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US economy
Looking back at 2005, clearly one of the most dramatic events was the one-two punch of Hurricanes Katrina and Rita. The economic consequences for the Gulf Coast region have been enormous. More than a million people have been displaced, thousands of businesses and jobs have been disrupted or destroyed, and the infrastructure—notably for energy—took a severe beating.
When the hurricanes hit at the end of August, the economy had been doing quite well. Over the preceding two years, monetary accommodation and robust productivity growth supported economic activity.
The real GDP grew steadily at, or above, its potential or long-run sustainable pace, which is estimated at three to three and a quarter per cent. This pattern continued even during the third quarter, when real GDP is estimated to have grown by four and a quarter percent.
With this stretch of near or above-trend growth in economic activity, slack in resource use has gradually, but steadily, diminished—that is, jobs have increased by more than enough to absorb a growing workforce, and the unemployment rate has declined.
Indeed, for October and November, unemployment came in at five per cent, a number that’s near conventional estimates consistent with so-called “full employment.”
At the same time, capacity utilization in American industry has risen—although, at 79 per cent, it is still somewhat lower than its long-run average. Moreover, signs point to another robust performance in the fourth quarter, so growth for the last half of 2005 could well come in noticeably above the potential rate.
This positive performance suggests that the overall economy has been quite resilient in absorbing the impact of the storms.
For 2006, it seems likely that this strength will continue in the first half, as rebuilding kicks in. Then, in the second half, a couple of factors are likely to cause economic growth to settle into a trend-like pattern.
One of the factors is the winding down of the rebuilding effort. The other is the lagged effect of monetary policy tightening; in other words, tighter financial conditions will have some dampening impact on interest-sensitive sectors, such as consumer durables and housing.
An important factor shaping the outlook, of course, is energy prices. Over the year and a half before the storms, energy prices had surged worldwide, with the price of oil nearly doubling and the price of natural gas rising by about two-thirds.
At this point, oil and wholesale and retail gasoline prices are still a good deal higher
than they were a year and a half ago.
Recent data suggest, however, that consumer spending has held up well so far. Indicators of business spending and output also have held up well. It is possible that higher energy prices have had a negative impact on consumer spending, but the drag from this factor has been offset by other stimuli to spending such as rising home prices and growth in disposable income.
But for now, at least, it appears that the national economy has come through the twin shocks of the hurricanes and the year and a half long escalation in energy prices quite well. Concerns about downside risks to the economy seem much smaller than just a few months ago.
The economic growth that the United States enjoyed in 2005 will continue in 2006, as stronger business investment begins to pick up the slack on the part of consumers who will curtail the white-hot spending that has been a key factor in propelling the economy, according to Wharton faculty members and private-sector economists.
Oil prices will remain high in 2006, but not much higher than they are now, the residential real estate boom will cool and American workers will be forced to deal with a volatile employment market, these experts say. The economy will witness slightly slower growth in 2006 — 3.5 per cent, compared with estimated growth of 3.7 per cent for 2005.
Growth in 2006 is going to be more balanced than in the past couple of years in that the manufacturing cycle is beginning to turn. Inventory building, in particular, will be a major story in 2006. Businesses have let their shelves go bare, basically, and there will be a build-back of inventories.
Meanwhile, economists at the Standard & Poor’s expect the GDP to increase by 3.4 per cent in 2006. Inflation, as measured by the consumer price index, will remain muted at 2.4 per cent in 2006, while the core CPI, which excludes volatile food and energy prices, will be 2.3 per cent for the year.
The S&P says the projected $200 billion likely to be spent on rebuilding efforts in the wake of Hurricane Katrina will contribute to economic growth in the first six months of the year.
Business investment has picked up substantially in recent months, as corporations begin to employ the profits they have generated in the last two and a half years. This will help to prolong the continuing growth in GDP.
The unemployment rate currently stands at five per cent, according to government statistics. This figure is expected to hold steady in 2006, while the job growth is expected to slow slightly — from 1.6 per cent in 2005 to 1.5 per cent in 2006.
China
China gross domestic product grew a feverish 9.8 per cent for all of 2005. The country had reported in late December that based on the census, the size of the entire economy was about 20 per cent bigger than previously thought because it had underestimated the services sector.
Since then, the government has gradually released figures for various years. The figures show the economy growing even faster than expected, resisting government efforts to curb growth that has strained energy supplies and transport systems, while generating massive pollution problems.
The estimated size of China’s economy in 2004 was revised upward by 16.8 per cent to 15.988 trillion Yuan ($1.98 trillion), from the previously reported 13.688 trillion Yuan ($1.7 trillion). Based on the revisions.
The China’s GDP grew by an average annual rate of 9.6 percent between 1979 and 2004, 0.2 percentage point higher than originally reported. The slowest was 7.6 per cent, in 1999.
Strong exports and massive flows of foreign investment have helped support continued robust growth, despite efforts by regulators to rein in spending on excess factory capacity and real estate development and other construction projects that they say could lead to financial problems.
Retail spending and other forms of domestic consumption, meanwhile, are playing an increasingly important role. The relatively low level of inflation in recent months, about 1.8 percent, was encouraging domestic demand.
Such demand is seen as crucial for China’s continued strong growth, given the potential for downturns in foreign investment and export demand. Rising car and home purchases have helped boost demand. But low incomes among the majority of China’s 1.3 billion populations who lives in the impoverished countryside, remain a key constraint.
Meanwhile, China’s trade surplus more than tripled to $102 billion in 2005, but December figures also reinforced a more recent trend of weakening export growth. Critics, particularly from the United States, charge that China’s ballooning trade surplus is a major source of global economic imbalances, but the latest data supports the view that the gap is narrowing slowly as Beijing promotes greater domestic consumption. China is gradually becoming a more positive force for global growth as its policies are adjusted towards boosting domestic demand.
December exports rose 18.2 per cent from a year earlier to $75.41 billion. Imports, up 22.2 per cent at $64.4 billion, rose faster than exports for the second consecutive month, pulling in the trade surplus to $11 billion from $11.1 billion a year earlier.
The latest trade figures showed a steady slowdown in the growth of the trade surplus last year. A first-quarter gap of about $25 billion over a year earlier narrowed to only about $5 billion in the fourth quarter.
That means the full-year surplus of $102 billion, compared with $32 billion in 2004, largely reflects gains posted earlier in the year.
Some economists forecast the trade surplus would narrow in 2006 to about $100 billion, slightly smaller than 2005’s gap but still big enough to spell
continued US pressure for Beijing to let the Yuan rise more quickly.
Chinese policy makers have made a priority of increasing the role of domestic consumption as a driver of growth, instead of relying so heavily on investment and exports. Gross domestic product would be 8.5 to 9 per cent higher this year than it was in 2005. The most recent official estimate of 2005 growth was 9.8 per cent.
The official forecast that the year-average consumer price index for 2006 would be up only one per cent on 2005, when prices showed an estimated annual growth of about two per cent. Consumption had to be boosted in part to fend off deflation, which could result from overcapacity.
Overcapacity in such industries as steel and autos has fuelled worries about a relapse into deflation, but many economists believe that remains a distant threat because the government is relaxing its control on energy and utility prices. Fixed-asset investment would slow slightly to 20 per cent.
