World Economy Review - February 2018
In another sign that the “Asian century” has arrived, China is on course to overtake the euro area in the size of its economy this year.
China`s gross domestic product is forecast to reach about $13.2 trillion in 2018, beating the $12.8 trillion combined total of the 19 countries that use the euro, according to data compiled by Bloomberg. In 2017, the euro cohort edged China by less than $200 billion.
“It`ll overtake and then persist,” said David Mann, Singapore-based global chief economist for Standard Chartered Bank. “It`s a function of the economic system, institutional infrastructure, education and hard infrastructure -- all of which have been moving in Asia`s favor.”
Asia -- including powerhouses Japan and India as well fast-emerging emerging nations such as the Philippines and Indonesia -- already crowded out the combined economies of North and South America in 2016, according to data compiled by Bloomberg. And the faster average growth pace in Asia is set to be a boon to that yawning gap for many years.
China`s leaders, convening in Beijing for the National People`s Congress, have doubled down on President Xi Jinping`s ability to keep growth stable, having removed the limit on his rule. The world`s second-biggest economy is weathering a gradual slowdown as Xi tries to manage a shift from the low-wage, high-exports model of the past to a more balanced mix where stronger domestic spending plays a greater role.
To do so, China faces numerous challenges. It will have to manage ballooning debt, financial markets need to open to global investors, and the government will have to adjust to a rapidly aging population. The UN projects that a quarter of its residents will be over 60 by 2030.
China should grow at a pace of at least 6 percent for the rest of this decade and keep up a 5 to 5.5 percent rate throughout the 2020s, Mann projected. He said it`s hard to argue that growth in the euro area would be much above 2 percent for the next couple of decades.
While it`s tricky to compare the growth data across large swaths of time, the best guess as to the last time China`s economy overshadowed Western Europe was around the mid-1800s, said Aditya Bhave, global economist at Bank of America Merrill Lynch, citing figures compiled by the Maddison Project at the University of Groningen in the Netherlands.
China`s rising trajectory would help return the global economy to a state that`s persisted through most of history, with the last 150 years being an outlier in which Western economies outweighed those in the East, Mann said.
“China`s rapid re-emergence as an economic powerhouse -- remember it used to be the world`s largest economy in the 1800s -- has enormous implications,” said Rob Subbaraman, head of emerging market economics at Nomura Holdings Inc. in Singapore.
“The impact of China on global financial markets and commodities is no longer trivial. But its economic size also brings economic tensions in terms of market share competition in trade and investment” as well as foreign policy tensions, according to Subbaraman.
Economy of the United States
U.S. economic growth slowed slightly more than initially thought in the fourth quarter as the strongest pace of consumer spending in three years drew in imports and depleted inventories.
Gross domestic product expanded at a 2.5 percent annual rate in the final three months of 2017, instead of the previously reported 2.6 percent pace, the Commerce Department said in its second GDP estimate. That was a deceleration from the third quarter`s brisk 3.2 percent pace.
The downward revision to the fourth-quarter GDP growth estimate largely reflected a smaller inventory build than previously reported. It was in line with economists` expectations.
The Fed said industrial production dipped by 0.1 percent after climbing by a downwardly revised 0.4 percent in December. Economists had expected production to rise by 0.2 percent compared to the 0.9 percent increase originally reported for the previous month.
The unexpected decrease in production was partly due to a steep drop in mining output, which slumped by 1.0 percent in January after falling by 0.4 percent in December. Manufacturing output came in unchanged for the second consecutive month. On the other hand, the Fed said utilities output rose by 0.6 percent in January after spiking by 4.6 percent in December.
The report also said capacity utilization in the industrial sector dropped to 77.5 percent in January from 77.7 percent in December. Capacity utilization had been expected to rise to 78.0 percent.
The Commerce Department said the trade gap jumped 5.0 percent to $56.6 billion. That was the highest level since October 2008 and followed a slightly upwardly revised $53.9 billion shortfall in December. Economists polled by Reuters had forecast the trade gap widening to $55.1 billion in January from a previously reported $53.1 billion in the prior month. Part of the rise in the trade deficit in January reflected commodity price increases.
In January, exports fell 1.3 percent to $200.9 billion as shipments of civilian aircraft and crude oil declined. But exports of consumer goods rose to a record high and those of motor vehicles, parts and engines were the highest since July 2014.
U.S. consumer prices, excluding the volatile food and energy categories, rose 0.3% in January. That was the biggest climb in a year and is likely to fan inflation fears in financial markets.
The Labor Department says overall consumer prices rose 0.5% in January, the most in four months. Inflation rose 2.1% from a year earlier and core prices increased 1.8%. The increases were led by much higher clothing costs and more expensive car insurance.
