World Economy Review - January 2007

The economic slowdown in the United States will weaken growth in the world economy from 3.8 per cent in 2006 to 3.2 percent in 2007, according to the Conference Board`s World Outlook - Winter 2007.
The United States is facing tumbling home sales nationally and falling prices in some parts of the country, as well as weaker vehicle and retail sales and orders of durable goods. The Conference Board`s U.S. Outlook - Winter 2007 forecasts that the U.S. economy will have a soft landing, although the odds of a hard landing have increased somewhat over the past 12 months. The United States is expected to avoid slipping into a recession because a weaker U.S. dollar will boost American exports and business investment will remain strong, leading to economic growth of 2.2 per cent in 2007.
After performing relatively well in 2006, economies in western Europe and Japan will weaken in 2007, dragging down global growth. Europe`s real gross domestic product (GDP) is expected to grow by two per cent in 2007, but tax increases in Germany and a stronger euro will negatively affect the short-term outlook. The slowdown in the United States will affect the Asia-Pacific region by slowing Asian exports and weakening real GDP growth from the 5.3 per cent recorded in 2006 to 4.6 per cent in 2007.
The United Nations has also predicted a deceleration of the world economy this year after three straight years of growth with American economy weakening dragged down by softening housing market. The growth of world gross product (WFP) is forecast to moderate its pace to 3.2 percent from estimated 3.8 percent during the last year. The report holds out the possibility of much stronger slowdown in American economy, leading to sustained risks. These include dollar losing its value too fast or inability of the United States to draw outside investments. The economic growth rate in Europe is expected to slow down to 2 percent and in Japan below 2 percent.

United States

Real US gross domestic product (GDP) increased 3.5 percent in the fourth quarter of 2006 after increasing 2.0 percent in the third quarter, according to estimates released today by the Bureau of Economic Analysis. Annual growth in 2006 was 3.4 percent, compared with 3.2 percent in 2005. The rise of 3.4% in 2006, compared to a 3.2% increase in 2005 and 3.9% growth in 2004.
Inflation indicators within the GDP report indicated that consumer prices softened significantly during the fourth quarter. The price index for personal-consumption expenditures (PCE) fell, declining by 0.8% after rising 2.4% in the third quarter and 4.0% in the second quarter. The fall was the biggest since 1.2% in third-quarter 1954, fuelled by declining energy costs. The PCE price index excluding food and energy rose 2.1%, after increasing 2.2% in the third quarter. The price index for gross domestic purchases, which measures prices paid by US residents, only rose 0.1%, after rising to 2.2% in the third quarter. The chain-weighted GDP price index increased 1.5%, after rising 1.9% in the third quarter.
Manufacturing in the U.S. unexpectedly expanded and construction spending fell less than forecast, signaling the worst of the economic slowdown is over. Industrial production in the U.S. rose more than forecast in December 2006, driven by demand for computers, home electronics and automobiles. Production at factories, mines and utilities rose 0.4 percent, following a 0.1 percent November drop, the Federal Reserve said this week. Capacity utilization, which measures the proportion of plants in use, rose to 81.8 percent, from 81.6 percent a month earlier. Manufacturing, which accounts for about four-fifths of the industrial production report, rose 0.7 percent last month, the most since June, after no change the prior month. Excluding autos, factory production rose 0.6 percent and followed a 0.3 percent drop in November. Mining output in the U.S. rose 0.8 percent last month, following a 0.4 percent decrease.
The ISM manufacturing index rose to 51.4 in December from 49.5 in November, when activity contracted for the first time in more than three years. Spending on construction dropped 0.2 percent in November after a 0.3 percent drop in October that was smaller than originally reported, the Commerce Department said. The ISM measure of prices paid for raw materials fell to 47.5 from 53.5 the month before. The ISM new orders index, which makes up about a third of the total index, rose to 52.1 from 48.7. The production index, a measure of work being performed, rose to 51.8 from 48.5. The inventory index fell to 48.4 in December from 49.7.

