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World Economy Review - May 2008

A newly released U.N. Economic Survey forecasts a global downturn but does not predict the gloom and doom scenario which is being bandied about by so many pundits and politicians. While world economic growth, which registered 3.8 percent in 2007, is expected to "decline markedly" to 1.8 and 2.1 percent for 2008 and 2009, respectively, the prospects are not all dim. Naturally, the big question hinges on the economic performance of the United States.
The report World Economic Situation and Prospects 2008 states that the U.S.`s 2007 GDP growth rate of 2.2 percent will certainly decline by about 0.2 percent this year due to the combination of the housing crisis, energy prices and slumping consumer confidence. Japan, another global economic pillar, saw expansion of 2.1 percent in 2007, but is expected to see a slowdown in 2008. Western Europe, which witnessed a strong 2.6 percent GDP growth last year, could see a slowdown to about 1 percent this year. Uncertainty clouds the horizons.
Beyond the obvious, there`s much good news and indeed impressive results which are generally not being seen. For example, "defying global storms, German gross domestic product leapt by 1.5 percent in the first quarter, the fastest quarterly rate in 12 years," according to the Financial Times. Likewise, the French economy grew unexpectedly by 0.6 percent in the same period. "A dramatic German growth rate and better than expected economic performance from France, powered a eurozone rebound at the start of this year, in contrast to the sharp slowdown in the U.S." the paper adds. And don`t forget that with conservative and market-oriented governments, both Germany and France are re-discovering economic prosperity and trimming, and, if ever so slowly, the bloated social welfare state.
The World Economic Situation adds, that among new members of the European Union, such as Poland, Slovakia and Slovenia, performance last year "was robust with a growth average averaging 6 percent." This year growth is only expected to slip by one percent.
East Asia without question is another star player with GDP growth in the region reaching an impressive 8.8 percent in 2007. This year will see a moderate slowdown given a deceleration of exports. Indeed, the growth in world trade decreased 4.7 percent in early 2008, down from 7.2 percent last year due to weak import demand from the U.S. The report adds, "as a result, dynamic exporters of manufactured goods, such as China, reported significant deceleration of export volumes." Nonetheless, the trade boom in recent years has filled the coffers in mainland China where the reserves reached a staggering US$1.5 trillion by the end of 2007.

