World Economy Review - July 2019
A sharp deceleration of global trade driven by ongoing trade tensions is slowing the global economy more than earlier projections, according to the latest forecasts of the International Monetary Fund.
Real global economic growth will slow to 3.2% this year, 0.1 percentage point slower than forecast in April, and down from 3.6% last year and 3.8% in 2017, according to the quarterly update to the IMF`s flagship World Economic Outlook.
The slowdown in growth and downgrade in the forecast reflect the ongoing fallout from trade tensions. Since the IMF`s last round of forecasts in April, three more months of data have confirmed weaker growth in much of the world, while tariffs escalated between the U.S. and China during a two-month breakdown in negotiations.
Global trade has decelerated rapidly during the ongoing trade tensions. The IMF now projects world trade will grow 2.5% in 2019, a downgrade of nearly a full percentage point in the forecast since April. Earlier forecasts had anticipated a slowdown, but not this sharp. As recently as 2017, global trade in goods and services was growing at a robust 5.5%.
“Global growth is sluggish and precarious, but it does not have to be this way because some of this is self-inflicted,” said Gita Gopinath, the IMF`s chief economist.
“Dynamism in the global economy is being weighed down by prolonged policy uncertainty as trade tensions remain heightened despite the recent U.S.-China trade truce,” she said, referring to an agreement in late June between President Trump and China`s President Xi Jinping to return to negotiations after two months of escalating tariffs.
She also cited risks to the economy from tensions over technology companies, and the prospect of a disorderly Brexit if the U.K. leaves the European Union without agreeing to a deal with the bloc.
The downgrades in growth were largely concentrated in emerging markets, with growth in India down 0.3 percentage points from earlier forecasts, Russia down 0.4 points, Mexico down 0.7 points and Brazil down 1.3 points.
Advanced economies fared relatively better in this round of forecasts. The U.S. and euro area are expected to grow more slowly than in 2018, but the U.S. slowdown is now forecast to be less pronounced than in the April round of forecasts while Europe`s outlook was unchanged.
The IMF`s outlook, which now reflects data through mid-July, adds to evidence that trade tensions are continuing to ripple around the world.
A separate report from the World Trade Organization, released on Monday, showed the extent to which trade protectionism has continued to increase. The WTO said in its mid-year monitoring report that, since October, trade restrictions were applied to approximately $340 billion a year of trade.
Those new trade restrictions were the second-highest figure on record, surpassed only by the $588 billion in restrictions reported in its previous monitoring report. “Together, these two periods represent a dramatic spike in the trade coverage of import-restrictive measures,” said the WTO, which counts tariffs, import bans, special safeguards, import taxes and export duties among the restrictions that it tracks.
Economy of the United States
Growth decelerated in the second quarter, but not by as much as Wall Street thought, as tariffs and a global slowdown weighed on the U.S. economy, the Commerce Department reported.
GDP increased 2.1%, down from the first quarter`s 3.1% and the weakest increase since Q1 of 2017 when President Donald Trump took office. Dow Jones Q2 estimates were for 2% growth.
Consumer and government spending helped propel GDP in the April-to-June period, while a pullback in business investment weighed on the number. Personal consumption expenditures rose 4.3%, the best performance since the fourth quarter of 2017. Government consumption expenditures and gross investment rose 5%, the fastest pace since Q2 of 2009 as the economy was coming out of the Great Recession.
At the same time, gross private domestic investment tumbled 5.5%, the worst since Q4 in 2015 as spending on structures slumped 10.6%. The decline pulled a full percentage point from the final GDP number. Falling inventories also acted as a 0.86 percentage point drag.
Industrial production fell 0.2% in July, the second drop in the past four months, the Federal Reserve reported. Wall Street economists had forecast a 0.2% gain, according to a MarketWatch survey. June output was revised to a 0.2% gain from the initial reading of flat activity, but output in April and May was revised down slightly. Industrial output is only up 0.5% on a year-on-year basis.
Manufacturing fell 0.4% in July, with broad based declines across durable and non-durable good sectors. The only sizable gains were in aerospace and miscellaneous transportation equipment. Auto production slipped 0.2% after a 2.5% gain in June.
