World Economy Review

The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed. The world economy will contract 2.9 percent, compared with a previous forecast of a 1.7 percent decline, the Washington- based lender said in a report. Growth will be 2 percent next year, down from a 2.3 percent prediction, the bank said.
The bank is more pessimistic than its sister organization, the International Monetary Fund. The IMF, which is forecasting a global contraction of only 1.3 percent this year and growth of 2.4 percent in 2010, said June 19 that it plans to revise estimates "modestly upward."
The World Bank cut its forecast for the U.S. this year, calling for a 3 percent drop in the world`s biggest economy, after predicting a 2.4 percent contraction in March. Japan`s gross domestic product will shrink 6.8 percent, more than the previous prediction of a 5.3 percent decline, the lender said. The euro area`s economy may shrink 4.5 percent, compared with the previous estimate of a 2.7 percent contraction. Global trade may drop by 9.7 percent, compared with a March forecast of a 6.1 percent decline.
Economic growth in the developing world will be 1.2 percent, the World Bank said, scaling its outlook back from 2.1 percent. Developing nations in eastern Europe and Central Asia will be some of the hardest hit, the revised forecasts show. The region`s economy is likely to shrink 4.7 percent this year, down from the 2 percent decline projected in March.
Meanwhile, the Organization for Economic Cooperation and Development (OECD) raised its forecast for the economy of its 30 member nations for the first time in two years as the U.S. slump shows signs of easing. The combined economy of the world`s most-industrialized countries will shrink 4.1 percent this year and grow 0.7 percent in 2010, the Paris-based group, which was founded in 1961 to coordinate international economic policies, said today. The new projections compare with March forecasts for contractions of 4.3 percent and 0.1 percent.
The U.S. economy was largely responsible for the OECD`s prediction that the global recession will reach its bottom in the second half of this year. The world`s largest economy will contract 2.8 percent this year and grow 0.9 percent next year, the organization said in revising its forecast from declines of 4 percent in 2009 and zero growth in 2010.
Even as Japan`s slump shows signs of nearing its end, a slow rebound and excess capacity are “likely to further entrench” deflation. The organization said the Bank of Japan should better communicate its intention to keep its main interest rate low and hold it at 0.1 percent beyond next year.
In the 16-nation euro-area, signs of a recovery are not as clear, the OECD said, as it cut its 2009 forecast to show a contraction of 4.8 percent compared with 4.1 percent in March. Even though it no longer anticipates a 0.3 percent decline next year, it still predicts stagnation as rising unemployment makes consumers reluctant to spend.
The organization said evidence of a recovery in China, which is not a member of the OECD, was already apparent, with the economy expected to grow 7.7 percent this year and 9.3 percent in 2010. The OECD previously projected expansions of 6.3 percent and 8.5 percent respectively. The government still has room to spend on social programs, the OECD said.
The Brazilian economy will shrink 0.8 percent this year, more than the 0.3 percent forecast in March, before growing 4 percent next year, up from a 3.8 percent estimate, the OECD said. The organization also raised growth predictions for India to 5.9 percent and 7.2 percent this year and next. Such emerging market recoveries mean trade will soon stabilize and begin to pick up by the end of the year, the OECD said. It predicted global trade will expand 2.1 percent next year after plunging 16 percent this year.

