World Economy Review - October 2012

Plagued by uncertainty and fresh setbacks, the world economy has weakened further and will grow more slowly over the next year, the International Monetary Fund says in its latest forecast. Advanced economies are risking recession, the international lending organization said in a quarterly update of its World Economic Outlook, and the malaise is spreading to more dynamic emerging economies such as China.
The IMF forecasts that the world economy will expand 3.3 percent this year, down from the estimate of 3.5 percent growth it issued in July. Its forecast for growth in 2013 is 3.6 percent, down from 3.9 percent three months ago and 4.1 percent in April.
Underpinning that bleaker scenario are the assumptions that Europe will continue to ease monetary policy and that the U.S. will avert a crushing blow to growth by fending off a so-called "fiscal cliff" that could result from a failure to reach a compromise on its budget law and tax cuts.
Conditions could worsen if the United States doesn`t deal with its budget crisis soon, the IMF said. "Downside risks have increased and are considerable," the fund said. It said its forecasts are based "on critical policy action in the euro area and the United States, and it is very difficult to estimate the probability that this action will materialize."
The IMF has urged the U.S. to raise the ceiling on the level of debt the government can issue, which is capped by law. In August 2011, a battle between the Obama administration and Congress over raising the limit wasn`t resolved until the U.S. almost defaulted on its debt.
Global efforts to ease credit and increase the amount of money available for lending are helping, but appear to be yielding diminishing returns, as are fiscal stimulus policies, the IMF warned. "Because uncertainty is high, confidence is low, and financial sectors are weak, the significant fiscal achievements have been accompanied by disappointing growth or recessions," it said. Among other things, it says governments need to do more to relieve the burden of household debt that is constraining spending power and thus crippling demand.
While large corporations pay record low rates for credit, households and small companies struggle to obtain bank loans, it said. Fortifying domestic demand is all the more crucial given weakening trade trends. The IMF forecasts that growth in world trade volume will slump to 3.2 percent this year from 5.8 percent last year and 12.6 percent in 2010.
"Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses," the IMF`s chief economist, Olivier Blanchard, said in a statement.
But he said a more optimistic scenario was possible if the right measures are taken, such as fixing banks in European countries and reducing the uncertainty about U.S. policies. "The case for an upside scenario is stronger than it has been," he said at the opening of the IMF meeting in Tokyo.
He noted some positive signs in the U.S. economy such as a turnaround in the housing market. The IMF also sees the slowdown in China as part of a shift from the past double-digit growth to a rate that is "sustainable," a process he described as "a soft landing." And the slowdown in developed nations had pushed down exports, the key factor behind the slowdown in China, Blanchard and other IMF officials said.
The IMF raised the U.S. growth forecast slightly, to 2.2 percent this year from 2 percent in July. For 2013, though, it expects U.S. growth of 2.1 percent, down from 2.3 percent. Among the 17 nations that use the euro, low growth in the major "core economies," such as Germany and France, will be offset by outright contractions in the smaller economies, leading real gross domestic product to fall by about 0.4 percent in 2012, the IMF said. It forecasts growth in the euro area will stay flat in the first half of 2013 and tick up to about 1 percent in the second half of the year, the IMF said.
The IMF said it expects growth in Japan to hit 2.2 percent this year but to slacken further as reconstruction from the March 2011 disasters winds down, falling to 1.2 percent in 2013. Japan, whose population is both shrinking and aging faster than elsewhere, is confronting problems of high debt and stagnation, it said.
As usual, the bright spots are developing economies that were less affected by the global financial crisis, where rising employment and strong demand will help support growth, the IMF said. China`s economy will likely expand 7.8 percent this year, down from July`s 8 percent forecast, though a pickup in construction projects is expected to spur growth late in the year. India`s economy will grow 4.9 percent, down from 6.1 percent. And Brazil`s growth will be only 1.5 percent, compared to 2.5 percent.
The IMF advised policymakers to devise stronger medium-term fiscal and structural reforms to shore up confidence in the growth potential of the advanced economies. Only then, will investor confidence in markets and public debt be restored. "Unless governments spell out how they intend to effect the necessary adjustment over the medium term, a cloud of uncertainty will continue to hang over the international economy, with downside risks for output and employment in the short term," it said.

