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We provide a granular assessment of the potential ramifications of a China hard landing. Based on simulations on the Oxford Global Economic model, we assess the impact on key macroeconomic and financial variables across 46 countries – and find stark implications for global growth and inflation, the stance of monetary policy and key yield differentials.
It would a be a big surprise if the ECB fails to take further action in December – the key issue is just how much it will do. In the past Draghi has often delivered more than anticipated, which suggests that a deposit rate cut combined with a longer period of larger asset purchases is possible. But on balance, we expect the ECB to stop short of raising the size of monthly bond purchases.
Regional German price data indicates that inflation continued to rise in November, whereas inflation in Italy surprised to the downside, and the country is now again at the edge of deflation. On balance, however, following the release of inflation figures for Spain last week, the latest batch of inflation data seems to point to a gradual strengthening of consumer prices in the Eurozone.
Our forecasts for GDP growth in 2015 and 2016 are unchanged at 2.4% and 2.5% respectively, with the recent Autumn Statement unlikely to have a tangible impact on the outlook. However, the MPC’s dovish Inflation Report has led us to push back our call for the first interest rate hike from May 2016 to November 2016.
Growth in household lending in October continued the robust trend of recent months, with the annual rise exceeding 3% for the first time since 2008. But the rise in total lending is still not outpacing household incomes. And the possibility of action by the FPC to rein in some aspects of credit means that today’s numbers are unlikely to influence the MPC’s thinking on interest rates.
Growth has recovered sooner than we had expected, supported by a rebound in manufacturing. We expect that the improvement will have been sustained in Q4. Against this background, the RBI will keep interest rates unchanged in the short term, as it monitors the transmission of monetary policy and awaits more clarity on US Fed policy.
However, the risks remain on the downside. Monthly indicators point towards a patchy recovery that is likely to be vulnerable to external shocks going forward, given little room for further macro policy support.
Our forecasts for Argentina are likely to change in the coming months once the new President, Mr. Macri, takes office (on 10 December) and he starts to implement economic policies to tackle the many problems the country faces (including an overvalued exchange rate, high inflation, large budget deficit and a stifled private sector).
As we have argued in a recent Research Briefing, the economy could contract significantly in the short term should a ‘shock therapy’ macro policy be implemented. But if structural reforms are coordinated with an agreement with bond ‘holdouts’ (thereby providing more room for manoeuvre on fiscal policy), and firms and consumers are reassured about the medium-term outlook, then the adjustments could be much less painful.
Despite the large budget deficits forecast for the next few years, we believe that Saudi Arabia’s government debt profile will remain manageable. Our analysis suggests that the debt ratio will increase from around 2% of GDP in 2014 to over 30% by 2020 as the Kingdom embarks on a debt issuance spree that will include global bonds for the first time, and help to limit the drawdown of its foreign assets.
But clearly, if oil prices are weaker than we expect, things would be worse for the debt profile. In an extreme case in which oil prices average just $30 per barrel, spending cuts are modest and government asset sales sluggish, the debt ratio would leap to 100% of GDP by 2020. However, we assign only a 10% probability to this outcome.
We expect the new Saudi bonds to be issued at a yield of more than 100bps over equivalent US treasuries based upon (i) our spreads versus ratings model predicts a AA-rated sovereign should trade a just over 50bp over Treasuries (ii) there are risks of ratings downgrades; (iii) it should trade outside higher-rated Qatar; (iv) there will be a small premium for the new issue above the secondary market yield.
In October domestic activity in China was again dampened by the downturn in real estate construction and struggling mining and heavy industry sectors. Import volumes are estimated to have contracted again and industrial production growth eased to 5.6%. Furthermore, export performance is being held back by lacklustre global demand and an overvalued currency. But light industry, services and the car industry are showing healthier trends, supported by solid consumption growth.
Current investment and consumption trends should broadly continue into 2016, with real estate remaining a drag on growth and consumption staying relatively robust. A 3-4% depreciation against the US$ next year should provide some support to exporters. We also expect the government to continue to take additional incremental measures to ensure that growth does not deviate too much from its targets, but not go for major stimulus. Overall, we expect the economy to slow to 6.3% growth in 2016 and 5.8% in 2017.
The Economic Commission’s Economic Sentiment indicator (ESI) remained unchanged at a healthy level in November, supporting the view that the region remains resilient to external weakness. Ahead of the ECB’s meeting next week, consumers and manufacturers reported a rise in inflation expectations. Furthermore, with consumer and services sector sentiment more upbeat compared to October, we continue to see domestically-oriented sectors as main drivers of growth in Q4 again.
