World Economy Review

Europe should take bolder steps to fix its banks, starting with stress tests of vulnerability, and better coordinate national policies to improve chances of the region shaking off recession during the course of 2010, the International Monetary Fund said. A report from the Washington-based agency, which has provided economic rescue funds for emerging market European countries hit hardest by the global financial crisis, stressed the need for Europe to adopt policies that helped west and east. "Europe is facing the economic storm of a lifetime and it urgently needs to weatherproof its institutions," Marek Belka, who is head of the IMF`s European department, and presented the publication in Paris, said.
ECB interest rates cuts had probably gone about as far as was useful, or near in any case, said Belka, whose main point was to stress the IMF`s call for measures to restore confidence in the banking system, starting with stress tests. "We are coming quite close to the point where the efficiency of interest rate actions is exploited," said Belka. The IMF report repeats the macroeconomic forecasts contained in the IMF`s April 22 World Economic Outlook. It foresees deep recession in 2009 and flat to sub-zero growth for 2010 as a whole despite a pickup that should take place as long as government measures are effective. It sees both advanced and emerging economies in deep contractions in 2009 but the emerging market region returning to growth for 2010 as a whole while advanced economies still struggle, if much less so than this year. The IMF said fiscal stimulus should continue in 2010 and focus on infrastructure and direct transfers rather than tax breaks and subsidies for companies and consumers. "Crisis measures, regulatory, and supervisory actions have been unhelpfully diverse especially in Europe`s well-integrated financial sector," the IMF said.
Meanwhile, the United Nations (UN) has downgraded its world economic forecast for 2009 with a shrinkage of 2.6 per cent from an already pessimistic estimate made five months ago. It also warned that the developing countries would be hit the hardest. "The world economy is expected to shrink by 2.6 per cent in 2009, down from a de cline by 0.5 per cent, according to the pessimistic scenario of the forecast presented in January,`` the UN mid-year report stated.
The report however predicted that "with a coordinated, development-oriented policy scenario, the world economy would recover to an annual growth of 4-5 per cent in 2010-2015, led by a robust growth of 7 per cent per year in developing countries.

Economy of The United States

The U.S. economy contracted slightly less than initially estimated in the first quarter, while corporate profits rebounded, according to a Commerce Department report on May 29th that hinted that the recession was moderating. Gross domestic product, which measures total goods and services output within U.S. borders, dropped at a 5.7 percent annual rate, the department said, less than the 6.1 percent estimated by the government last month. The revisions were below market expectations for a 5.5 percent contraction for the January-March quarter. Output has declined for three straight quarters for the first time since 1974-1975.
The Commerce Department`s preliminary report also showed corporate profits after taxes increased 1.1 percent in the first quarter, the first increase in a year, after plummeting 10.7 percent in the fourth quarter. Analysts polled by Reuters had forecast profits dropping 7 percent. Economic activity in the first quarter was dragged down by cutbacks in business, federal government, residential and nonresidential investment as well as a drop in exports.
Business inventories fell $91.4 billion after slipping by $25.8 billion in the fourth quarter. Last month, the Commerce Department estimated the drop in inventories at a record $103.7 billion in the first quarter. Inventories subtracted 2.34 percentage points from the overall GDP figure.Excluding inventories, GDP contracted 3.4 percent, the department said.
Exports fell 28.7 percent, the largest decline since the fourth quarter of 1971, after dropping 23.6 percent in the fourth quarter. The drop in exports lopped off a record 3.86 percentage points from GDP. Investment by businesses tumbled a record 36.9 percent in the first quarter, while residential investment dived 38.7 percent, the biggest decline since the second quarter of 1980.
Consumer spending, which accounts for over two-thirds of U.S. economic activity, rose 1.5 percent, but slower than the 2.2 percent rate estimated by the government last month. Spending had collapsed in the second half of last year. Consumer spending was lifted by a 9.6 percent leap in the consumption of durable goods, the biggest advance since the first quarter of 2006. Motor vehicle output cut 1.36 percentage points from first-quarter economic activity, an improvement from the 2.01 percent subtraction in the fourth quarter.
U.S. industrial production fell 0.5 percent in April, dropping for the sixth consecutive month but at a more modest pace than in recent months, Federal Reserve data showed. Economists polled by Reuters had expected a drop of 0.6 percent in April, compared with a 1.7 percent slide in March, which was initially reported as a 1.5 percent fall. The figures provided more evidence that the pace of recession may be easing after back-to-back quarters of sharp contractions in gross domestic product.
The capacity utilization rate for total industry, a measure of slack in the economy, fell to 69.1 percent in April, the lowest level on records dating back to 1967. Production in manufacturing declined 0.3 percent in April, and was 16 percent below its recent peak in December 2007, which was when the current recession began.
The unemployment rate surged to 9.4%, the worst it has been in 25 years. Manufacturing continues to shed jobs as automobile and parts makers lay off workers. Declines in services and construction sectors have moderated. In May payrolls declined by 345,000 to 132.2 million and the decline in the month was half of the average monthly decline in the last six months of 643,000.
Since the start of recession in December 2007, the number of unemployed has increased by 7 million and the unemployment rate has nearly doubled. Only healthcare industry added jobs and employment in government was unchanged. Healthcare added 24,000. Manufacturing job losses were 156,000 in the month, 59,000 in construction and 51,000 and professional and business services. Retail trade lost 18,000 jobs in the month and employment in wholesale trade declined 22,000. Financial activities shed 30,000 jobs, securities industry shed 10,000 and real estate lost 9,000.
Of the U.S. civilian labor force of 155.1 million, 140.6 million are employed, 14.51 are unemployed and 80 million are not in labor force. In, May, Hourly earnings for production and nonsupervisory workers in the private sector were unchanged at $18.54. The unemployment rate in April was revised to 8.9%.

