World Economy Review - May 2016
The World Bank`s 2016 global economic growth predictions estimate a slower rate of increase than what was previously forecast. The bank currently estimates 2016 global growth at approximately 2.9 percent. Combinations of less than anticipated growth in two of the world`s largest economies, China and the U.S., curbed these global growth predictions.
Positive trends in both economies are seen to be present, although such trends may not be enough to trigger consumer sentiment and the confidence associated with widespread economic growth. Lower unemployment and income parity in the U.S. and China, respectively, are leading considerations in estimating baseline trends for future growth.
With regard to emerging markets, South America, sub-Saharan Africa and parts of Asia produce smaller economic impacts on the global economy than do the major national economies. When compared to global gross domestic product (GDP), shifts in overall growth in these regions is negligible.
Turmoil from the European Union`s economic recovery strategy lingers in bond markets as underpricing debt, given that currently added liquidity remains trapped in the market through the eurozone`s quantitative easing programs.
China`s current growth slowed to 7.3 percent, down from the 10.6 percent recorded prior to 2007, a period that saw U.S. growth of 2.5 percent. China`s monetary policy targets a tight control over its domestic money supply. China cut its reserve ratio five times in the most recent fiscal year. Down to 17 percent, the discount rate now stands at 1.5 percent, its lowest since 2008.
Most other central banks are below 1 percent, arguably a unit or more away from traditional risk-averse standards. At 1.5 percent, the Chinese still remain above most of Europe in terms of their easy money policy, which presumably keeps them well outside of a possible liquidity trap. Unknown, however, is whether this will affect future growth.
In U.S. dollars, the yuan has appreciated at or about $33 over the three years that ended in March. Despite its foreign reserve climbing steadily to rest at $431.60 as of March 2016, China`s total loan growth has risen 37 percent since 2006.
What drives demand? Income and expectations. Average Chinese income is significantly less than 20 percent of the U.S. average despite the dramatic rise in that number of people in the same income bracket over the past two decades. Yet Chinese average income quadrupled from 2004 to 2015 to an average of $7,000 U.S. and is expected to climb even higher in the coming decade. What decreases demand? Lower income and negative expectations. Speculators attribute the current slowdown in China`s economy to decreased policy manipulation, a shrinking technology gap and changes in capital and labor productivity.
Reported local government spending in China is restrained. However, globally, government military expenditures place China second only to the United States in that category with total 2015 military expenditures up 11 percent in 2015 as compared to the previous year. Overall military growth predictions for China should keep in mind that the country`s military spending numbers are known to be deflated. On other fronts, China`s government plans to have a manned space station operational by 2020. According to the Council on Foreign Relations, in 2012, China supplied the U.S. with $165 billion (U.S.) in foreign direct investment (FDI).
As predicted by economists, Japan`s decision to increase its sales tax produced negative impacts on GDP growth in 2014. July 2014 saw a -0.2 percent decrease in growth as a result of the tax increase imposed in April that year. Further tax increases scheduled for 2016, ranging from 8 to 10 percent, were postponed until 2017 for fear of eroding economic conditions. The deep plunge in demand and economic growth was minus 1 percent in 2014, though it neared a positive 1 percent in 2015. The World Bank currently estimates 2016 growth at 1.3 percent.
Sustained by external demand, Japan`s anemic GDP growth exhibited a notable decrease in imports as Japanese exports fell by 0.9 percent. Non-residential investment and government spending led growth on the plus side. Overall, however, Trading Economics.com estimates that Japan`s economy contracted as much as 1.1 percent in FY 2015.
The U.S. Federal Reserve`s decision on whether to raise interest rates currently consumes the attention of most economists. As the largest global economy, changes in U.S. monetary policy are watched closely, factoring into various predictions for global growth and worldwide consumer demand.
U.S. Industrial Production (IP) has decreased in all sectors—most notably mining—since March 2015. IP is one of two reports closely monitored by the Federal Reserve because it gauges the relative strength and flexibility of the manufacturing sector. As a leading indicator of business investment spending, it also helps determine estimates of ongoing and future economic vitality.
According to official estimates, U.S. unemployment is currently hovering around 5 percent, as of March 2016, its lowest point since President George W. Bush`s second term, with approximately 8 million unemployed. Hardest hit by the recent recession were African-Americans, who are currently experiencing an elevated rate of unemployment, currently estimated at roughly 9.0 percent. Unofficial Department of Labor estimates of U-6 unemployment among all economic strata puts the number of unemployed, underemployed and uncounted workers at just under 10 percent.
With decreased IP and anemic GDP growth at less than 2.4 percent, however, the U.S. economy may very well be contracting. The upside is that there is no inflation.
