World Economy Review - January 2014

The International Monetary Fund raised its global economic growth outlook for the year, with expansion to be fueled by U.S., euro-zone and Japanese growth, though deflation and financial-sector risks threaten a full recovery. "The recovery is strengthening," though it is still weak and uneven, IMF Chief Economist Olivier Blanchard said as the fund released its latest World Economic Outlook report.
The IMF raised its 2014 global growth forecast to 3.7%, up 0.1 percentage point from its last outlook in October. Mr. Blanchard said the financial system is slowly healing, uncertainty among investors is abating and the drag from budget belt-tightening around the globe is decreasing.
Advanced economies are fueling the world`s economic expansion, unlike the years following the 2008 financial crisis when emerging markets were the primary drivers of global growth.
The U.S. leads the recovery. The IMF raised its forecast for U.S. economic growth this year by 0.2 percentage point to 2.8%, though it downgraded its 2015 outlook by 0.4 percentage point to 3% amid the fights in Congress over the federal balance sheet and spending.
The fund said the Federal Reserve`s plans to exit its easy-money policies are broadly appropriate, and it expects an increase in the Fed`s policy rate in 2015.
For Europe, however, officials warned that rising risks of falling prices threaten to stall the anemic recovery. Although the fund raised its growth forecast for the U.K., Germany and Spain, Mr. Blanchard said, "Southern Europe continues to be the more worrisome part of the world economy."
Exports are strengthening in the Southern euro-zone countries. But demand is slack, with weakness among banks and businesses. More budget tightening is needed as well, the IMF said, and unemployment remains at dangerously high levels, especially among youth.
To avoid a deflationary spiral that could reignite the euro zone`s crisis, the IMF said the European Central Bank can do more to stimulate growth in the 18-member currency union. The ECB should be prepared to act "if the next few numbers on inflation turn out to be weaker than they expect," Mr. Blanchard said, through measures including cutting interest rates or targeted injection of cheap cash for lending to small and midsize companies.
Estimating a 10%-20% risk of deflation, "it`s important for the central bank to commit to do anything needed to maintain inflation, thereby anchoring expectations, and to sustain demand," Mr. Blanchard said. Also, the ECB`s bank balance sheet review is likely the area`s most important short-term task, the IMF said.
For Japan, the IMF raised its growth forecast for the year by 0.4 percentage point to 1.7%. It said Japan`s government will continue to face the challenge of trimming its budget enough to reassure investors, while not slowing the recovery.
The fund also raised the growth forecast for the world`s No. 2 economy, China, by 0.3 percentage point to 7.5%. Mr. Blanchard said, however, that China`s need to contain escalating risks in the financial sector without excessively slowing growth will be a major challenge "and a delicate balancing act."
The IMF downgraded its outlook for many other major emerging-market economies. Most notably, it cut Russia`s growth forecast for the year by 1 percentage point to 2% and Brazil`s growth outlook by 0.2 percentage point to 2.3%.
Stronger growth in advanced economies should boost demand for emerging-market exports enough to offset an expected rise in borrowing costs as the U.S. Fed begins to wind down its easy-money policies this year, the fund said.
Still, Mr. Blanchard said that while some of the rise in interest rates has already been factored into investors` outlook for emerging markets, "we can expect complex capital movements across countries for some time to come."

