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World Economy Review - May 2010

The Organization for Economic Cooperation and Development said the industrial world`s economy is recovering at a faster-than-expected pace but faces growing danger from woes over sovereign debt as well as the prospect of emerging economies overheating. The Paris-based organization, whose members include the world`s 30 richest nations, said it now expects gross domestic product across member countries to grow by 2.7% this year and by 2.8% in 2011, up from its November projections of 1.9% and 2.5% growth, respectively.
Red-Flag Market Gauges Recall `08 Crisis Levels Rising rates in credit-market gauges like Libor and the "TED spread" are just a few of the signs that corporate-lending conditions may be seizing up the way they did in the crisis of 2008, says Jay Mueller of Wells Capital Management. "Many OECD countries need to reconcile support to a still fragile recovery with the need to move to a more sustainable fiscal path," said OECD Secretary-General Angel Gurria, in a statement. "We also need to take into account the international spillovers of domestic policies. Now more than ever, we need to maintain co-operation at an international level."
The OECD said it now expects inflation-adjusted GDP growth of 1.2% across the 16-nation euro zone in 2010 followed by 1.8% growth in 2011, up from an earlier forecast of 0.9% growth this year. But the organization warned that the region faces huge challenges in resolving sovereign debt question marks.
A "prompt and massive response" by the European Central Bank and euro-zone government has calmed turbulence in financial markets, but the region`s "underlying weaknesses are far from settled," wrote OECD chief economist Pier Carlo Padoan in an introduction to the report. "The sovereign debt crisis has highlighted the need for the euro area to strengthen significantly its institutional and operational architecture to dissipate doubts about the long-term viability of the monetary union," Padoan said. "At a minimum, surveillance of domestic policies needs to be strengthened, taking on board broader competitiveness considerations."
Bolder measures to strengthen and enforce fiscal discipline are needed, ranging from better oversight and the effective use of sanctions for non-compliance with budget rules to external auditing of national budgets and "de facto fiscal union," Padoan said.
The OECD also boosted its outlook for U.S. economic growth in 2010, forecasting GDP expansion at a 3.2% pace compared to an earlier forecast of 2.5%. The OECD expects growth of 3.2% in 2011 as well. The Federal Reserve and the Obama administration "should gradually withdraw policy stimulus as economic growth becomes self sustaining," the OECD said. "Gauging the appropriate timing will not be a simple task, but keeping the stimulus in place risks recreating some of the imbalances in the housing and financial markets that led to the financial crisis."