According to government estimates and projections, the overall economic trend in the U.S. is seen as incrementally positive and stable, although still not as strong or robust as it was before the Great Recession. Economic predictions in an election remain tentative, at least in part because the November elections carry potentially far-reaching implications regarding future economic and consumer expectations.
Until this month at least, any interest rate increase by the Federal Reserve was judged unlikely to occur until after Q4 2016, giving the Fed time to consider holiday shopping trends and fiscal policy shifts from state and federal budgets. Speculation has recently shifted raising expectations of a Q2 or Q3 interest rate increase. Such expectations will likely lead to a continuing rise in bond prices and a decrease in yields.
Economy of the United States
The U.S. economy got off to a slow start in the first quarter of 2016, but not quite as slow as initially reported. Gross domestic product rose at 0.8% rate from January to March, up from an initial 0.5% reading, the Commerce Department said. Somewhat stronger home building and restocking of warehouse shelves were behind the upward revision.
The low rate of growth in the first three months of the year is unlikely to be repeated in the spring, however. A raft of evidence such as higher retail sales and rising home purchases suggests the U.S. is on track to expand at a 2%-plus clip in the second quarter. A slow first quarter followed by an improved second quarter also occurred in each of the past two years.
What might help the economy is a stabilization in corporate earnings. Adjusted pretax profits rose at a 0.3% rate to mark the first increase since the spring of 2015. Profits are down about 6% in the past year, however.
Consumer spending, the main engine of the economy, rose 1.9% in the first quarter. That was unchanged from the government`s original estimate. Americans spent more on housing, utility bills and health care and pared back purchases of new cars.
Outlays on new home construction surged at 17.1% clip in the first quarter, up from a prior 14.8% estimate. That`s the biggest gain in nearly four years. The value of inventories - goods produced but waiting to be sold - also increased by $69.6 billion instead of $60.9 billion, revised figures show. Yet business investment in every other category declined, in some cases sharply. Outlays on structure such as oil rigs sank 8.9% and spending on new equipment such as computers fell 9%.
The nation`s trade picture, meanwhile, was not quite as cloudy as the earlier estimate showed. Exports fell 2% instead of 2.6%. And imports actually declined at a 0.2% rate instead of rising 0.2%. A smaller trade deficit adds to GDP.
U.S. factory output expanded in April as makers of machinery and cars posted solid increases in production, a sign that the country`s manufacturing sector was resisting the downward pull from sputtering global growth. Manufacturing output rose 0.3 percent, the Federal Reserve said. The reading matched the gain expected in a Reuters poll of economists.
Overall industrial output rose 0.7 percent in April, beating the consensus forecast of a 0.3 percent gain, as utilities output rebounded from March when it was restrained by warmer-than-usual weather. Mining output, another component of total industrial production, fell 2.3 percent in April.
In April, production of long-lasting manufactured goods increased 0.6 percent. The largest gains in manufacturing came from producers of machinery, who increased output by 2.4 percent. Production of motor vehicles and auto parts increased 1.3 percent. With output increasing in April, industrial capacity use jumped 0.5 percentage point to 75.4 percent.
The US good and services deficit was reported at $37.4B exceeding expectations of $41.2B. The March deficit previously reported at an estimate of $40.4B was revised down to $35.5B with an upward revision to exported goods of $0.7B and a downward revision of exported services of $3.2B. Imports were revised down with goods lower $0.7B and services $0.6B.
The revised March figures indicates an increase in the goods and services deficit for April. The goods deficit rose $1.6B to $58.8B and services decreased $0.5B to $21.4B. The deficit has decreased $8.1B or 4.8% from the same period in 2015, with both imports and exports decreasing an equal 5.1 percent.
U.S. consumer prices recorded their biggest increase in more than three years in April as gasoline and rents rose, pointing to a steady inflation build-up that could give the Federal Reserve ammunition to raise interest rates later this year. The Labor Department said its Consumer Price Index increased 0.4 percent in April, the largest gain since February 2013, after rising 0.1 percent in March. That took the year-on-year increase in the CPI to 1.1 percent from 0.9 percent in March.
There were also increases in medical care and food prices. Economists polled by Reuters had forecast the CPI gaining 0.3 percent in April and advancing 1.1 percent from a year ago. The so-called core CPI, which strips out food and energy costs, rose 0.2 percent after climbing 0.1 percent in March. In the 12 months through April, the core CPI increased 2.1 percent after increasing 2.2 percent in March.
