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World Economy Review - December 2014

What prospect does the New Year hold for the world economy? The outlook that emerges from many forecasts is perhaps best described as "not bad", though inevitably there are risks, some of them quite substantial. The International Monetary Fund, for example, predicts global growth this year of 3.8% compared with 3.3% in 2014. That is not boom-time, though it would be the fastest growth since 2011.

There is often a "but" that comes with comes with an economic forecast, and this time there are quite a few. One of them is a development which might actually be a boost for most of the world. It`s the price of crude oil which has fallen by nearly half from the high it reached in June. For most countries it means consumers have more to spend on other things and it reduces business costs. Of course the price decline is bad news for oil exporters and it has already hit Russia hard.

The main source of strength expected by most forecasters is the US. The IMF reckons economic growth there is likely to be almost a full percentage point faster than 2013. It says a stronger housing market and business investment suggest the rebound is becoming more sustainable. That raises one of the big issues for the coming months.

The US economy has been growing faster than previously forecast. The continued recovery in the US means the country`s central bank, the Federal Reserve will probably raise its main interest rate, which has been close to zero for six years.

Stronger economic growth and increasing spending can lead to higher inflation, which can be contained by higher interest rates. A senior Fed official, Bill Dudley acknowledged that this change "will undoubtedly be accompanied by some degree of market turbulence".

Higher interest rates would make American markets more attractive to investors, so funds could be pulled out of other countries especially emerging markets. The danger is that it might happen in a disruptive way that leads to sharp currency declines, higher inflation and rising borrowing costs for governments and business in developing countries. Mr Dudley, however, said that many emerging economies appear better equipped to handle the Fed`s move than they were in past.

China is another important factor. The country`s economic slowdown is likely to continue: that is almost universally seen as inevitable sooner or later. China has been driven by investment and export performance that couldn`t last for ever.

The boom years have ended in China. All the same, adjusting to a slower growth rate will present challenges both for China itself and for countries that sell goods to Chinese industry - raw materials suppliers in Africa among them. Jan Hatzius, chief economist at the investment bank Goldman Sachs expects "several years of declining growth rates" for China.

And now there is new uncertainty about the eurozone as Greece prepares for an early election. Financial markets in other financially stressed eurozone countries, notably Italy and Spain, wobbled as political events in Greece unfolded. There is some risk that serious financial instability could spreading from Greece to other countries, but the dangers are seen as less severe than at the height of the eurozone crisis.

The political crisis in Ukraine could yet could yet do wider economic damage, and if the problems in the Middle East disrupt oil production they could send the price of the commodity back up.

here are certainly some rumbling sources of potential trouble and little prospect of really strong growth year, but there is a decent chance that 2015 will be another year of gradual post-crisis rehabilitation.

Economy of the United States

The U.S. economy grew at its quickest pace in 11 years in the third quarter, the strongest sign yet that growth has decisively shifted into higher gear. The Commerce Department revised up its estimate of gross domestic product growth to a 5.0 percent annual pace, citing stronger consumer and business spending than it had previously assumed. It was the fastest growth pace since the third quarter of 2003. The economy was previously reported to have expanded at a 3.9 percent rate.

GDP growth has now been revised up by a total of 1.5 percentage points since the first estimate was published in October. Big revisions are not unusual as the government does not have full information when it makes its initial estimates.

The economy expanded at a 4.6 percent rate in the second quarter, meaning it has now experienced the two strongest back-to-back quarters of growth since 2003. Economists polled by Reuters had expected growth would be raised to a 4.3 percent pace. But the pace of growth likely slowed in the fourth quarter.

U.S. manufacturing output recorded its largest increase in nine months in November as production expanded across the board, pointing to underlying strength in the economy. Factory production increased 1.1 percent last month after an upwardly revised 0.4 percent advance in October, the Federal Reserve said. Economists polled by Reuters had forecast manufacturing output rising by only 0.5 percent in November after a previously reported 0.2 percent gain in October.

