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Inflation still in check. Consumer prices rose in September on higher food and shelter costs. Energy prices fell further, preventing an otherwise more robust rise of the headline index. Inflation remains modest and continues to pose little threat to the economy. Subdued inflationary pressures will keep the Fed in an accommodative stance well into next year.
This has been no ‘normal’ consumer recovery. The emphasis on rising employment levels, rather than wage growth, to drive the improvement in real incomes means that while the collective spending power of UK households has strengthened, many individual households continue to feel squeezed. A tightening labour market and emerging skills shortages will improve workers’ wage bargaining power, but progress will be gradual and, for many workers, limited by the impact of further strong growth in the labour supply. Therefore, with little scope for households to further reduce the share of income saved, consumer spending growth is likely to remain relatively subdued, lagging well behind the growth rates achieved over the decade prior to the financial crisis.
On the face of it, the minutes of October’s MPC simply continued a theme, with two Committee members once again dissenting and voting for a hike in Bank Rate. But the majority doves on the MPC are looking ever more dovish, and the possibility of inflation dropping further puts Messrs. Weale and McCafferty in an increasingly awkward position. With disinflationary forces dominating, we think the MPC will stick to no change in policy until well into 2015.
Goods exports rebounded strongly in September. Some of this will be distorted by the new iphone release, however a broad-based rise beyond electronics provides some encouragement that the depreciating yen may be translating to better exports volumes. Imports also posted strong growth, widening the trade deficit in the process, but a pick-up in capital goods imports bodes well for industrial production, while falling oil prices should ease the burden of fuel imports going forward.
Retail sales rose in August by 4.4% y/y, beating market estimates and supporting evidence of improving private consumption trends in the Mexican economy. Important methodological changes to the series could undermine the headline figure, but underlying trends due point to firmer consumption dynamics into the 2H period.
As the end of US quantitative easing approaches, have some emerging economies missed the reform boat? This article looks at what reform really means and what emerging markets need to do next. Continued improvements are the key to sustaining growth, but progress gets harder the more advanced an economy becomes, regardless of how supportive foreign capital flows might be.
Consumer prices rose by 0.5% q/q in Q3. This took the headline annual inflation rate to 2.3%, down from 3% growth in Q2. Today's outcome will reinforce the RBA's message that 'a period of stability in interest rates' is needed, and we still expect rates to remain on hold well into 2015.
October IPCA-15 inflation printed at 0.48% m/m, below consensus, but still indicative of a headline 6.62% figure. Underlying inflationary trends remain worrisome and we continue to forecast a year-end inflation rate of 6.55% in 2014. To that, our Selic rate call for 2014 and 2015 remains unchanged at 11%, with some upside risks to 2015.
Existing home sales rise to their highest level this year. Sales recovered in September as abating price pressures and low interest rates pulled buyers back into the market. However, very low inventory continues to hold back a further increase in sales. While slow housing sector activity remains a clear risk to the economy, Oxford Economics believes existing home sales will trend higher in coming months as economic activity rises and wage growth gradually materializes.
GDP expanded by 7.3% in Q3, supported by the services sector continuing to expand faster than headline growth and the secondary sector remaining broadly stable. But with signs of the sluggish state of domestic demand increasing, the authorities will have to lower their 2015 target sharply.
The spot price for Brent, an important marker for crude oil, fell below $85 per barrel (pb) in mid-October, down more than $30 from its peak in June. The collapse is more shocking because Brent had been moving within a fairly narrow range around $105 pb for much of the previous two years. Now, consumers, suppliers, investors and government officials all want to know what caused the break and where the price of Brent is going from here. We think there are reasons to believe that oil prices will settle close to $90 pb in the medium term, given the weaker fundamentals brought about by softer demand growth and increased availability of non-conventional liquids. The latter might also result in a more diverse, competitive global oil market, less prone to supply disruptions.
Another dire set of figures for the public finances have put the Chancellor in an awkward place ahead of the Autumn Statement in early December. Deficit reduction has not just stalled but started to go into reverse and it looks likely that the OBR will have to make some hefty upward revisions to their borrowing forecasts, not just for this year but for future years as well. There is certainly no room for pre-election sweeteners and further difficult decisions may have to be made.
