World Economy Review - November 2015

The global economy as we know it in terms of predictability and trajectory is no more. Events have changed dramatically, so much so, engines of growth are being replaced while preparing for a new future.

The end to a decade-long commodity boom has caused economic charts to be redrawn, peppered with reduced expectations.

Cuts to global growth by the International Monetary Fund (IMF) and the World Bank recently assumed added gravity following downgrades by the Organization for Economic Cooperation and Development (OECD) and revised trade prospects by container vessel operator AP Moeller-Maersk A/S.

Year 2016 could see a slew of “half profits, slower pace, drastic constraints to new business, overcapacity and commodity-currency correlations deepening”.

The prospect of worldwide trade growth slipping from 3.4% (in 2014) to 2%, prompted the Paris-based OECD to say: “This is deeply concerning.

Robust trade and global growth go hand in hand.” Early last month, Maersk, a global indicator of trade volume, said third-quarter (3Q) net profits had almost halved to US$778 million, from US$1.5 billion a year ago.

Areas of real concern? The coming year is to see rising inventories of vessels, crude oil, metals in general, imports and exports waning (China an important case in point), unsettling terms of trade, stock, currency depreciation even devaluation.

And, with overcapacity far outstripping demand, only something short of a timely turnaround in current trends can avert a deeper plunge.

Deutsche Bank (New York) threw some cold water on prevailing negativity: “Financial markets continue to be dominated by market speculation, whether it is about Fed rates or health of the global economy. Fed focus on external risks from emerging markets (EMs) has stoked rising concerns, and despite revisions to growth, we don`t share the widespread pessimism.”

In a note to The Malaysian Reserve (TMR), it offered three reasons why pessimism was “overdone”.

Domestic demand fundamentals remain solid in US and Europe, and data from China are far from suggesting a sharp slowdown — leaving the three world`s leading economies on sound footing.

When CEO of AP MoellerMaersk, Nils Smedegaard Andersen said early this month the world`s economy was growing at a slower pace than claimed by the IMF and other forecasters, he was seeing an emerging world where the resources economy is rapidly falling behind developed markets that are relying on their greatest strengths — services and technology.

Shipments, according to Asia-centric HSBC continue to be “soggy” — the reason being that Asia`s trade slowdown reflects not just structural but also cyclical influences.

Forecasters see such factors stemming from exclusively weak demand from mostly advanced economies (AE), in spite of the hype about US economic growth and stock market frenzy that are raising hopes the Federal Reserves (Fed) will raise interest rates soon.

The investment bank in a note to TMR explains what is happening to EM trade.

“Shipments in value terms (measured in US dollars) have begun to significantly contract in 2015. Even in volume terms, exports are falling.”

This, it added, is highly unusual, being only the fourth time in over 25 years that shipment volumes are contracting. (The other episodes are the Asian financial crisis, the tech slump and the Great Recession.)

HSBC added: “The good news is that inflation in EMs is unlikely to constrain central banks. More fiscal spending would now help, given financial risks are mostly manageable.”

Money Value, Markets to Change For the investment market, 2015 has been mostly a year of weary “anticipation” of a Fed rate hike triggering carry trade.

The Oct policy-setting meeting has sent the strongest signal so far that an uptick is on the cards, with many researchers, analysts and traders concurring.

Central banks in AEs are expected to continue struggling with weak demand and inflation in the coming year as EMs slow down.

The second-largest central bank, European Central Bank (ECB), is going for a substantial stimulus program.

Capital movement: The massive outflow of some US$500 billion from China (since July, 2001) and subsequent departure of another half a trillion dollars from other EMs have, since mid-2014, become a drag on currency value, posing renewed threats to stability.

Global investment bank Credit Suisse (New York) in a separate note to TMR predicts 2016 could likely “prove to be a watershed in global economic history”. It blames the prospect squarely on the Fed`s rate move.

“This attempt at tightening will occur in a global economy experiencing historically large divergences among the major players, as structural issues intersect with normal cyclical dynamics,” the bank said.

Outflow of liquidity from EMs that had benefitted from the eight-year-long Fed stimulus largesse could produce a “high-impact event,” it added.

