World Economy Review - March 2018
World trade in goods is maintaining a robust recovery, but it still might falter if trade tensions escalate further, the World Trade Organization said in its annual forecast.
Trade in goods will grow 4.4 percent this year after a decade averaging 3.0 percent a year following the financial crisis. Last year it grew 4.7 percent - much higher than the 3.6 percent forecast in September - and a further 4.0 percent rise is expected in 2019, the WTO said.
“However, this important progress could be quickly undermined if governments resort to restrictive trade policies, especially in a tit-for-tat process that could lead to an unmanageable escalation,” WTO Director-General Roberto Azevedo said in a statement. “A cycle of retaliation is the last thing the world economy needs.”
The United States and China have threatened each other with tens of billions of dollars` worth of tariffs in recent weeks, leading to worries that Washington and Beijing may engage in an all-out trade war.
The WTO`s 2018 forecast puts world trade growth at the top end of previous expectations, since the organization said last September that it expected 2018 growth of 1.4 to 4.4 percent, most likely around 3.2 percent.
The latest forecast raises that to 3.1 to 5.5 percent based on current GDP forecasts, but “a continued escalation of trade restrictive policies could lead to a significantly lower figure,” the WTO said.
“These forecasts do not, and I repeat, they do not factor in the possibility of a dramatic escalation of trade restrictions,” Azevedo told a news conference.
“It is not possible to accurately map out the effects of a major escalation, but clearly they could be serious,” he said. “Poorer countries would stand to lose the most.”
New trade restrictions could trigger cycles of retaliation that weigh on global trade and output, but disruption could equally come from central banks raising interest rates rapidly or from geopolitical tensions, it said.
Cyber attacks were a further risk, with potentially even greater impact on trade in services than trade in goods. Trade in commercial services grew by 7.4 percent in 2017, after two years of weak or negative growth, the WTO said.
Last year`s growth in goods trade was led by Asia, by investment spending and by higher commodity prices. China`s rebalancing away from investment and towards consumption could mean it imports fewer capital goods, putting a drag on world trade growth.
“Less investment could also help reduce overcapacity in sensitive sectors such as steel and aluminum, thereby alleviating trade tensions,” the WTO said.
Steel and aluminum were the targets of one of U.S. President Donald Trump`s three big tariff announcements this year, each more controversial than the one before.
The steel and aluminum tariffs, justified on national security grounds, came soon after a restriction on imports of solar panels and washing machines. They preceded a huge package of tariffs that Trump has proposed to punish China for its alleged theft of U.S. intellectual property.
China`s commerce ministry said that Washington`s attempts at dialogue were not sincere and vowed to retaliate should Trump escalate further.
Economy of the United States
US economic growth slowed less than previously estimated in the fourth quarter as the biggest gain in consumer spending in three years partially offset the drag from a surge in imports.
Gross domestic product expanded at a 2.9 per cent annual rate in the final three months of 2017, instead of the previously reported 2.5 per cent, the Commerce Department said in its third GDP estimate for the period. That was a slight moderation from the third quarter`s brisk 3.2 per cent pace.
The upward revision to the fourth-quarter growth estimate also reflected less inventory reduction than previously reported. Economists polled by Reuters had expected that fourth-quarter GDP growth would be revised up to a 2.7 per cent rate. The economy grew 2.3 per cent in 2017, an acceleration from the 1.5 per cent logged in 2016.
After reporting a modest decrease in U.S. industrial production in the previous month, the Federal Reserve released a report showing a substantial rebound in production in the month of February. The Fed said industrial production surged up by 1.1 percent in February after dipping by a revised 0.3 percent in January.
Economists had expected production to rise by 0.3 percent compared to the 0.1 percent downtick originally reported for the previous month. The bigger than expected rebound in production was partly due to a sharp increase in mining output, which soared by 4.3 percent amid strong gains in oil and gas extraction.
Manufacturing output also surged up by 1.2 percent in February after edging down by 0.2 percent in January, reflecting broad based strength. On the other hand, the Fed said utilities output plunged by 4.7 percent, as warmer-than-normal temperatures reduced the demand for heating.
The report also said capacity utilization in the industrial sector rose to 78.1 percent in February from 77.4 percent in January. Capacity utilization had been expected to inch up to 77.7 percent. While capacity utilization in the utilities sector fell to 76.9 percent, capacity utilization in the manufacturing and mining sectors rose to 76.9 percent and 87.6 percent, respectively.
The U.S. trade deficit increased to a near 9½-year high in February as both exports and imports rose to record highs, but the shortfall with China narrowed sharply. The Commerce Department said the trade gap rose 1.6 percent to $57.6 billion. That was the highest level since October 2008 and followed a slightly downwardly revised $56.7 billion shortfall in January. The deficit has now risen for six straight months. The goods trade deficit was the highest since July 2008 and the surplus on services was the lowest since December 2012.