The U.S. created just 38,000 new jobs in May and hiring in the prior two months was weaker than originally reported, casting doubt on whether the Federal Reserve will raise interest rates later in June. The number of new jobs was the smallest the economy has created since the fall of 2010. Economists polled by MarketWatch had predicted an increase of 155,000 nonfarm jobs.
The unemployment rate, in a surprising twist, fell to 4.7% from 5% to mark the lowest level since the month before the Great Recession began in December 2007. Yet the decline owed almost entirely to 458,000 people leaving the labor force. The labor-force participation fell for the second month in a row to 62.6%, the Labor Department said.
Average hourly wages climbed 0.2% to $25.59. Hourly pay rose 2.5% from May 2015 to May 2016. Employment gains for April and March, meanwhile, were reduced by a combined 59,000. The government said 123,000 new jobs were created in April instead of 160,000. March`s gain was lowered to 186,000 from 208,000.
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 an estimate published by Eurostat, the statistical office of the European Union. In the fourth quarter of 2015, GDP grew by 0.4% and 0.5% respectively. Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.7% in the euro area and by 1.8% in the EU28 in the first quarter of 2016, after +1.7% and +2.0% respectively in the previous quarter.
In March 2016 compared with February 2016, seasonally adjusted industrial production fell by 0.8% in the euro area (EA19) and by 0.5% in the EU28, according to estimates from Eurostat. In February 2016 industrial production fell by 1.2% in the euro area and by 1.0% in the EU28. In March 2016 compared with March 2015, industrial production increased by 0.2% in the euro area and by 0.3% in the EU28.
The first estimate for euro area (EA19) exports of goods to the rest of the world in March 2016 was ˆ177.8 billion, a decrease of 3% compared with March 2015 (ˆ182.8 bn). Imports from the rest of the world stood at ˆ149.2 bn, a fall of 8% compared with March 2015 (ˆ162.9 bn). As a result, the euro area recorded a ˆ28.6 bn surplus in trade in goods with the rest of the world in March 2016, compared with +ˆ19.9 bn in March 2015. Intra-euro area trade fell to ˆ149.3 bn in March 2016, down by 2% compared with March 2015. These data are released by Eurostat.
The first estimate for extra-EU28 exports of goods in March 2016 was ˆ150.7 billion, down by 7% compared with March 2015 (ˆ162.4 bn). Imports from the rest of the world stood at ˆ143.5 bn, down by 8% compared with March 2015 (ˆ155.7 bn). As a result, the EU28 recorded a ˆ7.2 bn surplus in trade in goods with the rest of the world in March 2016, compared with +ˆ6.7 bn in March 2015. Intra-EU28 trade fell to ˆ270.9 bn in March 2016, -2% compared with March 2015.
Euro area annual inflation is expected to be -0.1% in May 2016, up from -0.2% in April, 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 May (1.0%, compared with 0.9% in April), followed by food, alcohol & tobacco (0.8%, stable compared with April), nonenergy industrial goods (0.5%, stable compared with April) and energy (-8.1%, compared with -8.7% in April).
The euro area (EA19) seasonally-adjusted unemployment rate was 10.2% in April 2016, stable compared with March 2016, and down from 11.0% in April 2015. This is the lowest rate recorded in the euro area since August 2011. The EU28 unemployment rate was 8.7% in April 2016, down from 8.8% in March 2016, and from 9.6% in April 2015. This is the lowest rate recorded in the EU28 since April 2009. These figures are published by Eurostat.
Eurostat estimates that 21.224 million men and women in the EU28, of whom 16.420 million were in the euro area, were unemployed in April 2016. Compared with March 2016, the number of persons unemployed decreased by 106 000 in the EU28 and by 63 000 in the euro area. Compared with April 2015, unemployment fell by 2.096 million in the EU28 and by 1.309 million in the euro area.
Economy of Japan
Japan`s gross domestic product jumped 0.4 percent on quarter in the first quarter of 2016, the Cabinet Office said. That topped forecasts for an increase of 0.1 percent following the downwardly revised 0.4 percent contraction in the previous three months (originally -0.3 percent). On a yearly basis, GDP surged 1.7 percent - blowing away forecasts for a gain of 0.3 percent following the downwardly revised 1.1 percent contraction in the three months prior (originally -1.1 percent).
Nominal GDP added 0.5 percent on quarter - in line with expectations after slipping 0.2 percent in the previous quarter. The GDP deflator added 0.9 percent on year - shy of expectations for 1.0 percent and slowing from 1.5 percent in the three months prior. Private consumption added 0.5 percent on quarter, exceeding estimates for 0.2 percent following the 0.8 percent contraction in the previous three months. Business spending skidded 1.4 percent on quarter versus forecasts for a 0.8 percent decline following the 1.2 percent increase in the previous three months.
