World Economy Review - December 2011

Fitch Ratings has revised downwards its forecast of global economic growth in 2012, and remains concerned about the ability of politicians in Europe and the US to resolve financial market tensions.
Fitch now puts growth in the major advanced economies (MAE) at 1.3% in 2011 and expects it to remain weak at 1.2% in 2012, followed by only a modest acceleration to 1.9% in 2013. Compared with the previous GEO in October, Fitch has revised down its GDP forecasts over the entire forecast horizon to 2013. The agency forecasts global growth, based on market exchange rates, at 2.4% for 2012 and 3.0% in 2013, compared with 2.7% and 3.1% previously.
Mildly negative quarterly growth rates are likely over the next quarters in the eurozone (EZ) and, among its four largest members, Fitch expects only Italian GDP to contract over 2012 as a whole, by 0.5%. However, the outright contraction of the eurozone economy over 2012 is now a one-in-three probability.
The recovery in the US will remain lacklustre in the short run with stronger growth momentum expected from H212 onwards, weighed down by the continued drag from the housing market as well as fiscal tightening equivalent to around 1% of GDP. In line with weak GDP growth in the EZ, the economic outlook has also weakened in the UK, where Fitch has revised down its GDP growth forecasts again to just 0.7% in 2012 and 2.0% in 2013.
In contrast, Fitch expects the economic growth of BRIC countries will remain robust over the forecast horizon, at 6.3% in 2012 and 6.6% in 2013, well above MAE or global growth rates. Nevertheless, in line with the economic cycle of MAEs, China and Russia will slow in the coming years. Brazil and India have already experienced a sharp slowdown this year and are expected to regain some of the lost momentum by 2013.
In Fitch`s assessment downside risks dominate at this current juncture. In particular, financial tensions may intensify further in the EZ. A special section of the GEO explores such an alternative scenario to Fitch`s baseline case and highlights the fragility of economic growth in the EZ.
Notwithstanding the short and long term decisions taken by the European Council on 9 December to resolve the euro crisis, market tension remains high. Furthermore, progress on US fiscal consolidation or global imbalances could unwind in a disorderly fashion. Therefore, the probability of unfavourable outcomes is high and the risk of tail events, with severe consequences, has increased over the last months. Conversely, improvement in private sector balance sheets could generate stronger demand and a swift resolution of financial stress could boost confidence globally.

Economy of the United States

The U.S. economy expanded less than thought during the third quarter as consumer spending fell short of an earlier estimate, though signs point to stronger growth in the final months of the year. Gross domestic product, the broadest measure of all the goods and services produced in an economy, grew at an inflation-adjusted annual rate of 1.8% in the July to September period. While still the strongest performance of the year, the Commerce Department`s third estimate of GDP is lower than the previous reading of 2.0%. Economists surveyed by Dow Jones Newswires had forecast 2.0% growth.
The economy`s lower growth level was largely due to a downward revision of how much consumers spent, especially for services such as health care. The latest estimate showed personal consumption expenditure, which accounts for about two-thirds of spending in the economy, rose by 1.7% in the third quarter. That compares to a previous estimate of a 2.3% increase.
Industrial production decreased 0.2 percent in November after having advanced 0.7 percent in October. Factory output moved down 0.4 percent in November; excluding a drop of 3.4 percent in the output of motor vehicles and parts, manufacturing production declined 0.2 percent. Mining production edged up 0.1 percent, while the output of utilities rose 0.2 percent. At 94.8 percent of its 2007 average, total industrial production for November was 3.7 percent above its year-earlier level. Capacity utilization for total industry decreased to 77.8 percent, a rate 2.0 percentage points above its level from a year earlier but 2.6 percentage points below its long-run (1972-2010) average.
The U.S. trade deficit narrowed in October to its lowest point of the year after Americans bought fewer foreign cars and imported less oil. The Commerce Department said that the trade deficit shrank 1.6% to $43.5 billion. It was the fourth straight monthly decline.
Overall imports fell 1% to $222.6 billion, which largely reflected a 5% decline in oil imports. The average price of imported oil fell for the fifth straight month to the lowest level since March. Oil prices rose last winter because of turmoil in the Middle East and North Africa. Exports slipped 0.8% to $179.2 billion, the first drop after three months of gains. Shipments of industrial supplies, such as natural gas, copper and chemicals, fell. Exports of autos and agricultural goods also dropped.
A lower deficit is the latest sign that the economy has rebounded after nearly stalling in the spring. It can boosts economic growth because it typically means foreign nations are buying more American goods. That can lead to more jobs and higher consumer spending, which fuels 70% of economic activity. But economists expect the trend toward a narrower deficit could reverse in the coming months. Oil prices are increasing and Europe is likely to import fewer U.S. goods as its economy weakens. At the same time, U.S. businesses are stocking up on foreign goods as consumer demand improves.
The Consumer Price Index for All Urban Consumers (CPI- U) was unchanged in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment.
The energy index declined for the second month in a row and offset increases in the indexes for food and all items less food and energy. As in October, the gasoline index fell sharply and the index for household energy declined as well. The food index rose slightly in November, though the index for food at home declined as four of the six major grocery store food group indexes fell.
The index for all items less food and energy increased 0.2 percent in November following increases of 0.1 percent in each of the prior two months. The indexes for shelter, medical care, apparel, and personal care all rose. These increases more than offset declines in the indexes for new vehicles and used cars and trucks.
The all items index has risen 3.4 percent over the last 12 months. This is a slightly smaller increase than last month`s 3.5 percent figure, as the 12-month change in the energy index declined from 14.2 percent to 12.4 percent. The 12-month change in the food index also declined slightly, from 4.7 percent to 4.6 percent. In contrast, the 12-month change in the index for all items less food and energy continued to rise, reaching 2.2 percent in November.

