|
U.S. first
quarter growth revised upwards as economy rebounds
According
to final estimates for gross domestic product (GDP) released on 29 June,
the economy increased at an annual rate of 5.6% in the first quarter. The
reading represents a 0.3 percentage point upward revision from the 5.3%
preliminary estimate released last month but was in line with
expectations, which had been ratcheted up in the recent past as resilient
retail sales and other indicators had suggested a strong first quarter.
The reading represents the fastest pace since the third quarter 2003 and
is a significant rebound from the anaemic 1.7% growth registered in the
final quarter last year. The fourth quarter had marked the slowest growth
pace since 2002 and interrupted a string of ten consecutive quarters with
economic growth in excess of 3%. The first quarter rebound was mainly due
to a recovery in private consumption, which bounced from a lacklustre 0.9%
growth in the fourth quarter last year to a 5.1% expansion in the first
quarter. The recovery in private consumption mainly reflects a strong
rebound in durable goods, where a double-digit contraction in the fourth
quarter turned into a double-digit expansion. In addition, business
investment also picked up notably over the 4.5% fourth quarter growth and
expanded by 14.2%.
Fed
continues tightening as high energy prices exert inflation pressures
The
current pace of economic growth is clearly unsustainable. In particular,
the fast growth in durable consumer goods, which expanded by 20.3% over
same period last year will certainly give way to a more moderate rhythm as
it mostly reflects a rebound from a very weak preceding quarter.
Nevertheless, economic growth will remain solid supported by healthy
consumer spending, as consumer confidence, the key determinant for
purchasing decisions, strengthened. In June, the University of
Michigan’s consumer sentiment index increased to 84.9 from 79.1 in May.
In May, consumer confidence had dropped to the lowest level since
September last year, when sharply higher gasoline prices triggered the
steepest drop in consumer confidence in more than 25 years. Since
September last year, consumer confidence is largely determined by
fluctuations in gasoline prices, which have a notable impact on consumers’
perception of their financial situation. Since the beginning of May,
gasoline prices have not registered any major increases hovering around
US$ 2.90 a gallon. Moreover, while the current gas price is up almost a
third over last year positive effects of rising wages and declining
unemployment are compensating for the erosion of purchasing power. The
Federal Reserve recognises the potential of the high energy prices to
exert inflation pressures and has decided to tighten monetary policy yet
again. On 29 June, the Federal Open Market Committee voted unanimously to
lift the benchmark federal funds rate target by 25 basis points to 5.25%.
The widely expected increase was the 17th consecutive
quarter-point move since June 2004 and took the target rate to its highest
level since March 2001. While the Fed suggested that it would raise rates
one more time, it also left open the possibility of keeping the rate
stable at its next meeting in August if price pressures diminish.
Regarding economic developments, the Fed claimed that recent indicators
suggest that economic growth is moderating from the strong pace earlier
this year, partly reflecting a gradual cooling of the housing market and
the lagged effects of increases in interest rates and energy prices.
Consensus Forecast participants share the Fed’s cautious optimism and
anticipate a moderate deceleration to 3.4% growth in the second quarter
and for growth to remain at that level virtually unchanged until the end
of the year.
Japans
growth revised upwards as economy remains robust in first quarter
In the
first quarter, gross domestic product expanded 0.8% over the previous
quarter and 3.1% over the same period the year before in seasonally
adjusted terms, according to second preliminary national accounts data.
The reading represents a 1.2 percentage point upward revision from the
1.9% figure reported in the first preliminary data set released in May.
However, the revised reading was in line with market expectations, which
were more optimistic than the initial estimate amid strong company
spending. Despite the upward revision, first quarter growth remained
below the 4.5% annual growth reported for the previous quarter (revised
upwards from 4.3% reported earlier). In part, the first quarter slowdown
represents a strong acceleration in imports, which reduced the net
contribution of the external sector. Private consumption held up
relatively well, slowing from 2.6% annual growth in the fourth quarter to
2.0% in the first quarter. Moreover, business investment even improved,
bouncing back from a moderate contraction in the fourth quarter to an 8.3%
expansion in the first quarter. Preliminary indicators suggest that
consumption will gain further speed in the current quarter. According to
the government’s consumer confidence survey of households with two or more
people, the confidence index increased from 47.9 in March to 50.0 in
April. Thus, confidence just reached the critical 50 level, where the
number of pessimists equals the number of optimists. The reading
represents the highest value registered since June 1991. In fact, since
1982, the index has exceeded 50
only four
months. Nevertheless, Consensus Forecast panellists have ended their
series of upward revisions observed until last month and have maintained
the outlook for this year unchanged over last month at 2.7%. That said,
unlike past rebounds that proved to be short-lived, the current recovery
seems to be taking a firmer hold with prospects also improving for the
coming year, as Consensus Forecast participants expect economic growth to
reach 2.0%. The rekindling of the economy is also likely to overcome
deflation, which has held a grip of the economy for most of the past
decade. In May, annual core consumer price inflation, which excludes
fresh food, increased to 0.6%, marking the highest rate in eight years.
