World Economy Review

Fitch Ratings cut its global economic growth forecasts for this year and next due to the impact of rising oil prices and the earthquake and tsunami in Japan. The ratings company lowered its projections for growth in the U.S., Japan and the euro area for 2011 and said global expansion will slow to 3.2 percent from 3.8 percent in 2010, according to a report published in London today.
Crude oil prices have surged about 32 percent in the past six months, squeezing companies` profits and undermining demand. At the same time, the resulting surge in inflation from higher energy costs is likely to prompt an “earlier policy response” from central banks than previously forecast, Fitch said. “Inflationary pressures have increased in both advanced economies and emerging markets, exacerbating the policy dilemma faced by many monetary policy authorities,” said Maria Malas - Mroueh, a director in Fitch`s sovereign team.
Fitch sees the U.S. economy, the world`s largest, growing 3 percent in 2011 and 2.8 percent in 2012, lower than the previously forecast rates of 3.2 percent and 3.3 percent. For Japan, Fitch cut its 2011 projection to 1 percent from 1.5 percent and raised its 2012 outlook to 2.2 percent from 1.7 percent, reflecting an increase in reconstruction spending after the March 11 earthquake.
The euro-area economy will expand 1.2 percent this year and 1.8 percent in 2012, according to Fitch, lower than the 1.6 percent and 2.1 percent rates it projected previously. Fitch also cut its forecasts for Brazil, China and India, while the increase in oil prices led to a `small upward revision” to Russia`s forecast.
American investment bank Merrill Lynch sees global oil prices surging to $144 per barrel based on the Brent crude benchmark in the next three months given the political unrest in the Middle East and North Africa. “Global oil demand has been expanding at a breakneck pace in recent quarters, and now the political situation in Libya has reduced oil production by one million barrels per day,” Merrill Lynch said in a commentary dated March 7.
To reflect the tighter oil market, Merrill Lynch adjusted upward its average Brent crude forecast to $122 per barrel from its previous estimate of $86. The bank said prices could briefly break through $140 and hit $144 per barrel in the next three months.
For the average Brent crude price for 2011, Merrill Lynch said it would rise to $108 per barrel, up from its previous forecast of $88 per barrel. The bank expects WTI (West Texas Intermediate), also known as Texas light sweet oil, to average $101 per barrel this year, up from its earlier forecast of $87. The price of Brent crude is the benchmark for European economies while that of the WTI is used by the United States.

Economy of the United States

The United States economy grew at a stronger clip in the fourth quarter than originally estimated, according to figures released on March 25th. The U.S. Bureau of Economic Analysis said the American economy expanded by 3.1 per cent in the final three months of 2010. That was a marginal improvement versus the agency`s so-called flash estimate of 2.8 per cent. The revision shows that the U.S. economy is in somewhat better shape than initially believed and is another piece of decent economic news in recent days. Corporate profits grew by 2.3 per cent in the October-to-December period compared to the third quarter of 2010. Better still, company earnings rose a hefty 18 per cent compared to the one year ago period.
Industrial production declined 0.1 percent in February after having risen 0.3 percent in January, the Federal Reserve said. Output in January was previously estimated to have edged down 0.1 percent. Manufacturing output increased 0.4 percent in February, and the gain in January was revised up to 0.9 percent. Outside of manufacturing, the output of mines rose 0.8 percent in February, which more than reversed its decline in January. However, the output of utilities fell 4.5 percent--the drop reflected unseasonably warm weather in February, which reduced the demand for heating after two months of unseasonably cold temperatures. At 95.5 percent of its 2007 average, total industrial production was 5.6 percent above its year-earlier level. The capacity utilization rate for total industry edged down 0.1 percentage point to 76.3 percent, a rate 4.2 percentage points below its average from 1972 to 2010.
The U.S. trade deficit widened to a five-month high in January, as imports surged across a variety of sectors, far outpacing exports. The trade balance, which measures the difference between the nation`s imports and exports, grew to a $46.3 billion deficit in January, up from $40.3 billion in December, the Commerce Department said. That number was much larger than economists` estimates for a $41.5 billion deficit, as imports grew more than expected. Exports totaled $167.74 billion in January, a rise of $4.4 billion from the month before. But imports totaled $214.08 billion, or $10.5 billion more than in December.
On one hand, some economists say stronger import growth means Americans are consuming more goods -- and that`s good news for the U.S. economy. But others argue a wider deficit is bad news no matter what the cause, because it points to greater imbalances in the world economy.
The consumer price index rose 0.5% last month, the Labor Department reported. The so-called core rate, which strips out the volatile food and energy categories, rose a lesser 0.2%. Economists surveyed by MarketWatch had forecast the CPI, which tracks inflation at the retail level, to rise by 0.5% overall and by 0.1% on a core basis. Although consumer prices fell sharply in 2010, they`ve started to tick up lately. The cost of consumer goods and services have climbed 2.1% over the past year, on an unadjusted basis. As recently as November, the 12-month inflation rate was just 1.1%.
The unemployment rate in the U.S. fell a tenth of a percentage point in March to 8.8 percent, the lowest in two years, according to figures from the Department of Labor. In the past four months, unemployment has lowered by a full percentage point, representing the largest decline in more than 25 years. February of last year was the low point but since then--and especially in February and March of 2011-- private sector employment has risen by 1.8 million, Solis said. In March, the economy added approximately 216,000 new jobs, figures show. February also posted strong numbers with around 194,000 new jobs added.