Economy of the European Union

GDP increased by 0.2% in the euro area (EA17) and by 0.3% in the EU27 during the third quarter of 2011, compared with the previous quarter, according to second estimates released by Eurostat, the statistical office of the European Union. In the second quarter of 2011, growth rates were +0.2% in both zones. Compared with the third quarter of 2010, seasonally adjusted GDP rose by 1.4% in both the euro area and the EU27, after +1.7% in both zones for the previous quarter.
During the third quarter of 2011, household final consumption expenditure increased by 0.3% in the euro area and by 0.2% in the EU27 (after -0.5% and -0.4% respectively in the previous quarter). Gross fixed capital formation rose by 0.1% in the euro area and by 0.2% in the EU27 (after 0.0% and +0.4%). Exports gained 1.5% in the euro area and 1.2% in the EU27 (after +1.1% and +0.6%). Imports increased by 1.1% in the euro area and by 0.9% in the EU27 (after +0.3% and +0.2%).
In October 2011 compared with September 2011, seasonally adjusted industrial production1 fell by 0.1% in the euro area (EA17) and by 0.2% in the EU27. In September production decreased by 2.0% and 1.5% respectively. In October 2011 compared with October 2010, industrial production increased by 1.3% in both zones.
In October 2011 compared with September 2011, production of energy fell by 0.9% in the euro area and by 0.6% in the EU27. Intermediate goods decreased by 0.8% in both zones. Durable consumer goods dropped by 0.4% in the euro area and by 0.5% in the EU27. Non-durable consumer goods grew by 0.6% and 0.3% respectively. Capital goods rose by 1.2% in the euro area and by 0.9% in the EU27.
Among the Member States for which data are available, industrial production fell in fourteen, remained stable in France and rose in eight. The highest decreases were registered in Greece (-4.4%), Lithuania (-3.7%), Luxembourg (-3.6%) and Slovenia (-2.3%), and the largest increases in Ireland (+6.6%), Estonia (+2.9%), Malta and Slovakia (both +0.9%).
In October 2011 compared with October 2010, production of capital goods increased by 5.3% in the euro area and by 5.5% in the EU27. Non-durable consumer goods rose by 0.9% and 1.2% respectively. Intermediate goods grew by 0.4% in the euro area and by 0.6% in the EU27. Durable consumer goods fell by 2.1% and 2.8% respectively. Production of energy decreased by 5.1% in the euro area and by 5.4% in the EU27.
Among the Member States for which data are available, industrial production rose in fourteen and fell in nine. The highest increases were registered in Ireland (+12.2%), Slovakia (+7.8%), Poland (+7.1%) and Sweden (+6.0%), and the largest decreases in Greece (-12.4%), Luxembourg (-11.3%), Finland (-6.0%) and Italy (-4.2%).
The first estimate for euro area (EA17) trade with the rest of the world in October 2011 gave a 1.1 bn euro surplus, compared with +3.1 bn euro in October 2010. The September 2011 balance was +2.7 bn, compared with +0.3 bn in September 2010. In October 2011 compared with September 2011, seasonally adjusted exports fell by 1.9% and imports by 0.7%.
The first estimate for the October 2011 extra-EU27 trade balance was a 11.0 bn euro deficit, compared with -9.6 bn in October 2010. In September 2011 the balance was -10.6 bn, compared with -13.9 bn in September 2010. In October 2011 compared with September 2011, seasonally adjusted exports fell by 0.7%, while imports rose by 0.5%.
Euro area annual inflation is expected to be 2.8% in December 2011 according to a flash estimate issued by Eurostat, the statistical office of the European Union. Euro area annual inflation was 3.0% in November 2011, unchanged compared with October. A year earlier the rate was 1.9%. Monthly inflation was 0.1% in November 2011. EU annual inflation was 3.4% in November 2011, unchanged compared with October. A year earlier the rate was 2.3%. Monthly inflation was 0.2% in November 2011.