Economy of the United States

US economic growth picked up in the third quarter as a late burst in consumer spending offset the first cutbacks in investment in more than a year by cautious businesses. The stronger pace of expansion, however, fell short of what is needed to make much of a dent in unemployment, and offers little cheer for the White House ahead of the closely contested November 6 presidential election.
Gross domestic product expanded at a 2 percent annual rate, the Commerce Department said, accelerating from the second quarter`s 1.3 percent pace. A pace in excess of 2.5 percent is needed over several quarters to make substantial headway cutting the jobless rate.
Economists polled by Reuters had expected a 1.9 percent growth pace in the third quarter. The report comes a little more than a week before the election in which President Barack Obama is trying to fend off Republican challenger Mitt Romney.
Since climbing out of the 2007-09 recession, the economy has faced a series of headwinds from high gasoline prices to the debt turmoil in Europe and, lately, fears of U.S. government austerity. It has struggled to exceed a 2 percent growth pace and remains about 4.5 million jobs short of where it stood when the downturn started. Consumers, however, largely shrugged off the impending sharp cuts in government spending and higher taxes, which are due at the start of the year absent congressional action. Indeed, they went on a bit of a shopping spree as the quarter wound down, buying a range of goods - including automobiles and Apple Inc`s iPhone 5. Consumer spending, which accounts for about 70 percent of U.S. economic activity, grew at a 2 percent rate after increasing 1.5 percent in the prior period.
American manufacturers churned out more appliances, clothing and construction supplies in September, indicating a mainstay of the early part of the economic expansion is regaining its footing. Output at factories, mines and utilities rose 0.4 percent, beating the median forecast of economists surveyed by Bloomberg, after a 1.4 percent drop in August that was the biggest since March 2009, according to data from the Federal Reserve issued in Washington. Other reports showed there was little inflation outside of fuel costs and homebuilder confidence climbed to a six-year high. The biggest back-to-back gain in retail sales in almost two years points to a pickup in consumer spending that may help offset a pullback in business investment. At the same time, a global slowdown that is hurting exports represents a hurdle for manufacturing.
The median estimate in a Bloomberg survey of 85 economists called for production to rise 0.2 percent. Projections ranged from a drop of 1 percent to an increase of 0.7 percent. Industrial output grew 8.1 percent in the first 12 months of the recovery than began in June 2009, and expanded 2.8 percent in the year to September.
Manufacturing, which makes up 75 percent of total production, climbed 0.2 percent last month after falling 0.9 percent in August, the report showed. Factories account for about 12 percent of the economy. Production of motor vehicles and parts decreased 2.5 percent after a 5.1 percent drop a month earlier, according to the Fed`s data. The decrease is at odds with gains in sales and may indicate automakers will boost output in the last three months of the year.
Cars and light trucks sold at a 14.9 million annual pace in September, the most since March 2008, according to Ward`s Automotive Group. Chrysler Group LLC and General Motors Co. reported gains. Excluding autos and parts, manufacturing production climbed 0.4 percent after decreasing 0.6 percent in August.
Mining production, which includes oil drilling, increased 0.9 percent in September after falling 1.6 percent the prior month, according to the report. Utility output advanced 1.5 percent after a 4.3 percent drop in August. The figures also showed output of business equipment rebounded 0.8 percent last month after falling 0.9 percent in August. Machinery output climbed 0.4 percent after falling 0.6 percent, and construction supplies gained 1.3 percent.
The U.S. trade deficit widened in August from July because exports fell to the lowest level in six months. The wider deficit likely dragged on already-weak economic growth. The deficit grew 4.1 percent to $44.2 billion in August, the biggest gap since May, the Commerce Department said. Exports dropped 1 percent to $181.3 billion. Demand for American-made cars and farm goods declined. Imports edged down a slight 0.1 percent to $225.5 billion. Purchases of foreign-made autos, aircraft and heavy machinery fell. The cost of oil imports rose sharply.
A wider trade deficit acts as a drag on growth. It typically means the U.S. is earning less on overseas sales of American-produced goods while spending more on foreign products. Most economists don`t expect the economy to grow much more than 2 percent for the rest of the year. The trade deficit is running at an annual rate of $561.6 billion, up slightly from last year`s $559.9 billion imbalance.
U.S. consumer prices rose steadily again last month as gasoline costs jumped, possibly stoking concerns about inflation despite tepid economic growth. The index of consumer prices grew 0.6% in September, matching the prior month`s gain, the Labor Department said. The August gain was the largest one-month increase since 2009. As with the prior month, September`s gain was driven largely by energy prices. Gasoline prices rose 7.0%, helping push overall energy prices up 4.5%. But when removing volatile food and energy costs, consumer prices rose a mild 0.1% last month. Economists surveyed by Dow Jones Newswires had forecast that overall prices would climb 0.5% and so-called core prices would rise 0.2% in September.
Gasoline prices had eased during much of the spring and summer, but jumped in August and September. Signs of tension in the Middle East and North Africa threaten to push energy costs, and overall inflation, up further. Also, some critics of the Fed said the central bank`s latest round of bond buying could also stoke inflation. The central bank is buying mortgage-backed securities in an effort to push down interest rates and increase employment. However, Federal Reserve Bank of New York President William Dudley said that the policy creates "no conflict" with Fed`s mandate to control price increases because inflation should continue to run right around the 2.0% target level, as it has for some time.
The Labor data showed consumer price gains were on that mark, up 2.0% on a year-over-year basis in September. Core prices increased by the same amount over the 12-month span. Food prices rose just 0.1% in September from the prior month, as higher prices for nonalcoholic beverages were largely offset by lower prices for meats, fish and eggs.
Outside of energy, most price gains were mild. The index for shelter rose 0.2% and the cost of medical care services rose 0.4%. The price for new vehicles in September fell 0.1% and used car and truck prices dropped 1.4% last month, the largest decline since February 2009. The consumer price index measures what Americans pay for everything from groceries to hospital stays. The government uses the index to determine benefit increases.

