still too weak to call out a victory. Japan`s core consumer price index, excluding food, rose 0.7 percent in September compared with the same month a year ago, posting its fourth monthly gain in succession, the government in Tokyo announced. With food prices factored in, the index was up 1.1 percent, the latest inflation data showed.
The news about rising inflation in the world`s third-largest economy was welcomed by the government of conservative Prime Minister Shinzo Abe. For the past 15 years, Japan has been locked in a deflationary spiral marked by falling prices, lower consumer spending, reduced investment and dropping growth. Economics Minister Akira Amari likened Tokyo`s battle against deflation to climbing the country`s highest mountain, Mount Fuji.
Japan`s unemployment rate declined by 0.1 percentage points to 4.0 per cent from the previous month, for the first decline in two months, the government said. The number of unemployed people dropped by 170,000 from a year earlier to 2.58 million, falling year-on-year for the 40th consecutive month, the Ministry of Internal Affairs and Communications said.
Medical and welfare services added 140,000 employees for a total of 7.31 million people, and wholesalers and retailers saw an increase of 150,000 employees to reach 10.83 million. Scientific research and professional and technical services lost 220,000 jobs, to 1.95 million, the ministry said.
But analysts say unstable forms of employment, especially among women and young people, have been a more serious issue for the country than unemployment rates. The proportion of temporary and part-time workers in the labour force hit a record high in 2012 of 35.2 per cent for the third straight year of increase, the government said. The availability of jobs, measured as the ratio of job offers per job seeker, was unchanged at 0.95 in September from the previous month, the Ministry of Health, Labour and Welfare said.

Economy of Russia

Russia`s third-quarter growth rate fell well below expectations on Friday in a fresh blow to government hopes of avoiding the worst performance for the economy since the 2008-2009 economic collapse. Deputy Economy Minister Andrei Klepach said the economy expanded by 1.2 percent between July in September compared to output in the same period in 2012.
The annual rate was the same as in the second quarter and slower than the 1.6-percent rise witnessed in the first three months of the year. Klepach said a closer look at the figures revealed disappointing signs of an economy that was losing momentum rather than gathering pace. Seasonally-adjusted growth slowed by 0.1 percent in September from August. The figure for that month was 0.1 percent less that the one in July. Both the government and economists had expected Russia`s economy to pick up pace in the second half of the year and reach an annual rate of about 1.8 percent.
Russia`s industrial production in September grew 0.3% from a year earlier, following an annual 0.1% rise in August, as a recovery in the utility sector outweighed a weak manufacturing performance, data from the Federal Statistics Service showed.
Monthly data, however, showed that production in September fell 0.7% from August, after a 0.6% monthly rise in August. In the first nine months of 2013, production inched up 0.1% from the year-earlier period, when it rose 2.9% compared with 2011.
The utility sector outperformed, gaining 2.9% from the year earlier at the onset of the heating season. Production in the mining sector rose 1.7%. The manufacturing sector contracted for the fifth month in a row, declining 0.7% on the year.
Russian consumer inflation is set to remain above the central bank`s annual target in October due to higher food prices, the economy ministry said. The ministry said inflation will be unchanged from September`s reading of 6.1%. In monthly terms, October inflation is set to post a 0.5% growth mainly due to higher food prices, contrasting with a usual seasonal trend of declining prices for fruit and vegetables.
Last week, Deputy Economy Minister Andrei Klepach said annual inflation in October was expected to reach the upper boundary of the central bank`s inflation target range of 5%-6%. The central bank has repeatedly said that it will ease monetary policy only when it sees inflationary expectations falling to its target range.