Economy of the United States

The Commerce Department said gross domestic product increased by 3.2 percent in the fourth quarter compared to the 4.1 percent growth seen in the third quarter. The GDP growth came in line with the expectations of most economists. The report said the growth in consumer spending accelerated to 3.3 percent in the fourth quarter from 2.0 percent in the third quarter. The increase reflected the fastest growth since the fourth quarter of 2010.
A pick-up in export growth to 11.4 percent in the fourth quarter from 3.9 percent in the third quarter was also a big positive. The Commerce Department said the fourth quarter GDP growth also reflected positive contributions from non-residential fixed investment, private inventory investment, and state and local government spending. At the same time, negative contributions from federal government spending and residential fixed investment limited the upside. Imports, which are a subtraction in the calculation of GDP, also increased.
U.S. industrial output rose at its fastest clip in 3-1/2 years in the fourth quarter as factory activity closed out the year on a strong note, a sign of the economy`s brightening prospects. Manufacturing production rose 0.3 percent in December after an out-sized 1.0 percent increase the prior month, a Federal Reserve report showed.
That helped push overall output at the nation`s factories, mines and utilities up 0.3 percent last month. Economists polled by Reuters had expected factory output to rise 0.3 percent, while the gain in overall industrial production matched forecasts. For the fourth quarter as a whole, industrial production advanced at a 6.8 percent pace, the largest quarterly increase since the second quarter of 2010.
The U.S. trade deficit fell to a four-year low in November as exports hit another record and oil imports continued to decline, boosting estimates for last quarter`s economic growth.
The trade gap fell 12.9% to $34.3 billion, a significantly smaller total than economists forecast and lowest since October 2009. A narrower gap lifts U.S. economic growth as American manufacturers and services companies sell more products overseas and U.S. consumers buy relatively fewer foreign goods and services.
In November, exports rose nearly 1% to an all-time high of $194.9 billion on stronger overseas sales of civilian aircraft and engines; industrial supplies, including chemicals and crude oil; and autos.
Imports dropped 1.5% to $229.1 billion as oil imports continued to fall. Oil imports fell 10.6% in November to $21.4 billion and were down 13.7% the first 11 months of last year vs. the same period in 2013.
U.S. consumer prices picked up slightly last month, through overall inflation remains weak as the Federal Reserve winds down its bond-buying program. The consumer-price index, which measures how much Americans pay for everything from snack foods to rent, rose a seasonally adjusted 0.3% in December from the prior month, the Labor Department said. Core prices, which strip out volatile food and energy costs, were up a mild 0.1%.
Compared with a year earlier, overall consumer prices increased 1.5%. The Fed targets an annual inflation rate of 2%. Core prices increased 1.7% in 2013, down from a 1.9% increase in 2012.

Economy of the European Union

In November 2013 compared with October 2013, seasonally adjusted industrial production grew by 1.8% in the euro area (EA17) and by 1.5% in the EU28, according to estimates from Eurostat, the statistical office of the European Union. In October industrial production decreased by 0.8% and 0.5% respectively. In November 2013 compared with November 2012, industrial production increased by 3.0% in both the euro area and the EU28.
In November 2013 compared with October 2013, production of capital goods grew by 3.0% in the euro area and by 2.6% in the EU28. Durable consumer goods increased by 2.2% and 1.5% respectively. Energy rose by 1.8% in the euro area and by 1.2% in the EU28. Non-durable consumer goods gained 1.4% and 0.9% respectively. Intermediate goods grew by 1.0% in the euro area and by 0.8% in the EU28. Among the Member States for which data are available, industrial production rose in sixteen, remained stable in three and fell in six. The highest increases were registered in Ireland (+11.7%), Sweden (+6.4%), Malta (+3.8%), Croatia (+3.0%), the Netherlands (+2.5%) and Germany (+2.4%), and the largest decreases in Lithuania (-3.5%), Denmark (-3.0%) and Greece (-2.2%).
In November 2013 compared with November 2012, production of capital goods rose by 4.4% in the euro area and by 4.7% in the EU28. Intermediate goods grew by 3.3% and 3.5% respectively. Non-durable consumer goods increased by 3.1% in the euro area and by 2.7% in the EU28. Energy decreased by 0.5% and 1.4% respectively. Durable consumer goods fell by 0.8% in the euro area and by 0.3% in the EU28. Among the Member States for which data are available, industrial production rose in nineteen and fell in six. The highest increases were registered in Ireland (+13.2%), Slovakia (+12.7%), the Czech Republic (+8.8%) and Romania (+8.7%), and the largest decreases in Malta (-8.6%) and Greece (-6.2%).
The first estimate for the euro area (EA17) trade in goods balance with the rest of the world in November 2013 gave a 17.1 billion euro surplus, compared with +12.5 bn in November 2012. The October 2013 balance was +16.8 bn, compared with +9.6 bn in October 2012. In November 2013 compared with October 2013, seasonally adjusted exports fell by 0.2% and imports by 1.3%. These data are released by Eurostat. The first estimate for the November 2013 extra-EU28 trade balance was a 3.4 bn euro surplus, compared with -3.0 bn in November 2012. In October 2013 the balance was +4.8 bn, compared with -10.2 bn in October 2012. In November 2013 compared with October 2013, seasonally adjusted exports fell by 0.6% and imports by 1.4%.
Euro area annual inflation is expected to be 0.7% in January 2014, down from 0.8% in December 2013, according to a flash estimate from Eurostat.
Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in January (1.7%, compared with 1.8% in December), followed by services (1.1%, compared with 1.0% in December), non-energy industrial goods (0.2%, compared with 0.3% in December) and energy (-1.2%, compared with 0.0% in December).
The euro area (EA17) seasonally-adjusted unemployment rate was 12.0% in December 2013, stable since October. It was 11.9% in December 2012. The EU28 unemployment rate was 10.7% in December 2013, down from 10.8% in November. It was 10.8% in December 2012. These figures are published by Eurostat.
Eurostat estimates that 26.200 million men and women in the EU28, of whom 19.010 million were in the euro area, were unemployed in December 2013. Compared with November 2013, the number of persons unemployed decreased by 162 000 in the EU28 and by 129 000 in the euro area. Compared with December 2012, unemployment decreased by 173 000 in the EU28, but increased by 130 000 in the euro area.

