World Economy Review - January 2015

The World Bank lowered its global growth forecast for 2015 and next year due to disappointing economic prospects in the euro zone, Japan and some major emerging economies that offset the benefit of lower oil prices.

The global development lender predicted the global economy would grow 3 percent this year, below a forecast of 3.4 percent made in June, according to its twice-yearly Global Economic Prospects report. World GDP growth will reach 3.3 percent in 2016, as opposed to a June forecast of 3.5 percent, before dipping to 3.2 percent in 2017, it said.

"The global economy is at a disconcerting juncture," World Bank chief economist Kaushik Basu told reporters. "It is as challenging a moment as it gets for economic forecasting." The world economy has been more sluggish than expected since the 2007-2009 global financial crisis.

The World Bank said strong growth prospects in the United States and Britain separated them from other rich nations, including members of the euro zone and Japan, which continue to face anemic economies and deflation fears. "The global economy is running on a single engine, ... the American one," Basu said. "This does not make for a rosy outlook for the world."

Among emerging markets, Brazil and Russia in particular weighed on the bank`s global growth predictions, along with China, which is in a managed slowdown as it transitions away from an investment-led growth model. Basu said India`s economic growth should finally catch up to China`s next year and in 2017, at a clip of about 7 percent.

Like other forecasters, the World Bank predicted the roughly 60-percent drop in global oil prices since June of last year should be a net positive for the world economy, boosting oil-importing countries.

But while the World Bank expected oil prices to stay low this year, it said the positive price shock could take several years to feed into its growth outlook, while increasing short-term market volatility and reducing investments in unconventional oil such as shale and deep sea oil. The immediate impact of lower crude prices was limited to a 0.1 percentage point boost to the global outlook this year, the World Bank said.

Falling oil prices could also depress inflation around the world. Fears of deflation, along with overall gloomier global prospects and stagnant U.S. wages, could encourage the U.S. Federal Reserve to raise interest rates more slowly than anticipated, Basu said.

Economy of the United States

U.S. economic growth slowed in the final three months of 2014 as a big burst in consumer spending was offset by weakness in other areas. The Commerce Department said gross domestic product grew at a 2.6 percent annualized rate in the October-December period, down from sizzling gains of 5 percent in the third quarter and 4.6 percent in the second quarter. Consumers did their part in the fourth quarter, pushing up spending by fastest rate in nearly nine years. But businesses investment, trade and government spending weakened.

In the October-December period, consumer spending, which accounts for 70 percent of economic activity, grew at 4.3 percent rate, up from 3.2 percent growth in the third quarter. It was the strongest gain for consumer spending since the first three months of 2006.

But business investment on equipment shrank at a 1.9 percent annual rate after big gains in the previous two quarters. Economists partly blamed the weakness on cutbacks in oil and gas drilling by energy companies grappling with the plunge in energy prices.

Government spending fell at a 2.2 percent annual rate in the fourth quarter after a 4.4 percent gain in the third quarter. The third quarter had been bolstered by a 16 percent rise in defense spending, which backpedaled in the fourth quarter. Trade, which had contributed 0.8 percentage point to growth in the third quarter, reduced growth by a full percentage point in the fourth quarter. Business stockpiling added 0.8 percentage point.

For 2014 overall, the economy grew at a moderate rate of 2.4 percent. The year began on a sour note as severe winter storms sent the economy into reverse. GDP dropped at a 2.1 percent rate in the first quarter. But the economy bounced back, with growth averaging 4.1 percent over the next three quarters. Economists have even higher hopes for 2015. With strong employment gains and falling gas prices boosting consumer spending, many analysts expect growth above 3 percent this year.

Industrial production declined 0.1% in December, marking the first drop since August, after unusually warm weather quelled demand for heating, the Federal Reserve reported. Economists polled by MarketWatch expected a 0.2% decline. Excluding utilities, industrial production rose 0.7%, as manufacturing output rose 0.3%. Compared to a year ago, industrial production climbed 4.9%. Capacity utilization fell in December to 79.7% from 80% in November.

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.

The cost of living in the U.S. declined in December by the most in six years, reflecting a plunge in energy costs that`s keeping inflation from rising toward the Federal Reserve`s goal. The consumer-price index dropped 0.4 percent, the biggest decline since December 2008, after falling 0.3 percent in November, a Labor Department report showed Friday in Washington. The median forecast of 89 economists surveyed by Bloomberg called for a 0.4 percent decline. Excluding volatile food and fuel, the so-called core measure was unchanged, failing to rise for only the second time since 2010.

The unchanged reading in the core gauge followed a 0.1 percent rise in November. Economists had forecast a 0.1 percent gain, according to the survey median. Overall consumer prices rose 0.8 percent in the 12 months ended in December, the smallest year-to-year gain since October 2009. They were up 1.3 percent the prior month. The core measure increased 1.6 percent from December 2013 after climbing 1.7 percent.

