World Economy Review - June 2015
The World Bank downgraded its outlook for global economic growth this year amid a broad-based slowdown in emerging markets and softer output in the U.S.
The development institution said that it now expects the world economy to grow by 2.8%, 0.2 percentage point slower than it estimated in January. “Global growth has yet again disappointed,” said World Bank Chief Economist Kaushik Basu.
Sharp contractions in Brazil and Russia, alongside weaker growth in Turkey, Indonesia and scores of other developing economies are offsetting healthier growth in Europe and Japan, the bank said in its Global Economic Prospects report.
The bank expects global economic growth in 2016 to accelerate to 3.3%, barring trouble in emerging markets as the U.S. Federal Reserve moves toward raising rates. The forecast also assumes recoveries in the eurozone and Japan take hold.
Although the U.S. economy is gathering steam, a brutal winter sapped output in the first quarter and prompted the bank to downgrade prospects for this year by 0.5 percentage point to 2.7%.
A host of challenges are weighing on growth in many of the world`s largest emerging-market economies, countries that helped drive the global recovery in the wake of the financial crisis.
“There is a structural slowdown under way,” said Ayhan Kose, the lead author of the report. “Increasingly, they have difficult growth prospects going forward.”
Many of those economies are reaching the limits of their capacity to grow without major policy overhauls that would open up markets, improve the business environment and increase productivity. Trillions of dollars are needed to expand the arteries of economic growth: roads, railways, ports and other infrastructure.
These emerging-market economies also relied on international sales to power growth over the past decade. But now those export-reliant developing countries are struggling to cope with weak demand across the globe as rich nations continue to struggle to recover from the ravages of the financial crisis.
China, the world`s No. 2 economy and a primary export market for much of the world, is slowing after two decades of breakneck growth as a faster clip than expected. Commodity prices have plunged in the past year amid anemic consumption and resource oversupply.
Adding to their economic headaches, emerging markets are facing dangerous mix of headwinds, having borrowed heavily to finance their decadelong expansions.
Borrowing costs are expected to rise as the Fed prepares to raise interest rates for the first time in nearly a decade. That prospect has also sparked a strong dollar rally, tightening the squeeze on developing-country governments and corporations that borrowed dollars but whose income is denominated in local currency. Investors are increasingly questioning their ability to pay for ballooning obligations amid slowing growth.
The bank`s forecast for a pickup in global growth to 3.3% next year assumes that there is no repeat of the type of volatility that struck emerging markets in mid-2013. Then, former Fed chief Ben Bernanke set off the so-called taper tantrum that triggered emerging-market bond, equity and currency selloffs when he signaled a pullback in the central bank`s stimulus.
But the World Bank said the Fed`s liftoff and long-term tightening cycle combined with domestic uncertainties could fuel major swings in financial markets, capital outflows and contagion throughout emerging economies.
“Our baseline is that it`s going to be smooth sailing,” said Mr. Kose in an interview. “But it still is a realistic concern and with all of these combined, the question is: `Is there a perfect storm outcome?` ”
A pickup in growth next year also assumes that recoveries in Europe and Japan prove durable, a prospect that is still questionable, he said.
Those risks are why governments across the globe are the reason World Bank economists are redoubling their calls for economic overhauls.
“We often repeat that countries must complete `structural reforms` again and again,” Mr. Kose said. “But in the context of Fed tightening, these reforms are critical.”
Investors are growing increasingly wary. The Institute of International Finance—an industry group representing around 500 of the world`s largest banks, insurance firms, hedge funds and other financial institutions—forecasts capital flows into emerging markets will fall to their lowest level this year since the financial crisis.
Falling oil prices and sanctions against Russia for its Ukraine interventions have forced the country into a deep recession. Brazil, where a corruption scandal is reaching the highest levels of the government, is contracting as commodity prices fall and the country struggles rekindle growth prospects. Turkey`s recent elections, instead of cementing the ruling party`s power, has cast a cloud over the country`s political fate and is fueling investor worries that the government won`t enact much-needed economic overhauls.
