World Economics Monthly - January 2012
Pace of growth slows in China
Chinese year-on-year GDP growth slowed to 8.9% during Q4 2011. The annual rate of growth in industrial production slowed for the fourth time in five months during November, the latest available data shows. A number of other economic indicators, such as oil imports point to the continuation of a slowdown in early 2012.
This performance is relatively impressive given the fact that the economy was able to withstand severe policy headwinds in the second half of 2011,when monetary tightening was at its height as attempts were made to slow the property price inflation. With both fiscal and monetary policy “fine tuning”, the economy should start to turn around in 2012.However, residential property investment, which accounted for 12.5% of GDP during 2011 remains a significant downside risk.
Capital goods output weak in both India and Brazil
Industrial production in both India and Brazil is coming under pressure. While overall output bounced back in India in November, the production of capital goods continued to decline. Similarly, capital goods output was weak in Brazil during the same month, with the strength of the real on foreign-exchange markets weighing on exports and acting as a drag on performance. In Russia, capital outflows accelerated in late 2011, highlighting the importance of oil and gas export revenues to the economy, despite healthy GDP growth.
Consumer weakness persists in developed economies
Across developed economies, consumer demand remains rather anemic. Although unemployment is falling in the USA, December retail sales were lacklustre, while in the UK, rising unemployment and weak earnings growth are constraining consumers. Across Europe, the Eurozone crisis continues to weigh on consumer sentiment, while in Japan, household expenditure has yet to recover from the psychological impact of March’s earthquake and tsunami.
Developed Economies
Eurozone woes weigh on German GDP...
German GDP contracted 0.25% during Q4 2011. This figure pulled the annual GDP growth rate for 2011 down to 3.0% from 3.7% the year earlier. The continuation of the Eurozone sovereign debt crisis negatively affected export demand which was particularly weak; industrial orders from abroad fell 7.8% in November while domestic orders declined 1.1%.
...as Eurozone industrial output falls for third consecutive month in November...
More broadly, Eurozone industrial production contracted for a third consecutive month in November, by a seasonally adjusted 0.1% month-on-month. This followed a 0.3% decline during the previous month and a fall of 2.1% during September. In y-o-y terms, output fell by 0.3% in November, having risen by 1% during October. The production of capital goods was stable m-o-m, while the output of intermediate goods and consumer goods both increased by 0.1%. Non-durable consumer goods were the main source of weakness, with output down 0.6% m-o-m.
Business climate stabilises in Germany towards year end
Having fallen for fourth successive months between July and October, the German Ifo business climate index stabilised during November and December. Nonetheless, German industrial production fell by a seasonally adjusted 1% m-o-m in November, while there was a 1.6% decline in Spain. French industrial production grew 1.1%, while output in Italy rebounded 0.3%, having slumped over the previous two months.
Rising unemployment rate undermines wage growth in the UK
The rate of unemployment in the UK rose from 8.3% to 8.4% between October and November, its highest level since 1996. Largely as a result of this labour market weakness, average weekly earnings rose at an annual rate of just 1.9% in the three months to November, well below the annual rate of consumer price inflation (4.2% during December, down from 4.8% in November). Although retail sales rose by 4.1% y-o-y during December, this was largely due to a strong base-year effect (the impact of heavy snow during December 2011) and did not reflect any real improvement in consumer sentiment.
US Retail sales growth disappoints, but automotive sector bucks trend...
US retail sales grew by a seasonally adjusted 0.1% m-o-m and 6.5% y-o-y during December, to US$400.6 bln. During 2011 as a whole, retail sales rose 6.7%. However, as in the UK, discounting was a major driver of this growth. Automotive sales were particularly strong, rising by 9.9% during the year, with November and December reported to be particularly strong months.
...as labour market conditions continue to improve
The rate of unemployment in the USA continues to trend downwards, falling to 8.5% during December. It declined by a cumulative 0.6 percentage points during the last five months of the year. Total nonfarm payroll employment increased by 200,000 in December and 1.6 million during 2011 as a whole. Employment in the private sector rose by 1.9 million, with public sector employment down almost 300,000. However, over the past 12 months, average hourly earnings have increased by just 2.1%.