Economy of the European Union

At the end of the second quarter of 2012, the government debt to GDP ratio in the euro area (EA17) stood at 90.0%, compared with 88.2% at the end of the first quarter of 2012. In the EU273 the ratio increased from 83.5% to 84.9%. Compared with the second quarter of 2011, the government debt to GDP ratio rose in both the euro area (from 87.1% to 90.0%) and the EU27 (from 81.4% to 84.9%). These data are released by Eurostat, the statistical office of the European Union.
At the end of the second quarter of 2012, securities other than shares accounted for 78.6% of euro area and for 80.1% of EU27 general government debt. Loans made up 18.6% of euro area and 16.1% of EU27 government debt. Currency and deposits represented 2.8% of euro area and 3.7% of EU27 government debt.
Due to the involvement of EU governments in financial assistance to certain Member States, and in order to obtain a more complete picture of the evolution of government debt, quarterly data on intergovernmental lending (IGL) is also published. The share of IGL in GDP at the end of the second quarter of 2012 amounts to 1.6% for the euro area and to 1.2% for EU27.
The highest ratios of government debt to GDP at the end of the second quarter of 2012 were recorded in Greece (150.3%), Italy (126.1%), Portugal (117.5%) and Ireland (111.5%), and the lowest in Estonia (7.3%), Bulgaria (16.5%) and Luxembourg (20.9%).
In August 2012 compared with July 2012, seasonally adjusted industrial production grew by 0.6% in the euro area (EA17) and by 0.3% in the EU27, according to estimates released by Eurostat. In July production increased by 0.6% and 1.0% respectively. In August 2012 compared with August 2011, industrial production dropped by 2.9% in the euro area and by 1.8% in the EU27.
In August 2012 compared with July 2012, production of durable consumer goods increased by 3.9% in the euro area and by 2.4% in the EU27. Non-durable consumer goods grew by 1.3% and 1.0% respectively. Production of energy rose by 0.9% in the euro area and by 0.3% in the EU27. Capital goods gained 0.7% in the euro area and remained stable in the EU27. Intermediate goods remained stable in the euro area and fell by 0.1% in the EU27.
Among the Member States for which data are available, industrial production rose in thirteen, fell in eight and remained stable in Ireland. The highest increases were registered in Portugal (+6.8%), Lithuania (+4.6%), Slovenia (+4.0%) and Greece (+2.5%), and the largest decreases in the Czech Republic (-2.9%), Denmark (-2.8%), Romania and Finland (both -1.1%).
In August 2012 compared with August 2011, production of intermediate goods declined by 4.9% in the euro area and by 3.8% in the EU27. Durable consumer goods fell by 4.9% and 2.9% respectively. Capital goods decreased by 1.9% in the euro area and by 0.8% in the EU27. Non-durable consumer goods dropped by 1.4% and 0.8% respectively. Production of energy remained stable in the euro area and fell by 0.5% in the EU27.
Among the Member States for which data are available, industrial production fell in eleven and rose in eleven. The largest decreases were registered in Italy (-5.2%), Spain (-3.2%) and the Czech Republic (-3.1%), and the highest increases in Slovakia (+17.0%), Lithuania (+11.1%) and Latvia (+8.1%).
The first estimate for the euro area (EA17) trade in goods balance with the rest of the world in August 2012 gave a 6.6 bn euro surplus, compared with -5.7 bn in August 2011. The July 20122 balance was +14.7 bn, compared with +2.1 bn in July 2011. In August 2012 compared with July 2012, seasonally adjusted exports rose by 3.7% and imports by 2.1%. These data are released by Eurostat.