Economy of Eurozone

GDP increased by 0.3% in the euro area (EA16) and by 0.2% in the EU27 during the fourth quarter of 2010, compared with the previous quarter, according to second estimates released by Eurostat, the statistical office of the European Union. In the third quarter of 2010, growth rates were +0.3% in the euro area and +0.5% in the EU27. Compared with the fourth quarter of 2009, seasonally adjusted GDP increased by 2.0% in the euro area and by 2.1% in the EU27, after +1.9% and +2.2% respectively.
In January 2011 compared with December 2010, seasonally adjusted industrial production grew by 0.3% in the euro area (EA17) and by 0.6% in the EU27. In December 2010 production rose by 0.3% and 0.2% respectively. In January 2011 compared with January 2010, industrial production grew by 6.6% in the euro area and by 6.8% in the EU27.
In January 2011 compared with December 2010, production of intermediate goods grew by 2.5% in the euro area and by 2.7% in the EU27. Durable consumer goods rose by 2.5% and 2.0% respectively. Capital goods fell by 0.3% in the euro area, but increased by 0.6% in the EU27. Non-durable consumer goods dropped by 0.4% and 0.2% respectively. Production of energy declined by 3.1% in the euro area and by 2.4% in the EU27. Among the Member States for which data are available, industrial production rose in fourteen and fell in five. The highest increases were registered in Malta (+6.0%), Estonia (+4.2%) and the Czech Republic (+3.5%), and the largest decreases in Portugal (-4.2%), Finland (-2.8%) and Latvia (-2.4%).
In January 2011 compared with January 2010, production of capital goods grew by 12.3% in the euro area and by 13.2% in the EU27. Intermediate goods increased by 10.1% and 10.6% respectively. Durable consumer goods rose by 3.8% in the euro area and by 3.4% in the EU27. Non-durable consumer goods gained 0.3% and 1.3% respectively. Production of energy fell by 1.9% in the euro area and by 2.1% in the EU27. Industrial production rose in all the Member States for which data are available, except Portugal (-1.4%). The highest increases were registered in Estonia (+28.8%), Slovakia (+17.1%) and Lithuania (+16.0%), and the smallest in Italy (+0.6%), Ireland (+1.4%) and Malta (+2.1%).
The first estimate for the euro area (EA17) trade balance with the rest of the world in January 2011 gave a 14.8 bn euro deficit, compared with -9.7 bn in January 2010. The December 2010 balance was -0.5 bn, compared with +3.2 bn in December 2009. In January 2011 compared with December 2010, seasonally adjusted exports rose by 3.6% and imports by 5.3%. The first estimate for the January 2011 extra-EU27 trade balance was a 29.8 bn euro deficit, compared with -22.7 bn in January 2010. In December 2010 the balance was -10.9 bn, compared with -2.9 bn in December 2009. In January 2011 compared with December 2010, seasonally adjusted exports rose by 6.4% and imports by 4.8%.
Euro area annual inflation is expected to be 2.6% in March 2011 according to a flash estimate issued by Eurostat, the statistical office of the European Union. Euro area annual inflation was 2.4% in February 2011 , up from 2.3% in January. A year earlier the rate was 0.8%. Monthly inflation was 0.4% in February 2011. EU annual inflation was 2.8% in February 2011, unchanged compared with January. A year earlier the rate was 1.5%. Monthly inflation was 0.4% in February 2011.
The euro area (EA17) seasonally-adjusted unemployment rate was 9.9% in February 2011, compared with 10.0% in January. It was 10.0% in February 2010. The EU27 unemployment rate was 9.5% in February 2011, compared with 9.6% in January. It was 9.6% in February 2010. Eurostat estimates that 23.051 million men and women in the EU27, of whom 15.747 million were in the euro area, were unemployed in February 2011. Compared with January 2011, the number of persons unemployed fell by 99 000 in the EU27 and by 77 000 in the euro area. Compared with February 2010, unemployment decreased by 31 000 in the EU27 and by 77 000 in the euro area.

