World Economy & The Review Of Developments In The World Economy, 2014!.
# WORLD ECONOMY, 2014:
Slight improvements in the US, counter-balanced by ongoing challenges in the Euro-zone and a negative impact from April’s sales tax increase in Japan left OECD growth at 1.8% for this year and at 2.0% for 2015. Downward revisions were seen in the emerging and developing economies. Taking into account the mainly weak momentum from the first half of the year, GDP growth in Brazil has been revised down to 0.7% in 2014 and 1.4% in 2015. Russia’s GDP growth forecast has also been lowered to 0.3% in 2014 and 1.1% in 2015. However, the forecasts for China and India remain unchanged. Growth in China is forecast at 7.4% in 2014 and 7.2% in 2015. India’s forecast stands at 5.5% for this year and 5.8% for next year. As a result, the global growth forecasts remain unchanged at 3.1% for 2014 and 3.4% in 2015. The current growth forecast accommodates continued fragility in the global economic environment, given some uncertainties about the dynamism of US growth, ongoing fragility in the Euro-zone and the challenges of Japan’s sales tax increase. Also, near-term events in emerging markets and geopolitical developments require close attention.
OECD: OECD Americas US:
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Economic developments in the US have been mixed in the first half of 2014 and some uncertainties remain for the near-term forecast. While the 1Q decline remained at last month’s 2.1% q-o-q seasonally adjusted annualised rate (saar), the latest revised number for the 2Q shows an increase of 4.2% q-o-q. The 1Q was significantly impacted by the extremely cold weather at the beginning of the year. But a decline in exports to China was also an important factor and needs to be taken into consideration. The 2Q showed growth not only because some spending had been delayed from the 1Q but also due to some improvements in the labour market. It is not clear yet at which pace this will continue in the 2H14, but it is expected to be at a lower level. Given the experience of the past year’s political challenges over the budget and debt ceiling issues, some uncertainty for next year’s growth figures may also come from the possible consequences of November’s mid-term elections and the potential need for renewing the current debt ceiling in 2015.
While the labour market has improved significantly over the past months, the latest batch of data has varied. The unemployment rate has remained generally flat over the past months, moving from 6.1% in June to 6.2% in July and then back to 6.1% in August. Non-farm payrolls in August grew by a 142,000, which is the lowest number seen since the end of last year. On a positive note, the share of long-term unemployed fell again to 31.2% from the previous month’s level of 32.9%. But this might be due to the fact that some job-seekers have just given up and are disappearing from statistical measurements. This is also indicated by the fact that the participation rate remained at a low level and is barely changed from the last month’s 62.8%.
A factor that had a very positive impact on the recovery in the US was the recovery of the housing market, which constitutes one of the most important elements of private household wealth in the US. House prices have rebounded considerably and prices have continued rising in the past month, though at a clearly lower level. Since the middle of last year, when prices reached a peak level increase of more than 8% y-o-y, price rises have fallen. The latest available number stood at 5.1% y-o-y, as reported by the Federal Housing Finance Agency. Prices have, therefore, recovered slightly less than 20% since they bottomed out in 2011.
Supported by these broad improvements, consumer confidence has risen again. The Conference Board’s consumer confidence index rose to 92.4 in August, the highest level since December 2007. The purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), has also shown a robust upward trend once again. It was recorded at 59.0 in August, compared to 57.1 in July. In addition, the PMI for the services sector increased to 59.6, versus a July level of 58.7.
Given the now better-than-initially-estimated GDP growth figure for 2Q14 and the expectation of continued healthy growth in the 2H14, the 2014 GDP growth forecast has been revised up from 2.0% to 2.1%. The growth expectation for 2015 remains unchanged at a moderate level of 2.6%, given remaining uncertainties about the pace of economic momentum.
Canada:
In Canada, improvements continue as well, along with the US, which is the largest export market by far for the relatively much smaller economy, with more than two-thirds of exports being shipped to the US. Industrial production rose by 5.3% y-o-y in June, the largest increase since September 2011. The PMI for manufacturing rose to 54.8 in August from 54.2 in July. The GDP growth forecast, therefore, has been raised by 0.1 percentage points for both 2014 and 2015, and now stands at 2.2% for both years.
OECD Asia-Pacific: Japan:
Japan reported a significant decline in the 2Q14 when GDP fell by a 6.8% q-o-q seasonally adjusted annualised rate (saar). The magnitude of this decline was even bigger than the strong increase of 6.1% q-o-q saar seen in the 1Q14. This was certainly mainly due to April’s sales tax increase which caused domestic demand to slide. But in addition to these domestic issues, export markets were also weakening at the time. It now remains to be seen which actions will be undertaken by the government in combination with the Bank of Japan (BoJ). But, given the high public debt level and the extraordinary monetary supply measures that have been implemented already, there is not much room left to consider options. Greater attention will possibly be given to the third set of support measures: structural changes. In fact, reforms have already been announced and it now remains to be seen how rapidly they will be implemented and what the outcome will be.