Capacity utilization fell to 77.5% in July, the lowest rate since October 2017. The capacity utilization rate reflects the limits to operating the nation`s factories, mines and utilities. It`s still below pre-2008 recession levels, above 80%, that could fan production costs and prices.
The Commerce Department said the trade deficit slipped 0.3% to $55.2 billion. Data for May was revised slightly to show the trade gap widening to $55.3 billion instead of the previously reported $55.5 billion. Economists polled by Reuters had forecast the trade gap would shrink to $54.6 billion in June.
In June, goods imports fell 2.2% to $212.3 billion. Imports of consumer goods fell $0.9 billion, pulled down by a $1.4 billion drop in imports of cellphones. Crude oil imports declined $1.4 billion, reflecting cheaper oil. Goods exports fell 2.8% to $137.1 billion. Exports of consumer goods fell $1.9 billion. There were also decreases in exports of capital goods and motor vehicles.
U.S. consumer prices rose 0.3% in July, pushed higher by more expensive gas, medical care and housing. The consumer price index increased 1.8% compared with a year earlier, up from 1.6% in June, the Labor Department said. Excluding the volatile food and energy categories, core prices moved up 0.3% in July and 2.2% from a year ago.
While last month`s price gains were modest, they were widespread. Clothing prices increased 0.4%, used car and truck prices moved up 0.9%, and prescription drug costs rose 0.4%. Airline fares jumped 2.3%. Rents rose 0.3% and are up 3.5% in the past year. Hotel stays have gotten 4.6% more expensive in the past year. There are some signs higher wages may be having an effect. The cost of housing operations, such as cleaning, landscaping and moving, jumped 5.4% in the past year.
U.S. employers slowed their hiring in July but still added a solid 164,000 jobs to an economy that appears poised to extend its decade-long expansion. The unemployment rate remained at 3.7% for a second straight month, the Labor Department said. Average hourly earnings rose 3.2% from a year ago, up from a 3% year-over-year gain in June.
Economy of the European Union
Seasonally adjusted GDP rose by 0.2% in both the euro area (EA19) and in the EU28 during the second quarter of 2019, compared with the previous quarter, according to a flash estimate published by Eurostat, the statistical office of the European Union. In the first quarter of 2019, GDP had grown by 0.4% 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 1.1% in the euro area and by 1.3% in the EU28 in the second quarter of 2019, after +1.2% and +1.6% respectively in the previous quarter.
In June 2019 compared with May 2019, seasonally adjusted industrial production fell by 1.6% in the euro area (EA19) and by 1.5% in the EU28, according to estimates from Eurostat. In May 2019, industrial production rose by 0.8% in the euro area and by 0.9% in the EU28.
In June 2019 compared with June 2018, industrial production decreased by 2.6% in the euro area and by 1.9% in the EU28.
In the euro area in June 2019, compared with May 2019, production of capital goods fell by 4.0%, non-durable consumer goods by 2.8%, durable consumer goods by 1.2%, intermediate goods by 0.8% and energy by 0.2%. In the EU28, production of capital goods fell by 3.5%, non-durable consumer goods by 2.2%, durable consumer goods by 1.4%, intermediate goods by 0.9% and energy by 0.4%.
Among Member States for which data are available, the largest decreases in industrial production were registered in Ireland (-8.8%), Denmark (-7.6%) and Portugal (-4.5%). The highest increases were observed in Lithuania and Malta (both +1.8%) and Latvia (+1.5%).
In the euro area in June 2019, compared with June 2018, production of capital goods fell by 4.4%, intermediate goods by 2.6%, durable consumer goods by 1.0% and energy by 0.1%, while production of non-durable consumer goods rose by 0.1%. In the EU28, production of capital goods fell by 3.7%, intermediate goods by 2.0% and durable consumer goods by 0.5%, while production of non-durable consumer goods rose by 0.2% and energy by 0.6%.
Among Member States for which data are available, the largest decreases in industrial production were registered in Germany (-6.2%), Croatia and Portugal (both -5.6%). The highest increases were observed in Estonia (+7.4%), Latvia (+4.4%), Denmark (+4.2%) and Hungary (+4.1).
