World Economy Review - March 2015
In the last several months, the dollar has strengthened tremendously against other currencies like the euro, the pound and the yen. This largely reflects the realization among investors that the American economy will do much better than other major economies in the coming months.
The dollar is now the strongest it has been against more than two dozen other currencies in more than 10 years, according to an index compiled by the Federal Reserve. One euro was trading at $1.09 on Friday, March 27th, down from $1.37 a year ago; many analysts predict that the two currencies could reach parity in the coming months for the first time since 2003. At the same time, the yen has fallen about 14 percent against the dollar.
Like any major move in the financial markets, the strengthening of the dollar has unnerved investors and policy makers. Some, like the governor of the Reserve Bank of India, Raghuram Rajan, have complained that we are in the “age of competitive devaluation and beggar-thy-neighbor policy.” He and officials in other countries, like South Korea, are worried that central banks have engineered the depreciation of currencies like the euro and the yen by printing money and aggressively buying bonds in a bald attempt to make their exports cheaper.
The European Central Bank and the Bank of Japan are buying lots of bonds to stimulate weak regional economies, but not necessarily to hurt other countries. If they are successful, it will ultimately benefit the entire global economy, including the United States, which is also hurt when the dollar appreciates because that makes American goods more expensive for buyers abroad.
The bigger question is whether monetary policy and a depreciating currency can make a significant difference. There is growing evidence that simply increasing the money supply may not be enough to revive weak economies, especially if demand in the rest of the world is not growing quickly enough. Countries cannot export their way to growth if other nations are not in a position to buy their goods and services.
That might help to explain why Japan`s economy is still struggling two years after its central bank began buying bonds in a big way, which has helped to send the yen tumbling against the dollar. A major part of the problem is that the government of Prime Minister Shinzo Abe has not done enough to reform the economy, for instance by getting businesses to invest more of their savings and increasing the employment of women.
There are some signs of a European revival, though not enough to celebrate a return to growth. Several countries, like Greece, Italy and France, are still shrinking, stagnant or barely growing. A weaker euro is good for all the countries that use it but will primarily benefit big exporting nations like Germany, which is already one of the strongest eurozone economies. Even if the euro reaches parity with the dollar, this might not significantly help weaker countries like Greece that are not big exporters or nations like Portugal that export mostly to other European countries. To help those nations, policy makers in the eurozone have to move away from mindless austerity and push through long-delayed reforms to encourage investment and job growth.
For the United States, a stronger dollar will serve to dampen growth, though by how much nobody can accurately predict because the relative values of currencies are hard to forecast. Some American manufacturers have said they are losing orders or seeing their profits decline as they are forced to cut prices to compete with the lower prices offered by European and Japanese businesses.
The appreciation of the dollar is a good reason for the Federal Reserve to hold off on raising interest rates this summer. But more than anything else, the stronger dollar serves as a reminder that the world is still far too reliant on the United States, which itself has not yet fully recovered from the financial crisis. That does not augur well for sustainable global growth.
Economy of the United States
Economic growth in the U.S. slowed to 2.2% in the fourth quarter as previously reported, and was not revised up to 2.4% as many economists predicted based on Q3`s huge 5% gain. For 2014 as a whole, real Gross Domestic Product increased 2.4% from 2.2% in 2013, according to the latest report from the Commerce Department.
Consumer spending, the largest component of economic activity, was revised up for the fourth quarter to 4.4% from 4.2%. The fastest rate of growth since 2006. Corporate profits fell 1.4% quarter-over-quarter, erasing almost half of Q3`s 3.1% gain. As a whole, 2014 saw corporate profits fall 1.8% after 2013`s jump of 4.2%.
U.S. industrial production increased 0.1 percent in February, less than expected by analysts, the Federal Reserve reported. Most economists expected a 0.3 percent rise last month. The Fed also revised its estimate of industrial production in January from a gain of 0.2 percent to a 0.3 percent decrease.
Factory production, the key category in the indicator, dropped 0.2 percent in February, the third consecutive monthly decline. Output in extractive industries fell 2.5 percent, mostly because of slowdown in oil drilling as prices for energy continued dropping. Industrial capacity utilization fell from 79.1 percent in January to 78.9 percent in February, below the 79.6 percent expected by most analysts.
The U.S. trade deficit fell 17 percent in February to $35.4 billion, its lowest level since 2009, the Commerce Department said. The trade deficit shrank even though a strong dollar and weak global demand adversely affected U.S. companies` foreign sales.
The deficit fell more than $7.2 billion from January, whose figure was upwardly revised from $41.8 billion to $42.7 billion. That decrease far exceeded forecasts by analysts, who had expected a $41.7 billion deficit in February. U.S. exports fell 1.6 percent in February to $186.2 billion, their lowest level since October 2012, the department said. Imports, however, fell 4.4 percent to $221.7 billion, their lowest level in nearly three years.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in February on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index was unchanged before seasonal adjustment.