Another aspect to consider will be the development of inflation in combination with income levels. After the sales tax was hiked in April from 5% to 8%, consumer price inflation has remained at a high level, registering 3.4% y-o-y in July after reaching 3.6% y-o-y in June and 3.7% in May. While it has been a key policy objective of the government to raise inflation to a level of around 2% (adjusted for the sales tax increase), the recent price increase has not been counter-balanced by a similar increase in income. Consumer price inflation stood at 3.6% y-o-y in the 2Q, while average monthly earnings rose only by 1.6% during the same period. Although this change in earnings is a sharp increase – and the highest appreciation since 2010 – the even higher rise in the consumer price level might lead to an enduring negative effect if not counter-balanced.
Japanese exports have also underperformed in the recent months but recovered in July when they rose by 3.9% y-o-y after two months of decline. Quarterly growth in the 2Q stood at 0.1%. Also, industrial production has been sluggish recently, falling by 0.9% y-o-y in August, the latest available number. Consumer sentiment is holding up relatively well, with the manufacturing PMI number, as provided by Markit, showing an increase in August to 52.3 from 50.5 in July. The domestically very important services sector, however, has seemed to contract, with the PMI for the sector falling below the growth-indicating level of 50, standing at only 49.9 in August, after reaching 50.4 in July and 49.0 in June.
Taking the weak 1H14 developments into account, the GDP growth estimate for 2014 has been revised down from 1.4% to 0.9%. Developments in domestic demand, in particular, will need close monitoring in the coming weeks to gain further insight into the near-term development of the economy. With next year expected to become challenging once again, and considering the expected sales tax increase from 8% to 10% in October, the forecast for 2015 has been changed from 1.2% in the previous month to 1.1%.
Australia:
Australia’s economy continues to expand at solid rates but has slowed down, as expected, in the 2Q14. After GDP growth of 4.5% q-o-q saar in the 1Q, growth slowed to a 2.0% q-o-q saar in the 2Q. On a positive note, quarterly industrial production stood at 4.9% y-o-y in the 2Q, only slightly below the 1Q level of 5.2% y-o-y. However, exports have slowed down significantly from double-digit growth in the 1Q to 2.4% y-o-y in August, the latest available number. Also, retail trade grew by only 0.1% q-o-q in the 2Q. Taking into consideration the strong growth in the 1Q, the 2014 growth forecast remains unchanged at 2.9% for 2014 and 2.4% for 2015.
OECD Europe: Euro-zone:
The Euro-zone’s fragile situation has not materially improved. Again, very low inflation numbers in August, ongoing problems in the banking system (as well as the need for the banking sector to recapitalise) and the ongoing recession in Italy, Europe’s third largest economy, in combination with some weakness in Germany and France, its two largest economies, all point to ongoing challenges. Inflation has remained low, standing at 0.3% y-o-y in August, again lower than the 0.4% in July and the 0.5% y-o-y from June. However, the unemployment rate in July remains at a high level of 11.5%.
While there are clearly positive developments in its economic performance, compared to last year, the Euro-zone’s recovery remains sluggish. The macroeconomic data in general remains mixed. While Germany is doing better than most other economies, its situation has also continued to weaken. GDP growth in the 2Q14 was even negative on a quarterly basis, falling by 0.2% q-o-q. Industrial production in Germany has remained stagnant since the beginning of the year based on a monthly comparison. France, too, has continued to weaken, and GDP growth in the 1H14 was flat. Industrial production has declined since the beginning of the year and fell again by 0.4% y-o-y in June. Finally, Italy’s GDP has declined for two consecutive quarters, leading the economy straight into recession. Contrary to the weakening situation in the Euro-zone’s three largest economies, the smaller peripheral economies are improving slightly, albeit starting from very low levels of economic activity. Spain, in particular, is improving with GDP growth in the 2Q14 of 0.6% q-o-q and 0.4% q-o-q in the 1Q14.
The European Central Bank (ECB) has announced that it will continue supporting the Euro-zone economy as inflation has dropped again and lending of financial intermediaries to private households is still falling. Lending fell by 2.0% y-o-y in July, hardly better than the decline of 2.2% y-o-y in June and the minus 2.4% y-o-y in May. The ECB has, therefore, announced that it will reduce its key interest rate from 0.2% to 0.05%. It also announced that it will charge lenders 0.2% for their deposits at the ECB, instead of the previous 0.1%. Most importantly, the ECB indicated (without providing specifics) that it will engage in large-scale buying of private sector bonds. The detailed modalities of these programmes will be announced after the Governing Council meeting in October.