Economy of The European Union

GDP declined by 2.5% in both the euro area (EA16) and the EU27 during the first quarter of 2009, compared with the previous quarter, according to flash estimates published by Eurostat, the Statistical Office of the European Communities. In the fourth quarter of 2008, growth rates were -1.6% in the euro area and -1.5% in the EU27. Compared with the same quarter of the previous year, seasonally adjusted GDP decreased by 4.6% in the euro area and by 4.4% in the EU27 in the first quarter of 2009, after -1.4% in both zones in the previous quarter. During the first quarter of 2009, US GDP decreased by 1.6% compared with the previous quarter, after -1.6% in the fourth quarter of 2008. US GDP decreased by 2.6% compared with the same quarter of the previous year (-0.8% in the previous quarter).
In March 2009 compared with February 2009, seasonally adjusted industrial production fell by 2.0% in the euro area (EA16) and by 1.9% in the EU27. In February production decreased by 2.5% and 2.2% respectively. In March 2009 compared with March 2008, industrial production declined by 20.2% in the euro area and by 18.8% in the EU27. In March 2009 compared with February 2009, production of capital goods fell by 0.5% in the euro area and by 1.3% in the EU27. Non-durable consumer goods decreased by 1.0% and 0.5% respectively. Durable consumer goods dropped by 2.5% in the euro area and by 1.8% in the EU27. Energy declined by 2.8% and 3.1% respectively. Intermediate goods fell by 3.1% in the euro area and by 2.7% in the EU27.
Among the Member States for which data are available, industrial production rose in five and fell in fourteen. The highest increases were registered in Portugal (+3.1%) and Finland (+2.2%), and the most significant falls in Luxembourg (-7.2%), Lithuania (-6.3%), Italy (-4.6%) and Spain (-3.5%). In March 2009 compared with March 2008, production of non-durable consumer goods fell by 7.2% in the euro area and by 5.3% in the EU27. Energy decreased by 9.2% and 9.0% respectively. Durable consumer goods declined by 23.2% in the euro area and by 20.5% in the EU27. Capital goods dropped by 23.5% and 23.0% respectively. Intermediate goods fell by 27.0% in the euro area and by 25.6% in the EU27. Industrial production fell in all Member States for which data are available. The largest decreases were registered in Estonia (-29.7%), Luxembourg (-29.6%), Spain (-24.7%) and Italy (-23.8%), and the smallest in Greece (-5.8%), Portugal (-7.9%) and Poland (-10.0%). Euro area1 annual inflation was 0.6% in April 2009, unchanged compared with March. A year earlier the rate was 3.3%. Monthly inflation was 0.4% in April 2009. EU annual inflation was 1.2% in April 2009, down from 1.3% in March. A year earlier the rate was 3.6%. Monthly inflation was 0.3% in April 2009.
Eurozone inflation has fallen to zero, the lowest rate since at least 1991, and could fall lower as a result of the region`s severe recession as well as cheaper oil prices. The annual inflation rate in the 16-country region fell from 0.6 per cent in April to 0 per cent this month, according to Eurostat, the European Union`s statistical office.
Economists said inflation would almost certainly turn negative in June, complicating further the task of the European Central Bank as it combats the worst economic downturn for half a century in continental Europe. Among the Eurozone`s biggest countries, Germany and Spain have already reported negative national inflation rates. The US has also reported year-on-year falls in consumer prices but UK inflation is expected to remain positive, largely because of the effects of sterling`s weakness. May`s Eurozone inflation rate was the weakest since comparable records began in 1991. Calculations by the Royal Bank of Scotland put it at the lowest in the region since 1953.
Unemployment in the Eurozone rose to nearly 10% of the workforce last month as businesses continued to shed staff in the face of the worst global downturn since the second world war. The European Union statistics office said the unemployment rate in the 16-nation Eurozone rose for the 13th month in a row to 9.2% in April, from 8.9% in March as 396,000 more people lost their jobs, bringing the number of people out of work to 14.579 million. It is the highest unemployment rate since September 1999.

