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World Economy Review - January 2019

The world economy is headed for a period of "dull, low" growth, according to fund manager Janus Henderson, but the risk of an outright recession remains small.

Market participants are increasingly worried about the prospect of a serious economic downturn this year.

A long-running U.S.-China trade war and uncertainty around the U.K.`s exit from the European Union has soured business and consumer sentiment in recent months.

Most economists, as well as some the world`s business elite, agree that economic growth is slowing but policymakers have expressed some hope for a soft landing rather than a full-blown recession.

"There is definitely a slowdown in the momentum of the global economy. I don`t think the economy is going to be as strong as it was last year," Jane Shoemake, investment director of global equity income at Janus Henderson Investors, told CNBC`s "Squawk Box Europe" on Monday.

"Our central forecast is not for a recession… It is just for dull, low growth," she added.

In contrast, Nobel Prize-winning economist Paul Krugman warned earlier this month that there is a significant chance the world economy is headed for a recession either later this year or early next year.

Krugman warned there is "quite a good chance" of a recession in 2019, adding he was worried economic policymakers "do not have an effective response" if the economy slows down.

At the start of February, the European Commission sharply downgraded its forecast for euro zone economic growth in 2019 and 2020.

The Commission said euro zone growth will slow to 1.3 percent this year from 1.9 percent in 2018 and is expected to rebound in 2020 to 1.6 percent.

The estimates were markedly less optimistic than the EU executive`s previous forecasts, exacerbating fears that a global economic downturn is spreading to Europe.

An economic downturn in China, the world`s second-largest economy, has heightened concerns of a global recession but Europe has been the "real disappointment," Shoemake said.

"We have had a massive change in what expectations are for the Federal Reserve and so if they don`t raise any further, dividend yields (regular payouts from a stock) are going to look very attractive because bond yields are not going to be moving any higher particularly," she added.

Economy of the United States

Barclays and J.P. Morgan reduced their estimates on U.S. economic growth in the final quarter of 2018 following data that showed domestic retail sales took a 1.2 percent spill in December, which was its steepest monthly drop in nine years.

U.S. gross domestic product likely grew at a 2.0 percent annualized pace in the final three months of last year based on the latest retail sales figures, slower than an earlier calculated rate of 2.6 percent, J.P. Morgan economist Michael Feroli wrote in a research note.

Meanwhile, Barclays economists scaled back their view on fourth-quarter GDP to 2.1 percent from 2.8 percent.

U.S. industrial production fell 0.6 percent in January, stemming in large part from an 8.8 percent plunge in the making of motor vehicles and auto parts. That marked the first - and biggest one month - drop since May 2018 and compared with economists` expectations for a 0.1 per cent increase, according to a Thomson Reuters survey. That also followed a downwardly revised 0.1 per cent increase in December.

The Federal Reserve said that that the manufacturing component of the index dropped 0.9 percent last month, reversing a 0.8 percent gain in December. Over the past 12 months, factory production has increased just 2.9 percent. Manufacturing of wood products, computers, electrical equipment, apparel and chemicals also fell in January.

In the Fed`s industrial production report, utility output rose 0.4 percent as the winter caused more natural gas usage. Mining edged up 0.1 percent. Overall, industrial production is up 3.8 percent from a year ago.

The industrial sector used less of its capacity in January, as the capacity utilization rate fell to 78.2 from 78.8 in January. When manufacturers rely on less of their capacity, they have less need to invest in new equipment and facilities.

The U.S trade deficit with its global partners fell in November for the first time after five straight months of increases as the shortfall with China and several other countries declined.

A release from the government showed the gap had closed in November, the most recent month for which data was available, to $49.3 billion from $55.7 billion in October, representing an 11.5 percent decline. Economists surveyed by Dow Jones had been looking for a deficit of $54.3 billion.

The decline was largely due to a slide in imports, which fell 2.9 percent to $259.2 billion. Exports edged lower to $209.9 billion, a 0.6 percent drop.

In all, the year-to-date goods and services deficit increased by $51.9 billion, a 10.4 percent rise from the same period in 2017. Exports rose $157.1 billion or 7.3 percent, while imports gained $208.9 billion or 7.9 percent.

US consumer prices held firm in January, likely supporting the Federal Reserve`s patient approach as it weighs future rate rises.

