World Economy Review - June 2016

The World Bank is reducing its forecast for the global economy this year - again. The aid agency predicted that the world economy will expand 2.4 percent this year, down from the 2.9 percent it expected in January and unchanged from a tepid 2015.

“The global economy is fragile,” said World Bank economist Ayhan Kose, who helped produce the forecast. “Growth is weak.”

In the years since the world began recovering from the 2008 financial crisis, the World Bank and the International Monetary Fund have repeatedly proved too optimistic about the world economy and have had to downgrade their previous forecasts.

The World Bank`s latest 2016 forecast is more pessimistic than the IMF`s outlook for 3.2 percent global growth this year, a projection made in April.

Since then, it`s become clearer that low commodity prices continue to vex many developing countries whose economies depend on exports of those commodities. And advanced economies are still struggling to gain momentum as they contend with aging workforces and lackluster productivity growth.

The World Bank expects the U.S. economy to grow 1.9 percent this year, down from 2.4 percent in 2015. The downgrade for the United States reflects a weak first quarter: Growth from January through March reached a negligible 0.8 percent annual rate. U.S. manufacturers have been especially hurt by a strong dollar, which has made their goods more expensive overseas.

The bank expects developing and emerging market economies as a group to grow 3.5 percent this year, down from the 4.1 percent it forecast in January and barely changed from last year`s 3.4 percent.

World Bank economists are drawing a distinction between emerging market countries that export commodities and those that import them.

The exporters, crushed by tumbling prices of oil and other commodities, collectively grew just 0.2 percent last year and are expected to expand 0.4 percent in 2016. The importers, which benefit from lower raw materials prices, are still growing at healthy rates - 5.9 percent last year and a predicted 5.8 percent this year.

Latin America has been particularly hard hit. The World Bank predicts that the region`s economy will shrink 1.3 percent this year after sliding 0.7 percent in 2015. Brazil, mired in political scandal, is expected to suffer a 4 percent economic contraction in 2016 after shrinking 3.8 percent last year.

The 19 countries that use the euro - the Eurozone - will grow 1.6 percent, the same as last year, the World Bank says. Eurozone growth has been constrained by the weakness of European banks, which are still saddled with bad debt and aren`t making many new loans.

Japan will expand 0.5 percent, a bit slower than last year, the World Bank predicts. Prime Minister Shinzo Abe`s aggressive plans to rejuvenate growth - partly through the Bank of Japan`s easy-money policies - have had only mixed results so far.

The World Bank left its forecast for China`s economic growth unchanged at 6.7 percent. The Chinese economy, the world`s second-biggest, has been decelerating for six years as Beijing has sought to move away from dependence on investment in factories and real estate toward slower but steadier growth built on consumer spending.

Economy of the United States

U.S. economic growth slowed in the first quarter but not as sharply as previously estimated, with gains in exports and investment in software partially offsetting weak consumer spending. Gross domestic product increased at a 1.1 percent annual rate, rather than the 0.8 percent pace reported last month, the Commerce Department said in its third GDP estimate. First-quarter GDP growth has now be revised higher by six-tenths of a point since the advance estimate was published in April. The economy grew at a rate of 1.4 percent in the fourth quarter. Economists polled by Reuters had expected first-quarter GDP growth would be revised up to a 1.0 percent rate.

U.S. industrial production fell more than expected in May on a decline in utilities output and auto manufacturing, the Federal Reserve said, a sign that the economy may be losing some steam in the second quarter. Industrial output declined 0.4 percent last month after a downwardly revised 0.6 percent increase in April. Economists polled by Reuters had forecast industrial production slipping 0.2 percent in May.

Last month, manufacturing output fell 0.4 percent and the output of consumer goods declined 0.7 percent. A 2.2 percent drop in consumer durables reflected fewer automotive products but also declines for home electronics, appliances and furniture, the Fed said. Business equipment spending also faltered, down 0.7 percent.

The index for utilities fell 1.0 percent. Mining rose 0.2 percent due to a ramping up in coal mining while oil and gas extraction was little changed. With overall output decreasing, the percentage of industrial capacity in use fell 0.4 percentage points in May to 74.9 percent, from a downwardly revised 75.3 percent in April.

The US trade deficit grew more than expected in May as imports jumped and exports slipped, and the gap with China widened sharply, government data showed. The country`s chronically deficit trade balance with the rest of the world climbed 10.1 percent in May to a seasonally adjusted $41.1 billion, the largest month-over-month increase since July 2015. Analysts had expected a smaller 7.0 percent rise from April`s $37.4 billion shortfall.

