World Economy Review - February 2014

Experts at the National Institute of Economic and Social Research in a forecast have said that the world economy will grow by 3.7 per cent in 2014 and 2015, an improvement on the 3.1 per cent compared with that recorded last year.
The forecast was contained in the National Institute Economic Review for February 2014 which showed growth prospects as having improved in advanced economies, particularly in the US, but deteriorated in a number of emerging market economies.
The report stated that high unemployment rates coupled with moderate and uneven growth will raise the prospect of continuing below-target inflation and that this could greatly complicate macroeconomic policymaking.
“World growth is projected to pick up to 3.7 per cent in the next two years. The outlook has improved mainly in the advanced economies, and especially in the United States, but has been disappointing in the Euro Area and Japan, and has deteriorated in some of the emerging market economies,” the report said.
It also provided information on how monetary authorities have sought to provide some assurance that the current supportive policy stance will continue even as the recoveries become more entrenched, noting that fiscal policies are also less restrictive than in recent years in most of the advanced economies.
“Inflation in the advanced economies continues to decline. Sustained below-target inflation and more so deflation, poses a risk to our projections and could impede recovery in a number of ways. In particular, adjustment in the Euro Area would be more balanced and less costly if inflation were at its target on average, and above average in the core countries,” the report read.
Notably, the NIESR forecast noted that with the exception of the US, there has been only a small reduction in private sector debt burdens. This adjustment would be considerably more difficult in a deflationary environment.
It projected that better growth, very low borrowing costs and little pricing power in goods markets may lead to further appreciation of asset prices. This could complicate monetary policy stances and the associated forward guidance.
It reasoned whether central bankers` new tool box of macro- prudential measures can in fact contain such pressures against this backdrop remains to be seen.
The report specified that a further risk to the Euro Area relates to the design and implementation of the Single Resolution Mechanism, an integral part of a banking union.
“It is very difficult to see that the current proposals are either workable or credible. Until there is real progress on providing a pooled public back-stop, it is difficult to see how a credible banking union will emerge. With bank lending to the private sector already weak, this could be very damaging to prospects for continuing recovery,” the reported stated.
It posited that the outlook has worsened in emerging market economies: “The gradual slowdown in China is proceeding broadly as we expected, but near-term growth prospects for Brazil, India, Russia and a number of other emerging market economies have deteriorated, and financial pressures have appeared in Argentina, Russia, Turkey, and other countries. Since late October, official interest rates have been raised in Brazil, India, Indonesia, Turkey and South Africa.”
It also predicted that the volatility of capital flows to emerging markets may increase, as an adjustment in monetary policy in the advanced economies becomes a closer prospect and the financial imbalances in some emerging market economies are reassessed.
It pointed out those economies with external current account deficits that are not financed by long-term capital flows seem particularly vulnerable specifying that while China is not dependent on external finance, the lack of a robust financial system poses risks here too.

