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Industrialised countries
United States of America
In the US, recession in the first half of the year appears to be very likely on continued weakness in labour markets, with a fall in payrolls for the third month, steep drops in consumer confidence and further contraction in the housing sector. While existing home sales are showing some signs of bottoming, new home sales fell in February to the lowest level in 13 years, while home prices continued to drop. The median price of existing single-family homes fell 8.7% in February from a year earlier. Mortgage-related asset writedowns and losses reported by the world’s biggest financial institutions now exceed $230 bn. Total losses from the US mortgage crisis are expected to approach one trillion, according to the IMF. Most indicators point to a stagnating economy at near zero growth.
The poor state of the economy was acknowledged by the Fed Chairman who admitted that it was likely that the economy would show little if any growth and could even contract slightly in the first half of the year. The Fed resorted to another cut on March 18, this time by 75 basis points bringing the federal fund target rate down to 2.2%, three percentage points lower than in August 2007. It is expected that the Fed will cut rates further possibly at its next regular meeting at the end of April but the pace of easing may slow down. The Fed's preferred inflation measure, the core personal consumption expenditures price index (PCEPI), excluding food and energy, rose 2% in February from year ago. The headline PCEPI climbed 3.4%, exceeding 3% for the fourth consecutive month. With the slowing economy, the Fed expects overall inflation to slow.
One of the most closely observed indicators is the employment report. The March report showed that the economy had shed jobs for the third month in a row. Payrolls fell by 80,000 in March and the unemployment rate rose to 5.1%, the highest level since September 2005, from 4.8% in February. Job losses in February were revised up to 76,000 from 63,000. While private employers subtracted 98,000 jobs in March, there were some gains in government employment. Manufacturing payrolls fell by 48,000 workers, the biggest decrease since July 2003. However, half of these losses can be attributed to the auto industry, reflecting a strike at a supplier for General Motors.
With the loss of around 232,000 jobs so far this year, coupled with rising food and energy costs, falling home prices and tightening credit, consumers are rapidly losing confidence. The Conference Board Consumer Confidence Index, based on a monthly survey of 5000 US households, fell further in March to 64.5 from 76.4 in February (1985=100). The cutoff date the for March's results was March 18th. A more recent measure of consumer confidence, the Reuters/University of Michigan preliminary index of consumer sentiment for April fell to 63.2 from 69.5 in March, the worst reading since March 1982. It is therefore expected that consumer spending will weaken in the first half of the year. Consumer credit is still growing but at a slower pace. The Federal Reserve reported that consumer credit in February increased by $5.1 bn following a $10.3 bn in January.
Business sentiment also fell. Confidence among U.S. small businesses dropped in March to the lowest level in 28 years, which does not bode well for future hiring and investment plans. The National Federation of Independent Business optimism index declined to 89.6, the lowest reading since the second quarter of 1980 from 92.9 in February.
Service industries contracted for a third month in March but there was a slight improvement from February. The Institute for Supply Management's non-manufacturing index stood at 49.6 in March up from 49.3 in February. Meanwhile, manufacturing contracted less than forecast in March, as gains in exports helped offset declines in orders. The index increased to 48.6 from 48.3 in February. For both indices a reading below 50 indicates contraction.
Moreover, orders to U.S. factories fell by a higher-than-expected 1.3% in February, as companies scaled back investment plans. This followed a 2.3% drop in January. Excluding orders for volatile transportation equipment, orders fell 1.8%, the largest decline since January 2007. Orders for non-defense durable goods excluding aircraft, a proxy for future business investment, fell 2.4% Our overall forecast for US economic growth in 2008 has been revised down by 0.2 pp to 1.1%.
Japan
Recent economic data in Japanese indicate the economy is losing steam. While exports continued to grow, with the currant account improving in the first two months of 2008, corporate sentiment fell to four-year lows, machinery orders dropped, while industrial production declined for a second month. The Bank of Japan kept interest rates on hold at 0.5% at its early April meeting as it cut its assessment of the economy for the first time in four months amid concern of an economic slowdown and possible recession. The central bank pointed to the negative effects of high energy and materials prices on inflation and growth. However, an interest rate cut in the near future appears unlikely.
