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World Economy Review - September 2007

The International Monetary Fund has sharply cut its forecast for 2008 economic growth in the United States and made a more modest reduction in its outlook for the euro zone, Italian news agencies reported. Citing a draft version of the IMF`s Economic Outlook to be released next month, news agency AGI said the IMF slashed its 2008 U.S. growth forecast to 2.2 percent from 2.8 percent, largely due to the fall-out from the crisis of the subprime mortgage sector.
The IMF`s forecast for the euro zone has been trimmed to 2.3 percent from a previous 2.5 percent projection, AGI and several other Italian news agencies reported. The IMF`s growth forecast for Germany was cut to 2.2 percent from 2.4 percent, the agencies said, while France`s growth was left unchanged at 2.3 percent and Italy`s was trimmed to 1.6 percent from 1.7 percent. The IMF left its forecast for this year`s Italian growth at 1.8 percent.
Also in September, the U.S. Federal Reserve cut official interest rates by a half-percentage point last week, saying it wanted to try to forestall some of the impact of a credit squeeze, which policy-makers fear will take a toll on both U.S. and global expansion. As a result, the euro rose as high as $1.41, bringing its gains since January to around 7.0 percent. The dollar index held near a 15-year low set in September.
The analysts said the U.S. interest rate cut can curb rates in other countries, increasing inflation pressures. Particularly, the international oil price that was forecasted to assume an upward curve due to a fall in the interest rate, followed by a possible end of global economic slowdown and a weak dollar, can play a role in impeding progress of the world economy.
Also, a fall in the U.S interest rate can trigger other currencies including the won to grow stronger against the dollar. We all know what a strong won can do to our exports and the overall economy.
Furthermore, a deep cut in the U.S. interest rates can accelerate liquidation of yen-carry funds worldwide that are estimated to mount up to $80-500 billion. From a long-term perspective, it can be another risk factor in the international financial market.

Economy of the United States

The US economy grew at an annual rate of 3.8 percent in the second quarter, following 0.6-percent growth in the first quarter, according to the "final" estimates released by the Bureau of Economic Analysis. The second-quarter growth rate was revised down from the "preliminary" estimate of 4.0 percent. The acceleration in real GDP growth reflected upturns in net exports, Federal government spending, and inventory investment; an acceleration in business investment; and a smaller decrease in residential home investment. In contrast, consumer spending decelerated sharply. The downward revision to GDP growth reflected updated estimates of net exports and business spending for structures; both were smaller than previously estimated. In contrast, business investment in equipment and software was higher than previously estimated.
Production at U.S. factories, mines and utilities edged up in August at the slowest pace in three months. The Federal Reserve reported that industrial production was up just 0.2 percent in August. That was slower than the 0.3 percent gain that analysts had been expecting. It was the poorest performance in three months and reflected a 0.3 percent drop in output at U.S. factories, the first decline in manufacturing after five straight increases. The 0.3 percent gain in industrial output followed much stronger increases of 0.5 percent in July and 0.6 percent in June. The drop in manufacturing output was accompanied by a decline of 0.6 percent in mining, the category that includes oil production. These declines were offset by a 5.3 percent surge in output at U.S. utilities, reflecting a hotter-than-usual August. Capacity utilization, measuring the proportion of plants in use, held at 82.2 percent in August, the Fed said.
The Reuters/University of Michigan Surveys of Consumers found U.S. consumer sentiment essentially unchanged this month, at its lowest level in 13 months, as lower gasoline prices failed to buoy an economy weighed down by the credit crunch and real estate slump, according to Bloomberg News. The surveys` final index of consumer sentiment in September was 83.4 points (2000 = 100 points), edging down slightly from this month`s preliminary reading of 83.8 points and the August reading of 83.7 points to its lowest level since August 2006. For the first eight months of the year, the average reading was 83.9. The index had been expected to rise to 84 points, according to the median forecast of 58 economists surveyed by Bloomberg News. The Reuters/University of Michigan current conditions index reflecting Americans` perceptions of their own current finances fell to 97.9 points from last month`s 98.4. But the surveys` expectations index reflecting consumers` view of the economy in the months ahead rebounded slightly, rising to 74.1 points this month from 73.7 in August.

