World Economy Review - October 2014

The eurozone is struggling to revive itself, and may slip into recession in the next two years, slowing down the global economic recovery, according to the French Economic Observatory (OFCE). The director of the OFCE`s analysis and forecast department, Xavier Timbeau, presented his economic predictions for 2014-2015 on 29 October, saying "the eurozone is a problem for the global economy".

The expert believes that the eurozone is acting as a brake on the world economy, and will enter into "a phase of low inflation or even deflation in certain countries," leading to a eurozone recession within two years. The Observatory`s economists say this change will be slow, but almost inevitable.

Germany, the mainstay of the eurozone, is expected to see limited economic growth of 1.5% in 2015 (with 1.4% forecast for 2014). The prognosis for Italy is also disappointing: it is expected to go into recession. Spain, where unemployment remains at 25%, is the only eurozone economy where economic growth is expected to rise, with 2.1% percent predicted for 2015.

After a period of revival in 2011, the recovery of the eurozone has been sluggish. Timbeau attributes this to budgetary decisions taken by member states and to "the toughening of monetary conditions in 2013-2014". Even if economic constraints are loosened, the effects of austerity measures from 2012 and 2013 continue to weigh the economy down.

The Observatory claims to be "moderately optimistic for 2015," foreseeing eurozone growth of 1.3%.

The OFCE economists are sceptical about the future European Commission President`s investment plan. Xavier Timbeau said that "Jean-Claude Juncker`s investment plan will be expertly put together from existing measures, but it will not contain anything new".

The OFCE expects to see a slight improvement in the French economic situation in 2015, predicting growth of 1.1%, compared with 0.4% in 2014. This change is due to "the decline of two negative factors that have stifled economic growth since 2010: borrowing conditions and the reductions of deficits". "France should also become more competitive as the euro drops in value, and the tax credit for encouraging competitiveness and jobs (CICE) becomes more powerful," the OFCE said.

This moderate improvement in the situation will not be enough to bring down unemployment or have a significant impact on public deficits. The Observatory foresees an unemployment level of 9.8% and a public deficit of 4.3% for France in 2015.

Finally, Xavier Timbeau believes that the presentation of France`s 2015 budget was "rather clumsy". He said that France was making an effort, but that some of the measures outlined in the budget were questionable, such as the anticipated lowering of interest rates, which would bring down the total cost of borrowing in 2015. "This is not a structural change that should be brought about through the budget," the economist said, adding that the Commission`s acceptance of this bill demonstrates just how fed up everyone is with the French budget.

Economy of the United States

The U.S. economy continued its march forward in the third quarter with GDP coming in stronger than expected. Beyond the headline number, however, some of the details left a bit to be desired. The Bureau of Economic Analysis released its advance estimate of real gross domestic product for the third quarter of 2014 - covering July, August and September of this year. The release showed output in the U.S. increasing at an annual rate of 3.5%. This is relative to the second quarter when real GDP gained 4.6%.

The growth in real GDP beat consensus expectations of 3% gains and was due to positive contributions from personal consumption expenditure, exports, nonresidential fixed investment, and government spending at all levels.

Imports, which negatively impact GDP, increased. Gains were also partially offset but a decrease in private inventory investments. The slowdown in growth compared to the second quarter was due to deceleration in most measures other than federal government spending which surged to 4.6% due to a large increase in defense spending.

The price index for gross domestic purchases - which measures prices paid by U.S. residents - increased 1.3%, compared to 2.0% growth in the second quarter. Real personal consumption expenditures increased by 1.8%, down from the 2.5% increase last quarter.

After reporting an unexpected drop in U.S. industrial production in the previous month, the Federal Reserve released a report showing that production rebounded by much more than expected in the month of September.

The Fed said industrial production surged up by 1.0 percent in September after edging down by a revised 0.2 percent in August. Economists had been expecting production to increase by about 0.4 percent compared to the 0.1 percent drop originally reported for the previous month.

A substantial increase in utilities output contributed to the rebound in industrial production, with utilities output soaring by 3.9 percent in September after climbing by 1.2 percent in August. The report also said mining output jumped by 1.8 percent in September after rising by 0.3 percent in August, while manufacturing output rebounded by 0.5 percent following a 0.5 percent drop in the previous month.

