USA
The driving force behind the rapid 6.1 percent annualized decline in real GDP in the first quarter was a collapse in investment spending. Not only did residential investment fall at the fastest pace in nearly three decades, but business fixed investment plunged at a 37.9 percent annualized pace 's the largest decline in the six decades for which we have quarterly GDP data. The drop was especially significant in business structures at -44.1 percent. Construction of commercial buildings plummeted, but the biggest drop was a 78.5 percent plunge in petroleum and natural gas exploration, which was likely a response to the drop in commodity prices at the end of 2008.
This one quarter drop reversed four years of increases. This deterioration in investment may be viewed as the adjustment by the business sector to the lower level of consumer spending and exports that has prevailed after the financial shock of last fall. Other parts of the GDP report were more encouraging. The GDP data confirmed that business inventories plunged in the first quarter. Real inventories fell at a $103.7 billion annualized pace, subtracting 2.8 percentage points from growth. Relative to GDP, inventories are now falling at a pace in line with the largest contractions in recent decades, and these contractions have usually marked the end of recessions.
nce inventories approach desired levels, production will need to pick up to slow the fall in inventories. The other silver lining in the GDP report was the 2.2 percent growth in real consumer spending, a big improvement from the -4 percent pace of the second half of last year. Given that it is more than 70 percent of the economy, if consumption stays in positive territory, the more than 6 percent pace of GDP contraction of the past two quarters will not persist.
Europe
Recent economic data out of the eurozone has in general been somewhat disappointing. Eurozone capacity utilization in April slumped to a record low of 70.5 percent from 74.7 percent in January and 81.5 percent in October 2008. The speed and magnitude of the slump in this series is unprecedented. Also, the slump in capacity utilization is matched by a sharp rise in eurozone unemployment, which has increased by 2.8 million during the 12 months to March 2009. T
his has caused the rate to shift up to 8.9 percent, while it looks likely that the April rate will be 9.1 percent. As with capacity utilization, the swing in the jobless rate over a year earlier is at a record pace, implying an extremely large emergence of slack in the eurozone economy. Unemployment has been rising particularly rapidly amongst the young: for those below 25 years old, the rate is already 18.1 percent (and 35.4 percent in Spain). During the past year, youth unemployment surged at a record pace of 3.6 percentage points in the eurozone (and 14.3 percentage points in Spain).
Given government incentives for firms to adopt short-time working, the full effect of the economic slump on eurozone unemployment has not yet been fully felt 's the longer that weakness in demand persists, the more likely it is there will be further substantial cuts of jobs. Additionally, the first preliminary GDP indications from governments and central banks signal that euro area real GDP in the first quarter of the year is likely to have fallen by about 2.0 percent quarter on quarter.
Baltic Region and CIS
Kazakhstan's output has entered negative territory. GDP declined by 2 percent year on year in the first quarter of the year, as a result of a continued fall in investment (4.9 percent year on year in the first quarter, after a 3.3 percent decline in fourth quarter of last year), and a contraction in external demand (exports and imports declined 48 percent and 17.4 percent, respectively, in dollar terms). In parallel, official unemployment increased to 6.9 percent (7 percent in March) from 6.6 percent in the fourth quarter of last year, while hidden unemployment was estimated at 1.7 percent, bringing overall unemployment in the first quarter to 8.7 percent.
The consensus annual growth forecast for Kazakhstan has been lowered to -2.0 percent from -0.3 percent as a result of a protracted decline in investment that could reach about 6 percent and a slightly negative growth in private consumption, reflecting rising unemployment. Analysts expect a 2.3 percent year on year GDP contraction in the second quarter, followed by declines of 1.9 percent and 1.8 percent year on year in third and fourth quarters, respectively.
*** Written using materials from Bloomberg and Reuters Research
