World Economy Review - December 2015

A sharp slowdown in the world`s second largest economy China would hit global growth hard, according to a report by Fitch ratings agency, which warned of "significant knock-on effects" for the rest of the world.

In its report published in December, Fitch warned that a sharp slowdown in China`s GDP growth rate to 2.3 percent during 2016-2018 "would disrupt global trade and hinder growth, with significant knock-on effects for emerging markets and global corporates. In turn, this would keep short-term interest rates and commodity prices lower for longer."

Global GDP growth is currently expected to be 3.1 percent in 2017, according to Oxford Economics` global economic model which was used by Fitch to frame its "shock" China scenario. But if a slowdown of such a magnitude materialized in China, Fitch said global GDP growth would slow to 1.8 percent in 2017.

As a result, any rise in U.S. and euro zone short-term interest rates would be postponed, and oil prices would remain under pressure, Fitch said.

"Lower-for-longer in terms of growth, interest rates and commodity prices, could be the defining mantra of this decade for the major advanced economies if a Chinese shock scenario materializes," Bill Warlick, senior director of Macro Credit Research at Fitch, noted in the study.

While Fitch emphasized that this hypothetical scenario did not reflect its current expectations for China`s growth, it was "designed to test credit connections between China and the rest of the world."

In terms of these "credit connections", a China slowdown would "impair" the credit profiles of many companies globally, particularly commodity-dependent ones in oil and gas, steel, and mining, Fitch said.

"Shipping companies would also suffer, as commodities account for a significant portion of freight volume. The global technology, heavy manufacturing and automotive sectors would also feel increased credit pressure due to a slowdown in Chinese demand," the agency warned.

Andrew Steel, managing director of Asia-Pacific Corporates Ratings at Fitch, said commodity companies already under pressure from slowing China demand and falling prices, would be pressured further.

"Knock-on effects like anaemic or slowing global consumer demand and commodity supply gluts would persist or worsen," Steel predicted.

Within Fitch`s rated portfolio, 25 percent of oil and gas companies and 52 percent of other commodities companies are already sub-investment grade. If the slowdown scenario materialized, it could create ripple effects through the high-yield bond market, the agency said.

China`s growth rate is expected to be 6.8 percent in 2015, according to the International Monetary Fund`s latest "World Economic Outlook" report published in October.

Although robust, that growth rate has been slowing down year on year, reflecting slower economic conditions in the rest of the world. In 2013, China`s economy grew 7.7 percent but in 2014 China`s GDP expanded by 7.3 percent. The IMF predicted further slowing growth in 2016, of 6.3 percent.

Fitch`s Warlick said markets were watching China for signs of the slowdown accelerating. "China`s rapid rise as a global economic power, and its deepening ties to the rest of the world, have forced global credit investors to weigh carefully the potential impact of a sharp China slowdown," he said in the report.

"After tracing China`s financial and trade links around the world, it`s clear that a greater-than-expected deceleration in Chinese economic activity would have far-reaching implications for global growth, corporate credit quality and monetary policy."

Economy of the United States

The U.S. economy grew at a fairly healthy clip in the third quarter as strong consumer and business spending offset efforts by businesses to reduce an inventory glut, underscoring its resilience despite a raft of headwinds. Gross domestic product grew at a 2.0 percent annual pace, instead of the 2.1 percent rate reported last month, the Commerce Department said.

While that was a sharp deceleration from the brisk 3.9 percent pace logged in the April-June period, growth remained around the economy`s long-run potential. Economists polled by Reuters had forecast third-quarter GDP growth revised down to a 1.9 percent rate. When measured from the income side, the economy grew at a 2.7 percent pace, not the 3.1 percent clip reported last month, to account for downward revisions to corporate profits.

U.S. industrial production saw its sharpest decline in more than three and a half years in November as utilities dropped sharply, a sign of weakness that could moderate fourth-quarter growth. Industrial output slipped 0.6 percent after a downwardly revised 0.4 percent dip in October, the Federal Reserve said, marking the third straight month of declines. Economists polled by Reuters had forecast industrial production slipping 0.1 percent last month.

The drop in output - the steepest since March 2012 - reflected a 4.3 percent decrease in the utilities index, a likely result of mild weather this season as fewer households switched on heating or air-conditioning. The mining index fell 1.1 percent, standing 8.2 percent lower than the same time a year ago.

Total manufacturing output, however, remained unchanged, bolstered by gains in nondurable goods particularly in the food, beverage and tobacco products category. Analysts had expected manufacturing to tick up 0.1 percent, according to a Reuters poll. Durable goods declined 0.2 percent overall, with the largest drops in categories including electrical equipment and motor vehicles.