Extreme volatility in the markets is back. This time, however, much of the dislocation stems from rising growth tantrum threats, particularly related to the weaker growth in China, deflationary risks in the EU and Japan, and fears that the US recovery will not be strong-enough to propel global growth. A recent simulation using Oxford Economics’ Global Economic model suggest that the while LatAm is not immune to a global slowdown, the depth of the downturn would be less-acute than feared.
Given recent disappointing data, both at a national and Eurozone level, we now forecast that GDP will fall by 0.1% in Q3, following on from a decline of 0.2% in Q2. As a result, we think that the economy will contract by 0.3% in 2014 as a whole. We then expect activity to improve only very gradually, with GDP expanding by 0.1% in 2015. However, the draft budget for 2015 is moving in the right direction, with some cuts to tax burdens and new incentives to take on full-time employees. These could provide an upside risk to our GDP forecast.
Economic activity has been stagnating since the beginning of the year, with no sign of either an upturn or a relapse in Q3. Private sector output declined further in September with both manufacturing and services PMIs remaining below the 50 “no change” mark. No positive contribution is set for net exports in Q3 or for 2014 as a whole – despite the weakness of the euro since May – further highlighting the steady erosion of France’s competitiveness. Looking ahead, only private consumption is set to show reasonably solid growth next year – though even here, there are risks to spending patterns from lower prices: core inflation dropped to 0% in September and we have revised down our inflation forecasts for the remainder of 2014. With GDP growth of just 0.4% this year and 1% next, France continues to lag the Eurozone – both in terms of the speed of recovery and the pace of structural reforms.
The chart shows UK consumer price inflation.CPI inflation dropped to 1.2% in September from 1.5% in August and 2.6% on average in 2013. The fall was mainly driven by volatile components such as food and transportation.
Fighting in eastern Ukraine (especially, over the strategically important Donetsk airport) continues despite the supposed ceasefire. However, the fighting less intense than a few months ago.
President Putin met his Ukrainian counterpart in Milan on 17 October, but there was no breakthrough. The two sides remain at odds over the issues of gas supplies and Ukraine’s territorial integrity. Parliamentary elections are due in Ukraine on 26 October, with rebels in eastern Ukraine planning their own polls on 2 November. These elections could be further flashpoints.
Probability of negative conflict scenario: 15% (last week: 15%)
Domestic fundamentals suggest the US economy is finally poised to reach the coveted 3% sustainable growth path. However, plunging commodity prices, equity prices and bond yields have provided an early Halloween fright that global growth is much slower than expected. While the US is a relative bright star, it is not immune to a sharp global slowdown. Running a global slowdown scenario with Oxford Economics' Global Economic Model suggests US growth is dampened, but a recession would be avoided.
As expected, the BCCh delivered a 25bps cut in the policy rate to 3.00%. The tone of the communique however, points to a more neutral policy stance that corroborates our forecast for no additional policy easing this year. We sense deeper growth constraints would be needed to push the BCCh towards a more dovish stance
With Jokowi set to be officially inaugurated as president, all eyes will be focused on whether he can be true to his word and implement much-needed reforms to boost Indonesia’s gradually slowing economy. Despite his appeal to the electorate, Jokowi has struggled to win over allies in parliament. He will lead a minority coalition in the House of Representatives, facing up to a potentially hostile opposition. Cutting fuel subsidies will be his first major challenge, and failure to do so would damage Indonesia’s growth prospects.
Housing starts and permits back over the million mark. The rise in housing starts was primarily driven by multi-family as single-family starts failed to accelerate much. Building permits reflected a similar tone as multi-family permits rose and single-family declined. Despite this monthly uptick, housing activity remains under stress and is still a key risk for the economy.
World growth forecasts have steadily slipped lower during 2014, a recurring pattern over recent years. Will this pattern break in 2015? Our forecasts suggest growth will pick up next year, but the acceleration will be modest and highly uneven across countries. The latest cyclical indicators support this view, as do forward-looking credit and money supply indicators. US indicators are broadly supportive of growth reaching the 3% mark next year, but there are once again warning signals coming from the Eurozone. And emerging market growth looks likely to remain very subdued, with 2014-15 being the weakest pair of years since 2001-02. Downside risks continue to prevail in the emergers, with contraction in Brazil and Russia and in China some cyclical indicators suggesting growth is already running somewhat below the ‘official’ rate.