Economy of Japan

Japan`s economy rebounded in the third quarter at a slightly slower pace than initially estimated as companies pulled back on capital spending, worried that yen strength and slowing global growth will hurt exports. Gross domestic product grew a revised 1.4% in July-September 2011 from the previous quarter, slightly slower than a preliminary 1.5% increase but above a median forecast of a revised 1.3% expansion.
Industrial production in Japan declined a seasonally adjusted 2.6 percent on month in November, the Ministry of Economy, Trade and Industry said in preliminary reading - suggesting that Japan`s recovery from the devastating earthquake and tsunami on March 11 may be stalling. The November headline figure was well shy of forecasts for a 0.8 percent contraction following the 2.2 percent fall in October.
On an annual basis, industrial production dropped 4.0 percent - again missing expectations for a 2.0 percent fall following the 0.1 percent gain in the previous month. As a result of the data, the METI maintained its assessment of industrial production, saying: "Industrial production appears to be flat."
Industries that contributed to the decrease include transport equipment, communications equipment and steel. Commodities that contributed to the decrease include large and small passenger automobiles, and cellular telephones. Industries that contribute to the increase in December include transport equipment, communication electronics equipment and general machinery. Industries that contributed to the increase in January include transport equipment, iron and steel and electrical machinery.
According to the survey of production forecast, production is expected to climb 4.8 percent in December and 3.4 percent in January.
Shipments in November contracted 1.5 percent on month, reversing the previous month`s gains. Shipments also fell 4.5 percent on year. Industries that contributed to the decline included communication electronics equipment, transport equipment and iron and steel. Inventories in November were down 0.8 percent on month but jumped 8.0 percent on year. Industries that contributed to the moves included transport equipment, electrical machinery and communication electronics equipment. The Inventory Ratio in November fell 1.7 percent on month, falling for the second straight month. It rose 7.5 percent on year.
Japan posted a larger-than-expected trade deficit in November as exports slumped for a second straight month, hit by slowing global growth and the strong yen, data from the Ministry of Finance showed. Japan`s trade deficit, the sixth this year, winded to Y684.7 billion in November from Y280.2 billion in October, reversing a surplus of Y157.62 billion seen a year earlier. The latest trade balance was worse than the median forecast by economists in a Market News International survey for a deficit of Y442.4 billion.
Exports fell 4.5% on the year to Y5.20 trillion in November, marking a second straight month of declines. It was largely in line with the median forecast by economists in a MNI survey for a 4.4% drop. Exports of semiconductors and other electronic parts, which are sensitive to changes in the trend of the global economy, fell 15.1% on year while shipments of TVs and DVD recorders tumbled 48.5%. Japanese imports rose 11.4% y/y in November to Y5.88 trillion for the 23rd consecutive rise on continued high demand for crude oil and liquefied natural gas used for power generation as well as mobile phones from Asia.
Core inflation prices in Japan were down 0.2 percent on year in November, the Ministry of Internal Affairs and Communications said - matching forecasts following the 0.1 percent decline in October. Overall nationwide CPI was down 0.5 percent on year versus forecasts for a decline of 0.4 percent after easing 0.2 percent in October. On a monthly basis, core inflation was down 0.3 percent, while overall CPI fell 0.6 percent.
Core inflation for the Tokyo region - considered to be a leading indicator for the nationwide trend - was down 0.3 percent on year in December versus expectations for a 0.4 percent contraction following the 0.5 percent fall in November. Overall CPI in Tokyo was down 0.4 percent on year, in line with expectations following the 0.5 percent decline in November. On month, Tokyo CPI was flat both on month and on year for December.
The unemployment rate in Japan came in at a seasonally adjusted 4.5 percent in November, the Ministry of Internal Affairs and Communications said - in line with forecasts and unchanged from the previous month. The job-to-applicant ratio was 0.69 - slightly above expectations for 0.68 after showing 0.67 in October. The number of employed persons was 62.60 million, while the number of unemployed persons was 2.80 million. The participation rate was 59.2 percent, down from 59.4 percent a month earlier.

Economy of Russia

Russia`s gross domestic product grew 5.4 percent in November 2011 year-on-year, and increased 4.4 percent in the first 11 months of the year compared to the same period a year ago, Economy Minister Elvira Nabiullina said. In month-on-month terms, GDP grew 0.3 percent in November. Earlier, the Russian government said its gross domestic product grew at a 4.8% pace in the third quarter of 2011. In the whole of 2011, Russia`s economy is likely to grow at between 4.2 percent and 4.5 percent in GDP terms.
Russian industrial-production growth accelerated in November 2011, beating economist forecasts as electricity generation increased. Output rose 3.9 percent in November compared with a year earlier after a 3.6 percent increase a month ago, the Federal Statistics Service in Moscow said in an e-mailed statement. The median forecast in a Bloomberg survey of 17 economists was for growth of 3.6 percent. The increase suggests Russia`s economy is accelerating even as Europe`s debt crisis and slower growth in China threaten to damp demand for the country`s exports.
Russia`s inflation slowed to 6.1 percent this year, the lowest year-end rate since the Soviet Union collapsed in 1991, according to a preliminary estimate by the Federal Statistics Service. Consumer prices rose 0.4 percent in December from a month earlier, the Moscow-based service said in an e-mailed statement today. Final data for December and the year will be published Jan. 10, the service said.