The rebound in manufacturing output came even though the production of motor vehicles and parts saw further downside, falling by 1.4 percent in September after plunging by 7.0 percent in August.

The Fed also said capacity utilization for total industry rose to 79.3 percent in September from a revised 78.7 percent in August. Economists had expected capacity utilization to climb to 79.0 percent. Capacity utilization in the utilities sector showed a notable increase, jumping to 79.2 percent in September from 76.3 percent in August. The report said capacity utilization in the mining sector also climbed to 90.1 percent from 89.2 percent, while capacity utilization in the manufacturing sector crept up 77.3 percent from 77.1 percent.

The Fed noted that industrial production increased at an annual rate of 3.2 percent in the third quarter of 2014, roughly its average quarterly increase since the end of 2010. For the third quarter as a whole, manufacturing output rose at an annual rate of 3.5 percent and mining output increased at an annual rate of 8.7 percent. On the other hand, the report said utilities output fell at an annual rate of 8.5 percent, reflecting a second consecutive quarterly decline.

The U.S. trade deficit rose in September as exports slumped, a sign that the world`s biggest economy is starting to feel the impact of weakening global growth. The Commerce Department said that the trade deficit rose 7.6 percent to $43 billion in September. That marks the first increase in four months. A deficit occurs when a country imports more than it exports.

Economic slowdowns in Europe and China appear to have hurt demand for American-made goods. Since September, the dollar has appreciated in value more than 4 percent against the euro to $1.25, making U.S. products less competitively priced abroad. Exports fell 1.5 percent to $195.6 billion, led by declines in shipments of industrial supplies, consumer products and capital goods such as engines and computers. September imports held steady at $238.6 billion for the second straight month.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.

Increases in shelter and food indexes outweighed declines in energy indexes to result in the seasonally adjusted all items increase. The food index rose 0.3 percent as five of the six major grocery store food group indexes increased. The energy index declined 0.7 percent as the indexes for gasoline, electricity, and fuel oil all fell.

The index for all items less food and energy increased 0.1 percent in September. Along with the shelter index, the index for medical care increased, and the indexes for alcoholic beverages and for personal care advanced slightly. Several indexes were unchanged, and the indexes for airline fares and for used cars and trucks declined in September.

The all items index increased 1.7 percent over the last 12 months, the same increase as for the 12 months ending August. The 12-month change in the index for all items less food and energy also remained at 1.7 percent. The 12-month change in the shelter index has been gradually increasing, and reached 3.0 percent for the first time since January 2008. The food index has also risen 3.0 percent over the span, while the energy index has declined 0.6 percent.

The Labor Department reported that the U.S. added 214,000 new jobs in October, while the unemployment rate slipped to 5.8% from 5.9% in September. Economists surveyed by The Wall Street Journal had expected the economy to add 233,000 jobs and the unemployment rate to holding steady at 5.9%. The so-called U-6 unemployment figure, which takes into account a broader range of factors, fell more sharply to 11.5% from 11.8% in September.

Looking at wages, average hourly earnings for private nonfarm payroll employees rose by 3 cents to $24.57 in October. Over the past year, average hourly earnings have risen by 2.0%, which is in line with the low point of the Fed`s inflation target.

Economy of the European Union

The Eurozone economy grew more than previously estimated in the second quarter, according to the latest estimates under the new ESA 2010 rule. Gross domestic product grew 0.1 percent sequentially in the second quarter, the Eurostat reported. The ESA 95 based estimation had shown a flat growth for the second quarter. In the first quarter of 2014, GDP grew by 0.3 percent versus 0.2 percent expansion based on ESA 95 estimate. Likewise, the annual growth for the currency bloc was revised to 0.8 percent in the second quarter from 0.7 percent.

In August 2014 compared with July 2014, seasonally adjusted industrial production fell by 1.8% in the euro area (EA18) and by 1.4% in the EU28, according to estimates from Eurostat, the statistical office of the European Union. In July 2014 industrial production rose by 0.9% and 0.7% respectively. In August 2014 compared with August 2013, industrial production decreased by 1.9% in the euro area and by 0.8% in the EU28.

