GDP UPDATE
May 2013
McIlvaine Company
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The recently released gross domestic product quarterly report shows a sluggish but improved economy. Markets responded with a day that saw little change in value.
The advance estimate of real GDP expanded at a seasonally-adjusted annualized rate of 2.5%, according to the U.S. Department of Commerce, falling short of analysts’ expectations of 3%, but much improved over the previous quarter’s 0.4% growth. GDP measures the nation's total output of goods and services. The Commerce Department will release an adjusted first quarter report on May 30.
BBVA Compass, a financial services firm, estimated a first quarter GDP growth of 2.3 or 2.4%. “We are more pessimistic than the majority of analysts,” Kim Fraser, an economist at BBVA Compass, said. “Personal consumption and employment were strong in January and February, but slowed dramatically in March. Employment was down drastically,” she said.
The increase in the first quarter was due to rises in personal consumption, business inventory, equipment and software, and housing investment, according to the Commerce Department’s report.
“Consumption was stronger than expected, and housing was a strong mover,” Fraser said.
Imports increased, which resulted in a lower GDP, but economists like Fraser see an upside to this. “Imports may be an encouraging sign,” she said, referencing the fact that they indicate an increase in consumer spending.
Another factor responsible for lower than expected GDP growth was a decrease in spending by local, state and federal governments.
Most of the effects of sequestration, the drastic across the board cuts to federal spending, have yet to be felt in the economy, but defense spending declined 11.5%, which kept the first quarter GDP growth from reaching 3%, according to BMO Capital Markets Senior Economist Sal Guatieri. “Federal defense spending carved 0.6 percentage points from growth,” he wrote in a report.
Both Fraser and Guatieri believe the sequestration cuts will have more of an effect in the second quarter. Despite this, Guatieri predicted, “While sequestration will slow GDP in Q2, we still expect growth to top 3% in the second half of the year amid improved household finances, pent-up demand for autos, and the long-running housing market recovery.”
The outlook for economic growth and inflation in Latin America's second-largest economy this year has deteriorated among private-sector economists, according to a Bank of Mexico survey.
Analysts see the country's economy expanding 3.35% in 2013, according to the average estimate of the central bank's April survey, down from the 3.46% expected in the previous month's poll.
Mexico's annual inflation is seen rising 3.9% this year, up from the previous estimate of 3.75%. Thirty-three local and foreign banks and consultancy firms responded to the April survey.
The central bank's survey showed economists maintain a glum view of Mexico's growth as sluggish global demand, particularly in the U.S., is already affecting Mexico's export engine.
The government itself sees first-quarter GDP growth slowing to an annual rate of 1%, the lowest since the recession of 2009, with an economic recovery expected to happen in the second half of the year.
Price worries have recently increased in Mexico after 12-month inflation rose to 4.72% in the first half of April, the highest level in seven months. The central bank has said it is a temporary uptick caused by volatile agricultural prices.
Lower growth and higher inflation led Mexico's central bank to stand pat on rates in its last policy meeting in late April, keeping a neutral tone. The bank already cut the key overnight interest rate by 50 basis points to 4% in its March decision.
Projecting a modest pick-up in economic activity in the coming months, Reserve Bank today pegged GDP (Gross Domestic Product) growth rate for the current fiscal year at 5.7%, significantly lower than the Finance Ministry's forecast of 6.1 to 6.7%.
"The Reserve Bank's baseline projection of GDP growth for 2013-14 is 5.7%. The bank's current assessment is that activity will remain subdued during the first half of this year with a modest pick-up in the second half, subject to appropriate conditions ensuing," RBI said in its annual monetary policy review for 2013-14.
India's economy grew by 5% in the last fiscal year, lowest in a decade, because of poor performance of manufacturing, agriculture and services sector.
The RBI's current fiscal year's growth estimate of 5.7% is much lower than the finance ministry's growth projection of 6.1-6.7% and Prime Minister's Economic Advisory Council's growth projection of 6.4% for 2013-14.
It is also lower than the World Bank's growth projection, which predicted the Indian economy to grow by 6.1% in 2013-14 on account of robust domestic demand, strong savings and investment rate.
