World Economy Review - March 2016

There is a near one in three chance the world economy will slip back in to recession this year as low oil prices and extraordinary monetary stimulus have a dwindling impact on global growth, Morgan Stanley has warned.

The US investment bank said a "low growth environment" had made the world vulnerable to a litany of shocks, including fears that central banks have lost control over domestic financial conditions, while rising political risks from Europe to the Middle East threaten to overwhelm governments.

Global growth is forecast to hit just 3pc this year, down from Morgan Stanley`s earlier estimate of 3.3pc, with advanced world growth falling to 1.5pc.

Japan received the biggest single downgrade of any country, with GDP slashed in half to just 0.6pc from 1.2pc.

Global GDP fell to 2.3pc in the last quarter of 2015 - below the 2.5pc threshold, which marks a recession - forcing Morgan Stanley to raise their global recession risk probability from 20pc to 30pc.

"The renewed slowdown in global growth late last year has pushed the risk of a recession higher," said Elga Bartsch at Morgan Stanley.

Despite a record crash in global oil prices over the last 20 months - widely seen as a tax cut for the world`s oil consumers - the positive effects of lower oil prices were not as pronounced as previous eras, said the investment bank.

It noted that fuel high taxation in many countries meant many consumers were failing to see the full benefits at the pumps, while investment was collapsing in major producer countries such as the US.

Contrary to many expectations, consumers in the advanced world have also failed to spend the windfall from lower prices, opting instead to pay down debts and save. Lower consumption levels have thus weighed down on economic activity.

"The global economy does not seem to be as responsive [to lower oil prices] as it has been in the past", said Ms Bartsch.

Their bearish outlook was also driven by the inability of central banks "to pull the global economy out of its low-growth, lowflation rut".

The European Central Bank redoubled its efforts to revive growth and inflation in the Eurozone last week, announcing its first foray into corporate bond buying, slashing interest rates, and providing a series of cheap loans to commercial banks.

Eight years after the financial crisis, the size of the ECB`s balance sheet will finally overtake that of the US Federal Reserve and Bank of England at more than 20pc of the bloc`s GDP, according to JP Morgan.

However, analysts noted that investors were no longer in thrall to central bank action. The euro strengthened and equities fell in the immediate aftermath of the unexpectedly large stimulus package.

Faltering market confidence is worrying for policymakers as it "could undermine the effectiveness of monetary policy" much of which is aimed at weakening exchange rates to boost inflation.

"Repeated easing initiatives seem to have a diminishing effect on financial markets, portfolio reallocation and economic sentiment", said Ms Bartsch.

Tighter financial conditions and moderate growth has forced the investment bank to slash its initial expectation of three interest rate hikes from the Federal Reserve this year, to just one. US growth is expected to slow to 1.6pc this year, down from 1.8pc.

Morgan Stanley also expect the ECB to end the year with a -0.5pc deposit rate and the Bank of Japan to carry out another 20 basis point cut to its already negative rate by July.

"The global economy is still stuck in a low-growth environment characterized by weak demand dynamics, subdued investment spending, low inflation rates, elevated unemployment, as well as modest wage and productivity gains. This leaves us vulnerable to shocks," said Morgan Stanley.

Economy of the United States

U.S. consumers did their bit to boost the country`s fourth-quarter gross domestic product (GDP) to a growth rate of 1.4%. That is double the preliminary estimate of 0.7% released in January by the Department of Commerce`s Bureau of Economic Analysis (BEA), and up from the second estimate of 1.0%.

In addition to consumer spending, residential fixed investment (home building) and federal government spending also rose. On the downside, nonresidential construction slowed, as did spending by state and local governments, exports and investment by private businesses in new inventory. Imports also decreased.

Third-quarter GDP rose by 2%, and the BEA attributed the quarter-over-quarter decline to nonresidential fixed investment, a slowdown in consumer spending, fewer exports and declines in state and local government spending. Falling imports, a smaller drop in private inventory investment and higher federal spending partially offset the declines.