While in general the situation of the Euro-zone remains fragile, recent PMI numbers point at a continuation of modest growth. The latest PMI for manufacturing stood at 50.7 in August compared to 51.8 in July. It fell by 1 index point in Germany and France to stand at 51.4 and 46.9, respectively. In Italy it also fell below 50 and stood at 49.8, the lowest level since June last year.
While the Euro-zone’s indicators have improved compared to last year, the recent weakening of output indicators again in some economies has served as a reminder that the recovery remains fragile. The GDP growth forecast has, therefore, been lowered by 0.1 percentage point for 2014 and now stands at 0.8%. The growth forecast for 2015 remains at 1.1%, only slightly higher than in the current year.
UK :
The United Kingdom has performed remarkably. While the latest UK manufacturing data has highlighted the fact that the economy might not be immune to the global challenges in the 1H14, some lead indicators point at a continued strong but slowing momentum. The manufacturing PMI remained at a high level of 52.5 but is now clearly below the 1H level of more than 55. Considering the trend from the beginning of the year, the 2014 GDP growth forecast has been revised to 2.9% from 2.8%. The forecast for 2015 remains at 2.3% in anticipation of some moderation of the current momentum.
Emerging and Developing Economies:
The statistics of the 1H14 clearly point to considerable deterioration in Brazil’s economic growth. Structural bottlenecks and policy issues are both drags on investment and contributing to a rising inflation, as well as hurting domestic demand. The manufacturing sector decelerated in the four months to July, while August’s improvement was mild and fragile. The services sector, on the other hand, has been expanding at a significant pace. That said, the forecast for 2014’s GDP growth is pared back this month to 0.7% from 1.5% previously. For 2015, GDP is anticipated now to post 1.4%, down from the previous figure of 1.8%.
Economic growth in Russia over the first half of this year exhibited an obvious trend to the downside. Last month, some encouraging signs emerged from the manufacturing and services sectors. Yet these muted improvements do not provide a solid ground for a better economic outlook. Continued geopolitical uncertainty is increasingly limiting the prospects for economic growth, amid currency depreciation, high inflation and poor growth in retail sales. The expected second round of EU economic sanctions would make faster GDP growth even less likely. The forecast this month for Russia’s 2014 GDP growth is revised down to 0.3% from 0.5%, while 2015 is now anticipated to see 1.1% growth, down from the previous forecast’s 1.2%.
India experienced the fastest growth in more than two years in the 2Q14, growing 5.7%, the fastest rate in more than two years. Manufacturing and construction output recovered, with activity also supported by solid growth in services. The latest PMI data for August highlighted a tenth consecutive monthly improvement in operating conditions, as solid output growth was supported by strong expansions in total new orders and business from abroad. Manufacturing activity moderated following a spurt in the previous month. Despite making progress in cutting the twin deficits, the Indian economy remains vulnerable to capital outflows stemming from domestic or external shocks, such as tighter monetary policy in the US.
It seems improving net exports were a key factor behind China’s GDP growth picking up to 7.5% in the 2Q. But FDI weakness will have significant effect on GDP growth rate in the 2H. Manufacturing sentiments faltered in August, the latest sign that a stimulusled rebound late in the 2Q is flagging as fiscal support eases. Weakening PMI readings are consistent with other indicators that show business activity softening after June.
That change appears to be the result of fiscal spending easing after a two-month surge in May and June, which is consistent with government statements that the stimulus would be targeted and short-lived, similar to the stimulus in 2013.
Brazil:
Data released late last month by Brazil’s national statistics agency showed a 0.6% GDP contraction in the 2Q, following a downward revision for the 1Q to -0.2% from a previous 0.2%. These two consecutive downturns are the standard definition of a recession and, in fact, this deceleration is larger than the market estimate of -0.4% GDP growth. In addition, gross fixed capital formation deteriorated 5.3% in the 2Q from the previous quarter, signalling its fourth consecutive quarterly contraction. While private consumption was back to expansion, growing 0.25% from -0.2% a quarter earlier. This slow rate of growth is the third lowest positive rate since the 4Q08.