Not happy with RBI's growth projection, Planning Commission Deputy Chairman Montek Singh Ahluwalia had described its outlook as 'pessimistic'.
"Reserve Bank is clearly more pessimistic than the government is. I think that the government forecast as of now is feasible. Critically what matters is, how effective we are in restoring the momentum of investment in the large projects", the Plan panel deputy chief said.
The Reserve Bank today cut the key interest rate by just 0.25% to 7.25% and kept the liquidity enhancing cash reserve requirement unchanged.
Further, the central bank said it expects inflation to hover broadly around the 5.5% mark in the current fiscal and will deploy "all instruments at command" to bring it down to 5% by March next year.
Taiwan's economy grew by a much-slower-than-expected 1.54% in the first quarter from a year earlier, badly undershooting a median forecast of 3% as export growth fell short of expectations and private consumption sputtered.
The figure was well below even the lowest forecast from 11 analysts polled by Reuters, as soft global demand continues to weigh on Asia's trade-reliant economies.
On a quarterly basis, gross domestic product (GDP) contracted 0.8% from the December quarter, preliminary data showed.
Private consumption growth eased to 0.35% on-year, from 1.55 in the fourth quarter, contributing 0.20 percentage point to GDP growth, while government spending declined 0.52%.
But investment remained robust, growing 10.64% from 8.97% the previous quarter, contributing 1.65 percentage points.
Exports increased 4.84%, while imports rose strongly at 6.92%, with net exports dragging growth by 0.26 percentage points. (Imports are subtracted from exports to give the net effect.)
Reduced government spending cut GDP growth by 0.5 percent to 1.54 percent.
As demand for Taiwan's exports is expected to pick up following the typically slow first quarter, some analysts saw the weak GDP number as signifying the worst was over for the export-driven economy, sparking a rally in Taiwan stocks and the local currency. Taiwan shares ended up 0.8%, to a more-than-13-month closing high, while the Taiwan dollar rose T$0.128 to T$29.478 to the U.S. dollar in early afternoon trading.
"Most investors believe GDP has hit the bottom in Q1, and will be then ticking up each quarter throughout this year," said Rex Chen, chief investment officer of BNP Paribas's fund management joint venture in Taiwan.
Frances Cheung, a senior strategist of Credit Agricole CIB in Hong Kong, said that although exports had contributed slightly to GDP growth, expanded imports had been more significant in reducing it.
"On a more positive note, contributions from exports actually picked up, but imports were even stronger. So it may be a good sign for Q2 growth if those imports are transformed into exports going forward," said Cheung.
Andrew Tsai, an economist at KGI Securities, took a slightly less optimistic view and noted the lack of policy options available to stimulate growth because an interest rate cut by the central bank would not stimulate demand.
\"We may not see a strong rebound until Q3-Q4," he said, adding that the central bank may try to lower the Taiwan dollar's value via heavy selling of the local currency to keep exports competitive against those of South Korea and other Asian rivals.
Tuesday's share and currency market rallies took place against a backdrop of weak demand from Europe and China, Taiwan's biggest export destination, suggesting the market reaction may have been premature.
Mainland China's economic recovery unexpectedly stumbled in the first quarter as the annual rate of growth eased back to 7.7% from the 7.9% pace set in the final quarter of last year.
Overlapping that data, Taiwan's export orders unexpectedly contracted 6.6% in March from a year earlier, shrinking for the second straight month.
Taiwan's export orders are a leading indicator of demand for Asia's exports and for hi-tech gadgets such as smartphones, and typically lead actual exports by two to three months.
The EC downgraded its estimate of this year´s development of the Czech economy in its prediction. In February it had expected stagnation.
For next year, the EC downgraded the Czech GDP forecast from a growth of 1.9% to a growth of 1.6%.
The Czech budget deficit should get below 3% of GDP, which is one of conditions for euro zone entry. The EC expects the deficit to drop to 2.9% of GDP from last year´s 4.4%.
In its previous forecast, the EC expected the Czech budget deficit to reach 3.1% of GDP for this year, compared with 5.2% of GDP estimated for last year.