Mining output slipped 0.1 percent last month, while utilities production jumped 5.1 percent as a cold snap boosted demand for utilities. The gain in manufacturing and utilities combined to lift overall industrial production by 1.3 percent in November, the largest gain since May 2010. October`s industrial output was revised to show a 0.1 percent increase instead of the previously reported 0.1 percent dip.

The amount of manufacturing capacity in use rose to 78.4 percent last month from 77.6 percent in October. Overall industrial capacity use increased to 80.1 percent, the highest since March 2008, from 79.3 percent in October.

The United States trade deficit fell in November to the lowest level in 11 months as crude oil imports dropped to a two-decade low. The trade deficit narrowed to $39 billion in November, down 7.7 percent from a revised October deficit of $42.2 billion, the Commerce Department said. United States exports slipped 1 percent to $196.4 billion as sales of commercial airliners fell.

Imports dropped even faster, falling 2.2 percent to $235.4 billion, which was primarily a reflection of foreign oil declines. The volume of crude oil imported in November hit its lowest level since 1994, while the average price dropped to a two-year low. The United States trade deficit is being helped by falling global oil prices and a boom in American energy production, which has decreased the country`s reliance on imports. The November deficit was the lowest since a trade gap of $37.4 billion in December 2013. Through the first 11 months of 2014, the deficit is 5.1 percent above the same period in 2013.

US consumer prices recorded their biggest drop in nearly six years in November as gasoline prices tumbled, but this probably will not change views the Federal Reserve will start raising interest rates in mid-2015.

The Labor Department said its Consumer Price Index fell 0.3 percent last month, the largest decline since December 2008, after being flat in October. In the 12 months through November, the CPI increased 1.3 percent, the smallest gain since February, after advancing 1.7 percent in October. Wall Street had forecast the CPI slipping only 0.1 percent from October and rising 1.4 percent from a year ago.

Stripping out food and energy prices, the so-called core CPI edged up 0.1 percent after rising 0.2 percent in October. In the 12 months through November, the core CPI rose 1.7 percent after increasing 1.8 percent in October.

Economy of the European Union

Seasonally adjusted GDP rose by 0.2% in the euro area (EA18) and by 0.3% in the EU28 during the third quarter of 2014, compared with the previous quarter, according to a second estimate published by Eurostat, the statistical office of the European Union. In the second quarter of 2014, GDP grew by 0.1% in the euro area and by 0.2% in the EU28.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 0.8% in the euro area and by 1.3% in the EU28 in the third quarter of 2014, after +0.8% and +1.3% respectively in the previous quarter.

In October 2014 compared with September 2014, seasonally adjusted industrial production rose by 0.1% in both the euro area (EA18) and the EU28, according to estimates from Eurostat. In September 2014 industrial production grew by 0.5% and 0.6% respectively. In October 2014 compared with October 2013, industrial production increased by 0.7% in the euro area and by 0.8% in the EU28.

The first estimate for the euro area (EA18) trade in goods balance with the rest of the world in October 2014 gave a 24.0 billion surplus, compared with +16.5 bn in October 2013. The September 2014 balance was +18.1 bn, compared with +10.9 bn in September 2013. In October 2014 compared with September 2014, seasonally adjusted exports fell by 0.3% and imports by 1.3%. These data are released by Eurostat, the statistical office of the European Union.

The first estimate for the October 2014 extra-EU28 trade balance was a 7.6 bn surplus, compared with +4.1 bn in October 2013. In September 2014 the balance was +2.7 bn, compared with -0.7 bn in September 2013. In October 2014 compared with September 2014, seasonally adjusted exports fell by 0.7% and imports by 1.4%.