GDP growth in the 2Q14 compared with the same period a year earlier was even worse, contracting 0.9%, while gross fixed capital formation collapsed 11.3% y-o-y. By easing the rules on reserve requirements, the Central Bank of Brazil has injected about R$10 billion into the banking system with the aim of increasing liquidity to banks for lending. This is the second round of freeing up cash following an injection of around R$45 billion three weeks earlier. The Ministry of Finance also announced the issuance of a new tax-exempt bond to boost the mortgage market. In July, the Central Bank held its benchmark interest rate unchanged at 11.0% for the fourth month in a row. Inflation posted 6.3% y-o-y increase in July, signalling the third consecutive month of a price increase higher than 6%. It is also well above the 4.5% yearly target. As a result, the consumer confidence index fell last month to its lowest level since April 2009 posting 100.9, while data from the Central Bank indicated the Brazilian public sector was running a budget deficit of more than R$32 billion in July. This represents the largest deficit since the financial crisis.
Operating conditions in Brazil’s manufacturing sector modestly improved in August. The manufacturing PMI registered 50.2 last month, up from 49.1 a month earlier. The last reading marks the first expansionary reading since March. This improvement could be attributed to resuming normal activities following the disruptions caused by the World Cup. The survey showed, however, that new business remained stable compared to July suggesting that the outlook for the manufacturing sector remains fragile. Statistics for the 1H clearly point to considerable deterioration in economic growth. Structural bottlenecks and policy issues are dragging investment, raising inflation and hurting domestic demand. The manufacturing sector decelerated in the four months to July, while August’s improvement was mild and fragile. The services sector, on the other hand, is expanding at a significant pace. Nevertheless, the forecast for 2014’s GDP growth is pared back this month to 0.7%, from a previous 1.5%. For 2015, GDP is anticipated now to post 1.4%, down from the previous figure of 1.8%.
Russia:
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Preliminary data from the country’s Federal Statistics Service showed that Russia had a disappointing GDP growth in the 2Q of only 0.8% y-o-y compared to 0.9% in the 1Q. GDP growth has been slowing since the 1Q12 when it advanced 4.9%. Last month, Russia’s Economic Ministry downgraded its forecast for 2014 GDP by half to 0.5% from 1.0% a month earlier. The Ministry also halved its 2015 figure from 2.0% to 1.0%. Unfavourable market conditions led Russia to cancel its seventh ruble-denominated bond auction in a row last month (its fifteenth auction this year). Geopolitical tensions caused the government’s borrowing costs to climb this year hovering above 9.8%, some more than 180 basis points above the Central Bank’s key interest rate. Russia has raised RUB124 billion this year from selling the domestic bonds, though the initial plan was to raise RUB808 billion in 2014. Energy exports revenue and a depreciated ruble are seen as seen as giving the government a decent source of local currency to keep side-stepping higher borrowing costs.
The manufacturing sector showed signs of slow expansion last month with the manufacturing PMI unchanged from the previous month at 51.0. The survey highlighted the fastest growth in new orders this year, though it remains muted, while output rose for the third month running, also at weaker rate. The rise in output is attributed to local demand as new export orders have been decreasing for the past 12 months. The sector could benefit from the import substitution policy which the government has made a priority. However, this might lead to faster inflation in prices which will eventually impact private consumption. Indeed, the survey showed that input price inflation accelerated for the first time since March as shortages were reported alongside a weaker ruble. Firms continued to cut staff in August, albeit at the slowest pace in the current 14-month period of job shedding. The services sector expanded moderately in August, with business rising to 50.3 from 49.7 in July. This improvement followed five straight months of decline.
The Russian ruble depreciated 1.6% against the US dollar at the end of August compared to end of July. A weaker ruble helps exporters when most of their revenue is in foreign currencies, while their costs are in rubles. However, a weaker ruble has resulted in notably higher inflation of more than 7.0% in the four months to July. Inflation accelerated further to 7.5% in July. The Central Bank’s inflation target is 5% for 2014 and 4.5% for 2015. Aiming at tempering inflation, the Central Bank continued its tightening policy in July, raising the benchmark interest rate by 50 basis points to 8%. Retail sales barely increased in July by 1.1% y-o-y, its second slowest rate since December 2009. The unemployment rate in Russia remained unchanged at 4.9% in July of 2014 from the previous month.
Economic growth over the first half of this year exhibited an obvious trend to the downside. Last month, some encouraging signs emerged from the manufacturing and services sectors. Yet these muted improvements do not provide a solid ground for a better economic outlook. Continued geopolitical uncertainty is increasingly limiting the prospects for economic growth, amid currency depreciation, high inflation and poor growth in retail sales. The expected second round of EU economic sanctions would make faster GDP growth even less likely. The forecast this month for Russia’s 2014 GDP growth is revised down to 0.3% from 0.5%, while 2015 is now anticipated to see 1.1% growth, down from the previous forecast’s 1.2%.
