World Economy Review - July 2016

The International Monetary Fund (IMF) cut its global growth forecasts for the next two years, citing uncertainty over Britain`s looming exit from the European Union. The move included a nearly full percentage-point reduction in the UK`s 2017 growth forecast.

Cutting its World Economic Outlook forecasts for the fifth time in 15 months, the IMF said that it now expects global GDP to grow at 3.1 percent in 2016 and at 3.4 percent in 2017 -- down 0.1 percentage point for each year from estimates issued in April.

The Fund said that despite recent improvements in Japan and Europe and a partial recovery in commodity prices, the UK`s Brexit vote had created a "sizeable increase in uncertainty" that would take its toll on investment and market and consumer confidence.

On the day before Britain`s June 23 EU referendum, the IMF was "prepared to upgrade our 2016-17 global growth projections slightly," IMF chief economist Maury Obstfeld said in a statement. "But Brexit has thrown a spanner in the works."

The IMF said that the impact will hit hardest in Britain itself, where the institution cut its 2016 growth forecast to 1.7 percent, down 0.2 percentage points from its April forecast. It cut the 2017 UK forecast more sharply, by 0.9 percentage points, to 1.3 percent.

The IMF lifted its euro zone forecast slightly for 2016, but cut its 2017 outlook by 0.2 percentage point to 1.4 percent for 2017.

It said last week that Brexit would have a "negligible" impact on the United States.

The IMF noted that its latest forecasts were made under relatively benign assumptions of a settlement between the EU and Britain that leads to limited political fallout, avoids a major increase in economic barriers and prompts no major further financial market disruptions.

But the Fund also modeled other scenarios, including a "severe" one in which the divorce negotiations go badly, financial stress intensifies, the UK-EU trading relationship reverts to World Trade Organization rules, and London loses a large portion of its financial services sector to continental Europe.

Under that scenario, Britain would fall into recession and global growth would slow to 2.8 percent in both 2016 and 2017, the IMF said.

A middle scenario labeled "downside" would see tighter financial conditions and lower consumer confidence than the baseline, with the UK losing some of its financial services sector to Europe. It shows global growth at 2.9 percent in 2016 and 3.1 percent in 2017.

Obstfeld said that the financial market recovery following the initial Brexit shock helped persuade the IMF to go with the most benign of the three scenarios.

Responding to the IMF`s report, a UK Treasury spokeswoman said that the Brexit vote marks a "new phase" for Britain`s economy, but the country would remain globally focused.

"Our absolute priority is to send a clear signal to businesses both here and across the world, that we are open for business and determined to keep Britain an attractive destination for investors from overseas," the spokeswoman said in a statement.

The IMF said China`s outlook was largely unchanged, with a slight improvement to 6.6 percent seen in 2016, but still slowing to 6.2 percent in 2017.

Recessions in Brazil and Russia will be less severe than previously forecast this year due partly to some recovery in oil and commodities prices, the IMF said, adding that both countries will return to positive growth in 2017.

The Fund urged policymakers not to accept the tepid growth rates as a "new normal," and said that they should support demand in the near-term and structural reforms to aid medium-term growth.

The IMF said it had been prepared to raise Japan`s 2017 growth outlook by 0.4 percentage points after the delay of a consumption tax hike next spring, but this has been cut in half by the continued rise in the yen`s value.

It now expects 2016 growth of 0.3 percent compared with 0.5 percent previously, while 2017 growth will be barely in positive territory at 0.1 percent.

Economy of the United States

The US economy grew by 1.2% in the second quarter, weaker than expected, according to an advance estimate. Economists had forecast an improvement in growth from the first quarter to an annualized pace of 2.5%, according to Bloomberg. The big drag on growth was weak business spending, and its impact was bigger than recorded in the first quarter. The decline in company inventories shaved 1.2 percentage points from second-quarter gross domestic product.

Private fixed investment fell at a 3.2% pace, the steepest drop in seven years, Bloomberg noted. Also, nonresidential fixed investment - on factories, machinery, and the like - fell for a third straight quarter, by 2.3%. Consumer spending, however, was strong. Personal-consumption growth in the second quarter jumped to 4.2% from 1.5%, showing that spending remained an important driver of economic growth.

U.S. industrial production rose in June by the largest amount in 10 months, led by a strong rebound in auto production. The Federal Reserve says industrial production increased 0.6 percent last month, the best showing since a similar gain last August. In May industrial production had fallen 0.3 percent.

