World Economy Review - August 2012

Moody`s Investors Service has slashed its growth forecasts for the advanced and emerging nations in the G-20, citing an increase in the downside risks to global recovery.
In its latest Global Macro-Risk Outlook 2012-2013 update, the ratings agency says real growth in the G-20 economies will be about 2.8 per cent in the 2012 and 3.4 per cent in the following year. This is a respective 20 basis points and 10 basis points lower than Moody`s predicted in April.
According to the agency, the main risks to global growth are the deeper than expected recession in the eurozone, the danger of a hard landing in major emerging markets such as China, India and Brazil, an oil-price supply-side shock caused by resurfacing geopolitical risks and the potential for sudden and sharp fiscal tightening in the US next year.
G-20 advanced economies, which include the eurozone, the UK and the US, are expected to grow by about 1.4 per cent in 2012 and 2.0 per cent in 2013. This compares with 1.4 per cent last year and 3 per cent in 2010.
Moody`s group credit officer for sovereign risk Elena Duggar says: “In our view, fiscal consolidation efforts, weak consumer and business confidence, banking and household sector deleveraging, persistently high unemployment levels and real-estate market weakness will continue to constrain growth in advanced economies.”
The ratings agency also predicts G-20 emerging economies will grow by about 5.2 per cent in 2012 and 5.7 per cent next year. This is “materially lower” than the 6.6 per cent seen in 2011 and the 8 per cent achieved in 2010.
Duggar says: “We are revising downwards our forecast for these large emerging market economies, where the weaker external environment and decelerating domestic demand are causing a slowdown in growth momentum.
“We continue to expect that the slowdown in advanced economies and volatile capital flows will suppress growth in emerging markets.”

Economy of the United States

The U.S. economy fared slightly better than initially thought in the second quarter, but the pace of growth remained too slow to shut the door on further monetary easing from the Federal Reserve. Gross domestic product expanded at a 1.7 percent annual rate, the Commerce Department said in its second estimate on Wednesday as stronger export growth offset a pull-back in restocking by businesses wary of sluggish domestic demand. That was up from last month`s 1.5 percent estimate and in line with economists` expectations. The economy grew at a 2.0 percent pace in the January-March period. The report also showed that after-tax corporate profits unexpectedly rose at 1.1 percent rate after sinking 8.6 percent in the first quarter. First-quarter economic growth was revised up to show strong export growth, despite slowing global demand. Trade contributed 0.32 percentage point to GDP growth instead of subtracting a third of a percentage point, as previously reported.
U.S. factories made more cars, computers and airplanes last month, a hopeful sign that manufacturing is recovering after a weak spring. Industrial production, which includes output at factories, mines and utilities increased 0.6 percent in July from June, the fourth straight monthly increase, the Federal Reserve reported.
Factory output, the most important component of industrial production, rose 0.5 percent, the second straight increase. Factory output has risen 21.9 percent since its recession low hit in June 2009 and is just 1.7 percent below the pre-recession peak for factory output reached in April 2007.
Mining output, which includes oil and gas production as well as coal mining, increased 1.2 percent in July. Utility output rose 1.3 percent, largely because of hot weather in many parts of the country.
Manufacturing helped lift the economy out of the Great Recession three years ago. But it has slowed this spring as consumers cut back on spending and businesses invested less in machinery and equipment. Some worry that manufacturing could weaken further in coming months if Europe`s financial crisis and slower global growth cut demand for U.S. exports.
Still, analysts noted that the growth in U.S. factory output in July and June suggests the spring slowdown in manufacturing may be temporary. July`s increase was led by a 3.3 percent surge in output of motor vehicles and parts. Production of computers and primary metals such as steel also showed big gains.
The U.S. trade deficit fell to its lowest level in 18 months in June, pushed down by a steep drop in oil imports and a rise in exports. The trade gap narrowed to $42.9 billion in June, down from $48 billion in May, the Commerce Department said.
Exports rose 0.9 percent to a record high of $185 billion. Overseas sales of autos, pharmaceuticals, and industrial machinery increased. Despite Europe`s struggling economy, exports to the 27-nation European Union grew 1.7 percent.
Imports fell 1.5 percent to $227.9 billion, the lowest in four months. A key reason was the average price of imported oil fell $7.78 to $100.13, the biggest drop in 3 ½ years. That brought the trade deficit in oil to its lowest level since November 2010 and accounted for half of the improvement in the overall trade gap.
Excluding oil, the trade deficit dropped to $20.4 billion in June from $23.2 billion in May. Imports of computer equipment and TVs also declined.
U.S. consumer prices were unchanged in July, as lower energy prices offset gains in the cost of food and other items, the Labor Department reported. An index of energy prices declined 0.3% in July, while the food index rose 0.1%. The so-called core consumer price index, which excludes the volatile categories of food and energy, rose 0.1%.
Economists surveyed by MarketWatch had expected an increase of 0.2% for both the overall and core-price gauges. See economic calendar. In June overall consumer prices were also unchanged, while the core gauge rose 0.2%. The CPI rose 1.4% over the year through July, the smallest 12-month change since late 2010. The core rate gained 2.1% over the past 12 months, the smallest gain since late 2011.