India:
GDP growth accelerated to 5.7% y-o-y in the 2Q, the fastest growth in 10 quarters from 4.6% in the 1Q. This outcome was in line with expectations. The sustainability of the pick-up in growth depends on whether it was driven by business cycle dynamics, as reflected by industrial and private services growth, or strong agriculture and government spending growth, which is unlikely to be sustained. Worth noting on the supply-side was a modest expansion in mining, which has also been in a prolonged recession, having contracted in nine of the previous 11 quarters. Insurance, real estate and business services recorded the 13th consecutive quarter of double-digit growth, clearly a pocket of strength. In fact, in an indication of how India's economy is changing, this sector now accounts for more than 18% of GDP, on a par with agriculture. On the demand-side, private consumption growth eased to 5.6% in April-June. Some mild deceleration in consumption had been anticipated given elevated inflation, so this deceleration is not entirely worrisome. It appears, in fact, to be a more sustainable pace – closer to typical levels – neither as buoyant as the 8.2% rate seen in January-March nor as lethargic as the 2.8% expansion of the previous two quarters. One positive side effect of weaker private consumption was that overall demand for imports remained weak, with real imports contracting on an annual basis for the third consecutive quarter. Against the 11.5% y-o-y expansion in real exports – its fourth consecutive double-digit gain - India's net trade position has improved considerably.
India's merchandise trade deficit (not seasonally adjusted) widened to $12.2 billion in July, up from June's $11.7 billion. This was still 2% below last year's reading, according to data released by the Commerce and Industry Ministry. Merchandise exports stood at $27.7 billion, with growth softening slightly to 7.3% y-o-y from doubledigit figures seen in the previous two months. Merchandise imports, on the other hand, continued to recover and stood at $40 billion, up 4.3% y-o-y.
India's inflation rate remains the highest among Asia's major emerging markets. After having slowed sharply between April and June 2014, the rate of consumer price inflation accelerated to 7.9% y-o-y in July, dampening hopes that prices move to more reasonable levels. Until inflation moderates to more manageable and sustainable levels, economic growth in India is likely to remain below par owing to the distortions wrought by an unstable price environment. India's wholesale price index (WPI) inflation eased marginally in July, but the sharp rise in retail inflation released earlier this week suggests that the odds that the Reserve Bank of India (RBI) will cut benchmark interest rates in the coming months remain low. The headline WPI inflation stood at 5.2% y-o-y in July, down from 5.4% in the previous month. This was the lowest wholesale inflation reading in five months.
The seasonally adjusted PMI dipped slightly from July’s 17-month high of 53.0 to 52.4 in August. Nonetheless, the reading was consistent with a solid improvement in operating conditions. Output and new orders slowed slightly in August but remained robust relative to their 12-month history. Among the monitored sub-sectors, the best performing was consumer goods, while business conditions deteriorated in the capital goods category.
Indian manufacturing activity grew at its quickest pace in 17 months in July as order books swelled. This marked the ninth consecutive month of expansion according to the PMI. India's manufacturing growth contracted 0.8% during the fiscal year ending March 2013. Reduced imports has helped correct current account imbalances in recent quarters, and there were tentative signs of recovery in manufacturing activity during the last three months. Going forward, even as import growth accelerates further, healthy exports should keep the current account deficit under 2.5% of GDP in both 2014 and 2015, and provide much-needed support to the overall economic recovery.
Growth expectations remain unchanged at 5.5% in 2014 and 5.8% in 2015. It also seems underlying problems in the domestic economy will continue to restrict India’s GDP growth as the country continues to struggle with ongoing problems such as high inflation, relatively tight monetary policy, high corporate debt and non-flexible fiscal policy. Furthermore, despite making progress in cutting the twin deficits, the Indian economy remains vulnerable to capital outflows stemming from domestic and external shocks such as tighter monetary policy in the US.
China:
Improving net exports seemed to have been a key factor behind GDP growth picking up to 7.5% in the 2Q14. This pattern continued into July, with the monthly surplus reaching record levels. However, as well as reflecting a marked pick-up in exports after a weak 1Q, the continued sluggishness of imports has also driven the widening surplus, suggesting weak domestic demand. However, other monthly indicators – such as retail sales and industrial output – continue to show healthy growth, albeit slightly slower than in 2013.
