World Economy Review - September 2014

It has been a consistent theme in recent months that global growth has been slowing, a fact some investors may have missed in the good news about American GDP. The latest confirmation came from the World Trade Organization, which cut its forecast for trade growth this year from 4.6% to 3.1% and for 2015 from 5.3% to 4%. The WTO doesn`t forecast economic growth directly; it takes its lead from other international organizations.

What is interesting from the WTO announcement is that even the revised forecast relies on a bit of optimism. Actual trade growth in the first half of the year was just 1.8%; the organization is relying on a rebound in the second half. The first half regional numbers were revealing; Asia increased its exports by 4.2% but its imports by just 2.1%. In effect, it has been gaining market share. North America was more balanced, increasing exports by 3.3% and imports by 3%. Europe was predictably sluggish, increasing exports by 1.2% and imports by 1.9%. The real weakness came in South America which suffered a 0.8% fall in exports and a 3.4% decline in imports.

All told, developed economies provided the biggest share of demand; their imports rose 2.6% while those of developing economies increased by just 0.5%. In export terms, the developed economies continued to lose market share; their exports grew 1.6%, while those of developing economies grew 2.1%.

Sluggish growth in 2014 would confirm the recent trend. After a phenomenal rebound in 2010, trade growth slowed to 2.3% in 2012 and 2.2% in 2013. So what is going on? Part of the problem is the slowdown in emerging market growth detailed in a recent issue. In turn, this may be related to slowing Chinese demand for commodities (incidentally, Goldman cut its Chinese GDP forecast for 2015 from 7.6% to 7.1%); commodity prices have been very weak recently, with the widely-followed Bloomberg index dropping 12% since the end of June. Then there may be specific problems this year; the winter weather that seems to have hit US first quarter growth; the Japanese sales tax rise; the sanctions tit-for-tat between the west and Russia.

But it is still striking that most people think the bond markets are mispriced when a fall in commodity prices, weak inflation numbers in the developed world and those growth revisions would seem to form a pretty good backdrop for fixed income. The continued resilience of equity markets (despite yesterday`s wobble) looks more of the odd one out.

Economy of the United States

After a dismal winter, the U.S. economy expanded at an annual rate of 4.6 percent in the spring, the fastest pace in more than two years, the government reported. The solid rebound is expected to provide momentum for strong growth the rest of the year. The Commerce Department said the April-June figure compared to a decline of 2.1 percent in the first three months of the year, when a harsh winter caused the biggest drop in activity since the Great Recession. The result was even better than the 4.2 percent estimate made a month ago.

The final upward revision reflected new-found strength in business investment, which grew at an annual rate of 9.7 percent in the second quarter. The result is better than the government`s previous estimate of 8.1 percent, bolstered by both investment in structures and equipment. The revision showed that export sales grew at an 11.1 percent rate in the second quarter, stronger than a previous 10.1 percent estimate, another factor helping to boost growth. Consumer spending, which accounts for more than two-thirds of economic activity grew at a 2.5 percent annual rate, unchanged from the previous estimate but double the 1.2 percent growth in consumer spending in the first quarter.

Economists expect much less volatility in growth going forward. Many say the economy will grow at an annual rate of 3 percent or better in both the current July-September quarter and in the final quarter this year. But because of the rough start to the year, growth for all of 2014 is expected to be a lackluster 2.1 percent, little changed from last year`s 2.2 percent GDP increase.

U.S. industrial production fell in August for the first time since January, the latest sign of uneven improvement in the economy. Industrial production, which measures the output of U.S. manufacturers, utilities and mines, fell 0.1% in August from the prior month, the Federal Reserve said Monday. Economists surveyed by The Wall Street Journal had forecast a 0.3% gain. July`s increase was revised down to 0.2% from 0.4% and August capacity utilization fell 0.3 percentage point to a 78.8% rate.

Manufacturing production, the biggest and most closely watched component of the overall figure, fell 0.4% last month after jumping 0.7% in July thanks to strong output from the automobile factories. Auto production can be volatile this time of year because of the shifting timing of summer shutdowns. Output for the smaller mining and utilities sectors expanded by 0.5% and by 1%, respectively. Excluding autos, factory output rose by 0.1% in both July and August. It had expanded by 0.3% in the prior three months.