The seasonally adjusted increase in the all items index was broad-based, with increases in shelter, energy, and food indexes all contributing. The energy index rose after a long series of declines, increasing 1.0 percent as the gasoline index turned up after falling in recent months. The food index, unchanged last month, also rose in February, though major grocery store food group indexes were mixed.
The index for all items less food and energy rose 0.2 percent in February, the same increase as in January. In addition to shelter, the indexes for used cars and trucks, apparel, new vehicles, tobacco, and airline fares were among those that increased. The medical care index was unchanged, while the personal care index declined.
The all items index was unchanged over the past 12 months, after showing a 0.1-percent decline for the 12 months ending January. Over the last 12 months the food index rose 3.0 percent and the index for all items less food and energy increased 1.7 percent. These increases were offset by an 18.8-percent decline in the energy index.
Total nonfarm payroll employment increased by 126,000 in March, and the unemployment rate was unchanged at 5.5 percent, the U.S. Bureau of Labor Statistics reported. Employment continued to trend up in professional and business services, health care, and retail trade, while mining lost jobs.
In March, the unemployment rate held at 5.5 percent, and the number of unemployed persons was little changed at 8.6 million. Over the year, the unemployment rate and the number of unemployed persons were down by 1.1 percentage points and 1.8 million, respectively. Among the major worker groups, the unemployment rates for adult men (5.1 percent), adult women (4.9 percent), teenagers (17.5 percent), whites (4.7 percent), blacks (10.1 percent), Asians (3.2 percent), and Hispanics (6.8 percent) showed little or no change in March.
Economy of the European Union
Seasonally adjusted GDP rose by 0.3% in the euro area (EA18) and by 0.4% in the ÅÑ-28 during the fourth quarter of 2014, compared with the previous quarter, according to a second estimate published by Eurostat, the statistical office of the European Union. In the third quarter of 2014, GDP grew by 0.2% in the euro area and by 0.3% in the ÅÑ-28.
Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 0.9% in the euro area and by 1.3% in the ÅÑ-28 in the fourth quarter of 2014, after +0.8% and +1.2% respectively in the previous quarter. Over the whole year 2014, GDP rose by 0.9% in the euro area and by 1.3% in the ÅÑ-28, compared to -0.5% and 0.0% in 2013.
In January 2015 compared with December 2014, seasonally adjusted industrial production fell by 0.1% in the euro area (EA19) and remained stable in the ÅÑ-28, according to estimates from Eurostat. In December 2014 industrial production rose by 0.3% and 0.4% respectively. In January 2015 compared with January 2014, industrial production increased by 1.2% in the euro area and by 1.5% in the ÅÑ-28.
The first estimate for euro area (EA19) exports of goods to the rest of the world in January 2015 was ˆ148.2 billion, nearly stable compared with January 2014 (ˆ148.8 bn). Imports from the rest of the world stood at ˆ140.3 bn, a fall of 6% compared with January 2014 (ˆ148.7 bn). As a result, the euro area recorded a ˆ7.9 bn surplus in trade in goods with the rest of the world in January 2015, compared with +ˆ0.1 bn in January 2014. Intra-euro area trade fell to ˆ130.5 bn in January 2015, -5% compared with January 2014.
The first estimate for extra-ÅÑ-28 exports of goods in January 2015 was ˆ127.1 bn, down 2% compared with January 2014 (ˆ130.2 bn). Imports from the rest of the world stood at ˆ137.7 bn, down 5% compared with January 2014 (ˆ144.4 bn). As a result, the ÅÑ-28 recorded a ˆ10.6 bn deficit in trade in goods with the rest of the world in January 2015, compared with -ˆ14.3 bn in January 2014. Intra-ÅÑ-28 trade fell to ˆ235.5 bn in January 2015, -3% compared with January 2014.
The euro area (EA19) seasonally-adjusted unemployment rate was 11.3% in February 2015, down from 11.4% in January 2015, and from 11.8% in February 2014. This is the lowest rate recorded in the euro area since May 2012. The ÅÑ-28 unemployment rate was 9.8% in February 2015, down from 9.9% in January 2015 and from 10.5% in February 2014. This is the lowest rate recorded in the ÅÑ-28 since September 2011. These figures are published by Eurostat.
Eurostat estimates that 23.887 million men and women in the ÅÑ-28, of whom 18.204 million in the euro area, were unemployed in February 2015. Compared with January 2015, the number of persons unemployed decreased by 91 000 in the ÅÑ-28 and by 49 000 in the euro area. Compared with February 2014, unemployment fell by 1.547 million in the ÅÑ-28 and by 643 000 in the euro area.