The volume of exports is expected to grow at a solid pace. The export sector should support economic growth in the 2H14, benefiting from the acceleration in advanced economies and the lagging impact of the 1H14’s renminbi depreciation. Targeted support of sectors such as infrastructure and affordable housing will continue, which is also positive. The softness in manufacturing and real estate investment is expected to remain a drag on China’s economic growth, despite recent easing in local home purchase restrictions and mortgage support for first-home buyers. In mid-August, the Chinese Ministry of Commerce (MoC) stated that July's foreign direct investment (FDI) (which excludes investment in the financial sector) slumped 16.95% y-o-y to $7.81 billion, the lowest level since July 2012. Between January and July, China received $71.14 billion in FDI, down 0.35% y-o-y. China's authorities recently launched anti-monopoly investigations into foreign-funded companies. According to the MoC, the top overseas investors were France, Germany, Hong Kong, Japan, the Netherlands, Singapore, South Korea, Taiwan, the US and the UK, with a combined investment of $66.8 billion, accounting for 93.9% of total FDI. Investment from South Korea rose 34.6% to $2.92 billion and the UK’s FDI soared 61.2% to $730 million in the first seven months. However, due to a series of territorial disputes, investment from Japan slumped 45% to $2.83 billion, the biggest decline among countries. FDI from Europe dropped 17.5% to $3.8 billion, while investment from the US fell 17.4% to $1.8 billion during the same period. While FDI in manufacturing fell 14.3% to $25.2 billion, investment in the services industry actually jumped 11.4% to $39.7 billion, which accounts for 55.8% of the total. Based on such data, the MoC attributes the weakness in FDI to excess capacity in the Chinese manufacturing sector and believes some fluctuation in FDI figures is normal as China speeds up economic restructuring.
The People's Bank of China (PBC) will maintain continuity and stability of its monetary policy. Its monetary policy aims to keep the value of the renminbi stable and contribute to economic growth, while avoiding further easing in the near-term, according to 2Q monetary policy report. The PBC will continue to adopt prudent monetary policy and fine tune it in light of changes so that policy measures can stabilize growth, boost reforms, adjust structures, enhance people's welfare and prevent risks. When highlighting areas of potential concern, the report also describes financing growth in the 1H as "relatively fast" and monetary policy during that period as "relatively loose", although it also notes positive developments in the structure of loans and new financing flows. The M2 measure of money supply expanded by 14.7% during the 2Q, compared to 12% in the 1Q and an annual target of 13.5%, as conditions eased as the government moved at all levels to support growth. It seems the real estate market will continue its adjustment process but at a more measured pace in the 2H. The stabilization of the housing market will depend on the stabilization of market expectations and market demand, as well as adjustments in market supply. From a macro perspective, the magnitude of the real estate investment slowdown remains a source of major uncertainty in the growth outlook for the 2H14 and 2015.
Chinese manufacturers saw a further improvement in overall operating conditions in August. After adjusting for seasonal factors, the manufacturing PMI posted 50.3 in August, down from July’s 18-month high of 51.9. This signalled a pace of improvement that was the weakest in three months. The decline in the headline index partly reflected slower expansions of both output and total new business during August. The rates of production and new order growth were moderate overall, having eased from their 16-month highs in July. Data suggest that client demand softened both at home and abroad, as new export work also rose at a weaker pace in August. The revisions were mixed, with an upward revision to new export orders and output sub-indices but with downward revisions to the employment and input prices indices. Although external demand showed improvement, domestic demand looked more subdued. Overall, the manufacturing sector still expanded in August but at a slower pace compared to the previous months. The economy still faces considerable downside risks to growth in the 2H of the year, which warrants further policy easing to ensure a steady growth recovery. The expected GDP growth for 2014 remains unchanged at 7.4% and for 2015 is pegged at 7.2%.
OPEC Member Countries :
The non-oil producing private sector in Saudi Arabia reported a strong rate of increase in output, new business and employment in August. The PMI reading improved last month to a level of 60.7 from July’s 60.1. The latest figure marks a 37-month high and shows that expansion has gained momentum. The survey highlighted strengthened market conditions and stronger demand, both domestic and from abroad. Data showed that output increased the most sharply since June 2011, while the rise in sales was the strongest in nearly two years. Net employment, in turn, increased further and at the strongest rate since March 2013.
In Iran, the government projects inflation will fall below 20% by the end March 2015, following its announcement that it intends to implement an anti-recession programme until a single-digit inflation rate is achieved. The National Development Fund (NDF) has allocated 70 trillion rials for the anti-recession plan. Part of the fund will be invested in water preservation and agricultural development projects over the course of three to four years. Business conditions in the UAE’s non-oil producing private sector strengthened markedly in August with the PMI hitting a record high. The index registered 58.4 last month, rising from 58.0 in July. The survey showed new orders and output rising at accelerated rates. The rate of new exports growth rose to a record high and new orders in August expanded at the second-fastest pace in the series’ history. Increased new orders led to companies hiring additional staff in August at a solid rate.