Such structural reforms - such as opening up long-closed sectors, overhauling outdated or overly burdensome regulations and other policies that help markets work more efficiently - are often painful and politically controversial in the short term. The outcomes often don`t bear fruit for years.
But in the context of all the challenges facing those economies and their need for investment, “there is a very valuable signaling effect associated with those reforms during this transition period of lower commodity prices and higher interest rates,” Mr. Kose said.
India is one example. The government has promised, and enacted, a series of policies that have galvanized investor confidence, including trimming bureaucratic hurdles, slashing fuel subsidies and allowing more foreign investment in some industries.
Although many investors say that work is yet unfinished, the country has now surpassed China as the world`s fastest-growing large emerging market, and economists, including the World Bank, are raising forecasts for India`s growth.
Economy of the United States
The economic slowdown early this year was less severe than previously estimated, raising expectations for stronger growth later in 2015. Gross domestic product, the broadest sum of goods and services produced across the economy, contracted at a 0.2% seasonally adjusted annual rate in the first quarter, the Commerce Department said. The latest figure matched economists` forecasts. The agency previously estimated output fell 0.7% from January through March. The revision showed consumer spending was stronger than previously estimated and that firms stocked up more on inventory.
Consumer spending, representing more than two-thirds of economic output, grew at a 2.1% rate in the first quarter, as opposed to the previous estimate of 1.8%. Government spending fell 0.6% in the first quarter, versus a prior estimate of a 1.1% decline. Business investment - reflecting spending on construction, machinery, and research and development - fell at a 2% pace. Exports declined 5.9% from January through March, versus a previous estimate of a 7.6% decline. Exports of goods fell by 11.6%. Imports, which subtract from GDP, rose at a 7.1% pace last quarter, compared to a prior estimate of a 5.6% increase.
The price index for personal consumer expenditures - the Fed`s preferred gauge for inflation - fell 2% in the first quarter from the final three months of last year. Core prices, which exclude food and energy costs, rose 0.8%.
Federal Reserve officials forecast the economy to grow between 1.8% to 2.0% this year, according to projections released earlier this month. That would represent a slowdown from the 2014 rate.
U.S. industrial production unexpectedly fell in May, likely as a strong dollar and energy spending cuts continued to weigh on manufacturing and mining output, bucking signs of an acceleration in the broader economy. Industrial output fell 0.2 percent after a revised 0.5 percent drop in April, the Federal Reserve said.
The production side of the economy continues to struggle against the lingering effects of dollar strength and deep spending cuts in the energy sector in response to a sharp decline in crude oil prices. Economists polled by Reuters had forecast industrial production rising 0.2 percent last month after a previously reported 0.3 percent fall in April.
Last month, manufacturing output slipped 0.2 percent after gaining 0.1 percent in April. Manufacturing continues to be hamstrung by a strong dollar, which has eroded profits of multinational corporations. Mining production declined 0.3 percent as oil and gas well drilling fell 7.9 percent. Unseasonably warm weather in May lifted demand for air conditioning. Utilities production increased 0.2 percent after dropping 3.7 percent in April.
Industrial capacity use fell to 78.1 percent last month from 78.3 percent in April. Officials at the Fed tend to look at capacity use as a signal of how much "slack" remains in the economy and how much room there is for growth to accelerate before it becomes inflationary.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index was unchanged before seasonal adjustment.
The gasoline index increased sharply in May, rising 10.4 percent and accounting for most of the seasonally adjusted all items increase. Other energy indexes were mixed, with the fuel oil index rising but the electricity index declining and the index for natural gas unchanged. The food index was unchanged for the second month in a row, as a decline in the food at home index offset an increase in the index for food away from home.
The index for all items less food and energy rose 0.1 percent in May, its smallest increase since December. The indexes for shelter, airline fares, and medical care all increased, as did the indexes for personal care, recreation, new vehicles, alcoholic beverages, and tobacco. In contrast, the indexes for apparel, for household furnishings and operations, and for used cars and trucks all declined in May.