European Union

In July 2007, compared with June 2007, seasonally adjusted industrial production increased by 0.6% in the Eurozone (EA13) and by 0.4% in the EU27. In June production remained stable in the Eurozone and grew by 0.1% in the EU27. In July 2007 compared with July 2006, industrial production grew by 3.7% in the Eurozone and by 3.5% in the EU27. These estimates are released by Eurostat, the Statistical Office of the European Union. In July 2007 compared with June 2007, production of capital goods increased by 1.0% in the Eurozone and by 0.7% in the EU27. Intermediate goods grew by 0.5% in both zones. Non-durable consumer goods rose by 0.3% in the Eurozone and by 0.2% in the EU27. Energy gained 0.1% and 0.7% respectively. Durable consumer goods fell by 0.1% in the Eurozone , but remained stable in the EU27. In July 2007 compared with July 2006, production of capital goods increased by 6.3% in the Eurozone and by 6.1% in the EU27. Intermediate goods grew by 3.7% and 3.6% respectively. Non-durable consumer goods rose by 2.9% in the Eurozone and by 2.3% in the EU27. Durable consumer goods gained 1.8% and 3.5% respectively. The energy sector fell by 0.4% in the Eurozone and by 0.1% in the EU27.
Euro zone`s economic sentiment indicator dropped 2.8 points to 107.1 in September, the European Commission said Friday. Economists were looking for a reading of 109. The index showed a reading of 109.9 in August, revised from 110 initially estimated.
Consumer confidence weakened to minus 5 in September from minus 4 recorded in the prior month. The retail confidence indicator fell sharply to minus 3 from plus 3, while services confidence slid to 18 from 20. The confidence index for industry dropped to 3 from 5.
The European Commission said the business confidence index dropped to 1.09 from a revised 1.37 in August. The reading for August was revised from 1.41 initially estimated. The number came in weaker that the expected reading of 1.30 in September.

Economy of Asia

The Japanese economy declined 1.2 percent in the second quarter from a year earlier, the government said Monday, revising downward a preliminary estimate of 0.5 percent growth for the quarter. It was the first contraction in the Japanese gross domestic product in three quarters.
From the first quarter, GDP shrank 0.3 percent, according to revised data from the Cabinet Office. It was the first decline in GDP since July-September 2006, when the economy shrank 0.5 percent from a year earlier.
Japan`s industrial production surged at the fastest pace in almost four years in August as exports rose and Toyota Motor Corp. and Honda Motor Co. resumed manufacturing after a July earthquake disrupted output.
Production climbed a seasonally adjusted 3.4 percent from July, the Ministry of Economy, Trade and Industry said. The median estimate of 47 economists surveyed by Bloomberg News was for a 3.0 percent increase.
Japan`s inflation fell 0.1% in August compared with the corresponding month last year. The Japanese inflation fell for seventh month in a row in August. Consequently, Bank of Japan (BoJ) is less likely to make rate rise before the end of the year. The bank was keen to raise interest rates from their current level of 0.5% but it will struggle to do so, as inflation is falling.
Japan`s unemployment rate rose to 3.8 per cent in August from a nine-year low of 3.6 percent the previous month, worse than market expectations, official data showed. But the total number of unemployed declined by 230,000 from a year earlier to 2.49 million in August, the Ministry of Internal Affairs and Communications said.
Economists had on average expected the jobless rate to hold steady at 3.6 per cent in August. The unemployment rate is watched closely for evidence of expanded hiring by Japanese companies and positive knock-on effects for consumer spending.
In a separate report, the labour ministry said the ratio of job offers to job seekers fell from 1.07 in July to 1.06 in August, which means there were 106 jobs available for every 100 job seekers. Meanwhile, Japan`s average monthly household spending increased a real 1.6 per cent in August from a year earlier to 296,035 yen (2,563 dollars), the Ministry of Internal Affairs and Communications said. Household spending is one of the key indicators of personal consumption, which accounts for about 55 percent of Japan`s gross domestic product.
China`s growth in its gross domestic product is likely to continue its fast clip in the second half, bringing GDP growth for the year to 11.6% and the inflation rate to 4.6%, a report by People`s Bank of China`s researchers said.

