World Economy Review - August 2013

The OECD trimmed its growth forecasts for China and the United States, warning that lasting recovery is still not firmly on its feet despite a rebound in some countries. A central risk to recovery is how the U.S. Federal Reserve bank winds down its easy-money policies, the OECD said, a concern which has already upset several emerging economies.
Central banks that have provided stimulus need to maintain their lax monetary policies for some time, it advised. "The pace of recovery in the major advanced economies improved in the second quarter and growth is expected to be maintained at a similar rate in the second half of the year," the Organization for Economic Cooperation and Development said. "Activity is expanding at encouraging rates in North America, Japan and the United Kingdom, while the euro area as a whole is no longer in recession," it added.
Nevertheless, it said that the U.S. economy would probably grow 1.7% this year, compared to its forecast of 1.9% in April, after taking into account the latest data. Japan`s forecast was unchanged at 1.6%. Growth for Britain was raised to 1.5% from 0.8%; Germany`s increased to 0.7% from 0.4%; and France`s forecast flipped to 0.3% growth from 0.3% contraction. "While the improvement in growth momentum in OECD economies is welcome, a sustainable recovery is not yet firmly established and important risks remain," it added.
The OECD now sees the economy of China, which is not part of the 34-nation group of advanced economies, growing 7.4% instead of 7.8%. "Growth in China has seemingly already passed the trough and looks set to recover further in the second half of 2013, although the expansion is still expected to be more subdued than in earlier cycles," said the OECD. It also pointed to the perils of the scaling back of U.S. monetary stimulus, which has led to capital outflows from emerging countries and tightening of financial conditions in much of the global economy.
"As emerging economies contributed the bulk of global economic growth in recent years, and since their share of global output has increased so much, this widespread loss of momentum makes for sluggish near-term growth prospects for the world economy," said the OECD. "There is a risk that the financial market volatility and strong capital outflows in recent months in some emerging economies could intensify, exerting an additional drag on growth," it added.
Easy-money policies from central banks that have propped up demand are needed a while longer, said the OECD. "It is necessary to continue to support demand, including through unconventional monetary policies, in order to minimize the risk of the recovery being derailed," it said in its Interim Economic Assessment.
The OECD endorsed the Federal Reserve`s plans to begin gradually reducing the monetary stimulus it injects into the U.S. economy from its current level of $85 billion per month. It said Japan should keep up its stimulus efforts until deflation ends, while the eurozone should be ready to undertake further monetary easing if the recovery fails to take hold.
The OECD said the European Central Bank may need to undertake measures to boost sluggish lending such as "providing direct incentives to banks to extend credit to the real economy." Despite subdued inflationary pressures in China, the OECD recommended caution over monetary easing if growth slows due to the fast increase in lending.