Economy of Asia

Japan`s export-addicted economy shrank during the first quarter at the fastest pace in more than 50 years, continuing a dismal trend that since last year has made it the worst performer among major countries. A sustained collapse in exports, especially of cars and electronics to the United States, led to an annualized 15.2 percent decline in the gross domestic product in the first quarter of this year, the government said. That was after a 14.4 percent annualized decline from October to December.
Japan`s rate of contraction is more than double that of the United States. For the first time on record, the total value of goods and services produced in Japan fell for four consecutive quarters, the government said.
As exports have fallen sharply in the past year, most Japanese companies have sharply curtailed production and drawn down inventories. Famously well-run companies such as Toyota have posted record losses, idled factories, laid off workers and apologized to the public. Even though the first-quarter numbers were wretched, they were better than some economists had predicted. Meanwhile, there are a number of tentative signs in Japan, as in the United States, that the worst recession since World War II may have bottomed out.
Stocks here have bounced back by about 33 percent from a quarter-century low in early March. Some economic analysts are predicting a return to growth as soon as this summer. Orders for machinery, an indicator of companies` plans for future spending, have begun to rise. Consumer confidence climbed to a 10-month high last month, and a huge government stimulus package is expected to revive domestic demand.
Japan`s industrial output in April rose at the fastest monthly pace in more than half a century as production of electronic parts and chemicals picked up, official figures showed. The April reading, a jump of 5.2 percent from the previous month, was far above market expectations for an increase of around 3.3 percent, sparking hopes that the nation is emerging from its worst post-war recession.
Compared with a year earlier, industrial production was still down 31.2 percent as a result of the deep global downturn that has hit the export-led economy hard. But as a month-on-month rise, it was the "second highest on all records available, only behind a rise of 7.9 percent in March 1953," said an official at the Ministry of Economy, Trade and Industry.
April shipments rose 2.3 percent from the previous month while inventory stockpiles fell 2.7 percent, official figures show. Production is expected to surge ahead by 8.8 percent in May from April and by a further 2.7 percent in June, according to the manufacturers` own forecasts, the ministry said.
Japanese core consumer prices fell 0.1 percent in April from a year earlier, the second straight month of annual decline, suggesting that waning demand on top of falling commodities costs is pushing the country deeper into deflation. The drop in April was matched a consensus market forecast and followed a 0.1 percent fall in March data.
Japan has slipped back into its second round of deflation in less than two years, although much of the impetus so far is coming from falling prices for oil and other commodities. Last year sharp price gains in such goods pushed annual core consumer inflation to a decade high of 2.4 percent. The core consumer price index excludes volatiles prices of fresh fruit, vegetables and seafood but not oil prices.
The so-called core-core inflation index, which strips out both energy and food prices, similar to the core index used in many other developed countries, fell 0.4 percent in April from a year earlier. The core price index for Tokyo, available a month before the nationwide data, fell 0.7 percent in May from a year earlier, bigger than a median market forecast of a 0.5 percent decline.
Japan`s unemployment rate climbed to a five-year high in April and job prospects worsened, signaling household spending will weigh on the economy just as exports are showing signs of improving. The jobless rate rose to 5 percent from 4.8 percent in March, the government statistics bureau said in Tokyo today. The ratio of positions available to each applicant dropped to 0.46 from 0.52, the lowest in a decade, the Labor Ministry said.
Economists expected unemployment to climb to 5 percent in April and household spending to fall 0.7 percent. The ratio of jobs to applicants slid to a lower level than the 0.49 predicted.