During 2015 (that is, measured from the fourth quarter of 2014 to the fourth quarter of 2015), real GDP increased 2.0%, compared with an increase of 2.5% during 2014. The price index for gross domestic purchases increased 0.4% during 2015, compared with an increase of 1.2% during 2014.

Industrial production - a broad gauge of output across US factories, mines and power plants - decreased a seasonally adjusted 0.5 per cent in February from the prior month after surging a revised 0.8 per cent in January, the Federal Reserve said. Total production fell 1.0 per cent in February from a year earlier, the fourth consecutive annual decline.

The Fed said overall capacity utilization, a measure of industrial slack, slipped by 0.4 percentage point to 76.7 per cent in February. It averaged 80 per cent from 1972 to 2015. Economists surveyed by The Wall Street Journal had expected production would fall 0.2 per cent in February and that capacity utilization would edge down to 76.8 per cent.

Manufacturing production rose by 0.2 per cent in February after climbing 0.5 per cent the prior month. It was up by 1.8 per cent from February 2015, led by a 9.1 per cent year-over-year increase in motor-vehicle production. Mining output decreased by 1.4 per cent in February after a 0.7 per cent decline in January, and fell by 9.9 per cent from a year earlier. Utilities production fell by 4.0 per cent in February after jumping 4.2 per cent in January, and declined 9.3 per cent on the year.

The Commerce Department said the trade deficit widened to $47.1 billion in February from a revised $45.9 billion in January. Economists had expected the deficit to widen to $46.2 billion from the $45.7 billion originally reported for the previous month.

The wider than expected deficit was partly due to an increase in the value of imports, which climbed 1.3 percent to $225.1 billion in February from $222.2 billion in January. Imports of consumer goods showed a substantial increase during the month along with imports of motor vehicles, parts, and engines.

The report also said the value of exports increased by 1 percent to $178.1 billion in February from $176.3 billion in the previous month. The growth in exports reflected notable increases in exports of gem diamonds, pharmaceutical preparations and other goods.

The Consumer Price Index, a gauge of what Americans pay for everything from refrigerators to dental care, declined 0.2% over the month, the Labor Department said. Overall prices haven`t risen since November and are up just 1% over the past year. The weak picture has been obscured by depressed oil prices that have brought down the cost of gasoline and electricity. The drop resulted in the CPI increasing 1.0 percent in the 12 months through February, slowing after a 1.4 percent rise in January.

The CPI, excluding the volatile food and energy components, increased 0.3 percent after a similar gain in January. In the 12 months through February, the so-called core CPI rose 2.3 percent, the largest gain since May 2012, after increasing 2.2 percent in January. Economists polled by Reuters had forecast the core CPI rising 0.2 percent in February and increasing 2.2 percent from a year ago.

The U.S. economy gained 215,000 jobs in March, the Bureau of Labor Statistics says in its monthly report released. The Bureau of Labor Statics revised January`s jobs gains downward, to 168,000 from 172,000. February`s figures were revised upward, to 245,000 from 242,000. The unemployment rate rose slightly to 5 percent, up from 4.9 percent in the month before. Average hourly earnings for private sector workers increased by 7 cents, to $25.43, after dropping 2 cents in February, the BLS report says.

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 fourth quarter of 2015, compared with the previous quarter, according to an estimate published by Eurostat, the statistical office of the European Union. In the third quarter of 2015, GDP also grew by 0.3% and 0.4% respectively.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.6% in the euro area and by 1.8% in the EU28 in the fourth quarter of 2015, after +1.6% and +1.9% respectively in the previous quarter.

Over the whole year 2015, GDP rose by 1.6% in the euro area and by 1.9% in the EU28, compared with 0.9% and 1.4% respectively in 2014.

