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IMF forecasts
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Strong growth but some risks remain
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IMF expecting world growth at around 5% in 2006 and 2007...
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In its report on prospects for the world economy put out in September, the International Monetary Fund (IMF) raised its growth forecasts for 2006 from 4.9% to 5.1%. For 2007 it expects a very slight easing off which would set the increase at 4.9%. World growth is strong thanks to low interest rates up until now and the growth of world trade. In spite of a positive main scenario, there are higher risks of a downward revision of growth because of rising interest rates, possible increases in oil prices, the slowdown in the US housing market and imbalances in the current account balance which could bring about protectionist pressure.
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...but increasing risks from interest rates, slowdown in housing in United States and current account imbalances.
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By geographical region, the United States is losing some strength while Europe is growing stronger and this is especially so in the emerging countries with China in the lead. In the United States growth of 3.4% is expected in 2006 with a drop to 2.9% in 2007. Japan is maintaining its growth with increases of 2.7% in 2006 and 2.1% in 2007 while the economic contribution forecast for the Euro Area has been revised from 2.0% to 2.4% for 2006 and stays at 2.1% for 2007. But it is the emerging countries which see their prospects of economic growth raised most with an overall increase of 7% this year, a level that will be maintained in 2007.
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China will maintain sharp growth at around 10%. The economies of Latin America can expect to grow by 4.8% this year and 4.2% in 2007, in both cases being revised upward by around a half percentage point. Russia and the countries of Eastern Europe have also had their growth corrected upward in a similar manner.
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As for Europe, some of the unknowns about Germany have been eased. This was the country about which there have been most doubts and it has now been given a growth forecast of 2.0% for 2006 and 1.3% for 2007. Growth prospects for France and United Kingdom have again been improved while those for Italy are maintained. Spain continues to stand in the lead of European growth rates with a forecast of 3.4% for 2006 and 3.0% in 2007.
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Growth dropping in United States, rising in Europe and leaping ahead in emerging countries.
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Leaving apart inflationary risks from oil, the sharp world growth rates are bringing about higher utilization of production capacity. It is mainly this fact that has brought about an increase in core inflation with levels generally above the objectives of the central banks. In this regard, what stands out are unit labour costs in the United States which could lead the Federal Reserve System to be on the lookout in spite of lower growth. As a result, the prospects for inflation have been revised upward and it is expected that prices will go up by 3.6% this year and 2.9% next year. The situation of the European Central Bank is similar with less inflation expected (but also revised upward above the central bank’s objective) at 2.3% in 2006 and 2.4% in 2007.
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The biggest risk for growth continues to be the trade imbalances. Correcting these means the possibility of a sharp adjustment of the dollar exchange rate. On top of this risk comes the correction of the real estate market in the United States and doubts about the strength of the emerging economies in a less favourable world environment with higher interest rates and lower-priced raw materials, of which they are net exporters. There still remain fiscal imbalances and a lack of decided policies to correct them at a moment that is specially appropriate.
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United States
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United States for now bearing up under end of housing cycle
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Heavy utilization of production capacity bringing about price increases.
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In recent weeks, Richard Fisher, chairman of the Federal Reserve Bank of Dallas, has been concerned. At the end of August he had obtained first-hand information from professionals in the real estate sector that indicated that we were facing the most drastic adjustment in memory. The US economy is dropping gently, with year-to-year growth of 3.6% in the second quarter and less of a threat from inflation than was expected only a few months ago. The latest figures for the housing market, however, confirm Fisher’s concerns, although it must be said that these worst fears have not come about yet. We may ask why.
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United States growing at 3.6% with lower inflationary pressures.
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The slowdown in the real estate market has been sharp but it has been more in volume of economic activity than in prices. The drop in sector activity has been very rapid, much more so than in earlier downward markets such as those at the beginning of the Eighties and Nineties that showed bigger decreases in trend, so that what cannot be discarded now is the return to an upward move. Housing starts in August were down 19.8% over the same period last year whereas for the whole of 2005 they had risen by 6.3% over the previous year. A similar thing is happening with housing sales, new or existing, that in August dropped by 17.4% year-to-year and 12.6% respectively. In prices things are somewhat different. Rather than an easing off we should speak of a sharp slowdown. Prices of new housing and existing housing were down by 1.7% year-to-year and 1.3%. These are figures much lower than growth of the order of 10% at the beginning of the year but are still far from meaning an appreciable loss of value.
