World economy at the beginning of 2007

FROM THE REDACTION

The year 2007 started with a serious drop in oil prices, though it is within the frames of the predictable data.

In the US government statement that it is planning a serious replenishment of the reserves, the fact that the period of warm winter in Europe is coming to the end and it has become cold there, OPEC’s repeated threats that it will reduce the production quota once more and Russia’s status as an unstable supplier, its price is ranging between 49 and 55 USD and it is expected that it will remain within this range during the whole quarter.
– The second significant factor is encouraging data on the growth rates of the American and European economics along with the 10.7% growth indicator of the Chinese economy.
– Thirdly – energy security issues were considered at the World Economic Forum in Davos. Here Russia is again trying to exert pressure on Europe and common principles cannot be agreed upon.
Now as to what is particularly going on in the world market and in the economics of the leading developed countries and what we should expect in the first quarter of 2007.
The United States of America
According to the annual calculation, in December 2006 the US consumer price index rose by 2.6%. The growth rate of the domestic component, which makes up 42,4% of the consumer price index, has increased and, according to monthly calculations, made up 0,4% at the expense of the rise in dwelling space taxes and the increase in natural gas and water supply prices. In December prices of hotel services and dwelling space rose by 0,4% and, correspondingly, they were monthly increasing by 0,5%. This growth is conditioned on the 4,3% growth of dwelling space prices according to the annual calculation. After such a sharp increase, real estate insurance service prices dropped by 1,0%. While natural gas price rose by 3,9% and electric power prices remained unchanged. Over the past 12 months electric power prices rose by 7,5% and natural gas prices dropped by 14,2%. In view of the 8,0% rise in gasoline price, the price of liquid fuel was monthly increasing by 3,2%, which stipulated for the annual 2,4% rise of this indicator. Public utilities prices are increasing according to both monthly and annual calculations. In December clothes prices rose by 0,6%, which was related to 0,7%, 1,0% and 0,4% increase in footwear prices, while children’s clothes prices decreased by 2,0%. The prices of food products and drinks did not change in December, which provided for the 2,2% growth of this indicator in accordance with annual calculations. According to monthly calculations, prices of fruit and vegetables decreased by 1,5%. During the same period the price of butter also decreased by 0,6%. In spite of the New Year and Christmas holidays, prices of alcoholic drinks decreased by 0,2%. According to monthly calculations, medical assistance prices increased only by 0,1%, and according to annual ones – by 3,6% in view of the decrease in medicaments prices. According to monthly calculations, medicaments prices decreased by 0,2%. The drop in fuel prices in December caused decreasing of air tickets prices by 2,4%. The decrease in ticket prices caused cheapening of the public transport fares. Prices of new and secondhand cars dropped by 9%, and according to annual calculations – by 2,2%, which was compensated for by the increase in the prices of technical maintenance of cars. At the expense of the 1,8% drop in the prices of computers, computer accessories and software, the prices of communication services decreased by 0,2%. The prices of study services increased by 0,5%, which was caused by the 0,5% rise in the prices of education and educational literature. The consumer price index, except for food products and fuel, rose by 0,2% according to monthly calculations, and by 2,6% – according to annual ones (Chart 1 and Picture 1).
According to monthly calculations imported goods prices increased by 1,1% and of oil products imported in December – by 4,8%. During the same period, according to monthly calculations, oil prices increased by 5,3% after the 1,8% drop last November. All in all, fuel prices rose by 5,2% according to monthly calculations and by 1,4% – according to annual calculations. In December, according to monthly calculations, prices of imported appliances and industrial purpose goods of non-energy origin increased by another 1,5% after the 4,0% growth that took place last November. According to monthly calculations, prices of imported unprocessed metals and metal semimanufactures increased by 1,1% and stipulated for their 34,4% growth according to annual calculations. It is the third month since prices of construction materials started to decrease. In December the 0,3% drop was observed according to monthly calculations, which is the result of decreasing of real estate prices on the market and the decline in the volume of house-building. Prices of imported food products and drinks dropped by 0,6% according to monthly calculations and by 4,1% – according to annual ones, which was caused by the 1,0% rise in the prices of agricultural products.
