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Russia
THE year 2006 has been better for the Russian economy than was predicted. According to data from the Ministry of Economic Development and Trade, Russia's GDP growth last year was 6.8-6.9%, higher than the forecast of six per cent. However, this is not the only reason for optimism. The trend towards a slowdown in economic growth that has persisted over the past several years has been reversed. In 2003, Russia's GDP grew by 7.3 per cent, in 2004 by 7.2 per cent, and in 2005 by 6.4 per cent. Also, total investment in the Russian economy increased by 19.1 per cent over the same month in 2005. The 2006 annual indicator may be 13.2 per cent higher than the 2005 figure.
Russia's economic indicators for last year are good not only because they exceeded the forecast. An increase of less than one percentage point is not in itself a great achievement. Only this year's performance will show whether the year 2006 has signaled a turning point or not. However, it is obvious that Russia's economic performance last year has proven to be better than the year before in terms of the key macroeconomic indicator.
The Russian economy hit rock bottom in 1998, when GDP had fallen by nearly 40% from the 1991 level. The decline lasted for seven years after the start of reforms, and in 1999 Russia's economy began to slowly grow again. It took eight years of growth, including last year, for Russia's GDP to fully recover. The 2006 figure means that Russia's transition to a market economy is complete. The economy has been fully restored to its pre-reform level.
Among other Economic Indicators, inflation last year was about 9%, its lowest level in 15 years. It is also significant that for the first time in the past several years inflation is no longer recorded in double digits. In 2005, Russia's annual inflation was 10.9 per cent. The initial forecast for inflation last year was 7-8.5 per cent, which means that the planned targets had not been met. Nevertheless, the year-end results are respectable.
Russia's lasting economic growth has served as the foundation for achieving the level of inflation in 2006. The government's efforts to restrict the money supply and the Stabilization Fund's efforts to sterilize it have also had a positive effect. However, there are still reserves left for curbing inflation in 2007. Russian commodity producers' competitive potential has not been fully taken advantage of.
Foreign investment is a major indicator of investment activity in general. A total of $130 billion in foreign capital had accumulated in the Russian economy by late September of last year. In January-September, the Russian economy received $35.3 billion in foreign investment, or 31.7 per cent more than in the same period in 2005. It is interesting that Russian investment abroad amounted to nearly the same sum, $34.6 billion, registering a 51.4% increase over the previous year's figure.
There is little doubt that the total figure for 2006 will be even higher. However, Russian investment abroad will still nearly equal foreign investment in Russia. On the one hand, it is not so bad that Russian investment abroad is growing. On the other hand, this growth far outpaces the growth of investment in Russia. This means that in the near future Russian investment abroad will exceed foreign investment in the Russian economy. The country is becoming a kind of global donor.
Under the new forecast, however, real GDP growth will slow somewhat in 2007-08, although high oil prices will continue to underpin buoyant expansion of domestic demand, limiting the extent of the output slowdown. Strong unsterilised foreign-exchange inflows mean that inflation will ease only moderately. The economy should grow approximately 5.7 per cent a year in 2007-2009, says a draft forecast for Russia's social and economic development in 2007 and up to 2009.
Prices for Urals brand crude oil are forecast at $58 per barrel in 2007, $53 in 2008 and $48 in 2009. Thus, despite the growth in the oil price forecast, the GDP growth forecast remained practically unchanged. A government forecast in March put prices for Urals oil at an average of $49 per barrel in 2007 and at $46 in 2008-2009. GDP was forecast to grow 5.7 in 2007, 5.8 in 2008 and six per cent in 2009.
The current-account surplus will narrow gradually, but is projected still to amount to about $75 billion (five per cent of GDP) in 2008. The Kremlin's determination to establish control of Russia's energy sector means that foreign investors will be limited to minority stakes and that the unfavourable production-sharing agreements from the 1990s will be revised. Forcing Shell (UK) to cede control of Sakhalin-2 to Gazprom is likely to be a precursor of similar moves against BP (UK) and Total (France).