Industrial output in August was up 4.1% from the same period last year. That`s a slight decrease from in July but marks the third consecutive month the annual rate of increase has been over 4%. Growth had fallen below this level in 2013 and for much of 2014.

The U.S. trade deficit shrank for the fourth straight month in August, falling to the lowest level since January as exports rose to an all-time high. The deficit dropped 0.5 percent in August to $40.1 billion, compared to a revised $40.3 billion in July, the Commerce Department reported. Exports increased 0.2 percent to a record $198.5 billion, aided by increased sales of petroleum, telecommunications equipment and industrial engines. Imports also rose by a smaller 0.1 percent to $238.6 billion.

Through August, the trade deficit totaled $335.2 billion, compared to $321.7 billion for the same period last year, when the deficit for the whole year totaled $476.4 billion, 11.4 percent lower than in 2012. For this year, many economists believe the trade deficit will be slightly higher than in 2013, reflecting in part a stronger U.S. economy attracting more imports. They are forecasting the deficit will be a modest drag on overall growth.

The consumer-price index (CPI), a measure of much U.S. consumers pay for everything from groceries to health care, dropped 0.2 percent in August on a seasonally adjusted basis from the previous month, according to the Labor Department report. The figure marked the first drop in the CPI since April 2013. Excluding the volatile prices for food and energy, the gauge was flat, which marked the first time since October 2010 that the CPI did not increase.

Economists polled by The Wall Street Journal had predicted overall prices to stay flat but costs excluding food and energy to edge higher by 0.2 percent. Despite the increase in inflation during the spring, the latest data shows evidence of easing inflationary pressures. The index was up 1.7 percent in August from a year ago, down from the 2.0 percent annual increase in July.

The national unemployment rate dipped below 6 percent last month, according to a Bureau of Labor Statistics report. The rate fell from 6.1 percent in August to 5.9 percent in September, the lowest since July 2008. The economy added 248,000 jobs in September, offering some reassurance after a disappointing report for August, which saw an increase of just 142,000 jobs. Friday`s report revised that number upward to 180,000 jobs. Economists had expected to see 215,000 new jobs added to payrolls in September. They had also expected the unemployment rate to remain at the 6.1 percent reported in August.

Economy of the European Union

Seasonally-adjusted gross domestic product (GDP) remained stable in the 18-member euro area during the second quarter of 2014, compared with the previous quarter, official figures indicated. Meanwhile, the GDP rose by 0.2 percent in the wider 28-member European Union (EU) during the same period, compared with the previous quarter, according to second estimates published by Eurostat, EU`s statistical office.

On a yearly basis, seasonally-adjusted GDP rose by 0.7 percent in the euro area and by 1.2 percent in the EU in the second quarter. Among member states, Germany and Italy both registered 0.2 percent decrease compared with the previous quarter, while Malta, Latvia, Lithuania, Hungary and Britain recorded the highest growth.

In July 2014 compared with June 2014, seasonally adjusted industrial production rose by 1.0% in the euro area (EA18) and by 0.7% in the EU28, according to estimates from Eurostat, the statistical office of the European Union. In June 2014 industrial production fell by 0.3% and 0.1% respectively. In July 2014 compared with July 2013, industrial production grew by 2.2% in the euro area and by 2.0% in the EU28.

The increase of 1.0% in industrial production in the euro area in July 2014, compared with June 2014, is due to production of capital goods rising by 2.6%, non-durable consumer goods by 1.2% and intermediate goods by 0.5%, while durable consumer goods fell by 1.2% and energy by 1.3%. In the EU28, the increase of 0.7% is due to production of capital goods rising by 2.3%, non-durable consumer goods by 0.8% and intermediate goods by 0.4%, while energy fell by 0.6% and durable consumer goods by 0.8%. The highest increases in industrial production were registered in Ireland (+11.3%), Estonia (+2.8%), Slovenia (+2.3%) and Croatia (+2.1%), and the largest decreases in Denmark (-4.7%), Malta (-4.2%) and Greece (-1.7%).