Industrial production continues to decline. It fell by 1.2% in February after a drop a 2.2% in January. Core machinery orders, a leading indicator for capital spending, fell by 12.7 % in February m-o-m, the worst performance since November 2003. However, orders had surged by 19.6% in January. Over the previous year orders were 2.4% up in February.
The quarterly Bank of Japan’s March Tankan business sentiment Diffusion Index for large manufacturers fell to 11 from 19 in December, reaching a four-year low. Moreover, the survey indicated that Japanese companies had become cautious with their investment plans. The main reason for the drop in confidence appears to be a profit squeeze caused by higher input costs. However, the index has remained above zero since September 2003, the threshold which indicates optimists outnumber pessimists. On the other hand, the Tankan diffusion index for small manufacturers fell into negative territory registering -6 while that for non-manufacturing small firms to -15. Small firms have suffered disproportionably with the rise of input prices. However, the Tankan report also showed that labor markets remain tight which is an encouraging signal that job growth could continue.
Meanwhile, inflation has picked up. Japan's wholesale prices rose a higher-than-expected 3.9% in March from a year earlier, the fastest pace since February 1981, following a revised 3.6% increase in February, highlighting concerns voiced by the Bank of Japan that higher fuel and food costs will fan inflation even as the economy slows. Cost-push inflation is spreading to a wider range of industries and businesses squeezing profits especially in small to medium-sized firms. Producer prices rose 2.2% in the year ended March 31, the fastest pace in 18 years. Price increases for steel, oil- and coal-related products, iron scrap and processed foods contributed to higher wholesale prices in March. As an example, coking coal prices for the steel industry have tripled this year. Core consumer prices, excluding fruit, fish and vegetables, but including energy, climbed 1% in February, the fastest pace in ten years. Prices of daily goods such as bread and milk climbed 2.5%, more than twice the pace of overall prices and the government raised wheat prices sharply. According to a Central Bank survey, Japanese consumers' inflationary expectations remained at near record highs.
On the positive side one notes the improvement in private consumption on the back of moderate increases in household income. The Cabinet Office‘s private consumption index indicates around 4% annualized increase in the first quarter. Core wages posted a 0.9% increase on year ago in February. Separately, the OECD has urged Japan to improve its government’s fiscal position by raising revenues and reduce expenditures. Japan’s pubic debt is the highest in the industrialized world and is forecast to reach 182% of GDP in 2008 according to OECD estimates.
Overall, our estimate for Japanese growth has been trimmed slightly by 0.1 percentage points to 1.3% in 2008.
Euro-zone
Although inflation is rising and the euro has continued to appreciate, reaching yet new record highs versus the dollar, the Euro-zone economy’s deceleration is moderate, so far. However, the overall relatively good performance masks differences within the region. Euro-zone unemployment fell to a historical low of 7.1% in February. Nevertheless, given that unemployment is a lagging indicator, it could be that the improvement in labour markets which has characterized the last three years will slow down or go into reverse in coming months with the ongoing deceleration in economic activity. A measure of economic conditions in the retail sector fell in March to 48.2 from 52.4, signaling a decline in retail sales in March after the improvement recorded in February.
The European Central Bank again kept interest rates on hold in April, despite a strong rise in consumer prices. Consumer prices rose 3.5% in March from a year earlier, the fastest pace in almost 16 years. The ECB has also resisted pressures to lower interest rates although concerns are deepening that the fallout from the US subprime-mortgage crisis will affect European economies. So far, writedowns and losses incurred by European banks from the US subprime crisis in 34 institutions are estimated at $77 bn compared to an overall figure of $230 bn.
The overall March composite Purchasing Management Index (PMI) for the Euro-zone, which includes both the services and manufacturing sectors, slipped 0.1 from the flash estimate to 51.8 from 52.8 in February. The final services sector PMI was 51.6, also 0.1 below the earlier estimate, compared to 52.3 the previous month. The manufacturing sector PMI index indicated that growth has slowed down marginally from February. The final reading was 52.0, unchanged from the flash estimate but below the 52.3 reached in February and the lowest reading since October. Although lower, both the manufacturing and services sectors continued to expand.