Economy of The United States

US economic momentum posted a 0.9 percent annual growth pace in the first quarter of the year, the government said Thursday in a report which calmed the nerves of some economists. In its initial revision of first quarter gross domestic product (GDP), the Commerce Department hiked its estimate compared with an prior assumption that pegged growth at a lackluster 0.6 percent. The revision, largely in line with expectations, bolsters the stance of some economists who believe the world`s largest economy will avoid a recession despite a deep housing slump, a related credit crunch and soaring oil prices.
The revised reading left consumer spending, a critical driver of economic growth, pegged at a 1.0 percent growth rate which marked a considerable moderation from the fourth quarter`s 2.3 percent. Consumer spending on services showed a 3.0 percent growth clip compared with a lesser 2.8 percent in the fourth quarter of last year, but spending on durable goods declined 6.2 percent against a positive 2.0 percent in the prior quarter. Real residential fixed investment, which tracks new home construction, slumped 25.5 percent during the quarter after falling a similar 25.2 percent during the last three months of 2007. Business spending outside housing declined 0.2 percent in the quarter, following a 6.0 percent gain in the prior three month period.
The combined exports of goods and services added 0.80 percentage points to growth, partly as exports were propped up by the ailing dollar. Exports grew 2.8 percent during the period while imports fell 2.6 percent. Some imported goods have become more pricey for Americans to purchase because the dollar has fallen sharply in value against foreign currencies. An inflation barometer in the report showed a key price index linked to GDP rose 3.5 percent while core prices, excluding food and energy costs, rose at a 2.1 percent clip. First quarter growth will be revised a final time in coming weeks.
US industrial production fell faster than expected in April, led by reduced manufacturing of autos, business equipment and construction supplies. The Federal Reserve reported today that industrial production in April fell 0.7 pct, a larger drop than the 0.3 pct decline that was expected by economists polled by Thomson`s IFR Markets. March`s industrial production level was downwardly revised to a 0.2 pct increase, from the 0.3 pct increase initially reported. The Fed also reported today that April`s plant capacity use rate fell to 79.7 pct, the lowest level in the current downturn. However, April`s plant capacity rate is still just a bit below the 81.0 pct rate seen a year earlier.
Economists were expecting plant capacity use to fall to 80.1 pct. The lower factory output for April was prompted by declines in a wide range of market groups. Production of auto and auto parts fell 7.8 pct, consumer goods fell 0.8 pct, and business equipment production fell 1.1 pct. "As was the case in March, factory output in April was held down by a large drop in the index for motor vehicles and parts; strikes and strike-related parts shortages resulted in suspended production at many facilities", the Fed said in its report. The Fed noted that excluding autos and auto parts production, manufacturing production fell 0.4 pct in April after rising 0.3 pct in March.
Segmented by industry group, durable manufacturing fell 1.4 pct, while nondurable manufacturing fared better, fallling 0.1 pct. Mining production fell 0.8 pct, natural gas utilities fell 0.3 pct, and electric utilities rose 0.4 pct.
The US economy is likely to have ground to a halt during the spring and its growth is set to stay enfeebled for an extended two-year run, inflicting knock-on damage to Europe and Japan, a leading international think-tank said. Rich economies across the West are being battered by a "triple whammy" of soaring oil and commodity prices, financial turmoil and the end of a world housing boom, the Organisation for Economic Co-operation and Development (OECD) said.
The US economy is set to bear the brunt of the downturn, assessment suggested. America`s growth is forecast to grind to a halt in the present, second quarter of this year, and eke out an annual gain of only 1.2 per cent over 2008, down from the OECD`s previous projection of 2 per cent growth this year. The think-tank projects growth in 2009 of only 1.1 per cent, compared with its previous expectation of 2.2 per cent. Despite this downgrade, the OECD said that the US Federal Reserve should now keep interest rates pegged until recovery takes hold.

Economy of The European Union

Economic growth in the 15 eurozone countries rebounded to 0.7 per cent in the first quarter of the year, boosted by strong German figures, the European Union`s Eurostat data agency said. The initial estimates were higher than economists` predictions and well above the 0.4 per cent gross domestic product (GDP) growth recorded in the last quarter of 2007. Analysts welcomed the figures. But they also warned that the good news was unlikely to last amid weaker business confidence and a slowdown in orders as the strong euro and soaring oil prices, coupled with the US sub-prime mortgage crisis, hit consumers and businesses.
Eurozone (EA15)seasonally adjusted industrial production fell by 0.2% in March and by 0.1% in the EU27. In February production rose by 0.3% and 0.4% respectively. In March 2008 compared with March 2007, industrial production rose by 2.0% in the Eurozone and by 1.8% in the EU27. These estimates were released by Eurostat, the Statistical Office of the European Union.
In March 2008 compared with February 2008, production of energy increased by 2.7% in the Eurozone and by 1.6% in the EU27. Intermediate goods fell by 0.2% in both zones. Non-durable consumer goods declined by 0.5% in the Eurozone and by 0.6% in the EU27. Capital goods dropped by 1.1% and 0.8% respectively. Durable consumer goods decreased by 1.5% in the Eurozone and by 1.6% in the EU27.
In March 2008, among the Member States for which data are available, industrial production rose in seven and fell in fifteen.The highest increases were registered in Ireland (+9.1%) and the Netherlands (+2.1%), while the largest decreases were recorded in Denmark (-6.1%), Estonia (-5.3%), Slovakia (-4.9%) and Lithuania (-4.7%).
Inflation in the euro zone snapped back to a record 3.6% in May amid soaring oil prices, according to a first estimate from the EU`s Eurostat data agency. The 12-month inflation rate had eased in April to 3.3% after hitting 3.6% in March, the highest level since the launch of the euro in 1999. Recent record oil and food prices have pushed inflation higher, putting additional strain on consumers and businesses already struggling with slowing economic growth. The bounce-back to 3.6% in May took euro zone inflation further away from the European Central Bank`s comfort zone, which it defines as annual consumer price growth of close to but less than 2%.