Economy of the United States

The nation`s economic output grew at a much faster rate in the second quarter than originally estimated, buoyed by an increase in exports. Gross domestic product, a broad measure of goods and services produced across the economy, grew in the second quarter at an annualized rate of 2.5 percent in April through June of this year, the Commerce Department reported. The government initially estimated G.D.P. at 1.7 percent.
The growth rate is still far lower than what the country needs to recover the ground lost during the recent recession anytime soon. The long-term average growth rate for the economy is more than 3 percent, and the economy needs above-trend growth to make up for sharp losses from the downturn.
Even so, the upward revision was welcome news, particularly alongside another report on Thursday showing that jobless claims were falling. The improving economy is also likely to factor into the Federal Reserve`s decision to pull back from its stimulus efforts, which some analysts expect as soon as September.
Expansion in the second quarter - faster than the annualized growth rate in the first quarter of 1.1 percent - was driven by gains in consumer spending, exports, private inventory investment, nonresidential fixed investment and residential fixed investment. Residential fixed investment, which reflects the sharp rebound in housing construction, has been one of the brightest spots in the economy so far this year, growing at an annualized rate of 12.9 percent in the second quarter and 12.5 percent in the first.
Industrial production stalled in July, the latest sign of U.S. manufacturers struggling to gain traction amid slow global economic growth. Industrial output last month was unchanged on a seasonally adjusted basis from the prior month, while the use of available production capacity fell 0.1 percentage point to 77.6%, the Federal Reserve said. Economists had forecast a 0.2% rise in output and capacity utilization of 77.8%.
Manufacturing, the biggest and most closely watched component of industrial production, fell 0.1% in July, partially reversing gains posted in May and June. The mining component rose while utility output fell.
The U.S. trade deficit jumped by 13% in July after hitting a more than three-year low the previous month, as the nation imported more goods, such as crude oil, and exports fell, the Commerce Department said. The increase in the trade deficit to $39.1 billion from June`s upwardly revised level of $34.5 billion sent a mixed message about the hoped-for pickup in economic growth in the second half of the year.
A $3.5-billion rise in imports showed domestic demand increased in July for products such as consumer goods and automobiles, a positive sign. But a $1.1-billion decline in exports from a record high in June demonstrated the continued impact on U.S. companies of Europe`s economic troubles and a slowdown in some emerging markets, such as China.
Economists expected the nation would not be able to sustain the deficit level reached in June, which was the lowest since October 2009. They projected the July trade deficit to widen to about $38.6 billion in July.
Crude oil imports were up 6.1% in July, to $23.4 billion, after a decrease the previous month, the Commerce Department said. The rise was partly caused by higher prices related to increased tensions in the Middle East. Imports of automotive vehicles, parts and engines rose 3.1% to $26.4 billion. Imports of consumer goods, such as clothes, cellphones and appliances, rose 1.6% to $44.5 billion.
Exports dropped 0.6% in July from the record high of $190.5 billion the previous month. Still, the $189.4 billion in exported goods in July was the second-highest level ever. Exports of capital goods, such as computers and civilian aircraft, as well as automobiles and consumer goods all were down in July from the previous month.
Total nonfarm payroll employment increased by 169,000 in August, and the unemployment rate was little changed at 7.3 percent, the U.S. Bureau of Labor Statistics reported. Employment rose in retail trade and health care but declined in information.
Both the number of unemployed persons, at 11.3 million, and the unemployment rate, at 7.3 percent, changed little in August. The jobless rate is down from 8.1 percent a year ago. Among the major worker groups, the unemployment rates for adult men (7.1 percent), adult women (6.3 percent), teenagers (22.7 percent), whites (6.4 percent), blacks (13.0 percent), and Hispanics (9.3 percent) showed little change in August. The jobless rate for Asians was 5.1 percent (not seasonally adjusted), little changed from a year earlier.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment.
The rise in the seasonally adjusted all items index was the result of increases in a broad array of indexes including shelter, gasoline, apparel, and food. Despite the gasoline increase, the energy index rose only 0.2 percent as the natural gas and electricity indexes declined. The increase in the food index was caused by a sharp rise in the fruits and vegetables index; other food indexes were mixed.
The index for all items less food and energy rose 0.2 percent in July, the third straight such increase. Along with the advances in the shelter and apparel indexes, the indexes for medical care, tobacco, and new vehicles all rose. In contrast, the indexes for household furnishings and operations, airline fares, and used cars and trucks all declined in July.
The all items index increased 2.0 percent over the last 12 months. The index for all items less food and energy has risen 1.7 percent over the last year; this compares to 1.6 percent for the 12 months ending June. The energy index has risen 4.7 percent over the last 12 months, its largest increase since the 12 months ending February 2012. The food index has risen 1.4 percent, the same figure as in May and June.