In December, according to annual calculations, prices of exported goods rose by 0,7% in comparison with 0,4% of November 2006 and 0,1% of December 2005 respectively (Chart 1). The growth of exported goods prices made up 4,6%. The main reason for the increase in the prices of exported goods was the prices of industrial-scale plants as well as the prices of both durable and non-durable goods which rose by 2,5% in December. Rising in price of industrial-scale plants as well as both durable and non-durable goods was conditioned on the increase of fuel price by 4,2%. The prices of exported construction materials have also risen. In December, according to monthly calculations, the prices of industrial-scale plants and goods of agricultural purpose rose by 3,0%. Prices of exported production means, the share of which in the total amount of exported goods makes up 39,6%, increased by 0,1% according to monthly calculations and by 1,2% – according to the annual one. This increase is conditioned on the 0,4% growth related to transport and the 0,2% one related to electrical installations.
According to monthly calculations, the prices of exported food products and drinks increased by 13,5%, which was caused by the 15,3% increase in the prices of agricultural products. For the first time in several quarters, according to monthly calculations, the prices of motor-cars and spare parts rose by 0,3%.
According to monthly calculations, in December the index of finished commodity producers rose by 0,9%, while according to annual calculations it rose by 1,2%, which was caused by the increase of gasoline price by 7,1% and that of fuel – by 4,0%. Correspondingly, according to monthly calculations, during the same period the price of fruit rose by 26,3% and that of vegetables – by 21,7% (Chart 1). The prices of glass-ware, eggs and bird meat have also increased considerably. The prices increasing on the aforementioned goods was partly compensated for by the 2,4% drop in beef prices and the 0,5% drop in soft drinks prices. In December the index of finished commodity producers, except for food products and fuel, also rose by 0,7% after the 0,7% growth that took place last November. In view of the increase in the price of diesel and aviation fuel, the prices of semi-finished products, appliances and raw materials rose by 0,5% according to monthly calculations. On account of an unusually warm weather, according to monthly calculations, the price of natural gas intended for thermoelectric power stations decreased by 5,0%, while that of natural gas intended for industrial purposes rose by 3,0%.
Recent year high prices of oil, natural gas and metals materialized on the consumer price index. Moreover, the rise in the population’s incomes gradually increased the pressure on the energy price index at the expense of the grown labor remuneration and the drop in the unemployment rate. However, on the other hand, a sharp drop in the prices of energy carriers and real estate on the market will contribute to slowing down of the inflation rate’s growth. In the first half of 2007 oil and natural gas prices sharply decreased after a considerable growth that took place last December. In this connection, an analyst of “Forex Club” financial company Aram Saakyan believes that the consumer price index, except for food products and fuel, will considerably decrease in the near future.
The Eurozone
According to annual calculations, in December the growth of consumer price index in the Eurozone made up 1,9%.