Germany continues to exhibit surprising resilience. German exports were unchanged in February, despite the global slowdown and the strong euro appreciation. Exports have risen a seasonally adjusted 3.6% in January. Exports in February were around 9% higher than a year ago. Manufacturing growth accelerated and business confidence improved in March. The IFO survey of business confidence has increased for three consecutive months and is now at its highest level since August 2007. Industrial production also unexpectedly rose by 0.4% in February following a gain of 1.4% in January, as warm weather boosted construction. From a year earlier, seasonally adjusted industrial production rose 6.1%.
Overall, growth in the Euro-zone in 2008 is forecast at 1.7%, 0.1 pp lower than last month.
Former Soviet Union
Russian consumer prices have risen more than five percent since the start of the year, the state statistics committee in Russia has reported, casting further doubts over the government's ability to reduce price rises to single digits in 2008. Inflation has become the main problem for government, which is enjoying a 10th year of economic boom, after it hit 11.9 percent in 2007, exceeding the government's target of around 8 percent by a wide margin. Inflation is running at over 13 percent year-on-year in the first quarter despite outflows of $22.8 billion amid global market jitters. According to the latest data from Kazakh State Statistics agency producer’s prices in the country have soared by 5.4 percent m/m in March. It is estimated to remain high in the near term. Kazakhstan's Central Bank kept its key refinancing rate unchanged at 11 percent from April. The central bank last changed the rate in December 2007, raising it sharply by two percentage points due to high inflation, after keeping it unchanged for months due to a liquidity squeeze in the banking sector. A credit crunch due to the US sub-prime mortgage crisis hit
Central Asia’s top economy hard in mid-2007 after local banks had aggressively tapped international debt markets to fund growth. Liquidity tightness could in fact restrict Kazakhstan's strong economic growth, which has been driven by booming global prices for its key exports, oil and metals.
The World Bank has raised its inflation prediction for Ukraine, setting price increases expected during 2008 at an unsettling 17.2%. The main contributors to accelerating inflation in Ukraine are fuel prices, increasing money supply, and continued high demand for Ukraine's main exports, metals and agricultural products. Russia, Ukraine’s main supplier of oil and gas, has put up the price of fuel sold to Kiev by about 400% since 2005. It is forecast that continued high energy prices will combine with slowly falling domestic demand to reduce inflation to some 10% during 2009 and 2010, while GDP will stabilize at around 5% over the same period. The government has decided to set price controls on key goods such as flour, bread, meat and dairy products by limiting retail prices to 15% above wholesale prices and capping profits of producers to 12% above costs. It has already imposed prohibitive export quotas on grains, in place since October 2007. Other anti-inflationary measures included raising reserve requirements, refraining from issuing foreign debt, and considering cuts to the budget deficit.
Developing Countries
The National Statistical Bureau (NSB) in China revised up China’s GDP growth for 2007 to 11.9% from 11.4%. The NSB also revised up 2006 GDP growth to 11.6% from 11.1%. Accounting for the entire revision in GDP growth, services grew by 12.6% last year compared with an initial estimate of 11.4%. The IMF cut its forecast for China’s 2008 growth to 9.3% from 10.0% in January. It is widely expected that declining export growth affected by the US slowdown is likely to drag China’s GDP growth down this year, but that growth would remain above the government target of 8%. Inflation is likely to remain high because of rapid money supply growth, although it might ease slightly as the impact of a severe snowstorm has worn off. The authorities allowed companies to raise prices in China as they consider that inflation may trend down from its peak in February.
Inflation in India was bound to rise with the pressure coming from oil and food prices. This is the fastest rate in more than three years. The wholesale price index rose 7.41% in the 12 months to 29 March. Surging commodity and food costs globally have fueled inflation across Asia, forcing governments to seek ways to stem price gains. In India, the government may decide on measures of price controls, at the same time the central bank may order lenders to park more money with it to raise the cost of funds.
