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World Economy Review - July 2007

Global factory growth eased in July, while production growth slipped to a six-month low, an indicator compiled from national surveys of manufacturers showed. The Global Manufacturing PMI, produced by JP Morgan with research and supply management organisations, slipped to a four-month low of 53.1 in July from 54.4 in June. That is still well above the 50.0 level that divides growth from contraction.
Activity was held back by a gear down in the rate of expansion for production and new orders, with the output index hitting a six-month low of 54.3 from 57.5 the previous month. "The July PMI data suffered a significant setback, all but reversing the impressive uptrend since the turn of the year," said David Hensley at JP Morgan. He said it pointed to sluggish gains in industrial activity through the summer months.
Employment growth also cooled, with that index hitting 51.7 in July from 52.6 the previous month. The index combines survey data from countries including the United States, Japan, Germany, France, Britain, China and Russia.
Manufacturing in the U.S expanded in July at close to the fastest pace in more than a year as factories received more orders from overseas. The Institute for Supply Management`s factory index slipped to 53.9, lower than forecast, from 56 in June, the Tempe, Arizona, group said. The index matched 2006`s average and any figure higher than 50 signals expansion.
The eurozone`s seasonally adjusted purchasing managers` index (PMI), compiled by NTC Research, was revised up to 54.9 from a provisional estimate of 54.8 but still well down from 55.6 in June and the weakest reading since February 2006.
The International Monetary Fund (IMF) has raised its world economic growth forecast for 2007 and 2008 to 5.2 per cent, up 0.3 per cent from the 4.9 per cent growth forecast for both years in its World Economic Outlook (WEO), published in April. The IMF hiked the growth forecast by 0.3 percentage points on the back of robust growth in emerging markets, with China poised to become its most powerful growth driver. Under the revised estimates, China will see growth of 11.2 per cent in 2007, 1.2 percentage points higher than forecast in April. The IMF also revised India`s growth rate upward by 0.6 points to 9.0 per cent, and Russia`s to 7.0 per cent. The US growth forecast for 2008 was left unchanged at a 2.8 per cent. For Japan, the world`s second-biggest economy, the IMF raised its growth forecast to 2.6 per cent in 2007, up 0.3 percentage points, and to 2.0 in 2008, up 0.1 point. In Europe, the IMF expects the 27-nation euro to expand at a faster rate of 2.6 per cent in 2007 and 2.5 per cent in 2008, up 0.3 points and 0.2 points, respectively.