Non-oil domestic exports moderated in September and in this case, the devil is most definitely in the detail, giving us little to be cheerful about. While exports to half of Singapore's top 10 trading markets fell, the sharp decline in intermediate imports does raise the red flag that manufacturing activity may be very weak in the coming quarters.
Recent data prints continue to point to an economy that is struggling to gain traction. While the retail sales report was better than expected, prevailing trends still show that consumption continues to weaken. Importantly, the August IBC-Br GDP proxy and the September CAGED report point to sustained weakness into the 2H period.
US industrial production shining in a lackluster world. Industrial production posted a healthy gain in September on broad-based gains. Total industry activity continues to grow at a solid pace above 4% y/y, and we expect the trend to continue in the final months of this year. We are conscious that weaker global activity could impose a drag on the US economy, but remain confident that the US economy could withstand a modest global slowdown.
Aggregate financing recovered in September, supported by traditional bank lending. But non-bank lending declined sharply in Q3 and three-month annualised broad money growth fell to an all-time low. Subdued demand and a decline in the effectiveness of the PBoC's easing measures are probably the main reasons for the marked deceleration.
We expect GDP growth to show a modest pick-up during H2 2014, with quarterly growth averaging 0.4-0.5% after zero in H1. This improvement should be consolidated in 2015 when we forecast annual growth of 2.5%. But there are many uncertainties that could result in a weaker outturn. In the very short term, industrial output probably fell significantly on average in Q3, the trade deficit has continued to widen and the recovery in the mining sector after the strikes has been disappointingly slow, albeit the PMI survey has bounced sharply in the last two months and retail sales growth strengthened in July and August. High inflation remains a hindrance to consumer spending, while a repo rate hike in November and a volatile rand may add to the structural problems holding back business investment. In addition, the external sector may come under further pressure from falling commodity prices and weakening Chinese demand.
Although September’s final Eurozone inflation release confirmed that inflation ticked down to a cyclical low, an upward revision to core inflation provided some modest comfort. Despite the recent plunge in the oil price plunge, our central forecast is still for inflation to rise gently over the coming months and we believe that deflation concerns are exaggerated. Meanwhile, Eurozone exports fell in August but the decline was offset by a larger drop in imports. On balance, net trade appears likely to be less of a drag on GDP in Q3 than Q2.
The minutes from BanRep’s September policy meeting in which rates were left unchanged at 4.50% point to a pause in the tightening cycle, much in line with expectations. Give the bank’s assessment of the economy’s current growth-inflation equilibrium, however, the ongoing pause in the rate-hike cycle may be longer than what was previously expected. We now expect the rate-hike cycle to resume in Q2 2015, with a terminal rate of 5.00% in 2015. Importantly, BanRep’s latest policy communique carries important implications across the local markets in Colombia.
Producer prices fall in September for first time in more than a year. Falling energy prices explained a large part of the decline. Meanwhile, core prices remain firmly anchored. Oxford Economics expects price pressures to build over the course of the next few months as activity strengthens, but lower energy prices should put a lid on wholesale inflation.
Retail sales slip, but this is no time to panic. Lower gasoline prices and an expected slowdown of auto sales help explain most of the weakness. Consumer spending can best be described as modest and cautious, and splurging is not yet up for consideration. That being said, strong sales at restaurants and bars is an indication that households are slowly loosening the purse strings. Oxford Economics sees ongoing payroll gains, stronger wage growth, and more cheerful consumers supporting economic activity into 2015.
Following September’s surprisingly large fall in inflation, the latest labour market data reinforce the picture of an economy in the grip of disinflation. While unemployment dropped sharply and the number in work reached a new record high, annual growth in average earnings remained stubbornly below 1%, implying a further decline in real pay. Meanwhile, productivity growth finally appears to be on the rise, good news for a sustainable, low-inflation expansion.
