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U.S.
growth grows at slowest pace in three years
According
to advance estimates released on 27 January, gross domestic product (GDP)
increased at an annual rate of 1.1% in the fourth quarter of 2005. Fourth
quarter growth thus fell substantially short of expectations, which had
shown GDP growing at 2.8% and was little more than a quarter of the third
quarter's 4.1% growth rate. In fact, the fourth quarter marked the
slowest growth pace since 2002 and thus ends one of the longest strings of
sustained economic growth, as the economy grew in excess of 3% for ten
consecutive quarters. In spite of the lacklustre expansion in the end of
the year, full-year growth came in at 3.5%. The deceleration over the
third quarter was mostly due to slower consumption growth. However, gross
fixed investment, also slowed down considerably. Moreover, the
deceleration reflected an acceleration in imports and a downturn in
federal government spending, which were partly offset by an upturn in
inventories.
Consumer
confidence continues to recover
In
January, consumer confidence continued to recover but has not yet reached
the level prior to the drop in August and September last year. In
January, the University of Michigan’s preliminary consumer sentiment index
rose to 93.4 from 91.5 in the December survey. The reading marks the
third consecutive month of increasing consumer confidence and thus
continued the recovery from the plunge last year, when sharply higher
gasoline prices in the wake of supply shortages related to the hurricanes
Katrina and Rita, eroded consumers’ purchasing power. As a result, in
September, consumer confidence experienced the steepest drop in more than
25 years. According to the December survey, the rise and fall of gas
prices during the past year have had a huge impact on consumers’
perception of their financial situation and was the key factor behind the
erratic shifts in consumer confidence. While the recovery of consumer
confidence exceeded market expectations, the current level still falls
short of the 95.5 points reached in July prior to the storms. The survey
estimates that energy prices will continue to determine consumer
confidence this year. With consumer confidence rebounding, the US
government remains optimistic about this year’s growth prospects,
expecting the economy to expand around 3.5%. Consensus Forecast
participants share the government’s assessment and see the economy adding
3.4%, with a moderate decelerating trend throughout the year from 3.7%
growth in the first quarter to 3.2% in the final quarter 2006. In spite
of the strong imbalances in the external accounts, Consensus Forecast
panellists see the US economy growing unperturbed above 3% over the next
several years.
Japan's
consumer confidence rises to highest level since 1991
The
outlook for the Japanese economy continues to improve. Even though
economic growth in the third quarter of the calendar year tapered off to a
paltry 1.0% annual expansion, following a robust 5.4% growth in the first
half, private and government observers are increasingly optimistic about
the prospects for the Japanese economy. On 20 January, the Bank of Japan
upgraded its economic assessment slightly stating that the economy is
performing better than expected three months ago. This is the first time
the Bank of Japan has stepped up the tone of its assessment in four
months. Monetary authorities asserted that Japan's economy continues to
recover steadily. However, the Bank still sees the economy entrenched in
a state of deflation and consequently the policy board decided to maintain
the Bank’s current ultra-loose monetary policy, as expected by the
market. Consumers share the government’s optimism as job prospects and
wages continue to improve. According to the government’s consumer
confidence survey of households with two or more people, the confidence
index increased to 48.2 in the fourth quarter in seasonally adjusted
terms, up from 44.8 in the third quarter. While confidence remained below
the critical 50 level, where pessimists outnumber optimists, the reading
represents the highest value registered since 1991. Amid the recent
improvements in consumer confidence, Consensus Forecast panellists have
again revised their outlook for this year upward from 2.0% expected last
month to the current 2.2%. Moreover, unlike past rebounds that proved to
be short-lived, the current recovery seems to take a firmer hold with
prospects also improving for the coming year from 1.7% last month to 1.9%.
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 0.2 percentage points this month to 4.6%. The
forecast for output growth in the regional economy excluding Japan also
inched up 0.2 percentage points over last month to 6.9%, as the region’s
two leading economies, China and India are seen more optimistically
compared to last month. The regional average growth forecast for 2006
increased in spite of the recent spike in oil prices. However, evidence
from last year suggests that economic growth in the major economic areas
is not easily derailed even by substantial oil price increases. Moreover,
consumer confidence is on the rise in the world’s two largest economies,
which suggests continued strong demand for consumer goods. Given Asia’s
function as a manufacturing hub for the global consumer goods industry,
the region is set to profit from this trend, which is reflected in the
recent upgrade.
Growth
outlook for Latin America improves as better prospects for Argentina
outweigh less upbeat view on Brazil
The
outlook for Latin American output growth this year increased over the past
month, as upward revisions to five major economies more than compensated
for weaker prospects in one country. As a result, the Consensus Forecast
for GDP growth in 2006 for Latin America increased from 3.9% expected last
month to the current 4.0%. Last year, Latin America expanded 4.0%,
continuing a strong recovery initiated in 2004. The upward revision to
the regional growth outlook was almost entirely motivated by improving
prospects for Argentina. Argentina experienced an 0.5 percentage point
upward revision to the 2006 GDP forecast. Consensus Forecast panellists
raised their forecast for the sixth consecutive month from 3.9% expected
in August to the current 6.0%. Following on three 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, 9.0% in 2004 and 8.6% in
2005, the devastating recession that held its grip over the economy for
full four years has provided for more cyclical recovery potential than
anticipated. On a negative note, the outlook for Brazil deteriorated,
which precluded a more meaningful upgrade to the regional outlook. Since
Brazil accounts for more than a third of total regional output, any
downward revision is likely to show in the regional average. Compared to
last month, Consensus Forecast panellists sliced 0.1 percentage points
from the full-year projection for this year. The downward revision was
principally motivated by weaker than expected developments towards the end
of last year.
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