Economy of Russia

Russia`s GDP grew 7.7 percent in January to August of this year vs. 6.2 percent a year earlier, signaled the survey of current economic situation elaborated by the RF Economic Development Ministry. Russia`s economy maintained the accelerating rates in summer, though the pace slowed down in August vs the speed manifested in May through July. The August growth in GDP was just 6.4 percent. Less seasonal and calendar factors, the monthly growth in GDP was still rather high (0.7 percent a month on average from January through August of 2007). The economy accelerated on high rates of investment growth, construction, consumer demand coupled with increasing impact of imports in meeting domestic demand in the environment of some slowdown in processing industries and exports.
Russia`s industrial production grew 7.0 percent in Junuary to August compared to 4.3 percent a year earlier. In August industrial production grew only 3.8 percent. Economic Development Ministry also provided the inflation estimate for January through September, saying the inflation was 7 percent to 7.1 percent during the period. Consumer inflation went down to 0.1 percent in August because of the seasonal drop in prices for fruit and vegetables from 0.9 percent to 1 percent posted in June through July. The inflation was 6.7 percent from early this year (vs. 7.1 percent a year ago) and 8.6 percent for a year`s period (August 2007 to August 2006). At the same time, the external surplus of Russia shed 17.9 percent on year to $82.1 billion in January through August 2007. Exports reached $216.9 billion, while imports stood at $134.8 billion.
Russia`s Economy Ministry predicts stronger GDP growth for 2007-2010. The 2007 GDP forecast increased to 7.3 percent, up 0.8 percent. According to new estimates, Russia`s economic growth is projected at 6.4 percent in 2008, 6.0 percent in 2009 and a 6.3 percent rise is forecast for 2010.
Acting First Deputy Prime Minister Alexander Zhukov said that Russia`s gross domestic product in 2007 will grow by more than 7.5 percent. Speaking at the 6th International Investment Forum Sochi 2007 on Saturday, Zhukov said the average annual GDP growth in 2000-2006 was 6.8 percent. In his words, the high economic growth over the past several years was accompanied by "a sustainable budget surplus" and the sevenfold increase in the state`s expenditures. All this and purposeful policy of the state have created favourable conditions for foreign investments in the country. "Over the first seven months of this year investments in fixed capital in the Russian economy was 23 percent, and over 60 billion U.S. dollars were attracted in foreign investments in the first half of the year, which is almost three times more than in 2006", Zhukov said.
He stressed that investment demand had grown most intensively in industry, construction, and high-tech industries. In his view, Russia has reserves to improve the investment climate, including by perfecting tax administration, antimonopoly legislation and ownership rights legislation.
Russia`s trade surplus dropped 17.5 percent to $82.5 billion in January-July 2007 compared to the same period a year earlier, the Federal Custom Service (FCS) reported. According to the FCS, the foreign trade turnover increased 20.9%, to $286.7 billion in the reporting period. Exports amounted to $184.6 billion in January-July 2007, an increase of 9.5 percent from the same period of 2006. Imports totaled $102.1 billion, up 48.8 percent in the reporting period compared to the first seven months of 2006. Andrei Klepach, head of the ministry`s planning department, said the country would see its enormous current account surplus disappear in 2009, or even earlier, due to rapidly rising imports. - 29.09.2007 13:09:52