GDP Observatory

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GDP growth in 4Q07

Thu, Jan 31 2008, 08:16 GMT
by Marcial Nava

BBVA Bancomer


  • • Real GDP growth decelerated in the fourth quarter driven by weakness in all components.
  • • We expect GDP to grow below potential in 2008
  • • Moreover, risks continue to be tilted to the downside

GDP growth slowed to 0.6% in 4Q07 from 4.9% in 3Q07. This was 0.5 pp less than our estimate. On a year-over-year basis, real GDP increased 2.5% from 2.8% in 3Q07. Consumer and government spending, private fixed investment and international trade added to GDP growth, a contribution that was partially offset by a decline in residential investment and inventories.

The growth of non-residential investment (NRI) softened to 7.5% from 9.3% in 3Q07, though it remained relatively strong. NRI growth was supported by a solid demand of information equipment, which more than compensated the negative contributions of industrial equipment and transportation, both related with the housing downturn.

The housing adjustment deepened in the fourth quarter. Residential investment subtracted 1.2 pp to GDP growth, dropping 23.8% in 4Q07, its lowest rate since 4Q81. Private inventories decreased $3.4 billion, subtracting 1.25 pp to overall GDP growth. However, given that the inventories to sales ratio remains relatively low, stockpiles could rebound in the next quarter, adding to GDP growth. The pace of government spending softened to 2.6% from 3.8% in 3Q07.

Exports’ growth eased to 3.9%, following a strong rebound of 19% in 3Q07. On the other side, imports’ growth decelerated to 0.3% from 4.4% in 3Q07. Consequently, the contribution of net exports to GDP was 0.4 pp, well below the 1.4% in the previous quarter.

Personal consumption expenditures (PCE) decelerated, rising 2% from 2.8% in 3Q07. Spending on durable goods grew 4.2% from 4.5% in 3Q07, purchases of non-durable goods rose 1.9% from 2.2% in 3Q07, while spending on services increased 1.6% from 2.8% in 3Q07. These figures suggest that the three main components of PCE deteriorated in December. This could be the result of weaker fundamentals such as employment, personal income and consumer confidence. Out of the last fifteen years, the three main components of PCE decreased in the same month only in seven occasions. We expect PCE to experience its worst momentum during the first quarter of 2008, causing a decrease in GDP.

The risks to our main scenario continue to be tilted to the downside. Tighter credit standards have the potential to dampen capital spending plans, resulting in a deeper deceleration of non-residential investment, employment and consumer spending. In addition, exports could be hit by slower growth overseas. In such scenario, GDP could decrease in 1Q08 and 2Q08, entering into a technical recession.


Published on  Thu, Jan 31 2008, 08:24 GMT

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This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) Research Department on behalf of itself and its affiliated companies (each a BBVA Group Company) for distribution in the United States and the rest of the world and is provided for information purposes only. The information, opinions, estimates and forecasts contained herein refer to that specific date and are subject to changes without notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been gathered or obtained from public sources believed to be correct by the Company concerning their accuracy, completeness, and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.

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