global economy remains poised for robust growth this year, following on two
years of anaemic growth. Moreover, the prospects for next year are
also positive. With the exception of Europe, all regions are
recovering, with the upturn being most pronounced in emerging Asia,
particularly China. Among the industrial countries, the United States
led growth, followed by Japan, for which forecasts have been ratcheted up
rapidly in the past months, as the economy seems rebounding strongly from
several sluggish years. However, both economies are hampered with
fundamental imbalances. The United States economy is burdened with
sizeable deficits in the current account and public sector balances, which
could trigger a sudden adjustment in the foreign exchanging markets.
In Japan, misalignments in the financial sector persist and the country
remains mired in deflation. More recently, higher oil prices are also
beginning to cast a shadow over each country’s outlook. The
prospects for the major European economies, on the other hand, remain sombre.
The Euro Area will recover from last year’s slump but economic growth will
remain moderate. Finally, Latin America remains poised for a robust
recovery, as all economies are profiting from increased global and
increasingly domestic demand.
second quarter growth disappoints
According to advance estimates released by the Bureau of Economic
Analysis (BEA) on 30 July, gross domestic product (GDP) increased at an
annual rate of 3.0% in the second quarter of 2004.
The actual reading was well below expectations, which had expected
the economy to advance by 3.7% in the second quarter.
With the publication of the second quarter figures, the BEA also
revised past national accounting data back to 2001, which included an
upward revision of first quarter GDP growth from the 3.9% previously
reported to 4.5%.
economy cools off in second quarter amid consumption slowdown
The deceleration in real GDP growth in the second quarter compared to
the first quarter primarily reflected a sharp deceleration in consumption,
which dropped from an annual 4.1% growth in Q1 to a paltry 1.0% expansion
in the second quarter. In particular, durable consumer goods slumped and
actually entered the red territory (-2.5 year-on-year), following 2.2%
growth in the first quarter.
However, growth dropped on the back of the very robust expansion
observed in the same period last year, when durable consumer goods swelled
The slowdown in durable goods was thus to be expected.
In the second quarter, non-durable consumer goods consumption
dropped by 0.1% over the same period last year, following on 6.7% growth
in the first quarter.
In addition, the slower build-up of inventories also contributed to
the overall slowdown in the second quarter.
These detrimental impacts were partly offset by accelerations in
exports and in residential fixed investment.
for U.S. economy remains solid despite recent oil price increase
the weaker than expected second quarter compensated for by the upward
revision to first quarter growth, the Consensus Forecast for this year’s
growth prospects did not change over last month’s 4.5% forecast.
In fact, the Consensus has remained virtually unchanged since February,
despite some important changes in the fundamentals underlying the
development of the global economy. In particular, the recent sharp
increase of the oil price is beginning to raise doubts about the previous
optimistic assessment of global economic growth prospects. Past
price increases have ebbed off at high but insufficient levels to derail
the U.S. economy from its upswing. However, the latest jitters have raised
concerns that the oil price might move into the US$ 50 to US$ 60 range and
could dent the current growth spurt. The recent surge in oil prices
is fuelled by concerns that the increase in demand prompted by the buoyant
global economy cannot be met by sufficient supply from the main oil
producing countries. According to recent estimates, the steaming
Chinese economy accounts for one third of this year’s demand increase.
The Organization of Petroleum Exporting Countries (OPEC) has indicated
that it is on standby to increase oil supplies by up to 1.5 million
barrels per day (bpd) to help to cool prices, pending a formal decision on
its next meeting on 14 September in Vienna. However, even so, OPEC
has difficulties reassuring markets about the cartel's ability to quickly
boost output to provide additional supply. Consequently, on 5
August, the price for West Texas Intermediate (WTI) increased to an
all-time high of US$ 44.41 per barrel. However, if inflation is
taken into account, oil prices would have to climb to about US$ 57 per
barrel to exceed the value leading up to the first Gulf War and above US$
80 to be comparable to the levels reached in the early 1980s.
government raises outlook for economic growth
Japan, the economy is recovering at a solid pace, as improvements in the
corporate sector are extending into households, according to the
government’s monthly economic report, published on 5 August. This
upbeat judgment followed on a doubling of the government’s growth
forecast in July. On 21 July, the Cabinet Office revised upwards its
January assessment and almost doubled its economic growth forecast for the
current fiscal year (ending in March 2005) from 1.8% to 3.5%, as strong
business investment and a rebound in consumer spending could lift growth
to its fastest pace in eight years. Brisk exports to China and a
pick-up in capital spending and personal consumption have helped pull
Japan's economy out of its decade-long slump in recent months. The economy
grew at an annualised pace of 6.1% in the first quarter of this year
compared to the same quarter in 2003, its best showing in more than a
decade. The government is also optimistic that the country could
advance on edging out persistent deflation and stated that it now expected
the consumer price index to decline only 0.1% this year, compared with its
previous forecast of a 0.2% drop. However,
at the same time, the government warned that rising oil prices and higher
interest rates could dampen activity. A private sector study has
recently shown that Japan's economy may be vulnerable to higher oil prices
because companies, the main driver of the current recovery, have only
limited ability to pass on higher input costs to consumers. The
report by Nikko Citigroup stated that for every US$ 10 rise in the oil
price, Japan's GDP growth rate would be reduced by 0.2 to 0.3 percentage
points. Nevertheless, Consensus Forecast panellists remain
optimistic and have even hiked their projection for economic growth in
2004 a notch over last month’s forecast to 4.3%.