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World Economy Review - March 2008

The Organisation for Economic Co-operation and Development (OECD) stopped short of predicting a recession in the US, but said GDP growth was likely to fall from just 0.1% during the first quarter of 2008 to 0% in the second quarter. The gloomy prediction comes as the International Monetary Fund said the US economy "remains very weak, certainly close to a possible recession". The leaked report, which was a draft version of the IMF`s World Economic Outlook, also reportedly said the dollar remained "rather strong" despite recent depreciation. In an interim assessment of the economic outlook for OECD countries, the group said: "The most recent dataflow, including the decline in payroll employment witnessed in the first two months of 2008, suggest that the US economy is now essentially moving sideways, if not contracting outright. "It may be premature to declare a recession but, with the pace of activity so far below potential, economic slack is widening rapidly." But other regions are expected to fare better, with Euro Area countries expected to see GDP growth of 0.5% in the first quarter before falling to 0.4% in the second. Predictions for the UK are the strongest out of all the countries in the OECD study, with economic growth of 0.6% for both quarters pencilled in, although this is down on GDP growth of 0.8% during the same period last year. Global GDP is expected to again grow strongly in 2008, despite the increasingly serious problems in the US economy. In its January update the IMF forecasts global GDP growth in 2008 to be 4.1%, down 0.3% percentage points from an earlier forecast, but well above the long-term average of 3.5%.

Economy of The United States

Consumer spending and exports were up slightly while business inventories were lower, leaving the government`s estimate for fourth-quarter economic growth unrevised, the Commerce Department said. The economy grew at a 0.6 pct annualized pace in the fourth quarter, the same rate reported in the previous estimate. That matched the 0.6 pct median estimate from economists polled by Thomson IFR Markets. There was a small improvement in inflation. The headline number, measured by the Personal Consumption Expenditures price index, was revised lower to 3.9 pct from 4.1 pct. Consumer spending, which makes up roughly 70 pct of the US economy, was higher in the final report, revised up to 2.3 pct growth from 1.0 pct. The Commerce Department said the major increase was in spending on services, which was revised higher to 2.8 pct growth from 2.1 pct. Foreign trade continued to provide a large counter to the domestic US economic slowdown in the final Q4 report. Exports were revised higher to 6.5 pct growth from 4.8 pct. Imports fell slightly less than previously estimated, dropping 1.4 pct compared to 1.9 pct. That left the net effect on GDP growth higher, up from a positive 0.90 percentage points to a positive 1.02 points.
Output US factories, mines and utilities declined in February at the sharpest pace since October as capacity utilization fell to its lowest level in more than two years, the Federal Reserve said. Output US factories, mines and utilities declined in February at the sharpest pace since October as capacity utilization fell to its lowest level in more than two years, the Federal Reserve said. Output in February fell 0.5 pct, steeper than the 0.1 pct fall expected, while factories were using 80.9 pct of their capacity, down from 81.5 pct in January. Economists polled by Thomson`s IFR Markets had predicted a slight fall to 81.3. That`s the lowest level of utilization since November 2005. The Federal Reserve keeps a close watch on the operating rate to see if it is approaching levels where bottlenecks could develop and threaten to boost inflationary pressures. Manufacturing production fell 0.2 pct in February, while mining output rose 0.4 pct. Utility output plunged 3.7 pct in February after rising 2.2 pct in January.
Consumer prices have risen 4.0% year on year in February, and they went 2.3% up excluding food and energy, while they remained flat on the month, according to data released by the US Labor Department. On the month, both CPI as well as core CPI remained unchanged, against the analysts expectations of slight increases. Wall street economists had advanced a 0.2% increase for the Core CPI and a 0.3% rise for the CPI. Energy prices have risen 18.9% on the year, while they declined 0.5% on the month. Food prices have posted a 4.6% yearly increase and a 0.4% rise on the month, while housing, which accounts for 40% of the CPI increased 0.2% on the month for its second consecutive time, and 2.8% year on year.
The U.S. unemployment rate remains unchanged at 4.8 percent. First-time claims for unemployment insurance fell to 366,000 in the week ending March 22, the U.S. Department of Labor reported. The drop of 9,000 claims shifted the four-week moving average to 358,000 from the previous week`s average of 365,250, the report said. A year ago, the four-week average was 312,000.
The economy has slowed down since the beginning of the year in two-thirds of the US Federal Reserve`s regions and growth is subdued in the others, the Fed`s Beige Book regional survey said, although no region reported an actual contraction. Eight of the 12 regional Fed banks "cited softening or weakening in the pace of business activity, while the others referred to subdued, slow or modest growth", the summary of anecdotal reports from the regional banks said. Two-thirds of the banks also said there were "tight credit standards" in their area and all but two districts had declining loan demand. Some regional banks also cited indications of declining loan quality. Housing was described as "weak" and home sales "low" all across the country. There were increasing reports that commercial real estate demand had also begun to slow down. Retail spending reports were "generally downbeat", with auto sales particularly "slow or sluggish". Manufacturing was "mixed but, on the whole subdued", the Beige Book said. All districts, the summary noted "mentioned caution or concern on the part of at least some segments of manufacturing".