Economy of the United States

The U.S. government slashed its estimate for fourth-quarter economic growth in the latest sign of a loss of momentum, but some tentative signs emerged that suggested the worst of the slowdown may be over. Gross domestic product expanded at a 2.4 percent annual rate, the Commerce Department said, down sharply from the 3.2 percent pace it reported last month and the 4.1 percent logged in the third quarter.
The economy averaged growth of just 1.9 percent last year after expanding 2.8 percent in 2012. The revision left GDP just above the economy`s potential growth trend, which analysts put somewhere between a 2 percent and 2.3 percent pace. Even with the downgrade, the second-half growth pace was a solid 3.3 percent and a jump from 1.8 percent in the first six months of the year.
Consumer spending accounted for a large chunk of the revision. It grew at a 2.6 percent rate, not 3.3 percent as previously reported. A price index in the report rose at a 1.0 percent rate, instead of the previously reported 0.7 percent rate. A core measure that strips out food and energy costs increased at a 1.3 percent rate, revised up from a 1.1 percent pace.
U.S. manufacturing output unexpectedly fell in January and recorded its biggest drop since 2009 as cold weather disrupted production, the latest indication the economy got off to weak start this year. Factory production fell 0.8 percent last month, the largest decline since May 2009, the Federal Reserve said. Output had increased 0.3 percent in December.
The Fed attributed the first decline in factory output to "severe weather that curtailed production in some parts of the country." Manufacturing joined retail sales and employment in suggesting a step-back in growth early in the first quarter as cold weather takes its toll.
The drop in factory output and a 0.9 percent fall in mining weighed on overall production, which fell 0.3 percent in January, the biggest drop since April. Production at the nation`s mines, factories and power plants had increased 0.3 percent in December. But freezing temperatures boosted demand for heating last month, causing utilities production to jump 4.1 percent. Economists polled by Reuters had expected manufacturing output to edge up 0.1 percent and industrial production to rise 0.3 percent last month.
Last month, the amount of industrial capacity in use fell to 78.5 percent from 78.9 percent in the prior month. Industrial capacity utilization, a measure of how fully firms are using their resources, was 1.6 percentage points below its long-run average.
The U.S. trade deficit widened slightly in January as a rise in imports of oil and other foreign goods offset a solid increase in exports. The trade deficit increased to $39.1 billion, up 0.3 percent from December`s revised $39 billion deficit, the Commerce Department reported.
Exports climbed 0.6 percent to $192.8 billion, led by increased sales of U.S.-made machinery, aircraft and medical equipment. Imports also rose 0.6 percent to $231.6 billion, reflecting a 9 percent jump in imports of petroleum. Imports of food and machinery also rose.
The consumer price index (CPI) rose 0.1% in January, causing the annual inflation rate to rise one tick to 1.6% (from 1.5%). That matched consensus. The January CPI got a lift from energy (+0.6%), while food prices rose just 0.1%. Excluding food and energy, prices were up just 0.1%, allowing the year on year core inflation rate to drop one tick to a consensus matching 1.6%. Core CPI was supported in January by increases in tobacco, medical care, recreation, which more than offset price declines for apparel and computers.
The national unemployment rate was 6.7 percent last month, bouncing up slightly from 6.6 percent in January, the U.S. Bureau of Labor Statistics said. The number of people unemployed for at least 27 weeks rose 203,000 to 3.8 million, but was down 901,000 from February 2013. That fell short of analyst expectations of 6.6 percent, as the country added 175,000 jobs in professional and business services, and wholesale trade. Over the past year, average growth across all sectors was 189,000 jobs per month.

