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Highlights of the World Economy - Feb 10
Source: OPEC_RP100205 2/10/2010, Location: Europe
Financials and Investment
Industrialised countries
USA
The US economy continues to improve from its recent trough-levels. 4Q09 real GDP
growth was reported at a seasonally-adjusted annualized rate (saar) of 5.7%. Although
this number indicates a solid recovery, a closer review of the details indicates a more
mixed picture.
Personal expenditures expanded by 2.0% in 4Q09, after having risen by 2.8% in 3Q09.
This is a positive sign indicating households probably have again the means to spend
and are willing to do so. This is particularly important as government expenditure has
declined slightly by 0.2% in the fourth quarter after growth having peaked in the second
quarter at 6.7% and was still increasing by 2.6% in the third quarter.
So while most areas of GDP have improved for the better, the main question with regard to the 2010 forecast
is what is coming next, especially as 3.3 percentage points of the 5.7% GDP growth in
fourth quarter were due to inventory replenishing,. This could potentially push growth in
the next quarter to a much lower level, once the inventory replenishment is over.
The labour market remained weak by historical standards even though The
unemployment rate fell to 9.7% in January 2010, compared to 10.0% in December. The
question remains if this improvement can be sustained. Payrolls continued falling with
20,000 jobs unexpectedly being shed in January. Excluding government hiring, the joblosses
would have been at 53,000.
The recent weekly jobless claims also increased. On the positive side, hours worked per work week for all employees– considered widely as a leading indicator – rose by 0.1 hours to 33.9 hours. The work week in factories rose by 0.3 hours to 39.9, so this might also validate the recently high ISM numbers and might
support the industrial production number for January.
Compensation has improved as average hourly earnings were up 0.2% m-o-m in January, after a rise of 0.1% m-o-m in
December. This comes along with signs of a bottoming out in consumer credit, which
dropped by $1.7 bn in December compared with double digit declines in the previous
months. Consumer credit fell by $21.8 bn in November. Both developments id sustained
could potentially support household spending going forward.
Business sentiment also continued to improve. Both of the ISM indices were moving up,
reflecting the positive growth trend. ISM manufacturing improved to 58.4 in January,
which is the highest level since the recession started two years ago. The ISM nonmanufacturing
index which was only slightly above the 50 level in December when it
stood at a level of 50.1 rose again slightly in January to 50.5. At this level it is just about
indicating a little growth in the services sector, which accounts for more than 70% of US GDP. It remains to be seen whether the leading manufacturing sector can pull the
service-sector significantly above the 50 level.
The uncertainty about the pace of the economic recovery is being reflected in the equity
market as well. The two positive data releases- the relatively high fourth quarter 2009
GDP numbers and the surprising improvement in the unemployment numbers for
January were widely ignored by the stock market. The current level of the S&P 500 as a
major benchmark for the US equity market is around 7-8% lower in the past two weeks..
There could be a realization that equity markets might have risen too far too fast on
exaggerated expectations and that the economic recovery might take longer than
expected.
The housing sector remains under pressure as well. Prices continued to fall
on a yearly basis, according to the Case-Shiller index, but the decline moderated to
5.32% in November. With prices in both important areas – housing and equities – are in
decline, a substantial improvement to the pre-crisis level currently seems to be unlikely
in an economy that is dependent on household spending, but burdened by debt, the
prospect of higher taxes to repay the stimulus, high unemployment and falling asset
prices.
So while there are signs for a continuation of the recovery, an element of caution is still
required. The forecast for GDP growth has been revised up somewhat to 2.5% for 2010
while the estimate for 2009 is for a contraction of 2.4%.
Japan
The Japanese economy’s growth is still challenged by deflation, declining retail sales,
and remains dependent on government-led support and its relative success in exports,
mainly to Asia and particularly to China.
Real retail sales are estimated to have declined for the third consecutive month in
December by 0.5% m-o-m. This follows a decline in November and October of 0.3% mo-
m and 0.4% m-o-m, respectively. The falling trend reflects a drop in consumer
confidence, led by continuing uncertainty in the employment market, falling wages,
deflationary pressures, and the tapering off of governmental support for car and
electronics purchases. In nominal terms, the December decline in retail sales was at
1.2% m-o-m and 0.3% y-o-y basis.
Sales were thus by lower than the level of last year’s December retail sales in the midst of the financial crisis. As far as household consumption is concerned the numbers for December were still solid, with real spending
levels rising 2.1% y-o-y and 1.0% m-o-m, after an increase of 0.1% m-o-m in November
and 0.7% m-o-m in October. However, most of the stimulus that was targeting this
increase in consumption is now tapering off, which implies weakening demand going
forward.
