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World Economy Review - March 2017

Global debt rose to 325 per cent of the world`s gross domestic product (GDP) in 2016, totaling $215 trillion (172.39 trillion pounds), an Institute for International Finance (IIF) report showed, boosted by the rapid growth of issuance in emerging markets.

Global debt grew by $7.6 trillion in 2016 compared with the prior year. Issuance rose from 320 per cent of GDP in 2015.

Emerging market debt saw a "spectacular rise" to $55 trillion outstanding in 2016, equal to 215 per cent of their GDP. This was driven mostly by non-financial corporate debt, the report said.

Emerging markets have raised nearly $40 trillion of new debt between 2006 and 2016, a significant acceleration from the roughly $9 trillion added between 1996 and 2006, according to the report.

Global debt has risen more than $70 trillion in the last decade to a record high for debt issuance, the institute said.

Developed market countries accounted for $160 trillion, the lion`s share of global debt, reaching nearly four times, or 390 per cent of those markets` combined GDP.

The report found that the $32 trillion increase in developed market debt had been driven largely by governments, with the US and UK public sector debt having more than doubled since 2006. Japan and developed markets in Europe have seen an increase of about 50 per cent in the dollar value of their outstanding government debt.

The majority of the increase in emerging market indebtedness has been in local currency, which was more than $48.5 trillion as of the end of 2016 from around $43 trillion in 2015.

The world is racking up a record level of debt, much of it driven by emerging markets. But with interest rates in the U.S. heading up, the excessive reliance on easy money to drive economic growth can backfire on countries that depend on money flows from abroad.

The global debt pile has climbed to $215 trillion in 2016, an increase of $70 trillion from a decade ago, according to a report published Monday by the International Institute of Finance.

Once minor players in global lending markets, developing-market nations have benefited from international investors willing to invest in assets from markets perceived as riskier in search of relatively richer returns, or income, as ultralow and subzero interest rates from quantitative easing snatched away easy returns from safe assets like U.S. Treasurys.

The published findings confirms worries that the global economy has binged on debt, even if the usual suspects may have changed. Most of the recent concern among investors over growing debt levels has been targeted toward the high-income countries of the West.

The U.S. has continued to bump against the debt ceiling, raising concerns that it will no longer have the economic or political wherewithal to pay back the interest and principal on its debt. Greece has struggled to pay its creditors, and Italy is trying to bail out its big banks saddled with bad loans.

In fact, much of this precipitous rise has come from emerging markets. In the past decade, emerging markets have issued $40 trillion of additional debt.

“Higher domestic rates and a stronger U.S. dollar pose headwinds for those emerging markets with a debt-driven growth model,” wrote the authors of the report, titled “Eye-watering rise in debt levels.”

A tightening interest-rate cycle in the U.S. can result in a pull-back in portfolio flows, sparking a credit crunch. And a rising U.S. currency can make it more expensive for overseas borrowers to pay back investors in dollars when the money earned to pay back the interest is denominated in a weakening currency.

Particularly worrying is the rapid growth in corporate credit. Principal culprits of the boom in corporate lending include China, Turkey and Saudi Arabia. Bonds from such issuers have already been hit by a combination of slowing growth, heightening political turmoil and dipping energy prices.

Though an accumulating debt mound can trouble investors concerned over possible defaults, the credit profile for emerging markets has improved as corporate credit grades have recovered since the first half of 2016, according to an average of S&P`s, Moody`s and Fitch`s ratings compiled by Bloomberg.

Economy of the United States

Gross domestic product in the U.S. increased by more than previously estimated in the fourth quarter of 2016, according to a report released by the Commerce Department.

The report said real GDP climbed by 2.1 percent in the fourth quarter compared to the previously reported 1.9 percent increase. Economists had expected the pace of GDP growth to be upwardly revised to 2.0 percent.

Despite the upward revision, the GDP growth in the fourth quarter still reflects a notable slowdown from the 3.5 percent jump seen in the third quarter.

The Commerce Department said the stronger than previously estimated growth primarily reflected upward revisions to consumer spending and private inventory investment.

The report said consumer spending jumped by an upwardly revised 3.5 percent in the fourth quarter compared to the previously reported 3.0 percent increase. However, the upward revisions were partly offset by downward revisions to non-residential fixed investment and exports. Imports, which are a subtraction in the calculation of GDP, were also revised upward.

With a steep drop in utilities output offsetting a jump in mining output, the Federal Reserve released a report showing that U.S. industrial production came in flat in the month of February.

The Fed said industrial production was unchanged in February after edging down by a revised 0.1 percent in January. Economists had expected production to rise by 0.2 percent compared to the 0.3 percent drop originally reported for the previous month.