"I am sure that the public finance deficit will fall below 3%. Regarding the fact we have fulfilled the key target of our financial policy to stabilize public budgets, we can implement some pro-growth measures now," Kalousek said.
"It cannot therefore be ruled out that the economic development trend will turn round in the second half of this year already," Kalousek added.
According to the EC, the condition of Czech public finances has improved thanks to a considerable reduction of public investments and a growth of budget revenues, which rose mainly thanks to higher VAT.
The EC expects the Czech government debt to climb to 48.3% of GDP this year from last year´s 45.8%. Next year it should exceed the level of 50% of GDP slightly.
The EC also expects the Czech economy to rebound from the bottom in about the middle of this year since negative factors, including weak consumer confidence, fall of investments and unfavorable external environment, should subdue.
Next year, the economic revival should be boosted by an increase in households´ real incomes.
The EC also expects the average unemployment rate in the Czech Republic to rise to 7.5% this year from last year´s 7%. Next year it should fall slightly to 7.4%.
The EC forecast is much more pessimistic than the prediction of the International Monetary Fund (IMF), which said last month it expected the Czech economy to halt its fall and grow by 0.3% this year.
The Czech Finance Ministry recently downgraded its estimate of GDP development for this year from a slight growth to stagnation.
The Czech National Bank (CNB) said in its latest forecast it expected Czech GDP to fall by 0.3% this year.
France's economy and finances will finish the year in a worse state than President Francois Hollande's government forecast only three weeks ago, the European Commission said.
The euro-zone's second-largest economy will contract 0.1% in 2013 and its deficit will decline to 3.9% of annual output from 4.8% in 2012, the EU's executive arm said in its Spring economic forecasts.
The commission previously forecast that French GDP would grow 0.1% in 2013 and the deficit would come in at 3.7%--forecasts that Paris used in a stability program it submitted to Brussels recently.
France was already pushing Brussels to let the country run a budget deficit of 3.7% of GDP this year instead of the 3% Mr. Hollande pledged when he took power just under a year ago. Paris argues that taking further steps to reach the 3% target would have pushed its economy--which posted no growth in 2012--into recession.
The gloomier forecasts from the commission are unlikely to spur Mr. Hollande to take steps to rein in the budget as his government has led a public push against austerity in the euro zone. Finance Minister Pierre Moscovici has said the government will not make any changes to the budget this year to meet deficit targets. He has also argued in favor of optimistic growth forecasts, saying being too cautious would bind the country into excessive fiscal consolidation.
France's structural deficit--a calculation that strips out the effect of economic slumps--is expected to come in at 2.5% of GDP, the commission said. Paris has been pushing the commission to focus more on structural targets, which would allow France more leeway in meeting headline targets.
Latvia’s economy will grow at the fastest pace in the European Union this year and next, driven by exports, the 27-member bloc’s executive arm said.
Gross domestic product will rise 3.8% in 2013 and 4.1%in 2014, the European Commission said in its spring economic forecasts. Consumer prices will advance 1.4% this year and 2.1% next, it predicted.
The Baltic country, which plans to adopt the euro in 2014, grew by more than 5% in each of the last two years after a slump that began in 2008 triggered a bailout and erased more than a quarter of output. The nation meets all the criteria to adopt the common currency on Jan. 1, according to Prime Minister Valdis Dombrovskis.
“Despite the volatile external environment, the Latvian economy retained a strong growth path,” the commission wrote. “The most recent high-frequency indicators, in particular industrial and retail sales, confirm the previously expected slowdown in 2013 but nevertheless the country is still likely to remain among the fastest growing in Europe.”
Unemployment will fall to 13.7% this year and 12.2% in 2014, the commission estimates. The budget deficit will stay at 1.2% of GDP in 2013 and narrow to 0.9% next year, it predicts.
Lithuania’s economy grew more slowly than economists predicted in the first quarter as the construction industry slumped, the statistics office said, citing a preliminary estimate.
Gross domestic product (GDP) advanced 3.4% from a year earlier, compared with 4.1% in the previous three months, the statistics office in the capital, Vilnius, said by e- mail. That’s less than the 3.5% median estimate of three economists in a Bloomberg survey. GDP rose a seasonally adjusted 1.3% from the fourth quarter.