Bank of Korea followed up August's interest rate cut with a further 25bps cut this morning, lowering the Base Rate to 2.00%, the lowest rate since June 2010. Amid a series of underwhelming data releases over recent months, policy makers have been quick to respond. In combination with monetary easing, additional fiscal stimulus for 2015-17 should support a modest acceleration in GDP growth over the next year.
Year-on-year GDP growth was reported at zero in Q2 2014, whereas most analysts had expected a large fall. The national accounts data look highly questionable. Although the latest figures show quarterly declines in the seasonally adjusted levels of consumer spending and investment, these falls were more than offset by the combination of plunging imports and rising government consumption and export volumes, In reality, consumption and investment probably fell more dramatically. And several indicators show a further weakening in Q3; the value of imports in US$ terms was nearly 7% lower in July-August than in Q2, while the annual fall in vehicle output worsened to -28% in Q3 from -26% in Q2. In the light of the official data for Q2, we have upgraded our 2014 GDP growth forecast to -0.6% from -1.6% previously. But the underlying weakness of the economy has prompted us to assume a weaker 2015 upturn than last month, with growth of 1.2% now expected (down from 1.6%). In other developments, the government has made no real effort to compromise and escape its debt default and it has reverted to a more heterodox economic policy, prompting the resignation of the central bank president.
India's annual WPI inflation rate fell from 3.7% in August to 2.4% in September – its lowest level since October 2009. CPI inflation over the same period also eased from 7.7% to 6.5%. The fall in inflation was expected, although the magnitude of the decline came somewhat as a surprise. But despite these positive figures, India is not out of the woods on the inflation front. The risk of the RBI missing its target of lowering CPI inflation to 6% by January 2016 still remains. As such we do not expect interest rates to be cut any sooner than H2 2015.
Today’s data offers mixed signals – gloom about the third quarter and gloom about the fourth. The Eurozone industrial production release for August suggests slowing activity in the industrial sector through Q3, while the German ZEW sentiment index points to yet more deceleration in the final three months of the year. In addition, faster price falls in France will do little to improve confidence. But a little sang-froid is in order. A number of headwinds should become tailwinds moving into 2015, so let’s not write off the recovery just yet.
Conflicts impact markets, but rarely have markets had such a potentially important role in the outcome of conflicts as is the case for Russian and Ukraine. The hope in the west is that markets can accelerate resolution by accentuating the impact of sanctions and catalysing a change in Russia’s political direction. But while the transmission from markets to politics may take a long time in Russia, in Ukraine the explosive impact of market dislocation is on a much shorter fuse. While the rouble has fallen markedly, the hryvnia has fallen off a cliff; while Russian sovereign yields have widened, Ukraine’s are heading towards default. Hence Ukraine appears likely to continue to cave in to political pressures that follow military setbacks, and awful economic and market conditions. But ultimately there are probably no winners. Not Russia, nor Ukraine − and, at current prices, not investors in either of these countries’ assets.
CPI inflation slowed surprisingly sharply in September, reaching a 5-year low of 1.2%. And there is little reason to expect any meaningful pickup over the next few months, given falling oil prices and disinflationary pressures coming along the supply chain. Against this backdrop the chances of a 2014 rate hike are now practically zero, while the odds against a move in early-2015 are lengthening
Data from Q3 have come in even weaker than initially expected. We estimate that GDP was almost flat in Q3, with quarterly growth of only 0.2%. As a result, we now expect only 0.7% growth for 2014 as a whole. Furthermore, we have downgraded our near-term China forecast, which will weigh on Japan's export sector. We have therefore also lowered our annual growth forecasts for 2015 and 2016 to 0.9%. We still see no change to monetary policy in the near term, although a negative outturn for Q3 could force the BoJ to reconsider its stance.
Monetary and fiscal policy tightening and falling commodity prices have put the brakes on the Indonesian economy, which registered annual growth of 5.1% in Q2, the lowest rate for five years. The second half of 2014 is set for more of the same, but momentum should pick up in 2015, buoyed by strong government-induced investment expenditure and better prospects for exporters. As Jokowi prepares to take office as president, much depends on his ability to push reforms through a difficult and hostile parliament.
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