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U.S.
economic growth accelerates in third quarter in spite of personal income
losses related to Hurricanes Katrina and Rita
According
to advance estimates released on 28 October, gross domestic product (GDP)
increased at an annual rate of 3.8% in the third quarter of 2005. Third
quarter growth thus exceeded expectations, which had shown GDP growing at
3.6% and was ahead of the 3.3% growth rate observed in the second
quarter. The market had recently lowered growth expectations for the
third quarter amid concerns that the disastrous 29 August Katrina
Hurricane and the more moderate 24 September Hurricane Rita had taken at
least a moderate toll on economic growth. The Commerce Department claimed
that the economic effects of the two hurricanes could not be separated but
attributed a part of the observed slowdown in personal income to lost
wages and rents in the wake of the storms. The third quarter reading
underlines the strength of the U.S. economy as it constituted the tenth
consecutive quarter with growth in excess of 3%. This current cycle is
the longest string of sustained economic growth since a 13-quarter period
that ended in March 1986 and represents the best performance among nations
in the Group of Seven industrialized nations, which includes the U.S.,
Japan, Germany, the U.K., France, Canada and Italy.
Strong
consumption constitutes backbone for economy
The
acceleration over the second quarter was mostly due to faster consumption
growth. Investment, on the other hand, expanded at a slower rhythm than
in the second quarter. In the third quarter, consumption growth
accelerated to 3.9% from 3.4% in the second quarter. The acceleration was
mostly due to strong durable goods and services whereas non-durable
consumer goods increased at a slower pace than in the previous quarter.
In contrast, business investment actually decelerated from an 8.8%
expansion in the second quarter to 6.2% in the third. Moreover, companies
continued to draw down inventories considerably, which sliced 0.55% of the
third quarter expansion. Without the negative impact of the inventories,
GDP would have grown by 4.4%. The external sector, in contrast,
contributed positively to economic growth for the second consecutive
quarter amid a narrowing trade gap. However, the improvement in the trade
balance mostly reflects sluggish imports, which showed no variation over
the same period last year. Export growth actually diminished from a
robust 10.7% in the second quarter to 0.8% in the third. Strong
consumption growth accounted for the positive third quarter reading.
However, recent gauges of consumer confidence suggest that the most
important backbone of the U.S. economy is likely to falter in the near
future.
Consumer
confidence plummets in September and October
In
September, consumer confidence experienced the steepest drop in more than
25 years, followed by additional but more moderate deterioration in
October. In September, the University of Michigan’s index of consumer
sentiment declined to 76.9 from 89.1 in the August survey, the lowest
level in more than twelve years. Moreover, according to the final October
release published on 28 October, consumer confidence plunged further to
only 74.2, even worse than the 76.4 expected by the market and the lowest
reading registered since October 1992. According to the survey, high gas
prices had a devastating impact on consumers’ budgets and raised
consumers’ concerns about the potential for a worsening of the financial
situation in the year ahead. The study further states that such steep and
widespread declines in confidence have typically triggered recessions in
the past. Even though the economy may avoid falling into recession, the
data indicate that consumer spending will weaken in the months ahead. The
key issue is whether the rise in government spending in the wake of the
hurricanes Katrina and Rita will be sufficient to offset the decline in
consumer spending. In spite of the plunge in consumer confidence,
Consensus Forecast panellists expect the U.S. economy to continue to grow
along the lines observed in the first half of the year, with growth only
slowing moderately to 3.3% in the final quarter and full year growth
expected to expand 3.6%.
Japan's
economy is likely to continue to recover as exports continue to grow at a
fast pace
The
outlook for the Japanese economy continues to improve. Following a very
solid 4.6% annual GDP growth registered in the first half, the fastest in
15 years, the economy is building on a solid backdrop for further
expansion this year. While growth is likely to taper off in the remainder
of the year, Consensus Forecast participants are increasingly optimistic,
as developments on the domestic and the external side of the economy alike
look promising. As anticipated, the trade surplus narrowed in September
for the sixth consecutive month amid a jump in import costs in the wake of
higher oil prices. However, the decline in the trade surplus was less
pronounced than expected and with 8.8% growth, exports expanded only
marginally slower than in August. In particular, the robust growth of
exports to China alleviated concerns that exports to the world’s most
dynamic economy could falter. In September, exports to China expanded a
solid 14.4% over the same month last year, following on 17.7% expansion in
August. In June and July, exports growth to China, which has become a key
destination for Japanese goods, had weakened substantially, fuelling
concerns that the efforts of the Chinese government to cool the economy
could take a toll on Japanese exports. Strong exports growth in August
and September have alleviated these concerns. However, in the medium
term, the underlying global trend to relocate production facilities to
China, which Japanese corporations have also begun to follow, is likely to
eventually erode part of the export base.
