In our global macro chartbook for September, we summarise our views on current global themes and asset markets. This month, we focus on the further momentum in the world economy; the great rotation in global credit risks; and highlight results from our latest Global Scenario Service, including North Korea.
A 1% monthly rise in retail sales volumes in August was the strongest in four months and capped the first run of three consecutive monthly gains in volumes since 2015.
Admittedly, retail price inflation picked up in the month, suggesting consumers are not out of the woods yet. But August’s growth in sales leaves the retail sector in good stead to make a positive contribution to GDP growth in Q3.
Recent data has been somewhat mixed, but the on-going European recovery and strong domestic fundamentals support a solid outlook for Q3 and Q4. Growth should only slow slightly from the elevated levels in H1 and remain broad-based. At 2.1% GDP growth in 2017 should be the highest since 2011 with the post-election tax cuts posing small upside risks to our 2018 forecast (2.0%).
Housing starts slipped 0.8% in August to a SAAR of 1.180 million. The impact of Hurricane Harvey on housing starts was limited, although Harvey had a bigger impact on housing completions. Building permits increased due to a 19.6% spike in multi-family permits, suggesting there is still some momentum in the multi-family sector.
Angela Merkel is virtually guaranteed a fourth term in office after Sunday’s election. The question now is whether the complacent and dull election campaign is a taste of what’s in store for the next four years and we are pretty sure it is. Our analysis shows that even the promised tax cuts and some spending increases – about 0.5% of GDP – are likely to lack impact and focus.
Merkel’s CDU is unlikely to command an absolute majority and for now we have few indications who the preferred coalition partner is. Another grand coalition with the Social Democrats (SPD) is quite possible. But none of the possible coalitions would suggest ground-breaking change. Voters are mostly concerned about immigrants and integration, but the mainstream parties offer little policy differentiation on these.
Germany has plenty of long-term challenges that need addressing, including a demographic time bomb and European integration. The fact that the economy is in excellent shape though makes it easy enough for politicians to avoid addressing them for now. Instead, they have opted for popular quick fixes which a healthy surplus allows them to do. Most mainstream parties are dangling the carrot of lowering income tax and higher spending.
This will give the German economy a moderate fiscal boost (which cyclically it doesn’t even need) and provides some modest upside risks to our private consumption forecast for 2018. But coupled with a closed output gap and labour shortages, this is more likely to raise price pressure and increase imports than significantly benefit the domestic economy. Lower fiscal surpluses and more imports might shush some of the international criticism of German economic policy.
The pressure on China’s FX reserves has eased considerably since the start of this year, underpinned by a reduction in financial outflows and a globally weaker US$, which has taken the pressure off the CNY and boosted the value of non-dollar reserve assets.
In our baseline scenario, with the US$ remaining weak globally, we now expect the CNY/US$ rate to strengthen somewhat further to 6.5 (from 6.6 previously) by end-2017 and to continue appreciating modestly in 2018. We do not expect a material relaxation of the policy stance on outflows any time soon, given still sizeable net financial capital outflows. In all, we expect FX reserves to remain broadly constant over the coming 6-9 months.