The labour department said declines in fuel prices offset inflationary pressure from food, automobiles, housing and apparel. The consumer price index was unchanged for the month following a 0.1 per cent decline in December. Economists were looking for a gain of 0.1 per cent, according to Refinitiv.

Over the past 12 months, CPI has gained 1.6 per cent, marking the smallest gain since June 2017 and slower than the 1.9 per cent increase seen in December.

So-called core CPI, which excludes volatile food and energy prices, was up 0.2 per cent, matching expectations. A 2.2 per cent year-over-year increase in the core CPI matched December`s reading.

The US unemployment rate rose to 4 percent in January 2019 from 3.9 percent in the previous month and slightly above market expectations of 3.9 percent. The number of unemployed increased by 241 thousand to 6.54 million while employment fell by 251 thousand to 156.69 million, following the 35-day partial government shutdown.

The impact of the partial federal government shutdown contributed to the uptick in both the unemployment rate and the number of unemployed persons. Among the unemployed, the number who reported being on temporary layoff increased by 175,000. This figure includes furloughed federal employees who were classified as unemployed on temporary layoff under the definitions used in the household survey.

Among the major worker groups, the unemployment rate for Hispanics increased to 4.9 percent in January. The jobless rates for adult men (3.7 percent), adult women (3.6 percent), teenagers (12.9 percent), Whites (3.5 percent), Blacks (6.8 percent), and Asians (3.1 percent) showed little change over the month.

In January, the number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 1.3 million and accounted for 19.3 percent of the unemployed.

The labor force participation rate, at 63.2 percent, and the employment-population ratio, at 60.7 percent, changed little over the month; both measures were up by 0.5 percentage point over the year.

Economy of the European Union

Seasonally adjusted GDP rose by 0.2% in both the euro area (EA19) and the EU28 during the fourth quarter of 2018, compared with the previous quarter, according to a flash estimate published by Eurostat, the statistical office of the European Union. In the third quarter of 2018, GDP had grown by 0.2% in the euro area and by 0.3% in the EU28.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.2% in the euro area and by 1.4% in the EU28 in the fourth quarter of 2018, after +1.6% and +1.8% respectively in the third quarter.

Over the whole year 2018, GDP rose by 1.8% in the euro area and by 1.9% in the EU28, based on seasonally and calendar adjusted quarterly data. The annual growth rate for 2017 was +2.4% for both the euro area and the EU28.

In December 2018 compared with November 2018, seasonally adjusted industrial production fell by 0.9% in the euro area (EA19) and by 0.5% in the EU28, according to estimates from Eurostat. In November 2018, industrial production fell by 1.7% in the euro area and by 1.2% in the EU28.

In December 2018 compared with December 2017, industrial production decreased by 4.2% in the euro area and by 2.7% in the EU28. The average industrial production for the year 2018, compared with 2017, rose by 1.1% in the euro area and by 1.3% in the EU28.

The first estimate for euro area (EA19) exports of goods to the rest of the world in December 2018 was ˆ176.5 billion, a decrease of 2.5% compared with December 2017 (ˆ181.0 bn). Imports from the rest of the world stood at ˆ159.5 bn, a rise of 1.9% compared with December 2017 (ˆ156.5 bn). As a result, the euro area recorded a ˆ17.0 bn surplus in trade in goods with the rest of the world in December 2018, compared with +ˆ24.5 bn in December 2017. Intra-euro area trade fell to ˆ142.6 bn in December 2018, down by 1.2% compared with December 2017.

The first estimate for extra-EU28 exports of goods in December 2018 was ˆ153.9 billion, down by 3.9% compared with December 2017 (ˆ160.1 bn). Imports from the rest of the world stood at ˆ153.2 bn, up by 4.3% compared with December 2017 (ˆ146.9 bn). As a result, the EU28 recorded a ˆ0.7 bn surplus in trade in goods with the rest of the world in December 2018, compared with +ˆ13.1 bn in December 2017. Intra-EU28 trade fell to ˆ255.2 bn in December 2018, -1.5% compared with December 2017.

Euro area annual inflation is expected to be 1.4% in January 2019 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 January (2.6%), followed by food, alcohol & tobacco (1.8%), services (1.6%) and non-energy industrial goods (0.3%).