The all items index was unchanged for the 12 months ending May after showing a 0.2-percent decline for the 12 months ending April. The energy index fell 16.3 percent over the last 12 months, with the gasoline index down 25.0 percent despite rising in May. The food index increased 1.6 percent over the last year, and the index for all items less food and energy rose 1.7 percent.
Total nonfarm payroll employment increased by 223,000 in June, and the unemployment rate declined to 5.3 percent, the U.S. Bureau of Labor Statistics reported. Job gains occurred in professional and business services, health care, retail trade, financial activities, and in transportation and warehousing.
The unemployment rate declined by 0.2 percentage point to 5.3 percent in June, and the number of unemployed persons declined by 375,000 to 8.3 million. Among the major worker groups, the unemployment rates for adult men (4.8 percent), adult women (4.8 percent), and blacks (9.5 percent) edged down in June, while the rates for teenagers (18.1 percent), whites (4.6 percent), Asians (3.8 percent), and Hispanics (6.6 percent) showed little change.
Economy of the European Union
Seasonally adjusted GDP rose by 0.4% in both the euro area (EA19) and the EU28 during the first quarter of 2015, compared with the previous quarter, according to a second estimate published by Eurostat, the statistical office of the European Union. In the fourth quarter of 2014, GDP also grew by 0.4% in both areas.
Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.0% in the euro area and by 1.5% in the EU28 in the first quarter of 2015, after +0.9% and +1.4% respectively in the previous quarter.
Among Member States for which data are available for the first quarter of 2015, the Czech Republic (+3.1%), Cyprus and Romania (both +1.6%) recorded the highest growth compared with the previous quarter, followed by Poland (+1.0%), Bulgaria and Spain (both +0.9%), Hungary, Slovenia and Slovakia (all +0.8%). Decreases were registered in Lithuania (-0.6%), Estonia (-0.3%), Greece (-0.2%) and Finland (-0.1%).
In April 2015 compared with March 2015, seasonally adjusted industrial production rose by 0.1% in both the euro area (EA19) and the EU28, according to estimates from Eurostat. In March 2015 industrial production decreased by 0.4% and 0.1% respectively. In April 2015 compared with April 2014, industrial production increased by 0.8% in the euro area and by 1.2% in the EU28.
The increase of 0.1% in industrial production in the euro area in April 2015, compared with March 2015, is due to production of durable consumer goods rising by 1.0%, capital goods by 0.7% and intermediate goods by 0.3%, while non-durable consumer goods fell by 0.8% and energy by 1.6%. In the EU28, the increase of 0.1% is due to production of capital goods rising by 0.6% and durable consumer goods by 0.5%, while intermediate goods were stable. Energy fell by 0.4% and non-durable consumer goods by 1.2%.
Among Member States for which data are available, the highest increases in industrial production were registered in Lithuania (+3.4%), Sweden (+2.2%) and Portugal (+2.1%), and the largest decreases in Croatia (-4.1%), Malta (-3.8%), Greece (-2.3%) and Poland (-2.1%).
The increase of 0.8% in industrial production in the euro area in April 2015, compared with April 2014, is due to production of capital goods rising by 2.1%, durable consumer goods by 1.7% and both intermediate goods and energy by 0.2%, while non-durable consumer goods fell by 0.3%. In the EU28, the increase of 1.2% is due to production of capital goods rising by 2.4%, durable consumer goods by 1.7%, energy by 1.1% and intermediate goods by 0.8%, while non-durable consumer goods fell by 0.8%.
Among Member States for which data are available, the highest increases in industrial production were registered in Latvia (+10.2%), Ireland (+9.8%) and Hungary (+6.3%). Decreases were recorded in Finland (-4.1%), the Netherlands (-3.9%), Portugal (-1.1%) and Estonia (-0.2%).