The key manufacturing sector posted a 0.4 percent rise, reflecting a jump in the output of motor vehicles and parts, which rose by 5.9 percent after having fallen by 4.3 percent in May. Output at the nation`s utilities rose 2.4 percent as electricity production increased as warmer weather than normal boosted demand for air conditioning. Output in the mining sector edged up a tiny 0.2 percent, the second small increase after eight straight monthly declines.

The 0.6 percent June gain in industrial production was stronger than the 0.2 percent increase that many economists had been forecasting. Overall capacity utilization rose to 75.4 percent in June, compared to 74.9 percent in May. At the depths of the Great Recession in 2009, U.S. industry was operating at just 66.7 percent of capacity. Even after seven years of an economic expansion, the 75.4 percent operating rate in June was below the 80 percent average from 1972 through 2015.

The Commerce Department said the U.S. trade deficit jumped 8.7% in June to a 10-month high of $44.5 billion, reflecting the higher cost of oil and more imports of consumer goods such as cellphones and drugs. Economists polled by MarketWatch had expected the trade gap to rise to $43.2 billion from a revised $41 billion in May. U.S. imports increased 1.9% in June to a seasonally adjusted $227.7 billion. U.S. exports edged up 0.3% to $183.2 billion. The U.S. exported less oil and fewer new autos in June.

U.S. consumer prices increased for a fourth straight month in June as Americans paid more for housing, gasoline and health care, pointing to steadily rising inflation pressures. The Labor Department said its Consumer Price Index rose 0.2 percent last month after a similar gain in May. In the 12 months through June, the CPI advanced 1.0 percent, matching May`s increase. The year-on-year increase is below the 1.7 percent average annual increase over the last 10 years. 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, also rose 0.2 percent in June, rising by the same margin for three consecutive months. That lifted the year-on-year core CPI gain to 2.3 percent from 2.2 percent in May. This increase is higher than the average annual rate of 1.9 percent over the past 10 years.

The U.S. added 255,000 jobs in July, according to the monthly report from the Bureau of Labor Statistics; economists had been expecting about 180,000 new jobs. It`s the second month in a row showing job growth significantly stronger than anticipated. The unemployment rate is holding steady at 4.9 percent, and the labor force participation rate ticked up slightly, from 62.7 to 62.8 percent. Average hourly earnings are up 0.3 percent.

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 second 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 first quarter of 2016, GDP grew by 0.6% in the euro area and by 0.5% 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 1.8% in the EU28 in the second quarter of 2016, after +1.7% and +1.8% respectively in the previous quarter.

In May 2016 compared with April 2016, seasonally adjusted industrial production fell by 1.2% in the euro area (EA19) and by 1.1% in the EU28, according to estimates from Eurostat. In April 2016 industrial production rose by 1.4% in the euro area and by 1.5% in the EU28. In May 2016 compared with May 2015, industrial production increased by 0.5% in the euro area and by 1.1% in the EU28.

The decrease of 1.2% in industrial production in the euro area in May 2016, compared with April 2016, is due to production of energy falling by 4.3%, capital goods by 2.3%, durable consumer goods by 1.4%, intermediate goods by 0.4% and non-durable consumer goods by 0.1%. In the EU28, the decrease of 1.1% is due to production of energy falling by 3.3%, capital goods by 2.0%, durable consumer goods by 0.7%, intermediate goods by 0.5% and non-durable consumer goods by 0.3%. Among Member States for which data are available, the largest decreases in industrial production were registered in the Netherlands (-7.8%), Portugal (-4.4%), Greece (-4.3%) and Romania (-4.0%), while increases were recorded in Lithuania (+3.9%), Latvia (+2.4%), Slovenia (+0.6%) and Malta (+0.3%).

The increase of 0.5% in industrial production in the euro area in May 2016, compared with May 2015, is due to production of both intermediate goods and non-durable consumer goods rising by 0.8% and capital goods by 0.3%, while production of energy fell by 1.1% and durable consumer goods by 0.9%. In the EU28, the increase of 1.1% is due to production of non-durable consumer goods rising by 1.5%, capital goods by 1.0% and both intermediate goods and durable consumer goods by 0.8%, while production of energy fell by 2.0%. Among Member States for which data are available, the highest increases in industrial production were registered in Slovakia (+6.0%), Ireland (+5.8%), Latvia (+5.1%) and Slovenia (+5.0%), and the largest decreases in Malta (-3.7%), Bulgaria (-3.3%) and Portugal (-2.4%).

