World Economy Review - September 2015
A marked slowdown in big emerging market countries will cut global growth to its lowest level since the deep recession of 2009, the head of the International Monetary Fund has warned.
Christine Lagarde, the IMF`s managing director, said forecasts to be published by her organisation next week would show activity expanded by less than the 3.4% recorded in 2014 – the joint weakest since the world economy came to a standstill six years ago.
Speaking in Washington, Lagarde said “global growth will likely be weaker this year than last, with only a modest acceleration expected in 2016”.
Lagarde said she was “concerned about the state of global affairs”, highlighting the refugee crisis in Europe, the prospect of 2015 being the hottest year on record and the state of the global economy.
“The prospect of rising interest rates in the United States and China`s slowdown are contributing to uncertainty and higher market volatility. There has been a sharp deceleration in the growth of global trade,” she said. “And the rapid drop in commodity prices is posing problems for resource-based economies.”
The good news had been the modest pick-up seen in developed countries, Lagarde said, but this was offset by the fifth year of declining growth rates in the emerging world.
“India remains a bright spot. China is slowing down as it rebalances away from export-led growth. Countries such as Russia and Brazil are facing serious economic difficulties. Growth in Latin American countries, in general, continues to slow sharply.”
Lagarde said financial stability had not yet been assured despite progress in recent years to make the system safer. “If we put all this together, we see global growth that is disappointing and uneven,” she said. “In addition, medium-term growth prospects have become weaker. The `new mediocre` of which I warned exactly a year ago – the risk of low growth for a long time – looms closer.
“Why? Because potential growth is being held back by low productivity, population aging, and the legacies of the global financial crisis. High debt, low investment, and weak banks continue to burden some advanced economies, especially in Europe; and many emerging economies continue to face adjustments after their post-crisis credit and investment boom.”
Lagarde warned that the slowdown in China would have knock-on effects on countries that rely heavily on Chinese demand for their raw materials. She said there was a possibility of a prolonged period of low commodity prices, particularly in the large commodity exporters.
Calling for a “policy upgrade” to meet the challenges, the IMF managing director said most advanced economies, “except the United States and possibly the UK”, would need to keep providing economic stimulus at its current rate.
She urged the eurozone to tackle non-performing loans worth about ˆ900bn. “This is one of the major unresolved legacies of the financial crisis. By removing the NPL build-up, banks would be able to increase the supply of credit to companies and households. It would enhance the potency of monetary accommodation, improve the outlook, and bolster market confidence.”
Policymakers in emerging economies should better monitor the foreign currency exposure of their major companies and ensure the resilience of their banks following a build-up in corporate leverage and foreign debt.
“At the global level, there is a pressing need to complete and implement the regulatory reform agenda – with a special focus on improving the transparency and oversight of non-banks, or shadow banks. And we still have another major upgrade ahead of us – the resolution framework for systemic, globally active financial institutions remains inadequate.”
Economy of the United States
The US economy grew 3.9% in the second quarter, better than previously reported. Economists had forecast that the third and final estimate of gross domestic product (GDP) would be 3.7%, unchanged from the prior estimate. The GDP rise was led by consumer spending on healthcare, food services, and accommodation, according to the Bureau of Economic Analysis (BEA). Second-quarter consumption was revised up to 3.6% from 3.1%.
U.S. industrial production fell in August as auto and auto-part output dropped following a robust rise in July. Industrial production, which measures output in the manufacturing, utilities and mining sectors, fell a seasonally adjusted 0.4% in August from July, the Federal Reserve said. It was the sixth time in eight months that the measure fell from the previous month.
Capacity utilization, which measures industrial slack, fell to 77.6% in August from 78% in July. Economists surveyed by The Wall Street Journal had anticipated a production drop of 0.2% in August and capacity utilization of 77.8%. Meanwhile, industrial production for July was revised up to a 0.9% rise from an initial estimate of 0.6% growth.
