World Economy Review - December 2010

Fitch Ratings says in its latest quarterly Global Economic Outlook (GEO) that despite significant financial market volatility, the global economic recovery is proceeding in line with its expectations, largely due to accommodative policy support in developed markets and continued emerging-market dynamism.
Fitch has marginally revised up its projections for world growth to 3.4% for 2010 (from 3.2%), 3.0% for 2011 (from 2.9%), and 3.3% for 2012 (from 3.0%) compared to the October edition of the GEO.
Accommodative policy measures extended by the US government have provided a boost to Fitch`s US growth outlook - these include the proposed extension of a number of tax measures, and the introduction of a second round of quantitative easing. Incoming data has also turned more positive (including strong GDP quarterly growth in Q310), reflecting strength in private consumption and corporate profitability. Consequently, Fitch has raised its US growth forecasts by 0.6% in both 2011 and 2012 to 3.2% and 3.3% respectively. Unemployment is now also expected by Fitch to moderate to 9.1% in 2011 and 8.7% in 2012. Despite the improved outlook, the agency`s view remains that the recovery will continue to be mild by historical standards in light of still weak labour and housing markets.
Persistently weak domestic demand continues to weigh on growth prospects in Japan in the medium term. Fitch has made only marginal revisions to its Japan forecasts, revising up expected 2010 GDP growth to 3.2% from 3% after Q310 growth came in at 1.1% against the agency`s expectation of 0.6%, while revising 2011 growth down to 1.5% from 1.6%.
Fitch has also marginally revised down its medium term forecast growth in the UK from 2.3% to 2.0% in 2011 and 2.6% to 2.4% in 2012, reflecting still weak consumer and business confidence in the context of heightened volatility in Europe and plans for fiscal consolidation at home. In the euro area, the agency has stated that although economic challenges facing the peripheral economies are significant, the severity of the market turmoil is not warranted by underlying fundamentals. Still, heightened volatility has eroded the growth outlook for a number of countries, resulting in a downward revision of some of Fitch`s growth forecasts in the area.
Conversely, the agency has revised up its outlook for Germany due to its view that secular growth is now emerging along with the expected cyclical rebound following the contraction in 2009. Overall, Fitch has marginally reduced its growth forecasts for the euro area to 1.7% in 2010 and 1.5% for 2011. For 2012, the agency has increased its growth outlook to 2.1%.
Emerging markets continue to outperform expectations and Fitch has raised its 2010 forecasts for China, Brazil, and India due to still buoyant economic growth. However, the agency has revised down its Russian forecast as the pace of recovery proved weak, partly as a result of the severe drought and heatwave in the summer. Fitch forecasts growth of 8.4% for these four countries (the BRICs) in 2010, and 7.4% for each of 2011 and 2012.
The December 2010 GEO outlines Fitch Rating`s baseline quarterly macroeconomic projections, with a special focus on the MAEs.

