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World Economy Review - September 2018

The International Monetary Fund (IMF), in its latest World Economic Outlook (WEO), fell into the same trap as so many other forecasters have: ignoring both the temporary nature of Trump`s tariff strategy and the incoming wave of repatriated funds that have been languishing overseas for years.

The chief apologist for the IMF, Maurice Obstfeld (on loan from the University of California, Berkeley, and a former member of President Obama`s Council of Economic Advisors), in a note accompanying the WEO, said that world growth has “plateaued”: “Last April, the world economy`s broad-based momentum led us to project a 3.9 percent growth rate for both this year and next. Considering developments since then, however, that number appears over-optimistic: rather than rising, growth has plateaued at 3.7 percent.”

Those “developments,” not surprisingly, have to do with Trump`s trade wars and his “unsustainable” economic policies: “Not only have some downside risks that the last WEO identified been realized, the likelihood of further negative shocks to our growth forecast has risen. In several key economies [including, of course, the United States], moreover, growth is being supported by policies that seem unsustainable over the long term.”

Obsfeld, the economic counselor and director of research at the IMF, added that the present roaring economy in the United States is only temporary: “Growth in the United States, buoyed by a procyclical fiscal package, continues at a robust pace and is driving US interest rates higher. But US growth will decline once parts of its fiscal stimulus go into reverse.”

Obsfeld appears to be oblivious to two essential facts: It`s the Federal Reserve that has decided in its wisdom that it`s time to remove the punch bowl from the party by continuing to raise interest rates; and those “parts of the fiscal stimulus” that are scheduled to disappear (unless Congress extends them) won`t be felt until 2025, seven years from now.

Surely Obsfeld knows that of the 52 temporary provisions added to Trump`s Tax Cuts and Jobs Act (TCJA), half of them won`t roll off until 2025, but his group is anticipating them much earlier. The IMF is forecasting that GDP growth in the United States in 2019 will decline to 2.5 percent.

The IMF did get part of its forecast right: China`s economy is faltering and, with the assistance of Trump`s tariffs both present and prospective, is likely to decline further. It projects China`s GDP growth to drop from 6.6 percent this year to 6.2 percent next year, its lowest since 1990.

Missing from his commentary is any mention of the strategy Trump is employing, but instead he assumes that the tariffs Trump is using to get China to come to the negotiating table will continue forever.

To his credit, deep into his commentary, Obsfeld gets it right: When China comes to terms acceptable to Trump, that “would be a significant upside to [our] forecast.”

That “significant upside” is going to take place even if China remains stubborn in coming to the table, thanks to the half a trillion dollars that have already been repatriated under Trump`s TCJA with another trillion likely to be returning to the United States over the next couple of years.

Those “high tariffs” will ultimately result in low tariffs, providing a stimulus to the world economy that Obsfeld cannot, or will not, foresee. And if Congress makes those “temporary” tax cuts permanent, then the IMF will be forced to adjust upwards significantly its future World Economic Outlook reports.

Economy of the United States

U.S. real gross domestic product for the second quarter rose at a 4.2% annualized rate, unrevised from the earlier estimate, the Commerce Department said. Economists surveyed by MarketWatch expected second-quarter growth to be revised up to a 4.3% rate. A downward adjustment to private inventory investment was offset by small upward revisions to many other components. The boom in second quarter growth was led by consumer spending, exports and federal and state government spending. Consumer spending rose 3.8% in the second quarter, unrevised from prior estimates.

U.S. industrial production increased for a fourth straight month in September, boosted by gains in manufacturing and mining output, but momentum slowed sharply in the third quarter.

The Federal Reserve said industrial production rose 0.3 percent last month after an unrevised 0.4 percent increase in August. Industrial output grew at a 3.3 percent annualized rate in the third quarter after accelerating at a 5.3 percent pace in the second quarter.

Manufacturing output increased 0.2 percent in September after rising 0.3 percent in August. A 1.7 percent increase in motor vehicle production helped to lift manufacturing output last month. Motor vehicle production surged 4.3 percent in August.

Manufacturing output increased at a 2.8 percent rate in the third quarter after growing at a 2.3 percent pace in the April-June period. Mining production increased 0.5 percent, adding to the 0.4 percent rise in August. Oil and gas well drilling, however, fell for a third straight month in September. Utilities output was unchanged in September after surging 1.1 percent in the prior month.

Capacity utilization for the industrial sector, a measure of how fully firms are using their resources, was unchanged at 78.1 percent. It is 1.7 percentage points below its 1972-to-2017 average.

Amid an ongoing tariff battle with its global partners, the U.S. saw its trade deficit continue to widen as soybean exports plunged by $1 billion in August.