Overall, February imports were $262bn, rising 1.7% from January amid ramped up spending on items such as civilian aircraft, computers and food. Exports also rose 1.7%, reaching $204.4bn over the month, driven by sales of oil and natural gas and automotive vehicles.
Consumer prices rose 0.2 percent in February, in line with expectations and likely alleviating concerns that inflation is about to accelerate, according to the Labor Department. On a year-over-year basis, the consumer price index rose 2.2 percent, a bit ahead of the 2.1 percent increase reported in January.
Excluding volatile food and energy prices, the CPI was up 0.2 percent for the month and 1.8 percent annualized, unchanged from a month ago.
U.S. employers added a modest 103,000 jobs in March after several months of bigger gains, though the government`s jobs report suggests the labor market remains healthy. The Labor Department says the unemployment rate remained 4.1 percent, a 17-year low, for the sixth straight month. Average hourly pay ticked up, climbing 2.7 percent compared with a year earlier.
Hiring has accelerated since last fall, defying expectations that a shortage of workers would make it harder for companies to fill open positions. Employers have added a healthy average of 211,000 jobs a month in the past six months. Still, hiring in January was revised sharply lower to 176,000, while February`s figure was revised higher to a blockbuster 326,000. Overall, the revisions lowered job gains in those two months by 50,000.
Economy of the European Union
Seasonally adjusted GDP rose by 0.6% in both the euro area (EA19) and the EU28 during the fourth quarter of 2017, compared with the previous quarter, according to an estimate published by Eurostat. In the third quarter of 2017, GDP grew by 0.7% in both zones.
Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.7% in the euro area and by 2.6% in the EU28 in the fourth quarter of 2017, after +2.7% in both zones in the previous quarter.
Over the whole year 2017, GDP rose by 2.3% in the euro area and by 2.4% in the EU28, compared with 1.8% and 2.0% respectively in 2016.
In January 2018 compared with December 2017, seasonally adjusted industrial production fell by 1.0% in the euro area (EA19) and by 0.7% in the EU28, according to estimates from Eurostat. In December 2017, industrial production rose by 0.4% in the euro area and by 0.3% in the EU28. In January 2018 compared with January 2017, industrial production increased by 2.7% in the euro area and by 3.0% in the EU28.
The first estimate for euro area (EA19) exports of goods to the rest of the world in January 2018 was ˆ178.6 billion, an increase of 9.1% compared with January 2017 (ˆ163.7 bn). Imports from the rest of the world stood at ˆ175.4 bn, a rise of 6.3% compared with January 2017 (ˆ165.0 bn). As a result, the euro area recorded a ˆ3.3 bn surplus in trade in goods with the rest of the world in January 2018, compared with a deficit of ˆ1.4 bn in January 2017. Intra-euro area trade rose to ˆ159.8 bn in January 2018, up by 8.8% compared with January 2017.
Euro area annual inflation is expected to be 1.4% in March 2018, up from 1.1% in February, according to a flash estimate from Eurostat.
The first estimate for extra-EU28 exports of goods in January 2018 was ˆ150.5 billion, up by 6.5% compared with January 2017 (ˆ141.3 bn). Imports from the rest of the world stood at ˆ170.8 bn, up by 7.6% compared with January 2017 (ˆ158.7 bn). As a result, the EU28 recorded a ˆ20.3 bn deficit in trade in goods with the rest of the world in January 2018, compared with -ˆ17.4 bn in January 2017. Intra-EU28 trade rose to ˆ288.2 bn in January 2018, +9% compared with January 2017.
Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in March (2.2%, compared with 1.0% in February), followed by energy (2.0%, compared with 2.1% in February), services (1.5%, compared with 1.3% in February) and non-energy industrial goods (0.2%, compared with 0.6% in February).
The euro area (EA19) seasonally-adjusted unemployment rate was 8.5% in February 2018, down from 8.6% in January 2018 and from 9.5% in February 2017. This is the lowest rate recorded in the euro area since December 2008. The EU28 unemployment rate was 7.1% in February 2018, down from 7.2% in January 2018 and from 8.0% in February 2017. This is the lowest rate recorded in the EU28 since September 2008. These figures are published by Eurostat.
Eurostat estimates that 17.632 million men and women in the EU28, of whom 13.916 million in the euro area, were unemployed in February 2018. Compared with January 2018, the number of persons unemployed decreased by 201 000 in the EU28 and by 141 000 in the euro area. Compared with February 2017, unemployment fell by 1.968 million in the EU28 and by 1.436 million in the euro area.