Exports fell a modest 0.2 percent to $182.4 billion, led by a drop in capital goods as foreign businesses cut back spending on assets such as US machinery and equipment. In May, US goods exports notably sagged for civilian aircraft, down 7.5 percent, and motor vehicles, off 2.3 percent. Imports leaped 1.6 percent to $223.5 billion, almost entirely due to an increase in imports of goods such as industrial supplies, up 7.1 percent, and consumer goods, including mobile phones, up 2.9 percent. Meanwhile, imports of services reached an all-time high of $41.4 billion.

U.S. consumer prices moderated in May, but sustained increases in housing and health care costs kept underlying inflation supported, which could allow the Federal Reserve to raise interest rates this year. The Labor Department said its Consumer Price Index increased 0.2 percent in May after rising 0.4 percent in April. In the 12 months through May, the CPI advanced 1.0 percent after rising 1.1 percent in April.

Economists had forecast the CPI gaining 0.3 percent last month 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 a similar gain in April. That took the year-on-year core CPI rise to 2.2 percent from 2.1 percent in April.

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 April 2016 compared with March 2016, seasonally adjusted industrial production rose by 1.1% in the euro area (EA19) and by 1.3% in the EU28, according to estimates from Eurostat. In March 2016 industrial production fell by 0.7% in the euro area and by 0.5% in the EU28. In April 2016 compared with April 2015, industrial production increased by 2.0% in the euro area and by 2.5% in the EU28.

The first estimate for euro area (EA19) exports of goods to the rest of the world in April 2016 was ˆ172.3 billion, a decrease of 1% compared with April 2015 (ˆ173.9 bn). Imports from the rest of the world stood at ˆ144.8 bn, a fall of 5% compared with April 2015 (ˆ153.0 bn). As a result, the euro area recorded a ˆ27.5 bn surplus in trade in goods with the rest of the world in April 2016, compared with +ˆ20.9 bn in April 2015. Intra-euro area trade rose to ˆ142.8 bn in April 2016, up by 1% compared with April 2015. These data are released by Eurostat.

The first estimate for extra-EU28 exports of goods in April 2016 was ˆ146.9 billion, down by 6% compared with April 2015 (ˆ155.7 bn). Imports from the rest of the world stood at ˆ141.3 bn, down by 4% compared with April 2015 (ˆ147.5 bn). As a result, the EU28 recorded a ˆ5.6 bn surplus in trade in goods with the rest of the world in April 2016, compared with +ˆ8.2 bn in April 2015. Intra-EU28 trade rose to ˆ260.9 bn in April 2016, +2% compared with April 2015.

Euro area annual inflation is expected to be 0.1% in June 2016, up from -0.1% in May 2016, 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 June (1.1%, compared with 1.0% in May), followed by food, alcohol & tobacco (0.9%, stable compared with May), non-energy industrial goods (0.4%, compared with 0.5% in May) and energy (-6.5%, compared with -8.1% in May).

The euro area (EA19) seasonally-adjusted unemployment rate was 10.1% in May 2016, down from 10.2% in April 2016 and from 11.0% in May 2015. This is the lowest rate recorded in the euro area since July 2011. The EU28 unemployment rate was 8.6% in May 2016, down from 8.7% in April 2016 and from 9.6% in May 2015. This is the lowest rate recorded in the EU28 since March 2009. These figures are published by Eurostat.

Eurostat estimates that 21.084 million men and women in the EU28, of whom 16.267 million were in the euro area, were unemployed in May 2016. Compared with April 2016, the number of persons unemployed decreased by 96 000 in the EU28 and by 112 000 in the euro area. Compared with May 2015, unemployment fell by 2.166 million in the EU28 and by 1.440 million in the euro area.

Economy of Japan

Japan`s gross domestic product was revised up to 0.5 percent on quarter in the first three months of 2016, the Cabinet Office said. That was in line with expectations following last month`s preliminary reading for a 0.4 percent gain. That followed the 0.4 percent contraction in the previous three months.

On a yearly basis, GDP was revised up to 1.9 percent - again in line with expectations and up from 1.7 percent in the preliminary reading. It contracted 1.1 percent in the previous three months. Nominal GDP was revised up to 0.6 percent on quarter, matching forecasts and up from 0.5 percent.

Japan`s industrial production declined more than economists forecast as a drop in exports hit most of the country`s manufacturing sectors. Output declined 2.3 percent in May from April when it rose 0.5 percent, the trade ministry reported. The median forecast of economists surveyed by Bloomberg was for a 0.2 percent drop, and the slump was bigger than all but one of the estimates.