Economy of Japan

Japan`s economy contracted more than initially estimated in the final quarter of last year, as both business investment and private consumption were weaker than expected, revised data from the Cabinet Office showed. Gross domestic product contracted a price-adjusted 1.3 per cent in annualised terms during the October-December period. That compared with an initial reading of a 1.1-per-cent contraction released last month. GDP shrank 0.3 per cent from the previous quarter, the data showed, unchanged from the initial estimate.
Japan`s industrial production rose for the fourth-straight month in February, according to government data Wednesday, though the index is expected to fall sharply during the current month due to the catastrophic March 11 earthquake and tsunami. Industrial production increased by a seasonally adjusted 0.4%, the economy ministry said, beating expectations for a 0.2% month-on-month fall, according to a consensus forecast reported by Dow Jones Newswires. The result was sharply lower than January`s 2.4% rise, however. A survey of manufacturers included with the data projected production up 1.4% in March and down 1.3% in April. Transport equipment, general machinery and chemicals were the biggest drivers of the increase, the ministry said.
The Ministry of Finance has revealed Japan swung back to a surplus in February. The trade balance came to a surplus of 654.1 billion yen - after having posted the first deficit for 22 months in January. Exports rose 9% in February on an annual basis - beating expectations of a 8.6% rise. The Japanese economy, which is the world`s third largest, emerged from recession in the second quarter of 2009 - much sooner than many other economies - driven by export demand. Meanwhile, imports were 9.9% higher on an annual basis – again exceeding expectations for a 4.4% rise. However, according to analysts, the country`s trade balance could deteriorate after this month`s earthquake and tsunami. This has forced some of Japan`s largest exporters to halt production.
Japan`s deflation moderated in February even before the country`s worst earthquake on record and an ensuing tsunami and nuclear crisis this month push up energy and food costs. Consumer prices excluding fresh food declined 0.3 percent from a year earlier, the statistics bureau said today in Tokyo, matching the median estimate of 23 economists surveyed by Bloomberg News.
The unemployment rate in Japan was a seasonally adjusted 4.6 percent in February, the Ministry of Internal Affairs and Communications said - beating forecasts for an unchanged rate of 4.9 percent. The number of unemployed persons in February was 3.00 million, a decrease of 240 thousand or 7.4 percent on year. The number of employed persons in February was 62.23 million, an increase of 380 thousand or 0.6 percent. The job-to-applicant ratio came in at a two-year high of 0.62 - in line with expectations after showing 0.61 in January. The participation rate was 59.0 percent.
The March 11 disaster may cause Japan`s gross domestic product to shrink by as much 12 percent on an annualized basis in the second quarter, Morgan Stanley MUFG Securities Co. predicted. The shortage of daily necessities caused by the magnitude-9.0 quake may push up prices, while the weakening economy may dampen consumption and slump price gains.

Economy of Russia

Russia`s GDP growth picked up slightly in February, data showed on Thursday, potentially offering some comfort to the central bank which is battling to contain inflation without jeopardizing the economic recovery. Gross domestic product growth (GDP) picked up to 4.4 percent year-on-year from January`s 4.3 percent, Economy Minister Elvira Nabiullina told reporters. Adjusted for seasonal and calendar factors, GDP rose 0.2 percent in February, month-on-month, after a fall of 0.3 percent in January.
Russia will cash in on high oil prices through better growth and bigger surpluses, but soaring commodity prices have prompted economists to raise their inflation forecast this year to 9 percent, a Reuters poll shows. The poll estimated economic growth this year of 4.6 percent, up from 4.2 percent in a poll in February, with analysts citing stronger industrial production and higher capital investment.
Inflation of 9 percent this year would exceed the 8.8 percent posted in both 2010 and 2009 and far overshoot the central bank`s 6-7 percent target, according to the median forecast in a Reuters poll of 16 analysts. The forecast is up from the 8.5 percent estimate in last month`s poll, despite some signs of moderating inflation in the short term, which the central bank thought sufficiently encouraging to pause in its rate hike cycle in March.
The World bank lowered its forecast of economic growth rates in 2011 to 4.4 percent, compared with last year`s prediction of 4.5 percent. Cutting inefficient expenditures was one possible way to reduce budget spending and prevent inflation growth.