Economy of the European Union

GDP fell by 0.2% in both the euro area (EA17) and the EU27 during the second quarter of 2012, compared with the previous quarter, according to flash estimates published by Eurostat, the statistical office of the European Union. In the first quarter of 2012, growth rates were 0.0% in both zones. Compared with the same quarter of the previous year, seasonally adjusted GDP fell by 0.4% in the euro area and by 0.2% in the EU27 in the second quarter of 2012, after 0.0% and +0.1% respectively in the previous quarter.
In June 2012 compared with May 2012, seasonally adjusted industrial production fell by 0.6% in the euro area (EA17) and by 0.9% in the EU27. In May production rose by 0.9% and 0.8% respectively. In June 2012 compared with June 2011, industrial production dropped by 2.1% in the euro area and by 2.2% in the EU27. These estimates are released by Eurostat, the statistical office of the European Union.
In June 2012 compared with May 2012, production of capital goods dropped by 1.3% in both the euro area and the EU27. Non-durable consumer goods decreased by 0.7% and 1.0% respectively. Intermediate goods declined by 0.4% in the euro area and by 1.0% in the EU27. Durable consumer goods grew by 0.2% in the euro-area, but fell by 1.1% in the EU27. Production of energy rose by 0.4% in the euro-area, but decreased by 0.2% in the EU27.
Among the Member States for which data are available, industrial production fell in sixteen and rose in five. The largest decreases were registered in the United Kingdom (-2.5%), Poland (-2.0%), Estonia (-1.7%) and Italy (-1.4%), and the highest increases in Lithuania (+18.6%), Slovenia (+2.9%) and Ireland (+2.7%).
In June 2012 compared with June 2011, production of intermediate goods dropped by 3.7% in the euro area and by 3.5% in the EU27. Durable consumer goods fell by 2.0% and 2.5% respectively. Non-durable consumer goods decreased by 2.0% in the euro area and by 1.5% in the EU27. Capital goods declined by 0.9% and 1.0% respectively. Production of energy fell by 0.4% in the euro area and by 1.7% in the EU27.
Among the Member States for which data are available, industrial production fell in twelve, rose in eight and remained stable in Greece. The largest decreases were registered in Italy (-8.2%), Spain (-6.3%), the United Kingdom (-4.6%) and Portugal (-4.4%), and the highest increases in Ireland (+9.5%), Latvia (+5.4%) and Slovenia (+2.8%).
The first estimate for the euro area (EA17) trade in goods balance with the rest of the world in June 2012 gave a 14.9 bn euro surplus, compared with +0.2 bn in June 2011. The May 20122 balance was +7.1 bn, compared with -0.9 bn in May 2011. In June 2012 compared with May 2012, seasonally adjusted exports rose by 2.4% and imports remained almost stable.
The first estimate for the June 2012 extra-EU271 trade in goods balance was a 0.4 bn euro surplus, compared with -15.3 bn in June 2011. In May 2012 the balance was -3.8 bn, compared with -14.2 bn in May 2011. In June 2012 compared with May 2012, seasonally adjusted exports rose by 2.1% and imports by 0.9%.
Euro area annual inflation is expected to be 2.6% in August 2012 according to a flash estimate issued by Eurostat, the statistical office of the European Union. Euro area annual inflation was 2.4% in July 2012, stable compared to June. A year earlier the rate was 2.6%. Monthly inflation was -0.5% in July 2012. EU annual inflation was 2.5% in July 2012, also stable compared to June. A year earlier the rate was 2.9%. Monthly inflation was -0.4% in July 2012.
The euro area (EA17) seasonally-adjusted unemployment rate was 11.3% in July 2012, stable compared with June. It was 10.1% in July 2011. The EU27 unemployment rate was 10.4% in July 2012, also stable compared with June4. It was 9.6% in July 2011. Eurostat estimates that 25.254 million men and women in the EU27, of whom 18.002 million were in the euro area, were unemployed in July 2012. Compared with June 2012, the number of persons unemployed increased by 43 000 in the EU27 and by 88 000 in the euro area. Compared with July 2011, unemployment rose by 2.104 million in the EU27 and by 2.051 million in the euro area.