Other Asia:
Following disappointing GDP growth of 1.9% y-o-y in the 2Q14, operating conditions in Hong Kong’s private sector began to deteriorate again in August. This marks the first weakening in the private sector since May. Hong Kong’s PMI posted below 50 points at 49.6 last month, down from July’s 50.4, suggesting the economy is still in a cyclical slowdown. The survey showed a drop in new orders for the fourth consecutive month together with continued staff shedding. Vietnam posted 5.2% y-o-y GDP growth in the 2Q14, up from 5.1% in the 1Q. The manufacturing sector showed a narrow loss of momentum last month with the manufacturing PMI remaining in the expansion territory. The index fell to 50.3 in August from 51.7 in July. The deceleration was triggered by a slower rise in output amid a drop in new orders that resulted in an accumulation of stocks of finished goods.
GDP growth in Indonesia slowed to 5.1% in the 2Q14 from 5.2% in the 1Q, marking the weakest rate of growth since 3Q09. Despite the strong performance of the manufacturing sector in Indonesia in the three months to July, the sector registered a surprise last month with deteriorating business conditions. The HSBC manufacturing PMI registered 49.5 in August, down from 52.7 in July. The drivers behind that deterioration were the sharpest decline in output since August 2013 and the first fall in new orders in eleven months. As a result, staffing levels declined in August. GDP growth in Taiwan maintained its 3.5% y-o-y rate in the 2Q14, unchanged from the 1Q. This highlights a notable improvement relative to last year’s growth of 1.7% and 2.8% in the 1Q13 and the 2Q13, respectively. The manufacturing PMI in Taiwan increased to 56.10 in August from 55.80 in July. This marks the highest reading in more than three years. New orders in August increased at their fastest pace since the start of 2011. The increase in new orders supported the sharp rise in production. August’s reading marks the twelfth month of continuous expansion in production.
Africa:
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South Africa’s economy showed an overall GDP growth of 0.2% q-o-q in the 2Q14 compared to -0.2% in the 1Q, thus narrowly avoiding falling into its second recession since the 2Q09. On a yearly comparison, however, the economy accelerated 1.1% in the 2Q, down from 1.8% a quarter earlier. The country’s private sector indicated renewed expansion in August, with the PMI registering 51.1, up from 46.4 in July. This came after four months of continuous contraction. Output, which had been trapped in a five-month period of deterioration, stabilized in August. Furthermore, new orders and job creation began expanding again last month. The United Nations Food and Health and Agriculture Organization warned that Ebola in West Africa has made food more costly due to labour shortages prior to the upcoming harvests. This, in turn, could trigger trade disruptions in the region. Food transport and trade have been severely restricted by the movement controls and quarantine zones imposed to limit the spread of the virus. On the other hand, foreign investment is expected to be hampered by the disease.
The economy of Egypt posted a GDP growth rate of 2.5% y-o-y in the 1Q14. Its highest since the 3Q12. Public sector expenditures quickened 9.1% y-o-y and private sector consumption increased 4.8% y-o-y. The country’s private sector returned to growth in August, with the PMI posting 51.6, up from 49.0 in July. Last month’s reading represents the index’s highest score in eight months. A solid increase was reported in output alongside a rise in new business. The survey highlighted the sharpest increase in new export orders since November 2011.
Latin America:
In Argentina, the peso fell by nearly 2% in August from the previous month, signaling the fastest pace of depreciation in seven months. This came on the back of an exports drop of around 9% m-o-m in July and a decline in foreign reserves of more than 21% y-o-y in July (0.9% m-o-m). These developments have led to increased demand for dollars from Argentines and resulted in a fall in the price of the peso. The economy of Argentina has been in recession since the 1Q14 after shrinking by 0.8% q-o-q from a 0.5% contraction in the 4Q13.
The Central Bank in Peru intervened in the currency market last month by buying dollars. Its aim was weaken the local currency in order to support exports. An attempt at a revival of exports came after they fell by nearly 5% y-o-y in the 2Q14, the first yearly contraction in five quarters. Quarterly changes, however, showed exports falling for the third consecutive period, falling 6.6% in the 2Q14 relative to the previous quarter. The Central Bank also kept borrowing costs unchanged last month, with the overnight rate remaining at 3.75%.
Transition regions:
In the Czech Republic, GDP growth fell into the negative in the 2Q14, falling 0.02% q-o-q, the first negative figure since the 1Q13. On a yearly comparison, GDP grew 2.7% y-o-y in the 2Q14. Expansion in business activity in the goods-producing sector slowed in August. The manufacturing PMI fell to 54.3 in August from 56.6 in July. August’s reading is the weakest since September 2013. The index remained in the expansion territory for the past sixteen months. Despite being less than in July, August’s reading indicates a solid overall improvement in business conditions in the manufacturing sector. The survey continued to mark growth in total new orders, while export orders reported a rise at its slowest pace since June 2013. At the same time, manufacturers reported continuingly low inflationary pressures last month.