The Swiss bank said a more likely risk scenario involves a drift higher in US core inflation that triggers higher interest rates and further tighter financial conditions worldwide. Simplistically, this means rush by carry trade players whose transfer of funds will further depress commodity-linked currencies.

Given the weaker return on investment, EMs are not expected to raise large capital to revitalize their economies like AEs, but as Deutsche Bank points out in an Asia year-end review: “While weak growth is a concern for EMs next year, we don`t expect systemic crises and no sharp slowdown in China.”

Events in the world`s most important trading markets are unfolding in a way nobody could have predicted this year.

For the moment, money value (consolidation of greenback), and the ECB`s readiness to pump billions into the Eurozone are mostly on track.

However, the economic news last month about the second and third-largest economies in the world remain dismal. While China continues to hit new gross domestic product lows, Japan is in technical recession.

Economy of the United States

The U.S. economy grew at a healthier clip in the third quarter than initially thought, but strong inventory accumulation by businesses could temper expectations of an acceleration in growth in the final three months of the year. The Commerce Department said the nation`s gross domestic product grew at a 2.1 percent annual pace, not the 1.5 percent rate it reported last month, as businesses reduced an inventory bloat less aggressively than previously believed.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a still strong 3.0 percent rate in the third quarter, down from the 3.2 percent rate estimated last month. The downward revisions mostly reflected weak outlays on communication services and utilities. A trade deficit that was larger than previously estimated subtracted 0.22 percentage point from GDP growth in the third quarter. However, business spending on equipment was revised up to a 9.5 percent rate from a 5.3 percent pace.

Reflecting steep drops in mining and utilities output, the Federal Reserve released a report showing that U.S. industrial production unexpectedly decreased in the month of October. The report said industrial production dipped by 0.2 percent in October, matching the decrease seen in September. The drop surprised economists, who had expected production to inch up by 0.1 percent.

The unexpected decrease in production was partly due to a continued drop in mining output, which fell by 1.5 percent in October after tumbling by 2.4 percent in September. Utilities output also showed a substantial decrease, plunging by 2.5 percent in October after jumping by 1.2 percent in the previous month. On the other hand, the report showed an increase in manufacturing output, which climbed by 0.4 percent in October after edging down by 0.1 percent in September.

The Fed also said capacity utilization for the industrial sector slipped to 77.5 percent in October from 77.7 percent in September. Capacity utilization in the manufacturing sector dipped to 80.8 percent and capacity utilization in the mining sector edged down to 76.1 percent, while capacity utilization in the utilities sector inched up to 76.7 percent.

The U.S. trade deficit widened in October, the Commerce Department said, as exports of U.S. goods fell to the lowest level in more than four years, a reflection of the impact of a weak global economy and stronger dollar. The trade deficit widened 3.4 percent in October to $43.9 billion, compared to a revised $42.5 billion deficit in September.

Exports of goods and services fell 1.4 percent to $184.1 billion while exports of just goods dropped an even bigger 2.4 percent to $123.8 billion, the lowest level since June 2011. Imports of goods and services were also down in October, dropping 0.6 percent to $228 billion. The drop in imports reflected in part falling oil prices, which pushed petroleum imports down to the lowest level in nearly 15 years.

Consumer prices in the United States rose 0.2 percent in October, the first increase since July, the Labor Department reported. The CPI also climbed 0.2 percent over the 12 months ending Oct. 31. October`s figure was in line with analysts` expectations. Energy prices increased 0.3 percent in October, while food prices were up 0.1 percent, the report said. Excluding more volatile food and energy prices core inflation in October was 0.2 percent, with a 1.9 percent year-to-year increase, the same as in September.

The U.S. economy generated another month of solid hiring in November, making it highly likely the Federal Reserve will raise interest rates from record lows later this month. The Labor Department says employers added 211,000 jobs last month, led by big gains in construction and retail. Hiring was revised higher in October and September by a combined 35,000 jobs.

The unemployment rate remained 5 percent for the second straight month as more Americans entered the workforce to look for jobs. Pay gains last month were modest. Average hourly wages rose 2.3 percent from 12 months earlier.