The decrease of 1.8% in industrial production in the euro area in August 2014, compared with July 2014, is due to production of capital goods falling by 4.8%, intermediate goods by 0.7% and non-durable consumer goods by 0.2%, while durable consumer goods increased by 0.2% and energy by 1.2%. In the EU28, the decrease of 1.4% is due to production of capital goods falling by 4.3% and intermediate goods by 0.4%, while non-durable consumer goods increased by 0.2%, durable consumer goods by 0.6% and energy by 1.2%. The largest decreases in industrial production were registered in Hungary (-5.8%), Germany (-4.3%) and Croatia (-4.1%), and the highest increases in Denmark (+6.9%), Portugal (+3.1%) and the Netherlands (+1.3%).

The decrease of 1.9% in industrial production in the euro area in August 2014, compared with August 2013, is due to production of capital goods falling by 3.7%, energy by 3.5%, durable consumer goods by 2.9% and intermediate goods by 1.1%, while non-durable consumer goods increased by 1.4%. In the EU28, the decrease of 0.8% is due to production of energy falling by 3.3% and capital goods by 2.3%, while intermediate goods increased by 0.4%, durable consumer goods by 1.4% and non-durable consumer goods by 1.9%. The largest decreases in industrial production were registered in Malta (-7.0%), Greece (-6.0%), Lithuania (-4.9%) and Croatia (-4.7%), and the highest increases in Ireland (+18.3%), Luxembourg (+5.6%), Slovenia (+4.6%) and Portugal (+3.9%).

The first estimate for the euro area (EA18) trade in goods balance with the rest of the world in August 2014 gave a 9.2 billion surplus, compared with +7.3 bn in August 2013. The July 2014 balance was +21.6 bn, compared with +18.0 bn in July 2013. In August 2014 compared with July 2014, seasonally adjusted exports fell by 0.9% and imports by 3.1%. These data are released by Eurostat.

The first estimate for the August 2014 extra-EU28 trade balance was a 8.9 bn deficit, compared with -2.3 bn in August 2013. In July 2014 the balance was +1.6 bn, compared with +10.7 bn in July 2013. In August 2014 compared with July 2014, seasonally adjusted exports fell by 2.1% and imports by 4.0%.

The euro area (EA18) seasonally-adjusted unemployment rate was 11.5% in September 2014, stable compared with August 2014, but down from 12.0% in September 2013. The EU28 unemployment rate was 10.1% in September 2014, also stable compared with August 2014 and down from 10.8% in September 2013. These figures are published by Eurostat.

Eurostat estimates that 24.512 million men and women in the EU28, of whom 18.347 million were in the euro area, were unemployed in September 2014. Compared with August 2014, the number of persons unemployed decreased by 108 000 in the EU28 and by 19 000 in the euro area. Compared with September 2013, unemployment fell by 1.818 million in the EU28 and by 826 000 in the euro area.

Euro area annual inflation is expected to be 0.4% in October 2014, up from 0.3% in September, 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 October (1.2%, compared with 1.1% in September), followed by food, alcohol & tobacco (0.5%, compared with 0.3% in September), non-energy industrial goods (-0.1%, compared with 0.2% in September) and energy (-1.8%, compared with -2.3% in September).

Economy of Japan

Real gross domestic product in Japan increased 0.4% in August from the previous month, rising for a fourth consecutive month, according to estimates released by the Japan Center for Economic Research. Consumer spending grew 0.9% after having fallen in July due to inclement weather. Public works spending climbed 0.3%. Capital investment sank 2% while housing investment slipped 1.5%, the private-sector think tank said.

Industrial output in Japan added a seasonally adjusted 2.7 percent on month in September, the Ministry of Economy, Trade and Industry said in preliminary reading. That beat forecasts for an increase of 2.2 percent following the 1.9 percent contraction in August. On a yearly basis, industrial production added 0.6 percent - again beating forecasts for a decline of 0.1 percent following the 3.3 percent drop in the previous month.

Industries that mainly contributed to the increase included transport equipment, electronic parts and devices and electrical machinery. According to the Survey of Production Forecast in Manufacturing, production is expected to decrease 0.1 percent in October and increase 1.0 percent in November.