Economy of Asia

The Japanese economy grew at a faster-than-expected pace in the first quarter due to brisk exports and consumer spending, government data showed, but economists are unsure the momentum will continue amid a shaky global economic outlook. Some economists think the positive surprise may have been due to the leap year factor, with an extra day in February boosting sales of consumer companies, and the story is unlikely to see a repeat in the coming quarters.
The Cabinet Office said gross domestic product grew 0.8 percent in real terms in the January-March quarter and at an annualized rate of 3.3 percent. The growth beat market expectations. Ten economists polled by Thomson Financial News were looking at 0.4 percent growth for the quarter and an annualized pace of 1.5 percent, on average. The better-than-expected numbers came after the Cabinet Office revised down GDP growth for the October-December quarter to 0.6 percent from 0.9 percent as reported earlier while the annualized rate was tweaked to 2.6 percent from 3.5 percent. Net exports - or the difference between exports and imports - pushed up GDP by 0.5 percentage point. Consumer spending, which makes up 55 percent of Japan`s GDP, also helped the world`s second-largest economy expand. Private consumption rose 0.8 percent during the quarter, the fastest growth since October-December 2006 when it grew 1.1 percent.
Japan`s industrial output fell a seasonally adjusted 0.3 percent in April from March as companies cut production due to rising inventories amid slowing demand from the United States and other key trading areas such as Europe, government data showed. The fall matched the 0.3 percent decline economists had expected, according to a survey by Thomson/IFR Markets.
The industrial production index fell to 106.2 in April after hitting an all-time high of 110.2 in February. Industrial output rose 1.8 percent in April from a year earlier following a 0.7 percent fall in March. The Ministry of Economy, Trade and Industry said, citing a poll of private sector companies, that industrial output is expected to rise 4.7 percent in May from April, but will fall 0.9 percent in June from May. If the projections are met, the industrial output will rise 0.7 percent in the April-June quarter after marking the first decline in four quarters in the three months to March.
China`s inflation almost climbed to a 12-year high in April, swamping official efforts to cool surging living costs that could provoke unrest ahead of the Beijing Olympics. The government, which took further steps Monday to tame the inflation, faces the possibility of more sharp price hikes, some analysts warned. "Underlying inflationary pressures remain undiminished", Goldman Sachs economists Yu Song and Hong Liang said in a report. The government ordered banks to increase their reserves for a fourth time this year in a move meant to contain inflation by curbing lending, but it gave no indication whether it would boost interest rates. April`s consumer prices rose by 8.5 percent over the same month last year, the National Bureau of Statistics reported. That was a rebound from March`s 8.3 percent rate and below February`s 8.7 percent Ч the highest in 12 years. Premier Wen Jiabao has said taming inflation is Beijing`s priority. The government said in March it hoped to hold price rises to 4.8 percent this year Ч a target that looks increasingly unlikely. April inflation was driven by a 22.1 percent jump in food prices, including 68.3 percent for pork over the same month last year, 46.6 percent for cooking oil and 13.6 percent for vegetables.