The first estimate for euro area (EA19) exports of goods to the rest of the world in June 2019 was ˆ189.9 billion, a decrease of 4.7% compared with June 2018 (ˆ199.3 bn). Imports from the rest of the world stood at ˆ169.3 bn, a fall of 4.1% compared with June 2018 (ˆ176.6 bn). As a result, the euro area recorded a ˆ20.6 bn surplus in trade in goods with the rest of the world in June 2019, compared with +ˆ22.6 bn in June 2018. Intra-euro area trade fell to ˆ160.5 bn in June 2019, down by 6.6% compared with June 2018.
The first estimate for extra-EU28 exports of goods in June 2019 was ˆ164.5 billion, down by 4.4% compared with June 2018 (ˆ172.1 bn). Imports from the rest of the world stood at ˆ158.3 bn, down by 4.2% compared with June 2018 (ˆ165.2 bn). As a result, the EU28 recorded a ˆ6.1 bn surplus in trade in goods with the rest of the world in June 2019, compared with +ˆ7 bn in June 2018. Intra-EU28 trade fell to ˆ288.8 bn in June 2019, -6.4% compared with June 2018.
Euro area annual inflation is expected to be 1.1% in July 2019, down from 1.3% in June 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 (2.0%, compared with 1.6% in June), followed by services (1.2%, compared with 1.6% in June), energy (0.6%, compared with 1.7% in June) and non-energy industrial goods (0.4%, compared with 0.3% in June).
The euro area (EA19) seasonally-adjusted unemployment rate was 7.5% in June 2019, down from 7.6% in May 2019 and from 8.2% in June 2018. This is the lowest rate recorded in the euro area since July 2008. The EU28 unemployment rate was 6.3% in June 2019, stable compared with May 2019 and down from 6.8% in June 2018.
This remains the lowest rate recorded in the EU28 since the start of the EU monthly unemployment series in January 2000. These figures are published by Eurostat, the statistical office of the European Union.
Eurostat estimates that 15.674 million men and women in the EU28, of whom 12.377 million in the euro area, were unemployed in June 2019. Compared with May 2019, the number of persons unemployed decreased by 36 000 in the EU28 and by 45 000 in the euro area. Compared with June 2018, unemployment fell by 1.205 million in the EU28 and by 1.032 million in the euro area.
Among the Member States, the lowest unemployment rates in June 2019 were recorded in Czechia (1.9%) and Germany (3.1%). The highest unemployment rates were observed in Greece (17.6% in April 2019) and Spain (14.0%).
Economy of Japan
The world`s third-largest economy after the U.S. and China expanded at an annualized rate of 1.8% during the quarter. Economists had expected 0.4% growth. It followed a 2.8% expansion in the previous quarter--which is an upward revision from earlier results.
The April-June results were led by solid private consumption, which accounts for more than half of gross domestic product. Spending increased 0.6% on quarter as consumers rushed to buy big-ticket items such as cars and air conditioners before the national consumption tax is raised in October to 10% from 8%. A 10-day holiday to celebrate the enthronement of Emperor Naruhito also boosted consumption.
Capital expenditures rose 1.5% in the second quarter compared with the previous quarter as companies continued to make labor-saving investments, while exports declined 0.1% amid slowdowns in China and other Asian countries.
Japan`s industrial output in June fell 3.6 percent from the previous month, government data showed. The seasonally adjusted index of production at factories and mines stood at 101.1 against the 2015 base of 100, the Ministry of Economy, Trade and Industry said in a preliminary report. The result followed a 2.0 percent increase in May.
The index of industrial shipments fell 3.3 percent to 100.6 while that of inventories was up 0.3 percent at 104.6. Based on a poll of manufacturers, the ministry expects output to climb 2.7 percent in July and increase 0.6 percent in August.
Japan`s trade surplus narrowed to JPY 589 billion in June 2019 from JPY 728 billion in the same month a year earlier and compared to market expectations of a JPY 420 billion surplus. Exports declined for a seventh straight month while imports fell for the second month in a row.
Exports fell 6.7 percent from a year earlier to JPY 6.58 trillion, compared to market consensus of a 5.6 percent drop and May`s 7.8 percent fall. It was the seventh straight month of declines in shipments, amid weakening global demand and the US-China trade dispute.