As a result, the Central Bank is increasingly preparing financial markets
for monetary tightening. On 9 March, the Bank of Japan (BoJ) had
announced the end of its ultra-loose monetary policy and the return to a
conventional interest rate regime. The BoJ expects consumer prices to
rise 0.6% this fiscal year, which ends in March and to increase to 0.8% in
the coming fiscal year, ending March 2008. Consensus Forecast panellist
mainly share the Central Bank’s assessment and see inflation reaching 0.5%
in 2006 and 0.6% in 2007.
Better
outlook for Asia in spite of monetary tightening
Asian
growth prospects continue to improve. Following last month’s brief
interruption in a series of upward revisions since the beginning of the
year, Consensus Forecast panellists beefed up this year’s economic growth
forecast for the region including Japan another 0.1 percentage points this
month to 5.2%. The regional average growth forecast for 2006 increased in
spite of the ongoing tightening of monetary policy in the United States
that seems to have been one of the major causes for triggering the
sell-off in Emerging Markets’ assets observed since mid-May. So far, the
real side of the economy is unlikely to suffer a major setback from
tighter U.S. monetary policy, as evidenced by this month’s upgrade.
However, if the tightening continues and reduces excess liquidity that has
fuelled the current business cycle, the global economy could experience a
slowdown.
Once more, China is the key reason for the
more optimistic prospects for the entire region.
In
2006, China’s economy will grow 9.5% according to this month’s Consensus,
0.2 percentage point better than expected last month and the tenth
consecutive monthly improvement. Apparently, even the recently introduced
measures to slow the growth of credit and investment are considered
insufficient to slow the underlying momentum of the Chinese economy.
India experienced an even more pronounced upgrade to this year’s growth
outlook, as the resilient industrial sector pushes economic growth beyond
expectations. Next to China and India, Singapore and Hong Kong
experienced notable upward revisions to their GDP forecast, as the
countries benefit from the solid global consumer electronics demand.
Outlook
for Latin America improves amid upward revisions to Argentina, Mexico and
Venezuela
The
outlook for Latin America also improved over the past month. Since the
4.2% expansion projected in June, Consensus Forecast panellists revised
the growth forecast for Latin America upward by 0.2 percentage points to
4.4%. Thus, the Latin American region will experience yet another year of
above average growth, following on last year’s 4.0% expansion. In fact,
apart from 2004, this year’s expansion would represent the highest rate
since 1997. This month, an improved growth forecast for five of the seven
major economies lifted the regional outlook. The outlook of two countries
remains unchanged and no country was revised downward over last month.
The most important contribution to this month’s improved outlook comes
from Mexico. While the 2006 GDP growth forecast inched up only one tenth
of a percentage point over last month to 3.9%, Mexico accounts for almost
one third of total regional output, which helped to lift the growth
forecast for the entire region. The upward revision in Mexico was mainly
motivated by the strong first quarter rebound in the United States. With
almost 90% of all exports directed to the United States, Mexico is the
most likely Latin American economy to benefit from faster growth in the
United States. Next to Mexico, Argentina, Latin America’s third largest
economy, experienced a 0.3 percentage point upward revision to the 2006
GDP forecast. Consensus Forecast panellists raised their forecast eleven
times during the past twelve months, culminating in the current 7.2%
forecast, which makes Argentina the fastest growing economy in the
region. The forecast for Venezuela improved 0.3 percentage points from
6.4% expected last month to 6.7%, as the windfall profits related to the
sustained oil price increase provide abundant funds to boost consumption. |