Economy of the United States

Manufacturing in the U.S expanded in July at close to the fastest pace in more than a year as factories received more orders from overseas. The Institute for Supply Management`s factory index slipped to 53.9, lower than forecast, from 56 in June, the Tempe, Arizona, group said. The index matched 2006`s average and any figure higher than 50 signals expansion.
Industrial production in the U.S. rose last month by the most since February as factories turned out more automobiles, computers and electronics. The 0.5 percent increase in production at factories, mines and utilities followed a 0.1 percent decrease in May that was initially reported as unchanged, a Federal Reserve report showed today. Capacity utilization, which measures the proportion of plants in use, rose to 81.7 percent, the highest in eight months. Manufacturers are expanding again after getting rid of excess inventories built up late last year. Growth in production, spurred in part by rising exports, is helping the economy ride out the worst housing slump in 16 years. The increase in industrial production matched the median of 73 forecasts in a Bloomberg News survey. Projections ranged from no change to a 0.8 percent increase. Factory output, which accounts for about four-fifths of industrial production, rose 0.6 percent after no change the prior month, the report showed. Utility production rose 0.3 percent after decreasing 1.6 percent, today`s report showed. Mining, which includes oil drilling, increased 0.5 percent last month after rising 0.3 percent.
Inventories at U.S. businesses rose a bigger than expected 0.5 percent in May, the largest gain in 10 months, the Commerce Department reported on Friday. The increase in stocks on hand in May came after a 0.4 percent gain in April and will likely add to expectations on Wall Street that the economy will see better growth in the second quarter after a lackluster start of the year when business inventory growth moderated. Financial markets were expecting a 0.3 percent rise in May. In the report, retail inventories advanced by 0.6 percent in May, the biggest gain since June of last year. Sales advanced 1.3 percent in May, after a 0.7 percent rise in April. The stock-to-sales ratio, a measure of how long it would take to deplete inventories at the current sales pace - fell to 1.26 months` worth from 1.27.
The U.S. trade deficit widened in May as a jump in imported oil costs outpaced record exports. The gap in goods and services trade expanded 2.3 percent to $60 billion from $58.7 billion in April, the Commerce Department said in Washington. The deficit with China also grew. The total gap probably won`t widen much more as a weaker dollar and growing economies in Europe and Asia boost demand for U.S. goods, economist said. Exports have contributed to a rebound in manufacturing that`s helping the economy accelerate following a first-quarter slump. The widening in the deficit matched the median forecast of 71 economists surveyed by Bloomberg News. Estimates ranged from deficits of $58 billion to $64.6 billion. April`s gap was revised from a previously reported $58.5 billion. In May, exports rose 2.2 percent to a record $132 billion, as sales of civilian aircraft and electrical equipment strengthened. Imports rose 2.3 percent to $192.1 billion, also the highest ever.
The U.S. Federal Reserve chairman, Ben Bernanke, said this week that the U.S. economy had emerged from its anemic spell, but that overall growth for the year would be lower than expected. Inflation remained the chief concern, he said. Delivering a midyear Fed economic report to Capitol Hill, Bernanke struck a somewhat cautious tone. He suggested that the economy appeared likely to expand "at a moderate pace" over the second half. Still, the Fed chief told the House Financial Services Committee that growth this year would be a bit slower than the Fed projected in February. Growth should strengthen a bit next year, he said. The inflation forecast, however, was not changed. It called for prices other than food and energy to edge lower. Against this backdrop, the Fed is likely to leave interest rates where they are through the rest of this year. For just over a year, the Federal Reserve has held the benchmark interest rate at 5.25 percent, providing a period of stability to borrowers. Before that, the Fed had raised rates for two years to fend off inflation.

Economy of European Union

Manufacturing activity in the 13 nations that share the euro fell to a 17-month low in July, a survey released Wednesday found, a decline analysts attributed to a strong euro and high oil prices. The eurozone`s seasonally adjusted purchasing managers` index (PMI), compiled by NTC Research, was revised up to 54.9 from a provisional estimate of 54.8 but still well down from 55.6 in June and the weakest reading since February 2006.
The latest data are consistent with annual industrial production growth of three percent, almost half the pace seen a year ago. The July figures nonetheless showed that the eurozone manufacturing sector expanded for the twenty-fifth successive month, as a reading above 50 indicates growth.
"Manufacturing activity slowed in most countries, with a clear contrast between ongoing relatively robust German expansion and markedly softer activity in France, Italy and Spain," said Howard Archer, chief economist at Global Insight. Industrial output in the Eurozone rose 0.9 percent in May over April and 2.5 percent over 12 months, according to figures from the European Union`s Eurostat data agency.
The result, which was adjusted for seasonal variations, was not far off economists` forecasts for a rise of 1.0 percent over one month and 2.3 percent over one year.
In April, industrial output fell 0.7 percent over one month but rose 2.9 percent over one year, Eurostat said, revising slightly higher a first estimate. In the 27-nation EU as a whole, industrial output rose 0.7 percent in May over one month and increased 2.7 percent over one year.
The eurozone unemployment rate remained stable at 6.9 percent in June, the European Union`s statistics bureau Eurostat said last month. It was the same as the previous month, according to revised figure from the Eurostat, when the lowest level since the indicator was introduced in 1993 was recorded The jobless rate in the 13-nation bloc sharing the same currency stood at 7.9 percent a year ago. Among the 13 member states, the Netherlands recorded the lowest unemployment rate at 3.3 percent.