Economy of The United States

The US economy shrank at an annualized rate of 5.5% in the first three months of 2009, better than previously thought, government figures show. Gross domestic product (GDP) had been previously estimated at a 5.7% decline. The fall in GDP now seems to be easing, after shrinking at an annualized pace of 6.3% in the previous quarter.
Consumer spending, which accounts for about two-thirds of domestic economic activity, rose 1.4% last quarter, the department also said. It had fallen 4.3% in the final quarter of 2008, the biggest decline in 28 years. U.S. industrial production slid a steeper-than-expected 1.1 percent in May from the prior month with output off sharply at factories, utilities and mines, a Federal Reserve report showed. Economists polled by Reuters were expecting a 0.9 percent decline after a revised 0.7 percent drop in April, initially reported as a 0.5 percent decrease. The data suggest that any slowdown in the pace of the recession that many economists have pointed to in recent weeks may be uneven. The capacity utilization rate for total industry, a measure of slack in the economy, fell to 68.3 percent, the lowest level on records dating back to 1967.
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total April exports of $121.1 billion and imports of $150.3 billion resulted in a goods and services deficit of $29.2 billion, up from $28.5 billion in March, revised. April exports were $2.8 billon less than March exports of $123.9 billion. April imports were $2.2 billion less than March imports of $152.5 billion.
In April, the goods deficit increased $0.9 billion from March to $40.1 billion, and the services surplus increased $0.2 billion to $10.9 billion. Exports of goods decreased $2.6 billion to $80.0 billion, and imports of goods decreased $1.7 billion to $120.1 billion. Exports of services decreased $0.2 billion to $41.1 billion, and imports of services decreased $0.5 billion to $30.2 billion. In April, the goods and services deficit decreased $33.0 billion from April 2008. Exports were down $33.7 billion, or 21.8 percent, and imports were down $66.7 billion, or 30.7 percent.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in May before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the last 12 months the index has fallen 1.3 percent. This is the largest decline since April 1950 and is due mainly to a 27.3 percent decline in the energy index.
On a seasonally adjusted basis, the CPI-U increased 0.1 percent in May after being unchanged in April. The index for energy, which had declined the previous two months, rose 0.2 percent in May as an increase in the gasoline index more than offset declines in other energy indexes. The food index decreased for the fourth consecutive month, falling 0.2 percent as the indexes for all major grocery store food groups declined.
The index for all items less food and energy rose 0.1 percent in May following a 0.3 percent increase in April. The smaller increase was partly due to the tobacco and smoking products index, which turned down in May after rising sharply in March and April. In May, the indexes for shelter, new and used motor vehicles, and medical care posted increases, while the public transportation index fell 1.0 percent and the indexes for apparel and tobacco declined slightly. The index for all items less food and energy has increased 1.8 percent over the last 12 months.
Nonfarm payroll employment fell by 345,000 in May, about half the average monthly decline for the prior 6 months, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The unemployment rate continued to rise, increasing from 8.9 to 9.4 percent. Steep job losses continued in manufacturing, while declines moderated in construction and several service-providing industries. Since the start of the recession in December 2007, the number of unemployed persons has risen by 7.0 million, and the unemployment rate has grown by 4.5 percentage points.

Economy of The European Union

GDP fell by 2.5% in the euro area (EA16) and by 2.4% in the EU27 during the first quarter of 2009, compared with the previous quarter, according to first estimates released by Eurostat, the Statistical Office of the European Communities. In the fourth quarter of 2008, growth rates were -1.8% in the euro area and -1.7% in the EU27. Compared with the first quarter of 2008, seasonally adjusted GDP declined by 4.8% in the euro area and by 4.5% in the EU27, after -1.7% and -1.6% respectively for the previous quarter.
In April 2009 compared with March 2009, seasonally adjusted industrial production fell by 1.9% in the euro area (EA16) and by 0.9% in the EU272. In March production decreased by 1.4% and 1.3% respectively. In April 2009 compared with April 2008, industrial production declined by 21.6% in the euro area and by 19.4% in the EU27.
In April 2009 compared with March 2009, production of non-durable consumer goods fell by 0.7% in the euro area and by 0.2% in the EU27. Durable consumer goods decreased by 0.8% and 0.3% respectively. Production of energy dropped by 1.1% in the euro area and by 0.2% in the EU27. Intermediate goods declined by 1.7% and 0.8% respectively. Capital goods fell by 2.7% in the euro area and by 1.4% in the EU27.
Among the Member States for which data are available, industrial production rose in six and fell in twelve. The highest increases were registered in Latvia (+4.8%), Spain (+2.0%) and Italy (+1.1%), and the most significant falls in Slovenia (-3.8%), Finland (-3.4%) and Estonia (-2.8%).
In April 2009 compared with April 2008, production of non-durable consumer goods fell by 6.5% in the euro area and by 4.4% in the EU27. Production of energy decreased by 12.3% and 9.6% respectively. Durable consumer goods declined by 22.4% in the euro area and by 20.0% in the EU27. Capital goods dropped by 26.7% and 25.1% respectively. Intermediate goods fell by 27.1% in the euro area and by 25.6% in the EU27.
Industrial production fell in all Member States for which data are available. The largest decreases were registered in Estonia (-33.7%), Slovenia (-24.9%), Lithuania (-24.5%) and Italy (-24.2%), and the smallest in Poland (-6.9%), Romania (-7.8%), Portugal (-11.1%), Greece (-12.2%) and the United Kingdom (-12.3%).
The first estimate for the euro area (EA16) trade balance with the rest of the world in April 2009 gave a 2.7 bn euro surplus, compared with +2.2 bn in April 2008. The March 2009 balance was +1.8 bn, compared with -2.3 bn in March 2008. In April 2009 compared with March 2009, seasonally adjusted exports fell by 1.3% and imports by 2.7%.
The first estimate for the April 2009 extra-EU27 trade balance was a deficit of 7.8 bn euro, compared with -14.9 bn in April 2008. In March 2009 the balance was -9.3 bn, compared with -19.6 bn in March 2008. In April 2009 compared with March 2009, seasonally adjusted exports fell by 1.5% and imports by 2.8%.
Euro area annual inflation is expected to be -0.1% in June 2009 according to a flash estimate issued by Eurostat, the Statistical Office of the European Communities. Euro area annual inflation was 0.0% in May 2009, down from 0.6% in April. A year earlier the rate was 3.7%. Monthly inflation was 0.1% in May 2009. EU annual inflation was 0.7% in May 2009, down from 1.3% in April. A year earlier the rate was 4.0%. Monthly inflation was 0.1% in May 2009.