Economy of the United States

The U.S. economy grew at a slower pace than previously estimated in the first quarter as businesses investment slackened, while hard-hit state and local governments curbed spending at the steepest rate since 1981, a government report showed. Gross domestic product expanded at a 3.0 percent annual rate, the Commerce Department said, instead of the 3.2 percent pace it reported last month.
Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, growing at a 3.4 percent rate in the January-March period. The economy expanded at a 5.6 percent pace in the fourth quarter and has now grown for three straight quarters.
Economists are monitoring the U.S. recovery closely to see how well the economy can endure the debt troubles that threaten to slow Europe`s growth. The above-trend first-quarter U.S. growth suggests a solid base of support.
Output in the first three months of the year was revised down as business spending rose at only a 3.1 percent rate instead of the 4.1 percent initially reported last month. Spending grew at a 5.3 percent pace in the fourth quarter. Business spending on software and equipment increased at a 12.7 percent rather than the 13.4 percent rate reported last month. State and local government spending contracted at a 3.9 percent rate, the largest decline since the second quarter of 1981.
However, consumer spending, which is key to the economy`s recovery, held up well. Consumer spending increased at a 3.5 percent rate, rather than the 3.6 percent rate reported last month. Although it was revised down slightly, it was still more than double the 1.6 percent pace in the fourth quarter and the largest advance since the first quarter of 2007. Consumer spending, which normally accounts for 70 percent of U.S. economic activity, added 2.42 percentage points to GDP last quarter, the largest contribution since the first quarter of 2007.
Real final sales to domestic purchasers, considered a better measure of domestic demand, rose at 2.0 percent rate. Sales were previously estimated to have increased at a 2.2 percent following a 1.4 percent rise in the fourth quarter.
American industrial production rose by 0.8% over April ahead of March`s reading of 0.2%. The figure slightly beat out analysts` predictions of 0.6%. Moreover, capacity utilization in the US rose by 73.7% in April, posting a slightly higher figure than the month prior at 73.1%.
U.S. manufacturing output surged in April, up 1% for the second month in a row, on broad-based increases across most factory sectors, the Federal Reserve reported. Total output of the nation`s mines, utilities and factories increased 0.8% last month, as expected, despite a 1.3% decline in utility production in response to mild temperatures. See our complete economic calendar and consensus forecast. Industrial production was 5.2% higher than it was a year earlier. Manufacturing output has increased 6% in the past year after suffering through the worst downturn since the aftermath of World War II. However, output is still 9% lower than it was at the peak in December 2007. Manufacturing output has increased 1% or more in four of the past six months. Output rose a revised 1% in March.
The U.S. trade deficit rose to a 15-month record as rising oil prices pushed crude oil imports to the highest level since fall 2008, offsetting another strong gain in exports. The larger deficit is evidence of a rebounding U.S. economy. Analysts expect this year`s deficit to be up significantly from 2009, when it hit an eight-year low. But U.S. exports should keep growing and will only be marginally affected by the European debt crisis. The Commerce Department reported that the trade deficit rose 2.5 percent to $40.4 billion in March, compared to February.
On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in April, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the index increased 2.2 percent before seasonal adjustment. The index for energy decreased 1.4 percent in April and accounted for the seasonally adjusted decline in the all items index. The indexes for gasoline and natural gas both decreased significantly, outweighing increases in the indexes for fuel oil and electricity.
The food index increased 0.2 percent in April, while the index for all items less food and energy was unchanged. The index for meats, poultry, fish, and eggs rose sharply in April and accounted for the food increase; other grocery store food groups were mixed and the index for food away from home rose slightly. Within all items less food and energy, the indexes for recreation, airline fares, and medical care all rose in April. Offsetting these increases were declines in the indexes for apparel and for household furnishings and operations. The continuing stability of the index for all items less food and energy has resulted in an increase over the last 12 months of 0.9 percent, the smallest 12-month increase since January 1966.
The U.S. unemployment rate declined to 9.7 percent in May as nonfarm payroll employment increased by 431,000, the Labor Department reported. The newly added jobs in May mostly came from the hiring of 411,000 temporary census workers. Such hiring by the federal government peaked in May and will begin tailing off in June. However, many private employers remain wary of increasing their work forces. They added just 41,000 jobs, down from 218,000 in April and the fewest since January. The unemployment rate dropped 0.2 percentage points last month from April`s 9.9 percent. In May, the number of unemployed Americans decreased to 15 million from 15.3 million in April. Still, about 8 million jobs have been lost since the start of the recession in December 2007.