Economy of The European Union

Eurozone GDP grew 0.4 pct in the fourth quarter from the third quarter, and was up 2.2 pct year-on-year, EU statistics office Eurostat said. The quarter-on-quarter figure is unchanged from Eurostat`s provisional estimate, but the year-on-year rise is revised from an earlier 2.3 pct. In the third quarter, GDP was up 0.8 pct from the second quarter and was up 2.7 pct year-on-year. Eurostat gave a breakdown of fourth-quarter GDP for the first time. It said household consumption fell 0.1 pct quarter-on-quarter, while investment was up 0.8 pct. Meanwhile, exports increased 0.5 pct and imports fell by 0.4 pct. In 2007 Eurozone GDP grew 2.6 pct. The European Central Bank cut its forecast for 2008 Eurozone GDP growth to 1.7 pct from 2.0 pct and its projection for 2009 growth to 1.8 pct from 2.1 pct. Meanwhile, the ECB raised its forecasts for euro zone inflation to 2.9 pct from 2.5 pct in 2008 and 2.1 pct from 1.8 pct in 2009.
In January 2008 compared with December 2007, seasonally adjusted industrial production grew by 0.9% in both the euro area (EA15) and the EU27. In December 20073 production remained stable in both zones. In January 2008 compared with January 2007, industrial production rose by 3.8% in the euro area and by 3.5% in the EU27. In January 2008 compared with December 2007, production of capital goods increased by 2.7% in the euro area and by 2.5% in the EU27. Durable consumer goods grew by 1.9% and 1.5% respectively. Intermediate goods rose by 0.8% in both zones. Non-durable consumer goods gained 0.6% in the euro area and 0.8% in the EU27. Production of energy fell by 2.9% and 2.1% respectively. In January 2008, among the Member States for which data are available, industrial production rose in ten, remained stable in the United Kingdom and fell in three. The highest increases were registered in Lithuania (+5.9%), Poland (+5.7%) and Slovakia (+4.6%), while the largest decrease was recorded in Portugal (-1.7%). Euro area annual inflation was 3.3% in February 2008, up from 3.2% in January. A year earlier the rate was 1.8%. Monthly inflation was 0.3% in February 2008. EU annual inflation was 3.4% in February 2008, unchanged compared to January. A year earlier the rate was 2.1%. Monthly inflation was 0.4% in February 2008.
Yearly inflation in the 15 nations that use the euro hit a new record high of 3.5 percent in March, the Eurostat said. In recent months, high prices for transport fuel, heating oil, bread, dairy products and vegetables have pushed up the rate and are blamed for holding back household spending Ч eating into one of the main drivers of economic growth in the region.
Inflation was 3.3 percent in February, running far above the European Central Bank`s guideline of just under 2 percent as worries over banks` reluctance to lend has held it back from the usual move of cooling inflation by hiking borrowing costs. The March first estimate is the fastest pace of price increases since Eurostat started keeping records 12 years ago for the countries that launched the common currency in 1999. The European Commission said the 3.5 percent estimate was more than it had expected.
Euro zone unemployment in February was 7.1 percent, unchanged from 7.1 percent in January, EU statistics office Eurostat said. Economists polled by Thomson Financial News had forecast a figure of 7.1 percent.