The US unemployment rate stood at 4.1 percent in February 2018, unchanged from the previous month`s 17-year low and slightly above market expectations of 4 percent. The number of unemployed increased by 22 thousand to 6.71 million.
Among the major worker groups, the unemployment rate for Blacks declined to 6.9 percent in February, while the jobless rates for adult men (3.7 percent), adult women (3.8 percent), teenagers (14.4 percent), Whites (3.7 percent), Asians (2.9 percent), and Hispanics (4.9 percent) showed little change.
Economy of the European Union
Seasonally adjusted GDP rose by 0.6% in both the euro area (EA19) and the EU28 during the fourth quarter of 2017, compared with the previous quarter, according to an estimate published by Eurostat, the statistical office of the European Union. In the third quarter of 2017, GDP grew by 0.7% in both zones.
Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.7% in the euro area and by 2.6% in the EU28 in the fourth quarter of 2017, after +2.7% in both zones in the previous quarter.
In December 2017 compared with November 2017, seasonally adjusted industrial production rose by 0.4% in the euro area (EA19) and by 0.3% in the EU28, according to estimates from Eurostat. In November 2017, industrial production rose by 1.3% in the euro area and by 1.2% in the EU28.
In December 2017 compared with December 2016, industrial production increased by 5.2% in the euro area and by 4.8% in the EU28.
The average industrial production for the year 2017, compared with 2016, rose by 3.0% in the euro area and by 3.3% in the EU28.
The first estimate for euro area (EA19) exports of goods to the rest of the world in December 2017 was ˆ180.7 billion, an increase of 1.0% compared with December 2016 (ˆ179.0 bn). Imports from the rest of the world stood at ˆ155.3 bn, a rise of 2.5% compared with December 2016 (ˆ151.4 bn). As a result, the euro area recorded a ˆ25.4 bn surplus in trade in goods with the rest of the world in December 2017, compared with +ˆ27.6 bn in December 2016. Intra-euro area trade rose to ˆ142.4 bn in December 2017, up by 2.8% compared with December 2016.
The first estimate for extra-EU28 exports of goods in December 2017 was ˆ160.6 billion, down by 2.7% compared with December 2016 (ˆ165.0 bn). Imports from the rest of the world stood at ˆ146.4 bn, up by 1.4% compared with December 2016 (ˆ144.3 bn). As a result, the EU28 recorded a ˆ14.3 bn surplus in trade in goods with the rest of the world in December 2017, compared with +ˆ20.7 bn in December 2016. Intra-EU28 trade rose to ˆ256.2 bn in December 2017, +2.9% compared with December 2016.
Euro area annual inflation is expected to be 1.2% in February 2018, down from 1.3% in January 2018, according to a flash estimate from Eurostat.
Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in February (2.1%, compared with 2.2% in January), followed by services (1.3%, compared with 1.2% in January), food, alcohol & tobacco (1.1%, compared with 1.9% in January) and non-energy industrial goods (0.7%, compared with 0.6% in January).
The euro area (EA19) seasonally-adjusted unemployment rate was 8.6% in January 2018, stable compared to December 2017 and down from 9.6% in January 2017. This is the lowest rate recorded in the euro area since December 2008. The EU28 unemployment rate was 7.3% in January 2018, stable compared to December 2017 and down from 8.1% in January 2017. This remains the lowest rate recorded in the EU28 since October 2008. These figures are published by Eurostat.
Eurostat estimates that 17.931 million men and women in the EU28, of whom 14.111 million in the euro area, were unemployed in January 2018. Compared with December 2017, the number of persons unemployed decreased by 19 000 in the EU28 and by 10 000 in the euro area. Compared with January 2017, unemployment fell by 1.867 million in the EU28 and by 1.429 million in the euro area.
Economy of Japan
Japan`s economy grew at a more solid pace in the three months through December than initially reported, according to a revised estimate. The revised reading on gross domestic product showed annualized growth of 1.6 per cent in the fourth quarter, up from a preliminary estimate of 0.5 per cent reported last month, Japan`s cabinet office reported.
The revised reading beat the median forecast of 0.9 per cent from economists polled by Reuters. It also meant that GDP rose 0.4 per cent quarter on quarter, up from the preliminary reading of 0.1 per cent and ahead of the 0.3 per cent pace recorded in the third quarter.
Japanese industrial production fell sharply in January after the previous month`s solid gains, as output of automobiles, electronic devices and industrial machinery decreased on month continuing a patchy run of results, government data showed.