Economy of the European Union

GDP increased by 0.2% in both the euro area (EA16) and the European Union (EU27) during the first quarter of 2010, compared with the previous quarter, according to flash estimates published by Eurostat, the statistical office of the European Union. In the fourth quarter of 2009, growth rates were 0.0% and +0.1% respectively.
Compared with the same quarter of the previous year, seasonally adjusted GDP increased by 0.5% in the euro area and by 0.3% in the EU27 in the first quarter of 2010, after -2.2% and -2.3% respectively in the previous quarter.
In March 2010 compared with February 2010, seasonally adjusted industrial production grew by 1.3% in the EA16 and by 1.2% in the EU27. In February production increased by 0.7% and 0.5% respectively. In March 2010 compared with March 2009, industrial production increased by 6.9% in the euro area and by 6.0% in the EU27.
In March 2010 compared with February 2010, production of capital goods grew by 1.5% in the euro area and by 1.2% in the EU27. Non-durable consumer goods rose by 1.2% and 1.1% respectively. Durable consumer goods increased by 0.6% in the euro area and remained stable in the EU27. Intermediate goods gained 0.5% and 0.8% respectively. Production of energy decreased by 0.6% in the euro area and by 0.2% in the EU27.
Among the Member States for which data are available, industrial production rose in seventeen and fell in four. The highest increases were registered in Latvia (+9.9%), Portugal (+7.2%), Bulgaria (+4.2%) and Estonia (+3.8%), and the largest decreases in Ireland (-2.6%) and the Netherlands (-2.0%).
In March 2010 compared with March 2009, production of intermediate goods grew by 11.7% in the euro area and by 10.6% in the EU27. Production of energy increased by 4.9% and 2.9% respectively. Non-durable consumer goods rose by 4.6% in the euro area and by 3.2% in the EU27. Capital goods gained 4.5% and 4.9% respectively. Durable consumer goods grew by 2.2% in the euro area and by 3.8% in the EU27.
Among the Member States for which data are available, industrial production rose in eighteen and fell only in Greece (-4.5%), Denmark (-1.9%) and Bulgaria (-0.4%). The highest increases were registered in Estonia (+11.6%), Latvia (+11.4%), Poland (+11.2%) and Germany (+9.1%).
The first estimate for the EA16 trade balance with the rest of the world in March 2010 gave a 4.5 billion euro surplus, compared with +1.6 bn in March 2009. The February 20102 balance was +2.4 bn, compared with -1.2 bn in February 2009. In March 2010 compared with February 2010, seasonally adjusted exports rose by 7.5% and imports by 10.3%.
The first estimate for the March 2010 extra-EU27 trade balance was a 7.1 bn euro deficit, compared with -9.2 bn in March 2009. In February 20102 the balance was -6.5 bn, compared with -10.8 bn in February 2009. In March 2010 compared with February 2010, seasonally adjusted exports rose by 7.0% and imports by 10.4%.
Euro area annual inflation is expected to be 1.6% in May 2010 according to a flash estimate issued by Eurostat, the statistical office of the European Union. Euro area annual inflation was 1.5% in April 2010, up from 1.4% in March. A year earlier the rate was 0.6%. Monthly inflation was 0.5% in April 2010. EU27 annual inflation was 2.0% in April 2010, up from 1.9% in March. A year earlier the rate was 1.3%. Monthly inflation was 0.4% in April 2010.
The EA16 seasonally-adjusted unemployment rate was 10.1% in April 2010, compared with 10.0% in March. It was 9.2% in April 2009. The EU27 unemployment rate was 9.7% in April 2010, unchanged compared with March. It was 8.7% in April 2009. Eurostat estimates that 23.311 million men and women in the EU27, of whom 15.860 million were in the euro area, were unemployed in April 2010. Compared with March 2010, the number of persons unemployed increased by 25 000 in both the EU27 and the euro area. Compared with April 2009, unemployment went up by 2.400 million in the EU27 and by 1.275 million in the euro area. These figures are published by Eurostat, the statistical office of the European Union.