The first estimate for euro area (EA19) exports of goods to the rest of the world in May 2016 was ˆ167.4 billion, an increase of 2% compared with May 2015 (ˆ164.3 bn). Imports from the rest of the world stood at ˆ142.8 bn, a fall of 2% compared with May 2015 (ˆ146.0 bn). As a result, the euro area recorded a ˆ24.6 bn surplus in trade in goods with the rest of the world in May 2016, compared with +ˆ18.3 bn in May 2015. Intra-euro area trade rose to ˆ139.4 bn in May 2016, up by 1% compared with May 2015. These data are released by Eurostat.

The first estimate for extra-EU28 exports of goods in May 2016 was ˆ142.7 billion, down by 2% compared with May 2015 (ˆ145.9 bn). Imports from the rest of the world stood at ˆ136.3 bn, down by 3% compared with May 2015 (ˆ140.1 bn). As a result, the EU28 recorded a ˆ6.4 bn surplus in trade in goods with the rest of the world in May 2016, compared with +ˆ5.8 bn in May 2015. Intra-EU28 trade rose to ˆ252.0 bn in May 2016, +1% compared with May 2015.

Euro area annual inflation is expected to be 0.2% in July 2016, up from 0.1% in June 2016, 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 July (1.4%, compared with 0.9% June), followed by services (1.2%, compared with 1.1% in June), non-energy industrial goods (0.4%, stable compared with June) and energy (-6.6%, compared with -6.4% in June).

The euro area (EA19) seasonally-adjusted unemployment rate was 10.1% in June 2016, stable compared to May 2016 and down from 11.0% in June 2015. This remains the lowest rate recorded in the euro area since July 2011. The EU28 unemployment rate was 8.6% in June 2016, stable compared to May 2016 and down from 9.5% in June 2015. This remains the lowest rate recorded in the EU28 since March 2009. These figures are published by Eurostat.

Eurostat estimates that 20.986 million men and women in the EU28, of whom 16.269 million were in the euro area, were unemployed in June 2016. Compared with May 2016, the number of persons unemployed decreased by 91 000 in the EU28 and by 37 000 in the euro area. Compared with June 2015, unemployment fell by 2.114 million in the EU28 and by 1.363 million in the euro area.

Among the Member States, the lowest unemployment rates in June 2016 were recorded in Malta (4.0%), the Czech Republic (4.1%) and Germany (4.2%). The highest unemployment rates were observed in Greece (23.3% in April 2016) and Spain (19.9%). Compared with a year ago, the unemployment rate in June 2016 fell in twenty-five Member States, remained stable in Belgium and Estonia, while it increased in Austria (from 5.7% to 6.2%). The largest decreases were registered in Cyprus (from 15.1% to 11.7%), Croatia (from 16.2% to 13.2%), Bulgaria (from 9.7% to 7.2%) and Spain (from 22.3% to 19.9%).

Economy of Japan

Japan`s economic growth was expected to slow in the second quarter, weighed down by weak domestic demand and stagnant exports, a Reuters poll found. Weak economic growth would be a setback for Prime Minister Shinzo Abe who said this week that the top priority for his reshuffled cabinet was growing the economy and beating deflation.

Gross domestic product (GDP) was expected to expand at an annualized rate of 0.7 percent in April-June, the poll of 21 analysts showed, following 1.9 percent annualized growth in the first quarter. This would be a quarterly expansion of 0.2 percent after a 0.5 percent rise in January-March.

Industrial output in Japan jumped 1.9 percent on month in June, the Ministry of Economy, Trade and Industry said. That beat forecasts for a gain of 0.5 percent following the 2.6 percent decline in May. On a yearly basis, output slipped 1.9 percent - also exceeding forecasts for -2.9 percent after easing 0.4 percent in the previous month. Industries that mainly contributed to the monthly increase included chemicals, transport equipment and fabricated metals.

Shipments were up 1.2 percent on month in June and down 2.2 percent on year. Industries that contributed to the monthly increase included electronic parts and devices; business oriented machinery; and fabricated metals. Inventories were flat on month and on year. Industries that moved higher included iron and steel; transport equipment; and electrical machinery. Industries that moved lower included business oriented machinery; chemicals; and non-ferrous metals.

In the METI`s survey of production forecast, output is expected to rise 2.4 percent in July and 2.3 percent in August.

Japan`s trade balance turned positive in June, although exports and imports continued to plunge in the latest sign the world`s third largest economy was hampered by weak demand both domestically and internationally.