Euro area annual inflation is expected to be -0.2% in December 2014, down from 0.3% in November, according to a flash estimate from Eurostat. This negative rate for euro area annual inflation in December is driven by a fall in energy prices (-6.3%, compared with -2.6% in November), while prices remain stable for food, alcohol & tobacco (0.0%, compared with 0.5% in November) and non-energy industrial goods (0.0%, compared with -0.1% in November). The only annual increase is expected for services (1.2%, stable compared with November).

Euro area annual inflation was 0.3% in November 2014, down from 0.4% in October. A year earlier the rate was 0.9%. European Union annual inflation was 0.4% in November 2014, down from 0.5% in October. A year earlier the rate was 1.0%.

In November 2014, negative annual rates were observed in Bulgaria (-1.9%), Greece (-1.2%), Spain (-0.5%) and Poland (-0.3%). The highest annual rates were recorded in Romania and Austria (both 1.5%) and Finland (1.1%). Compared with October 2014, annual inflation fell in sixteen Member States, remained stable in five and rose in six.

The euro area seasonally-adjusted unemployment rate was 11.5% in November 2014, stable compared with October 2014, but down from 11.9% in November 2013. The EU28 unemployment rate was 10.0% in November 2014, down from 10.1% in October 2014 and from 10.7% in November 2013. These figures are published by Eurostat.

Eurostat estimates that 24.423 million men and women in the EU28, of whom 18.394 million were in the euro area, were unemployed in November 2014. Compared with October 2014, the number of persons unemployed decreased by 19 000 in the EU28 and increased by 34 000 in the euro area. Compared with November 2013, unemployment fell by 1.487 million in the EU28 and by 522 000 in the euro area.

Economy of Japan

Japan`s economy shrank more than previously estimated in the third quarter, contracting 1.9% as capital spending declined and private consumption remained weak, the government said. The economy has now contracted for two consecutive quarters that is a common definition for recession. Last month, the government estimated that gross domestic product contracted 1.6% during the July-September period.

The Ministry of Finance reported late last month that capital spending by businesses rose 3.1% during the quarter, compared with a previous estimate of a 0.2% decline. Business investment accounts for around 14% of GDP. But capital spending turned out to be weaker than the ministry`s estimate when taking into account smaller businesses, declining 0.4%, indicating that even as Japan Inc. reports record profits and the stock market hits multiyear highs, the benefits of Abenomics haven`t reached everyone.

Private consumption, the most important pillar of the economy, remains anemic, rising just 0.4% in the third quarter from the second, as consumers continue to stagger following a sales tax increase in April and a decline in the yen of more than 30%, which has raised the cost of imports. The downbeat consumer mood was most evident in weak sales of big-ticket items such as houses and automobiles. Residential investment and consumption of durable goods both fell sharply for two consecutive quarters. The government also revised its growth figures for the second quarter, saying the economy contracted 6.7% instead of the initially reported 7.2%. It also lowered first-quarter growth to 5.8% from 6.7%.

Japan`s factory production suffered a surprise drop and inflation continued to slow in November, official data showed despite Prime Minister Shinzo Abe`s pro-spending policy blitz to stoke growth. November industrial production fell 0.6 per cent from the previous month, the Industry Ministry said, against a market forecast for a 0.8 per cent rise.

Japan logged a trade deficit in November, the 29th straight month of shortfalls, despite a slight decrease in imports thanks to the recent plunge in crude oil prices and Japan`s return to recession. The 891.9 billion yen ($8.5 billion) deficit in November compared with a 737 billion yen gap the month before, customs data showed. However it was 32 per cent lower than a year earlier.

Japan`s costs for oil imports sank 22 per cent in November from a year earlier, reducing total imports by 1.7 per cent from a year earlier to 7.1 trillion yen ($60.7 billion). Exports rose 4.9 per cent to 6.19 trillion yen ($52.9 billion). Japan`s trade surplus with the U.S. grew 20 per cent over a year earlier to 582.1 billion yen ($5 billion) as an increase in shipments of machinery offset a 12 per cent drop in the value of car exports. Its deficit with China, its biggest trading partner, rose 10 per cent.