Economy of Asia

Japan`s economy shrank less than previously thought in the first three months of the year, but still contracted at a record pace. Gross domestic product - the sum of the nation`s goods and services - shrank by 3.8%, equivalent to 14.2% over a year. Earlier it was estimated at 4%, but there have been brighter signs in recent weeks.
Japan has been hit hard by the global downturn because it relied on consumers abroad to buy its cars and electronics. People in Japan are starting to hope that the worst might be over. The Government now says in the first three months of the year the economy shrank by 3.8%, less than was earlier estimated but still the worst on record. The reason for the revision is that capital expenditure - spending on factories and equipment - was cut by less than had been previously thought.
Japan`s Industrial Production rose less than economists had forecast, by only 5.9% vs 7.0% in May. The overly optimistic expectation may have come as newly found trending strength gave off signals that the economy may have bottomed. In fact April`s Industrial Production figure rose higher than that which was forecast. Retail Trade figures for April also surprised analysts by elevating by the largest amount in nearly two years.
Prices in Japan fell by the most on record last month, raising fears of a new bout of deflation, official figures from the Ministry of Finance show. Consumer prices fell 1.1% in May from the same month a year ago, the most since records began in 1970. Prices of goods excluding fresh food also fell for the third straight month. Japan was previously trapped in a deflationary spiral, where prices of goods kept falling, during its "Lost Decade" in the 1990s.
The unemployment rate in Japan came in at 5.2 percent in May, the Ministry of Internal Affairs and Communications said on Tuesday, marking its highest level since September 2003. Analysts had expected an increase of 5.1 percent following the 5.0 percent gain in April. The job-to-applicant ratio came in at a record low of 0.44, compared to forecasts for 0.45 after the 0.46 level in April. But the number of employed persons rose from 63.22 million in April to 63.42 million in May. The job participation rate was 60.5 percent, up from 60.4 percent a month earlier. The number of unemployed persons rose to 3.47 million people from 3.46 million in the previous month. The number of new job offers plummeted 34.5 percent on year after falling an annual 26.5 percent in April.

