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World Economy Review - May 2007

A report by the Organization of Economic Cooperation and Development (OECD) published on May 24 says that the world economy is not in for a decline. Despite certain risks, it is growing faster than in the past.
In 2007 and 2008, the economy of the 31 OECD countries would experience a growth in GDP of 2.7%, according to the OECD forecast. Germany would continue to experience strong growth, with GDP set to expand by 2.9% in 2007, and there would be `soft landing` in the US after several boom years. Growth in the US economy was slowing down from 3.3% in 2006 to 2.1% in 2007. Predicted growth for 2008 was 2.5%. Thanks to recovery in Germany and Italy, the Euro zone would experience a growth rate of 2.7% in 2007. In 2008, the predicted growth of 2.3% was above potential growth of 2%.
The Germany economy`s expansion rate would be 2.2% in 2008, 0.6 percentage points above potential growth rate. Growth would remain solid in Japan for 2007, up to 2.4% compared to 2.2% in 2006. Growth in China and India would be buoyant, the report predicted. However, it also warned of risks posed by imbalances in current accounts and, possibly, in financial and housing markets.
The OECD also predicts that Russia will develop more slowly, but still faster than many other countries, and the growth of prices will be much less significant. They believe in 2007 Russia`s GDP will stand at 6.5%, which is the same as in the two previous years. But in 2008, the economic growth will slow down to 5.8%. The inflation, which will slow down to 6.5% for objective reasons by 2008, is making its own contribution to economic stability.

The United States Economy

The US economy grew at an annual rate of 0.6 percent in the first quarter, according to the "preliminary" estimates released by the US Bureau of Economic Analysis. Based on newly available data that showed a marked reduction in business inventories and a surge in imports in March, the GDP growth rate was revised down 0.7 percentage point from the "advance" estimate of 1.3 percent.
BEA also released its first estimate of first-quarter corporate profits. The deceleration in first-quarter GDP growth primarily reflected a downturn in net exports. First-quarter corporate profits increased 6.3 percent from the same quarter a year ago. In the fourth quarter, profits grew 18.3 percent. Profits of financial corporations increased 13.1 percent in the first quarter, and profits of nonfinancial corporations decreased 0.4 percent.
Industrial production in the U.S. rose more than forecast last month as cold weather boosted electricity demand and manufacturers stepped up output after whittling down excess inventories. The 0.7 percent increase in production at factories, mines and utilities followed a revised 0.3 percent decrease in March that was bigger than originally reported, Federal Reserve figures showed today. Economists had forecast industrial production would rise 0.3 percent after a previously reported decline of 0.2 percent the prior month, according to the median of 81 forecasts in a Bloomberg News survey.
Capacity utilization, which measures the proportion of plants in use, rose to 81.6 percent from 81.2 percent in March. Factory output, which accounts for about four-fifths of industrial production, rose 0.5 percent after rising 0.6 percent in March. Mining output, which includes oil drilling, declined 0.3 percent last month, after rising 0.1 percent. Utility production rose 3.5 percent after falling 7.5 percent in March.
Economic activity in the U.S. manufacturing sector has expanded in May for the fourth consecutive time, as the latest Manufacturing ISM report on Business shows. The ISM index hit the 55.0 level from the 54.7 level in April, reaching its highest levels in the last twelve months. Both new orders and production sub indexes showed improvement on the month. New orders increased to 59.6 from 58.5 in April, while production index rose to 58.3 from 57.3 on the previous month.
US consumer confidence rebounded in May as shoppers became relatively more satisfied with the current state of the economy, a closely-watched gauge of the economy showed on Tuesday. The New York-based Conference Board said its Consumer Confidence Index rose to 108.0 in May, from a revised 106.3 in April. The April number is itself 2.3 points higher than the original 104.0 report. Analysts had expected a May reading of 104.8. A more detailed look at the survey showed that the Present Situation Index, which measures how shoppers feel now about economic conditions, increased to 136.1 from 133.5 in April. Meanwhile, the Expectations Index, which measures consumers` outlook for the next six months, rose 89.2 to from 88.2.
The US trade deficit jumped to a six-month high of $63.9 billion in March as rising imported oil prices more than offset stronger exports to China, the Commerce Department reported this week. The trade shortfall grew 10.4 per cent from the previous month, the sharpest monthly change in the trade picture since September 2005. In March, imports surged 4.5 per cent to $190.1 billion, their highest level since August 2006. Exports increased 1.8 per cent to 126.2 billion, the highest point since January. The March trade gap sharply exceeded analyst forecasts of $60 billion, raising fresh concerns about the gaps drag on the US economy. It was the widest since September 2006 and rose from 57.9 billion in February.
The politically sensitive US trade gap with China narrowed by 6.4 per cent to $17.2 billion, compared with 18.4 billion in February. Exports to China in March hit a new record high of $5.5 billion, while imports from the Asian powerhouse were at their lowest level since May 2006, at 22.7 billion. China, by far the leader in the US trade deficit, is under fire from US officials, industry and labor unions who accuse Beijing of keeping its currency, the yuan, artificially low to make exports unfairly competitive.