Economy of Japan
Japan`s economy expanded more than initially estimated in October-December due to an upward revision of capital expenditure and inventory data, confirming an eighth consecutive quarter of growth.
The economy grew an annualised 1.6 percent in October-December, versus economists` median estimate for 0.9 percent annualised growth and the preliminary reading of a 0.5 percent expansion, Cabinet Office data showed.
It marked the longest uninterrupted expansion since a 12-quarter run of growth between April-June 1986 and January-March 1989 during Japan`s asset-inflated bubble economy, a good omen for sustainable growth.
Japan`s industrial production rebounded in February from a large decline in the previous month and companies forecast further gains in coming months in a sign that factory output is back on the path toward expansion.
Factory output rose 4.1 percent in February from the previous month, less than economists` median estimate of a 5.0 percent increase but recovering from a revised 6.8 percent decline in January, trade ministry data showed.
The increase was led by higher output of cars, construction equipment, and semiconductors. Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to rise 0.9 percent in March and increase 5.2 percent in April.
Japan achieved a trade surplus of 3.4 billion yen ($32 million) in February, the government said. The surplus was the ninth consecutive month with a positive balance for the world`s third largest economy, although it contrasts with the surplus of 804.52 billion yen recorded in February 2017, according to data published by the Ministry of Finance.
Exports grew 1.8 per cent year-on-year to 6.46 trillion yen, and imports rose by 16.5 per cent to 6.45 trillion yen.
Japan`s key measure of consumer inflation rose in February in line with forecasts but is still halfway off the Bank of Japan`s target level. The core consumer price index, which strips out fresh food prices but leaves in fuel costs, notched a year-on-year rise of 1 per cent, according to Japan`s Statistics Bureau, matching a forecast from economists polled by Reuters and up slightly from 0.9 per cent in January.
Headline inflation rose 1.5 per cent year on year, up from 1.4 per cent a month earlier, while core-core inflation - excluding both fresh food and fuel and energy costs – edged higher to 0.5 per cent, up from 0.4 per cent in January.
Japan`s unemployment rate increased in February, the government said in a report. According to the Ministry of Internal Affairs and Communications, the unemployment rate rose to 2.5 percent in the recording month, marking the first rise in nine months.
Separately, the Ministry of Health, Labor and Welfare said that job availability in Japan stood at 1.58, dropping from 1.59 in January. This translates to there being 158 job openings for every 100 workers. The latest job availability figure marks the first decline since September 2012, the ministry`s data showed.
Amid a tight labor market, the jobless rate in the recording month was at its lowest level since April 1993, with the rate for men up 0.1 percentage point from January to 2.6 percent and that for females up 0.1 point to 2.3 percent, the government`s data showed.
On a seasonally adjusted basis, the number of unemployed people rose by 90,000 to 1.69 million in Japan, with people leaving their jobs of their own volition contributing significantly to this number, the ministry also said.
Economy of Russia
Russia`s gross domestic product grew 0.9 percent in the final quarter of 2017 in year-on-year terms, the state statistics service said, citing preliminary data. It also revised its third-quarter GDP growth estimate to 2.2 percent from the 1.8 percent reported earlier.
Russia`s industrial production increased by 1.5 percent year-on-year in February 2018, easing from a 2.9 percent growth in the previous month and missing market expectations of 2 percent. Output rose at a softer pace for both manufacturing (1.9 percent vs 4.7 percent in January) and extraction of raw materials (0.3 percent vs 1.1 percent). On the other hand, production and distribution of electricity, gas rebounded 1.8 percent (vs -2.2 percent in January) and distribution of water, sewage grew 1.4 percent (vs -4.6 percent in January). On a monthly basis, industrial output fell 2 percent.
Russia`s trade surplus widened by 43.9 percent to USD 16.99 billion in January 2018 from USD 11.81 billion in the same month a year earlier and above market expectations of USD 14.45 billion. It was the largest trade surplus since July 2014, as exports jumped 31.3 percent to USD 33.40 billion while imports rose at a softer 20.4 percent to USD 16.41 billion.
Russia`s consumer price inflation increased to 2.4 percent year-on-year in March 2018 from a record low of 2.2 percent in the previous month and in line with market expectations. Prices rose at a faster pace for both food and services. Still, inflation remained well below the central bank`s target of 4 percent. The Consumer Price Index in Russia increased 0.30 percent in March of 2018 over the previous month.
Russian unemployment rate fell to 5 percent in February 2018 from 5.6 percent in the same month of the previous year, beating market expectations of 5.2 percent. The number of unemployed people declined by 423 thousand to 3.808 million.