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World Economy Review - July 2017

The National Institute of Economic and Social Research have revised forecasts for world GDP growth in 2017 upward as several major economies exceed expectations for the year.

Global growth has been revised to 3.6% by the NIESR, while it has maintained its 2018 and long-term projections of 3.6% and 3.4% respectively.

In the report released by the research institute, strong performances from the Euro Area and Japan in particular drove the 2017 forecast higher.

Both areas have seen super-low interest rates in recent months and years, with the NIESR pointing towards this as a factor in their economic growth.

“Recent data for several major economies point to a more significant pick-up in global growth this year than we projected in May. Among the advanced economies, the upward revisions have been most marked for the Euro Area and Japan,” the report said.

“The improvement in growth performance seems due partly to the highly accommodative monetary policies of recent years but also to a turnaround in the stance of fiscal policies since 2015.”

A lessening of political instability in Europe was also referenced as a major reason behind the revision of the forecast, but the NIESR added it was still at the risk of further weakness owing to political events.

“In the euro area, political uncertainty has been reduced by the French elections, but risks of financial instability remain, especially with an incomplete banking union. More broadly, economic recovery remains fragile and could be derailed by policy mistakes.”

According to the report, lower-than-expected inflation across major economies presents a unique dilemma for central banks as they seek to maintain sustainable growth.

“Past relationships both between unemployment and inflation, and between interest rates and demand, seem unreliable,” it said.

“Economic recoveries are fragile, the costs of any renewed weakness are potentially high, and consistently below-target inflation in recent years jeopardizes the credibility of the symmetry of inflation targets.”

Economy of the United States

U.S. gross domestic product increased 2.6 percent in the second quarter, meeting expectations. First-quarter GDP was revised lower to 1.2%. The economy grew at a 2.1 percent pace in the fourth quarter of 2016. Consumer spending, the main engine of the economy, led the way with a 2.8% increase, according to Commerce Department data.

Business investment in equipment rose 8.2%, while outlays on structures advanced 4.9%. In a bit of a surprise, the value of inventories fell slightly to mark the second decline in a row. Investment in new housing also sank 6.8%. Exports rose 4.1% and imports edged up 2.1%. Inflation as measured by the PCE price index increased at a 0.3% annual rate.

U.S. industrial production rose for a fifth straight month in June, helped by gains in mining, while the manufacturing sector rebounded. Overall industrial production rose 0.4 percent in June after being up a revised 0.1 percent in May. Mining output increased 1.6 percent, with advances in oil and gas extraction, in coal mining and in drilling and support activities. Utilities output was unchanged. Economists had expected industrial output to increase 0.3 percent from the previously reported flat reading in May.

Manufacturing rebounded 0.2 percent, in line with economist expectations, after an unrevised 0.4 percent fall in May. Activity in the manufacturing sector, which makes up about 12 percent of the U.S. economy, has been slowing amid a moderation in oil prices and declining motor vehicle sales.

Capacity utilization, which measures how fully companies are deploying their resources, rose to 76.6 percent in June from 76.4 percent in May. Economists had forecast a 76.7 percent rate in June.

The U.S. trade deficit narrowed in June as exports hit the highest level in 2 years. The Commerce Department said that the trade gap slid 5.9 percent in June to $43.6 billion.

Exports of goods and services rose 1.2 percent to $194.4 billion, the highest amount since December 2014 on higher foreign demand for American soybeans, computer accessories and other products. Services exports reached a record $65.4 billion.

U.S. exports may be getting a lift from a pickup in global economic growth and a drop in the value of the U.S. dollar against other currencies. A weaker dollar makes American products a better bargain in foreign markets.

Overall imports slipped 0.2 percent to $238 billion on a drop in demand for cellphones and other household goods. So far this year, the trade deficit is up 10.7 percent to $276.6 billion.

U.S. consumer prices were unchanged in June as the cost of gasoline and mobile phone services declined further, pointing to benign inflation that could cast doubts on the Federal Reserve`s ability to increase interest rates for a third time this year. The U.S. Consumer Price Index was forecast to rise 0.2 percent in June.

The Labor Department said that the unchanged reading in its Consumer Price Index followed a 0.1 percent dip in May. The lack of a rebound in the CPI in June could trouble Fed officials who have largely viewed the recent moderation in price pressures as transitory.