Manufacturing output also rose by 0.5 percent for the second straight month, reflecting the sixth consecutive monthly increase. However, the Fed said utilities output plummeted by 5.7 percent in February after tumbling by 5.8 percent in January amid continued unseasonably warm weather.

The report also said capacity utilization for the industrial sector edged down to 75.4 percent in February from a revised 75.5 percent in January. The capacity utilization rate had been expected to rise to 75.5 percent from the 75.3 percent originally reported for the previous month.

Capacity utilization in the utilities sector plunged to 70.9 percent, while capacity utilization in the mining and manufacturing sectors rose to 80.5 percent and 75.6 percent, respectively.

The U.S. trade deficit declined sharply in February as imports from China fell by a record amount and American exports rose for a third straight month.

The deficit fell to $43.6 billion in February, 9.6 percent below January`s deficit of $48.2 billion, the Commerce Department reported. Exports rose a tiny 0.2 percent to $192.9 billion. Imports dropped 1.8 percent to $236.4 billion as the flow of Chinese goods tumbled by $8.6 billion, led by a big drop in cell phone imports.

The politically sensitive trade deficit with China narrowed in February to $23 billion, 26.6 percent below the January total.

The small rise in exports in February was led by U.S.-made autos and autos parts, which climbed 1.5 percent to the highest level since July 2014. Exports of petroleum products were up 8.6 percent. Those gains helped offset declines in exports of commercial airplanes, farm products and industrial engines.

The deficit with Mexico shot up 46 percent in February to $5.8 billion while the deficit with Canada, the other partner in NAFTA, dropped 38.1 percent to $2.1 billion.

The deficit with the European Union declined 18.6 percent to $9.4 billion, led by a 9.2 percent drop in the deficit with Germany.

U.S. consumer prices rose at a slower pace in February. Clothing and housing costs rose in February, while motor vehicle and gasoline prices dipped.

The Labor Department says consumer prices rose 0.1 percent in February, a sharp deceleration from the 0.6 percent jump in January. Consumer prices have risen 2.7 per cent over the past year. Excluding volatile food and energy categories, prices have increased 2.2 percent.

Several key categories are running above that average. Housing costs have risen 3.5 percent during the year, while the price of medical treatment has climbed 3.4 per cent.

The U.S. created just 98,000 new jobs in March to mark the smallest gain in almost a year, as hiring cooled off after a strong start in 2017. Economists polled by MarketWatch had predicted a 185,000 increase in nonfarm jobs. Yet the unemployment rate fell to 4.5% from 4.7% - the lowest level in almost 10 years - as the number of people who found work outstripped the increase in the labor force, the government said. Average wages rose 0.2% to $26.14 an hour. Hourly pay increased 2.7% from March 2016 to March 2017, down from 2.8% in the prior month. Hours worked totaled 34.3 a week, the same as in February. The government cut its estimate of new jobs created in February to 219,000 from 235,000. January`s gain was reduced to 216,000 from 238,000.

Economy of the European Union

Seasonally adjusted GDP rose by 0.4% in the euro area (EA19) and by 0.5% in the EU28 during the fourth quarter of 2016, compared with the previous quarter, according to an estimate published by Eurostat, the statistical office of the European Union. In the third quarter of 2016, GDP grew by 0.4% in both zones.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.7% in the euro area and by 1.9% in the EU28 in the fourth quarter of 2016, after +1.8% and +1.9% respectively in the previous quarter.

Over the whole year 2016, GDP rose by 1.7% in the euro area and by 1.9% in the EU28, compared with 2.0% and 2.2% respectively in 2015.

In January 2017 compared with December 2016, seasonally adjusted industrial production rose by 0.9% in the euro area (EA19) and by 0.5% in the EU28, according to estimates from Eurostat. In December 2016 industrial production fell by 1.2% in the euro area and by 0.7% in the EU28.

In January 2017 compared with January 2016, industrial production increased by 0.6% in the euro area and by 1.3% in the EU28.

The increase of 0.9% in industrial production in the euro area in January 2017, compared with December 2016, is due to production of capital goods rising by 2.8% and energy by 1.9%, while production of non-durable consumer goods fell by 0.7% and both intermediate goods and durable consumer goods by 0.4%. In the EU28, the increase of 0.5% is due to production of capital goods rising by 2.4% and energy by 1.5%, while production of non-durable consumer goods fell by 1.5%, durable consumer goods by 0.9% and intermediate goods by 0.4%.

Among Member States for which data are available, the highest increases in industrial production were registered in Ireland (+3.4%), Germany (+3.3%) and Greece (+2.5%), and the largest decreases in Croatia (-6.8%), Denmark (-4.6%) and Bulgaria (-3.9%).

