MarketEye: Global Business Environment

05.27.2009 // Posted by: Walt Custer // Posted in: Articles, Industry Conditions

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NEAR-TERM ECONOMIC OUTLOOK REMAINS DREARY (Chart 1)

First-quarter results were dismal

Gross Domestic Product (GDP) figures for the first quarter have begun to dribble in. As expected, the results were depressing. Annualized economic growth rates reported thus far include a 6.1 percent drop for the US, a 7.4 percent retreat for Britain and a calamitous 12.7 percent plunge for the Japanese economy. Japan has been particularly hard hit by the collapse in world trade, especially automotive vehicles. Not surprisingly, the indices of consumer and business confidence have also cratered. In fact, the March Tankan Business Survey of Manufacturers in Japan produced the gloomiest sentiment since the poll began in 1974. Our forecast for a 6.5 percent GDP contraction this year will more than wipe out Japan’s economic gains of the last four years. And despite a few encouraging news notes, the first-quarter results have done little to change our economic outlook. Global GDP is predicted to fall by 1.8 percent this year, versus a 1.7 percent drop predicted in our April report. But after a sluggish recovery in 2010, global GDP is predicted to accelerate to a solid 3.9 percent gain in 2011, as shown below.

In search of an economic bottom

Essentially all of the advanced economies have implemented fiscal and monetary stimulus packages. Traditional measures have included deficit spending and aggressive reductions in interest rates. And there have been an array of nontraditional programs that have included “cash for clunkers” in France and, especially, Germany to pump up automotive vehicle sales. The US is offering rebates to first-home buyers in the hope of reducing the inventory of unsold residences. In aggregate, the rescue efforts are, by far, the largest in history. And while it is not clear that the economic prescriptions will cure the disease, there have been tentative signs that an economic bottom may unfold during the second quarter.

Evidence includes a sharp increase in global equity markets, renewed activity in the US and British housing markets, rising consumer confidence in a number of countries and an unexpectedly strong first-quarter economic report for China. During the first three months of 2009 GDP increased 6.1 percent compared to the first quarter of 2008. It appears that the Chinese government’s massive infrastructure programs, along with consumer spending incentives, are having the desired effect. Consequently, we have raised our forecast for 2009 GDP growth from the 5.8 percent gain predicted in our April report to the 6.7 percent advance shown in (Chart 1), which also provides economic forecasts for other key geographic entities.

EQUIPMENT FORECAST LITTLE CHANGED (Chart 2)

Equipment production still plunging

Based on preliminary data for March, global equipment production came in at an annualized value of $1.38 trillion during the March. That compares to a record high of $1.83 trillion during December 2007, as shown in the left chart below. While the industry has been going through the usual seasonal downturn, the impact has been magnified by both the poor economic environment and an associated divestment of inventories. However, the seasonal factors are effectively filtered out by the moving average growth rates illustrated in the right chart. That is, the 3-month moving average (3/12) growth rate for March 2009 came in at -20.0 percent. That means that output during the first three months of 2009 was 20.0 percent lower than the first three months of 2008. The 12-month moving average (12/12) growth rate was -6.5 percent, which indicates that production values for the period of April 2008 through March 2009 were 6.5 percent lower than the prior 12-month period. Rather surprisingly, the 3/12 growth rates for China and Europe closely approximated the averages, while Japan’s was substantially worse. Most surprisingly, the US growth rates were considerably stronger than the average due to the continuing expansion of military electronics production.

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