Economy of Japan

Japan`s industrial output in June grew a seasonally adjusted 1.2 percent from May, ending three consecutive months of decline, and is forecast to sustain the rebound in the next two months, according to preliminary government data released Monday.
The sequential rise matched the market`s consensus forecast and was supported by increased production from makers of electronic devices, cars and information technology products.
Industrial output rose 1.0 percent year-on-year, up for the 23rd straight month, after expanding by 3.8 percent in May.
The Ministry of Economy, Trade and Industry said it expects industrial production to grow even faster ahead, predicting it will rise by 1.8 percent in July from June and by 4.9 percent in August.
Japan`s unemployment rate fell to 3.7 percent in June, the lowest level in more than nine years, from 3.8 percent in May, data from the Ministry of Internal Affairs and Communications showed Tuesday.That was the lowest jobless rate since February 1998 when it stood at 3.6 percent. Consumer spending rose 0.7 percent in June from a year earlier, compared with a 0.4 percent increase the previous month, a separate survey showed.
Confidence at major Japanese companies is at least as strong as three months ago, a closely watched Bank of Japan survey showed Monday, possibly reinforcing expectations that the central bank will raise interest rates in August. The quarterly tankan survey, which polls more than 10,000 companies nationwide, showed that the sentiment index for large manufacturers stood at 23 in June, unchanged from the previous survey in March. A similar index for large non-manufacturers was unchanged at 22. The yen`s recent weakness and healthy profit growth has buoyed sentiment at Japanese companies. Still, confidence has slipped a bit from December, when the major manufacturers` index rose to 25, the highest in about two years. The results confirm the government`s view that the economy is steadily expanding, Chief Cabinet Secretary Yasuhisa Shiozaki said. But any interest rate decision, he added, would be left up to the Bank of Japan.

Economy of Russia

Russian First Deputy Prime Minister Sergei Ivanov said Russia`s GDP grew 7.8 pct in the first half of 2007 compared to the same period in 2006. He added that certain sectors, including manufacturing, are expanding at a much faster rate than the overall economy. Manufacturing expanded by 12.2 pct on average in the first half of 2007.
Industrial output in Russia grew by a record 10.9% in June on the same month of 2006, and gained 7.7% year-on-year in January-June, the country`s top statistics body said. Industrial output in April-June 2007 grew 6.7% compared with 8.4% in the same period of last year. The largest growth in the second quarter of 2007 was seen in manufacturing industries, where output expanded 7% and registered a 4.5% expansion in the first half of the year. The production and distribution of electricity, gas and water increased 4.9% in the second quarter and 5.7% in the first half of the year. Output in the mining industries expanded 3.0% in the second quarter and 2.3% in the first half of the year. In January-June 2007, coal production fell 0.7% to 152 million metric tons, oil production edged up 3% to 243 million metric tons (1.78 billion barrels) and gas output climbed 0.1% to 333 billion cubic meters of gas, the service said. Electricity generation went up 0.4% in January-June 2007 year on year to 506 billion kWh, and car manufacture increased 9.5% to 604,000 vehicles.
Russia`s trade surplus in the first six months of 2007 dropped 13.8%, year-on-year, to $63.8 billion, the Russian economics ministry reported. The ministry said Russian exports stood at $160.5 billion in January-June 2007, up 11.6% against the same period last year, while imports increased 38.5% to $96.7 billion in the same period. The share of non-Commonwealth of Independent States (CIS) countries in Russian exports fell from 86.3% to 84.8%, with the CIS share increasing from 13.7% to 15.2%. The export of almost all goods, except fuel and energy, went up in January-May 2007. Import growth was caused by higher consumer demand, investment growth and ruble strengthening, the report reads. Non-CIS countries accounted for 85% for Russian imports, and the CIS share was 15%. The greatest import growth in the reporting period was for machinery, equipment, cars, metals, textiles and footwear. Russia`s economics ministry also said it still hoped to keep the country`s inflation no higher than its 8% target for 2007. Consumer prices increased 5.7% in the first half of the year, and the ministry said inflation would be 2.2-2.5% in the second half, or 0.2-0.4% lower that in the same period last year.
The Russian Economy Ministry is expected to introduce a revised social and economic development forecast until 2020 factoring in all the comments and proposals of various ministries and agencies to the government today, an Economy Ministry source has told. According to some of the figures in the document, Russia`s annual GDP growth will average 6.6-7.1 percent until 2010, while inflation will gradually recede to 3 percent. In the long term, the tax load is expected to decrease consistently, as will also export duty proceeds as related to GDP. The Economy Ministry predicts the current account balance to show a deficit as early as 2010, and trade in 2011. Meanwhile, the gap is expected to be narrow, and could easily be compensated for by capital inflow. - 01.08.2007 20:50