Economy of Japan

Japan`s industrial production rose a seasonally adjusted 1.1 per cent in December from the previous month for the first increase in two months, the Government said. The figure, which was below the 1.3-per-cent rise predicted by analysts surveyed by the Nikkei business daily, followed a 0.1-per-cent fall in December.
The Ministry of Economy, Trade and Industry maintained its basic assessment, saying “industrial production continues to show an upward movement”. The index of production at factories and mines stood at 100.3 against a baseline of 100 for 2005, the Ministry said.
General-purpose, production and business-oriented machinery, fabricated metals, and electronics devices industries contributed to the bulk of the increase in December, it said. Manufacturers surveyed by the Ministry expected industrial production to jump 6.3 per cent in January and edge up 0.3 per cent in February.
Japan`s annual trade gap was a record 11.47 trillion yen ($112 billion), about two-thirds larger than 2012`s 6.94 trillion yen shortfall. It was the third annual deficit in a row, the longest run in the data that goes back to 1979. Ministry of Finance data showed exports rose 9.5% in 2013, the first gain in three years, but export volumes fell 1.5%, a third consecutive fall.
Japan`s December trade deficit hit 1.3 trillion yen ($12.7 billion), up 101.6 percent year-on-year, pushing the deficits for all of 2013 to record highs. The MOF data showed exports rose 15.3% in December from a year earlier, led by car exports to the US, a key market. While below economists` median forecast for a 17.8% gain, it was a 10th consecutive month of gains. Imports rose 24.7% in December from a year earlier, compared to an expected 26.1% gain. Import costs have risen both due to the weaker year and higher fuel imports after Japan shut down nuclear power plants following the Fukushima disaster in 2011.
Overall nationwide consumer prices in Japan gained 1.6 percent on year in December, the Ministry of Internal Affairs and Communications said. That exceeded forecasts for an increase of 1.5 percent, which would have been unchanged from the previous month. Core inflation, which strips out the volatile prices for food, was up an annual 1.3 percent - also topping expectations for a gain of 1.2 percent, which also would have been unchanged. On a monthly basis, overall inflation was up 0.1 percent and core CPI was flat.
Japan posted a seasonally adjusted unemployment rate of 3.7 percent in December, the Ministry of Internal Affairs and Communications said. Analysts had expected 3.9 percent, and the figure was down from 4.0 percent in November. The job-to-applicant ration was 1.03, beating forecasts for 1.01 and up from 1.00 in the previous month. The participation rate was 59.0, down from 59.7 a month earlier.
The number of employed persons in December was 63.19 million, an increase of 910,000 or 1.5 percent on year. The number of unemployed persons in December was 2.25 million, a decrease of 340,000 or 13.1 percent on year.

Economy of Russia

Russia`s economy grew at less than half the previous year`s pace in 2013, missing economist forecasts as investment fell amid a record slump in Europe. Officials warned the outlook remains weak for this quarter.
Gross domestic product advanced 1.3 percent, the least since a 2009 recession, compared with 3.4 percent in 2012, the Moscow-based Federal Statistics Service reports its first estimate in an e-mailed statement. That fell short of the median 1.5 percent forecast of 19 economists in a Bloomberg survey and the Economy Ministry estimate of 1.4 percent.
Russia is struggling amid meager growth in investment, Economy Minister Alexei Ulyukayev said Jan. 29. Fixed-capital investment rose 0.3 percent from a year earlier in December after a 0.2 percent increase in November and a 1.9 percent drop in October, the Federal Statistics Service reported Jan. 27
Capital expenditure including value-added tax at OAO Gazprom fell to 782 billion rubles ($22 billion) in 2013 from more than 1 trillion rubles the previous year. The gas export monopoly, which built a biathlon center and energy infrastructure for next month`s Winter Olympics in Sochi, plans 701 billion rubles of capital spending this year.
The probability of a recession in Russia in the next 12 months is 33 percent, according to the median estimate of 10 economists in a Bloomberg survey. While the Economy Ministry sees 2.5 percent growth this year, GDP will probably expand 2.2 percent, according to the median estimate of 39 economists in a separate survey.