In the 12 months through June, the CPI increased 1.6 percent - the smallest gain since October 2016 - after rising 1.9 percent in May. The year-on-year CPI has been softening steadily since February, when it hit 2.7 percent.

The U.S. economy continued a strong summer, adding 209,000 jobs in July while the unemployment rate fell to 4.3 percent, the lowest since March 2001, according to a government report.

Economists surveyed by Reuters had expected the report to show growth of 183,000; the unemployment rate met expectations. A more encompassing rate that includes discouraged workers and the underemployed was unchanged at 8.6 percent.

The number of employed Americans hit a new high of 153.5 million thanks to a surge of 345,000. The employment-to-population ratio also moved up to 60.2 percent, tied for the highest level since February 2009.

Economy of the European Union

Seasonally adjusted GDP rose by 0.6% in both the euro area (EA19) and in the EU28 during the second quarter of 2017, compared with the previous quarter, according to a preliminary flash estimate published by Eurostat, the statistical office of the European Union. In the first quarter of 2017, GDP had grown by 0.5% in both zones.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.1% in the euro area and by 2.2% in the EU28 in the second quarter of 2017, after +1.9% and +2.1% in the previous quarter.

In May 2017 compared with April 2017, seasonally adjusted industrial production rose by 1.3% in the euro area (EA19) and by 1.2% in the EU28, according to estimates from Eurostat. In April 2017 industrial production rose by 0.3% in euro area and by 0.1% in the EU28. In May 2017 compared with May 2016, industrial production increased by 4.0% in both zones.

The first estimate for euro area (EA19) exports of goods to the rest of the world in May 2017 was ˆ189.6 billion, an increase of 12.9% compared with May 2016 (ˆ167.8 bn). Imports from the rest of the world stood at ˆ168.1 bn, a rise of 16.4% compared with May 2016 (ˆ144.4 bn). As a result, the euro area recorded a ˆ21.4 bn surplus in trade in goods with the rest of the world in May 2017, compared with +ˆ23.4 bn in May 2016. Intra-euro area traderose to ˆ162.4 bn in May 2017, up by 15.3% compared with May 2016.

The first estimate for extra-EU28 exports of goods in May 2017 was ˆ165.4 billion, up by 15.9% compared with May 2016 (ˆ142.7 bn). Imports from the rest of the world stood at ˆ161.4 bn, up by 17.2% compared with May 2016 (ˆ137.7 bn). As a result, the EU28 recorded a ˆ4.0 bn surplus in trade in goods with the rest of the world in May 2017, compared with +ˆ5.0 bn in May 2016. Intra-EU28 trade rose to ˆ288.1 bn in May 2017, up by 12.7% compared with May 2016.

Euro area annual inflation is expected to be 1.3% in July 2017, stable compared with June 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 July (2.2%, compared with 1.9% in June), followed by services (1.5%, compared with 1.6% in June), food, alcohol & tobacco (1.4%, stable compared with June) and non-energy industrial goods (0.5%, compared with 0.4% in June).

The euro area (EA19) seasonally-adjusted unemployment rate was 9.1% in June 2017, down from 9.2% in May 2017 and down from 10.1% in June 2016. This is the lowest rate recorded in the euro area since February 2009. The EU28 unemployment rate was 7.7% in June 2017, stable compared to May 2017 and down from 8.6% in June 2016. This remains the lowest rate recorded in the EU28 since December 2008. These figures are published by Eurostat.

Eurostat estimates that 18.725 million men and women in the EU28, of whom 14.718 million in the euro area, were unemployed in June 2017. Compared with May 2017, the number of persons unemployed decreased by 183 000 in the EU28 and by 148 000 in the euro area. Compared with June 2016, unemployment fell by 2.368 million in the EU28 and by 1.667 million in the euro area.

Economy of Japan

Gross domestic product (GDP) was seen expanding at an annualized rate of 2.5 percent in the second quarter, the poll of 20 analysts found, a rate last posted in January-March 2016, while the last six straight quarter run of growth was January-March 2005 through April-June 2006.

The anticipated 2.5 percent expansion would translate to 0.6 percent on quarter-on-quarter growth after a revised 0.3 percent rise in the first quarter this year. The Cabinet Office will announce the GDP data on August 14.