Economy of the European Union

GDP rose by 0.3% in the euro area (EA17) and by 0.4% in the EU28 during the fourth quarter of 2013, compared with the previous quarter, according to second estimates published by Eurostat, the statistical office of the European Union. In the third quarter of 2013, GDP grew by 0.1% in the euro area and by 0.3% in the EU28.
Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 0.5% in the euro area and by 1.1% in the EU28 in the fourth quarter of 2013, after -0.3% and +0.2% respectively in the previous quarter.
During the fourth quarter of 2013, GDP in the United States grew by 0.8% compared with the previous quarter (after +1.0% in the third quarter of 2013). Compared with the same quarter of the previous year, GDP rose by 2.7% (after +2.0% in the previous quarter).
Over the whole year 2013, GDP fell by 0.5% in the euro area and rose by 0.1% in the EU28.
In December 2013 compared with November 2013, seasonally adjusted industrial production fell by 0.7% in both the euro area (EA17) and the EU28, according to estimates from Eurostat, the statistical office of the European Union. In November industrial production rose by 1.6% and 1.3% respectively. In December 2013 compared with December 2012, industrial production grew by 0.5% in the euro area and by 0.9% in the EU28. Average industrial production for the year 2013, compared with 2012, dropped by 0.8% in the euro area and by 0.5% in the EU28.
In December 2013 compared with November 2013, production of capital goods decreased by 2.1% in the euro area and by 1.9% in the EU28. Energy fell by 2.1% and 1.5% respectively. Non-durable consumer goods dropped by 0.1% in the euro area and increased by 0.1% in the EU28. Durable consumer goods rose by 0.4% in the euro area, but decreased by 0.3% in the EU28. Intermediate goods grew by 0.9% and 0.7% respectively. Among the Member States for which data are available, industrial production fell in nineteen and rose in four. The largest decreases were registered in Estonia (-5.7%), Sweden (-2.7%), the Netherlands (-2.6%) and Croatia (-2.4%), and the increases in Slovenia (+2.7%), Greece (+2.6%), Portugal (+0.7%) and the United Kingdom (+0.4%).
In December 2013 compared with December 2012, production of intermediate goods rose by 3.6% in the euro area and by 3.7% in the EU28. Capital goods fell by 0.3% in the euro area, but grew by 0.7% in the EU28. Non-durable consumer goods decreased by 0.9% in the euro area, but gained 0.3% in the EU28. Durable consumer goods decreased by 1.2% and 0.8% respectively. Energy fell by 1.9% in the euro area and by 2.3% in the EU28.
Among the Member States for which data are available, industrial production rose in ten and fell in thirteen. The highest increases were registered in Portugal (+7.1%), Romania (+7.0%), the Czech Republic (+6.7%) and Slovenia (+5.2%), and the largest decreases in Malta (-7.3%), Ireland (-6.7%), Estonia (-6.4%) and Finland (-4.8%).
The first estimate for the December 2013 euro area (EA17) trade in goods balance with the rest of the world gave a 13.9 billion euro surplus, compared with +9.8 bn in December 2012. The November 2013 balance was +17.0 bn, compared with +12.5 bn in November 2012. These data are released by Eurostat, the statistical office of the European Union.
The first estimate for the December 2013 extra-EU28 trade balance was a 8.2 bn euro surplus, compared with -2.4 bn in December 2012. In November 2013 the balance was +3.1 bn, compared with -3.0 bn in November 2012.
During 2013, euro area trade in goods recorded a surplus of 153.8 bn euro, compared with +79.7 bn in 2012. The EU28 recorded a surplus of 49.9 bn in 2013, compared with a deficit of 115.0 bn in 2012.
Euro area annual inflation is expected to be 0.8% in February 2014, stable compared with January, according to a flash estimate from Eurostat, the statistical office of the European Union.
Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in February (1.5%, compared with 1.7% in January), followed by services (1.3%, compared with 1.2% in January), non-energy industrial goods (0.6%, compared with 0.2% in January) and energy (-2.2%, compared with -1.2% in January).
The euro area (EA18) seasonally-adjusted unemployment rate was 12.0% in January 2014, stable since October 2013. It was also 12.0% in January 2013. The EU28 unemployment rate was 10.8% in January 2014, stable since October 2013. It was 11.0% in January 2013. These figures are published by Eurostat, the statistical office of the European Union.
Eurostat estimates that 26.231 million men and women in the EU28, of whom 19.175 million were in the euro area, were unemployed in January 2014. Compared with December 2013, the number of persons unemployed increased by 17 000 in both the EU28 and the euro area. Compared with January 2013, unemployment decreased by 449 000 in the EU28, and by 67 000 in the euro area.
Among the Member States, the lowest unemployment rates were recorded in Austria (4.9%), Germany (5.0%) and Luxembourg (6.1%), and the highest in Greece (28.0% in November 2013) and Spain (25.8%). Compared with a year ago, the unemployment rate increased in thirteen Member States, fell in thirteen and remained stable in Austria and Slovenia. The highest increases were registered in Cyprus (14.4% to 16.8%), Greece (26.3% to 28.0% between November 2012 and November 2013), Croatia (17.4% to 18.8%), Italy (11.8% to 12.9%) and the Netherlands (6.0% to 7.1%). The largest decreases were observed in Latvia (14.3% to 11.5% between the fourth quarters of 2012 and 2013), Portugal (17.6% to 15.3%), Hungary (11.1% to 8.8% between December 2012 and December 2013), Ireland (13.8% to 11.9%), and Lithuania (12.8% to 11.3%).