Overall production of transportation equipment gained 0.7 percent as output of passenger cars rose, offsetting a decline in production of minicars. Output of the smaller vehicles dropped 11.8 percent in May from the previous month according to the ministry, with sales slumping 14.3 percent from a year earlier because of scandals surrounding fuel-economy tests.

Output is forecast to rise 1.7 percent in June, and then climb 1.3 percent in July, according to the trade ministry`s report.

Japan posted a goods trade deficit of ¥40.7 billion in May for the first red ink in four months, the government said, with the balance weighed down by sluggish exports amid a slowdown in overseas economies.

The value of exports dropped 11.3 percent from a year earlier to ¥5.09 trillion, down for the eighth straight month, led by declines in steel exports to the United States as well as smaller shipments of semiconductors and other electronic parts.

Imports plunged 13.8 percent to ¥5.13 trillion for the 17th consecutive monthly fall, as the value of crude oil imports plunged 30.6 percent, the Finance Ministry said in a preliminary report. The deficit compares to a deficit of ¥215.3 billion a year earlier.

Japan`s core consumer prices fell for a third straight month in May, dealing a fresh blow to the country`s faltering war on deflation, data showed. The Internal Affairs Ministry announced that core consumer prices, which exclude volatile fresh food prices, dropped 0.4 percent in May, on the heels of a similar decline the previous month. The result matched the average 0.4 percent drop expected by economists, according to the Nikkei business daily.

Japan`s seasonally adjusted unemployment rate was unchanged from the previous month at 3.2 per cent in May, data by the Ministry of Internal Affairs and Communications showed. It was also in line with the median estimate from a Reuters poll of economists. The jobs-applicants ratio rose to 1.36 in May from 1.34 in April, separate data by the labour ministry showed. The median estimate was for 1.35.

Economy of Russia

Russia`s gross domestic product fell by 0.8 percent year-on-year in May, Economy Minister Alexei Ulyukayev said, compared to a 0.7 percent fall in the previous month. The GDP contraction was smaller than the 1.1 percent decline analysts polled by Reuters had forecast. Russian GDP fell by 0.1 percent in month-on-month terms in May.

Russia`s industrial output in May increased by 0.7% y/y, continuing the modest positive trend seen in April when the indicator gained 0.5% y/y, according to data of the Rosstat. In m/m seasonally adjusted terms, the holiday-packed month of May saw a 0.3% slip in output.

In January-May, industrial output already beat the Ministry of Economic Development`s expectation of zero growth for 2016 overall, posting 0.1% y/y increase and rebounding from 0.6% y/y decline seen previously in the first quarter.

The 0.7% y/y output growth figure was in line with UralSib Capital`s expectations, while consensus forecasts compiled by Interfax and Bloomberg had both expected 0.8% y/y growth.

Notably, manufacturing gains continued after posting y/y growth for the first time in over 15 months in April. In May, the sector inched up by 0.3% y/y versus 0.6% y/y seen in April. Meanwhile, the main driver of industrial output growth in May was the utilities segment: growth in utilities accelerated to 2.1% y/y from a 4% y/y drop in April, bringing the sector to 0.1% y/y growth in January-March overall.

Russia`s trade balance surplus has decreased 48.9% to $38.5 bln in Jan-May 2016, runs the January-May 2016 monitoring released by the Economic Development Ministry.

Export of goods amounted to $106.1 bln in the reporting period, a 30% decrease compared with January-May 2015 while import of goods stood at $67.5 bln, an 11.3% decrease year-on-year, the ministry said. Exports to non-CIS countries dropped by 30.3% in January-May 2016 year-on-year to $91 bln while exports to CIS-countries plunged by 28.2% to $15.1 bln. Imports from non-CIS countries went down by 10.6% in January-May 2016 year-on-year to $60.1 bln while imports from CIS countries decreased by 16.3% to $7.4 bln.

The unemployment rate in Russia fell more-than-expected 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 5.6%, from 5.9% in the preceding month. Analysts had expected Russian Unemployment Rate to fall to 5.8% last month.

Russia`s monthly inflation was 0.4 percent in June and the year-on-year rate for the last 12 months reached 7.5 percent, the Rosstat said. In May, monthly inflation was 0.3 percent and year-on-year rate for the last 12 months was 7.3 percent.

The annual rate will be probably decreased to 6.3-6.5 percent by the end of 2016, said Alexey Vedev, deputy minister for economic development. According to official forecasts by the ministry, Russia`s inflation rate will slow down to 6.5 percent this year, and go down to 4 percent by the end of 2019.

06.07.2016 17:58:33

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