Retail
sales and industrial production are disappointingly low but outlook
improves nonetheless
The latest
data from the domestic side of the economy are less inspiring. In
September, retail sales dropped a seasonally adjusted 0.8% from August,
when growth had reached 1.5%. Markets had expected retail sales to grow
0.2%. In the third quarter, retail sales were down 1.9% over the
preceding quarter. In part, the September decline in retail sales was due
to climatic factors. Consumers reduced purchases of air conditioners,
which had surged the previous month during the hottest August in five
years. Moreover, temperatures in September were also higher than usual,
meaning a slow start to sales of autumn and winter clothing. Consumer
spending could slow further, amid the prospect of an end to tax rebates at
the start of 2006. Next to disappointing retail sales, industrial
production did not live up to expectations either. In September,
industrial production added an adjusted 0.2%, following on a 1.1%
expansion in August. The paltry 0.2% expansion contrasted market
expectations of a 2.0% increase. However, the government remains
optimistic that the September reading was only a bout of weakness and
expects manufacturing output, which constitutes the key component of
industrial production, to rise 2.4% in October and 1.9% in November. In
spite of the ambiguous signs from the domestic and external side of the
economy, Consensus Forecast panellists’ optimism about this and next
year’s growth prospects continues to grow. For 2005, Consensus Forecast
panellists have hiked growth projections by 0.1 percentage points from
1.9% expected last month to the current 2.1%. Simultaneously, Consensus
Forecast panellists lifted their outlook for next year’s economic growth
from 1.9% expected last month to 2.0%.
Outlook for Asia improves in spite of increasing inflation
risks amid higher oil prices
Growth
prospects for Asia continue to improve. Following on last month’s 0.1
percentage point upgrade to this year’s economic growth forecast for the
entire Asian region including Japan, Consensus Forecast panellists beefed
up the outlook another tenth of a percentage point this month to 4.3%.
The regional average growth forecast for 2005 increased even though oil
prices are posing an increasing risk to global growth. The year-to-date
oil price is more than 40% above the level registered in the same period
last year and the International Monetary Fund (IMF) does not rule out a
further substantial jump in oil prices. So far, higher oil prices have
had a surprisingly moderate impact on global growth, in part because
higher oil prices had reflected strong global demand. However, more
recent oil price spikes owe less to demand pressures than supply side
concerns. Therefore, further price increases could have a less benign
impact on economic growth, especially if the oil price increases have a
significant effect on consumer confidence as suggested by U.S. consumer
surveys. In addition, higher oil prices could also feed through to higher
inflationary expectations which could trigger a sharp rise in interest
rates with deleterious effects on economic growth. In fact, central banks
around the world are sending a remarkably unified warning about the threat
to inflation, as higher energy prices are also feeding through to an
increase in core inflation. As a result, an increasing number of Central
Banks has begun to tighten monetary policy.
Growth
outlook for Latin America remains unchanged as weaker Mexico offsets
improved outlook of other regional economies
The
outlook for Latin American output growth this year remained unchanged over
the past month, as upward revisions to two countries were insufficient to
lift the regional average. As a result, the Consensus Forecast for GDP
growth in 2005 for Latin America stayed at 4.1%, following on last year’s
stellar 5.9% expansion. Prospects for next year also remained unchanged
at 3.8% growth. This month, an improved growth forecast for two of the
seven major economies was insufficient to lift the regional outlook, even
though no country was revised downward over last month.
Venezuela
profits from strong oil prices while cyclical rebound persists in
Argentina
Venezuela
experienced the strongest upward revision to the 2005 GDP forecast, which
improved from 7.4% expected last month to 7.7% this month, the sixth
consecutive upward revision, as the country is benefiting from high oil
prices. While the Venezuela oil price has receded from the US$ 58 per
barrel threshold it reached at the beginning of September amid supply
concerns in the wake of Hurricane Katrina, most observers expect the oil
price to remain high amid continued strong demand combined with a
constrained supply situation. Argentina was the second country to
experience an upward revision to the 2005 GDP forecast. Consensus
Forecast panellists raised their forecast for the sixth consecutive month
from 7.3% expected in October to the current 7.5%. Following on two years
of strong growth, most economists had expected the growth pace to
moderate, as the cyclical rebound from the preceding recession is drawing
to an end. However, even though economic activity added 8.8% in 2003 and
9.0% in 2004, the devastating recession that held its grip over the
economy for full four years has provided for more cyclical recovery
potential than anticipated.
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