The increase of 0.6% in industrial production in the euro area in January 2017, compared with January 2016, is due to production of energy rising by 6.9%, durable consumer goods by 1.5% and intermediate goods by 0.8%, while production of non-durable consumer goods fell by 2.6% and capital goods by 0.8%. In the EU28, the increase of 1.3% is due to production of energy rising by 5.6%, durable consumer goods by 2.0%, intermediate goods by 1.7% and capital goods by 0.8%, while production of non-durable consumer goods fell by 2.2%.

Among Member States for which data are available, the highest increases in industrial production were registered in Lithuania (+8.4%), Greece (+7.4%) and Estonia (+6.7%), and the largest decreases in Ireland (-8.6%), Bulgaria (-1.2%) and Luxembourg (-0.9%).

The first estimate for euro area (EA19) exports of goods to the rest of the world in January 2017 was ˆ163.9 billion, an increase of 13% compared with January 2016 (ˆ144.9 bn). Imports from the rest of the world stood at ˆ164.5 bn, a rise of 17% compared with January 2016 (ˆ140.1 bn). As a result, the euro area recorded a ˆ0.6 bn deficit in trade in goods with the rest of the world in January 2017, compared with a surplus of ˆ4.8 bn in January 2016. Intra-euro area trade rose to ˆ145.7 bn in January 2017, up by 10% compared with January 2016. These data are released by Eurostat.

The first estimate for extra-EU28 exports of goods in January 2017 was ˆ141.2 billion, up by 16% compared with January 2016 (ˆ121.4 bn). Imports from the rest of the world stood at ˆ157.4 bn, up by 18% compared with January 2016 (ˆ133.5 bn). As a result, the EU28 recorded a ˆ16.2 bn deficit in trade in goods with the rest of the world in January 2017, compared with -ˆ12.1 bn in January 2016. Intra-EU28 trade rose to ˆ262.4 bn in January 2017, +10% compared with January 2016.

Euro area annual inflation is expected to be 1.5% in March 2017, down from 2.0% in February 2017, according to a flash estimate from Eurostat.

Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in March (7.3%, compared with 9.3% in February), followed by food, alcohol & tobacco (1.8%, compared with 2.5% in February), services (1.0%, compared with 1.3% in February) and non-energy industrial goods (0.2%, stable compared with February).

The euro area (EA19) seasonally-adjusted unemployment rate was 9.5% in February 2017, down from 9.6% in

January 2017 and from 10.3% in February 2016. This remains the lowest rate recorded in the euro area since May 2009. The EU28 unemployment rate was 8.0% in February 2017, down from 8.1% in January 2017 and from 8.9% in February 2016. This remains the lowest rate recorded in the EU28 since January 2009. These figures are published by Eurostat.

Eurostat estimates that 19.750 million men and women in the EU28, of whom 15.439 million were in the euro area, were unemployed in February 2017. Compared with January 2017, the number of persons unemployed decreased by 153 000 in the EU28 and by 140 000 in the euro area. Compared with February 2016, unemployment fell by 1.852 million in the EU28 and by 1.246 million in the euro area.

Among the Member States, the lowest unemployment rates in February 2017 were recorded in the Czech Republic (3.4%), Germany (3.9%) and Malta (4.1%). The highest unemployment rates were observed in Greece (23.1% in December 2016) and Spain (18.0%).

Compared with a year ago, the unemployment rate in February 2017 fell in twenty-six Member States, while it increased in Denmark (from 6.0% to 6.4%) and Lithuania (from 8.0% to 8.3%). The largest decreases were registered in Croatia (from 14.4% to 11.6%), Spain (from 20.5% to 18.0%), Portugal (from 12.2% to 10.0%) and Ireland (from 8.4% to 6.6%).

Economy of Japan

Japan`s economy grew faster than initially reported in the final quarter of 2016, with an upward revision in business spending and a jump in investment growth bolstering activity.

Asia`s second-largest economy grew at an annualized rate of 1.2 percent in the October-December quarter, revised up from a preliminary reading of 1.0 percent growth, according to new data from the Cabinet Office.

However, the revised figure still undershot market estimates: The median estimate in a Reuters poll of economists had pegged growth at 1.6 percent.

On a quarter-on-quarter basis, gross domestic product (GDP) rose 0.3 percent, versus a preliminary reading of 0.2 percent growth and the median estimate of a 0.4 percent increase.

Japanese industrial production rose 2.0% on month in February, the Ministry of Economy, Trade and Industry said, as demand for Japanese goods overseas picked up.

The rise was larger than the 1.2% increase forecast by economists surveyed by the Nikkei, and came after a 0.4% fall in January.

