World Economy Review - January 2008

The world economy faces serious challenges in sustaining the strong economic growth of the last few years in 2008, the United Nations said in World Economic Situation and Prospects 2008 released in New York.
The baseline forecast of the United Nations is for world economic growth to moderate to 3.4 percent this year, following the trend line down from 3.9 percent in 2006 and 3.6 percent in 2007.
But there is a clear and present danger of the world economy coming to a near standstill, the annual report warned. In the second half of 2007, the bursting of the housing market bubble in the United States and the unfolding credit crisis have induced uncertainty across global financial markets. This together with the decline of the U.S. dollar and the unresolved problem of the large global imbalances could combine to further drag world output down. To prevent this from happening, the United Nations advised concerted international policy action to address the global imbalances and calm currency markets.
Meanwhile, the world economic crisis evoked by economic recession in the United States will not have a significant impact on Russia, Russian Deputy Prime Minister and Finance Minister Alexei Kudrin said. "Today, Russia, just like China, will not be significantly subjected to the world crisis. One can say that we will sneeze, and maybe will not sneeze at all, but we will feel," Kudrin said on the air of Channel One Russia. Economic growth rates have been narrowing steadily in the U.S. over the past three years: from 3.6% to slightly more than two percent last year, the minister said. Meanwhile, Russia has "speeded up as to the economic growth" in the same three years, he said, adding that the GDP grew 8.1% in 2007, if compared to 7.4% in 2006.

Economy of The United States

The U.S. economy barely grew in the fourth quarter, pulled down by a worsening slump in housing and heightened caution by consumers and businesses, the Commerce Department reported. The 0.6% annualized growth rate in gross domestic product was lower than the 1.1% expected by economists surveyed by MarketWatch. The drag from inventories was larger than expected. Consumer spending and business investments slowed slightly in the fourth quarter, while investments in houses fell at the fastest rate in 26 years. Businesses reduced their inventories. Exports grew at a slower pace as well. The economy grew at a 4.9% pace in the third quarter. For all of 2007, GDP grew 2.2%, the slowest growth since 2002. GDP increased at a 2.9% rate in 2006.
Industrial production in the U.S. was greater than forecast in December as growth in exports helped make up for weakness in auto and housing-related industries. Production at factories, mines and utilities was unchanged following a 0.3 percent increase in November, Federal Reserve figures showed today. Economists had forecast a decline in production. Capacity utilization, which measures the proportion of plants in use, fell to 81.4 percent from 81.6 percent the prior month. Utility production fell 0.2 percent after two months of no change, the report showed. Mining output, which includes oil drilling, increased 0.1 percent last month, after rising 1 percent.
On a seasonally adjusted basis, the consumer price index increased 0.3 percent in December, following a 0.8 percent rise in November. The index for energy advanced 0.9 percent and accounted for about one-third of the overall CPI increase in December. The index for petroleum-based energy rose 1.2 percent and the index for energy services, 0.5 percent. The food index rose 0.1 percent in December. The index for food at home was virtually unchanged, while the index for food away from home increased 0.2 percent. The index for all items less food and energy advanced 0.2 percent in December, following a 0.3 percent increase in November.
U.S. unemployment remains low and recent weak readings on the labor market and growth do not signal an economic "disaster" is looming. Government data released on February 1 showed the unemployment rate eased to 4.9 percent in January from 5 percent in December.

Economy of The European Union

Euro zone GDP grew 0.8 pct in the third quarter from the second quarter, and was up 2.7 pct year-on-year, EU statistics office Eurostat said. The figures show an upward revision to provisional figures reported on Nov 30. Eurostat previously put Q3 quarter growth at 0.7 pct quarter-on-quarter and 2.7 pct year-on-year. In the second quarter, GDP was up 0.3 pct from the first quarter and was up 2.5 pct year-on-year. Among the components of third-quarter GDP, Eurostat revised its estimate for investment to a rise of 1.2 pct from 0.9 pct growth. It confirmed that household consumption rose 0.5 pct quarter-on-quarter and that government spending was up 0.6 pct.
Meanwhile, exports increased 2.2 pct and imports rose 2.6 pct, compared with earlier figures of 2.5 pct and 2.7 pct respectively. Household consumption made a positive contribution of 0.3 percentage points to the quarterly GDP figure, while investment made a positive contribution of 0.3 points. Net exports made a negative contribution of 0.2 points. Euro-zone GDP growth is expected to slow to 0.5 pct in the fourth quarter of last year and to 0.4 pct in the first and second quarters of 2008, according to the main economic institutes of Germany, France and Italy.
In November 2007 compared with October 2007, seasonally adjusted industrial production1 fell by 0.5% in the euro area (EA13) and by 0.3% in the EU27. In October production grew by 0.5% in both zones. In November 2007 compared with November 2006, industrial production rose by 2.7% in the euro area and by 2.6% in the EU27. These estimates are released by Eurostat, the Statistical Office of the European Communities. In November 2007 compared with October 2007, production of energy increased by 0.4% in the euro area and by 0.3% in the EU27. Non-durable consumer goods grew by 0.1% and 0.2% respectively. Intermediate goods fell by 0.6% in the euro area and by 0.5% in the EU27. Capital goods decreased by 0.7% and 0.6% respectively. Durable consumer goods declined by 1.9% in the euro area and by 1.4% in the EU27.
In November 2007 compared with November 2006, production of energy increased by 6.2% in the euro area and by 4.2% in the EU27. Capital goods grew by 3.7% and 4.2% respectively. Non-durable consumer goods rose by 1.9% in the euro area and by 1.2% in the EU27. Intermediate goods gained 1.8% in both zones. Durable consumer goods fell by 3.4% in the euro area and by 1.0% in the EU27.
Annual inflation in the euro zone jumped to a new high 3.2 percent in January, the European Union (EU)`s statistics bureau Eurostat estimated. The figure, including new eurozone members Malta and Cyprus for the first time, was the highest since the single currency was introduced to world markets as an accounting currency in 1999.
It rose from 3.1 percent in the previous two months and stayed well above the two percent ceiling preferred by the European Central Bank (ECB) for the fifth consecutive month.
Inflation in the euro zone has been rising in the previous months, due to hiking oil and food prices. It was 2.6 percent in October and 2.1 percent in September. It last hit 3.1 percent in May 2001, months before the euro came into circulation.
High inflation has put the Frankfurt-based ECB into dilemma. In order to take care of an economy, which was already under rising downward risks due to the recent financial turbulence and possible recession of the U.S. economy, the Frankfurt-based central bank has put its interest rate hike into a halt since June, before which it had raised interest rates eight times in one and a half years to contain inflation.
Euro zone unemployment in November was 7.2 pct, unchanged from 7.2 pct in October, EU statistics office Eurostat said. Economists polled by Thomson Financial News had forecast a figure of 7.2 pct.