Japanese industrial production rose 1.6% on month in June, the Ministry of Economy, Trade and Industry said. The increase was in line with a 1.7% rise expected by economists surveyed by the Nikkei, and came after a 3.6% drop in May. Industrial output rose 1.9% in the April-June period from the previous quarter.

The ministry stuck with its assessment of production, saying that production was picking up. According to a survey included in the report, manufacturers expect output to rise 0.8% in July and increase 3.6% in August.

Japanese exports rose 9.7% in June from a year ago, helped by steady demand overseas for semiconductors and related equipment as well as a weaker yen. It was the seventh straight monthly gain in exports, data from Japan`s Ministry of Finance showed. Exports of automobiles and steel also increased.

The gain was largely in line with a 9.4% rise expected by economists polled by The Wall Street Journal. Strong exports have served as the backbone of Japan`s recent growth. In January-March, Japan`s economy grew an annualized 1.0% for the longest stretch of gains in 11 years. Japan is set to release its April-June gross domestic product data on Aug 14.

Japan`s trade balance for June was a surplus of Y439.9 billion, down 36% from a year ago. That was lower than a Y488 billion surplus expected by economists in a Nikkei survey.

Japan`s consumer prices rose 0.4 percent in June from a year earlier partly due to higher oil prices, the government said, still far below the Bank of Japan`s 2 percent inflation target. The core consumer price index, which excludes fresh food prices because of their volatility, increased for the sixth straight month, the Ministry of Internal Affairs and Communications said.

A year-on-year rise in crude oil prices continued to push up the cost of kerosene and electricity. Oil producers such as members of the Organization of the Petroleum Exporting Countries and Russia are holding off on an output increase, pushing up oil prices from their lows of early last year.

The price of beer rose after a revision in the alcohol tax rule, while costs related to mobile phones fell. Excluding both fresh food and energy fees, consumer prices were flat for the third straight month.

Unemployment in Japan pulled back from its highest level in 2017 last month, dipping back below the 3 per cent line. Japan`s jobless rate fell to 2.8 per cent in June, according to the Statistics Bureau, down from 3.1 per cent in May. That was below a median estimate of 3 per cent from economists surveyed by Reuters. The job-to-applicant ratio edged up to 1.51, exceeding expectations it would tick up to 1.5 and marking the highest level since February 1974.

Economy of Russia

Russia`s Central Bank estimated that the country`s gross domestic product (GDP) was up 1.3-1.5 percent year-on-year in the second quarter of 2017 and revised the forecast for the third-quarter GDP increase to 1.5-1.8 percent from 1.3 percent previously.

"The increase in investment and consumer demand led to an acceleration of the annual GDP growth rate, which, according to the Bank of Russia, was 1.3-1.5% in the second quarter of 2017. It is expected that in the third quarter of 2017, GDP growth will reach 1.5-1.8%," the Central Bank said.

Russia`s industrial production increased by 3.5 percent year-on-year in June 2017, in line with market expectations and following a 5.6 percent rise in the previous month. Output grew at a slower pace for manufacturing (2.9 percent from 5.7 percent in May), mining (5.2 percent from 5.6 percent), and electricity and gas (0.6 percent from 4.7 percent). Meanwhile, distribution of water, sewage contracted 0.3 percent after increasing by 1.1 percent in May. On a monthly basis, industrial production rose 1.7 percent, following a 1.2 percent gain in May.

Russian trade surplus increased by 12.2 percent to $8.5 billion in May 2017 from $7.6 billion in the same month a year earlier and slightly above market expectations of a $8.3 billion surplus. Exports rose 27.8 percent to $28.1 billion and imports went up 35.9 percent to $19.6 billion.

Russia`s consumer prices increased by 3.9 percent year-on-year in July 2017, easing from a 4.4 percent rise in the previous month and missing market expectations of 4.3 percent. The inflation rate fell below the central bank`s 4 percent target for the first time since the bank switched to inflation targeting policy in late 2014, to hit the lowest level since May 2012. Prices increased at a slower pace for food (3.8 percent from 4.9 percent in June) and non-food products (3.7 percent from 4 percent). Month-on-month inflation slowed to 0.1 percent from 0.6 percent in June.

The unemployment rate in Russia declined to 5.1 percent in June 2017 from 5.4 percent in the same month a year ago and below market expectations of 5.2 percent. It was the lowest jobless rate since October 2014, as the number of unemployed people decreased by 331 thousand to 3.846 million.

07.08.2017 16:15:43

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