World Economy Review - October 2015
The International Monetary Fund (IMF) is warning that the weak recovery in the west risks turning into near stagnation after cutting its global economic growth forecast for the fourth successive year.
In its half-yearly update on the health of the world economy, the Washington-based fund predicted expansion of 3.1% in 2015, 0.2 points lower than it was expecting three months ago and the weakest performance since the trough of the downturn in 2009.
“Six years after the world economy emerged from its broadest and deepest postwar recession, a return to robust and synchronised global expansion remains elusive,” said Maurice Obstfeld, the IMF`s economic counsellor.
“Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth rates marginally, but nearly across the board. Moreover, downside risks to the world economy appear more pronounced than they did just a few months ago.”
The IMF`s world economic outlook (WEO) predicted the US would have the strongest growth of the leading G7 industrial nations in both 2015 and 2016, at 2.6% and 2.8%, respectively. Britain is expected to be the second-fastest growing G7 nation, although output growth is predicted to slow from 2.5% to 2.2%.
None of the other G7 countries – Germany, France, Italy, Japan and Canada – is predicted to post growth as high as 2% in either 2015 or 2016.
“Recovery is most advanced in the US and the UK, where monetary policy looks likely to tighten soon, but is more tentative in the euro area and Japan,” Obstfeld said.
The WEO accepted that the IMF has been consistently over-optimistic in its predictions for the global economy. “Growth has fallen short of forecasts over the past four years,” it said, noting that on average the IMF had over-estimated expansion by one percentage point a year.
“The main medium-term risk for advanced economies is a further decline of already-low growth into near stagnation, particularly if global demand falters further as prospects weaken for emerging market and developing economies,” the WEO said. “In this context, persistently below-target inflation could become more entrenched.”
Growth in the advanced countries of the west is forecast to pick up slightly, from 1.8% in 2014 to 2% in 2015. But this has been more than offset by a slowdown in the rest of the world, where growth is expected to fall from 4.6% to 4%. “Global growth remains moderate – and once again more so than predicted a few months ago.”
The IMF said the stronger advanced economies – the US and the UK – were likely to be the first to raise interest rates, with the first increase predicted in late 2015 for the US and in 2016 for the UK.
“The process of normalizing monetary policy in the United States and the United Kingdom is assumed to proceed smoothly, without large and protracted increases in financial market volatility or sharp movements in long-term interest rates.”
Following the share price falls in financial markets in August, the IMF said it was important that emerging market countries were prepared for a rise in US borrowing costs. Leading western countries that still had spare capacity following the recession of 2008-09 should continue to provide stimulus, through a combination of ultra-low interest rates, the money creation process known as quantitative easing, and public spending on capital projects. It said that “the case for infrastructure investment seems compelling at a time of very low long-term interest rates. Investment is one way to enhance potential growth, but targeted structural reforms can also play an important positive role.”
Emerging market economies such as China were the main source of growth in the immediate aftermath of the 2008-09 slump, but the IMF said the outlook was weakening, with growth projected to decline from 4.6% in 2014 to 4% in 2015 – the fifth annual decline in a row. China`s growth is expected to match earlier IMF forecasts but recessions in Brazil and Russia are now on course to be worse than previously estimated.
The WEO listed a number of potential risks – financial market turmoil; lower potential output; a hard landing in China; the impact of lower commodity prices on commodity-exporting nations; a strengthening of the US dollar; geo-political unrest; and secular stagnation. “The distribution of risks to global growth remains tilted to the downside,” it said.
Oil prices are projected to increase gradually, from an average of $52 a barrel in 2015 to about $55 a barrel in 2017. In contrast, non-fuel commodity prices are expected to stabilise at lower levels after recent declines in both food and metal prices.” Lower oil prices are expected to result in inflation in advanced countries declining from 1.4% in 2014 to 0.3% in 2015.
Economy of the United States
U.S. economic growth braked sharply in the third quarter as businesses cut back on restocking warehouses to work off an inventory glut, but solid domestic demand could encourage the Federal Reserve to raise interest rates in December.
Gross domestic product increased at a 1.5 percent annual rate after expanding at a 3.9 percent clip in the second quarter, the Commerce Department said. Economists had forecast GDP expanding at a 1.6 percent rate in the third quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 3.2 percent rate after expanding at a 3.6 percent pace in the second quarter.
U.S. factories scaled back production further in September as the strong dollar and weak overseas economies continue to suppress demand for American-made goods. Industrial production - a broad measure of output by factories, mines and utilities - slipped 0.2% in September after falling 0.1% in August, the Federal Reserve said.