Economy of Japan

Japan`s GDP growth in the three months to June was only half of what economists had expected and signified a significant slowdown in the economy after a 1.3% growth in the first quarter. The world`s third-largest economy grew at an annualised rate of 1.4%, less that the median forecast of 2.5%.
The first quarter growth was based on strong consumer spending fuelled by government subsidy for low emission cars. Japan`s economy has always relied on strong domestic consumption but in the second quarter the confidence among consumers dropped significantly. The country`s domestic consumption that makes up almost 60% of Japan`s economy dropped by 0.1% in the second quarter from 0.2% in the previous one.
However, the Japanese Government remains optimistic about the economy and argued that the slowdown was a reaction to the unexpectedly strong first quarter. Japanese industrial production resumed its slide, falling 1.2 percent in July from June amid slumping global demand, the government said. It`s a disappointing sign for the world`s third-biggest economy and suggests that any sort of recovery is sputtering.
Manufacturers had much rosier predictions a month ago, when they forecast that factory output, a key indicator for Japan`s export-oriented economy, would jump 4.5 percent in July. But weak global and domestic demand is weighing on manufacturers, particularly electronics makers, who are facing intense competition from South Korean, Taiwanese and other Asian manufacturers. The strong yen, which erodes overseas earnings, is also eating into profits.
Production of semiconductors, liquid crystal displays and steam turbine parts dragged on overall output, the Ministry of Economy, Trade and Industry said. The outlook for coming months is even gloomier: Manufacturers foresee output barely inching up 0.1 percent in August and sliding another 3.3 percent in September.
July`s drop comes after a modest 0.4 percent rise in factory output in June and declines of 3.4 percent in May and 0.2 percent in April. The industrial production index was the lowest since May 2011, when manufacturers were still reeling from disruptions from the massive earthquake and tsunami that hit northeastern Japan two months earlier.
Sinking exports to crisis-stricken Europe and the rest of Asia put Japan`s trade back into deficit in July, the Finance Ministry said, adding to gloom over the economic outlook. The deficit was 517.4 billion yen ($6.5 billion) in July, according to provisional trade figures. That compares with a 69.7 billion yen surplus a year earlier and a modest surplus of 62 million yen in June of this year. Exports fell 8 percent from a year earlier in July to 5.3 trillion yen ($66.9 billion), while imports rose 2 percent to 5.83 trillion yen ($73.6 billion), the ministry said.
On the labor front, the seasonally adjusted jobless rate remained at 4.3 percent for the second month. That`s down from 4.6 percent earlier this year but up from a recent low of 4.2 percent in September.
The Ministry of Internal Affairs and Communications said its survey showed that the number of employed fell 90,000 to 62.77 million in July, while the number of jobless people decreased 240,000 to 2.88 million.
Japan`s core consumer prices fell 0.3 percent in July from a year earlier, data showed on Friday, as the economy struggles to escape deflation and achieve the central bank`s 1 percent inflation target.
The decline in the core consumer price index, which includes oil products but excludes volatile prices of fresh fruit, vegetables and seafood, matched the median market forecast, data from the Ministry of Internal Affairs and Communications showed. It was the third straight month of declines, following a 0.2 percent drop in the core index in June.
The so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, fell 0.6 percent in the year to July, the data showed.
Core consumer prices in Tokyo, available a month before the nationwide data and a leading indicator for nationwide prices, fell 0.5 percent in August from a year earlier, slightly less than a median market forecast for a 0.6 percent decline.

Economy of Russia

Russia`s economy grew by 4.4 percent year-on-year in the first six months of 2012, the Federal State Statistics Service (Rosstat) reported. Rosstat`s GDP estimate coincided with the half-year figure published by the Economic Development Ministry in July.
Russia`s economy expanded by an annualized 4.9 percent in the first quarter and by 4 percent in the second quarter of the year, according to Rosstat. In January-June 2011, Russia`s GDP grew by 3.7 percent.
Economic Development Minister Andrei Belousov has previously said Russia`s economic growth in January-June 2012 was facilitated by a fast rise in investment and rapid output expansion in manufacturing.
In April the Economic Development Ministry cut its forecast for Russia`s economic growth in 2012 from 3.7 percent to 3.4 percent. The ministry said in June it could revise its GDP growth forecast upward by this fall from 3.4 percent to 3.7-4 percent.