Economy of the European Union

Seasonally adjusted GDP rose by 0.3% in the euro area (EA19) and by 0.4% in the EU28 during the third quarter of 2015, compared with the previous quarter, according to flash estimates published by Eurostat, the statistical office of the European Union. In the second quarter of 2015, GDP grew by 0.4% in both areas. Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.6% in the euro area and by 1.9% in the EU28 in the third quarter of 2015, after +1.5% and +1.9% respectively in the previous quarter.

In September 2015 compared with August 2015, seasonally adjusted industrial production fell by 0.3% in the euro area (EA19) and by 0.1% in the EU28, according to estimates from Eurostat. In August 2015 industrial production fell by 0.4% and 0.2% respectively. In September 2015 compared with September 2014, industrial production increased by 1.7% 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 September 2015 was ˆ173.4 billion, an increase of 1% compared with September 2014 (ˆ171.8 bn). Imports from the rest of the world stood at ˆ152.8 bn, a fall of 1% compared with September 2014 (ˆ154.4 bn). As a result, the euro area recorded a ˆ20.5 bn surplus in trade in goods with the rest of the world in September 2015, compared with +ˆ17.4 bn in September 2014. Intra-euro area trade rose to ˆ148.9 bn in September 2015, up by 2% compared with September 2014. These data are released by Eurostat.

The first estimate for extra-EU28 exports of goods in September 2015 was ˆ148.7 billion, down by 1% compared with September 2014 (ˆ150.3 bn). Imports from the rest of the world stood at ˆ144.4 bn, down by 3% compared with September 2014 (ˆ148.4 bn). As a result, the EU28 recorded a ˆ4.3 bn surplus in trade in goods with the rest of the world in September 2015, compared with +ˆ1.9 bn in September 2014. Intra-EU28 trade rose to ˆ271.2 bn in September 2015, +4% compared with September 2014.

The euro area (EA19) seasonally-adjusted unemployment rate was 10.7% in October 2015, down from 10.8% in September 2015, and from 11.5% in October 2014. This is the lowest rate recorded in the euro area since January 2012. The EU28 unemployment rate was 9.3% in October 2015, stable compared to September 2015, and down from 10.1% in October 2014. This is the lowest rate recorded in the EU28 since September 2009. These figures are published by Eurostat.

Eurostat estimates that 22.497 million men and women in the EU28, of whom 17.240 million were in the euro area, were unemployed in October 2015. Compared with September 2015, the number of persons unemployed decreased by 36 000 in the EU28 and by 13 000 in the euro area. Compared with October 2014, unemployment fell by 1.942 million in the EU28 and by 1.302 million in the euro area.

Euro area annual inflation is expected to be 0.1% in November 2015, stable compared with October 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 November (1.5%, compared with 1.6% in October), followed by services (1.1%, compared with 1.3% in October), non-energy industrial goods (0.5%, compared with 0.6% in October) and energy (-7.3%, compared with -8.5% in October).

Economy of Japan

Japan slipped into its second recession in as many years in July-September, as uncertainty hanging over the global economy chilled business and household spending, the latest setback in Prime Minister Shinzo Abe`s drive to put Japan back on a higher growth path. Gross domestic product shrank at an annualized pace of 0.8% in July-September from the previous three-months, government data showed, following a revised 0.7% contraction in April-June. In reality, nominal GDP in July-September rose just 0.1% at an annualized pace.

Business investment shrank an annualized 5.0% in July-September, marking a second straight quarter of decline, while a drop in inventories in warehouses and stores subtracted 2.1 percentage points from overall economic growth. Private consumption, which accounts for some 60% of GDP, turned up 2.1% following a decline of 2.3% in the previous quarter.

With a rise in production and shipments, Japan industrial production rose by 1.4% in October - compared to a rise of 1.1% in September 2015. Although it was higher than the previous month on a monthly basis, it was below the consensus estimate of 1.9%. On an annual basis, Japan`s industrial production fell by 1.4% in October. In November 2015, manufacturers expected production to rise by 0.2%. They expect production to fall by 0.9% in December.