Imports declined 5.2 percent to JPY 6.00 trillion, compared to market expectations of a 0.4 percent decline and following a 1.5 percent drop in the previous month.
Japan`s core consumer prices rose in June from a month earlier, the government said in a report. According to the Ministry of Internal Affairs and Communications, Japan`s core consumer prices rose 0.6 percent from a year earlier in the reporting month. The core consumer price index, excluding volatile fresh food prices, increased for the 30th straight month, the statistics bureau said. The latest rise follows a 0.8 percent increase in May, the data showed.
Japan unemployment rate came in at a seasonally adjusted 2.3 percent in June, the Ministry of Internal Affairs and Communications said on Tuesday. That was beneath expectations for 2.4 percent, which would have been unchanged from the May reading. The job-to-applicant ratio was 1.61, below forecasts for 1.62, which again would have been unchanged. The participation rate was 62.3 percent. The number of employed persons in June 2019 was 67.47 million, an increase of 600,000 or 0.9 percent on year.
Economy of Russia
Russian economic growth picked up to 0.9% in the second quarter of 2019 in year-on-year terms from 0.5% in the first three months of the year, the Federal Statistics Service said, citing preliminary data. The Russian central bank said in late July it expected gross domestic product to grow at 0.5-1.0% in the second quarter, before accelerating to 0.8%-1.3% in the third quarter.
Russia`s industrial production rose 2.8 percent from a year earlier in July 2019, following a 3.3 percent growth in the previous month and below market expectations of a 3 percent gain. Output advanced at a softer pace for manufacturing (2.8 percent vs 3.4 percent in June) and electricity, gas steam, air conditioning (1.7 percent vs 2.5 percent). In contrast, extraction of raw materials grew 3 percent, up from 2.3 percent in the previous month. Also, water supply, sewage rebounded (1.6 percent vs -1.8 percent). On a monthly basis, industrial production shrank 0.7 percent, after rising 2.3 percent in the preceding month.
Russia`s trade surplus shrank to USD 12.508 billion in June of 2019 from USD 15.201 billion in the corresponding month of the previous year. Exports plunged 10.5 percent from a year earlier to USD 32.476 billion, the third straight monthly decline. Shipments to non-CIS countries dropped 12.2 percent while those to CIS countries edged up 0.7 percent. Imports fell at a softer 5.3 percent to USD 19.968 billion, dragged by lower purchases from non-CIS countries (-6 percent). On the other hand, imports from CIS countries increased 0.7 percent. Considering the second quarter of 2019, the trade surplus narrowed by 16.2 percent to USD 38.036 billion from USD 45.367 billion in the same period a year earlier.
The annual inflation rate in Russia decreased to 4.6 percent in July of 2019 from 4.7 percent in the previous month and in line with market expectations. It was the lowest inflation rate since December of 2018, mainly due to lower services prices.
Year-on-year, services cots rose 4.5 percent in July, slowing from 4.9 percent increase in the prior month. Within the goods component, food inflation was steady at 5.5 percent while non-food products prices jumped 3.6 percent, accelerating from a 3.5 percent gain in June.
Annual core inflation rate edged down to a five-month low4.5 percent in July from 4.6 percent in the previous month.
On a monthly basis, consumer prices edged up 0.2 percent, after showing no growth in the previous month and below market expectations of 0.3 percent. Prices advanced faster for services (0.9 percent from 0.6 percent) while inflation was steady for non-food products (at 0.2 percent). Also, cost of food dropped at a softer pace (-0.3 percent from -0.5 percent).
Russia unemployment rate fell to 4.4 percent in June 2019 from 4.5 percent in the previous month and below market consensus of 4.5 percent. It was the lowest jobless rate since series began in 1992.
The number of unemployed dropped by 68 thousand to 3.334 million in June 2019 from 3.402 in the previous month. Compared with the previous year, unemployment decreased by 209 thousand from 3.543 million.
Meantime, registered unemployment came in at 0.746 million, slightly lower than May`s 0.776 million and below last year`s 0.706 million.
Russia`s real wages increased 2.3 percent from the previous year in June 2019, accelerating from a downwardly revised 1.6 percent in the previous month and against market expectations of a 2.8 percent rise. Average nominal wages surged 7.1 percent to RUB 49,840.