Economy of European Union

Economic growth in countries that use the euro currency was 3,1 percent in the first quarter of 2007, slowing only slightly after a record growth spurt at the end of last year as a rise in German sales tax hurt less than expected, the European Union`s statistical agency reported. The 13-nation euro zone grew 3.3 percent in the last three months of 2006, its fastest rate since 2000, as Europeans started spending again after several years of little economic growth. Quarter-on-quarter, the area`s economy expanded 0.6 percent in the three months ending March 31. GDP of EU-27 in Q1 grew the same 0.6 percent compared to the previous quarter and 3.2 compared to the first quarter of 2006.
Industrial production in the Eurozone increased by 0.4 percent in March over the previous month, the Eurostat said. Seasonally-adjusted industrial production in the 13-nation bloc sharing the same currency increased by 0.5 percent in February after a decline of 0.5 percent in January, according to newly revised figures. In the broader EU with 27 member states, industrial output increased by 0.5 percent in March, while year-on-year growth was 3.9 percent.
The eurozone`s seasonally adjusted purchasing managers` index (PMI), compiled by NTC Research, fell in May to 55.0 points from 55.4 in April, falling short of private economists` expectations for 55.6 points. Despite the lower level of activity, the sector kept showing resilience with the twenty-third consecutive month of growth, as indicated by a figure over 50.

Economy of Asia

Japan`s economy grew at an annualized 2.4 percent in real terms in the first quarter of this year, the Cabinet Office said in a preliminary report. The growth corresponds to a 0.6 percent expansion in gross domestic product (GDP) from the previous quarter, continuing the ninth straight quarterly gain, according to the report. The increase rate was below market expectation of an annualized 2.7 percent rise or a 0.7 percent quarterly increase. Government officials and economists held that the GDP data reflected the continuing recovery of Japanese economy despite a decrease of a real 0.9 percent in capital spending in the reporting quarter. Hiroko Ota, the economic minister said that it was still "too early to say the trend has changed". For fiscal 2006, the nation`s economy expanded 1.3 percent in nominal terms, up for the fourth straight year, the report noted.
The Chinese economy rose 11.1 percent in the first quarter of 2007, the Chinese National Statistics Office said, with a high level official admitting the possibility of economic overheating. According to analysts, rapid economic growth was due to increased internal consumption and investment in fixed assets alongside the country`s trade surplus, which affects the effectiveness of measures put in place by Beijing to prevent the economy overheating. "If rapid growth continues for a longer period of time, there is the risk that we will move from rapid growth to overheating", said Li Xiaochao, spokesman for the National Statistics Office. The 11.1 percent growth rate is the highest since the third quarter of 2006, in which China`s GDP grew 11.5 percent, leading analysts to fear that measures implemented by the Chinese government to cool growth had so far had a limited impact. China, which is the world`s fourth-largest, grew 10.7 percent last year, with growth in the fourth quarter of 10.4 percent. At the beginning of this year, the Chinese government set a limit of 8 percent for growth in 2007, which, similarly to previous limits set for GDP growth, is likely to be exceeded.

Economy of Russia

The Russia`s gross domestic product (GDP) grew by 7.1% in April, and 7.7% in January-April (both compared to the same period of 2006), Economic Development and Trade Minister German Gref said Monday at a meeting with President Vladimir Putin. Last year, the country`s gross domestic product (GDP), which measures the value of goods and services produced in an economy, grew 5.1% in the same period. Industrial output rose 7.5% in January-April, compared with 3.5% in January-April last year, Gref said thus confirming earlier reported figures. Consumer prices rose 0.3% in May 1 through May 14, Gref also said, adding that consumer prices accelerated slightly from the same period of 2006. He attributed the consumer price inflation in the first two weeks of May to a seasonal increase in the prices of meat and vegetables. - 02.06.2007 14:32