Economy of Russia

Russia`s GDP grew 8.4 pct year-on-year in April and 8.3 pct in the first fourth months of 2008, a deputy Russian economics minister said. Andrei Klepach said the GDP forecast for 2008 was 7.6 pct, compared to 8.1 pct in 2007. The minister said growth has been boosted by strong investment activity and consumer demand. Russia`s industrial output grew 6.9 pct year-on-year in January-April, the state statistics service Rosstat said. In April, output grew 14.5 pct year-on-year in manufacturing industries and 28.8 pct in car production.
Russia boosted industrial production 9.2% year-on-year in April - the biggest rise since the 10.3% seen in July 2007, the Federal State Statistics Service (Rosstat) said. Production growth in April accelerated from 4.5% in January 2008, 7.5% in February and 6.5% in March. Analysts told Interfax in a consensus forecast that they thought industrial production would rise 6.9% in April. Production grew 6.9% year-on-year in January-April 2008 - as much as in the same period of last year. However it was April`s surge that enabled growth in the four months to be sustained, as production only grew 6.2% in the first quarter of 2008, compared with growth of 7.2% in the same period of last year.
The manufacturing sector led the April growth, up 14.5% year-on- year (and up 10.2% in the four months). April production by the extractive sector in general only edged up 0.4% (up 0.6% in the four months), with oil and gas condensate production falling, by 0.7% (down 0.3% in the four months, to 161 million tonnes). However gas production increased, by 1.3% in April (1.4% year-on-year in the four months, to 234 billion cubic meters). The Russian Economic Development and Trade Ministry is forecasting full-year industrial growth of 5.7%, however the analysts polled by Interfax at the end of April said they thought grow would be closer to 6.35. Industry grew 6.3% in 2007.
The number of unemployed in Russia grew by 4.2 percent on year to 5 million in April, which accounts for 6.6 percent of the economically active population, Russia`s Federal Statistics Service (Rosstat) reported. The unemployment sank 3.3 percent vs. March. The number of unemployed in Russia lowered 0.6 percent on year from January through April, Rosstat reported. The country`s population declined by 80,900 (or 0.06 percent) in the first quarter to 141.9 million by April 1. The population reduction could be primarily blamed on the natural loss, which, however, went down by 26,700 on year from January through March.
The migration grew by 41.9 percent during the period. The number of births grew in 80 constituents of Russia, and the number of deaths was up in 58 constituents. Overall, the country`s death toll was 1.3 fold above the birthrate in the first quarter (vs. 1.4 fold a year earlier). Russia`s inflation stood at 0.3 percent between May 13 and May 19, the Federal State Statistics Service (Rosstat) reported today. Meanwhile, month-to-date inflation amounted to 0.8 percent and year-to-date inflation was 7.2 percent, compared to 0.6 percent and 4.5 percent respectively in 2007. Granulated sugar and polished rice prices saw the highest increase over the previous week (2.4 percent and 2.1 percent, respectively).
Russia`s trade surplus grew 1.6 times to $53.6bn in the first quarter of 2008 compared to the same period a year earlier, the Federal Customs Service of Russia said. Earlier, the Russian Economy Ministry said trade turnover increased 50.3 percent to $168.8bn in the first quarter. Russia`s exports jumped 50 percent to $108.1bn. The sharp increase can be attributed to faster-than-expected price growth for key products exported from Russia. Meanwhile, Russia`s imports grew 40.9 percent to $60.7bn. Countries outside the CIS accounted for 86.7 percent of Russia`s imports against 84.6 percent a year earlier, while the CIS`s share decreased from 15.4 percent to 13.3 percent accordingly. Two of Russia`s top three trade partners are European: Germany with a turnover of USD 31.9 billion and the Netherlands with 28.3 billion. China is the third. European countries account for 75 percent of direct investment in Russia. Britain ranks first. During the first part of 2007 it invested more than USD 15 billion.
The consumer price index stood (CPI) at 101.4 percent in Russia in April, reaching 106.3 percent for the year to date, the Russian State Statistics Service said in a statement. In 2007, the CPI amounted to 100.6 percent in April and 104 percent from the start of the year. Prices rose more than 2 percent in nine Russian regions. As during the previous month, prices and tariffs of consumer goods and services overall grew the most in the Chechen Republic (3.6 percent), where foodstuffs increased in value by 4.2 percent. The CPI stood at 101.1 percent in Moscow (105.8 percent from the beginning of the year) and 102.4 percent in St. Petersburg (106.6 percent from the start of the year).

www.ereport.ru - 05.06.2008 21:36:10