Export to become major engine in rasing Economy of Eurozone

Analysis Materials 27 July 2011 10:39 (UTC +04:00)

Fitch has revised only a notch downwards its global growth forecast to 3.1 percent in 2011, from 3.2 percent in its previous global economic outlook report. The latest report also projects that global economic output will rise to 3.4 percent in 2012 and 2013 (up from 3 percent projected earlier).

Global rating agency Fitch has revised the GDP forecast and lowered it for a number of countries and regions, stressing that it was a more moderate pace of growth rather than a sharp slowdown in a report, entitled Global Economic Outlook (GEO).

Fitch`s sovereign team director Maria Malas-Mroueh says, "The fragility of the global recovery is highlighted by the weak Q1 numbers in several major economies, slowing global production indicators, and concerns about the impact of monetary policy tightening in key emerging markets. "This growth moderation, combined with increased inflationary pressures, raises a policy dilemma for the central banks, particularly in the major advanced economies," she adds.

Emerging economies remain to be the engine of global growth. However, outlook downgrade was common for them, as well as a result of tighter monetary policy within the context of high inflation.

Meanwhile, Russia will see strengthening of the real GDP at the expense of high oil prices and improving consumption on the domestic market.

Fitch has said that current soft patch in global economic growth is temporary and the recovery is on track, though at an uneven pace, even as it has revised growth forecast for the BRIC (Brasil, Russia, India and China) economies downward to 6.9 from 7.1 percent for 2011.

In the direct aftermath of the Tohoku earthquake and tsunami of 11 March, Q111 GDP in Japan declined sharply, prompting the agency to revise down its 2011 full-year Japanese GDP forecast to 0.5% from 0.9%. The agency expects a V-shaped recovery to emerge during the second half of 2011, driven by a resumption of exports and restocking as supply disruptions are overcome and consumption growth is resumed. Fitch now projects GDP growth of 2.7% in 2012 (2.2% in the previous GEO).

In the UK, although temporary factors provided an additional headwind to the recovery, the weaker-than-expected Q111 performance, with consumption and investment both declining, served as a reminder of how anaemic the recovery is - with growth still weighed down by household and financial sector deleveraging. The agency has revised down 2011 UK GDP growth to 1.4% (1.6% previously), but maintained its 2012 growth projection at 1.7%.

Although the euro area sovereign debt crisis continued to dominate headlines, the region outperformed Fitch's growth projections in Q111, pulled up by continued robust growth in Germany. The agency projects euro area GDP growth at 1.7% for 2011 (1.2% previously) and 1.8% for 2012 (unchanged).

Russia`s Gross Domestic Product rose 3.9 percent in January-May on annualized basis compared to year-on-year 4.3 percent growth, the Economic Development Ministry said.
In May, Russia`s economy grew 3.8 percent on annualized basis and 0.4 percent month-on-month due to positive dynamics in industrial production, building and retail trade, the ministry said in a monitoring.

The ministry also said that capital investments returned to growth in April and May, increasing 5.3 percent and 4.3 percent, respectively, after a fall in the first quarter of 2011. In May, investment was up 7.4 percent year-on-year, the ministry said.

The Russian Statistical Service has said capital investments increased in May 7.4 percent on annualized basis and 25.8% month-on-month. Capital investments rose 2.0 percent in the first five months of the year, the service said.

The ministry cut its investment growth forecast for 2011 to 6 percent from 9 percent.

U.S. economy

US real gross domestic product (GDP) increased at an annual rate of 1.9 percent in the first quarter of 2011, official data showed. In the second estimate, the increase in real GDP was 1.8 percent.

The increase in real GDP in the first quarter primarily reflected "positive contributions" from personal consumption expenditures (PCE), private inventory investment, exports, and non-residential fixed investment that were partly offset by "negative contributions" from federal government spending and state and local government spending, the Department showed. It added that imports, which are a subtraction in the calculation of GDP, also increased.

Excluding food and energy prices, the price index for gross domestic purchases increased 2.3 percent in the first quarter, compared with an increase of 1.1 percent in the fourth quarter of 2010. Also, real personal consumption expenditures increased 2.2 percent in the first quarter, compared with an increase of 4.0 percent in the fourth quarter.

With increases in manufacturing and mining output largely offset by a sharp drop in utilities output, the Federal Reserve released a report showing only a modest increase in U.S. industrial production in the month of May. The report showed that industrial production edged up by 0.1 percent in May after coming in unchanged in April. Economists had been expecting slightly stronger growth of about 0.2 percent.

The increase in production in May was held back by a 2.8 percent drop in utilities output, which rose by 2.4 percent in April. The steep drop in utilities output came as unseasonably cool weather led to reduced air conditioner use. At the same time, manufacturing output rose by 0.4 percent in May after falling by 0.5 percent in the previous month. Excluding the production of motor vehicles and parts, manufacturing output rose by a slightly stronger 0.6 percent.
The report also showed that mining output increased for the third straight month, rising by 0.5 percent in May following a 0.8 percent increase in April. Additionally, the Fed said that capacity utilization came in at 76.7 percent in May, unchanged from the revised reading for the previous month. The capacity utilization rate had been expected to rise to 77.0 percent from the 76.9 percent originally reported for April.