The increase of 2.2% in industrial production in the euro area in July 2014, compared with July 2013, is due to production of capital goods rising by 4.6%, non-durable consumer goods by 4.0% and intermediate goods by 1.6%, while durable consumer goods fell by 0.2% and energy by 4.4%. In the EU28, the increase of 2.0% is due to production of capital goods rising by 4.5%, non-durable consumer goods by 2.8%, intermediate goods by 1.9% and durable consumer goods by 0.3%, while energy fell by 3.5%. The highest increases in industrial production were registered in Ireland (+17.6%), Hungary (+12.3%) and Slovenia (+9.2%), and the largest decreases in Denmark (-6.4%), Sweden (-5.0%) and Finland (-2.7%).

The first estimate for the euro area (EA18) trade in goods balance with the rest of the world in July 2014 gave a ˆ21.2 billion surplus, compared with +ˆ18.0 bn in July 2013. The June 2014 balance was +ˆ16.7 bn, compared with +ˆ15.7 bn in June 2013. In July 2014 compared with June 2014, seasonally adjusted exports fell by 0.2% while imports rose by 0.9%. These data are released by Eurostat.

The first estimate for the July 2014 extra-EU28 trade balance was a ˆ1.7 bn surplus, compared with +ˆ10.8 bn in July 2013. In June 2014 the balance was +ˆ2.8 bn, compared with +ˆ8.6 bn in June 2013. In July 2014 compared with June 2014, seasonally adjusted exports fell by 0.3% while imports rose by 2.3%.

Euro area annual inflation is expected to be 0.3% in September 2014, down from 0.4% in August, according to a flash estimate from Eurostat. Looking at the main components of euro area inflation, services is expected to have the highest annual rate in September (1.1%, compared with 1.3% in August), followed by food, alcohol & tobacco (0.2%, compared with -0.3% in August), non-energy industrial goods (0.1%, compared with 0.3% in August) and energy (-2.4%, compared with -2.0% in August).

The euro area (EA18) seasonally-adjusted unemployment rate was 11.5% in August 2014, stable compared with July 2014, but down from 12.0% in August 2013. The EU28 unemployment rate was 10.1% in August 2014, the lowest value since February 2012. The rate was down from 10.2% in July 2014, and from 10.8% in August 2013. These figures are published by Eurostat.

Eurostat estimates that 24.642 million men and women in the EU28, of whom 18.326 million were in the euro area, were unemployed in August 2014. Compared with July 2014, the number of persons unemployed decreased by 134 000 in the EU28 and by 137 000 in the euro area. Compared with August 2013, unemployment fell by 1.745 million in the EU28 and by 834 000 in the euro area.

Among the Member States, the lowest unemployment rates were recorded in Austria (4.7%) and Germany (4.9%), and the highest in Greece (27.0% in June 2014) and Spain (24.4%). Compared with a year ago, the unemployment rate fell in twenty-two Member States, increased in four and remained stable in two. The largest decreases were registered in Hungary (10.2% to 7.8% between July 2013 and July 2014), Portugal (16.1% to 14.0%), Spain (26.1% to 24.4%) and Croatia (18.2% to 16.5%), and the highest increases were registered in Finland (8.1% to 8.6%) and France (10.2% to 10.5%).

Economy of Japan

Japan`s economy contracted in the second quarter at the fastest pace since 2009, dealing a blow to Prime Minister Shinzo Abe`s efforts to re-energize the economy with pro-growth steps. Revised data showed that the country`s gross domestic product contracted an annualized 7.1% in the April-to-June quarter from the previous three-month period, as businesses as well as consumers retrenched after the government raised the sales tax. Preliminary figures showed a 6.8% decline.

Private economists expect the economy to snap back to a recovery path in the third quarter, forecasting a 4.0% rebound on average, according to the Japan Center for Economic Research.

Japanese industrial production unexpectedly fell 1.5% in August, a sign that output following a sales tax increase may be weaker than previously forecast amid tepid demand at home and abroad. The decrease in output after adjustment for seasonal factors came after a 0.4% rise in July. The fall compared with a 0.3% increase forecast by economists surveyed by The Wall Street Journal and the Nikkei. Companies forecast production to rise 6.0% in September before decreasing 0.2% in October.

Japan posted a merchandise trade deficit of 948.5 billion yen in August, the Ministry of Finance said - remaining in the red for a record 26th consecutive month. The headline figure beat forecasts for a shortfall of 1,028.9 billion yen following the 962.1 billion yen deficit in July.