Economy of Russia

The Russian federal government now believes the country`s GDP in 2009 will shrink between six and eight percent. In April, the GDP dropped 10,5 percent. Deputy Minister of Finance Andrey Klepachsaid that the decline in Russian GDP in the four first months of 2009 totaled 9,8 percent. In April, the drop was 10,5 percent. The official still highlighted that the drop in April was lower than in March and that the 2009 might see a total decline of 6-8 percent. The main negative issue is the decline is investments, which totaled 15,2 percent and in April and 15,8 percent over the last four months. Mr. Klepach also said that his ministry expects a 9 percent budget deficit this year, the news site informs. In his forecast presented to government and the countries federal assemblies, Russian President Dmitry Medvedev said the Russian budget deficit in 2010 will continue to drop to an estimated seven percent.
Industrial production in Russia dropped 16.9% year-on-year in April, faster than a 13.7% fall in March, the Federal State Statistics Service said. Economists expected a decline of 14%. Industrial output dropped for the sixth consecutive month in April. Month-on-month, industrial output slipped 8.1% in April, following an 11.1% growth in the previous month. In the January-April period, industrial production dipped 14.9% compared to the same period in the previous year.Rosstat bases its manufacturing output index on data from the resource extraction (mining) and manufacturing sectors, and includes the production and distribution of electricity, gas and water. The metric showed that the first quarter of 2009 stood at 85.1 percent over the previous year. Output in April 2009 was 83.1 percent from April 2008, and was down from March 2009 by 8.1 percent. Similarly, a report on the state of the economy published on May 15th showed that GDP had fallen 9.5 percent year-on-year in the first quarter. The International Monetary Fund predicted last month that Russian GDP would fall 6 percent in 2009.
Russia`s foreign trade surplus fell to $23.4 billion in January-March 2009 from $53.7 billion in the same period a year ago, the Federal Customs Service said. It provided the following data: exports fell 47.6 percent to $56.9 billion, imports fell 39.0 percent to $33.5 billion. The Bank of Russia expects the trade surplus to exceed $50bn in 2009, First Deputy Chairman of the Central Bank Alexei Ulyukayev told a Russian banking conference in Moscow on May 6th. "We expect a significant decrease in imports as a result of the ruble`s devaluation effect. With this in mind, the trade surplus will be significant and may even top $50bn," he observed. Russia`s February inflation proved to be lower than in a number of European countries, according to the Russian Federal State Statistics Service`s (Rosstat) report on the increase in consumer prices based on the publications by Eurostat and national statistics services. According to Rosstat`s data, Belgium accounted for the highest inflation among European countries with 2.3 percent in February. Meanwhile, inflation stood at 1.8 percent in Luxemburg, and 1.1-1.5 percent in Belarus, Ukraine and Latvia. At the same time, consumer prices went down in Greece, Estonia and Turkey 1.1-0.3 percent in February compared to the previous month. In Russia, the prices for products and services edged up 1.7 percent compared to January and 4.1 percent compared to December 2008.