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Housing sees sharpest drop in economic activity in recent decades...
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This difference between prices and sector activity is important. Weakness in volume of business and investment in the residential sector affects 6% of the total gross domestic product (GDP) in current dollars which, although it is not small, is far from the two-thirds represented by consumption. The US consumer has been one of the most important supports, if not the most important, of current growth not only of US growth but also in world terms. Wages have until recently been slipping and the increases in oil prices have undermined consumer budgets. In this theoretically unfavourable context, the wealth effect arising from the appreciation of real estate assets combined with low interest rates which has made it possible to rewrite home mortgages to finance other spending has been a crucial support for continuing to buy all over. The drop in building activity now is being felt in GDP growth but without any significant drop in prices, something which has not yet come about, and furthermore, if oil prices help a bit and wages come out of their lethargy, as seems to be happening, the slowdown in the economy is a long way from taking on melodramatic overtones.
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...but real estate still holding values.
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Retail sales continue to show notable strength. If we exclude sales of cars and petrol, because of their volatile volume in the first case and volatile price in the second, retail consumption grew by 6.9% year-to-year in August. However, there is something of a slowdown so far in 2006 with a trend toward increases of 6%. The slowdown is concentrated in construction materials and home goods, a logical result of the current situation in housing. Another sign of some weakness is the drop in consumption of food and drink in bars and restaurants and the fact is that, when things are not clear, it is better to eat at home and watch a video. After dropping in July, levels of consumer confidence found some support in August mainly thanks to the easing of oil prices mentioned above.
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Consumption remains strong with confidence somewhat higher thanks to dip in oil prices.
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In turn, while somewhat disappointing in August, industrial production is in better form than one year ago with growth at 4.7% year-to-year. While manufacturing jobs are not being created, there is a tendency in the sector to offer higher qualified jobs as a result of gains in productivity. Surveys on sector activity and business sentiment reflect this improved performance in the manufacturing sector with the index issued by the Institute of Supply Management for manufactures holding practically at stable levels in the high band as is also the case in services. The levels for August at 54.5 and 57.0 points respectively, both above 50, indicate that those who see improvement predominate over those who foresee a worsening of the situation.
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Business executives still see strength in state of economy.
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The labour market is moderating with job creation that during the current growth period has never reached levels similar to that seen in other cycles. Wages are coming out of their lethargy without any great strength. Following the August revision, unit labour costs rose somewhat higher than expected. This either indicates inflationary pressures or lower corporate profits. The slowdown of the economy, the position taken by the Federal Reserve System, and corporate profits at all-time highs compared with wages indicate some moderation in wages is most likely.
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Inflation down but no change in tendency yet.
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On the prices front, things continue to improve. Growth of the consumer price index (CPI) in August stood at 3.8% year-to-year, down from the previous 4.2% thanks to oil prices and a base effect because of the distortion resulting from the Katrina hurricane disaster. In the core component there is an opposite situation. Growth in August was 2.8% year-to-year there continues to be an upward trend which, at this time, comes from negative base effects. Nevertheless, the latest monthly changes show a trend to moderation which, supported by a lower level of economic activity, should continue to take shape. Producer prices also support the thesis of lower increases.
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The enormous trade deficit continues. The road to its correction is still not appearing clearly on the horizon but at least it has reached some stability. The doubt for many of those who are especially concerned (this applies to the Asian countries as well as to Europe) shows up in how gentle any future adjustment will be and whether this will come about through lower growth or by ceding to calls for protectionist policies with the dollar as the invited star playing an uncertain role.
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Immigration in Spain and United States: a question of gender
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Differences between male and female immigration
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In May 1903 a boatload of immigrants reached the port of New York. Still suffering from the terrible conditions of the trans-Atlantic voyage, one of the immigrants was a Sicilian boy of six with the surname Capra. In only 30 years Frank Capra was to become the most successful film director of his time, the conscience of America in the harsh moments of the Great Depression and a firm believer in the ability of ordinary people to make things better.