Exports fell 1.3 percent on year to 5.705 trillion yen, beating expectations for a drop of 2.6 percent but down from the 3.9 percent jump in the previous month. Exports to all of Asia were down 0.6 percent on year, while exports to China eased an annual 0.2 percent. Exports to the United States dropped 4.4 percent on year, while exports to the European Union gained an annual 5.6 percent.

Imports dipped an annual 1.5 percent to 6.654 trillion yen versus forecasts for a fall of 1.2 percent following the 2.3 percent gain a month earlier. Imports from all of Asia dipped 3.1 percent on year, while imports from China alone fell an annual 5.3 percent. Imports from the United States climbed 10.7 percent, while imports from the European Union dipped 1.5 percent.

Japan`s nationwide core consumer prices rose 3.1 percent in August from a year ago, data showed. The rise in the core consumer price index (CPI), which excludes volatile food prices, was shy of analyst expectations in a Reuters poll for a 3.2 percent increase. In July, core consumer prices rose 3.3 percent. Excluding the impact of the sales tax hike in April, core CPI rose 1.1 percent from a year ago, slower than the 1.3 percent increase in July. Consumer inflation remains below the 2 percent target the Bank of Japan aims to achieve by sometime next year.

Japan`s unemployment rate fell to a three-month low of 3.5 percent in August from a 3.8 percent retraction logged a month earlier, the Ministry of Internal Affairs and Communications said in a report. The number of people unemployed dropped by 400,000 in the recording period, marking the 51st straight drop from year-earlier levels, the ministry said. The data came in below median economists` forecasts of a 3.8 percent unemployment rate in August.

Economy of Russia

The Russian economy showed no annual growth in August and contracted 0.4% from the previous month in seasonally-adjusted terms, the economy ministry said. The figure confirms that the country`s economy is stagnating amid low investment, high inflation and capital flight.

Investors are reluctant to invest in Russia as geopolitical tensions related to the crisis in Ukraine show little sign of easing, and the lack of reforms slows the country`s productivity. Consumer spending, for years the engine of Russian growth, is stalling due to high inflation and a weakening ruble. Growth is also getting little support from the oil market, where prices for oil, Russia`s main export, are declining. Russia`s trade surplus was up 17% at $16.6 billion in August, the ministry said.

The Russian economy added 0.7% in the first eight months of the year, the ministry said. The government expects overall growth to be 0.5% in 2014.

Russia`s industrial output growth slowed to zero in annual terms in August, hurt by a drop in manufacturing sector production, data from the federal statistics service showed. The industrial sector`s performance poses risks for economic growth, which has been hit by sanctions-fueled capital flight. The central bank expects growth to slow to 0.4% this year from 1.3% last year, and down from an average annual growth rate of around 6% from 2000 to 2008.

The data showed industrial production was unchanged in August compared with a year earlier, after it grew 1.5% in July. In monthly terms, industrial output shrank 0.2% in August after expanding 2.2% in July. While output in the mining and utility sectors both grew in August, the manufacturing sector was down 0.6% on the year and 1.2% on the month. Broader industrial production was up 1.3% in the first eight months compared with the same period a year earlier, when it contracted 0.1%.

Russian consumer inflation accelerated in September following Moscow`s ban on food imports from countries that sanctioned Russia, data from the Federal Statistics Service showed. In September, consumer prices rose 8% on the year earlier after increasing 7.6% in August. Thus inflation has reached the level of the Bank of Russia`s key interest rate. Earlier the International Monetary Fund recommended the central bank keep its interest rates in positive territory, which means above the annual inflation reading, in order to anchor inflationary expectations.

The central bank, which has raised rates three times so far this year, will hold its next monetary policy meeting Oct. 31. The bank has already said that full-year inflation is likely to be around 8%, overshooting its initial inflation ceiling of 6.5%.

The data also showed that consumer prices rose 0.7% on month in September after climbing 0.2% in August. In the first nine months of 2014, consumer prices rose 6.3%, compared with a 4.7% increase in the corresponding period a year earlier. Prices for meat and poultry jumped 2.9% on the month in September and were up 16.8% on the year. Prices for fish and seafood rose 1.9% on the month and added 14.1% on the year in September.

Russia unemployment rate dipped from previous 4.9% to 4.8% in August.

05.10.2014 17:07

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