Export growth dropped further in December, while import growth stayed strong, pushing the trade balance into deficit (IDR -0.3bn) for the first time in five months. In spite of a disappointing Q4, we expect the favourable global trade outlook to support Indonesia’s exports in 2018. Meanwhile, the solid import momentum adds to the signs of an improvement in domestic demand.
Inflation continued to rise at a strong pace in December, in line with our expectations. Industrial production growth, however, staged an unexpectedly strong rebound in November.
Latest data points support our view of a sharp growth recovery in 2018 as one-off disruptions from last year’s demonetisation and GST introduction fade. This, in turn, underpins our view of inflation averaging around 5% this year and two rate hikes from the RBI.
A unilateral US exit from NAFTA is a real possibility. Negotiations are slow and difficult, and the recent passage of the Tax Cuts and Jobs Act may embolden the administration to take a more protectionist approach in 2018.
Our scenario modelling suggests that a US exit from NAFTA would reduce real US GDP growth by 0.5pp in 2019, while constraining growth in Mexico and Canada by 0.9pp and 0.5pp, respectively.
The impact would lessen over time as supply chains would re-adjust to account for higher tariffs between the US, Mexico and Canada. By the end of 2022, the US output shock would diminish, but Mexico's GDP would be 2% smaller.
A withdrawal from NAFTA would not significantly reduce the US trade deficit. The trade gap would remain at 3.2% of GDP in 2018 and 2019, compared with a modest widening to 3.3% of GDP in the baseline in 2019.
Argentina's poor inflation reading for December only reinforces how clumsy it was for the BCRA to cut rates earlier this week. With inflation ending 2017 at a whopping 25% and expectations for 2018 at 17% (and likely to rise further) we see no chance that the BCRA will meet its recently revised inflation target of 15% this year. Cambiemos may be losing their grip on macro stability.
Moreover, with wage negotiations playing out in the context of a weakening peso, higher-than-expected inflation and a central bank with no credibility, we see further upside risks to our 18.5% year-end inflation forecast.