The first estimate for euro area (EA19) exports of goods to the rest of the world in April 2015 was ˆ173.6 billion, an increase of 9% compared with April 2014 (ˆ159.6 bn). Imports from the rest of the world stood at ˆ148.7 bn, a rise of 3% compared with April 2014 (ˆ144.7 bn). As a result, the euro area recorded a ˆ24.9 bn surplus in trade in goods with the rest of the world in April 2015, compared with +ˆ14.9 in April 2014. Intra-euro area trade rose to ˆ141.0 bn in April 2015, up by 2% compared with April 2014.
The first estimate for extra-EU28 exports of goods in April 2015 was ˆ155.4 billion, up by 12% compared with April 2014 (ˆ138.5 bn). Imports from the rest of the world stood at ˆ143.2 bn, up by 4% compared with April 2014 (ˆ137.7 bn). As a result, the EU28 recorded a ˆ12.2 bn surplus in trade in goods with the rest of the world in April 2015, compared with +ˆ0.8 in April 2014. Intra-EU28 trade rose to ˆ254.1 bn in April 2015, up by 4% compared with April 2014.
Euro area annual inflation is expected to be 0.2% in June 2015, down from 0.3% in May 2015, according to a flash estimate from Eurostat. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in June (1.2%, stable compared with May), followed by services (1.0%, compared with 1.3% in May), non-energy industrial goods (0.4%, compared with 0.2% in May) and energy (-5.1%, compared with -4.8% in May).
The euro area (EA19) seasonally-adjusted unemployment rate3 was 11.1% in May 2015, stable compared with April 2015, and down from 11.6% in May 2014. This is the lowest rate recorded in the euro area since March 2012. The EU28 unemployment rate was 9.6% in May 2015, also stable compared with April 2015 and down from 10.3% in May 2014. This is the lowest rate recorded in the EU28 since July 2011. These figures are published by Eurostat.
Eurostat estimates that 23.348 million men and women in the EU28, of whom 17.726 million in the euro area, were unemployed in May 2015. Compared with April 2015, the number of persons unemployed decreased by 38 000 in the EU28 and by 35 000 in the euro area. Compared with May 2014, unemployment fell by 1.575 million in the EU28 and by 939 000 in the euro area. Among the Member States, the lowest unemployment rate in May 2015 was recorded in Germany (4.7%), and the highest in Greece (25.6% in March 2015) and Spain (22.5%).
Economy of Japan
Japan`s economy expanded much faster than initially expected over January to March as companies ramped up capital investment, underscoring the central bank`s view that recovery from last year`s recession is gaining momentum. The economy grew an annualized 3.9 percent in the first three months of this year, Cabinet Office data showed, handily beating a preliminary estimate of a 2.4 percent gain, and topping a median market estimate for 2.7 percent growth.
Capital spending rose 2.7 percent from the previous quarter, much more than a preliminary estimate of 0.4 percent growth and bigger than a 2.3 percent expansion projected in a Reuters poll.
Gross domestic product in Japan in May contracted 0.2% in real terms from the previous month, the Japan Center for Economic Research said. The second consecutive month-to-month contraction was blamed on a sharp 5.2% decrease in exports, especially those to the U.S. and China. Capital spending showed a decline of 0.2 %. It was the first time in three months that capital spending has shrunk. Consumer spending increased 0.6%, the first gain in two months.
Industrial output in Japan tumbled a seasonally adjusted 2.2 percent on month in May, the Ministry of Economy, Trade and Industry said. That missed forecasts for a decline of 0.87 percent following the 1.2 percent increase in April.
On a yearly basis, industrial production shed 4.0 percent - also shy of forecasts for a decline of 2.3 percent following the 0.1 percent fall in the previous month. Industries that mainly contributed to the monthly decline include transport equipment, chemicals and electronic parts.
According to the survey of production forecast in manufacturing, production is expected to rise 1.5 percent in June and 0.6 percent in July.
Japan`s trade deficit shrank 76.5 percent in May from a year earlier to 216.0 billion yen ($1.75 billion), as declining crude oil prices continued to push down imports, the government said. The trade balance remained in the red for the second consecutive month, due partly to slower growth in exports, which rose 2.4 percent from a year earlier to 5,740.5 billion yen, smaller than an 8.0 percent expansion the previous month. The value of imports dropped 8.7 percent to 5,956.4 billion yen, down for the fifth straight month, reflecting decreased energy-related imports including crude oil and liquefied natural gas.
