|
U.S.
Economy slows down slightly in fourth quarter
According
to final estimates released on 30 March, gross domestic product (GDP)
increased at an annual rate of 3.8% in the fourth quarter last year over
the same quarter the prior year. The reading was unchanged over last
month’s preliminary estimates and only slightly down from the 4.0% reading
for the prior quarter. The small deceleration in the fourth quarter
reflected slower private consumption growth, which was partially
compensated for by a more resilient investment activity. Moreover,
despite the significant weakening of the US$ versus the currencies of its
major trading partners, the contribution of the external sector
deteriorated, as export growth slowed from a 6.0% year-on-year expansion
in the third quarter to only 3.2% growth in the fourth quarter. Import
growth, in contrast, more than doubled as growth accelerated from 4.6% in
the third quarter to 11.4% in the fourth.
Current
account deficit to stay despite weaker dollar
In the
meantime, the US$ firmed substantially versus the yen and the euro and the
forecast for this year’s current account deficit continues to show
excessive deficit levels. According to this month’s Consensus, the
current account deficit will remain at last year’s 5.7% of GDP level this
year. Obviously, a weaker US$ is seen as insufficient to stem the
imbalance, as both the government and the consumer remain on a spending
spree. In fact, the projections for the fiscal deficit are rising despite
pledges of the Bush administration to rein in government spending. At
3.2% of GDP, the forecast for this year’s public sector shortfall is a
notch above last month’s projection and only half a percentage point below
last year’s fiscal deficit.
Private
consumption could falter, as consumer confidence drops for third
consecutive month
Private
consumption, however, could begin to slow. After having retreated from a
5.1% annual expansion in the third quarter to 4.2% growth in the final
quarter last year, consumption could weaken further, as employment is
developing below expectations and consumer confidence continues to drop.
The University of Michigan’s index of consumer sentiment declined from
94.1 in the February survey to 92.6 in March. While the reading
represented only a small decline, it marked the third consecutive drop.
Moreover, consumers’ expectations about the economy are also
deteriorating. In March, the expectations index was 82.8, down from 84.4
in February, which also represented the third monthly decline. While both
indexes remained at relatively high levels, they also point toward a
slowdown in the overall pace of economic activity. In fact, the numbers
indicate that a significant shift in consumer spending is underway. In
particular, big ticket items will be impacted. According to the survey,
consumers expressed the least favourable attitudes toward buying homes and
vehicles in five years, as rising mortgage rates have begun to erode the
enthusiasm of home buyers. In addition, less attractive discounts on
vehicle prices and higher interest rates have subdued vehicle buying
plans. In contrast, consumers voiced the most favourable views toward
buying household durables.
Japan emerges out of recession as government revises growth
numbers upward
Japan
unexpectedly slipped out of recession. According to revised numbers from
14 March, the economy expanded in the October-December quarter,
contrasting a previous government report based on a less complete data
set, which showed the economy had slipped into recession. In the
October-December quarter, GDP expanded 0.5% on a seasonally adjusted
annualized basis and 0.1% over the preceding quarter. The preliminary
estimates had indicated a 0.5% year-on-year and a 0.1% quarter-on-quarter
contraction. The swing in the quarter-on-quarter numbers was mostly due
to private inventories, which contributed 0.2 percentage points to GDP,
compared to no contribution reported in the initial estimate. In the
second and third quarter of the calendar year, the economy had contracted
1.0% and 1.1% on a seasonally adjusted year-on-year basis (or -0.3% for
both quarters on a quarter-on-quarter basis). The economy was thus in
recession, according to convention, which defines recession as two
consecutive quarters of negative growth. While the economy appears to
have emerged out of recession in the October-December period, the reading
nevertheless remains disappointingly weak. The year-end slump was
prompted by weaker consumer spending and a lower contribution from the
external sector, as exports faltered and imports surged.
Japanese
economy likely to pick up speed in the first quarter
The economy
is likely to rebound in the January-March quarter as consumption picks up
with better income and job conditions. In part, weak consumption in the
October-December quarter reflected adverse climatic conditions.