Economy of the United States

The U.S. economy grew at a slightly faster pace than previously estimated during the third quarter, as companies boosted inventories and imports slowed.
According to the Bureau of Economic Analysis` final estimate, seasonally adjusted real gross domestic product rose 2.6%, slightly higher than its previous estimate of 2.5%. Economists were expecting a higher revision to 2.7%, according to consensus estimates from Briefing.com. The U.S. economy expanded 3.7% in the first quarter, then sharply decelerated during the second, growing at a pace of 1.7%. That sparked fears of a double-dip recession. The acceleration of growth in the third quarter has helped abate those concerns.
Revisions in the final estimate included a faster than expected rise in business inventories. Private businesses increased inventories $121.4 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first.
Real final sales of domestic product, which excludes the impact of a build-up in inventories, increased 0.9% in the third quarter, the same increase as in the second.
Consumer spending, which accounts for 70% of GDP, rose 2.4%, less than previously estimated 2.6%. Exports jumped 6.8% in the third quarter, after rising 9.8% in the previous quarter, helped by a weaker dollar.
Inflation levels captured by the GDP report remained subdued. The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.7% in the third quarter, 0.1 percentage point less than the second estimate. The index increased 0.1% in the second quarter.
U.S. industrial production rose in November by the fastest pace in four months, the Federal Reserve reported. Output increased 0.4% in November after a revised 0.2% drop in the prior month. The growth in overall production at the nation`s factories, mines and utilities was stronger than expected: Economists surveyed by MarketWatch had forecast a 0.2% increase for November.
There were revisions to the data going back to June, but the net effect left the level of production about the same as was previously reported, the Fed said. In November, factory activity alone rose by 0.3%, matching the rate of growth seen during October. Utilities` output rebounded 1.9% in November after a sharp 3.7% decline in the prior month.
Capacity utilization for total industry increased by 0.3 of a percentage point, to 75.2% in November. This is the highest level since October 2008. Production of high-tech goods rose 0.8% in November, a turnaround after a 0.6% fall in October. Motor vehicle and auto-part production decreased 6% in November after rising 1.5% in the prior month. Excluding autos, November factory activity rose 0.7%, according to the Fed.
The U.S. trade deficit narrowed sharply in October, surprising economists and suggesting that the trade sector may make a positive contribution to growth in the fourth quarter for the first time since the final three months of 2009. The nation`s trade deficit shrank 13.2% in October to $38.7 billion from a revised $44.6 billion in September, the Commerce Department said. The narrowing of the deficit in October was a surprise to economists. Analysts surveyed by MarketWatch had expected the deficit to widen slightly to $44.3 billion from the initial September estimate of $44 billion. See MarketWatch calendar.
At a minimum, the October deficit means that the net impact from trade on growth will be much less negative that the whopping 3.5% drag on growth in the second quarter and the 1.8% drag in the third quarter.
In October, exports jumped to a new record level while imports decreased slightly. Exports rose 3.2% to $158.7 billion in October. This is the highest level since August 2008, just before the start of the global financial crisis and subsequent recession. Imports fell 0.5% to $197.4 billion in October.
Exports of goods alone rose 4.2% to $112.3 billion. The United States exported a record amount of agricultural products in October. Exports of autos, consumer goods and industrial supplies were also strong. Exports of civilian aircraft, often a key driver of export trends, actually declined in the month.
Meanwhile, imports of goods alone slipped 0.7% in October to $163.7 billion. Imports of petroleum were the lowest since November 2009. The value of U.S. crude-oil imports fell to $18.88 billion in October from $20.96 billion in September despite a rise in the price of a barrel of oil to $74.18 from $72.36 in the previous month. The quantity of crude imports fell to 254.5 million barrels from 289.7 million in September. Economists noted that oil prices increased sharply in October which should boost the value of petroleum imports next month. In real terms, which excludes prices, exports rose 3.3% in October. Imports rose fell 1.5%.
Consumer prices in the U.S. showed a modest increase in the month of November, according to a report released by the Labor Department, with the data suggesting that higher producer prices are not being passed on to consumers. The Labor Department said its consumer price index edged up by 0.1 percent in November following an unrevised 0.2 percent increase in October. Economists had been expecting consumer prices to increase by about 0.2 percent.
While the Labor Department`s report on producer prices released on Tuesday showed a 2.1 increase in energy prices, consumer energy prices rose by just 0.2 percent in November after surging up by 2.6 percent in the previous month. A 4.2 percent increase in prices for fuel oil was offset by a 5.7 percent drop in prices for natural gas. Gasoline prices rose by 0.7 percent in November after jumping by 4.6 percent in October.
Core consumer prices, which exclude food and energy prices, also rose by 0.1 percent in November after coming in unchanged in each of the three previous month. The modest increase in core prices came in line with economist estimates. Prices for new vehicles and used cars and trucks fell by 0.4 percent and 0.5 percent, respectively, while prices for transportation services rose by 0.5 percent. The prices in other categories showed even more modest changes.
Total consumer prices rose at an annual rate of 1.1 percent in November, reflecting a modest slowdown from the 1.2 percent rate of growth reported for October. Meanwhile, the annual rate of core consumer price growth edged up to 0.8 percent in November from 0.6 percent in the previous month.
The U.S. unemployment rate fell to 9.4% in December, the lowest level since May 2009, as the economy added 103,000 jobs in the final month of 2010, the Labor Department reported.
Payrolls for November and October were also revised higher by 70,000 jobs compared with prior government estimates. Economists surveyed by MarketWatch had forecast a 175,000 increase in jobs and were expecting the jobless rate to hold steady at 9.8%. Average hourly earnings in December rose 0.1% at $22.78. Economists polled by MarketWatch expected a 0.2% increase. Earnings have risen 1.8% over the past 12 months. The average workweek held steady at 34.3 hours.

