World Economy Review - February 2009

According to the United Nations baseline forecast, world gross product (WGP) is expected to slow to about 1.0 per cent in 2009, a sharp deceleration from the 2.5% growth estimated for 2008 and well below the more robust growth in previous years. The baseline forecast assumes that it will take six to nine months for financial markets in developed countries to return to normalcy, assuming central banks in the United States, Europe and Japan provide further monetary stimulus from the end of 2008 and on into 2009.
Uncertainties surrounding this forecast are high, as shown by the confidence interval around the baseline forecast. In a more pessimistic scenario, both the fire sale of financial assets and the credit crunch would last longer, while monetary stimulus would prove ineffective in the short run and fiscal stimulus would turn out to be too little, too late. This would then lead to worldwide recession in 2009, with global output falling by 0.4%, and postpone recovery to, at best, the following year. In a more optimistic scenario, a large-scale fiscal stimulus coordinated among major economies would stave off the worst of the crisis, yet - for the reasons indicated - it would not prevent a significant slowdown of the global economy in 2009.
Meanwhile, gross domestic product (GDP) in the OECD area fell by 1.5% in the fourth quarter of 2008 - the largest fall since OECD records began in 1960, according to preliminary estimates. In the US, GDP fell 1% in the fourth quarter of 2008, following a 0.1% decrease in the previous quarter. Japan`s GDP declined by 3.3%, following a 0.6% decrease in the previous quarter. GDP in the Euro area was down 1.5%, following a 0.2% fall in the previous quarter.
The US contributed 0.1% to the total OECD fall of 1.1% between the fourth quarter of 2007 and the fourth quarter of 2008. Japan contributed 0.5%, the Euro area (12 countries) 0.3%, and the remaining countries 0.2%.

Economy of The United States

The U.S. economy contracted more sharply than initially estimated in the fourth quarter, government data showed on Friday, as exports plunged and consumers cut spending by the most in over 28 years amid a severe recession. The Commerce Department said gross domestic product, which measures the total output of goods and services within U.S. borders, fell at an annual rate of 6.2 percent in the October-December quarter, the deepest slide since the first quarter of 1982. The government last month estimated the drop in fourth-quarter GDP at 3.8 percent. The weaker GDP estimate reflected downward revisions to inventories and exports by the department.
The decline was worse than analysts` expectations for a 5.4 percent contraction in fourth-quarter GDP. The economy expanded 1.1 percent in 2008, the slowest pace since 2001, the department said. Consumer spending, which accounts for more than two-thirds of domestic economic activity, dropped at a 4.3 percent rate, the biggest fall since the second quarter of 1980, as household wealth plunged. That compared with a 3.5 percent fall estimated last month.
Exports, until recently one of the few pillars supporting the distressed economy, tumbled at a 23.6 percent annual rate, the steepest plunge since 1971. That was revised from the 19.7 percent drop estimated in last month`s report. Inventories, which minimized the fall in GDP last month after being estimated up a surprising $6.2 billion, were revised to show a $19.9 billion decline in the fourth quarter. Business investment fell at a 21.1 percent rate, the largest drop since 1975, from a previously estimated 19.1 percent. Residential investment fell 22.2 percent in the fourth quarter. The deteriorating economy is dampening inflation pressures, with the personal consumption expenditures price index diving a record 5 percent. Excluding food and energy, prices rose 0.8 percent in the fourth quarter, the smallest advance since a matching increase in 1997.