Capacity utilization in the manufacturing and mining sectors rose to 74.5 percent and 88.6 percent, respectively, while capacity utilization in the utilities industry fell to 79.0 percent. Fewer oil imports and strong demand for American goods and services drove the U.S. trade deficit down nearly 7 percent in April, providing a break from a recent string of economic news that had called into question the pace of the nation`s fragile economic recovery.

The $43.7 billion shortfall is down from $46.8 billion in March, according to figures released by the Department of Commerce. Imports stood at $219.2 billion while exports totalled $175.6 billion, according to the data. Many economists had forecast the deficit to widen, with one consensus forecast pinning the April deficit at $48.8 billion.

Exports have grown nearly 18 percent since Obama launched the program in March 2010. But weaker imports also helped narrow the trade deficit. Crude oil imports tumbled 8.6 percent from March to April, and automobile import dropped 2.9 percent. Economists blamed the latter on the March earthquake in Japan, which disrupted auto manufacturing and other industries. Consumer Price Index rose 0.2% in May, the Labor Department said. That`s down from April`s 0.4% increase. Food costs rose 0.4%. But energy costs fell 1%. So-called "core" prices, which exclude volatile food and energy, rose 0.3%, the most in nearly three years.

Consumer prices rose 3.6% from April 2010 through May 2011, the biggest one-year gain since October 2008. Excluding the volatile food and energy categories, which account for about 20% of the index, so-called "core" prices rose only 1.5% in that same period. That`s below the Federal Reserve`s informal inflation target of about 2%.

The unemployment rate in the United States increased to 9.2 percent in June, the highest level this year. The report from the Labor Department showed that American employers added only 18,000 jobs in June, the smallest increase in nine months and another indication that the U.S. economy is still struggling to recover from a deep recession.

The June unemployment rate was one-tenth of a percentage point higher than the previous month and the highest since December of 2010.

Economy of Eurozone

GDP increased by 0.8% in both the euro area (EA17) and the EU27 during the first quarter of 2011, compared with the previous quarter, according to second estimates released by Eurostat, the statistical office of the European Union. In the fourth quarter of 2010, growth rates were +0.3% in the euro area and +0.2% in the EU27. Compared with the first quarter of 2010, seasonally adjusted GDP increased by 2.5 % in both the euro area and the EU27, after +1.9% and +2.1% respectively in the previous quarter.

In April 2011 compared with March 2011, seasonally adjusted industrial production grew by 0.2% in the euro area (EA17) and by 0.1% in the EU27. In March production remained stable in the euro area and fell by 0.2% in the EU27. In April 2011 compared with April 2010, industrial production increased by 5.2% in the euro area and by 4.7% in the EU27.

The first estimate for the euro area (EA17) trade balance with the rest of the world in April 2011 gave a 4.1 bn euro deficit, compared with -0.7 bn in April 2010. The March 2011 balance was +1.6 bn, compared with +2.7 bn in March 2010. In April 2011 compared with March 2011, seasonally adjusted exports rose by 0.6% and imports by 1.1%. The first estimate for the April 2011 extra-EU27 trade balance was a 15.9 bn euro deficit, compared with -12.0 bn in April 2010. In March 2011 the balance was -10.6 bn, compared with -8.9 bn in March 2010. In April 2011 compared with March 2011, seasonally adjusted exports fell by 0.8% and imports by 0.1%.Euro area annual inflation is expected to be 2.7% in June 2011 according to a flash estimate issued by Eurostat, the statistical office of the European Union. Euro area annual inflation was 2.7% in May 2011, down from 2.8% in April. A year earlier the rate was 1.7%. Monthly inflation was 0.0% in May 2011. EU3 annual inflation was 3.2% in May 2011, down from 3.3% in April. A year earlier the rate was 2.1%. Monthly inflation was 0.1% in May 2011.The euro area (EA17) seasonally-adjusted unemployment rate was 9.9% in May 2011, unchanged compared with April. It was 10.2% in May 2010. The EU27 unemployment rate was 9.3% in May 2011, unchanged compared with April. It was 9.7% in May 2010. Eurostat estimates that 22.378 million men and women in the EU27, of whom 15.510 million were in the euro area, were unemployed in May 2011. Compared with April 2011, the number of persons unemployed fell by 5 000 in the EU27 and increased by 16 000 in the euro area. Compared with May 2010, unemployment decreased by 904 000 in the EU27 and by 551 000 in the euro area.

The European economy will hardly be able to score points, as many countries of the region including Spain and Greece, are reducing expenses to cut the budget deficit, while rise in energy resources prices negatively impacts the consumer expenses.

"We might see a slight dent with one or two months showing weaker output growth," said Christoph Weil , an economist at Commerzbank AG in Frankfurt. "We'll have a very strong first quarter overall with Germany and France driving production."

Euro-region growth probably quickened to 0.5 percent in the first quarter from 0.3 percent in the previous three months, the European Commission forecast on March 1. The economy may expand 1.6 percent in the year, with Germany driving growth, it said.