Japan`s trade deficit expanded 1.6 per cent year-on-year in September, marking its worst ever shortfall for the month, data showed. Japan logged a deficit of ¥958.3 billion (US$8.96 billion) against a year-before shortfall of ¥943.2 billion, extending the run of red-ink to a 27th straight month. The result was much worse than the market median forecast for a deficit of ¥768 billion.

The finance ministry said exports in September rose 6.9 per cent to ¥6.38 trillion helped by higher shipments of cars, steel and ships. But imports climbed 6.2 per cent to a higher ¥7.34 trillion, boosted largely by imports of liquefied natural gas and telecommunications.

Japan`s consumer inflation slowed in September, raising skepticism over the Bank of Japan`s (BOJ) ability to achieve it`s 2 percent inflation target and increasing speculation that it will take additional stimulus measures. Nationwide core consumer prices rose 3 percent in September from a year ago, data showed. The rise in the core consumer price index (CPI), which excludes volatile food prices, was in line with analyst expectations in a Reuters poll. In August, core consumer prices rose 3.1 percent.

However, adjusted for an increase in the sales tax hike in April, core consumer prices rose 1 percent on year, slower than the 1.1 percent rise in August and well below the 2 percent target the Bank of Japan (BOJ) aims to achieve by April 2015. Both figures slowed for the second straight month.

The unemployment rate in Japan came in at 3.6 percent in September, the Ministry of Internal Affairs and Communications said - in line with expectations and up from 3.5 percent in August.

The job-to-applicant ratio was 1.09, missing forecasts for 1.10 - which would have been unchanged. The number of employed persons in September was 64.02 million, an increase of 430,000 or 0.7 percent on year. The number of unemployed persons in September was 2.33 million, a decrease of 250,000 or 9.7 percent on year. The participation rate was 59.9 percent.

Economy of Russia

Russia`s GDP, based on an estimate from the Economic Development Ministry, grew by 1.1 percent year-on-year in September 2014 after demonstrating zero growth in August, the director of the Economic Development Ministry`s Department for Macroeconomic Forecasting, Oleg Zasov, said at a briefing in Moscow.

Deputy Economic Development Minister Alexei Vedev said annual GDP growth was 0.7 percent in the third quarter of this year following 0.8 percent in Q2. The Economic Development Ministry said that excluding seasonal and calendar factors, GDP grew 0.4 percent month-on-month in September after falling 0.4 percent in August. Seasonally adjusted GDP growth was zero in Q3 for the second quarter in a row.

Vedev said year-on-year change in GDP could be negative in the fourth quarter due to the high level of Q4 2013. The Economic Development Ministry was nonetheless keeping its GDP growth forecast at 0.5 percent for 2014, he said, adding that growth could be somewhat higher.

Russia`s industrial output growth picked up in September, boosted by a rise in manufacturing sector production, data from the federal statistics service showed. Russia`s food industry was expected to see a rise in workload following Moscow`s decision to ban food imports from states that sanctioned Russia. While the ban imposed in August may provide temporary support for the manufacturing sector, it also fuels inflation, which is on track to reach a four-year high.

The data showed industrial production grew 2.8% in September after being unchanged in August. In monthly terms, industrial output rose by 2.7% in September after shrinking 0.2% in the preceding month.

The latest jump in the headline output figure for September was mainly driven by a 3.6% annual increase in the manufacturing sector, which also grew 4.1% on the month. The mining sector expanded 2.4% on the year, while the utility sector output fell 0.8% compared with September 2013.

Russian annual inflation has hit 8.3% the central bank`s first deputy said. Ksenia Yudayeva, who spoke to members of parliament, noted that "inflation is growing" and cited the government`s Statistical Agency, which measures inflation on a weekly basis. The recent reading is a 0.3% rise in the week to Oct. 20, resulting in a price rise of 7.0% since January. Russian officials recently said full-year inflation may reach 8% in 2014.

Consumer prices are being driven higher by a weakening ruble and higher prices for food amid Moscow`s ban on food imports from the European Union, the U.S. and some other countries.

The unemployment rate in Russia rose last month, official data showed. In a report, Russian Federation State Committee on Statistics said that Russian Unemployment Rate rose to a seasonally adjusted annual rate of 4.9%, from 4.8% in the preceding month. Analysts had expected Russian Unemployment Rate to rise to 4.9% last month.

09.11.2014 17:41:13

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