The unemployment rate unexpectedly declined by 0.1% in December and is back to
October levels of 5.1% lower than the peak-level in July 2009 of 5.7%. Again the widelywatched
job-to-applicant ratio continued its gradual improvement to stand at 0.46,
improving for a second consecutive month. However, cash-compensation was down for
the 19th consecutive month, by 6.1% y-o-y in December, and winter bonuses were fell
10.6% y-o-y. For all of 2009, wage compensation declined by 3.9% and currently no
major improvement can be expected.
Consumer prices remain under continued pressure and the consumer price index (CPI)
excluding energy and food declined by 1.2% y-o-y in December, the sharpest drop since
1971 when records began. According to the most recent data, this trend is to persevere
at the beginning of 2010.
Industrial production grew 2.2% m-o-m in December. This comes after an increase of
2.2% in November and 0.6% in October. While this indicates an upswing, going forward
the Ministry of Economic Trade and Industry (METI) is projecting much lower levels for
1H10. The current forecast is for 1.3% increase in January and 0.3% for February. As
the METI projections for industrial production are usually 0.2-0.3 percentage points
higher than the actual numbers, according to research undertaken by Deutsche Bank,
may imply that the growth in February might be even flat.
Significant support for the substantial increase in industrial production in December has
come from exports. Real exports were up by 2.6% m-o-m in December, after 5.1% m-om
increase in November and 5.2% m-o-m in October. On a quarter-on-quarter basis
exports increased by 12.7%. While exports to China are the main driver for this trend,
exports to the US are starting to decline again, pointing to the uncertain pace of recovery
in the US economy. Real exports to the US in December fell by 2.3% m-o-m, after a
sharp increase in October of 5.0% m-o-m and 0.6% in November. It is the first negative
m-o-m reading since February 2009.
The trend of exports to the EU has not been much better. Exports rose ng a mere 0.2% m-o-m in December after a strong growth in October of 9.3% and a decline in November of 4.0%. As highlighted, exports to Asia
were the main positive development in December, rising by 3.1% m-o-m, after a gain of
6.7% in October and a 1.8% decline in November. China, which currently constitutes the
main export market for Japan, is showing the steadiest development. Exports to China
grew constantly in the course of the 4Q.
In December, exports were 2.5% higher on a monthly basis, compared to 2.0% in November and 3.0% in October. While so far this certainly is a solid trend, the main question is whether this can continue. Recent moves
to slow down growth in China by curbing lending and other measures might have an
impact on Japanese exports.
In addition to this relatively muted forecast for 2010, the debt situation of Japan is adding
concern for the economy. According to IMF projections the debt/GDP ratio of Japan is
expected to reach 250% by 2014. This development is causing concern in the capital
markets and as in other OECD countries interest rates that investors might ask for
financing this public debt could be on the rise. The major financial source for the
Japanese budget deficit has been Japanese households and it remains to be seen
whether this can continue in the future.
Standard & Poor’s has just recently sounded the alarm over the Japanese debt-level and warned that it might lower the Japanese Aacredit rating, the agencies third highest. In addition to this, concerns were being raised in
the bond-markets that the Japanese Post Bank might diversify into non-Japanese
assets, i.e. US treasuries. Deposit-taking banks, including the postal sector, held 42.5%
and insurance companies another 20% of the outstanding Japanese government bonds
at the end of September last year. Foreigners owned just 5.8%, according to the Ministry
of Finance data.
Despite the current crisis in Japan, household savings are rising again. The widespread
complacency about Japanese debt levels seems to be a major driver for the success of
the Japanese government bond-market and a supporting factor for the government to
continue its debt spending.
In light of the challenges for 2010, the forecast remained unchanged at 1.1% and at
minus 5.3% for 2009.
Euro-zone
Economic conditions in the Euro-zone as a whole have been mostly steady over the last
months. However, the situation in some parts of the Euro-zone has worsened,
particularly in Greece and Spain, while the main economies, Germany and France, have
continued their slight improvement. But even there, first signs of potential worries are
emerging. Industrial production in Germany surprisingly declined by 2.6% m-o-m in
December following a small growth of 0.7% in November.
The December number would have been worse if one excludes the positive effect of high energy demand due to
the unusually cold weather. Industrial orders in Germany also declined in December.
Orders fell by 2.3% m-o-m in December, after increasing 2.7% in November. The
November figures were boosted by non-Euro-zone foreign orders pointing to the strong
German export market, but foreign orders plunged by 3.2% m-o-m in December. The
fourth quarter for Germany is already showing a weaker economic trend than 3Q09,
when Germany’s economy recovered from its trough and expanded – ahead of other
Euro-zone nations – by 0.7% q-o-q.