METI kept its assessment of production unchanged, saying that production was picking up.

Economists say that Japanese production is picking up as the world economy recovers and Japanese companies bring inventories down. Last year, inventories hit their highest level since 2009. In February, inventories rose 0.9% on month.

According to a survey included in the report, manufacturers expect output to fall in March, before increasing 8.3% in April.

Japan`s trade surplus hit a multi-year high in February, government data showed, as exports to China rebounded after a Lunar New Year lull. The value of Japan`s total shipments abroad rose 11.3 per cent, the most in two years, on strong demand for vehicle components and electronic parts, while imports grew 1.2 per cent.

That resulted in a trade surplus of 813.4 billion yen (US$7.3 billion), reversing a January deficit and more than tripling the 235.5 billion yen surplus a year ago. The latest figures marked Japan`s highest monthly trade surplus in nearly seven years.

Japan`s core consumer inflation notched another month above the water line in February, but ongoing contraction in household spending accelerated to the fastest pace since August.

Japan`s core consumer price index, which excludes the cost of fresh food, rose 0.2 per cent year on year in February, according to the Ministry of Internal Affairs and Communications. That was the second consecutive month of growth for the gauge after 12 months of contraction and came in dead-on a median forecast from economists polled by Reuters.

But consumer prices excluding both food and energy costs rose 0.1 per cent (compared to 0.2 per cent in January) while the headline CPI rose 0.3 per cent (0.4 per cent in January).

The rise in the core gauge of consumer inflation will come as good news for Japan`s central bank, which kept monetary policy on hold in March and offered no hint of future rate rises as it continues to fight to reach its inflation target of 2 per cent.

Japan`s unemployment rate fell to 2.8 percent in February, the lowest in more than 22 years, offering a positive sign for the country`s economy, government data showed.

Consumers, however, remained reluctant to loosen their purse strings, as household spending, a key indicator of private consumption, slipped 3.8 percent in the month from a year earlier to ¥260,644 ($2,300), the internal affairs ministry said. The February jobless rate fell slightly from 3.0 percent in January.

The country`s job availability, or the ratio of job offers to seekers, remained unchanged from January at 1.43, the best level since July 1991, according to labor ministry data. It means that 143 positions were available for every 100 applicants.

Economy of Russia

Recently released data reveal that the Russian economy expanded 0.3 percent in Q4-2016, snapping a two year streak in which GDP growth was negative every quarter. The reading was in line with consensus expectations. Examining the trends in the underlying GDP components suggest that Russia`s economy has bottomed out and should return to positive GDP growth through 2017 and 2018.

Personal consumption was less of a drag in Q4, slicing off just 1.6 percentage points, the lowest amount subtracted in the previous eight quarters. Inflationary pressures likely took a big bite out of real disposable income, which hampers growth in personal consumption. Likewise, investment spending dragged down GDP growth just 0.1 percentage points, after averaging a -1.1 percentage point contribution the previous eight quarters.

Industrial production in Russia unexpectedly dropped by 2.7 percent year-on-year in February of 2017, following a 2.3 percent gain in January while market expected a 1.4 percent rise. It was the first decline since January 2016, driven by a fall in the output of manufacturing (-5.1 percent from 2.0 percent in a month earlier) and water and waste disposal (-19.3 percent from 1.6 percent). In contrast, production went up for electricity and gas (2.7 from 0.8 percent) while mining output was flat (after a 3.3 percent rise in January). On a monthly basis, industrial production shrank 0.6 percent, following a 23.8 percent decrease in the prior month.

Russian trade surplus increased by 59 percent to $11.45 billion in January 2017 from $7.2 billion in the same month a year earlier, while below market expectations of a $13.2 billion surplus. Exports jumped 47.2 percent to $25.1 billion and imports went up 38.9 percent to $13.7 billion.

Consumer prices in Russia increased by 4.3 percent year-on-year in March 2017, easing from a 4.6 percent rise in the previous month and in line with market expectations. It was the lowest inflation rate since June 2012, as prices rose at a slower pace for food (3.1 percent from 3.3 percent in February); clothing and footwear (6.1 percent from 6.6 percent); transport (5.2 percent from 6.1 percent); furnishings and household equipment (3.3 percent from 3.9 percent); and alcoholic beverages and tobacco (7.6 percent from 8 percent). On a monthly basis, prices edged up 0.1 percent after advancing by 0.2 percent in February.

The unemployment rate in Russia remained unchanged at 5.6 percent in February of 2017 from the previous month and in line with market expectations. The number of unemployed people decreased by 62 thousand to 4.226 million and the number of economically active people increased by 200 thousand to 76.1 million, representing 52 percent of total population.

09.04.2017 12:46

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