Economy of Japan

Japan`s real gross domestic product (GDP) increased by an annualized 4.9 percent in the January-March quarter this year, marking the fourth straight quarter of gain, the Cabinet Office said. The acceleration of Japan`s economic recovery during the first quarter of 2010 is the fastest pace of economic growth since the April-June quarter of 2009, the official figures revealed. The Cabinet Office also said the economy grew 1.2 percent compared with the fourth quarter of 2009.
The GDP rose 1.0 percent on quarter in the previous three months to December, which equates to a climb of 4.2 percent on an annualized basis. Nominal GDP grew for the second straight quarter, up 1.2 percent from the October-December quarter of 2009, or an annualized 4.9 percent.
Japan`s GDP in fiscal 2009 that ended March 31, 2010 contracted 1.9 percent from the previous year, however in the latest quarter, consumer spending, which accounts for 60 percent of Japanese GDP, increased a real 0.3 percent from the October-December period, marking the fourth straight quarter of increase.
Analysts said the pace of the economic growth is due to robust demand and increased sales in emerging countries, which in turn has encouraged increased investment by Japanese businesses. Corporate capital investment increased for the second quarter in a row, rising 1.0 percent, as exports climbed 6.9 percent.
Industrial production in Japan rose 1.3 percent during April, which was only about half of what economists expected. The April increase, reported by the Ministry of Economy, Trade and Industry, follows a 1.2 percent rise in March. Economists had expected a surge in April of 2.5 percent.
Industrial production growth was led by a 1.6 percent rise in shipments, while increased activity in general machinery and fabricated metals also added to the increase. The recent rise in Japan`s production has mainly been led by exports, with a rebound in domestic consumers yet to gain footing.
Japan`s trade account continued to improve in April, with the surplus and export growth beating expectations. Total exports for the month were 40.4% higher than a year earlier, totaling 5.89 trillion yen ($65.4 billion), beating a Reuters survey forecast of 38.9%. Imports grew 24.2 from the year earlier. The trade surplus for the month was 742.26 billion yen, narrowing from 948.9 billion yen in March, but above a Dow Jones Newswires forecast of 709.3 billion yen.
Consumer prices in Japan were down by 1.2 per cent in April from a year earlier, but there is evidence that the underlying pressure for deflation is continuing to weaken. The fall in prices was faster than the 1.1 per cent recorded in March but that was due to the Democratic Party of Japan administration`s abolition of high-school tuition fees. That caused the education component of the consumer price index to plunge by 13.2 per cent from the previous month.
Unemployment data showed a second consecutive monthly increase that took the unemployment rate to 5.1 per cent. That suggests that companies are not yet confident enough in the recovery to hire more staff.

Economy of Russia

During the January-April period of 2010 the gross domestic product in the Russian Federation grew 3.5% y-o-y, said the MED-compiled report on the socio-economic development in Russia. In addition, industrial output increased 6.9%, while retail sales rose 2%. According to data from the Ministry for Economic Development, a four-month surplus of foreign trade equaled $61.7 bln. During the period fixed asset investments dropped 2.3% on the year. In April GDP, seasonally adjusted, grew 0.7% and dropped 0.1% in March. The first-quarter GDP improved 2.9% y-o-y, which, as estimated by deputy MED head Andrei Klepach, means suspension of seasonally adjusted growth. In late April the Ministry for Economic Development told reporters it proposes raising the GDP growth forecast for 2010 from 3.5% to 4%. Higher crude prices than they are now, according to Klepach, will allow Russia to boost GDP by 4.5%.
Russian industrial output surged in April as the manufacture of cars, steel pipes and freight cars increased, signaling a rebound from the country`s worst recession may be picking up pace. Production at factories, mines and utilities rose an annual 10.4 percent after a 5.7 percent advance in March, the Federal Statistics Service in Moscow said in an e-mail today. Non-seasonally adjusted output shrank 3.4 percent from the previous month. The median estimate of 11 economists in a Bloomberg survey was for an annual increase of 7.3 percent.
Improving global sales, higher raw-material prices and accelerating domestic demand are prompting companies including OAO Chelyabinsk Zinc, Russia`s largest zinc producer, and carmaker OAO AvtoVAZ to boost output. It bodes well for our expectation that GDP growth will pick up again in the second quarter after the disappointingly weak first quarter, Anna Zadornova, a London-based economist at Goldman Sachs Group Inc., said by e-mail.
Output rose an annual 2.9 percent in the first quarter, below the median forecast of a Bloomberg survey, as the rapid industrial growth through March wasn`t translated into final consumption, Moscow-based Alfa Bank economists Natalia Orlova and Dmitry Dolgin wrote in a note. - 04.06.2010 20:16:53