Manufacturing output - the biggest component of the index, measuring the production of everything from paper clips to bulldozers - fell 0.1% in September and 0.4% the prior month. From a year earlier, industrial production was up 0.4% in September, while factory production was up 1.4%. Capacity utilization, a measure of industry slack, fell to 77.5% in September from 77.8% a month earlier. Before the 2007-2009 recession, capacity use typically hovered above 80%.
The U.S. trade deficit declined in September to the lowest level in seven months as exports rebounded while imports shrank, reflecting the smallest monthly foreign oil bill in more than a decade. The trade deficit narrowed to $40.8 billion in September, down 15% from a $48 billion deficit in August, the Commerce Department reported.
Exports rose 1.6% to $187.9 billion, helped by stronger sales of commercial airplanes and jet engines. Imports contracted 1.8% to $228.7 billion. The big drop in oil prices sent petroleum imports down 8.3% to $13.8 billion, the lowest level since May 2004.
U.S. consumer prices recorded their biggest drop in eight months in September as the cost of gasoline fell, but a steady pick-up in underlying price pressures should allay fears that a disinflationary trend was reasserting itself.
The Labor Department said its Consumer Price Index fell 0.2 percent last month after slipping 0.1 percent in August. In the 12 months through September, the CPI was unchanged for the first time in four months after rising 0.2 percent in August.
Economists polled by Reuters had forecast the CPI falling 0.2 percent in September and dipping 0.1 percent from a year ago. The so-called core CPI, which strips out food and energy costs, rose 0.2 percent after ticking up 0.1 percent in August.
U.S. employers added a greater-than-expected 271,000 jobs in October, the best monthly showing of 2015. The unemployment rate fell to 5 percent, matching its lowest level since March 2008, the Labor Department said. October`s gain follows two consecutive months of tepid employment growth and multiple months of hiring growth slowdown.
Economy of the European Union
The European Commission raised its 2015 Eurozone GDP estimate to 1.6% from a previous estimate of 1.5%, but cut its 2016 Eurozone GDP estimate to 1.8% from a 1.9% estimate in May.
In August 2015 compared with July 2015, seasonally adjusted industrial production fell by 0.5% in the euro area (EA19) and by 0.3% in the EU28, according to estimates from Eurostat, the statistical office of the European Union. In July 2015 industrial production rose by 0.8% and 0.4% respectively. In August 2015 compared with August 2014, industrial production increased by 0.9% in the euro area and by 1.9% in the EU28.
The first estimate for euro area (EA19) exports of goods to the rest of the world in August 2015 was ˆ148.3 billion, an increase of 6% compared with August 2014 (ˆ140.5 bn). Imports from the rest of the world stood at ˆ137.1 bn, a rise of 3% compared with August 2014 (ˆ133.1 bn). As a result, the euro area recorded a ˆ11.2 bn surplus in trade in goods with the rest of the world in August 2015, compared with +ˆ7.4 bn in August 2014. Intra-euro area trade rose to ˆ114.7 bn in August 2015, up by 2% compared with August 2014.
The first estimate for extra-EU28 exports of goods in August 2015 was ˆ131.8 billion, up by 7% compared with August 2014 (ˆ123.1 bn). Imports from the rest of the world stood at ˆ134.1 bn, up by 1% compared with August 2014 (ˆ133.1 bn). As a result, the EU28 recorded a ˆ2.3 bn deficit in trade in goods with the rest of the world in August 2015, compared with -ˆ10.0 bn in August 2014. Intra-EU28 trade rose to ˆ215.3 bn in August 2015, +4% compared with August 2014.
Euro area annual inflation is expected to be 0.0% in October 2015, up from -0.1% in September 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 October (1.5%, compared with 1.4% in September), followed by services (1.3%, compared with 1.2% in September), non-energy industrial goods (0.4%, compared with 0.3% in September) and energy (-8.7%, compared with -8.9% in September).
The euro area (EA19) seasonally-adjusted unemployment rate was 10.8% in September 2015, down from 10.9% in August 2015, and from 11.5% in September 2014. This is the lowest rate recorded in the euro area since January 2012. The EU28 unemployment rate was 9.3% in September 2015, down from 9.4% in August 2015, and from 10.1% in September 2014. This is the lowest rate recorded in the EU28 since September 2009. These figures are published by Eurostat.