U.S. industrial production fell in January for the sixth time in seven months and more than forecast as companies reduced manufacturing amid a worldwide slowdown in demand. Output at factories, mines and utilities dropped 1.8 percent, after a revised decrease of 2.4 percent in December that was more than previously reported, the Federal Reserve said.
Factory output, which accounts for about four-fifths of industrial production, decreased 2.5 percent, led by automakers. Motor vehicle and parts production plummeted 23.4 percent in January following an 8.1 percent drop a month earlier, the report said. Vehicles alone had a 40 percent drop after a 12.6 percent decline the month before. Automakers assembled cars and light trucks at an annual rate of 3.9 million during the month, the lowest since record-keeping began in 1967. Production of consumer durable goods, including vehicles, furniture and electronics, fell 10.5 percent, the biggest monthly drop since November 1959. Utility production increased 2.7 percent after falling 0.2 percent a month earlier, report showed. Mining output, which includes oil drilling, decreased 1.3 percent.
Economists forecast industrial production would drop 1.5 percent, according to the median projection in a Bloomberg News survey of 75 economists. Estimates ranged from a decline of 3.1 percent to a gain of 0.5 percent. Capacity utilization, or the proportion of plants in use, fell to 72 percent, the lowest since February 1983, from 73.3 percent in December. Economists had forecast that figure would fall to 72.4 percent, according to a separate Bloomberg survey.
For the month of December, import consumption and export growth continued to fall, as weak worldwide economic growth wrecked havoc on international trade. According to the monthly trade balance report released by the Commerce Department, exports fell 6% in December, down $8.5 billion to a seasonally-adjusted $142.3 billion. Imports also fell, by 5.5%, with consumption of foreign goods falling $10.2 billion to a seasonally-adjusted $183.9 billion. The trade deficit, net imports and exports, also fell, to $39.9 billion from a revised $41.6 billion in November. The number is at a new six-year low.
US consumer prices edged up 0.3 per cent in January and were level over the entire year as the United States battles a deepening recession, the US Labour Department said. It marked the first rise in the seasonally-adjusted monthly rate in six months. Excluding more volatile food and fuel prices, the core inflation rate stood at 0.2 per cent in January, higher than economists had expected. Consumer prices were unchanged from January 2008, the lowest level of inflation since 1955. The United States, the world`s largest economy, has been in recession since December 2007. The transportation and energy sectors exhibited the sharpest swings from December to January. The price of petrol and cars in the US began rising again after six straight months of declines. Consumer prices had fallen 0.8 per cent in December, 1.7 per cent in November and 0.8 per cent in October, over which time the entire US economy shrank 3.8 per cent.
The US unemployment rate rose to 7.6% in January, up from 7.2% in December, according to official figures. The rise puts the unemployment rate at the highest level since 1992. According to the US Labor Department, the economy lost 598,000 non-farm jobs for the month, and it also revised upwards the job losses for December.