Strong domestic momentum, largely coming from a robust services sector, pushed year-on-year GDP growth up to 2.6% in Q3. We now expect that the economy will grow by 2.5% on average this year.
During the course of 2015, falling oil and gas production has dampened industrial activity. However, this drag has been offset by vigorous private consumption which has spurred service sector activity. Increased competition in the telecoms sector has pushed prices down and inflation is at its lowest level in history, even though the Mexican peso has weakened.
We believe that domestic fundamentals will stay relatively solid, while the manufacturing sector should gradually strengthen in response to the more competitive MXN and a pick-up in US industry. This background should be sufficiently strong to withstand the impact of a gradual tightening in interest rates. We forecast that GDP growth will edge closer to 3% next year.
The second estimate of GDP growth for Q3 2015 was unrevised at 0.5%, while the first cut of the expenditure breakdown offered further evidence of the split between the strength of the domestic economy and the weakness of external-facing sectors. With the consumer confidence data adding to the weight of evidence that consumer spending growth has peaked, the onus will increasingly fall on corporates to sustain the strength of the expansion.
Target inflation was steady at -0.1% in October, the labour market is very tight but consumption dipped in the month. The economy is in technical recession although the labour market would suggest otherwise. Reluctant consumers may remain a drag on the economy. A fiscal policy stimulus is imminent.
Canada has a two-speed economy. Oil and oil-related sectors are in a prolonged downswing, but prospects elsewhere are much better. Non-oil exports are being boosted by robust US demand and a weak Canadian dollar. Consumption is also being supported by low inflation (around 1%) and low interest rates. Overall the fall in commodity prices means we have cut our real GDP growth forecasts for 2016 and 2017 to 1.8% and 2.5% respectively, from 2.0% and 2.8%. We expect the Bank of Canada to tighten policy later in 2016.
Despite ongoing fiscal consolidation and sustained improvement in the fiscal position, latest data suggest that Spain will miss its deficit target of 4.2% of GDP this year. This in turn increases the risk of a fiscal miss in 2016 as well, which has already prompted the European authorities to issue a formal warning, requiring Spain to submit an amended budget for next year.
Lending in the Eurozone came back strong in October, following a temporary setback in September. Credit flows showed a complete reversal from the previous month, with business lending showing the largest increase in 4 years. This confirms our previous view that September data overstated the weakness in lending trends in the Eurozone and was driven by one-off factors. We continue to be optimistic that investment could start taking some pressure off consumption as a growth driver in the Eurozone going into next year.
GDP growth accelerated in Q3 rising 6.0% y/y from a revised 5.8% in the previous quarter, reflecting another quarter of buoyant domestic demand. Export growth also rebounded from Q2’s lull. However, a surge in imports meant net exports remained a drag on growth.
Despite a number of global headwinds, GDP growth is expected to remain strong for the rest of 2015 and into 2016 reflecting ongoing fiscal investment and solid household spending. We expect the economy to grow circa 5.7% in 2015 before acclerating to above 6% 2016.
China’s stressful summer led to the first major EM-related spike in global market volatility for 18 years. EM – and China in particular – have justifiably become a focal point for global economic concerns. But our detailed statistical analysis of four market episodes since 2012 suggests little intra-EM market contagion. What goes on in Brazil and Turkey will probably stay there; what goes on in China matters more via economic than financial channels. The impact of any global monetary tightening is a greater concern.
The OBR provided the Chancellor with an unexpected free pass which enabled him to deal with the tax credit problem and increase capital spending while remaining on course to achieve a budget surplus in the target year 2019-20. But otherwise there was little of note from a macroeconomic perspective, with the Chancellor suffering from a touch of fiscal fatigue in his fourth set-piece event in twelve months.
A stronger revenue forecast gave the Chancellor room to scrap plans to cut tax credits next April and modestly increase overall Government spending. That said, the Autumn Statement’s modest net ‘giveaway’ next year will be quickly eroded by tax rises. And the Spending Review confirmed that the economy faces a serious fiscal squeeze over the next few years.
Consumer sentiment rises modestly in November, but this is quite reassuring in light of the plunge in consumer confidence. Strong income growth and solid employment prospects should support consumer sentiment and outlays into 2016.
New home sales surge in October and point to resilient housing activity. Improving fundamentals should support new home sales as we head into 2016. As such, residential investment should be additive to GDP growth in the coming quarters.
Durable goods orders rise, largely on bump in aircraft orders, but core shipments fall. The trends in core orders and shipments point to ongoing business investment sluggishness as global headwinds and low oil prices continue to weigh on activity.
Disappointing consumer spending despite solid income growth. Despite this poor reading, we believe households are well positioned ahead of the holiday season. We see strong income growth supporting outlays in the next two months.