Eurostat estimates that 22.631 million men and women in the EU28, of whom 17.323 million were in the euro area, were unemployed in September 2015. Compared with August 2015, the number of persons unemployed decreased by 147 000 in the EU28 and by 131 000 in the euro area. Compared with September 2014, unemployment fell by 1.832 million in the EU28 and by 1.194 million in the euro area.
Economy of Japan
Japan Economics Team (JET) at Nomura anticipates a second straight decline in Japan`s Q3 GDP, with positive contributions from consumer spending and goods/services export expected. JET forecasts that the 2015 Q3 real GDP figures scheduled for release on 16 November will reveal a decline of 0.4% q-q annualized (-0.1% q-q). Spending and exports have been recovering, but with inventory drawdowns and higher imports depressing GDP, it thinks GDP growth will be in negative q-q territory for the second consecutive quarter in Q3, following the q-q annualized decline of 1.2% in Q2.
Industrial output in Japan was up a seasonally adjusted 1.0 percent on month in September, the Ministry of Economy, Trade and Industry said. That beat forecasts for a decline of 0.5 percent following the 1.2 percent contraction in August. On a yearly basis, industrial production dipped 0.9 percent - also beating expectations for a decline of 2.6 percent following the 0.4 percent decline in the previous month. According to the Survey of Production Forecast in Manufacturing, production is predicted to rise 4.1% in October and decrease 0.3% in November.
Japan`s trade deficit narrowed in September to 114.5 billion yen ($955 million) but exports fell short of expectations as demand from China waned. The monthly trade data showed exports rose only 0.6 percent from the year before to 6.42 trillion yen ($53 billion) while imports fell 11 percent, to 6.53 trillion yen ($54 billion). Japan`s trade balance has improved with the fall in prices of crude oil and other fuels. In September, imports of oil, gas and coal fell 36 percent from the year before.
Japan`s core consumer prices fell 0.1 percent in the year to September, a second straight month of declines, keeping inflation distant from the central bank`s 2 percent target. The 0.1 percent drop in the core consumer price index (CPI), which includes oil products but excludes fresh food prices, compared with a median market forecast for a 0.2 percent decline and followed a 0.1 percent fall in August, data by the Internal Affairs Ministry showed. The so-called core-core CPI, which strips away both energy and volatile food costs, rose 0.9 percent in the year to September, the data showed.
The unemployment rate in Japan came in at a seasonally adjusted 3.4 percent in September, the Ministry of Internal Affairs and Communications said - unchanged and in line with expectations.
The job-to-applicant ratio was 1.24, also matching forecasts and up from 1.23 in August. The participation rate climbed to 60.2 percent, up from 59.6 in the previous month. The number of employed persons in September was 64.39 million, an increase of 370,000 or 0.6 percent on year. The number of unemployed persons in September was 2.27 million, down 60,000 or 2.6 percent on year.
Economy of Russia
Russia`s economy shrank 4.3 percent in the third quarter this year, the government said, as a recession caused by low oil prices and Western sanctions over Ukraine continued to take its toll. Deputy economy minister Alexei Vedev said that preliminary estimates put the year-on-year drop in gross domestic product for the third quarter at 4.3 percent, slowing to 3.8 percent in September from 4.6 percent in August. Overall, the economy dropped 3.8 percent for the first nine months of the year.
According to the Federal State Statistics Service, Russia`s industrial production fell to 3.7% in September, compared to a fall of 4.3% in August 2015, year-over-year. On a monthly basis, industrial Production in Russia rose 3.4% in September 2015. In September, manufacturing production fell by -5.4% as compared to 6.3% in August 2015. Electricity, gas, and water fell by 2.6%, whereas mining rose by 0.8%.
According to the Central Bank of Russia, the goods and services surplus fell to $8.7 billion in August 2015, compared to $16.2 billion a year ago. Russia`s exports, contributing ~28.6% of its GDP, have fallen by 39% to $25.3 billion, respectively, in August 2015, compared to a year ago. Year-over-year, Russian imports fell by 34.3% in August to $16.6 billion, compared to $25.3 billion in August 2014.
Russian inflation decelerated for a second month, remaining almost four times the central bank`s target as expectations of faster price growth continue to throttle monetary easing.
Consumer prices increased 15.6 percent from a year earlier in October after a 15.7 percent gain in September, the Federal Statistics Service said. That matched the median of 20 estimates in a Bloomberg survey. Prices increased 0.7 percent in the month.
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 5.2%, from 5.3% in the preceding month. Analysts had expected Russian Unemployment Rate to remain unchanged at 5.3% last month.