Economy of The European Union

The euro zone economy saw its deepest contraction on record in the fourth quarter of 2008, data showed, boosting pressure on the European Central Bank to cut interest rates by 50 basis points in three weeks. Gross domestic product in the 15 countries using the euro in the last three months of 2008 shrank 1.5 percent against the previous quarter for a 1.2 percent fall year-on-year, the European Union statistics office Eurostat said. "Now it`s official: the euro zone economy is in its deepest recession since the end of the Second World War," said Christoph Weil, economist at Commerzbank. The collapse of exports and a sharp fall in investments were most probably the main reasons for the slump," he said. Economists polled by Reuters had expected a 1.3 percent quarterly drop after 0.2 percent contractions in the second and third quarters, and a 1.1 percent year-on-year decline. "This Friday the 13th is living up to its name. Eurostat has just released `scary` GDP numbers," said Martin van Vliet, economist at ING. "The best we can hope is that the fourth quarter marked the worst quarter in terms of the pace of contraction," he said.
In December 2008 compared with November 2008, seasonally adjusted industrial production fell by 2.6% in the euro area (EA15) and by 2.3% in the EU27. In November production decreased by 2.2% in both zones. In December 2008 compared with December 2007, industrial production declined by 12.0% in the euro area and by 11.5% in the EU27. Compared with 2007, the average industrial production index for 2008 fell by 1.7% in the euro area and by 1.6% in the EU27. These estimates are released by Eurostat, the Statistical Office of the European Communities.
In December 2008 compared with November 2008, production of energy rose by 1.1% in the euro area and by 0.8% in the EU27. Non-durable consumer goods fell by 0.9% and 0.8% respectively. Capital goods decreased by 2.5% in the euro area and by 2.8% in the EU27. Durable consumer goods dropped by 2.8% and 3.0% respectively. Intermediate goods declined by 5.7% in the euro area and by 5.2% in the EU27. Among the Member States for which data are available for December 2008, industrial production fell in nineteen and rose only in Lithuania (+1.1%). The most significant falls were registered in Slovakia (-12.7%), Ireland (-10.2%), Romania (-8.6%) and Germany (-4.9%). In December 2008 compared with December 2007, production of energy fell by 3.3% in both the euro area and the EU27. Non-durable consumer goods decreased by 3.9% and 4.1% respectively. Capital goods declined by 11.7% in the euro area and by 12.2% in the EU27. Durable consumer goods dropped by 14.5% and 14.1% respectively. Intermediate goods fell by 20.3% in the euro area and by 19.2% in the EU27.
In December 2008, industrial production fell in all Member States for which data are available. The largest decreases were registered in Estonia (-20.7%), Spain (-19.6%), Sweden (-18.4%), Romania and Slovenia (both -17.5%).
The euro zone recorded an external trade deficit of 32.1 billion euros (40.5 billion U.S. dollars) in 2008, the largest ever since the euro was introduced in 1999, official figures showed. The deficit, compared with a surplus of 15.8 billion euros in 2007, was mainly due to rising costs of energy imports and dwindling exports amid the global financial crisis. For the same reasons, the external trade deficit of the European Union (EU) also swelled to 241.3 billion euros in 2008 from 192.4 billion euros in 2007, the 27-nation bloc`s statistics bureau Eurostat said in a preliminary estimate.
In the first 11 months of 2008, the EU energy deficit increased to 339.5 billion euros, compared with 243.1 billion euros in the same period of 2007. While EU trade with most of its major partners grew, its exports to the United States and Japan dropped, down by 5 percent and 4 percent respectively in the period from January to November over a year ago. The largest increases were recorded for exports to Brazil and Russia, up by 26 percent and 20 percent on yearly basis. EU exports to China rose by 10 percent. Eurostat also said the eurozone trade balance with the rest of the world in December 2008 recorded a 0.7 billion euro deficit, compared with a deficit of 3.9 billion euros in December 2007. In the EU, it was a deficit of 10.4 billion euros in the last month of 2008, compared with 17.7 billion euros in deficit in December 2007.
Euro-Zone January HICP inflation was confirmed at 1.1% y/y, as expected. Prices fell 0.8% m/m on lower energy costs, as well as seasonal price reductions after the Christmas holiday period. Positive base effects from lower energy prices were one of the key reasons behind the deceleration in the headline rate, but core inflation, excluding energy and food also dropped - to 1.6% from 1.8% previously. The ECB has been stressing that its inflation "target" is symmetrical and that it wants to keep inflation below but close to 2%, which suggests that both headline and core inflation are now below target. Data will add to pressure on the ECB to cut rates next week, even though given the time lag with which monetary policy affects inflation monetary policy needs to be forward looking.
Meanwhile, German February inflation rose 0.6% m/m and 1.0% y/y, up from 0.9% y/y in January. HICP inflation was up 0.7% m/m and 1.0% y/y, also up from 0.9 %y/y in the previous month. Initial expectations had been for a rise in prices of around 0.3% m/m on seasonal factors, which should have brought annual rates down to 0.7% y/y. However, state data yesterday already indicated that February numbers would be higher than initially expected and pointed to acceleration in the annual rate to 1.0%, which therefore was no surprise. There was no breakdown with the preliminary numbers. At 1.0% y/y headline inflation still remains far below the ECB`s 2% limit for price stability and Spanish HICP inflation decelerated to 0.7% y/y from 0.8% y/y, which on balance points to a stable Euro-Zone rate of 1.1% y/y in February, which will add to pressures on the ECB to cut rates again next week.
In addition, Euro-Zone January unemployment rose to 8.2% and the December number was revised up to 8.1% from 8.0% reported initially. The number is slightly higher than consensus expectations for a reading of 8.1%, but the rise is no surprise in the light of the sharp slowdown in production experienced across the Euro-Zone. The slump in demand has forced companies to cut back production and staff levels and the unemployment rate is set to rise further in coming months. Developments will weigh on consumption this year and also push up social security spending across the Euro-Zone.