The euro area (EA19) seasonally-adjusted unemployment rate was 7.9% in December 2018, stable compared with

November 2018 and down from 8.6% in December 2017. This remains the lowest rate recorded in the euro area since October 2008. The EU28 unemployment rate was 6.6% in December 2018, stable compared with November 2018 and down from 7.2% in December 2017. This remains the lowest rate recorded in the EU28 since the start of the EU monthly unemployment series in January 2000. These figures are published by Eurostat.

.Eurostat estimates that 16.306 million men and women in the EU28, of whom 12.919 million in the euro area, were unemployed in December 2018. Compared with November 2018, the number of persons unemployed decreased by 75 000 in both the EU28 and the euro area. Compared with December 2017, unemployment fell by 1.533 million in the EU28 and by 1.174 million in the euro area.

Economy of Japan

Japan`s economy rose at an annualized rate of 1.4 percent in October-December, government data showed, as consumer spending and capital expenditure rebounded from natural disasters that disrupted corporate activity.

The preliminary reading for fourth-quarter gross domestic product matched the median estimate in a Reuters poll of economists. It followed a downwardly revised 2.6 percent annualized contraction in July-September.

On a quarter-on-quarter basis, GDP rose 0.3 percent, slightly less than the median estimate for 0.4 percent quarter-on-quarter increase.

Industrial production in Japan dropped 0.1 percent month-on-month in December 2018, unrevised from the preliminary estimate and after a decline of 1 percent in November. The industries that mainly contributed to a decrease were production machinery (-3.5 percent vs 2.8 percent in November); chemicals (-1.2 percent vs 1.6 percent); and electronic parts and devices (-2.6 percent vs -1.7 percent). In contrast, increases were seen in general-purpose and business oriented machinery (4.9 percent vs -11.0 percent); motor vehicles (1.1 percent vs 0.2 percent); and electrical machinery, and Information and communication electronics equipment (1.3 percent vs -1.7 percent). On an annual basis, output fell 1.9 percent in December, after a 1.5 percent rise in November.

Japan logged a trade deficit of JPY 55.3 billion in December 2018, compared with a surplus of JPY 356.2 billion a year earlier and market expectations of a JPY 29.5 billion gap. Imports rose 1.9 percent from a year earlier to JPY 7.08 trillion in December, missing market expectations of a 3.7 percent growth and far slower than a 12.5 percent increase in November. Exports declined 3.8 percent to JPY 7.02 trillion, worse than market consensus of a 1.9 percent drop and after a 0.1 percent rise in November.

Considering 2018 full year, Japan posted a trade deficit of JPY 1.20 trillion, the first trade gap since 2015, as persistent global trade tensions negatively affected Japanese companies` exports. Exports for the year increased 4.1 percent, much slower than a 11.8 percent rise in 2017, with sales growth easing to China (6.8 percent vs 20.5 percent) and the US (2.3 percent vs 6.9 percent). Imports went up 9.7 percent, after a 14.1 percent advance in 2017.

Japan`s consumer price inflation eased to 0.3 percent year-on-year in December 2018 from 0.8 percent in the previous month, in line with market expectations. It was the lowest inflation rate since October 2017, mainly due to declines in cost of food, housing and transport. In 2018, the average inflation rate was 1 percent. Prices of food declined by 1.1 percent from a year earlier in December, the first drop since November 2017, compared to a 0.5 percent rise a month earlier.

The country`s annual core consumer inflation, which excludes fresh food, slowed to a seven-month low of 0.7 percent in December 2018 from 0.9 percent in the previous month, missing market expectations of 0.8 percent. On a monthly basis, consumer prices declined 0.2 percent in December, the same pace as in November.

The seasonally adjusted unemployment rate in Japan fell by 0.4% to 2.4% in December 2018 when compared to the same period last year, according to Statistics Japan. When compared to November 2018, the unemployment rate fell by 0.1%.

The number of unemployed persons in December 2018 was 1.59 million, a decrease of 150,000 thousand or 8.6%, from the previous year.

Meanwhile, the employment rate in Japan stood at 60.0%, up 1.1% from the same period last year. The number of employed persons in December 2018 was 66.56 million, an increase of 1.14 million or 1.7% from the previous year. The labour force participation rate was 61.4%, an increase of 0.9% compared to last year.