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Immigration can be a blessing or a problem. More immigrants means more people working and probably increased economic growth. The question is whether this growth also carries with it an increase in productivity and per capita income. A good academic education and being able to complement the local labour force, as well as the initiative already shown by the effort in leaving behind one’s native country, all help to ensure the second aspect.
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The qualifications of foreign workers in Spain is relatively good although there is indeed a downward trend. One indicator of the level of qualification is the years of schooling weighted in terms of educational level reached. In 2003, in the United States, a country where immigration is of special importance, the period of schooling of foreign workers was nearly 14 years, well below the 16 and a half years for the rest of the population. The situation in Spain in June 2006 was surprising with a foreign worker population showing 14 years of schooling, only 9 months less than that of Spaniards. We do not take into account here the quality of schooling received nor its suitability for the demands of the labour market, although it is necessary to add that half of the immigrants in Spain come from Latin America so that language is not a problem.
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The downside is that, while in the case of the United States there was stability between 1998 and 2003, the situation in Spain seems to have deteriorated since the beginning of 2005, given that the difference in schooling between foreigners and Spaniards has gone up by three months. The main cause of this worsening lies in the change of origin of immigration, with a decrease in the percentage of Europeans, maintenance of the proportion of Latin Americans and an increase in those coming from other parts of the world.
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Even with good academic credentials, many foreigners are underemployed because they have not mastered Spanish or because of the preferences of business executives in favour of national workers. It is not true, however, the idea that immigrants carry out work Spaniards do not want to do. Spaniards may reject jobs done by immigrants at the wages they obtain. But, if there were no foreign workers, a low job offer would increase the wages being offered in vacant jobs to the point where there were people ready to fill them. Therefore, there is the possibility that some sectors may exist that are hurt by the presence of foreign workers.
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The key factor for lowering these costs is that recent arrivals be complementary to local workers. It would be difficult for the average American to emulate Frank Capra. Knowing whether nationals or immigrants are complementary is difficult to measure but a comparison of their respective job profiles, in what sectors one or the other is employed, may give us a clue. If we look at the percentage each sector represents out of total employment for each of the two groups, national or foreign, we can calculate the difference for each sector. If we add up the absolute values of these differences we obtain an indicator that, in the absence of other measurements, gives us a broad idea of the degree to which both groups are complementary. In the American case, if we take six macro-sectors of employment, the degree to which they are complementary thus measured grew by 12% between 1998 and 2003. For Spain, taking 45 sectors between the beginning of 2005 and June 2006, the difference held stable with a slight downward trend, which would appear to give some advantage to the United States.
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It is interesting to examine the differences by sex. In the American figures, the degree to which a worker is complementary in employment in the case of male foreigners and US workers goes up by 26.1% in the case of women who make up 48.5% of immigrants. The story does not end here given that, while in academic qualifications women immigrants were merely one and a half months below men in 1998, in 2003 they had gone just a little higher than men. Thus, in the absence of any disadvantage in qualifications and with a higher degree of being complementary, women seem to be the better bet for growth in the American case.
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In the case of Spain, there has not been any exhaustive study of the degree to which females are complementary but the differential factor is that female immigrants work proportionally more than Spanish women, are better trained than their male counterparts and furthermore this characteristic is increasing. A growing 43.5% of all immigrants working are women as against a figure of only 40.0% that women represent of all Spanish workers. Their academic qualifications are close to one year higher than those of males.
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It may be that, for many recently arrived Black Africans, Spain may not be the dreamed-about Shangri-La in the film by the famous director Capra but the female group, although less noted, is growing, is better trained and probably with a higher degree of being complementary to female Spanish workers. Thus, according to official figures, many immigrants, better qualified and with more potential than often supposed, may already be contributing to economic growth, silently and without excessive cost, while overcoming difficulties just as did the popular heroes of Frank Capra’s films.
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Japan
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Japan: growth based on investment
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In Japan investment up 9% with 2% rise in consumption.