The third quarter certainly was boosted by government-led stimulus on a global scale, which was filtering through into the significant support for the German export-engine. Moreover, domestically the government
undertook considerable stimulus measures and supported both the car sector and the
labour market via direct cash-injections and many other measures. Softer production and
order indicators signal a weaker fourth quarter and there is the likelihood that it will not
only stagnate, but probably decline.
On the other hand, business sentiment in Germany is still high and the widely-watched Ifo business climate index has reached a pre-crisis level of 95.8. This compares with only 82.9 one year ago. The detailed Euro-zone GDP
numbers, due to be published in mid-February will reveal how far the growth momentum
in the 4Q09 was maintained.
The Euro-zone unemployment rate reached 10% in December compared with 9.9% in
November. Again Germany was the most successful of the bigger Euro-zone economies
in fighting unemployment which came in at 7.5% for the third consecutive month, only
slightly higher than the highest post-crisis level in June 2009, when it reached 7.6% and
held this level for four months. This is in stark contrast to Spain which again faced an
increase of 0.1% to 19.5%, or almost twice the average Euro-zone level. Again, Spain
marked the record level in youth unemployment, which is now at 44.5%, higher than the
November level when it stood at 43.6%. This compares with a Euro-zone level of 21.0%,
up by 0.1% from November. The weak employment trend in the Euro-zone is feeding
through into the retail sales numbers that have stagnated in December on a monthly
basis, but are still better than the decline of 0.5% in November.
Business sentiment has improved in the Euro-zone. The Markit Euro-zone
manufacturing purchasing managers’ index rose to 52.4 in January, compared to 51.6 in
December 2009 and above an earlier “flash” estimate of 52.0. This increase was driven
by France with Germany and Italy also contributing to improvement. In contrast, the
survey reflects a slowing momentum in Greece and Spain which recorded lower levels
which are still showing contraction as the index remains below the 50 threshold.
A major problem in the Euro-zone is the mounting public-debt of some of its member
countries, particularly Greece. This weakening financial situation of many Euro-zone
countries might push up the interest rates investors are demanding for financing this
debt and this might put public finances in some of the Euro-zone countries under
considerable pressure.
Euro-zone countries have borrowed a record euro 110bn already this
year from financial markets, pushing up the cost of debt and forcing nations with the
weakest public finances to pay a higher price for the increased deficits. Greece said that
it would keep its borrowing program in spite of concerns in the markets, which saw its
bond yields hit 10-year highs in recent weeks. The volume of the Euro-zone sovereign
credit default swaps that allow hedging against sovereign bond-default has reached new
record highs.
In light of these worries about Euro-zone debt levels and the stress that it could put on the
Euro, the president of the European Central Bank (ECB) reassured investors about public
finances. The ECB also left its main interest rate unchanged at 1% for the ninth consecutive
month, a record low. The bank is expecting inflation – currently at 1.0% for January – and
economic growth to remain "moderate". Financial markets are not expecting any interest rate
rise until at the earliest late this year. The ECB hinted strongly that at its next meeting in
March further steps for implementing the ECB's "exit strategy", under which it will gradually
unwind emergency measures to support financial markets, would be provided.
The many uncertainties in the real economy and in the public finances led to the forecast
for 2010 to remain unchanged at an expected growth of 0.6% following a decline of 3.9%
last year.
Former Soviet Union
The Russian national statistics office announced in preliminary data that the economy
shrank by 7.9% in 2009, after growing by 5.6% a year earlier. The Russian economy
recovered in the third quarter, but improvements are still rather weak and its
sustainability uncertain. Russia’s manufacturing sector showed signs of recovery at the
start of 2010. Output rose for the sixth straight month, and at a faster rate, as new orders
increased for the first time since last October.
Employment continued to fall, but at a much slower rate than the trend pace recorded over late 2008 and 2009. Inflationary pressures strengthened, but remained relatively weak. Our forecast of 3% growth in
Russia GDP is based on the effect of delayed impact of the government’s large stimulus
package, an upturn in external demand and lower interest rates. Private consumption is
predicted to recover at a healthy pace, while the danger of non-performing loans might
comprise a big challenge to the financial sector.
The National Bank of Ukraine (NBU) has predicted that the deficit of the country's
balance of payment will improve in 2010, while in 2009 it came to $13.727 bn. The deficit
of Ukraine's current account in 2009 reached $1.94 bn, and the deficit of the financial
account totaled $11.787 billion. Ukraine's current account could end this year flat after
several years of sliding into the red and the capital account gap could also contract
significantly according to NBU.