Economy of the European Union

GDP rose by 0.3% in the euro area (EA17) and by 0.4% in the EU27 during the second quarter of 2013, compared with the previous quarter, according to second estimates published by Eurostat, the statistical office of the European Union. In the first quarter of 2013, growth rates were -0.2% and -0.1% respectively.
Compared with the same quarter of the previous year, seasonally adjusted GDP fell by 0.5% in the euro area and remained stable in the EU27 in the second quarter of 2013, after -1.0% and -0.7% respectively in the previous quarter.
In June 2013 compared with May 2013, seasonally adjusted industrial production grew by 0.7% in the euro area (EA17) and by 0.9% in the EU27, according to estimates released by Eurostat, the statistical office of the European Union. In May production decreased by 0.2% and 0.4% respectively. In June 2013 compared with June 2012, industrial production increased by 0.3% in the euro area and by 0.4% in the EU27.
The first estimate for the euro area (EA17) trade in goods balance with the rest of the world in June 2013 gave a 17.3 billion euro surplus, compared with +12.8 bn in June 2012. The May 2013 balance was +14.5 bn, compared with +6.2 bn in May 2012. In June 2013 compared with May 2013, seasonally adjusted exports rose by 3.0% and imports by 2.5%. These data are released by Eurostat, the statistical office of the European Union.
The first estimate for the June 2013 extra-EU27 trade balance was a 9.9 bn euro surplus, compared with -1.0 bn in June 2012. In May 2013 the balance was +15.7 bn, compared with -5.2 bn in May 2012. In June 2013 compared with May 2013, seasonally adjusted exports remained stable and imports rose by 1.8%.
The euro area (EA17) seasonally-adjusted unemployment rate was 12.1% in July 2013, stable compared with June. The EU28 unemployment rate was 11.0%, also stable compared with June. In both zones, rates have risen compared with July 2012, when they were 11.5% and 10.5% respectively. These figures are published by Eurostat, the statistical office of the European Union.
Eurostat estimates that 26.654 million men and women in the EU28, of whom 19.231 million were in the euro area, were unemployed in July 2013. Compared with June 2013, the number of persons unemployed decreased by 33 000 in the EU28 and by 15 000 in the euro area. Compared with July 2012, unemployment rose by 995 000 in the EU28 and by 1.008 million in the euro area.
Euro area annual inflation is expected to be 1.3% in August 2013, down from 1.6% in July, according to a flash estimate from Eurostat, the statistical office of the European Union. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in August (3.3%, compared with 3.5% in July), followed by services (1.5%, compared with 1.4% in July), non-energy industrial goods (0.3%, compared with 0.4% in July), and energy (-0.4%, compared with 1.6% in July).

Economy of Japan

Japan`s economy expanded much faster than initially expected in the second quarter, adding to growing signs of a solid recovery taking hold and fortifying the case for Prime Minister Shinzo Abe to proceed with a planned sales tax hike next year. A marked improvement in capital expenditure led to an upward revision in April-June gross domestic product (GDP) to an annualized 3.8 percent expansion from a preliminary 2.6 percent, data from the Cabinet Office showed.
The third straight quarter of growth, which roughly matched the median market forecast, underscored the strength of Japan`s recovery and boosted the chance the government will proceed with a two-staged hike in the sales tax. Japan emerged from recession in 2012 and data for much of this year has shown the benefits of Abe`s reflationary policies and the Bank of Japan`s aggressive monetary stimulus.
The second-quarter GDP follows an annualized 4.1 percent expansion in the first three months of this year, driven in large part by strong consumer spending. Corporate capital spending, which had been seen as soft in an otherwise robust economy, was revised up to a 1.3 percent rise from the preliminary 0.1 percent decline, marking the first increase in six quarters.
Industrial output in Japan gained a seasonally adjusted 3.2 percent in July compared to the previous month, the Ministry of Economy, Trade and Industry said - reversing the previous month`s contraction. That missed forecasts for an increase of 3.6 percent following the 3.1 percent decline in June. On a yearly basis, industrial production added 1.6 percent - also missing expectations for a gain of 1.8 percent following the 4.6 percent fall in the previous month.
Upon the release of the data, the METI`s assessment of industrial production was unchanged: showing signs of picking up at a moderate pace. Industries that contributed to the increase included business oriented machinery, electronic parts and transport equipment. Commodities that contributed to the increase included metal oxide semiconductors, digital transmission equipment and midget passenger cars.
According to the survey of production forecast in manufacturing, production is expected to be increase 0.2 percent in August and 1.7 percent in September.
Industries that contribute to the increase in August include communications equipment, electronic parts and devices and paper. Industries that contributed to the gain in September include business oriented machinery, transport equipment and electronic parts and devices.
Shipments in July climbed 1.3 percent on month, reversing the losses from June. Shipments also were up 0.7 percent on year. Industries that contributed to the increase included business oriented machinery, electronic parts and devices and iron and steel.
Inventories were up 1.5 percent on month in July - rising for the first time in three months - and dipped 2.8 percent on year. Industries that saw expansion included transport equipment, business oriented machinery and iron and steel. The inventory ratio in July eased 0.5 percent on month, reversing the previous month`s gains. It also dipped 4.2 percent on year.
Japan`s goods trade deficit expanded to a record 1,024.0 billion yen for the month of July, as the weaker yen and growing demand for energy in summer drove up fossil fuel import costs, eclipsing a rise in exports, the government said.
The trade deficit was the third largest for any month as Japan recorded its 13th straight month of red ink for the first time since 1979, when the country was hit by the second oil shock and the government began taking comparable data, a Finance Ministry official briefing reporters said.
The value of imports rose 19.6 percent year on year to 6,986.0 billion yen in July, up for the ninth straight month, as those of crude oil jumped 30.2 percent and liquefied natural gas 16.9 percent, the ministry said in a preliminary report.
With the yen sliding, exports, a key driver of Japan`s economic growth, increased for the fifth month in a row, up 12.2 percent to 5,962.0 billion yen due in part to healthy shipments of cars to other nations, but still failed to outweigh imports, the report showed.
Despite an upturn in exports, the country`s trade balance is unlikely to swing into the black soon as demand for gas and oil should remain robust from utilities boosting fossil fuel-based power generation as an alternative to nuclear power following the 2011 Fukushima disaster, analysts said.
Consumer prices rose in July at their fastest pace in almost five years, government data showed, giving cheer to the administration`s easy-money policy but putting a strain on workers owing to slow wage growth.
The reading, which excludes volatile prices of fresh food, was up 0.7 percent from a year earlier, the biggest rise since a 1 percent increase in November 2008 when expensive energy imports temporarily offset domestic deflationary pressure. It also follows June`s 0.4 percent increase, which marked the first rise in 14 months, according to the internal affairs ministry.
The unemployment rate in Japan came in at a seasonally adjusted 3.8 percent in July, the Ministry of Internal Affairs and Communications said. That beat expectations for 3.9 percent, which would have been unchanged from the June reading.
The job-to-applicant ratio was 0.94 percent, also topping expectations for 0.93 percent and up from 0.92 percent in the previous month. The number of employed persons in July was 63.11 million, an increase of 340,000 or 0.5 percent on year.