According to annual calculations, the subject of inflation rate’s growth remains unchanged after its considerable growth in November, which was related to the following factors: according to annual calculations, in December the energy component of the consumer price index increased by 2,9% and during the last 12 months this indicator made up 7.7%. In spite of a warm weather, the price of several energy resources faced considerably increase, the growth of the natural gas price by 10,6% and that of electric power by 5,1% increased the total significance of the consumer price index by 0,13 and 0.07 points. Such a considerable growth was partly compensated for by the drop in gasoline prices by 0,4% according to monthly calculations, which caused the decline in the consumer price index by 0,1%. It is the fourth month since fuel prices started to decline in spite of the heating season. According to monthly calculations, during the last month only fuel prices decreased by 0,9% and reduced the consumer price index by 0,1 points. Pursuant to the material published by the Eurozone’s Statistical Agency, the prices of air tickets rose by 3,9% according to monthly calculations. As it was expected, the New Year and Christmas holidays contributed to a sharp increase in tourist services prices. According to monthly calculations, in December tourist services rose in price by 17,3% and contributed to the increase of the consumer price index by 0,21 points. This growth is the result of the increase of hotel services and air tickets prices, which was partly compensated for by the rise in restaurant services prices. Monthly calculations focused on hotel services prices rose by 4,2%, a positive effect of which on inflation made up 0,06 points. After a considerable growth, the rise in food products prices decreased. According to annual calculations, in December 2006 food products prices rose by 2,6%. Among the components of food products, a considerable price increase was observed only with respect to vegetables. The increase of vegetables prices by 6,4% increased the consumer price index by 0,07 points. Fish prices rose by 1,4%. According to annual calculations, in December 2006 the prices of watches and jewelry rose by 11,8% and increased the consumer price index by 0,05 points. During the same period the prices of communication services decreased by 2,7%. At the same time it should be pointed out that the share of communication services in the consumer price index makes up 2,9%, in view of which a negative effect of this component makes up only 0,13 points. According to annual calculations, a negative effect on the consumer price index in view of the drop in the prices of audiovisual devices and informational technologies makes up 0,06 points. The consumer price index, except for food products, fuel and cigarettes, remained unchanged and made up 1,5% (Chart 2).
Slovenia has the highest inflation level among the Eurozne countries, Greece and Spain – 3,0%, 3,2% and 2,7% respectively, while the lowest one is in Finland, where the price growth rates made up 1,2%. Inflation growth rate has slowed down both in Germany and France. According to annual calculations, in December the consumer price index in Germany and France made up 1,4% and 1,7% respectively against 2,1% and 1,8% in December 2005. Besides, acceleration of structural reforms in Germany, in particular increasing of VAT rates this year, makes a real possibility of the inflation rate’s growing. In spite of a low inflation rate growth in Finland, this country’s share in the Eurozone’s consumer price index is insignificant.
According to an analyst of “Forex Club” company Aram Saakyan, a moderate rate of price increase in the Eurozone is conditioned on a comparatively slack domestic demand, high unemployment rate and the drop in oil prices which successfully continue to curb the inflationary pressure within the bounds of the rate predicted by the European Central Bank. Our supposition concerning the reduction of the gap between the consumer price index and the consumer price index except for food products, fuel and cigarettes at the expense of the latter has proved to be completely true. In Germany a positive effect on inflation in view of increasing of the VAT rate and a possibility of a wage rise in production sphere will be completely compensated for by a sharp decrease in oil prices at the beginning of the current year. Proceeding from the aforesaid, we expect that the inflation growth rate will be a moderate one and in the first quarter of the current year it will not exceed 2,0% (Picture 2).

Great Britain
In December 2006 the consumer price index in Great Britain was 2,7%, which is the highest indicator since December 2005 (Chart 3, Picture 3). A sharp increase of fuel and furniture prices is the based the inflation level acceleration. In December 2006 the 1,7% increase of the transport component’s indicator was observed, which was mainly related to increasing of gasoline prices as well as the rise in air, sea and river transport fares. According to monthly calculations, gasoline prices rose by 2,3%. According to the data published by the Statistical Agency of Great Britain, in December gasoline prices rose by 2,0 pence and made up 87,5 pence per liter after the drop by 3,0 pence in the same period of 2005. As a result of it, according to monthly calculations, liquefied gas prices rose by 4,7%. According to monthly calculations, in December air as well as sea and river transport fares rose by 24,4% and 5,2%. All in all, in view of a considerable increase in the transport component, a positive effect on the consumer price index made up 0,2 points. According to monthly calculations, furniture and home appliances prices rose by 8,7%, which is the highest growth limit since 1997. This unusual growth became the reason for the increase of the consumer price index to 0,11 points. In December prices of audiovisual appliances decreased by 7,5%, which took place at the expense of decreasing of prices of game devices and DVD players. In particular, according to annual calculations, DVD players` prices decreased by 13,0%. This commodity provided for the increase of the consumer price index by 0,06 points. According to both monthly and annual calculations, natural gas prices rose by 1,9% and 39,8% because of some companies’ overcharges, which was partly compensated for by the slowed down rate of water supply prices. In all, the increase of public utilities prices increased the consumer price indicator to 0,03 points. Such a significantly positive effect on the consumer price index was compensated for by the decrease in prices of food products, soft drinks, clothes and footwear. In particular, according to monthly calculations, prices of food products and soft drinks rose just by 0,2%, which was conditioned on the rise in fish, meat and bread products prices. It was compensated for by the decrease in fruit and vegetables prices. According to annual calculations, food products and soft drinks prices rose by 4,6%. In the same period soft drinks prices rose by 4,6%, which took place in view of the 8,7% increase of coffee, tea and cacao prices. In December clothes and footwear prices decreased by 1,3%, which was conditioned on the 2,0% decrease in footwear prices. In all, decreasing of clothes and footwear prices reduced the consumer price index by 0,06 points.