Total nonfarm payroll employment rose by 252,000 in December, and the unemployment rate declined to 5.6 percent, the U.S. Bureau of Labor Statistics reported. Job gains occurred in professional and business services, construction, food services and drinking places, health care, and manufacturing.

The unemployment rate declined by 0.2 percentage point to 5.6 percent in December, and the number of unemployed persons declined by 383,000 to 8.7 million. Over the year, the unemployment rate and the number of unemployed persons were down by 1.1 percentage points and 1.7 million, respectively. Among the major worker groups, the unemployment rate for adult women (5.0 percent) decreased by 0.2 percentage point in December, while the rates for adult men (5.3 percent), teenagers (16.8 percent), whites (4.8 percent), blacks (10.4 percent), and Hispanics (6.5 percent) showed little change. The jobless rate for Asians, at 4.2 percent (not seasonally adjusted), changed little from a year earlier.

Economy of the European Union

In November 2014 compared with October 2014, seasonally adjusted industrial production rose by 0.2% in both the euro area (EA18) and the EU28, according to estimates from Eurostat, the statistical office of the European Union. In October 2014 industrial production grew by 0.3% in the both zones. In November 2014 compared with November 2013, industrial production decreased by 0.4% in the euro area and by 0.1% in the EU28.

The increase of 0.2% in industrial production in the euro area in November 2014, compared with October 2014, is due to production of durable consumer goods rising by 1.9%, non-durable consumer goods by 0.5% and intermediate goods by 0.3%, while capital goods fell by 0.2% and energy by 0.9%. In the EU28, the increase of 0.2% is due to production of durable consumer goods rising by 1.7%, non-durable consumer goods by 0.5% and intermediate goods by 0.4%, while capital goods fell by 0.1% and energy by 1.0%. The highest increases in industrial production were registered in Ireland (+4.6%), Hungary (+3.3%) and Croatia (+2.7%), and the largest decreases in Lithuania (-2.0%), Latvia (-1.7%) and Malta (-1.4%).

The decrease of 0.4% in industrial production in the euro area in November 2014, compared with November 2013, is due to production of energy falling by 4.8%, capital goods by 0.9% and intermediate goods by 0.6%, while durable consumer goods rose by 0.4% and non-durable consumer goods by 3.2%. In the EU28, the decrease of 0.1% is due to production of energy falling by 4.4% and capital goods by 0.4%. Intermediate goods remained stable, while durable consumer goods rose by 2.4% and non-durable consumer goods by 2.5%. The largest decreases in industrial production were registered in Sweden (-3.9%), the Netherlands (-3.5%), Slovakia (-3.3%) and France (-2.9%), and the highest increases in Ireland (+35.8%), Hungary (+5.8%), Estonia (+4.9%) and the Czech Republic (+4.7%).

The first estimate for the euro area (EA18) trade in goods balance with the rest of the world in November 2014 gave a 20.0 billion surplus, compared with +16.5 bn in November 2013. The October 2014 balance was +23.6 bn, compared with +16.5 bn in October 2013. In November 2014 compared with October 2014, seasonally adjusted exports increased by 0.2% while imports remained stable. These data are released by Eurostat.

The first estimate for the November 2014 extra-EU28 trade balance was a 10.1 bn surplus, compared with +2.5 bn in November 2013. In October 2014 the balance was +7.4 bn, compared with +4.1 bn in October 2013. In November 2014 compared with October 2014, seasonally adjusted exports rose by 0.9% while imports fell by 1.1%.

Euro area annual inflation is expected to be -0.6% in January 2015, down from -0.2% in December 2014, according to a flash estimate from Eurostat. This negative rate for euro area annual inflation in January is driven by the fall in energy prices (-8.9%, compared with -6.3% in December). Prices are also expected to fall for food, alcohol & tobacco (-0.1%, compared with 0.0% in December) and non-energy industrial goods (-0.1%, compared with 0.0% in December). Only prices for services are expected to increase (1.0%, compared with 1.2% in December).

The euro area (EA18) seasonally-adjusted unemployment rate was 11.4% in December 2014, down from 11.5% in November 2014, and from 11.8% in December 2013. This is the lowest rate recorded in the euro area since August 2012. The EU28 unemployment rate was 9.9% in December 2014, down from 10.0% in November 2014 and from 10.6% in December 2013. This is the first time the rate for the EU28 has fallen below 10.0% since October 2011. These figures are published by Eurostat.

