World Economy Review - April 2016
Negative interest rates are the right policy for the world economy, the International Monetary Fund (IMF) has said, though it has warned central bankers and policymakers to stay vigilant about the potential for the “unprecedented” policy to cause significant side effects.
A study published ahead of the IMF`s spring meeting in Washington DC alongside the World Bank, has concluded that on balance, negative interest rates “help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability.”
“Still, there are limits on how far and for how long negative policy rates can go … both in terms of the extent to which central banks can set rates at negative levels and the length of time they can remain negative,” Jose Vinals, Simon Gray and Kelly Eckhold from the IMF said.
Restrictions on the use of negative interest rates - currently being used by six central banks - centered not only on a de facto `floor` for how low they could go before people started hoarding cash, but also on the impact negative rates would have on savers, investors and pensioners along with what the IMF called “significant political economy and social limits”.
“The public may feel that they are being `taxed` if and when deposit rates increasingly turn negative,” researchers warned, as they estimated that the effective basement for negative rates could be anywhere between minus 0.75 - minus two per cent, depending on the country.
“There may also be excessive risk-taking. As banks margins are squeezed, they may start lending to riskier borrowers to maintain their profit levels … Weak loans could become harder to detect, and vital corporate restructuring could be delayed.”
Perhaps most worryingly, the IMF also said that “negative interest rates may induce boom and bust cycles in asset prices.”
“These potential risks require close monitoring and supervisory scrutiny,” the Fund concluded, but confirmed that it “support[s] the introduction of negative policy rates … given the significant risks we see to the outlook for growth and inflation.”
Economy of the United States
U.S. economic growth braked sharply to its slowest pace in two years as consumer spending softened and a strong dollar continued to undercut exports.
Gross domestic product increased at a 0.5 percent annual rate, the slowest since the first quarter of 2014, the Labor Department said in its advance estimate, also as businesses doubled down on efforts to reduce unwanted merchandise clogging up warehouses.
Economists polled by Reuters had forecast the economy expanding at a 0.7 percent rate in the first quarter. The economy grew at a 1.4 percent pace in the fourth quarter. Almost all sectors of the economy weakened in the first quarter, with the housing market the lone star.
U.S. industrial production fell more than expected in March as output declined broadly, the latest indication that economic growth braked sharply in the first quarter. Industrial output decreased 0.6 percent last month after a downwardly revised 0.6 percent drop in February, the Federal Reserve said. Industrial production has declined in six of the last seven months.
Economists polled by Reuters had forecast industrial production slipping 0.1 percent last month after a previously reported 0.5 percent drop in February. Industrial production fell at an annual rate of 2.2 percent in the first quarter. With output declining last month, industrial capacity use fell 0.5 percentage point to 74.8 percent, the lowest level since August 2010.
The trade deficit narrowed in March as imports fell faster than exports, underscoring slow growth at home and abroad in the opening months of the year. The trade gap decreased 13.9% from February to a seasonally adjusted $40.44 billion, the Commerce Department said.
Exports of goods and services fell 0.9% while imports dropped 3.6%. Economists surveyed by The Wall Street Journal had expected a deficit of $41 billion in March. February`s trade deficit was revised to $46.96 billion from a previously estimated $47.06 billion.
U.S. consumer prices rose less than expected in March and underlying inflation slowed, suggesting the Federal Reserve will remain cautious about raising interest rates this year. The Labor Department said its Consumer Price Index gained 0.1 percent last month as a rebound in gasoline prices was partly offset by a drop in the cost of food. There were also slowdowns in medical care and housing costs.
The CPI fell 0.2 percent in February. In the 12 months through March, the CPI increased 0.9 percent after advancing 1.0 percent in February. Economists polled by Reuters had forecast the CPI gaining 0.2 percent last month and rising 1.1 percent from a year ago.
The so-called core CPI, which strips out food and energy costs, inched up 0.1 percent. That was smallest increase since August and followed a 0.3 percent increase in February. In the 12 months through March, the core CPI rose 2.2 percent after gaining 2.3 percent in February.