Prime Minister Algirdas Butkevicius’s four-party Cabinet took office in December after elections during which the eventual coalition members pledged to boost social spending. The government has a goal of adopting the euro in 2015 and projects the budget deficit will narrow to 2.5% of GDP this year, from 3.2% in 2012.
Slovenia’s recession will stretch into next year on weak domestic demand as the euro-area country teeters on the brink of needing an international bailout, the European Commission said.
Gross domestic product (GDP) will contract 2% in 2013 and 0.1% in 2014 as rising unemployment affects private consumption, the commission said in its spring economic forecasts, in Brussels. Inflation will remain “subdued” at 2.2% in 2013 and 1.4% in 2014.
Slovenia, the only euro-using nation along with Cyprus predicted to still be in recession in 2014, is working to fix its ailing banking industry with a 900 million-euro ($1.2 billion) capital boost and the creation of a so-called bad bank to cleanse lenders’ balance sheets and aid an economic recovery. A detailed overhaul plan is set to be presented to the European Commission in Brussels by May 9.
“Risks to growth are tilted to the downside,” the commission said. “Further delays in resolving the banking crisis and restructuring the highly indebted corporate sector have already resulted in a downward revision of growth forecasts.”
Any more delay in “required bold structural reforms” would lower further the country’s growth prospects, the commission said.
Spain reported another quarter of economic decline, with the economy contracting 0.5% in the first quarter, compared to the previous three month period. Spain's IBEX 35 rose 0.77% in early trade as the numbers were in line with the Bank of Spain's forecast.
On a year-on-year basis, the economy contracted by 2%.
Spain has experienced seven consecutive quarters of economic decline. The economy contracted by 0.8% in the fourth quarter of 2012.
On Tuesday, the Bank of Spain revised down its gross domestic product (GDP) forecast for the whole of 2013, from a contraction of 0.5% to a contraction of 1.3%.
The recession forced Spain to revise its public deficit target down to 6.3% of GDP from 4.5% this year. The budget minister, Cristobal Montoro, admitted last week that Spain would need two extra years to bring its budget deficit back within the EU limit of 3% of GDP.
Last week, the government announced a reform program aimed at promoting growth rather than austerity, in order to combat the recession and unemployment crisis. The jobless rate in Spain reached a record high of 27.2% in the first quarter and the country's debt-to-GDP ratio has reached 84.2%.
Prime Minister Mariano Rajoy said Spain would remain disciplined on spending but signaled that he would also look to stimulate growth by reviewing corporate taxes and labor reform.
The Deputy Prime Minister Soraya Saenz de Santamaria said that the Spanish economy would grow by 0.5% next year and by 0.9% in 2015.
Javier Hernani, director general and chief financial officer of Bolsas y Mercados Espanoles (BME), the operator of the Spanish stock exchange, told CNBC he was confident that the Spanish economy would recover.
"The first steps are clearly in place, if you think of the situation in Spain last year, the stock market has rebounded more than 40% from the lowest point last July and the spread of the Spanish ten-year bond was around 700 basis points (bps) but I think in general terms there are some elements that financial stability in place."
"Obviously the economy needs credit to flow back into [industrial] activity, back in the small and medium-sized businesses so let's hope we're able to reverse the situation in the near future," he added.
Nicholas Spiro, head of Spiro Sovereign Strategy, said there was a disconnect between market sentiment and the real economy.
"When it comes to financial conditions, it's just the sovereign that's benefiting from the more favorable perceptions of Spain. Borrowing costs for businesses and households remain punitive and show how the transmission mechanism is still impairing the European Central Bank's monetary policy," Spiro said.
Jonathan Hopkin of the department of comparative politics at the London School of Economics and Political Science (LSE) said Spain would now look to see if Italy can persuade countries such as Germany to relax the drive for austerity.
"In Spain, they'll be waiting to see what happens as a result of the new Italian government marking a policy shift and sending out a challenge to European policy makers," Hopkin told CNBC's "Worldwide Exchange."
Hopkin said that a different policy approach was needed towards Southern Europe, but said he did not expect any shift from Germany before the country holds general elections in September.
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