The economy of the former Soviet state has been hard hit by the global financial crisis and contracted by up to 15%, but a sharp fall in domestic demand for imports and a sharply depreciated currency that has made steel and
chemical exports much cheaper means the trade account has become close to
balanced, helping to bring the current account into the black. Inflation in Ukraine in
December 2009 fell to 0.9% m-o-m, from 1.1% in November 2009. Inflation was 12.3%
in 2009, while in 2008 it was 22.3%. The NBU forecasts further disinflation in January
2010.
Developing Countries
Inflation is appearing as a growing risk across most of developing Asia. The rise of
inflationary pressure in recent months is due to the rapid economic recovery in the
region after a deep global recession in early 2009. While rising demand is welcomed to
stimulate growth, it has exposed those countries to price instability, pushing
policymakers to take a tougher stand on expansionary policies.
Economic growth in China exceeded the government's aim of average real GDP growth
of 8% in 2009, posting a full-year growth of 8.7%. It is estimated that the above-target
performance was driven mainly by infrastructure investment linked to the government’s
stimulus package and a rebound in expenditure on property development. Although real
GDP is forecast to grow by 9.1% in 2010, the growth trend is predicted to decelerate
throughout the year, and in 2011 the rate of expansion is forecast to fall even further.
This reflects the introduction of gradual tightening measures and furthermore the fading
impact of the government’s stimulus efforts.
With these signs, monetary authorities have moved to rein in credit, which is believed to be causing the overheating. For the first time in over a year the People’s Bank of China raised the reserve-requirement ratio for banks by half a percentage point to 16% on 18 January, thus reducing the amount of money
available for banks to lend.
The IMF has projected India's economic growth for fiscal 2010-11 at 8% and at 6.7% for
the current fiscal year. It attributed India's prompt fiscal and monetary easing to the
speedy recovery from the global meltdown. Recent data show that the industrial sector
continued to strengthen in November, as year-on-year output growth hit a two-year high
of 11.7%. This followed a 10.3% year-on-year expansion in October. Although
agricultural output for the current fiscal year is estimated to decline 1% due to a drought,
non-agricultural GDP growth is likely to increase.
Job growth is expected to support private consumption. Investments are likely to improve with booming corporate profits, rising business confidence and favorable financing conditions. The accelerated pace of
reforms and capital inflows could also raise investment. India’s wholesale price inflation
rose at a faster rate during December. Wholesale prices shot up by 7.3% y-o-y,
compared with a 4.8% gain in November. While the Central Bank of India is trying to
keep prices down, the drought and supply bottlenecks have spurred increases.
To lower the amount of capital available for lending, the Reserve Bank of India on 29 January
increased the cash reserve ratio for banks by 0.75 percentage points to 5.75%. Tighter
interest rates could come next. The bank has moved from “managing the crisis to
managing the recovery”.
OPEC Member Countries
Recent data published by the Central Department of Statistics & Information in Saudi
Arabia show that annualized inflation accelerated for the second consecutive month in
December to 4.2% from 4.0% in the previous month. On a m-o-m basis, consumer prices
increased 0.4% in December compared with 0.3% in November.
The Kingdom's annual inflation came down from a record high of 11.1% in July 2008 to a two-year low of 3.5% in
October 2009. The Saudi Arabian Monetary Agency SAMA in October forecast
inflationary pressures during the fourth quarter, mostly due to seasonal factors. But all
data show that the general trend indicates a continued decline in the inflation rate during the fourth quarter of 2009 according to current indexes and future forecasts at both the
domestic and international levels, the SAMA said.
Oil prices, the US dollar and inflation
The US dollar continued to strengthen in January against all four major currencies after
having reached a 13-month low only at the beginning of December. On a monthly basis,
the dollar rose 2.3% against the euro, 1.9% versus the yen, 0.7% compared the Swissfranc
and up by 0.5% against the pound sterling. After having reached a level of
$1.5120/euro at the beginning of December – its weakest level since August 2008, it
averaged at a monthly rate of $1.4270/euro compared to the December level of $1.4608/euro.
The increase in the US dollar was supported only in part by positive indicators in the US
economy but even more so due to continued weakness in the Euro-zone and Japan.
Particularly the rising concern of the public debt situation in both of the economies
constitutes a key-element of the current weakness of their currencies. The surprisingly
high US GDP in 4Q09 as well as the drop in the US unemployment rate for December
also gave a boost to the US currency.
In January, the OPEC Reference Basket increased by $2.00/b or 2.7% to $76.01/b from
$74.01/b in December. In real terms (base June 2001=100), after accounting for inflation
and currency fluctuations, the Basket Price rose by $1.91/b or 4.1% to $48.01/b from
$46.10/b. The dollar rose by 1.4%, as measured against the import-weighted modified
Geneva I+US dollar basket, while inflation remained flat.
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