Economy of Asia

Japan`s industrial output rose a seasonally adjusted 1.4 percent in December from November as electronics device makers stepped up production, according to preliminary data released by the government. But the rise in factory output was smaller than the market`s consensus forecast for a rise of 2.1 percent and followed a 1.6 percent fall in November.
The industrial output index reached an all-time high of 112.2 in October. Year-on-year, industrial output increased 0.7 percent in December after rising by 2.9 percent in November.
Japan`s inflation rate doubled in December to the fastest in more than nine years, as companies passed rising oil and commodity costs to consumers. Core consumer prices, which exclude fresh food, climbed 0.8 percent from a year earlier, the statistics bureau said today in Tokyo. The median estimate of 44 economists surveyed by Bloomberg News was for a 0.6 percent gain.
Japan`s merchandise trade surplus fell for the second straight month in December as higher crude oil prices inflated imports and exports to the US dropped for the fourth month in a row, the Ministry of Finance said. The trade surplus dropped 20.9 percent to 877.87 billion yen from a year earlier, smaller than the market`s consensus forecast for a surplus of 926.9 billion yen. The fall followed a 12.2 percent decline in November. Imports increased 12.1 percent to a record 6.559 trillion yen as the average price of crude oil rose 54.6 percent to a record 90.60 dollars per barrel. Exports rose by a moderate 6.9 percent to 7.437 trillion yen, rising for the 49th straight month, on higher shipments of cars and telecommunications equipment.
China`s GDP grew by 11.4 pct in 2007, up from 11.1 pct in 2006. The report said consumption and investment growth made up 4.4 percentage points and 4.3 percentage points respectively of GDP growth, while net exports contributed 2.7 percentage points. China had 2007 retail sales of 8.92 trln yuan, up 16.8 pct. The growth level was 3.1 percentage points higher than the level in 2006. Overall fixed-asset investment grew 24.8 pct in 2007, 0.9 percentage point higher than the growth in 2006.

Economy of Russia

Russia`s GDP climbed 8.4 percent in December 2007 compared to the same month a year earlier, and annual GDP growth is estimated at 7.7-7.8 percent, Russian Economy Minister Elvira Nabiullina said during a meeting with Russian President Vladimir Putin. She noted that the GDP growth rate was rather high and that investments in Russia`s economy increased 24 percent in December 2007, the Vesti TV channel reported today. Nabiullina also noted that thanks to this increase, annual investment estimate for 2007 went up from 20 percent to 21.1 percent. The Minister also pointed out high growth of retail sales, as well as steady increase in industrial production, which amounted to 6.5 percent in the last month of 2007. Russia`s GDP growth is estimated to be 6.7 percent in 2008, 6.3 percent in 2009, and 6.4 percent in 2010.
Russia`s industrial production rose 6.5% in December and 6.3% in 2007, year on year, the Federal Statistics Service said. The figures surpassed preliminary forecasts that suggested the figure would reach around 4-5%. Russian manufacturing, which posted a 4.4% growth in 2006, showed a 9.3% rise last year.
Experts say that the overall growth indicates that Russia successfully coped with the "first wave" of the U.S. subprime loan crisis in August 2007 and ensuing global downturn. "For now, we can say that the financial crisis has had no negative impact on Russia`s economic growth" - Yarislav Lisovolik, a Deutsche Bank expert, said. "This gives us reason to hope that Russia will successfully cope with the new crisis, which erupted in January". Deutsche Bank forecasts 6.2% growth in industrial production, with GDP reaching 7.0% in 2008.