Economy of Japan

A shadow was cast over Japan`s efforts to revive itself as a leading economic superstar on Monday with new figures showing that the economy grew less than expected last year. Gross domestic product rose by 1 per cent during the last three months of 2013 compared to the previous year, falling short of forecasts for a 2.8 per cent expansion.
The economy grew overall by 1.6 per cent last year - the nation`s best annual performance in three years – while it also underwent its fourth consecutive quarterly expansion, as fuelled by the prime minister Shinzo Abe`s anti-deflationary policies of Abenomics.
However, analysts noted that the results, released Monday, were more lackluster than earlier in the year, due to a drop in private consumption and capital spending combined with weaker export figures. The results showed hints of waning momentum just two months before Japan raises its sales tax from 5 per cent to 8 per cent, a widely unpopular move among consumers but one which the government believes is critical in cutting soaring national debt.
Japan`s industrial output rose 4.0 percent in January, marking a second straight month of gains, government data showed, as companies ramped up production of cars and other goods to meet rising demand before a sales tax hike in April. The month-on-month gain compared with economists` median forecast for 3.0 percent growth and followed a 0.9 percent increase in December, the data from the Ministry of Trade, Economy and Industry showed. Manufacturers surveyed by the ministry expect output to rise 1.3 percent in February but decrease 3.2 percent in March. The ministry maintained its assessment that industrial output is picking up.
Japan`s trade deficit widened to a record in January as surging import costs weigh on Prime Minister Shinzo Abe`s campaign to drive a sustained recovery. The 2.79 trillion yen ($27.3 billion) shortfall reported by the Ministry of Finance in Tokyo exceeded the 2.49 trillion yen median estimate in a Bloomberg News survey of 28 economists. Imports rose 25 percent from a year earlier and outbound shipments gained 9.5 percent.
Declines in the yen are driving up import costs as the nation`s nuclear reactors remain shuttered, while exports have seen only limited gains from the currency`s slide of more than 20 percent against the dollar in the past two years. The trade deficit contributed to Japan`s economy growing a less-than-forecast 1 percent in the fourth quarter, underscoring the risk that Abenomics may falter after a sales-tax increase in April.
Japan`s core consumer price index rose 1.3 percent year-on-year in January in another indication of the economy coming out of deflation, data showed. It was the eighth consecutive month when the core inflation rate, which excludes volatile fresh food prices, had shown an increase, the Ministry of Internal Affairs and Communications said.
The January increase was pushed largely by higher prices of energy and home appliances, and came on top of a similar 1.3 percent year-on-year increase in December, the data showed. For all of 2013, the core CPI rose 0.4 percent year-on-year, the first such increase since 2008.
Japan`s unemployment rate stood at 3.7 percent in January, unchanged from the previous month due to economic recovery, according to the government. The number of unemployed people declined a seasonally adjusted 0.8 percent from December to 2.42 million, as those quitting jobs voluntarily was reduced by 8.4 percent to 870,000, said the Internal Affairs Ministry in a preliminary report. Meanwhile the number of people holding jobs fell 0.5 percent to 63.19 million, preventing the jobless rate from improving in January.

Economy of Russia

Gross domestic product of Russia in January 2014 grew in annual calculation by 0,7% in comparison with 1,0% in December 2013, according to the Ministry of Economic Development. At the same time, gross domestic product with an exception of seasonal and calendar factors in relation to December decreased by 0,5%.
Russia`s industrial production decreased 0.2% y/y in Jan. after it grew revised 0.4% y/y in Dec., Federal Statistics Service in Moscow says in e-mailed statement. Industrial production -18.8% m/m in Jan. versus +3.6% m/m in Dec. Mining +0.9% y/y in Jan. versus +2% y/y in Dec.; -4.2% m/m Manufacturing unchanged Y/y in Jan. versus +1.7% y/y in Dec.; -30% m/m Utilities -3.9% y/y in Jan. versus -10.1% y/y in Dec.; +1.1% m/m.
The surplus of the foreign trade balance of the Russian Federation in January 2014 grew by 10,1% in comparison with the similar period of last year to 20,7 billion dollars, - the Federal Customs Service (FCS) reported. Thus import to Russia in January decreased by 8,3% in comparison with January 2013 to 18,4 billion dollars, export increased by 0,6% to 39,2 billion dollars.
Inflation in Russia in February 2014 was 0,7% against 0,6% in February of last year. Thus, as reported on March 4th Rosstat, inflation appeared within forecasts of the Ministry of Economic Development. For January-February 2014 consumer prices in the Russian Federation rose 1,3% (1,5% in 2013). Annual inflation (February 2014 to February 2013) was accelerated to 6,2% from 6,1% in January of this year.