In January 2016 compared with December 2015, seasonally adjusted industrial production rose by 2.1% in the euro area (EA19) and by 1.7% in the EU28, according to estimates from Eurostat. In December 2015, industrial production fell by 0.5% in the euro area and by 0.6 in the EU28. In January 2016 compared with January 2015, industrial production increased by 2.8% in the euro area and by 2.5% in the EU28.

The first estimate for euro area (EA19) exports of goods to the rest of the world in January 2016 was ˆ145.3 billion, a decrease of 2% compared with January 2015 (ˆ148.0 bn). Imports from the rest of the world stood at ˆ139.1 bn, a fall of 1% compared with January 2015 (ˆ140.9 bn). As a result, the euro area recorded a ˆ6.2 bn surplus in trade in goods with the rest of the world in January 2016, compared with +ˆ7.1 bn in January 2015. Intra-euro area trade remained stable at ˆ132.5 bn in January 2016 compared with January 2015. These data are released by Eurostat.

The first estimate for extra-EU28 exports of goods in January 2016 was ˆ121.6 billion, down by 4% compared with January 2015 (ˆ126.9 bn). Imports from the rest of the world stood at ˆ132.7 bn, also down by 4% compared with January 2015 (ˆ138.6 bn). As a result, the EU28 recorded a ˆ11.0 bn deficit in trade in goods with the rest of the world in January 2016, compared with -ˆ11.8 bn in January 2015. Intra-EU28 trade rose to ˆ239.6 bn in January 2016, +1% compared with January 2015.

Euro area annual inflation is expected to be -0.1% in March 2016, up from -0.2% 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 (1.3%, compared with 0.9% in February), followed by food, alcohol & tobacco (0.7%, compared with 0.6% in February), non-energy industrial goods (0.5% compared with 0.7% in February) and energy (-8.7%, compared with -8.1% in February).

The euro area (EA19) seasonally-adjusted unemployment rate was 10.3% in February 2016, down from 10.4% in

January 2016, and from 11.2% in February 2015. This is the lowest rate recorded in the euro area since August 2011. The EU28 unemployment rate was 8.9% in February 2016, stable compared to January 2016, and down from 9.7% in February 2015. This is the lowest rate recorded in the EU28 since May 2009. These figures are published by Eurostat.

Eurostat estimates that 21.651 million men and women in the EU28, of whom 16.634 million were in the euro area, were unemployed in February 2016. Compared with January 2016, the number of persons unemployed decreased by 59 000 in the EU28 and by 39 000 in the euro area. Compared with February 2015, unemployment fell by 1.971 million in the EU28 and by 1.303 million in the euro area.

Economy of Japan

The world`s third-largest economy is stuck in neutral, as wary Japanese consumers and corporations opt to hold on to their cash rather than spend it.

The latest data showed Japan`s GDP contracted at a 1.1 per cent annualized pace in the last quarter in further evidence the economy is failing to gain traction despite unprecedented efforts by the central bank to spur more growth. The revised figures compared with a 1.4 per cent expansion in the July-September quarter. They showed a modest improvement over the previous estimate of a 1.4 per cent contraction in October-December.

Production from Japanese industrial sector fell by 6.2% on month-on-month basis in February, a turn-around from January`s increase of 3.7%. The figure indicates the biggest tumble in production since the country was hit by a tsunami in March 2011. However, it did not come as a big surprise as experts` estimate was higher by just 0.2%.

The cutback in February`s production was mostly caused by Lunar New Year holidays in China – a key market for Japanese industries, as well as Toyota`s temporary production halt due to an explosion at a steel plant. Despite February`s drawback, manufacturers are expecting industrial output to rise in March by 3.9%, similar to January`s 3.7%, and remain flat in the following months. On year-on-year basis production levels contracted by 1.5%.