According to Japan`s Ministry of Finance, the country recorded a trade surplus of 111.5 billion yen in October as compared to a trade deficit of 114.5 billion yen in September 2015. Japan`s trade balance has turned positive after recording a deficit for the consecutive past six months. A rise in exports and fall in imports helped Japan to turn a trade surplus in October.

In October, Japan`s exports grew by 2.0% to 6,544.0 billion yen as against 6,417.4 billion yen in September 2015. However, with the global slowdown, Japan`s exports fell 2.1% year-over-year. Japan`s imports fell by 1.5% to 6,432.5 billion yen in October compared to 6,531.8 billion yen in September 2015. With a fall in the import of mineral fuels by 43.2%, imports fell by 13.4% in October from a year ago. The fall in petroleum prices has helped Japan keep its import bills lower.

Japan`s core consumer prices fell in October for the third straight month. Household spending slumped as well. Government data showed core consumer price index (CPI), which includes oil costs, fell 0.1 per cent in the year to October. The data matched the median market forecast. The effect of falling energy costs led to the further dip in CPI.

Japan`s jobless rate fell to a 20-year low in October, but consumer spending and incomes edged down as the tight labor market failed to spur significant increases in wages. The government reported that unemployment in the world`s number three economy dipped to 3.1% in October, compared with 3.4% in September. It was the lowest level since July 1995. Consumer spending fell 2.4% from the same month a year earlier and average incomes fell 0.9%.

Economy of Russia

Russia`s gross domestic product fell 3.6 percent in October compared with a year earlier, the Economy Ministry said. The figure was an improvement on a 3.8 percent decline in September. In the third quarter, the Russian economy slipped 4.1 percent against the drop of 4.6 percent in the second quarter. The consecutive third quarter of contraction signals recessionary situation in the Russian economy.

Russia`s industrial production contracted in annual terms for the ninth consecutive month in October, dragged down by the manufacturing sector, data showed. According to the Federal Statistics Service, industrial output declined by 3.6% in October compared with a year earlier after falling 3.7% in September.

The data breakdown showed that industrial production was mainly hit by the manufacturing sector, where output fell by 5.9% on the year in October. Output in the utility sector declined by 3.6%, while output in the mining sector increased by 1.4%. In monthly terms, industrial output rose 5.2% in October after growing by 3.4% in September.

October`s trade data showed that Russia`s trade surplus totaled USD 10.0 billion. The result was well below the USD 14.7 billion observed in the same month last year. October`s surplus, nonetheless, came in slightly above the USD 9.6 billion surplus registered in the previous month. The trade surplus in October drove the 12-month rolling surplus to USD 154 billion (September: USD 159 billion), which is the lowest accumulated surplus since March 2011.

Exports of Russian goods totaled USD 26.8 billion in October, which marked a 35.4% contraction over the USD 41.5 billion registered in the same month last year. October`s pace of contraction was faster than the 30.8% drop see in September Meanwhile, imports were USD 16.8 billion in October, which were down a massive 37.4% over the level observed October 2014.

Russian inflation decelerated to the slowest since January as trade restrictions imposed against Turkey cloud the outlook. Consumer-price growth slowed to 15 percent from a year earlier in November from 15.6 percent in October, the Federal Statistics Service in Moscow said in a statement. The median of 21 estimates in a Bloomberg survey was for 14.9 percent. Prices increased 0.8 percent in the month.

Russian jobless rate unexpectedly increased to 5.5 percent in October from 5.2 percent in September and above market expectations of 5.4 percent. It is the highest rate since May as the number of unemployed people edged up while employed and economically active declined. The number of unemployed people increased by 223 thousand to 4255 thousand in October. A year earlier, the figure was 4565 thousand.

The number of employed people decreased by 388 thousand to 72538 thousand in October. Year-on-year, the number decreased by 500 thousand. The number of economically active people decreased by 165 thousand to 76793 thousand (69.3 percent of population) in October. Compared to October of 2014 the figure decreased by 191 thousand. The youth unemployment rate was recorded at 16.7 percent.

08.12.2015 00:56:17

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