The U.S. created 160,000 new jobs in April, marking the smallest gain in seven months, in a sign that a slower economy may have crimped job creation. Economists polled by MarketWatch had expected an increase of 203,000 nonfarm jobs. The unemployment rate was unchanged at 5%, as more people dropped out of the labor force. Average wages climbed 0.3% to $25.53 an hour. Hourly pay rose 2.5% in the past 12 months, up from 2.3%. The labor-force participation fell for the first time since last fall to 62.8%. Employment gains for March and February, meanwhile, were reduced by a combined 19,000. The government said 208,000 new jobs were created in March instead of 215,000. February`s gain was trimmed to 233,000 from 245,000.
Economy of the European Union
Seasonally adjusted GDP rose by 0.6% in the euro area (EA19) and by 0.5% in the EU28 during the first quarter of 2016, compared with the previous quarter, according to a preliminary flash estimate published by Eurostat, the statistical office of the European Union. In the fourth quarter of 2015, GDP grew by 0.3% in the euro area and by 0.4% in the EU28.
Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.6% in the euro area and by 1.7% in the EU28 in the first quarter of 2016, after +1.6% and +1.8% respectively in the previous quarter.
In February 2016 compared with January 2016, seasonally adjusted industrial production fell by 0.8% in the euro area (EA19) and by 0.7% in the EU28, according to estimates from Eurostat. In January 2016 industrial production rose by 1.9% in the euro area and by 1.5% in the EU28. In February 2016 compared with February 2015, industrial production increased by 0.8% in both the euro area and the EU28.
The first estimate for euro area (EA19) exports of goods to the rest of the world in February 2016 was ˆ163.5 billion, an increase of 1% compared with February 2015 (ˆ161.4 bn). Imports from the rest of the world stood at ˆ144.4 bn, a rise of 2% compared with February 2015 (ˆ141.5 bn). As a result, the euro area recorded a ˆ19.0 bn surplus in trade in goods with the rest of the world in February 2016, compared with +ˆ20.0 bn in February 2015. Intra-euro area trade rose to ˆ141.0 bn in February 2016, up by 3% compared with February 2015.
The first estimate for extra-EU28 exports of goods in February 2016 was ˆ137.1 billion, down by 1% compared with February 2015 (ˆ138.2 bn). Imports from the rest of the world stood at ˆ134.1 bn, down by 2% compared with February 2015 (ˆ136.4 bn). As a result, the EU28 recorded a ˆ3.0 bn surplus in trade in goods with the rest of the world in February 2016, compared with +ˆ1.8 bn in February 2015. Intra-EU28 trade rose to ˆ256.7 bn in February 2016, +4% compared with February 2015.
Euro area annual inflation is expected to be -0.2% in April 2016, down from 0.0% in March, according to a flash estimate from Eurostat. Looking at the main components of euro area inflation, services is expected to have the highest annual rate in April (0.9%, compared with 1.4% in March), followed by food, alcohol & tobacco (0.8%, stable compared with March), non-energy industrial goods, (0.5%, stable compared with March) and energy (-8.6%, compared with -8.7% in March).
The euro area (EA19) seasonally-adjusted unemployment rate was 10.2% in March 2016, down from 10.4% in February 2016, and from 11.2% in March 2015. This is the lowest rate recorded in the euro area since August 2011. The EU28 unemployment rate was 8.8% in March 2016, down from 8.9% in February 2016, and from 9.7% in March 2015. This is the lowest rate recorded in the EU28 for seven years, since April 2009. These figures are published by Eurostat.
Eurostat estimates that 21.419 million men and women in the EU28, of whom 16.437 million were in the euro area, were unemployed in March 2016. Compared with February 2016, the number of persons unemployed decreased by 250 000 in the EU28 and by 226 000 in the euro area. Compared with March 2015, unemployment fell by 2.091 million in the EU28 and by 1.477 million in the euro area.
Economy of Japan
Japan`s real gross domestic product sank 0.5% in March compared with the previous month, the Japan Center for Economic Research said. Consumer spending slumped 1.9% as households tightened their purse strings. Growth occurred in other areas, including a 0.1% uptick in capital spending, a 3.5% jump in housing investment and a 1.3% rise in exports. However, this did not fully compensate for the decline in consumption, which accounts for 60% of GDP.