Exports declined at an annualized rate of 7.4% in June after falling 11.3% the month before, the Ministry of Finance said in a report. A median estimate of economists called for exports to decline 11.6%. Imports plunged 18.8% annually, following a 13.8% annualized drop in May. Economists expected imports to fall 19.7% over a year ago. As a result, the country`s trade balance improved to ¥692.8 billion. The adjusted trade balance was ¥335 billion.

Japan`s national consumer price index (CPI) fell 0.5 percent year-on-year, representing the fourth consecutive month in decline, which adds extra pressure on Japan`s Central Bank (BoJ) to strengthen its stimulus package. The index, which excludes volatile fresh food prices, dropped 0.1 percent compared to May.

The data highlights the current difficulty in achieving a stable inflation of around 2 percent, a target that the Bank of Japan (BoJ) aimed to achieve by activating a large-scale asset purchase program since the spring of 2013.

Its effects have been minimal due to falling oil prices, as shown by figures published today by the Ministry of Internal Affairs and Communications, because CPI in June stood at 0.4 per percent year-on-year, excluding energy costs. The electricity, water bills and fuel costs in June fell 1 percent compared to May and 8.7 percent compared with same month last year.

Japan`s unemployment rate fell to 3.1 percent in June, the lowest level in nearly 21 years, government data showed, highlighting companies` willingness to hire more people in a tight labor market.

The improvement in three months came as separate data showed the country`s job availability improved to 1.37 in June, the best level since August 1991. The ratio means that 137 positions were available for every 100 job seekers.

The unemployment rate for men fell 0.2 percentage points to 3.2 percent, while that for women rose 0.1 point to 3.0 percent. The number of unemployed people increased a seasonally adjusted 1.9 percent to 2.08 million. The number of workers increased 470,000 to 64.56 million. The number of people leaving jobs voluntarily stood at a seasonally adjusted 880,000.

Economy of Russia

Russia`s economy looks poised for returning to growth this year with annual economic contraction slowing sharply in the second quarter, data from the economy ministry showed. Russia`s economy has struggled since 2014, hit by low prices for oil, its key export, and Western sanctions following Moscow`s annexation of Crimea.

The figures reflect a recovery in industrial output and stronger activity in transport and agriculture sectors, the economy ministry said. Retail sales, which mirror consumer demand, and construction activity, however, retained their negative impact on GDP in the second quarter.

Russia`s gross domestic product has fallen by 0.9 percent in the past six months, the country`s Economic Development Ministry reported. Despite a 0.1 percent increase to GDP in June, the first half of 2016 saw an overall decrease. Russia`s Minister of Economic Development Alexei Ulyukayev assured the public earlier this month that the GDP would increase in “the nearest future.” On an annual basis, the Russian economy fell by 0.5% in June - in line with market expectations and against a downwardly revised decline of 0.6% in the previous month.

Industrial production in Russia increased by 1.7 percent year-on-year in June 2016, following 0.7 percent rise in the previous month. It was the strongest growth since December 2014 and above market expectations of 0.6 percent. Manufacturing output rose 1.6 percent, mining and quarrying production went up 1.6 percent and electricity, gas and water grew 2.0 percent. On a monthly basis, industrial output was up 1.6 percent. Industrial Production in Russia is reported by the Federal State Statistics Service.

Russia`s trade balance surplus decreased by 1.93 times in January-May period of 2016 year-on-year to $41.5 bln, the Federal Customs Service reported. Russia`s external turnover plunged by 24.1% in the reporting period to $170.8 bln. Russia`s exports amounted to $106.2 bln in the first five months of 2016, a 30.5% decrease year-on-year, with fuel and energy commodities accounting for 61.6% of the country`s export commodity structure (down from 68.2% in Jan-May 2015). Russia`s imports totaled $64.6 bln in the reporting period, a 10.6% decrease year-on-year.

Russia`s trade surplus decreased sharply to USD 7.5 billion in May 2016, from a USD 15.3 billion surplus a year earlier while above market expectations of USD 7.2 billion. Exports dropped 28.3 percent and imports went down at a slower 5.5 percent.

Russia`s inflation just plunged to its lowest level in over two years. The headline inflation figure fell to 7.2% year-over-year in July, down from 7.5% in June, according to the Federal State Statistics Service. This is the lowest rate since March 2014 and below economists` expectations of a slight dip to 7.4%.

Russian unemployment rate was recorded at 5.4 percent in June of 2016, down from 5.6 percent in the previous month. The figure came well below market expectations of 5.6 percent and was the lowest since September 2015. The number of unemployed people decreased by 126 thousand to 4.17 million while economically active increased by 0.4 million to 76.9 million (52 percent of population).

05.08.2016 18:09:07

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