posted on 08 May 2016
from the Dallas Fed
-- this post authored by Kelvin Virdi
First-quarter gross domestic product (GDP) data have not yet been released for most countries, but new forecasts from the International Monetary Fund (IMF) project slow expansion over the next two years. Recently, the global outlook has been most affected by volatility in energy prices, which may have negatively impacted foreign investment and U.S. exports.
GDP Growth Remains Low
Year-over-year global GDP growth for the fourth quarter was revised up slightly over the past month (Chart 1). Real U.S. GDP growth edged up to 1.98 percent. Other significant revisions included a 0.17 percentage point increase to growth in the U.K., a 0.36 percentage point increase in Hungary and a 1.22 percentage point increase in Greece.
The IMF released its latest World Economic Outlook (WEO) in April, which included 2016 and 2017 GDP growth forecasts. The projections for 2016 are 2.40 percent for the U.S, 2.33 percent for the world (excluding U.S.), 1.47 for advanced economies (excluding U.S.) and 3.09 for emerging economies. The projections for 2017 are 2.50 percent for the U.S., 3.02 for the world (ex. U.S.), 1.72 for advanced economies (ex. U.S.) and 4.16 for emerging economies.
U.S. Exports Fall
Global trade remains sluggish, and U.S. exports are no exception. Table 1 shows the breakdown of the 6.7 percent year-over-year dip in exports in March. The largest drop in U.S. exports has been from Canada, which has a heavy reliance on its energy sector. The breakdown by industry shows that U.S. mining and energy exports fell the most, in line with the plunge in energy prices. Exports of durable goods, which account for 55 percent of U.S. total, have dropped 7.7 percent. Looking at exports by end use shows that industrial supplies (intermediate goods) and capital goods have contributed a combined 5.7 percentage point decline to the contraction in exports.
Inflation Measures Affected by Energy Price Volatility
The precipitous drop in energy prices in late 2014 depressed headline Consumer Price Index (CPI). As inflation is measured on a year-over-year basis, low energy prices caused headline inflation to stay low for most of 2015 (Chart 2). In 2016, we expect year-over-year headline inflation to be unusually high as it is now being measured versus the depressed 2015 CPI levels. Core CPI does not directly include energy prices, but it does include indirect effects of energy prices. Goods and services that use oil and oil products as intermediate goods have become cheaper as a result of low energy prices, and core CPI reflects these indirect effects.
Import and Producer Prices Decline
Another source of downward pressure on inflation comes from import prices. U.S. import prices, excluding food and energy, fell 2.3 percent from March 2015 to March 2016. This drop in import prices is the result of a strengthening dollar and more cheaply produced goods (in foreign currency terms). The producer price index (PPI) measures the price of output and, unlike the import price index, is available for most major countries.
Table 2 shows changes in PPIs, exchange rates (FX-rates) and FX-rate-adjusted PPIs for five major U.S. trading partners. For both the euro area and Japan, the decrease in PPI is overshadowed by changes in U.S. dollar exchange rates. For these two trading partners, goods are more expensive in dollar terms than they were a year ago. Mexico has seen an increase in PPI and a depreciation of its currency, resulting in cheaper goods in dollar terms. In China, both the PPI and exchange rate decreased, leading to much cheaper goods in dollar terms.
International Monetary Policies Mostly Unchanged
A number of central banks have held meetings recently, but most have left their monetary policies unchanged. The Reserve Bank of India announced a 25 basis point decrease in their repo rate on April 5. Canada, Brazil and the U.K. kept their official rates constant in their April meetings, and the European Central Bank (ECB) announced no change in their meeting on April 21. The ECB has released additional details about the expansion of their asset purchasing program that was announced in March and begins in June. Contrary to expectations, the Bank of Japan also announced no changes in their monetary policy in their meeting on April 28.
About the Author
Virdi is a research assistant in the Globalization and Monetary Policy Institute at the Federal Reserve Bank of Dallas.
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