The core consumer price index for November rose 2.7 percent from a year before, but the size of growth shrank due to slower increases in energy prices reflecting falling crude oil prices, government data showed. The core CPI, which excludes often-volatile fresh food prices, stood at 103.4 against 100 for the base year of 2010, up for the 18th straight month, the Internal Affairs and Communications Ministry said. The index rose 3.0 percent in September and 2.9 percent in October.

Excluding a 2.0-percentage-point boost from the April 1 consumption tax hike estimated by the Bank of Japan, the core CPI was up 0.7 percent in November, with the size of growth falling short of 1.0 percent for the second consecutive month.

The unemployment rate of Japan in November stood at 3.5 percent, unchanged from the previous month, government data showed. The number of people unemployed dropped seasonally adjusted 2.1 percent to 2.29 million, the Ministry of Internal Affairs and Communications said.

Economy of Russia

Russia`s gross domestic product (GDP) has been negative in November, the first time since the fall of 2009, the Economic Development Ministry said. "In November, the first time since October 2009, Russian GDP contracted by 0.5 percent year-on-year," the ministry said in a statement. According to the statement, the shrink was mainly due to negative trends in construction sector, agriculture and falling wholesale trade. In the past 11 months of 2014, the Russian economy has grown by 0.6 percent, the statement added.

Russia`s industrial output declined in November after two months of growth, data from the federal statistics service showed. The data showed industrial production fell 0.4% after expanding 2.9% and 2.8% in October and September, respectively. In monthly terms, industrial output declined by 0.25% after growing 5.1% in October and 2.7% in September.

The headline figure was hit by a 3% decline in manufacturing sector`s output compared with the same period of 2013, as ruble weakened sharply during the month, pushing inflation up. The decline was only partly mitigated by a 2.5% growth in resources exploration and a 7% growth in production of heat and electricity.

In October, the manufacturing sector showed sound growth of 3.6% on the year and 3.3% on the month, as Russia`s manufacturing benefited from Moscow`s decision to ban food imports from states that sanctioned Moscow. However the effect of the ban seems to be wearing off.

Production of heat and electricity, usually an indicator of economic health, declined 0.5% in the first 11 months of the year compared with the same period of 2013. Overall industrial production was up 1.5% in the first 11 months compared with January-November 2013.

Russia`s trade surplus widened in October for the first time in three months as imports shrank the most since 2009 after a retaliatory ban on some foreign food shipments and a weaker ruble crimped demand.

The surplus expanded 6.3 percent from a year earlier to $13.6 billion after plunging 20 percent last month, the central bank in Moscow said on its website. The median estimate of 16 economists surveyed by Bloomberg was for a $11.6 billion surplus. Imports fell 12 percent, offsetting a 6.9 percent decline in exports.

Russia has said annual inflation hit 11.4pc in 2014, the highest level since the financial crisis of 2008. The sliding rouble - hit by lower oil prices and Western sanctions - has significantly pushed up prices, with food up by 15.4pc for the year, the state statistics service said.

Inflation crept up 2.6pc in December, a month when the ruble experienced a dramatic crash on December 18, falling by 20pc in a single day and triggering fears of a full-blown bank run. The currency has stabilised over the past week between 50 and 60 roubles to the dollar - more than 40pc weaker than at the beginning of the year. Russia`s inflation in 2013 was 6.5pc.

The official number of unemployed stood at 821,800 people on December 1, 2014. According to the Russian Federal Statistics Service, about 5.2 % of economically active population was out of job in Russia in November 2014 against 5.1% in October 2014. The real unemployment rate is estimated at 3.9 million people.

Russia`s unemployment has dropped by 4.3% compared to November 2013 but has increased by 1.7% compared to October 2014. The number of economically active Russian population stood at 75.5 million people or 53% of the country`s total population in November 2014, according to preliminary reports.

08.01.2015 15:26

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