Economy of the European Union

Euro area (EA16) GDP increased by 0.3% and EU27 GDP by 0.5% during the third quarter of 2010, compared with the previous quarter, according to second estimates from Eurostat, the statistical office of the European Union. In the second quarter of 2010, growth rates were +1.0% in both zones. In comparison with the same quarter of the previous year, seasonally adjusted GDP rose in the third quarter of 2010 by 1.9% in the euro area and by 2.2% in the EU27, after +2.0% in both zones in the second quarter.
In the third quarter of 2010, Sweden (+2.1%) recorded the highest growth rate compared with the previous quarter, followed by Luxembourg (+1.5%) and Poland (+1.3%).
In October 2010 compared with September 2010, seasonally adjusted industrial production1 rose by 0.7% in the euro area (EA16) and by 0.3% in the EU27. In September 2010 production fell by 0.7% and 0.3% respectively.
In October 2010 compared with October 2009, industrial production increased by 6.9% in the euro area and by 6.7% in the EU27.
In October 2010 compared with September 2010, production of capital goods grew by 1.8% in the euro area and by 0.9% in the EU27. Non-durable consumer goods rose by 0.4% and 0.3% respectively. Production of energy increased by 0.4% in the euro area, but fell by 0.2% in the EU27. Intermediate goods gained 0.2% in both zones. Durable consumer goods decreased by 0.1% in the euro area and remained stable in the EU27.
Among the Member States for which data are available, industrial production rose in ten, fell in eleven and remained unchanged in Romania and the United Kingdom. The highest increases were registered in Lithuania (+9.7%), Luxembourg (+6.4%), Estonia (+4.9%) and Greece (+3.6%), and the largest decreases in Ireland (-4.8%), Denmark (-2.8%), Malta (-2.5%) and Portugal (-2.4%).
In October 2010 compared with October 2009, production of capital goods grew by 12.1% in the euro area and by 11.5% in the EU27. Intermediate goods increased by 7.3% and 8.0% respectively. Non-durable consumer goods rose by 3.6% in the euro area and by 3.9% in the EU27. Durable consumer goods gained 1.9% and 2.7% respectively. Production of energy grew by 0.3% in the euro area, but fell by 0.4% in the EU27.
Among the Member States for which data are available, industrial production rose in nineteen and fell in four. The highest increases were registered in Estonia (+37.3%), Latvia (+21.1%), Lithuania (+17.1%), Slovakia (+13.3%), Germany (+12.1%) Finland (+11.8%) and Poland (+10.4%). The decreases were recorded in Malta (-5.2%), Greece (-4.6%), Portugal (-2.8%) and Spain (-1.9%).
The first estimate for the euro area (EA16) trade balance with the rest of the world in October 2010 gave a 5.2 bn euro surplus, compared with +4.8 bn in October 2009. The September 2010 balance was +2.6 bn, compared with +1.4 bn in September 2009. In October 2010 compared with September 2010, seasonally adjusted exports fell by 0.1%, and imports by 1.3%.
The first estimate for the October 2010 extra-EU27 trade balance was a 7.4 bn euro deficit, compared with -6.4 bn in October 2009. In September 2010 the balance was -11.8 bn, compared with -10.5 bn in September 2009. In October 2010 compared with September 2010, seasonally adjusted exports rose by 0.1%, while imports fell by 3.0%.
Euro area annual inflation is expected to be 2.2% in December 2010 according to a flash estimate issued by Eurostat, the statistical office of the European Union. Euro area annual inflation was 1.9% in November 2010, unchanged compared with October. A year earlier the rate was 0.5%. Monthly inflation was 0.1% in November 2010.
EU annual inflation was 2.3% in November 2010, unchanged compared with October. A year earlier the rate was 1.0%. Monthly inflation was 0.2% in November 2010.
The euro area (EA16) seasonally-adjusted unemployment rate was 10.1% in November 2010, unchanged compared with October. It was 9.9% in November 2009. The EU27 unemployment rate was 9.6% in November 2010, unchanged compared with October. It was 9.4% in November 2009.
Eurostat estimates that 23.248 million men and women in the EU27, of whom 15.924 million were in the euro area, were unemployed in November 2010. Compared with October, the number of persons unemployed decreased by 35 000 in the EU27 and by 39 000 in the euro area. Compared with November 2009, unemployment rose by 606 000 in the EU27 and by 347 000 in the euro area.