Economy of Russia

Russia`s gross domestic product rose by 1.8 percent year-on-year in July, Deputy Economy Minister Andrei Klepach said, up from 1.5 percent in June. GDP edged up 0.2 percent in month-on-month basis, Klepach said. He also added that GDP growth in the whole of the year will be lower than the current forecast of 2.4 percent.
The Russian economy grew at the slowest pace in the second quarter since the 2009 recession, at 1.2 percent year-on-year, reflecting weaker exports and subdued consumer and investor demand at home. Russia`s central bank said in a document last week that economic growth could slow to around 2 percent in 2013. The economy grew by 3.4 percent in 2012.
Russian industrial production dropped 0.7% on year in July, increasing pressure on the central bank to ease its monetary policy in order to boost flagging economic activity.
Data from the Federal Statistics Service, however, showed that industrial production rose 1.2% on month in July after rising 0.9% in June. In the first seven months of 2013 production was unchanged on year compared with a rise of 3.2% in the same period a year ago.
The mining sector expanded by 0.4% on the year in July, while production in the manufacturing sector fell 1.5% on the year and the utility sector production declined by 1.8%.
Weak industrial production activity poses risks for economic growth, which is projected at 2.4% this year, according to the economy ministry estimates. The central bank this week said it sees 2013 economic growth at 2%.
Russia`s inflation rate held steady in August after slowing for two straight months, weakening the case for the central bank to lower interest rates for the first time since 2011.
Consumer prices increased 6.5 percent from a year earlier, unchanged from an eight-month low reached in July, the Federal Statistics Service in Moscow said. That was above the median estimate of 6.4 percent in a Bloomberg survey of 22 economists. Prices rose 0.1 percent in the month after a 0.8 percent increase in July.
Inflation has exceeded the top end of the central bank`s target range of 5 percent to 6 percent for 12 months, thwarting the central bank from easing monetary policy to counter the worst economic slump since 2009.