The first estimate for the August 2012 extra-EU27 trade in goods balance was a 12.6 bn euro deficit, compared with -22.1 bn in August 2011. The July 20122 balance was +2.7 bn, compared with -10.9 bn in July 2011. In August 2012 compared with July 2012, seasonally adjusted exports increased by 2.9% and imports by 3.3%.
Euro area annual inflation is expected to be 2.5% in October 2012, down from 2.6% in September, according to a flash estimate from Eurostat. Looking at the main components of euro area inflation, energy (7.8% compared with 9.1% in September) is expected to have the highest annual rate in October, followed by food, alcohol & tobacco (3.2% compared with 2.9%), services (1.8% compared with 1.7%) and non-energy industrial goods (1.1% compared with 1.2%).
Euro area annual inflation was 2.6% in September 2012, unchanged compared with August. A year earlier the rate was 3.0%. Monthly inflation was 0.7% in September 2012. EU3 annual inflation was 2.7% in September 2012, unchanged compared with August. A year earlier the rate was 3.3%. Monthly inflation was 0.6% in September 2012.
The euro area (EA17) seasonally-adjusted unemployment rate was 11.6% in September 2012, up from 11.5% in August. The EU27 unemployment rate was 10.6% in September 2012, stable compared with August. In both zones, rates have risen significantly compared with September 2011, when they were 10.3% and 9.8% respectively. These figures are published by Eurostat.
Eurostat estimates that 25.751 million men and women in the EU27, of whom 18.490 million were in the euro area, were unemployed in September 2012. Compared with August 2012, the number of persons unemployed increased by 169 000 in the EU27 and by 146 000 in the euro area. Compared with September 2011, unemployment rose by 2.145 million in the EU27 and by 2.174 million in the euro area.
Among the Member States, the lowest unemployment rates were recorded in Austria (4.4%), Luxembourg (5.2%), Germany and the Netherlands (both 5.4%), and the highest in Spain (25.8%) and Greece (25.1% in July 2012).
Compared with a year ago, the unemployment rate increased in twenty Member States and fell in seven. The largest decreases were observed in Lithuania (14.7% to 12.9%), Estonia (11.4% to 10.0% between August 2011 and August 2012), and Latvia (17.0% to 15.9% between the second quarters of 2011 and 2012). The highest increases were registered in Greece (17.8% to 25.1% between July 2011 and July 2012), Cyprus (8.5% to 12.2%), Spain (22.4% to 25.8%) and Portugal (13.1% to 15.7%).
Between September 2011 and September 2012, the unemployment rate for males increased from 10.1% to 11.5% in the euro area and from 9.7% to 10.6% in the EU27. The female unemployment rate rose from 10.6% to 11.8% in the euro area and from 9.9% to 10.7% in the EU27. In September 2012, 5.520 million young persons (under 25) were unemployed in the EU27, of whom 3.493 million were in the euro area. Compared with September 2011, youth unemployment rose by 164 000 in the EU27 and by 275 000 in the euro area. In September 2012, the youth unemployment rate was 22.8% in the EU27 and 23.3% in the euro area, compared with 21.7% and 21.0% respectively in September 2011. In September 2012 the lowest rates were observed in Germany (8.0%), the Netherlands (9.7%) and Austria (9.9%), and the highest in Greece (55.6% in July 2012) and Spain (54.2%).