Unseasonably warm weather and typhoons had kept private consumption at bay
but activity should bounce back amid normalizing weather conditions.
Therefore, the government remains upbeat about growth prospects and
claims that the recovery remains intact, stating that the current slump is
but a bout of weakness and that the consolidation has been protracted.
Latest data support the optimistic view, as gains in production and
consumer spending in January signal that the economy is gaining momentum.
In January, industrial production rose 2.5% from December, significantly
faster than the initial government estimate of a 2.1% increase. Moreover,
service industries expanded in January at the fastest pace in nine months,
led by retail and wholesale, according to the tertiary index, which rose
2.2% in seasonally adjusted terms over December. Finally, household
spending of salaried workers had the largest gain since April of last
year. A revival in the domestic economy comes at a welcome moment since
external demand is about to moderate as global economic growth will recede
from last year’s peak. In February, exports grew 1.7% over the same month
last year, which was down from the 3.2% expansion in January. The reading
falls well short of market expectations, which had expected exports to
grow an annual 6.2% in the second month of the year. Imports, in
contrast, expanded 11.3% over the same period. As a result, the trade
surplus shrank to 1.1 trillion yen (US$ 10.4 billion). Given the
importance of the external sector for the entire economy, Consensus
Forecast panellists have lowered their forecasts in spite of the upward
revision in the GDP data. For this year, Consensus Forecast participants
expect GDP to grow by 1.3%, which is down from 1.5% expected last month.
Moreover, the prospects for next year are also diminishing, as the
Consensus lowered the GDP forecast from 2.0% expected last month to the
current 1.9%.
Increased
optimism in Latin American
The
outlook of the Latin American region stands in stark contrast to the
dismal prospects for Japan. After growing by 5.9% in 2004, the fastest
clip in a decade, the region will experience yet another year of solid if
somewhat more moderate growth. While last year’s export growth, which
spurred the entire regional economy, is clearly unsustainable in the light
of moderating global growth, the domestic side of the economy have picked
up speed and will thus assume a more dominant role in buttressing economic
growth this year. According to this month’s Consensus Forecast, output in
the eleven countries surveyed will expand by 4.2% this year, which is up
0.2 percentage points over
Outlook
for Argentina improves following on conclusion of debt crisis
This
month’s upward revision to the economic growth outlook was broad-based, as
it was prompted by better projections for six of the seven major economies
in the region with only Colombia experiencing no change in projections.
Argentina experienced the strongest upward revision, as the Consensus
Forecast for GDP growth in 2005 increased 0.3 percentage points over last
month’s 5.7% projection to the current 6.0%. The successful completion of
the debt restructuring has paved the way for embarking on needed economic
reforms, which could provide some additional impetus to the ongoing
economic recovery. Consensus Forecast panellists also lifted the economic
growth forecast for Brazil by a 0.1 percentage point over last month to
the current 3.8%. Despite suffocating real interest rates, the economy
remains poised for continued healthy growth, as the robust expansion in
exports is now being complemented by healthy domestic demand growth.
Mexican
presidential elections beginning to cast shadow
Panellists
also lifted the outlook for Mexico. The GDP growth forecast for the
region’s largest economy added 0.1 percentage point from 3.7% expected
last month to the current 3.8%. While next year’s presidential election
is beginning to cast a shadow over the political arena, the signs from the
economy are mostly positive. The economy has had a good start into the
year and consumer confidence continues to hover around an all-time high.
However, the Central Bank is tightening monetary policy to keep
inflationary expectations in check.
Chile and
Peru benefit from copper, Venezuela from oil
Finally,
Consensus Forecast participants also lifted their outlook for Chile, Peru
and Venezuela. In Chile and Peru, the forecast was lifted by one tenth of
a percentage point as both countries continue to benefit from rising
demand for copper. The Venezuelan economy will expand 5.2% this year,
according to this month’s projection, up 0.2 percentage points from last
month’s estimate. Venezuela stands to benefit from high oil prices. In
addition, OPEC has lifted Venezuela production quota which gives the
country additional leeway to bolster the oil sector.
|
