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U.S.
Economy slows down slightly in fourth quarter
According
to advance estimates released on 28 April, gross domestic product (GDP)
increased at an annual rate of 3.1% in the first quarter 2005 over the
same quarter the prior year. First quarter growth thus fell short of
expectations, which had the economy growing by 3.5%. The reading was
below the 3.8% growth rate observed in the prior quarter and in fact
constituted the slowest pace since the first quarter of 2003. The
deceleration in the first quarter reflected slower consumption growth, in
particular of durable consumer goods, which dropped from a 3.9% expansion
in the fourth quarter to zero growth in the first quarter. Hopes that
investment would offset the anticipated slowing consumer spending were
quelled. Fixed investment growth dropped to half the strong 10.5%
expansion in the fourth quarter, as businesses cut their spending on
equipment and software. Finally, buoyant demand for imported goods also
ate into the first quarter performance. In spite of the weaker exchange
rate, imports expanded at twice the pace than exports, which took off 1.49
percentage points from the overall growth rate. In other words, without
the negative impact of the external sector, GDP would have grown by 4.6%.
Current
account deficit to stay despite weaker dollar
Despite
the significant weakening of the US$ versus the currencies of its major
trading partners 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 even increase 0.3 percentage
points from last year’s 5.7% of GDP level to 6.0% of GDP 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 3.3% of GDP, the
forecast for this year’s public sector shortfall is a notch above last
month’s projection and less than half a percentage point below last year’s
fiscal deficit.
Private
consumption could falter, as consumer confidence drops for fourth
consecutive month
Private
consumption, however, could begin to slow. After having retreated from a
4.2% annual expansion in the fourth quarter 2004 to 3.5% growth in the
first quarter this 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 92.6 in the March survey to 87.7 in April. The reading represented
the fourth consecutive drop. Moreover, consumers’ expectations about the
economy are also deteriorating. In April, the expectations index was
77.0, down from 82.8 in March, which represented the fourth 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 March 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.
Japanese
industrial production does not rebound as expected as exports dwindle in
the wake of lower global demand
Last month
brought some good news as an upward revision to economic growth data had
shown that the country unexpectedly slipped out of recession. However, a
host of new releases during April point towards more disappointing
economic developments than expected earlier. In March, industrial
production fell 0.3% in seasonally adjusted terms over February. The
March reading marks a considerable improvement compared to February, when
industrial production had contracted at a seasonally adjusted 2.3% over
the preceding month. However, the market had expected industrial output
to increase between 0.2% and 0.4%. Lower output of transport equipment,
fabricated metals as well as information and communication electronics
equipment prompted the March contraction.
Consumption not yet recovering as anticipated
In part,
the sluggish development in the industrial sector reflects reduced
external demand in the wake of the slowdown of the global economy. In the
first quarter, exports increased 3.8% over the same quarter last year,
just a third of the growth rate registered in the fourth quarter 2004 and
continuing a clear downward trend observed since the end of last year.
Hopes had run high that the domestic side of the economy could pick up the
slack from the external sector. In particular, consumption was expected
to rebound amid better income and job conditions, particularly following
the weak consumption in the October-December quarter, when adverse
climatic conditions had kept private consumption at bay. However, recent
data quashed hopes of a consumption-led rebound. In February, the
so-called tertiary index, a gauge of demand for services, fell a
seasonally adjusted 1.0% over the preceding month. Weaker wholesale and
retails sales activities led the decline, with a 2.7% decrease. More
recent indicators do not suggest that the February slide in retail sales
was not just a bout of softness. In March, spending by households headed
by a salaried worker declined 1.1% over February in seasonally adjusted
terms, the second consecutive monthly decline. Furthermore, unemployment
dropped from 4.7% in February to 4.5% in March in seasonally adjusted
terms. However, the drop was entirely due to a decline of the workforce
and not to job creation. On the contrary, the economy actually shed
270,000 jobs over February.
Deflation
likely to stay during 2005
In spite of
the less propitious developments in April, the government maintains that
the economy will experience a moderate recovery. In its April economic
report, the government reiterated its March assessment and remained upbeat
about growth prospects. Officials claimed that the recovery remains
intact, stating that the current slump is but a bout of weakness and that
the consolidation has been protracted. The Consensus is less upbeat about
this year’s growth prospects in Asia’s largest economy and expects the
economy to expand a paltry 1.3%. Moreover, deflation that had held a grip
over the economy throughout the past years is likely to prevail longer
than expected. According to this month’s Consensus Forecast, consumer
prices will remain in negative territory with a projected rate drop of
0.1%. Moreover, whether the economy will exit inflation next year is also
still uncertain, with the average forecast for 2006 being precisely on the
line that divides deflation from inflation.
Outlook for
Asia remains stable
The outlook
for aggregate output growth in Asia has remained very stable over the past
months. For 2005, the Consensus expects the regional economy to expand
3.7%, the same rate as projected over the past three months. The current
Consensus Forecast estimate represents a significant slowdown compared to
2004, when the region’s economy expended 4.9%, which had marked the
fastest pace since 1995. However, non-Japan Asia will grow at a much
faster clip this year. According to the current Consensus Forecast,
non-Japan Asia will expand 6.4% in 2005, up 0.1 percentage points from
last month’s forecast. The upward revision is mainly due to an improved
outlook for China, where 2005 output growth forecasts inched up from 8.3%
expected last month to the current 8.4%. The outlook for the other
regional heavyweight, India, remained unchanged at 6.9%.
Series of
upward revisions drawing to an end
The series of
upward revisions to the economic growth forecast for the Latin American
region is drawing to an end. After Consensus Forecast panelists have
continuously hiked their forecasts for output growth during the past six
months, the regional forecast for this year remained unchanged over last
month at 4.2%. While considerably below last year’s 5.9% expansion, the
region will hold up relatively well against the backdrop of lower global
growth. For the time being the external sector is still providing
substantial impetus to the region’s economies. In the first quarter,
Latin American exports (ex Venezuela) still expanded 10.0% over the same
period last year. However, in the final quarter last year, exports
expanded at twice the pace of the first quarter this year and the trend is
clearly indicating further deceleration.
Lower outlook
in Brazil amid suffocating interest rates
Compared to
last month, the forecasts of the individual countries remained virtually
unchanged. Of the seven major economies of the region, only Brazil and
Chile experienced visible changes. The growth forecast for Brazil was
lowered a notch over last month to 3.7%. The country is suffering from
suffocating real interest rates, as the Central Bank seems set to rein in
inflationary expectations even at the cost of lower economic growth. The
Central Bank’s firm stance on monetary policy is provoking politicians to
demand a less independent monetary authority, which is more willing to
sacrifice reputation for a more accommodative policy.
Prospects for
Chile improve as the country continues to benefit from high copper demand
Consensus
Forecast panellists lifted the outlook for the Chilean economy a notch
over last month to the current 5.6%, in spite of lower global growth,
which threatens to eat into exports growth of Latin America’s most
export-dependent economy. However, so far, continued high demand for
copper - supported by China’s unrelenting expansion - is maintaining
prices for Chile’s most important export commodity high and sustaining
export volumes.
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