Australia
THE government has revised down its forecast for economic growth this fiscal year to 2.5 per cent because of the worst drought in a century. The government had forecast economic growth of 3.25 per cent for the fiscal year ending June 30, 2007, when it released it annual budget in May. The Australian economy remains sound although its is buffeted by severe drought. The drought is the main downside risk to the economy, with official estimates showing gross domestic product for the farm sector down by 20 per cent this fiscal year.
The government's midyear budget review also boosted its budget surplus forecast to A$11.8 billion ($9.3 billion), from the May forecast of A$10.8 billion. The upward revision was counter to market expectations that centered on a paring back of the underlying surplus to A$10.4 billion (US$8.2 billion). The review raised the forecast average inflation in 2006-07 to 3.0 percent from the 2.75 per cent year average forecast in the May budget. The forecast for average inflation rate in 2007-08 was unchanged at 2.5 per cent. The economy expanded by just 0.3 per cent in the three months to September, compared with the previous quarter, the slowest growth rate in more than three years.
The government has raised inflation forecast from 2.75 per cent to 3.0 per cent, at the top end of the Reserve Bank of Australia's 2—3 per cent target band. Rising prices for fruit and fuel had boosted inflation, but it was expected to drop back into the middle of the 2008. Australia's central bank has been pursuing a policy of interest rate rises in recent months, and increased base rates by a quarter of a percentage point to 6.25 per cent in November in a bid to keep a lid on inflation. However any further rises in inflation, outside the bank's target band, may be enough to provoke an interest rate rise in early 2007.
The Australian economy will grow faster over the next nine months, helped by increased consumer spending and a surge in exports, a report shows. But stronger growth will lead to one more interest rate rise. Growth is expected to accelerate to 3.1 per cent during the year to September 2007 up from 2.2 per cent in the year earlier period, says a survey from Westpac/Melbourne Institute Leading Index of Economic Activity. Continuing strong consumer spending is helping offset the impact of three interest rate increases this year, prompting businesses to resume investing to keep pace with demand.
Canada
THE Canadian economy bounced back in the late stages of 2006 after a weak spell, leading it to project solid growth of 2.3 per cent for this year and 2.8 per cent in 2008. The estimates were unveiled in the latest release of the central bank's monetary policy report. The 2007 projection is revised slightly downward from what the Bank of Canada governing council estimated — 2.5 per cent — in its last report in October. The 2008 estimate is in line with the previous forecast. A slowdown in the U.S. economy, due mostly to weak auto and housing sales, spread to Canada, leading to estimated growth of only 1.6 per cent for the last six months of 2006 — weaker than the 2.4 per cent the Bank of Canada had expected.
But based on a range of indicators, the Canadian economy is judged to have been operating at, or just above, its production capacity at the end of 2006. Weakness in the US economy remains the biggest risk to the Bank of Canada's projections. But it said that weakness has eased somewhat, indicating the slowdown in housing and auto sectors has not spread to other sectors of the U.S. economy, and consumer spending, overall, remains solid. Moreover, inventories in the United States appear to have adjusted, as they have in Canada. Inflation is expected to be in the one per cent range for the first half of the year and return to the two per cent level next year.
Global oil demand in 2006 was growing at little over one per cent in a year when global economic growth was somewhere between 4.5—5 percent. The demand for oil in developed economies such as Japan, Western Europe, Canada and the United States was either flat or in decline last year. If oil prices rebound, they won't hit new records. Instead a more realistic bounce would take oil to just US$60 or US$70 a barrel, which is well below its recent high of US$77 last August. The price of crude oil has fallen more than 30% since August -- including an 18% drop this month. It closed at US$51.99 a barrel in New York.
According to a senior international economist at Capital Economics, the U.S. Energy Information Agency has cut its 2007 global demand forecast to 1.5 million barrels per day from a previous forecast of 1.9 million barrels per day. This has sent forecasts of spare capacity (or excess supply) up to their highest levels since 2002. When oil prices were at their peak last year, the consensus was that the level of spare capacity would remain extremely low, with producers continuing to pump almost flat-out.