With output declining, the percentage of industrial capacity in use fell to 77.0 percent from an unrevised 77.5 percent in October.

Underlying inflation pressures rose in November even as renewed weakness in gasoline prices kept overall U.S. consumer prices in check. The Labor Department said its so-called core Consumer Price Index, which excludes food and energy, increased 0.2 percent last month. It was the third straight month that the core CPI increased by 0.2 percent. In the 12 months through November, the core CPI rose 2.0 percent, the largest gain since May 2014, after rising 1.9 percent in October.

The increase in core CPI reflected steady gains in the cost of rents, airline fares, new motor vehicles and medical care. They were, however, offset by falling gasoline prices, leaving the overall CPI unchanged last month after a 0.2 percent increase in October. In the 12 months through November, the CPI increased 0.5 percent, the largest gain since December 2014, after rising 0.2 percent in October. The Fed targets 2 percent inflation and it tracks an index that is running far below the core CPI.

American employers added a strong 292,000 jobs in December, suggesting that the U.S. economy is so far defying global trends and growing at a solid pace. The Labor Department says the unemployment rate remained 5 percent for a third straight month. More Americans started looking for work, and most found jobs. The government also said employers added a combined 50,000 more jobs in October and November than it had previously estimated. Hiring averaged 284,000 a month in the fourth quarter, the best three-month pace in a year.

Economy of the European Union

Seasonally adjusted GDP rose by 0.3% in the euro area (EA19) and by 0.4% in the EU28 during the third quarter of 2015, compared with the previous quarter, according to a second estimate published by Eurostat, the statistical office of the European Union. In the second quarter of 2015, GDP grew by 0.4% and 0.5% respectively.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.6% in the euro area and by 1.9% in the EU28 in the third quarter of 2015, the same as in the previous quarter.

In October 2015 compared with September 2015, seasonally adjusted industrial production rose by 0.6% in the euro area (EA19) and by 0.5% in the EU28, according to estimates from Eurostat. In September 2015 industrial production fell by 0.3% in the euro area and remained stable in the EU28. In October 2015 compared with October 2014, industrial production increased by 1.9% in the euro area and by 2.4% in the EU28.

The first estimate for euro area (EA19) exports of goods to the rest of the world in October 2015 was ˆ181.1 billion, an increase of 1% compared with October 2014 (ˆ180.1 bn). Imports from the rest of the world stood at ˆ157.0 bn, nearly stable compared with October 2014 (ˆ157.7 bn). As a result, the euro area recorded a ˆ24.1 bn surplus in trade in goods with the rest of the world in October 2015, compared with +ˆ22.4 bn in October 2014. Intra-euro area trade rose to ˆ150.1 bn in October 2015, up by 1% compared with October 2014.

The first estimate for extra-EU28 exports of goods in October 2015 was ˆ154.0 billion, down by 2% compared with October 2014 (ˆ157.1 bn). Imports from the rest of the world stood at ˆ150.8 bn, nearly stable compared with October 2014 (ˆ151.1 bn). As a result, the EU28 recorded a ˆ3.2 bn surplus in trade in goods with the rest of the world in October 2015, compared with +ˆ6.0 bn in October 2014. Intra-EU28 trade rose to ˆ274.2 bn in October 2015, +2% compared with October 2014.

Euro area annual inflation was 0.2% in November 2015, up from 0.1% in October. In November 2014 the rate was 0.3%. European Union annual inflation was 0.1% in November 2015, up from 0.0% in October. A year earlier the rate was 0.3%. These figures come from Eurostat.

In November 2015, negative annual rates were observed in twelve Member States. The lowest annual rates were registered in Cyprus (-1.5%), Bulgaria, Romania and Slovenia (all -0.9%). The highest annual rates were recorded in Belgium (1.4%), Malta (1.3%) and Sweden (0.8%). Compared with October 2015, annual inflation fell in ten Member States, remained stable in two and rose in fifteen. The largest upward impacts to euro area annual inflation came from vegetables and restaurants & cafés (both +0.10 percentage points) and fruit (+0.08 pp), while fuels for transport (-0.54 pp), heating oil (-0.21 pp) and gas (-0.10 pp) had the biggest downward impacts.

Euro area annual inflation is expected to be 0.2% in December 2015, stable compared to November 2015, according to a flash estimate from Eurostat.