According to annual calculations, the retail price index and the retail price index without taxes rose by 4,4% and 3,8% respectively (Chart 3). In December the retail price index rose by 0,8%, which was conditioned on the increase of fuel and furniture price rate growth as well as by the interest rates on hypothec credits` interests increase. In December household components prices rose by 4,4% in view of rising of interest rates on hypothec credits. As a result of it, the retail price index rose by 0,24 points. In the same period, according to monthly calculations, the 2,3% increase of fuel price was observed, which was partly compensated for by decreasing of car and insurance service prices. In particular, car insurance prices decreased by 0,6% according to monthly calculations. However, according to annual calculations, this service rose by 2,3%. According to monthly calculations, car prices decreased by 0,4%, the share of which in the retail price index makes up 0,6%. The total positive effect of the transport component in the retail price index made up 0,23 points. According to monthly calculations, home appliance prices rose by 4,5% in view of a sharp increase in furniture prices. Such a considerable growth increased the retail price index by 0,09 points.
It is the seventh month since the indicator of the consumer price index exceeds the average limit predicted by the Bank of England, but, of “Forex Club” company analyst Aram Saakyan believes, that in the near-term outlook the subsequent growth of the consumer price index will be limited, since the main source of the inflation rate’s growth is fuel and oil prices that decreased by 13,4% and 7,6% respectively in January2007. Besides, if in the near future the volume of labor migration from Western Europe is retained and the economic growth rate in the North America region decreases, the domestic demand will drop considerably, which will slacken the inflationary pressure.
In September-November 2006 the unemployment rate in Great Britain faced 5,5% and remained unchanged in comparison with the previous period (Chart 4). Over the period of three months starting from September 2006, the number of unemployed people decreased by 29 000, while the number of applications for unemployment benefits dropped by 5 500 and made up 943 100. In September-November 2006 the employment rate of able-bodied population decreased by 0,1% and made up 74,6%. It is noteworthy that for the US, the Eurozone and Japan this indicator makes up 72,2%, 64,5% and 70,3%. Over the same period the number of workers and employees incresed by 14 000, and in comparison with the same period of the last year it rose by 274 000, i.e. 1%. After considerable job reductions in the first quarter of 2006, in October-December 2006 the number of vacancies dropped by 2 500 and made up 600 900.
In September-November 2006 new jobs were created mainly in finance, business-service, construction, energy, education and healthcare spheres. In particular, according to quarterly calculations, companies that provide for the financial and business-service sphere created 29,000 of new jobs (Chart 4). As a result of that, according to annual calculations, the number of jobs in the financial and business-service sphere rose by 1,5%, i.e. by 89.000 ones. According to the Statistical Agency of Great Britain dates, based on annual and quarterly calculations, 6 000 and 53 000 of new jobs were created in the construction sphere. In all 2 000 of new jobs were created in education, healthcare and public administration spheres, while, based on annual calculations, 133 000 of new jobs were created in the given sphere, which makes up 47.7% of jobs created in different service spheres. Over the period of three months, starting from September 2006, 2 000 of new jobs were created in public utilities and power generation sphere, and during the last year 9 000 of new jobs were created in this sphere. Employment was mainly reduced in the sphere of hotel-restaurant services and trade – by 5 000 jobs. According to annual calculations, the reduction of the employment rate in this sphere reached 42 000. During the same period, companies and organizations in the production sphere reduced 39 000 jobs.