Industrial output fell 6.6% in January from a month earlier, following December`s 2.9% increase, according to the Ministry of Economy, Trade and Industry. The slide was bigger than a 4.0% drop expected by economists surveyed by the Nikkei. METI softened its assessment of industrial output slightly, saying that production was picking up gradually.
According to a survey included in the report, manufacturers expect output to rebound strongly by 9.0% in February before falling again in March by 2.7%.
Japan`s trade balance swung to a deficit of ¥943.4 billion ($8.9 billion) in January, falling into the red for the first time in eight months after imports rose due largely to the higher cost of natural resources, government data showed.
The deficit was still 13.6 percent smaller than the ¥1.09 trillion deficit recorded a year ago, as exports grew 12.2 percent to ¥6.09 trillion helped by strong demand for hybrid cars and semiconductor production machinery from China.
Imports climbed 7.9 percent to ¥7.03 trillion, reflecting a surge in the value of crude oil imports, the Finance Ministry said in a preliminary report.
Japan`s key inflation rate remained at 0.9 percent in January on higher energy costs, almost matching market forecasts and still below the Bank of Japan`s 2 percent target, government data showed.
The year-on-year change in the core consumer price index, excluding volatile fresh food prices, remained positive for the 13th consecutive month, according to the Ministry of Internal Affairs and Communications. The rate also stood at 0.9 percent in each of the previous two months.
Electricity fees and gasoline prices were the main driver behind the increase in the core CPI, rising 6.4 percent and 8.8 percent, respectively.
Excluding fresh food and energy prices, so-called "core-core" consumer prices rose 0.4 percent in January from a year before.
Japan`s unemployment rate fell to 2.4 percent in January, the lowest in over 24 years, and job availability remained at a four-decade high, government data showed. The figures suggest companies are facing intensifying competition to secure workers as the economy enjoys its second-longest postwar economic expansion cycle.
Tightness in the job market, however, has yet to fully translate into robust wage growth - a headache for policymakers grappling with pulling the economy out of deflation. The unemployment rate fell 0.3 percentage point from December to the lowest level since April 1993. It has stayed below 3 percent since June 2017, Internal Affairs and Communications Ministry data showed.
The jobs-to-applicants ratio stood at 1.59 in January, unchanged from December and staying at its highest level since January 1974, according to the Health, Labor and Welfare Ministry. This means there were 159 job openings for every 100 workers.
Economy of Russia
Russia`s gross domestic product expanded by 1.5 percent year-on-year in 2017, compared with a 0.2 percent contraction in 2016, a preliminary estimate showed. It was the first year of growth since 2014.
According to the baseline scenario of the Ministry of Economic Development, the Russian economy should grow by 2.1% this year and by 2.2-2.3% in the next two years. The generalized forecast of economists describes the following scenario: at the end of 2018, the growth rate of GDP will accelerate slightly - by 0.2 percentage points to 1.7%. The peak of growth will be in 2021 and 2023 - but in these years, the economy will grow only by 1.8%.
Russia`s industrial production grew by 2.9 percent year-on-year in January 2018, recovering from a contraction of 1.5 percent in the previous month and beating market expectations of a 0.3 percent fall. It was the steepest increase in industrial production since June last year, boosted by a rebound in both manufacturing (4.7 percent vs -2 percent in December) and extraction of raw materials (1.1 percent vs -1 percent). Meanwhile, output continued to shrink for electricity and gas (-2.2 percent vs -5.5 percent) and distribution of water, sewage (-4.6 percent vs -4.2 percent). Industrial Production in Russia decreased 20.4 percent in January of 2018 over the previous month.
Russia`s trade surplus widened by 16.5 percent to USD 13.70 billion in December 2017 from USD 11.76 billion in the same month a year earlier, above market expectations of a USD 13 billion surplus. Exports increased 21.1 percent to USD 37.86 billion and imports rose 23.9 percent to USD 24.16 billion. In 2017, the trade surplus advanced 27.8 percent to USD 115.33 billion from USD 90.26 billion in 2016.
Russia`s consumer prices rose 2.2 percent year-on-year in February 2018, the same pace as in the previous month while missing market expectations of a 2.3 percent gain. The inflation remained at the lowest level since the series began in 1991 and well below the central bank`s target of 4 percent, despite a pick up in food inflation. The Consumer Price Index in Russia increased 0.2 percent in February of 2018 over the previous month.
Russian unemployment rate fell to 5.2 percent in January 2018 from 5.6 percent in the same month of the previous year, in line with market expectations.
The number of unemployed people declined by 372 thousand to 3.918 million from 4.290 million in the corresponding month of the previous year. Compared to December, the number of unemployed increased by 41 thousand from 3.877 million.
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