Economy of Japan

Industrial output in Japan fell a seasonally adjusted 4.1 percent on month in September, the Ministry of Economy, Trade and Industry said in preliminary reading. That missed expectations for a decline of 3.1 percent following the 1.6 percent decline in August. On a yearly basis, industrial production plummeted 8.1 percent - also missing forecasts for a fall of 7.1 percent after shedding 4.6 percent in the previous month. Upon the release of the data, the METI downgraded its assessment of industrial production, saying: "Industrial production is on a downward trend." Before the downgrade, the METI had said industrial production appears to be weakened.
Industries that contributed to the decline in September include transport equipment, general machinery, and iron and steel. Commodities that contributed to the decline include passenger cars and control parts.
According to the survey of production forecast in manufacturing, production is expected to decrease 1.5 percent in October and increase 1.6 percent in November. Industries that contribute to the fall in October include electronics equipment, iron and steel and other material. Industries that mark the increase in November include electronic parts, electrical machinery and chemicals.
Shipments were down 4.4 percent on month in September, reversing the gains in August. They were also down 8.5 percent on year, thanks to a decline in transport equipment, general machinery and electrical machinery.
Inventories were down 0.9 percent on month, falling for the second straight month. They were also down 4.8 percent on year thanks to electronics equipment, electronics parts and precision instruments. The inventory ratio was up 4.2 percent on month in September, after falling in the previous month. It was also up 11.0 percent on year.
Japan`s trade deficit widened in September as exports plunged 10.3 percent from a year earlier, weighed down by Europe`s debt crisis and a surge in antagonisms with China that have damaged close economic ties. The deficit for the month was 558.6 billion yen ($7.2 billion), the Finance Ministry said, higher than the forecasts of many analysts and bigger than a deficit of about $3.7 billion a year earlier. The deficit in August was $9.6 billion.
Japanese consumer prices deflated in September, compared to a year earlier, though the drop was less than expected. The core consumer price index, which excludes volatile fresh-food prices, slipped 0.1% from September 2011, the Finance Ministry said. The result compared to a consensus expectations for a 0.2% drop, according to a Dow Jones Newswires survey of economists. Losses for prices of furniture, household utensils, and culture and recreation led the decline. Compared to August, however, core CPI rose 0.2%. Overall CPI fell 0.3% from a year earlier but rose 0.1% month-on-month.
The unemployment rate in Japan was a seasonally adjusted 4.2 percent in September, the Ministry of Internal Affairs and Communications said- in line with expectations and unchanged from the previous month. The participation rate was 59.3 percent, also matching expectations and easing from 59.4 percent in August.
The number of employed persons in September was 63.08 million, down 130,000 or 0.2 percent from the previous year. The number of unemployed persons in September was 2.75 million, down 20,000 or 0.7 percent from the previous year.

Economy of Russia

Russian GDP growth stood at 2.5% year-on-year in September and at 0.4% on the previous month, Deputy Economy Minister Andrey Klepach said. The growth was mostly fueled by burgeoning domestic demand, which was up 4.4% year on year, while salaries were up 6.6%. Exports were mostly supported by the oil and gas sector, while imports stagnated on a monthly basis. The September figure represents a slowdown from the 2.8 percent growth seen in August.
Russian GDP growth stood at 3.8% for the first nine months of the year, while full-year growth is forecast at 3.5%. In the third quarter, Russia`s economy expanded by an estimated 2.8 percent year-on-year.
Russia`s industrial production rose by 2% in September compared with the same month the previous year, and declined 1% compared with the month earlier, the Federal Statistics Service said. The data came below expectations of a 2.6% year-on-year increase, according to an Interfax poll. In the first nine months of the year, Russia`s industrial output grew 2.9% in annual terms. The highest annual growth rate was registered in February at 6.5%, the lowest was in April at 1.3%.