The World Bank expects that Latin American countries rich in oil and other commodities will likely weather the expected slowdown in the US economy better than they would have even five years ago, thanks to growing trade with China and stronger domestic economies. A possible US recession would affect some regions more than others. Mexico and Chile, having closer relations with the US economy through trade agreements, are showing economic resilience as a result of reforms that have strengthened the business environment leading to higher investment. In Colombia, Peru, Brazil, and El Salvador where growth has picked up in recent years, perception of risk has decreased. The Brazilian Institute of Geography and Statistics (IBGE) announced that inflation measured by the Extended Consumer Price Index (IPCA) went from 0.49% in February to 0.48% in March. The accumulated IPCA for the first three months of this year registered 1.52%, compared to 1.26% for the same period in 2007. The accumulated IPCA to March was 4.73% y-o-y, a little above the 4.61% for the 12 months ending in February. This year's target is 4.50%, with a tolerance of plus or minus 2 percentage points.
OPEC Member Countries
The Indonesian Finance Ministry expects growth of GDP at between 6.2% and 6.3% in the first quarter of 2008 from a year earlier, slightly lower than the government's indicative target of 6.4%. The growth should come from household consumption and exports. The government had revised down its full-year GDP target for 2008 to 6.4% from a previous target of 6.8% which was set based on its assessment of the extent of slowdown in world economic growth. Indonesia's central bank kept its policy interest rate unchanged at 8%, close to a three-year low to help maintain economic growth even though inflation accelerated at the fastest pace in 18 months in March.
The Iranian central bank said on its website that prices rose by 3% in the Iranian month to 19 March, pushing up the y-o-y rate to 22.5%. The Central Bank of Iran has announced that the inflation rate for the past Iranian year (10 Mar 202007 to 20 Mar 2008) stood at 18.4%.
Saudi Arabia's nominal GDP is expected at around $465 billion this year. The surge in Saudi oil revenue will support further growth in public spending. Much of this will be directed toward basic infrastructure, but spending on salaries and other benefits, as well as subsidies, will also be raised in a bid to offset the social cost of rising inflation. Having been negative in the first five years of the decade, average consumer price inflation accelerated to 2.3% in 2006 and further to 4% in 2007. A major risk to a buoyant outlook stems from inflation. The outlook for prices depends on the pace of housing, the course of global commodity prices and the value of the US dollar. These conditions may gradually improve in the second half of this year and into 2009, helping to dampen some import price inflation and subdue wage pressures. The Saudi Arabian Monetary Agency (SAMA) has increased the proportion of assets which banks must hold in reserve, in a bid to reduce liquidity and help stem rising inflation. SAMA hopes that the change will help reduce the level of money supply in the economy, which grew by 23.9% in the year to January. Inflation in the kingdom reached 8.7% y-o-y in February, the highest level for 27 years.
Oil prices, the US dollar and inflation
The US dollar downward trend resumed in March against all major currencies. On average, over the whole month, US currency continued fell sharply versus the euro (5.3%), Japanese yen (almost 6%), the Pound sterling (around 2%) and most against the Swiss franc (7.31%). The US dollar reached a new all-time low of $1.5812 on the 31st of march and averaged $1.5524/€ over the month of March from $1.4746/€ in February.
The dollar also dipped to lows of less than 100 yen reaching 98.8¥/$ on March 27. The increasingly bearish sentiment about the US economy and the prospects of lower US interest rates has continued to pressure the US dollar. As expected, the Fed lowered the target for the federal fund rate on March 18 from 3% to 2.25%, while the ECB continued to hold its main refinancing rate at a six-year high of 4%.
In March, the OPEC Reference Basket rose by $8.39/b or almost 9.3% to $99.03/b from $90.64/b in February. In real terms (base June 2001=100), after accounting for inflation and currency fluctuations, the Basket price rose almost $2.9/b or 5.1% to $60.43/b from $57.42/b. The dollar depreciated by 3.5% as measured against the import-weighted modified Geneva I+US dollar basket, while inflation eroded the value of the barrel by nearly 0.3%.
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