The imbalance increased $3.2 billion in August to $53.2 billion, a 6.4 percent increase and part of an ongoing trend in 2018, according to the figures released by the Bureau of Labor Statistics and the U.S. Census. For the calendar year, the trade deficit is up $31 billion or 8.6 percent from a year ago.

Economists polled by Reuters had forecast the overall trade deficit swelling to $53.5 billion in August. Exports of goods and services fell 0.8 percent to $209.4 billion in August. Imports of goods and services increased 0.6 percent to a record $262.7 billion in August.

U.S. consumer prices rose less than expected in September, held back by a slower increase in the cost of rent and falling energy prices, as underlying inflation pressures appeared to cool slightly.

The Consumer Price Index increased 0.1 percent last month after rising 0.2 percent in August. In the 12 months through September, the CPI increased 2.3 percent, slowing from August`s 2.7 percent advance.

Excluding the volatile food and energy components, the CPI edged up 0.1 percent for the second straight month. The so-called core index had increased 0.2 percent in May, June and July.

In the 12 months through September, the core CPI increased 2.2 percent. Economists polled by Reuters had forecast both overall and core CPI climbing 0.2 percent in September.

The US unemployment rate fell to a 48-year low in September even after Hurricane Florence kept many Americans away from work.

According to the monthly jobs report from the Bureau of Labor Statistics released, the unemployment rate in September fell to 3.7%, its lowest level since December 1969, when Richard Nixon was president.

Nonfarm payrolls increased by 134,000, fewer than expected and slowed in part by job losses attributed to Hurricane Florence. Nearly 300,000 workers told the BLS that bad weather kept them away from their jobs, most likely in industries like hospitality in which they`re paid only if they show up. BLS revisions added 87,000 more jobs for July and August.

Average hourly earnings rose in line with forecasts, by 0.3% month-on-month and 2.8% year-on-year.

Economy of the European Union

Seasonally adjusted GDP rose by 0.4% in both the euro area (EA19) and the EU28 during the second quarter of 2018, compared with the previous quarter, according to an estimate published by Eurostat, the statistical office of the European Union. In the first quarter of 2018, GDP had also grown by 0.4% in both areas.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.1% in both the euro area and the EU28 in the second quarter of 2018, after +2.4% and +2.3% respectively in the previous quarter.

In August 2018 compared with July 2018, seasonally adjusted industrial production rose by 1.0% in the euro area (EA19) and by 0.8% in the EU28, according to estimates from Eurostat. In July 2018, industrial production fell by 0.7% in the euro area and by 0.6% in the EU28.

In August 2018 compared with August 2017, industrial production increased by 0.9% in the euro area and by 1.2% in the EU28.

The first estimate for euro area (EA19) exports of goods to the rest of the world in August 2018 was ˆ181.5 billion, an increase of 5.6% compared with August 2017 (ˆ171.9 bn). Imports from the rest of the world stood at ˆ169.8 bn, a rise of 8.4% compared with August 2017 (ˆ156.6 bn). As a result, the euro area recorded a ˆ11.7 bn surplus in trade in goods with the rest of the world in August 2018, compared with +ˆ15.3 bn in August 2017. Intra-euro area trade rose to ˆ140.7 bn in August 2018, up by 5.1% compared with August 2017.

The first estimate for extra-EU28 exports of goods in August 2018 was ˆ159.2 billion, up by 9.2% compared with August 2017 (ˆ145.8 bn). Imports from the rest of the world stood at ˆ167.6 bn, up by 10.3% compared with August 2017 (ˆ151.9 bn). As a result, the EU28 recorded a ˆ8.4 bn deficit in trade in goods with the rest of the world in August 2018, compared with -ˆ6.1 bn in August 2017. Intra-EU28 trade rose to ˆ262.9 bn in August 2018, +4.5% compared with August 2017.

Euro area annual inflation is expected to be 2.1% in September 2018, up from 2.0% in August 2018, 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 September (9.5%, compared with 9.2% in August), followed by food, alcohol & tobacco (2.7%, compared with 2.4% in August), services (1.3%, stable compared with August) and non-energy industrial goods (0.4%, stable compared with August).

The euro area (EA19) seasonally-adjusted unemployment rate was 8.1% in August 2018, down from 8.2% in July 2018 and from 9.0% in August 2017. This is the lowest rate recorded in the euro area since November 2008. The EU28 unemployment rate was 6.8% in August 2018, stable compared with July 2018 and down from 7.5% in August 2017. This remains the lowest rate recorded in the EU28 since April 2008. These figures are published by Eurostat.

Eurostat estimates that 16.657 million men and women in the EU28, of whom 13.220 million in the euro area, were unemployed in August 2018. Compared with July 2018, the number of persons unemployed decreased by 114 000 in the EU28 and by 102 000 in the euro area. Compared with August 2017, unemployment fell by 1.921 million in the EU28 and by 1.419 million in the euro area.