Japan reported a trade surplus of 242.8 billion yen ($2.2 billion, the government said), marking its biggest trade surplus since September 2011. Economists had expected 400.2 billion yen. The surplus compares with a deficit of 426 billion yen ($3 billion) in February 2015 and a deficit of 648.7 billion yen ($5.75 billion) in January 2016. Exports y/y: -4.0%, expected -3.0%, prior was -12.9%. Imports y/y: -14.2%, expected -15.8%, prior was -17.8%.

Japan`s consumer prices were flat in February from a year earlier for the second straight month, the government said, as the trend fell well short of the Bank of Japan`s 2 percent inflation target amid continued falls in energy-related prices. Energy prices dropped 10.9 percent from a year earlier, with electricity fees sliding 7.6 percent and gasoline prices plunging 15.8 percent due to lower crude oil prices.

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. Meanwhile, food prices excluding fresh produce climbed 2.1 percent, while prices of television sets surged 15.7 percent. Excluding food and energy, consumer prices rose 0.8 percent for the 29th straight month of increase.

The unemployment rate in Japan increased in February by 0.1 percentage point from a month earlier to a seasonally-adjusted 3.3 percent, with the rate marking a rise for the first time in three months, the Internal Affairs and Communications Ministry said. According to the report, the number of employed persons in February stood at 63.51 million, an increase of 290,000 or 0.5 percent from the previous year.

The number of unemployed persons in the recording period, however, stood at 2.13 million, a decrease of 130,000 or 5.8 percent from the previous year, not taking into account seasonal factors. The statistics bureau also said in its preliminary report that the unemployment rate for men increased 0.2 percentage point from the previous month to 3.6 percent, while that for women declined 0.1 point to 2.8 percent.

Economy of Russia

Russia`s GDP declined 3.7% year-on-year in 2015, Russian national statistics agency Rosstat reported. The GDP fell 3.8% on an annualized basis in the fourth quarter of 2015. Russia`s GDP amounted to 80.8 trillion rubles ($1.2 trillion) in 2015 in current prices. The GDP price deflator relatively to average annual prices of 2014 totaled 7.7% in 2015.

According to Rosstat, agriculture (+3.1% year-on-year), household activities (+1.4), mineral resources production (+1.1%), and healthcare and social services sphere (+0.4%) showed the highest growth at the last year-end. The highest decline was noted in wholesale and retail sector (-10% year-on-year), construction (-7.4%), processing industries (-5.1%), and hotels and restaurants business (-5.3%).

Final consumption expenditures totaled 71.7% in the Russia`s GDP structure at 2015 year-end and declined 0.5% year-on-year. At the same time, the net export share in the GDP was up 1.6% and reached 8.2%.

Industrial Production in Russia increased 1.0 percent year-on-year in February of 2016, compared to 2.7 percent drop in the previous month and above market expectations of 2.1 percent fall. It was the first growth in more than a year and highest since December of 2014. Mining and quarrying increased 5.8 percent while manufacturing output edged down 1.0 percent. On a monthly basis, industrial output rose 3.0 percent.

Russia`s trade surplus narrowed to USD 7.9 billion in January of 2016, from a USD 15.4 billion surplus a year earlier. It was the lowest surplus since August of 2010. Exports fell 37 percent year-on-year to USD 17.6 billion while imports decreased 21 percent to USD 9.7 billion, central bank data showed.

Russian jobless rate was recorded at 5.80 percent in February of 2016, unchanged from the previous two months and in line with market expectations. The number of unemployed people was steady at 4.4 million while economically active increased by 0.1 million to 75.9 million (52 percent of population).

Russia`s annual inflation rate slowed further in March, falling below market expectations, data from the Federal Statistics Service showed. Consumer prices rose 7.3% on the year in March after rising 8.1% on the year in February. Analysts had on average predicted March annual inflation at 7.5%. On the month, consumer prices rose 0.5% in March after rising 0.6% in February. In the first three months of the year prices went up 2.1%, compared with 7.4% growth in the same period a year earlier.

06.04.2016 14:00:14

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