Japanese real gross domestic product grew for the first time in two months in April, by 1% compared with March, the Japan Center for Economic Research said. Consumer spending rose 1.2%, also up for the first time in two months, on factors including higher new-car sales. Exports fell by 1.6%, and imports by 3.5%. External demand, or exports minus imports, contributed 0.2 percentage point of GDP growth.
Japan`s factory output unexpectedly rose in April as a series of earthquakes in the southern part of the country appeared to have had minimal impact on production, offering some signs of hope for an economy squeezed by weak exports and consumption.
Factory output rose 0.3 percent in April from the previous month, confounding market forecasts for a 1.5 percent drop and following a 3.8 percent gain in March, data by the Ministry of Economy, Trade and Industry showed. Manufacturers surveyed by the ministry expect output to rise 2.2 percent in May and increase 0.3 percent in June, suggesting that industrial production has bottomed out.
Japan`s trade surplus widened in April as exports and imports both declined sharply, underscoring ongoing challenges for the world`s third largest economy. Japanese exports declined 10.1% annually in April, much worse than March`s 6.8% year-over-year decline, government data showed. A median estimate of economists called for exports to fall 10% annually.
Meanwhile, imports declined for a 16th consecutive month, falling 23.3% annually. The decline was much worse than the median estimate, which called for a 19% year-over-year drop. As a result, Japan`s trade surplus rose to 823.5 billion yen in April, up from 755 billion yen the previous month.
Japan`s core consumer prices fell for a second straight month in April, dealing another blow to Tokyo`s faltering war on deflation, data showed. The negative reading of minus 0.3% offered fresh evidence of the challenges faced by the government and the Bank of Japan (BOJ) in their bid to revitalize the world`s number three economy.
The weak data raised pressure on the BOJ to expand its vast monetary easing program possibly at its next policy meeting in June, analysts said. The Internal Affairs Ministry announced that core consumer prices, which exclude volatile fresh food prices, dropped 0.3% in April, on the heels of a similar drop the previous month.
Japan`s unemployment rate was unchanged in April after falling the previous month, while job availability held near 24-year lows, a sign the country`s labour market remains tight despite ongoing concerns about growth and inflation. The national unemployment rate came in at 3.2% in April, unchanged from March, Tokyo`s Institute of Labour reported. The unemployment rate edged down 0.1 percentage point in March.
Japan`s unemployment rate has hovered at or below 3.4% over the past 12 months, reaching a low of 3.1% in October. The country`s job availability ratio, which is obtained by dividing monthly job openings by the number of active applications, edged up slightly to 1.34 from 1.30. This means that 134 job openings were available for every 100 job-seekers.
Economy of Russia
Russia`s economy contracted less than forecast in the first quarter, leaving it closer to growth than at any time since it slid into recession last year. Gross domestic product fell 1.2% from a year earlier after a decline of 3.8% in the previous three months, the Federal Statistics Service said. That was less than all but one forecast of 22 analysts in a Bloomberg survey, whose median was for a contraction of 2%. The Economy Ministry in Moscow had projected a 1.4% decrease.
Industrial production in Russia increased above market expectations by 0.5 percent year-on-year in April of 2016, following 0.5 percent drop in the previous month, the Federal State Statistics Service said. Manufacturing output rose 0.6 percent and mining and quarrying production went up 1.7 percent while electricity, gas and water declined 4.0 percent. On a monthly basis, industrial output fell 5.6 percent.
Russia`s trade surplus decreased by 51 percent to USD 7.7 billion in March of 2016, from a USD 15.8 billion surplus a year earlier and below market expectations of USD 8.5 billion, the Central Bank of Russia said. Exports fell 30.1 percent and imports went down at a slower 10.6 percent. Exports fell 30.1 percent year-on-year to USD 22.9 billion while imports decreased 10.5 percent to USD 15.2 billion, central bank data showed. The trade surplus with non-CIS countries declined 54.8 percent to USD 5.95 billion and trade surplus with CIS countries fell 33.4 percent to USD 1.76 billion.
Consumer prices in Russia increased 7.3 percent year-on-year in May of 2016, unchanged from the previous two months, staying at the lowest level since April of 2014, the Federal State Statistics Service said. Food and transport prices rose at a faster pace while clothing and footwear growth slowed down. On a monthly basis, prices went up by 0.4 percent.
Unemployment rate in Russia was recorded at 5.9 percent in April of 2016, down from 6.0 percent in the previous month and below market expectations of 6.0 percent. The number of unemployed people decreased by 47 thousand to 4.52 million while economically active increased by 0.2 million to 76.3 million (52 percent of population), the Federal State Statistics Service said.