Economy of Japan

Japan`s real gross domestic product climbed 0.8% in August from the previous month, data released by the Japan Center for Economic Research shows. Private-sector demand pushed up GDP growth by 0.6 percentage point, with housing investment jumping 1.2% and capital spending rising 0.6%. External demand, meanwhile, provided a 0.2-percentage-point boost as exports climbed 2% and imports edged up 1%.

Industrial production in Japan climbed a seasonally adjusted 0.7% on month in August, the Ministry of Internal Affairs and Communications said in a preliminary reading. That was shy of forecasts for an increase of 1.4% following the 0.1% decline in July.

On a yearly basis, industrial production added 0.6% - again missing forecasts for an increase of 1.5% and down sharply from 2.2% in the previous month.

Inventories were down 0.4% on month and up 2.9%, while shipments gained 2.1% on month and 0.9% on year. The inventory ratio fell 2.2% on month and jumped 3.9% on year.

According to the METI`s forecast for industrial production, output is expected to rise 2.7% in September and 1.7% in October.

Japan`s trade surplus narrowed to JPY 140 billion in September 2018, compared to a JPY 654 billion surplus in the same month a year ago, but well above market expectations of a JPY 50 billion deficit. Imports jumped 7.0 percent (vs 15.4 percent in August), mainly nudged by a 35.4 percent increase in purchases from the Middle East. In contrast, exports contracted 1.2 percent (following a 6.6 gain percent in August), mostly dragged by a 4.6 percent drop in exports to South Korea and a 1.7 percent dip in sales to China.

Japan`s underlying inflation rate edged up in August amid rising energy costs, government data showed, but tepid consumer goods prices underscored the Bank of Japan`s uphill battle to achieve its 2 percent inflation target.

The nationwide core consumer price index, which excludes fresh food prices because of their volatility, rose 0.9 percent from a year earlier, gaining momentum from a 0.8 percent rise in July. The index rose for the 20th straight month, according to the Ministry of Internal Affairs and Communications.

Consumer prices including fresh food rose 1.3 percent, boosted by higher vegetable prices, while so-called core-core consumer prices excluding both fresh food and energy rose 0.4 percent.

Japan`s unemployment rate dropped in August from a month earlier, the Ministry of Internal Affairs and Communications said. According to the ministry, the unemployment rate stood at 2.4 percent in the recording month, dropping from 2.5 percent a month earlier. The unemployment rate is hovering near the lowest levels since the 1990s, the ministry said.

Separately, the Ministry of Health, Labor and Welfare said the job availability ratio stood at 1.63, unchanged from a month earlier and remaining at the highest level since January 1974. The ratio equates to there being 163 available jobs for every 100 people seeking work.

Economy of Russia

The Russian economy has expanded by 1.3 percent in the third quarter, year-on-year, compared with a 1.9 percent increase in the second quarter, the Russian Economic Development Ministry said.

In September, the GDP grew by 1.1 percent in year-on-year terms. The ministry also said that it revised its estimates for growth in August to 1.1 percent from an earlier 1.0 percent. Growth slowed in the third quarter, quarter-on-quarter, mainly due to the agriculture sector, the ministry said.

Russia`s GDP in the first nine months of 2018 grew by 1.6 percent, according to a report. "Overall, in the first 9 months of 2018, GDP is estimated to have grown by 1.6 percent year-on-year," the report said.

Russia`s industrial production increased by 2.1 percent year-on-year in September of 2018, following a 2.7 percent advance in the previous month and missing market expectations of 2.5 percent. It was the smallest gain in industrial activity since December of 2017 when it shrank by 1.7 percent. Output fell for both manufacturing (-0.1 percent from 2.2 percent in August) and electricity, gas supply (-0.4 percent from 0.1 percent). Meanwhile, an acceleration in growth was recorded for extraction of raw materials (6.9 percent from 4.5 percent) and distribution of water, sewage (6 percent from 5.5 percent). On a monthly basis, industrial production went up 2.5 percent, after a 2.7 percent rise in August.

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, as imports fell and exports surged 28.7 percent from a year earlier.

Russia`s annual inflation rate rose to 3.4 percent in September of 2018 from 3.1 percent in the previous month, slightly above market expectations of 3.3 percent. It was the highest inflation rate since July of 2017. The Consumer Price Index in Russia increased 0.2 percent in September of 2018 over the previous month.

Russian unemployment rate dropped to a fresh record low of 4.5 percent in September 2018 from 5 percent in the corresponding month of the previous year, below market expectations of 4.7 percent. In August, unemployment rate was higher at 4.6 percent.

23.10.2018 20:07:45

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