Economy of Japan and China

Japan`s economy grew at a brisk 3.5 percent annualised pace in the fourth quarter of 2007, showing unexpected resilience in the face of growing fears of a US recession, official figures showed. Gross domestic product (GDP) grew by 0.9 percent compared with the previous quarter, unchanged from the initial estimate, the Cabinet Office said. The government said corporate capital investment in new equipment and factories increased by 2.0 percent quarter-on-quarter, down slightly from an initial 2.9 percent rise. Private and household consumption both grew by a tepid 0.2 percent. The Japanese economy is gradually rebounding from recession in the 1990s but consumer spending has remained sluggish, raising worries that the export-led recovery could be hit hard by a global slowdown. Despite the better than expected GDP data, concerns about the health of the world`s second largest economy have grown amid fears of a US recession that could hit Japanese exports and corporate earnings. The government also reported that Japan`s current account surplus grew 8.1 percent in January from a year earlier to 1.24 trillion yen (12.0 billion yen) as exports grew and income on overseas investments rose. The figure was ahead of market expectations for a surplus of about 1.21 trillion yen.
Japan`s industrial output fell a seasonally adjusted 1.2 percent in February from January as some manufacturers reduced production to deal with slowing demand and unexpected rises in inventories, according to preliminary data. It was the second straight month of decline and followed a 2.2 percent fall in January. But the fall in factory output was smaller than a decline of 2.2 percent forecast by Thomson/IFR Markets. The industrial output index reached an all-time high of 112.2 in October. Industrial output rose 4.2 percent in February from a year before, following a 2.2 percent rise in January. The Ministry of Economy, Trade and Industry said, citing a poll of private sector companies, that industrial output will rise 2.0 percent in March from February but will fall 1.0 percent in April from March.
Japan`s core inflation rate accelerated to 1.0 percent in February as rising energy and food costs drove up consumer prices, official figures showed. Core inflation, which excludes volatile fresh food prices, picked up from a pace of 0.8 percent in January, which was already the fastest since March 1998. Market forecasts, on average, had been for a year-on-year inflation rate of 0.9 percent in February.
Japan`s unemployment rate rose to 3.9 percent in February from 3.8 percent in the previous month as some companies trimmed their staff amid more difficult business conditions, government data showed. Economists had expected the jobless rate to stay at 3.8 percent last month, according to the median estimate of Thomson/IFR Markets.
Renowned Chinese economist Li Yining said here on Monday that China`s economy might grow by about 10 percent in real terms this year, higher than the government 8-percent target. The predicted growth, which is lower than last year`s 11.4 percent, does not mean a "big slowdown" of the Chinese economy, Li told a group of Chinese and foreign reporters. Li is a member of the National Committee of the Chinese People`s Political Consultative Conference (CPPCC), China`s top political advisory body now in its annual full session. Another CPPCC member, Director Liu Shucheng of the Institute of Economy under the Chinese Academy of Social Sciences echoed Li`s view, saying, "It`s out of question that the economy would maintain a growth rate of around 10 percent this year". Premier Wen Jiabao told the parliament on Wednesday that China`s gross domestic product (GDP) should grow by 8 percent on the basis of improving the economic structure, productivity, energy efficiency and environmental protection. Li also ruled out the possibility that the Chinese economy would slow down soon after the Beijing Olympic Games. As for the government target to control consumer price rise at 4.8 percent, Li predicted "the goal could be reached unless international oil price continues to grow or emergencies or severe natural calamities take place".

Economy of Russia

Russia`s gross domestic product growth accelerated to 8.2 percent year-on-year in February from 7.4 percent in January, the Economy Ministry said in its monthly economic review. The economy grew 8.1 percent last year. The ministry expects GDP to rise 7.1 percent in 2008 while analysts polled by Reuters predict 6.8 percent growth, according to the median forecast. "An acceleration of economic growth was a result of strong consumer and investment demand with a background of high growth tempo in the manufacturing sector," the ministry said. It said it expects the consumer price index (CPI) to rise 4.5-4.7 percent in the first quarter, compared with 3.4 percent in the same period last year when full-year inflation was 11.9 percent.
Russia`s industrial production rose 7.5 percent year-on-year in February, Rostat reported. Analysts polled by the Russian news agency forecast that industrial production rose by 5.5 pct last month. In January-February industrial production rose 6.0 percent year-on-year. Russia`s Mininstry of Economic Development and Trade forecasts that industrial production will grow 5.7 percent in 2008. Russia`s finance minister said he expected the country`s gross domestic product (GDP) to grow by at least 7.0 percent this year, agreeing with views that there were signs of overheating. Alexei Kudrin, speaking in parliament, also said M2 money supply would rise by 35-40 percent this year, down from 48 percent last year, while bank lending will increase by 30-40 percent, down from 50 percent last year.
The economic development ministry raised its forecast for economic growth in 2008 to 7.1 pct from 6.7 pct, and its inflation forecast to 9.5 pct from 8.5 pct, Russian news agencies reported. Gennady Kuranov, director of the macroeconomic forecasting department said, cited by Interfax: "The inflation forecast has been raised because of the rise in food and wheat products prices". Russia`s economics ministry also raised its 2008 forecast for the annual average price of Urals oil, a benchmark blend, by 16% to $86 per barrel, a high-ranking ministry official said. "The oil price is rising. The average price will be approximately at the level of $86 per barrel. However, in the second half of the year, prices will go down," Gennady Kuranov said. The ministry earlier raised its Urals forecast for the year in late January, from $56 to $74. In 2006 the annual average price for the Urals oil was $61 per barrel. - 01.04.2008 23:32