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The Japanese economy continues its own particular growth cycle resting mainly on domestic demand. If before this private consumption was the main engine of the economy, at this time investment in capital goods is the most active component and in the second quarter this moved up by 9.2% year-to-year. This investment is still mainly directed toward the foreign sector, recently hurt by energy prices, a sector that took away from growth in the same period. Japan continues to be an economy of producers rather than one of consumers.
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Stagnant retail sales and drop in car sales show private consumption at low ebb.
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On the demand side, private consumption is holding up although more and more with a lower profile. In the second quarter it grew by 1.8% year-to-year, an acceptable rate but one below the norm for the present growth cycle. Showing a similar pattern, confidence levels continue in the high band although in the second quarter they lost ground compared with the high in the first quarter. Demonstrating greater weakness, retail sales in July were down by a sharp 1.6% over June and remained unchanged compared with the same period the year before while facing a downward trend. Also significant is the fact that, with prices moving into positive ground, retail consumption in terms of volume is now dropping.
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Car sales have been losing ground over the past year and a half and in the 12 months ending in August they were 7.1% lower than the high for the current growth period which took place in mid-2005, some 25% lower than the absolute highs at the beginning of the Nineties. Housing was also down with a reduction in the volume of transactions in Tokyo in August at half those in July and with prices stagnant. The present moment is not comparable with the drop in the first half of the Nineties but the sector is draining away from growth and offers no stimulus to consumption.
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Industrial production and machinery orders form positive side.
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On the supply side, things are definitely going better. Industrial production grew by 5.0% year-to-year in July to stand at the highest rate of increase in the current growth period. Machinery orders, both for foreign and domestic origin, are following a clearly upward trend which is keeping up the strength of investment. In view of these figures, the traditional Japan, that is more involved in investment than in consumption, shows up more and more strongly although growth rates for investment are still a long way from previous growth figures at the beginning of the Nineties. In turn, the labour market remains stable with an unemployment rate of 4.1% in July. Worth noting here is the increase in manufacturing productivity which in Japan always coincides with the recovery of industrial production which shows that the country continues to be a competitive force in exports of the first order.
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Somewhat less clear is the performance on inflation and how this is bringing about the end of the deflationary period. Following revision of the index, the component excluding fresh foods showed an increase of 0.2% year-to-year in August. This updating has put rates for price increases down so that the end of deflation is coming later than it was initially stated, with June showing up as the first month with price increases, thus coinciding more with the gross domestic product (GDP) deflator. It would therefore seem that the more restrictive monetary policy of the central bank could have been premature, which, along with the containment of government spending in recent quarters, is draining off from growth. The foreign sector continues to show strength based on the competitiveness of exports although imports and energy prices for the moment are darkening the picture.
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Brazil
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Brazil losing strength
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Brazil again goes flat with growth of 1.7%.
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The Brazilian economy is beginning to see its macroeconomic situation becoming more complicated. Growth has slipped below 2% year-to-year with no important increases. In an economy with an unemployment rate of more than 15% it is not much use having inflation under control in order to quieten criticism of the government’s management.
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Consumption holding up but investment failing.
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The GDP in the second quarter rose by 1.7% year-to-year. Private consumption was the component to show most strength with an increase of 4.1% although investment again showed signs of weakness with growth of a slime 2.1%, which puts the sustainability of the current cycle in doubt. The foreign sector also had a poor performance, mainly because of the stagnation in exports following a good trend in the past two years. The weak figure for the second quarter raises doubts about competitiveness and also reflects Brazil’s dependence on purchases by economies such as China and the United States.
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Demand indicators stay stuck in slack.
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Following the situation in recent months, the monthly indicators for demand and supply show a low profile with some stagnation. Retail sales in July continued to sharpen their slowdown with growth at a slender 2.3% year-to-year although car sales continued to show strong. Industrial production grew again in July after decreases in previous months but the rise of 3.2% year-to-year is not a big enough figure for the Brazilian economy.
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Inflation stands below 4% but unemployment still 16%.
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Inflation continues to drop with prices, helped by a lower rate of economic activity, grew by a mere 3.8% year-to-year in July. A negative picture shows up in the high unemployment rate which in the São Paulo district held at 16.0% of the labour force in August.