Euro area annual inflation is expected to be -0.1% in March 2015, up from -0.3% in February, according to a flash estimate from Eurostat. Looking at the main components of euro area inflation, services is expected to have the highest annual rate in March (1.0%, compared with 1.2% in February), followed by food, alcohol & tobacco (0.6%, compared with 0.5% in February), non-energy industrial goods (-0.1%, stable compared with February) and energy (-5.8%, compared with -7.9% in February).
Economy of Japan
Japanese gross domestic product rose an annualized 1.5 percent in the October-December quarter, revised government data showed, less than the preliminary reading of a 2.2 percent increase as consumer spending and capital expenditure weakened. The median forecast was for 2.2 percent annualized growth in a Reuter`s poll of economists.
On a quarter-on-quarter basis, the economy grew 0.4 percent in the fourth quarter, the Cabinet Office data showed. That compared with a preliminary reading of a 0.6 percent increase and the median estimate of 0.6 percent growth. Capital expenditure fell 0.1 percent from the previous quarter, versus a preliminary 0.1 percent increase and below the median estimate of a 0.3 percent expansion.
Industrial output in Japan dipped 3.4 percent on month in February, the Ministry of Economy, Trade and Industry said - falling for the first time in three months. The headline figure missed forecasts for a decline of 1.9 percent following the 3.7 percent increase in January. On a yearly basis, industrial production slipped 2.6 percent - also shy of expectations for a decline of 0.6 percent following the 2.8 percent decline in the previous month.
Upon the release of the data, the METI maintained its assessment of industrial production, saying that it shows signs of increase at a moderate pace. Industries that mainly contributed to the monthly decline include business oriented machinery, transport equipment and electronic parts. According to the survey of production forecast in manufacturing, production is expected to fall 2.0 percent in March and rise 3.6 percent in April.
Japan`s trade deficit shrank 47.3 percent in February from a year earlier to 424.6 billion yen ($3.5 billion), reflecting a recovery in exports, while falling crude oil prices pushed down import values, government data showed. The value of exports rose 2.4 percent to 5,941.1 billion yen, up for the sixth straight month, due largely to increased automobile and semiconductor shipments and the effect of a weaker yen, the Finance Ministry said in a preliminary report. Imports dropped 3.6 percent to 6,365.7 billion yen, down for the second consecutive month, influenced by a continued decline in crude oil prices.
Japan`s consumer prices rose 2.0 percent in February from a year earlier for the 21th straight monthly increase, the government said. The core consumer price index, which excludes volatile fresh food prices, stood at 102.5 against the 2010 base of 100, the Ministry of Internal Affairs and Communications said.
Excluding the impact of last April`s 3-percentage-point consumption tax hike based on estimates by the Bank of Japan, consumer prices were flat from a year earlier for the first time, with a 2.1 percent drop in energy prices pushing down inflation. The figure compares to a 0.2 percent rise in January, excluding the impact of the tax hike. Among energy prices, gasoline plunged 15.4 percent and heating oil slid 21.6 percent in February, although electricity fees increased 7.3 percent.
Unemployment Rate in Japan decreased to 3.5 percent in February of 2015 from 3.6 percent in January of 2015.
Economy of Russia
Russia`s gross domestic product fell by 2.3 percent year-on-year in February compared with a 1.5-percent decline in January, the Economy Ministry said in a report on its website. Excluding seasonal factors, GDP declined by 0.5 percent compared with 1.1 percent in January, it added.
Industrial production in Russia relapsed more sharply than expected in February with a drop of 1.6% year over year, according to official statistics that reinforce the idea of the entry in recession of the country, which is already hit by a currency crisis. Economists polled by Interfax expected a smaller decline (-0.9%). Compared with January, the decline was less pronounced (-0.8%), said the federal statistics service Rosstat.
In detail, oil production increased by 0.2% from February 2014 but gas plunged by 8.8% and automobile production plunged by 7%. Despite the difficulties of the Russian economy amid Western sanctions related to the Ukrainian crisis and the fall of oil prices, industrial activity grew 1.7% in 2014., and continued to grow in January (+0.9% yoy). For this year, which should be marked by a deep recession in Russia, the government expects a decline of 1.6%.
Russian inflation reached 16.7 per cent in February as lower oil prices and Western sanctions over Ukraine caused the biggest jump in prices over one year since 2002, the state statistics service said.
Prices rose a further 2.2 per cent in February after leaping 3.9 per cent in January - a rate unseen in 16 years - as the economy remains fragile after the ruble at the end of last year lost half its value against the dollar. The most dramatic rise was in food prices, soaring 23.3 per cent over the past year and 3.3 per cent in February alone.
Russia unemployment rate up to 5.8% in February from previous 5.5%.
04.04.2015 17:59