Eurostat estimates that 24.056 million men and women in the EU28, of whom 18.129 million were in the euro area, were unemployed in December 2014. Compared with November 2014, the number of persons unemployed decreased by 228 000 in the EU28 and by 157 000 in the euro area. Compared with December 2013, unemployment fell by 1.710 million in the EU28 and by 693 000 in the euro area.

Economy of Japan

Industrial output in Japan collected a seasonally adjusted 1.0 percent on month in December, the Ministry of Economy, Trade and Industry said. That missed expectations for an increase of 1.2 percent following the 0.5 percent contraction in November. On a yearly basis, output added 0.3 percent - matching forecasts following the 3.7 percent tumble in the previous month.

Industries that contributed to the increase in December included electronic parts, communication electronics equipment and chemicals. According to the survey of production forecast in manufacturing, production is expected to increase 6.3 percent in January and decrease 1.8 percent in February.

Japan`s trade deficit swelled to a record $109 billion in 2014, data showed, mostly because of huge post-Fukushima energy bills, but analysts said a recent drop in oil prices would shrink the yawning gap. The shortfall of 12.78 trillion yen, Japan`s fourth-consecutive annual deficit, was 11.4 percent wider than 2013 and was the worst since records began in 1979, according to the finance ministry.

Fuel costs have weighed heavily on Japan as the resource-poor country struggles to plug a huge energy gap after the 2011 atomic crisis forced the shutdown of nuclear reactors that once supplied more than a quarter of its power. That problem has been exacerbated by a sharp fall in the yen, which hiked the cost of energy imports purchased in foreign currencies. The data showed Japan`s imports rose 5.7 percent to a record 85.89 trillion yen in 2014, outstripping a 4.8 percent jump in exports to 73.11 trillion yen.

In December alone, however, Japan`s trade deficit almost halved over the previous year to 660.7 billion yen, largely thanks to falling oil prices. The trade balance last month was also helped by a better-than-expected 12.9 percent jump in exports.

Japan`s consumer prices rose 2.5 percent in December from a year earlier for the 19th straight monthly gain, the government said. The core consumer price index, which excludes volatile fresh food prices, stood at 103.2 against the 2010 base of 100, the Ministry of Internal Affairs and Communications said. Consumer prices also increased 2.6 percent for the whole of 2014, rising for the second consecutive year, after the consumption tax was raised to 8 percent from 5 percent last April, the ministry said.

Excluding the impact of the tax hike, the ministry estimates a rise of 1.1 percent in the prices for 2014. The December figure was smaller than a 2.7 percent growth in the previous month, as the recent plunge in oil prices slowed the pace of increase in energy costs to 2.8 percent from 3.9 percent in November. Growth in prices of recreational durable goods such as televisions and nonperishable foods also slowed to 1.7 percent and 3.9 percent in December respectively from 3.9 percent and 4.0 percent in November.

The unemployment rate in Japan was a seasonally adjusted 3.4% in December, the Ministry of Internal Affairs and Communications said. That beat forecasts for 3.5%, which would have been unchanged from the November reading. The jobs-to-applicant ratio was 1.2, beating forecasts for 1.12 - which also would have been unchanged. The participation rate was 59.3, down from 59.4 in the previous month.

Economy of Russia

Russia`s economy grew by 0.6 percent in 2014, the country`s Statistics Service said, citing preliminary data. The statistics service said Russia`s nominal gross domestic product for 2014 was 70.98 trillion rubles ($1 trillion) in nominal terms. Russia`s economy grew by 1.3% in 2013. Russia`s economy ministry said it expected gross domestic product to fall 3 per cent this year, more optimistic than many analysts` forecasts of a 4-5 percent drop.

Russia`s industrial production grew by 1.7% in 2014, supported by the ruble`s depreciation and a ban on food imports from states that sanctioned Moscow, the data showed. The headline figure was supported by a 2.1% growth in the manufacturing sector as well as by a 1.4% expansion in mining. The industrial production growth, however, failed to keep economic growth afloat. Russia`s industrial output grew by 0.4% in 2013.

Consumer prices in Russia rose by 11.4% in 2014, the Federal Statistics Service said, confirming earlier estimates, showing the highest level since the 2008 financial crisis. Many retailers started raising prices in December as the ruble`s value against the dollar plummeted over 40% for the year. This took place against the backdrop of biting Western sanctions and the plunging price for oil, the country`s main export. Food prices rose 15.4% on the year, while non-food prices increased 8.1%, the confirmed data showed. In 2013, consumer prices rose 6.5% and the Bank of Russia set a 5% inflation target for 2014.

Russia`s inflation may hit about 12% in 2015, Economic Development Minister Alexei Ulyukayev said. Russia`s inflation will rise to an annual rate of 13.1% in January, he said, referring to the ministry`s estimates. At the same time, monthly inflation in January will exceed 2%, he added.

06.02.2015 16:02

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