The U.S. trade deficit jumped almost 16% in August to $48.3 billion, largely because of a strong dollar that reduced exports to their lowest level in three years. Economists surveyed by MarketWatch had predicted the deficit would rise to a seasonally adjusted $48.1 billion. Exports fell 2% to $185.1 billion in August, the Commerce Department said, with much of the decline resulting from fewer sales overseas of U.S.-produced petroleum and other industrial supplies. Lower oil prices contributed to the decline in export sales. Yet imports rose 1.2% to $233.4 billion even though U.S. demand for foreign oil fell to an 11-year low.
U.S. consumer prices edged down in August, marking the first decline in seven months and fueled by a big drop in gasoline prices. The Labor Department said its consumer price index slipped 0.1 percent in August after a small 0.1 percent rise in July. Gas prices, which had been rising for three months, dropped 4.1 percent amid the recent fall in global oil prices. Food prices were up 0.2 percent last month, led by another surge in egg prices.
Core inflation, which excludes volatile energy and food costs, rose a modest 0.1 percent in August, indicating cost pressures remain a no-show in the economy. Over the past 12 months, overall prices are up just 0.2 percent, while core inflation is up a modest 1.8 percent.
The U.S. unemployment rate remained unchanged at 5.1 percent in September, a month in which a lower-than-expected 142,000 jobs were created, the Labor Department said. The government`s report also downwardly revised the job-creation figures for August, from 173,000 in the initial estimate to 136,000, and for July, from 245,000 to 223,000. As a result, the world`s largest economy added 59,000 fewer jobs than previously estimated in July and August, which confirms a slowdown in hiring compared to the first half of the year and 2014.
Economy of the European Union
Seasonally adjusted GDP rose by 0.4% in both the euro area (EA19) and the EU28 during the second 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 first quarter of 2015, GDP grew by 0.5% in both areas.
Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.5% in the euro area and by 1.9% in the EU28 in the second quarter of 2015, after +1.2% and +1.7% respectively in the previous quarter.
In July 2015 compared with June 2015, seasonally adjusted industrial production rose by 0.6% in the euro area (EA19) and by 0.3% in the EU28, according to estimates from Eurostat. In June 2015 industrial production decreased by 0.3% and 0.1% respectively. In July 2015 compared with July 2014, industrial production increased by 1.9% in the euro area and by 1.8% in the EU28.
The first estimate for euro area (EA19) exports of goods to the rest of the world in July 2015 was ˆ185.2 billion, an increase of 7% compared with July 2014 (ˆ173.7 bn). Imports from the rest of the world stood at ˆ153.8 bn, a rise of 1% compared with July 2014 (ˆ152.4 bn). As a result, the euro area recorded a ˆ31.4 bn surplus in trade in goods with the rest of the world in July 2015, compared with +ˆ21.2 in July 2014. Intra-euro area trade rose to ˆ147.0 bn in July 2015, up by 4% compared with July 2014.
The first estimate for extra-EU28 exports of goods in July 2015 was ˆ162.1 billion, up by 7% compared with July 2014 (ˆ151.3 bn). Imports from the rest of the world stood at ˆ149.2 bn, down by 1% compared with July 2014 (ˆ150.0 bn). As a result, the EU28 recorded a ˆ12.9 bn surplus in trade in goods with the rest of the world in July 2015, compared with +ˆ1.2 bn in July 2014. Intra-EU28 trade rose to ˆ262.3 bn in July 2015, +4% compared with July 2014.
Euro area annual inflation is expected to be -0.1% in September 2015, down from 0.1% in August 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 September (1.4%, compared with 1.3% August), followed by services (1.3%, compared with 1.2% in August), non-energy industrial goods (0.3%, compared with 0.4% in August) and energy (-8.9%, compared with -7.2% in August).
The euro area (EA19) seasonally-adjusted unemployment rate was 11.0% in August 2015, stable compared to July 2015, and down from 11.5% in August 2014. The EU28 unemployment rate was 9.5% in August 2015, also stable compared to July 2015, and down from 10.1% in August 2014. These figures are published by Eurostat.
Eurostat estimates that 23.022 million men and women in the EU28, of whom 17.603 million were in the euro area, were unemployed in August 2015. Compared with July 2015, the number of persons unemployed decreased by 33 000 in the EU28 and by 1 000 in the euro area. Compared with August 2014, unemployment fell by 1.490 million in the EU28 and by 892 000 in the euro area.