Japan also published its full year 2018 data showing that the average unemployment rate stood at 2.4%, down 0.4% from the previous year and the lowest figure since 1992.

Economy of Russia

Russia`s economic growth climbed to a six-year high in 2018. Gross domestic product grew 2.3 percent last year, Rosstat said, exceeding the 1.5 to 2.0 percent foreseen by the central bank and the 1.8 percent predicted by the economy ministry.

Growth exceeded expectations partly because Rosstat revised construction growth in the first 11 months of 2018 to 5.7 percent from 0.5 percent. The economy ministry said construction in Russia`s Yamalo-Nenets region accounted for the revision.

A week after the data were published, the ministry said GDP growth had been boosted by one-time factors and predicted it would slow to 1.3 percent in 2019. Analysts polled by Reuters in late December had expected last year`s GDP growth would remain at 1.7 percent, then slow to 1.4 percent in 2019.

Industrial production in Russia increased 1.1 percent year-on-year in January of 2019, easing from a 2 percent rise in the previous month and missing market expectations of 1.3 percent. It was the smallest gain in industrial activity since December of 2017, when it contracted by 1.7 percent. Output slowed for extraction of raw materials (4.8 percent from 6.3 percent in December) and electricity, gas, steam & air conditioning supply (1.3 percent from 4.5 percent). In addition, production fell for manufacturing (-1 percent from a flat reading) and distribution of water (-2.8 percent from 3.8 percent). On a monthly basis, industrial output slumped 21.5 percent, after rising 7 percent in December.

Russia`s trade surplus widened to USD 15.80 billion in August of 2018 from USD 6.66 billion in the corresponding month of the previous year, and above market consensus of a USD 15.0 billion surplus.

Exports jumped 28.7 percent to USD 37.44 billion in August from USD 29.08 billion a year ago, as exports to non-CIS countries climbed 30.8 percent to USD 32.69 billion and those to CIS countries went up 16.3 percent to USD 4.75 billion.

Imports fell 3.5 percent year-on-year to USD 21.64 billion, the first annual decline since July of 2016. Imports from non-CIS countries decreased 4.1 percent to USD 19.42 billion while those from CIS countries advanced 2.6 percent to USD 2.22 billion.

The trade surplus with non-CIS countries grew 179.5 percent to USD 13.27 billion from USD 4.75 billion a year ago; and with CIS countries it widened 31.82 percent to USD 2.53 billion from USD 1.92 billion.

Russia`s consumer price inflation increased to 5 percent year-on-year in January 2019 from 4.3 percent in the previous month, but slightly below market expectations of 5.2 percent. It was the highest inflation rate since January 2017 after the government raised VAT to 20 percent from 18 percent.

Within the goods component, food cost advanced 5.5 percent in January, following a 4.7 percent rise in December and prices of non-food products rose 4.5 percent, after a 4.1 percent gain in the previous month. Also, services inflation picked up to 5.0 percent in January from 3.9 percent in December.

Annual core inflation rate climbed to 4.1 percent in January from 3.7 percent in the previous month. It was the highest rate since April 2017.

On a monthly basis, consumer prices increased 1 percent in January, compared with a 0.8 percent gain in December and also missing market consensus of 1.2 percent. Upward pressure came from all main categories: food (1.3 percent vs 1.7 percent); non-food products (0.6 percent vs 0.2 percent); and services (1.1 percent vs 0.4 percent).

Russia`s unemployment rate edged up to 4.9 percent in January 2019 from 4.8 percent in the previous month and in line with market expectations. It was the highest jobless rate since last April.

The number of unemployed fell by 31 thousand to 3.667 million in January from 3.698 million in the previous month. Compared with the previous year, unemployment fell by 251 thousand from 3.918 million.

Meanwhile, registered unemployment rose by 40 thousand to 0.733 million from 0.693 million a month earlier. Year-on-year, that number dropped by 45 thousand from 0.778 million.

Russia`s real wages increased by 0.2 percent year-on-year in January, following a revised 2.9 percent advance in the previous month and below market expectations of a 0.4 percent gain. Average nominal wages jumped 5.2 percent to RUB 41,120 while annual inflation rate rose to a two-year high of 5 percent.

21.02.2019 13:26:07

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