Thai floods hit Japanese industry as local consumers struggle
Japanese industrial production declined by 2.7% m-o-m and 4.2% y-o-y during November. Apart from weak export demand, driven in part by significant inflation in the value of the yen, serious flooding in Thailand impacted supply chains, particularly in the automotive and information technology segments. In spite of the fact that industrial orders increased by a seasonally-adjusted 14.8% y-o-y in November, GDP growth is likely to be weak during Q4.
This is reinforced by that fact that household consumer expenditure declined by 3.2% in real terms during November, its ninth consecutive monthly fall, with automotive sales down for the first time in three months. Meanwhile, the average real income of salaried workers’ households declined by 1% y-o-y in November, the fourth consecutive month of decline. Deflation remains firmly entrenched in Japan, with core consumer prices (excluding energy and food) declining by 0.4% m-o-m and 1.1% y-o-y during December.
Emerging Economies
Chinese GDP growth dips below 9% as residential housing sector beings to struggle
Chinese GDP growth continued to moderate during Q4, easing from 9.1% y-o-y to 8.9%. During 2011 as a whole, Chinese GDP expanded by 9.2%, down from 10.3% in 2010. Growth in industrial output eased steadily during the second half of the year, from 15.1% in June to 12.4% during November. However, others indicators depict a sharper slowdown: China’s annual rate of growth in oil imports slowed from 17.5% to just 6% between 2010 and 2011, while auto sales were down 2.5% during the year, to just over 18.5 million units.
Real estate investment accounted for 13% of China’s GDP in 2011, and the residential housing market remains a significant source of downside risk, as it evidenced notable weakness during the latter part of the year: Investment in real estate development rose 28% to RMB6.17 trillion (US$976 billion) in 2011, and a likely moderation in this figure will act as a drag on GDP growth during 2012. Indeed, housing starts declined 18.9% y-o-y in December, as increasing inventories, tightening liquidity and price declines led developers to slow the pace of construction.
Indian ouput bounces back on strengthening consumer demand
Industrial output in India rebounded from a contraction of -4.7% y-o-y during October (its worst performance since March 2009) to grow by 5.9% in November. However, Indian production data tends to be volatile, so too much should not be read into this (admittedly sizeable) rebound.
Mining output was down 4.4% in the wake of a number of corruption scandals that have led to a series of mine closures, with manufacturing output rising by 6.6%. Within manufacturing, the output of capital goods declined by 4.6%, while consumer goods output increased by 13.1%. During Q3, Indian GDP grew at a y-o-y rate of 6.9%, its slowest rate of expansion in than two years, and this slowdown is likely to have extended into Q4. On the other hand, India’s purchasing managers’ index rose to 54.2 in December, its highest level in six months.
Currency appreciation continues to weigh on Brazilian output prompting stimulus efforts
Brazil’s industrial output rose by a seasonally-adjusted 0.3% from October, but this represented no more than a marginal recovery, following an accumulated decrease of 2.6% during the previous three months. In y-o-y terms, output was down 2.5% y-o-y, with consumer durables particularly hard hit, declining by 11.5%. For much of 2011, domestic output has been undermined by a strong real driving import growth. This sluggishness has led to monetary and fiscal efforts aimed at reviving growth: The country’s central bank has reduced its Selic base interest rate three times over recent months (to 11%), while in December, a wide-ranging package of tax cuts and financing measures was introduced.
Russia posts higher GDP growth but accelerated capital outflows a cause for concern
Inflationary pressure continues to moderate in Russia, with the annual rate of consumer price inflation (CPI) declining to 6.1% during December. Moreover, the annual rate of GDP growth accelerated from 4% to 4.2% between 2010 and 2011, with new car sales up 39% during the year. However, the purchasing managers’ index decreased from an eight-month peak of 52.6 to 51.6 between November and December. This slowdown was largely due to weaker external demand. Nonetheless, it represented a 29th consecutive month of growth.
Net private sector capital outflow in Russia stood at $84.2 billion for 2011 as a whole, compared with the $33.6 billion that left the country in 2010. The 2011 figure represented around 5% of GDP. While this was relatively low by historical standards (during the 1998 financial crisis, it reached 15%), it accelerated markedly during the final quarter of the year as the threat of political instability grew. For the moment, this capital flight is sustainable because it is more than compensated for by an energy-driven trade surplus, but it highlights the need for reform to boost domestic investment.
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