Economy of Japan
Japan`s economy shrank less than expected in the second quarter although capital expenditure fell more than originally forecast, revised data showed, keeping policymakers under pressure to do more to energize the fragile recovery. The world`s third-largest economy shrank an annualized 1.2 percent in April-June, less than the initial estimate of a 1.6 percent contraction, Cabinet Office data showed. The median market forecast was a revision to a 1.8 percent contraction.
Analysts expect any rebound in July-September growth to be feeble as factory output unexpectedly fell in July and China`s slowdown dampened prospects for a solid recovery in exports.
Japan`s industrial output unexpectedly fell in August, raising concern that the economy may have fallen back into its second recession since Prime Minister Shinzo Abe took government. Production dropped 0.5 in August from July, when it slid 0.8 percent, the trade ministry said. Economists had projected a 1 percent gain while the government had estimated a 2.8 percent expansion. Production declined in 10 out of 15 industries included in the data, including general purpose machinery and electronics.
Japan`s trade deficit narrowed in August from the year before as costs for crude oil imports plunged and exports to the U.S. showed steady growth. The customs data showed a 4.2 percent drop from August a year earlier in the volume of exports for the world`s third-largest economy, likely mainly reflecting weakness in shipments to China.
But the value of exports rose 3.1 percent from a year earlier, to 5.9 trillion yen ($48.7 billion) while imports fell 3.1 percent to 6.5 trillion yen ($53.4 billion). The 569.7 billion yen ($4.7 billion) deficit was the largest in seven months.
The core consumer price index (CPI), which includes oil but not fresh food prices, declined 0.1% from a year ago - the first drop since April 2013. The headline consumer price index rose 0.2% from a year ago, but remained flat from the previous month.
Japan`s unemployment rate is expected to rise to 3.4% in August, from 3.3% in July. The number of job seekers that dropped out of the labour force increased in March and April, but jobseekers returned to the labour force in May and June. Most of them were absorbed by the increase in employment numbers. In July, however, the number of job seekers dropping out of the labour force increased again. As a result, the unemployment rate fell to 3.3% in July (from 3.4% in June). An adjustment to 3.4% was expected in August.
Economy of Russia
In its monthly review of the Russian economy, the economy ministry estimated that Russia`s real GDP was down 4.6% year-on-year in August, following a 4.7% decline in July. It looks a bit better than 4.9% y/y drop in the second quarter of 2015, despite the fact that the Urals oil price averaged just $45.60/barrel in August, almost $16/b less than in Q2 2015.
Russian industrial output was down 4.3% y/y, as usual dragged down by manufacturing. The ministry`s month-on-month stats show that after a brief balancing act in July, when manufacturing almost stopped shrinking (minus 0.1% m/m), it has turned down again in August (minus 0.5% m/m). If not for a positive growth contribution from mining (primarily oil & gas) and utilities, the industrial output decline would have been worse.
Households have seen real income shrink by 4.9% y/y in August. The nominal wages are only slightly up – by 5.5% over the last year to August, but down 9% in real terms. The average monthly wage is now below $500/month. Retail trade was down 9.1% in August.
The pressure on wages is unsurprising, given that companies let go of more employees compared to early this year. If in January, the numbers were down 0.3% y/y, by July, they were down 1.4% y/y , with over 6% y/y less employees in the financial sector.
Russia`s consumer price inflation slowed to 0.1% in the week to Sept. 28, down from 0.2% in the preceding week, data from the Federal Statistics Service showed. The latest data brings Russia`s accumulated inflation rate since the beginning of the year to 10.4% compared with 6.3% in the same period a year ago.
Steadily rising prices make it harder for the Bank of Russia to trim interest rates to revive the economy, which is in recession. The World Bank downgraded Russia`s economic outlook on Wednesday, saying that the economy may shrink by as much as 4.3% in 2015.
In September, the Bank of Russia kept its key interest rate unchanged at 11%, in line with market expectations. Economists now predict that a rate cut will be possible only once inflation shows sign of slowdown.