Japan`s consumer prices rose 0.1 percent in May from a year earlier for the 24th straight monthly increase, as a continued drop in crude oil prices weighed on inflation. The core consumer price index, which excludes volatile fresh food prices, stood at 103.4 against the 2010 base of 100, the Ministry of Internal Affairs and Communications said. Energy prices, which include electricity and gasoline, dropped 6.0 percent in May from a year earlier, with gasoline prices plunging 15.2 percent. Despite the decline in energy prices, the CPI was in positive territory, due partly to a rise in food prices excluding fresh foods, which climbed 1.6 percent.
Japan`s job availability improved to its best level in roughly 23 years, while the unemployment rate remained flat in May, government data showed, indicating that labor market conditions continued to improve amid economic recovery. The ratio of employment offers to seekers rose to 1.19 from 1.17 in April, the highest level since March 1992, according to the Ministry of Health, Labor and Welfare. The ratio means 119 positions were available for every 100 job seekers.
The country`s jobless rate was at 3.3 percent in May, unchanged from April, the Internal Affairs and Communications Ministry said in a preliminary report. A ministry official said the labor market "continues to be on a recovery path." The number of unemployed people fell a seasonally adjusted 0.5 percent from the previous month to 2.18 million.
Employment increased for women in the reporting month, with their jobless rate down 0.2 percentage point to 3.0 percent, the lowest since February 1995. The unemployment rate for men increased 0.2 point to 3.6 percent.
Economy of Russia
Russian gross domestic product in the first quarter of 2015 dropped 2.2% from a year earlier, data showed. A decline of 1.9% had been forecasted previously for the first quarter. The figure has been revised to reflect the annexation of Crimea by Russia last year, the Federal Statistics Service said. Russian GDP plunged 20.7% compared with the fourth quarter of 2014, FSS data also showed. Russia`s economy is expected to contract by 2.5% in 2015, according to official forecasts.
Russian industrial output fell in May at its fastest pace since October 2009, official data showed, underlining that the country`s sanctions-hit economy has yet to bottom out. Industrial output fell by 5.5 percent year-on-year in May, worse than a 4.5 percent fall a month earlier, Federal Statistics Service data showed.
Particularly sharp falls were seen in the manufacturing sector, which collapsed 8.3 percent versus a year earlier. Production of machinery, consumer goods and cars performed especially badly. As in previous months, output of certain food items subject to an import ban introduced in response to Western sanctions over the Ukraine conflict outperformed.
Russia`s trade balance rose unexpectedly in April, official data showed. In a report, Russian Federation State Committee on Statistics said that Russian Trade Balance rose to a seasonally adjusted annual rate of 15.04B, from 14.98B in the preceding month. Analysts had expected Russian Trade Balance to fall to 14.00B last month.
Russia`s consumer price inflation slowed somewhat in May, caused by a drop in certain food prices, a sign that it may have passed its peak, data showed. Russia`s Federal Statistics Service said the annual rate of consumer price inflation dropped to 15.8% in May from 16.4% in April. A decrease in food prices, such as fruit, vegetables, eggs and sugar, was main contributing factor to the decline in the rate.
Inflation in Russia has been fueled by a rapid weakening of the ruble, which has made imports more expensive. Moscow`s ban on food imports from countries that have imposed sanctions on Russia has also spurred price growth. But in the recent months, Russian officials have said repeatedly that inflationary pressure was set to ease and that inflation would retreat in the second quarter.
The unemployment rate in Russia fell unexpectedly last month, official data showed. In a report, Russian Federation State Committee on Statistics said that Russian Unemployment Rate fell to a seasonally adjusted annual rate of 5.6%, from 5.8% in the preceding month. Analysts had expected Russian Unemployment Rate to remain unchanged at 5.8% last month.
06.07.2015 14:39:55