Economy of Japan and China

Japan raised the reading for its third-quarter economic growth Thursday, citing stronger-than-estimated business investment, but the revision isn`t enough to dispel the gloom that other recent indicators have been casting over the economy`s prospects.
Gross domestic product, the broadest gauge of economic activity, increased 4.5% on a price-adjusted, annualized basis during the quarter ended September, data released by the Cabinet Office showed. That compared with a 3.9% rise estimated about a month earlier. The revised figure exceeded growth during the same quarter in both the U.S. and Europe, and topped economists` expectations for an upwardly revised annualized increase of 4.1%.
The Japanese Industrial Production rose by 1.0% in November 2010 after falling for four consecutive months and slightly above expectations of a 0.9% fall and following a revised 2.0% decrease in October. Over the year to November, the Industrial Production rose by 5.8%, above expectations of a 5.5% increase and following a 4.3% increase through the year to October 2010. November`s exports grew by 9.1% from the year earlier, while imports surged by 14.2%, and resulting in a trade surplus of 162.8 billion yen (US$1.943bn) from 821.9bn yen surplus in October. Japan`s exports accelerated for the first time in nine months in November but the trade surplus contracted as growth in imports outpaced the gains in the overseas shipments, the government said. November`s exports grew by 9.1% from the year earlier, while imports surged by 14.2%, and resulting in a trade surplus of 162.8 billion yen (US$1.943bn) from 821.9bn yen surplus in October. Economists had forecast a 10.8% gain for November exports and a trade surplus of 446 billion yen.
Japan`s unemployment rate remained unchanged in November at a seasonally adjusted 5.1 percent, according to data released by the Internal Affairs and Communications Ministry Tuesday. The data was in line with economists` forecasts of 5.1 percent. The number of jobless people stood at 3.18 million, a reduction of 130,000 jobless people from a year earlier, showed the preliminary data.
China`s central bank Governor, Zhou Xiaochuan, has said that the country`s 2010 economic growth is expected to be about 10 percent. Xinhua quoted Zhou as saying that he was not quite confident that China`s economy has returned to normal because external conditions continue to exert an important impact on the nation`s economy.
However, he said that China should be wise in handling its macroeconomic policies and needs to conduct counter-cyclical adjustments against "over-expansion." Zhou further assured that the Government would promote a market-oriented reform of the interest rate regime in a “gradual and unwavering way”.
Zhou first delivered his speech on December 15 when policymakers were intensifying their efforts to curb property prices and dampen inflation, as the nation`s consumer price index hit a 28-month high of 5.1 percent in November last year.

Economy of Russia

Russia`s GDP grew 4.2% in November 2010 compared with November 2009, Economic Development Minister Elvira Nabiullina said. GDP was 3.7% higher in January-November 2010 than in the same period last year. Seasonally adjusted GDP growth was 0.5% in November, following growth of 0.9% in October and 0.3% in September.
Russia`s industrial production grew 6.7% year-on-year in November, the Federal Statistics Service said Wednesday. It followed 6.6% increase in October. On a monthly basis, production was up 0.1% in November, much slower than the 4.2% rise seen in the preceding month. Manufacturing output fell 0.6% month-on-month, but rose 10.1% on an annual basis. In October, production was up 0.5% on a monthly basis and 9.9% over a year earlier.
Separately, the statistical office said Russia`s producer price index, or PPI, rose 4.4% month-on-month in November. Compared to the previous year, the PPI jumped 16%.