Japan`s industrial production increased at a faster-than-expected pace in March, after falling sharply in the prior month, preliminary figures from the Ministry of Economy, Trade and Industry showed. Industrial production climbed a seasonally adjusted 3.6 percent month-over-month in March, surpassing economists` expectations for a 2.8 percent rise. In February, production had fallen 5.2 percent.
Shipments grew 1.4 percent over the month and inventories went up by 2.8 percent. Inventory ratio also registered a growth of 3.5 percent. On an annual basis, industrial production edged up 0.1 percent in March, in contrast to a 1.2 percent gain in the preceding month. It was the first increase in four months.
Japan`s trade balance for March came in at a surplus of Y755 billion compared with a Y222.7 billion surplus in the same month a year earlier, according to data released by the Ministry of Finance. Economists polled by The Wall Street Journal and the Nikkei had expected a Y883.3 billion surplus.
Merchandise exports decreased 6.8% from a year earlier to Y6.457 trillion ($59.1 billion) last month, after a 4.0% drop the previous month. Japanese imports dropped 14.9% in March to Y5.702 trillion, the 15th consecutive month of declines.
Japan`s consumer prices fell 0.3 percent in March from a year earlier for the first decline in five months due to lower energy prices. The core consumer price index, which excludes volatile fresh food prices, stood at 102.7 against the 2010 base of 100, the Ministry of Internal Affairs and Communications said. The size of the decline was the largest since April 2013.
Energy prices plunged 13.3 percent from a year earlier amid declining crude oil prices, with gasoline prices sliding 20.5 percent and electricity fees dropping 9.0 percent. The inflation rate entered negative territory despite the central bank`s efforts to lift consumer prices with its large-scale monetary easing policy consisting of an asset-purchase program and negative interest rates.
The seasonally adjusted unemployment rate in Japan decreased in March to 3.2% compared to the previous month`s rate of 3.3% according to the Ministry of Communications and Internal Affairs.
The number of unemployed people fell to 2.11 million in March from 2.16 million a month earlier. A year ago, the jobless figure totaled 2.22 million. The number of workers fell by 0.2% to 63.87 million from the previous month. The unemployment rate for men declined by 0.2% from the previous month to 3.4%, while for women the unemployment rate increased by 0.2% to 3.0%.
Economy of Russia
Russia`s GDP in the first three months of 2016 fell by 1.4% compared to the same period for the previous year, according to the report of the Ministry of Economic Development. In March compared with March 2015 Russia`s GDP decreased by 1.8%, in January - -2.6% and in February - 0.0%.
Industrial production in Russia decreased 0.5 percent year-on-year in March of 2016, following 1.0 percent growth in the previous month, the Federal State Statistics Service said. The indicator was below market expectations of 1.0 percent fall. Manufacturing output declined 2.8 percent and electricity, gas and water went down 0.8 percent, while mining and quarrying production increased 4.2 percent. On a monthly basis, industrial output rose 9.1 percent. For the first quarter, industrial production dropped 0.6 percent.
Russia`s trade surplus narrowed to USD 7.35 billion in February of 2016, from a USD 13.97 billion surplus a year earlier. Exports fell 31.3 percent year-on-year to USD 20.17 billion while imports decreased 16.8 percent to USD 12.8 billion, the Central Bank data showed.
Consumer prices in Russia increased 7.3 percent year-on-year in April of 2016, the same pace as in the preceding month, staying at its lowest level since April of 2014 and below market expectations of 7.4 percent. Food and transport prices growth accelerated while housing and transportation cost slowed down. On a monthly basis, prices edged up by 0.4 percent, the Federal State Statistics Service said.
Unemployment rate in Russia was recorded at 6.0 percent in March of 2016, up from 5.8 percent in the previous three months and above market expectations of 5.9 percent. It was the highest rate since January of 2013, as the number of unemployed people increased by 138 thousand to 4.56 million while economically active increased by 0.2 million to 76.1 million (52 percent of population).