Economy of Asia

Japan`s economy shrank 3.3 percent in the fourth quarter, the biggest drop since 1974 and further confirmation that the world`s second-biggest economy is in a severe recession as the global economic crisis deepens. It was a bigger fall than the 3.1 percent contraction expected by economists and marked the third consecutive quarter of contraction - the first time this has happened in Japan in seven years. Japan`s gross domestic product figure translated into an annualised fall of 12.7 percent, exceeding a consensus market forecast for a 11.7 percent contraction, government data showed. The pace of contraction surpassed an annualised 3.8 percent drop in the United States, which was the biggest fall in nearly 27 years. In July-September, the Japanese economy shrank 0.6 percent.
Japan`s industrial production in January dropped 10 percent from the previous month, a decline for the fourth straight month, the government said. Industrial production was expected to decrease 8.3 percent in February before reversing course and climbing 2.8 percent in March, the Ministry of Economy, Trade and Industry said. Leading the decline were industries in transport equipment, electronic parts and devices, and general machinery, according to its report. Meanwhile, household spending on common items such as food and medical care fell 5.9 percent from a year ago - the largest drop since Japan announced in November it was in a recession. Transportation and communication took the biggest hits, dropping more than 15 percent over last year. Incomes, however, were up by 1 percent.
Japan`s consumer prices failed to rise in January for the first time in more than a year as households cut spending amid a deepening recession. Consumer prices excluding fresh food were unchanged from a year earlier after climbing 0.2 percent in December, the statistics bureau said today in Tokyo. The median estimate for 32 economists surveyed by Bloomberg News was for a 0.1 percent decline. Household spending fell 5.9 percent.
With the global financial crisis and a recession in full swing, the Japanese unemployment rate unexpectedly fell in January. The unemployment rate fell to 4.1% from 4.4% in December, according to the report from the Statistics Bureau released. Economists were expecting an increase to 4.6%. The fall in unemployment can be partly attributed to a low participation rate of 59.5%.

Economy of Russia

The Russian GDP contracted 2.4 percent in month-on-month terms in January and is likely to continue to contract throughout the first quarter, - Economy Minister Elvira Nabiullina said. Compared to January 2008 Russian GDP decreased 8.8 percent. Russia revised its economic outlook for 2009 earlier this month, forecasting the economy would contract by 2.2 percent on the assumption that the price for oil, Russia`s main export, averaged $41 per barrel throughout the year. "The trend (of economic contraction) will stay throughout the first quarter," Nabiullina said in Siberia at a session of the State Council chaired by President Dmitry Medvedev. The Economy Ministry later clarified the January data was adjusted for seasonal and calendar factors. The year-on-year data will be published later this month in the ministry`s monthly state of economy report. Russia`s GDP grew 5.6 percent in 2008, the lowest since 2002.
Industrial production in Russia plunged by 16.0 percent in January compared with activity in January 2008, recording its worst fall for 15 years, the statistics office said. Compared with December, industrial production fell by 19.9 percent as the effects of the economic crisis began to be felt hard by Russian industry, it said in a statement. Auto production crashed by 79.7 percent year-on-year while production of various construction materials was down from between 40-50 percent, the statistics office said. Even gas production fell by 10 percent compared with January 2008. Industrial production had already fallen by 10.3 percent in December 2008 year-on-year and only grew by 2.1 percent in 2008 from 2007 compared with 6.3 percent growth in 2007.
Russia`s foreign trade balance expanded 32 percent in 2008 reaching roughly $201.155bn, the Federal Customs Service said. Foreign trade grew 33.2 percent to nearly $734.992bn, with exports rising 33 percent to $468.073bn, and imports 33.6 percent to $266.918bn. In the fourth quarter of 2008 alone, foreign trade balance stood at 32.278bn. Foreign trade, however, shrank 5.4 percent compared with the same period a year earlier, to $162.275bn. Exports dropped 10.5 percent to $97.277bn, while imports inched up 3.4 percent.
Mr Alexei Kudrin Finance Minister said Russia`s GDP growth will be close to zero and budgetary revenues could decline 40% in 2009 amid the ongoing global financial crisis. He said that "Budgetary revenues will decline by RUB 4.4 trillion or more than 5.4% of GDP, suggesting Russia`s budgetary revenues could decline from RUB 10.9 trillion to RUB 6.5 trillion. He said Russia would have to spend a significant portion of its reserve funds to cover the 2009 budget deficit, and increase borrowing in 2010-2011.