The euro area (EA19) seasonally-adjusted unemployment rate was 10.5% in November 2015, down from 10.6% in October 2015, and from 11.5% in November 2014. This is the lowest rate recorded in the euro area since October 2011. The EU28 unemployment rate was 9.1% in November 2015, down from 9.2% in October 2015, and from 10.0% in November 2014. This is the lowest rate recorded in the EU28 since July 2009. These figures are published by Eurostat.

Eurostat estimates that 22.159 million men and women in the EU28, of whom 16.924 million were in the euro area, were unemployed in November 2015. Compared with October 2015, the number of persons unemployed decreased by 179 000 in the EU28 and by 130 000 in the euro area. Compared with November 2014, unemployment fell by 2.146 million in the EU28 and by 1.573 million in the euro area.

Economy of Japan

Revised figures showed that Japan`s gross domestic product, grew 1.0% in the third quarter, up from the second quarter on a seasonally adjusted annualized basis, the Cabinet Office said. The previous report from the office reported that the economy had shrunk 0.8% from the second to third quarter.

The second quarter`s number was a revised decline of 0.5%. When Japan first reported third-quarter results, the negative growth placed the country in its second recession, defined as two consecutive quarters of contraction, in as many years.

Japanese industrial production fell for the first time in three months in November, government data showed, as manufacturers scaled back after ramping up production in recent months. The 1.0% fall came after a 1.4% rise in October, and was larger than a 0.4% drop expected by economists surveyed by The Wall Street Journal. The Ministry of Economy, Trade and Industry kept its assessment unchanged that production was "moving back and forth."

Contributing to the decline was a fall in output of production machinery and business-oriented machinery. Output in the chemical industry and output of transport vehicles also fell. Shipments fell 2.5%, and inventories rose 0.4%. Companies expect output to rise 0.9% in December and 6.0% January, according to a survey in the report.

Japan`s trade balance returned to a deficit in November, maintaining a trend that has persisted since the nation`s energy bill soared after the March 2011 earthquake and tsunami. The deficit was 379.7 billion yen ($3.1 billion), following a surplus the previous month. Economists had forecast a shortfall of 449.7 billion yen. Exports fell 3.3 percent from the previous year, the biggest drop since December 2012. The decline was led by steel and organic chemicals. Imports dropped 10.2 percent, declining for an 11th straight month.

Japan`s consumer prices increased in November, in line with expectations, the Ministry of Internal Affairs and Communications said. The overall consumer price index rose 0.3 percent year-over-year in November as expected by economists. Excluding fresh food, consumer prices edged up 0.1 percent in November from a year ago, while it was expected to remain flat. Economists polled by The Wall Street Journal expected prices to be flat on year. Falling gasoline prices had less of a downward effect on overall prices than in previous months.

According to Japan`s Ministry of Internal Affairs & Communications, the unemployment rate in Japan rose to 3.3% in November 2015, as compared to 3.1% in October 2015 and 3.5% in November 2014. In November, the number of employed persons came in at 63.8 million, an increase of 80,000, or 0.1%, from last year. The number of unemployed persons was 2.1 million, a decrease of 100,000, or 4.6%, from last year. The labor force was virtually unchanged at 65.9 million, and the population aged 15 and over was also almost flat at 110.8 million in November.

Economy of Russia

Russia`s gross domestic product fell by 4.0 percent in November compared with a year earlier, the economy ministry said. The figure compares with a 3.7 percent decline in October.

Russia`s industrial production contracted in annual terms for the tenth consecutive month in November, dragged down by the manufacturing sector, data showed. According to the Federal Statistics Service, contraction in industrial production slowed for the sixth month in a row. Industrial output declined by 3.5% in November compared with a year earlier after falling 3.6% in October, the data showed.

The fall in output was mainly because of the manufacturing sector, where output fell by 5.3% on the year in November. Output in the utility sector declined by 3.5%, while in mining it decreased 0.1%. In monthly terms, industrial output contracted 0.2% in November after rising 5.2% in October.

The inflation rate in Russia reached 12.9 percent in 2015, according to the Federal Statistics Service. This is the worst rate since the global economic crisis in 2008 when annual inflation edged 13.3 percent. Apart from 2008, inflation in Russia has only been this high twice in the last 15 years, in 2001 at 18.8 percent and 2002 at 15.06 percent.

Russian jobless rate unexpectedly increased to 5.8 percent in November from 5.5 percent in October and above market expectations of 5.6 percent. It is the highest rate since April as the number of unemployed people edged up while economically active declined.

09.01.2016 12:23

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