European Union

Seasonally adjusted industrial production increased by 0.2% in the euro area in November 2006 compared to October 2006. Production fell by 0.1% in October and by 1.0% in September. In the EU25 output rose by 0.3% in November, after remaining unchanged in October and decreasing by 0.5% in September.
In November 2006 compared to November 2005, industrial production grew by 2.5% in the euro area and by 2.8% in the EU25. In November 2006 compared to October 2006, production of capital goods grew by 1.2% in the euro area and by 1.3% in the EU25. Durable consumer goods increased by 1.0% and 0.9% respectively. Production of energy rose by 0.9% in the euro area and by 1.1% in the EU25. Non-durable consumer goods remained unchanged in both zones. Intermediate goods decreased by 0.1% in the euro area and by 0.2% in the EU25.
Royal Bank of Scotland Group Plc said its manufacturing index fell to 56.5, the lowest in nine months, from 56.6 in November. A reading above 50 indicates growth. Economists expected the gauge, compiled by NTC Economics Ltd. from a survey of 3,000 purchasing managers, to rise to 56.8, the median of 25 forecasts in a Bloomberg News survey showed. A gauge of manufacturing in Germany, the largest economy in Europe, jumped to 59.4 from 58.3. Growth accelerated in Italy and Spain and slowed in France.
The OECD said the euro zone economic recovery seems set to continue over the next year or two. The latest economic news is encouraging and bodes well for the immediate future, - it said. Growth in the near term is likely to be at or slightly above the potential growth rate of just over 2 pct annually, it said. The OECD reiterated its forecasts for GDP growth of 2.2 pct in 2007 and 2.3 pct in 2008, after growth of 2.6 pct last year. This points to growth rates of around 0.6 pct per quarter in 2007 and 2008.
But it said the growth forecast for the euro zone is still modest by OECD standards, and action is needed to boost its potential growth rate and increase its resilience to shocks. This means easing employment protection legislation, increasing wage flexibility and reducing barriers to labour mobility.European manufacturing growth unexpectedly slowed in December 2006 after interest rates rose and the stronger euro clouded the outlook for exports.

Asia

The Japanese economic growth will accelerate next fiscal year as corporate profits spread to households, fueling consumer spending, the government said. The world`s second-biggest economy will probably grow 2 percent in the year starting April 1 from 1.9 percent in the current period, the Cabinet said.
The Japanese economic expansion, the longest in the postwar era, is being driven by business investment and exports amid a slump in consumer spending. Slower export growth as global demand cools will make the economy more reliant on a rebound in spending by Japanese households. "The economic recovery will be driven by the private sector", - the government said in the report. "Solid corporate profits will spread to households through improvement in the job market and wages".
Economy of China expanded faster than expected in 2006 with a full-year growth of 10.7%, according to published reports. Gross domestic product increased 10.4% in the fourth quarter of 2006 - an expansion that some predict will continue into 2007. But weak consumer spending and low farm income remains a concern for the government given the high values in banking, Xie Fuzhan, commissioner of the National Bureau of Statistics, told a news conference today, reports said.
Officials have passed measures to clamp down on foreign investment with limits on construction and money lending by banks. In addition, China may soon end tax breaks for foreign companies as they are not necessary to stimulate growth anymore, reports said. The country will now refocus on growth in domestic companies.

Russia

Russia`s gross domestic product (GDP) grew 6.8% year-on-year in January-November 2006, the economics ministry said this week. GDP growth in the first eleven months of last year was in line with the projected figure of 6.8% for the whole of 2006. In January-November 2005, Russia`s GDP grew 6.2%, the ministry said.
Russian foreign trade totaled $419.1 billion with a surplus of $130.5 billion in January-November 2006, the ministry said. Goods exports grew by an estimated 25.42% year-on-year in January-November 2006 to $274.8 billion, while imports were up 29.53% to $144.3 billion. The economics ministry projects GDP growth at 6.2% and inflation at 6.5-8% in 2007.
Russian industrial output grew 3.9%, year-on-year, in 2006, the Federal State Statistic Service (Rosstat) said. Rosstat said industrial production increased 1.9%, year-on-year, and 4.9%, month-on-month, in December 2006. Industrial output expanded more slowly in December 2006 compared with December 2005, as heat generation fell 8.2% due to warm weather. Industrial production increased 3%, year-on-year, in the fourth quarter of 2006, with output growing 1.9% in Q4 and 2.3% in 2006 in mining, 3.8% and 4.4%, respectively, in manufacturing industries, and 1.3% and 4.2% in electricity, gas and water production and distribution.
In 2006, Russia produced 309 million metric tons of coal (up 3.6% on 2005), 480 million metric tons (3.5 billion barrels) of oil (an increase of 2.1%), and 656 billion cubic meters of gas (a growth of 2.4%). Car production expanded 9.9% in 2006, to 1.2 million vehicles, the service said.