Economy of Russia

Russia`s gross domestic product (GDP) plunged 11 percent in May compared to the same period last year, Deputy Economic Development Minister Andrei Klepach said. The economy contracted 10.2 percent from January to May this year, compared to the same period of 2008, the Interfax news agency quoted Klepach as saying. "The economy is close to the lowest point of its contraction. In several sectors close to the global situation, a revival has been seen and exports can be expected to grow, but the sectors tied to investment demand are showing a major decline," Klepach said. Given the 10 percent decline over the first five months, Klepach said, lowering the economic slump to 6.8 percent for this year would be "a heroic act for our economy."
Russia`s economy, heavily dependent on exports of energy and raw materials, was hit hard by the global financial crisis. Russian GDP contracted by 9.8 percent year-on-year in the first four months of this year. The Russian economy will shrink by 7.9 percent in 2009 despite a recent rise in commodity prices, the World Bank said on Wednesday, a much sharper contraction than the 4.5 percent it forecast earlier. The Organization for Economic Cooperation and Development expects Russia`s gross domestic product to fall 6.8% this year, a sharper contraction than forecast in March, citing further erosion of domestic demand, falling investment and declining output. However, it expects stronger GDP growth in 2010 than previously forecast. In March, the OECD forecast a 5.6% fall in GDP from a previous estimate of 2.3% GDP growth.
Russia`s economy contracted the most in 15 years in the first quarter after industrial production plunged and the government`s 3 trillion rubles ($97 billion) in stimulus spending failed to boost companies and banks. Gross domestic product tumbled an annual 9.8 percent, compared with growth of 1.2 percent in the previous quarter, the Moscow-based Federal Statistics Service said in a statement on its Web site today. The preliminary estimate on May 15 was a 9.5 percent contraction. The world`s biggest energy supplier is falling into its first recession in a decade after the global slowdown sapped demand for its commodities and companies struggled to find funds. The government`s stimulus package has failed to spur bank lending, even as the central bank cut its main interest rates three times since April. Manufacturing fell 23.5 percent in the first quarter, compared with a revised 6.6 percent expansion in the same period last year. GDP may slump as much as 8 percent in 2009, Economy Minister Elvira Nabiullina said last month, after growth of 5.6 percent in 2008 and 8.1 percent the year before. President Dmitry Medvedev said on June 6 that the Russian economy will rebound “more quickly than had perhaps been expected.”
The economy contracted in May at the slowest pace since October, shrinking 6.8 percent from a year earlier, as slumps in manufacturing and service industries eased after record declines in April, according to VTB Capital`s GDP indicator, a gauge of economic growth, published on June 4. Rising crude oil prices will help the country narrow its budget shortfall and reduce the use of the Reserve Fund, one of its two sovereign wealth funds, Prime Minister Vladimir Putinsaid during a meeting in Moscow on June 9. The deficit, Russia`s first in a decade, may reach 10 percent of GDP this year, according to the Finance Ministry. The Reserve Fund may be exhausted by the end of next year, Finance Minster Alexei Kudrin said. Goldman predicts a contraction of 7.5 percent in GDP this year, while the International Monetary Fund on June 1 said it expected the economy to shrink 6.5 percent. Alfa Bank, Russia`s largest privately owned bank, expects the economy to contract 5.7 percent.
Russia`s foreign trade surplus fell to $31.3 billion in January-April from $70.1 billion in the same period a year ago, the Federal Customs Service said. It provided the following data: Exports $77.8 billion (-47.7 percent y/y), Imports $46.5 billion (-40.9 percent y/y). Central Bank data already released, the trade surplus fell to $6.7 billion in April alone from $6.8 billion in March and $14.8 billion in April 2008. Russia`s Central Bank estimates that the country`s net trade surplus for the period January-May 2009 was $35 billion, the bank`s deputy chairman told journalists at the St. Petersburg economic forum on Saturday.
Alexei Ulyukaev also said that the Central Bank had purchased less than $1 billion to restrain the ruble on the exchange market, which was also lower than the period February 1 - May 25 when the bank spent more than $30 billion on strengthening the ruble. The top bank official predicted that Russia could move towards a free floating regime for the ruble in 2010, but only if conditions were suitable, including an acceptable balance of payments and a mechanism allowing the system to be regulated through interest rates. "I wouldn`t rule out 2010," Ulyukaev said, "We have a much more liberal system now that a year ago. We have an extremely wide corridor [currency basket] 26-41 rubles." He also dismissed reports that the Central Bank had stress-tested the Russian banking system. "We have not carried out a stress test, and have no negative information. We think that the situation with the banking system is completely acceptable," Alexei Ulyukaev said.