According to annual calculations, in September-November 2006, the level of the population’s incomes rose by 4,1%, while the rate of the population’s income growth, without bonuses, made up 3,8%, which fully agrees with the data of August-October of 2006. Along with retaining of a complete employment situation in the economy, a moderate increase of the population’s incomes is explained by the experts of Bank of England by the influx from May 2004 to August 2006 of immigrants from the EU countries, the number of which reached 450 000. The increase in the number of countries that are participants of Schengen Agreement at the expense of the new EU countries will contribute to the rise in migration and, without doubt, will slacken the inflationary pressure.

Canada
As it was expected, the Monetary Policy Commission of the Bank of Canada kept the 4,25% interest rate unchanged. The Central Bank’s press-release reports about world economy still high rate developing, while that of the US economy has slowed down. The decrease in the demand for construction materials and motor-cars in the US can reduce the rate of Canadian industrial growth to 1,6%. In the report on monetary and credit policy made in January 2007 the experts of the Bank of Canada again make a correction of the predicted inflation level of and the rate of economic growth. According to the mentioned report, during the current year the price of West-Texas oil will remain within the limits of 59,0 USD, which is 10,0 USD less than the predicted indicator, but it is expected that in 2007 natural gas prices will rise to 8,0 USD. According to the published report of the representatives of the Bank of Canada, the expected level of GDP growth in 2006 and 2007 – decreasing of prices on the US real estate market, a drop in energy carriers prices as well as the reduction of the labor productivity level can become a precondition for slowing down of Canada’s economic growth rate next year. The expected level of GDP growth in 2006 and 2007 makes up 2,7% and 2,3% respectively (Chart 5). During the period of the last three and a half years the average growth of labor productivity in the private sector made up 1,0%, which was conditioned on the high level of this growth in 2005. However, in the first half of 2006 the growth of this indicator made up 1,8%. According to the study carried out by the Bank of Canada, the level of labor productivity in the recent years made up 1,5%, which was conditioned on some structural changes in the economy. In particular, in view of high raw materials prices a considerable part of labor force and capital was directed for oil, natural gas and metal production. It is natural that labor productivity decreases in the period of this kind of structural changes in the economy. In connection with decreasing of labor productivity rate and the economic growth, the total unemployment rate has dropped to the minimal level over the period of the past 30 years. In view of the decrease in economic growth rates and a sharp drop in oil and natural gas prices, most of the members of the Monetary Policy Commission of the Bank of Canada believe that slowing down of the consumer price index growth is expected. The lowest inflation rate is expected in the first half of 2007 – 11%, while in the second half of 2007 the growth of the consumer price index to 1,7% is expected, which is considerably lower than the predicted indicator in the US. It is also noteworthy that in 2007 and 2008 the inflation rate can be 1,4% and 2,0% respectively.
The information on monetary and credit policy published in the January press release was confirmed by “Forex Club” financial company – its analyst Aram Saakyan believes that the policy of interest rates’ raising is over both in the Bank of Canada and the Federal Reserve System and that the difference between the interest rates will remain unchanged. Besides, a sharp drop in energy carriers prices, a high exchange rate of the Canadian dollar and slowing down of the economic growth rates in the US can considerably reduce the volume of export, which is one of important components of Canada’s GDP. Presumably, in conditions of a consistent growth of energy carriers and metals prices, the interest rate on one-day credits of the Bank of Canada will be reduced in the first quarter of 2007.