GDP growth in Poland registered 3.2% y-o-y in the 2Q14, compared to 3.4% y-o-y in the previous period. The manufacturing PMI of August showed the sector contracting for the second month in a row, with the index posting 49.0, compared to July’s 49.4. Manufacturers reported the strongest fall in new orders since April 2013. Production also fell for the first time since mid-2013.
Oil prices, US dollar and inflation:
On a monthly average, the US dollar experienced a remarkable recovery in August compared to its major currency counterparts, a trend which continued at the beginning of September. Compared to the euro, the US dollar rose by 1.6% in August and stood at a monthly average of $1.3316/€. In September the US dollar continued increasing to a level below $1.30/€. Versus the Japanese yen, the US dollar rose by 1.2% to reach ¥102.957/$. Compared to the pound sterling, the US dollar rose by 2.2%, after five consecutive months of decline, while compared to the Swiss franc, it increased by 1.4%. With the ongoing recovery in the US, the tapering of the US Fed, the continued monetary stimulus from the ECB and the ongoing efforts to stimulate the economy by the BoJ, and given the current slow-down in the emerging markets, the US dollar should be expected to continue appreciating in the coming months.
In nominal terms, the price of the OPEC Reference Basket (ORB) declined by a monthly average of $4.86/b, or 4.6%, from $105.61/b in July to $100.75/b in August. In real terms, after accounting for inflation and currency fluctuations, the ORB fell by 3.5%, or $2.19/b, to $60.81/b from $63.00/b (base June 2001=100). Over the same period, the US dollar gained 1.2% against the import-weighted modified Geneva I + US dollar basket* while inflation remained flat.
# The Review Of Developments In
The
World Economy, 2014:
After a relatively weak start to the year, the global economy has gained traction again. However, the global growth trend remains slow and uneven. The US has performed better after a considerable decline in the first quarter, while Japan is facing headwinds after its sales tax-increase in April, the Euro-zone remains entangled in multiple concerns and growth in the emerging economies has continued to decelerate. This trend has also become visible in the most recent numbers for global industrial production. World GDP growth expectations therefore remain at a relatively modest level of 3.1% in 2014 and are expected to accelerate to 3.4% in 2015, based on 2005 purchasing power parity (ppp) weights.
The OECD group of economies is forecast to grow by 1.8% this year and by 2.0% in the coming year. After rebounding from a decline in the first quarter, the US is forecast to grow by 2.1% in 2014. For next year, slowing monetary stimulus in combination with small productivity gains and the possible re-emergence of previous governmental gridlock implies a limited upside, when growth is forecast to reach 2.6%. Japan currently is facing a larger-than-anticipated negative impact from its April’s sales tax increase and a challenging environment for its exports. As a result, Japanese growth is forecast at only 0.9% in 2014. Given that the soft recovery might continue and along with the prospect of another sales tax increase in 2015, GDP growth in Japan is expected to reach 1.2% next year. Also in the Euro-zone, improvements remain halting with growth forecast at just 0.8% this year. Given challenges from the slow improvement in labour markets, the risk of deflation and recapitalisation needs of the banking sector, growth in 2015 is forecast to be only slightly higher at 1.1%.
In the developing and emerging economies, the sluggish pace of growth has continued into the current year. Except for India, the other major emerging economies are expected to grow at a lower rate in 2014 compared to last year. Recovering from low growth last year, India is expected to grow at 5.5% in 2014 and at 5.8% in 2015. Russia and Brazil are expected to experience only limited growth this year, before slightly improving in 2015. Coming from very high growth levels last year, China is forecast to grow by 7.4% in 2014 and 7.2% in 2015, as the economy continues maturing and the country is in the process of managing the imbalances in the economy.
Although only modest growth had been observed so far this year, much of this has already been taken into account in earlier estimates for the remainder of this year and for 2015. At the same time, on-going geopolitical issues could further impact growth negatively. A continued tapering or even ending of extraordinary monetary supply measures in the US, in combination with rising interest rates, could cause additional capital outflows from emerging economies to safer and/or higher yielding markets. Combined with continued sluggish growth in the global economy, this capital outflow would not support world oil demand growth at a time when overall crude inventories are at a comfortable level. Any economic improvement due a resolution of on-going geopolitical concerns will boost already troubled economies and improve consumer sentiment, leading to higher oil demand growth in the near future.
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