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Argentina
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Argentina running full-steam-ahead
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Argentina grows by 8% thanks to consumption and investment.
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The Argentine economy continues its growth with something of a logical slowdown following various months of strong growth which has taken it above levels before the 2002 recession. Nevertheless, inflation and unemployment continue to be the two big unresolved questions troubling the public in Argentina and represent a latent risk to recovery which, up until now, has been surprisingly favourable.
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The Argentine GDP grew by 7.9% year-to-year in the second quarter of 2006. Private consumption continued relatively stronger than the rest of the economy, stabilizing growth above 8%. The relative moderation in public consumption is positive thus cutting off a growth trend that had been gaining strength. The crucial investment in productive capital continued to advance strongly going up by 18.5% year-to-year and with signs of continued growth. The foreign sector was still showing a surplus but the drop in exports was somewhat disappointing in an international context that up to now has been favourable.
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Consumption maintains lead but inflation still a risk.
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Demand indicators are consistent with the strength of growth. Retail sales slowed down in July but even so grew by 16.3% year-to-year while car purchases in the past 12 months ending in August moved up by 25%, gradually recovering levels of consumption before the recession.
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On the supply side, growth is continuing although will less strength than some months back. Industrial production in August slowed to 5.7% year-to-year although indicators for industrial activity and construction were maintained.
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Inflation in Argentina continues as the biggest risk for the stability of the current growth cycle. In May, the increase of 10.7% year-to-year meant a relative improvement compared with the levels at the beginning of 2006 but even so the increase in prices continues high, especially in the present context where most of the Latin American economies have been able to install practical price stability. Another important problem is the unemployment rate which, while it went down to 10.4% of the labour force in the second quarter, still remains at a high level. The trade surplus has stabilized in recent months in spite of the fact that exports are slowing down.
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Raw materials
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Unexpected drop in oil prices
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Oil drops 24% in less than two months…
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On August 8, 2006, the one-month forward price of Brent quality oil per barrel stood at 78.49 dollars, an all-time high. On September 27 the per barrel price was 59.79 dollars. In a little less than two months, oil had plummeted by 24%. There had not been such a sharp correction at any time during the long upward climb of oil that began at the start of 2001. How do we explain this sharp downward move?
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...ue to reduced geopolitical tensions and some change in prospects for world economy.
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First, the geopolitical agreement bringing about a cease-fire in Lebanon and some easing of the conflict between Iran and the western powers. Second, expected oil demand was lower than anticipated due to the situation of world slowdown that has been the general consensus in recent times, a situation characterized by the combined economic slowdown in United States, Europe and China although in the latter case it has been of lesser degree.
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In this respect, the Organization of Petroleum Exporting Countries and the International Energy Agency have substantially revised downward oil demand expected for 2006 and 2007. Finally, factors of a seasonal nature have also intervened such as the end of the high mobility season in the United States, known as the driving season, and a trend in inventories of distilled petroleum products which confirms a higher refinery margin, also in the United States.
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Metal prices up 50% in one year.
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Do these answer all the questions about the correction? Certainly not, given that the sharpness of the adjustment would rather seem to suggest a process of rapid change in expectations among those involved in the oil market. One measure of this process is the number of futures contracts being traded with a «buy» position, that is to say, the position of those investors who are expecting further increases in oil prices. If we take as a reference those players of a more speculative type in the New York market, the number of these contracts dropped by 18% from the highs at the beginning of August. This therefore seems to be the catalyst which must be added to the background factors mentioned above and the one that ends up causing the sharp drop in prices.
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Other raw materials, on the other hand, have largely escaped from the sharply downward trend seen in oil. In September, «The Economist» index in dollars, which records the trend in raw materials as a whole, stood at levels 30% higher than those one year ago, a similar rate to that recorded in July and August. This sharp rate was mainly due to the heavy demand for metals which, as a whole, were up by 50% year-to-year in September. In any case, the specific trends in metals have been varied. In recent months, nickel, copper and silver have tended to drop while aluminium and zinc have held stable.
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