This is the first of a series of monthly publications which will set out in detail our views on asset classes across countries and regions. For the US we cover equities, bonds credit markets and interest rates.
Brazil is experiencing its worst two-year period for growth since the 1930s. Our forecasts reflect an economy plagued with structural weaknesses and macro imbalances, with no room for countercyclical policies and facing a much more difficult external situation than a few years ago.
With the budget deficit now so large, we think that another downgrade to ‘junk’ status is just a matter of time – we expect it to take place in Q1 2016. Should this cut to ‘junk’ take place then we would expect the exchange rate to fall again, taking the real to 4.65 per US$ by end-2016, from 3.75 at the time of writing.
GDP growth was revised up sharply in Q3, from 0.1% q/q saar to 1.9%. As expected the upward revision was underpinned by a substantial upgrade to growth in the service sector, which more than offset declines recorded in the manufacturing and construction sector.
The upward revision has significantly reduced the risk of a recession. However, while the outlook for services remains firm, non-oil domestic exports, and hence the manufacturing sector is expected to remain in the doldrums, and we do expect the MAS to initiate more easing in the coming months
The retiring baby-boomers generation is increasingly weighing on labor force participation. Our age-adjusted participation rate is 1.7pp higher than the official 40-year low reading of 62.4%. All else equal, this indicates tighter labor market conditions, and thus modest upward wage pressure for 2016.
As expected, real GDP growth was revised up to 2.1% in Q3 with a smaller inventory drag and modestly slower domestic sales. Overall, the economy continues to display robust momentum around 2.5% as solid consumer spending and housing activity are partially offset by global headwinds and depressed oil and gas investment.
In our November global macro chart book we summarise our views on key global themes and our asset views; we also highlight the contributions of our recent research.
Sluggish wage growth has restrained economic activity in the post-recession era. This sluggishness can predominantly be attributed to three factors: nominal wage rigidity (in particular in “rigid” industries), still high under-employment and an elevated share of part-time workers.
A factor decomposition of the labor force points to the increasingly (80%) structural nature of the reduction in the participation rate as baby-boomers retire. Early retirement is also a factor explaining the decline, but since there is a very low probability of return into the labor force, we largely view this as structural.
Adjusting for age demographics, the decline in the labor force participation rate since December 2007 is only 1.9 percentage points compared with 3.6 pp in the official reading. The further we are from the Great Recession, the more the decline in participation becomes structural.
All else equal, this evidence points to increased tightness in labor markets which should add to upward wage pressures into 2016. Despite global disinflationary forces, firmer wage growth will slowly put upward pressure on domestic inflation. Thus, tighter labor markets, brewing wage growth and slowly firming inflation warrant the onset of monetary policy normalization.
With credit growth recovering slowly across the Eurozone, supported by the ECB's QE programme, concerns have re-emerged about high levels of household and corporate indebtedness. High private debt-to-GDP ratios show that there has been little progress in reducing the debt overhang.
In this Research Briefing, we examine gross debt ratios in the Eurozone and look at how the region has fared in the deleveraging process compared with the UK and the US. Furthermore, we explore main deleveraging channels to see whether the change in the debt-to-GDP ratios in several major Eurozone economies have come from measures that affect the nominal GDP or the level of debt.
We find that, relative to the US, the Eurozone's policy mix was far less effective in the balancing act of putting the economy on a deleveraging path while attempting to recover from the impact of the financial crisis. While the US, the UK and the Eurozone all recorded increases in public sector gross indebtedness after 2007, with levels now starting to fall, unlike the other major economies the Eurozone's private non-financial sector has not even started deleveraging.
Even in countries like Spain, which is arguably Europe's best example of deleveraging, bringing down the debt-to-GDP ratio was achieved through painful measures of tackling debt in environment of low growth and inflation. However, these measures also hurt GDP growth, thus squeezing the denominator of the debt-to-GDP ratio.
Historically, successful episodes of deleveraging have involved supportive banking and monetary policies so that credit can flow again and provide renewed support to activity. However, fiscal policy should subsequently contract gradually to prevent a swap of debt from private to public balance sheets – as opposed to overall deleveraging. This is a process more closely followed in the US – but not so much in the Eurozone. Admittedly, the implementation of tighter fiscal policy has been complicated by a sluggish recovery and the low interest rate environment.
Looking ahead, it is important that policymakers in Eurozone tackle the legacy of debt and avoid past mistakes; apart from main channels to bring down debt-to-GDP ratios (growth policies, slowdown in credit flows, debt write-offs and supportive banking policies), actions aimed at increasing potential GDP can lift debt-bearing capacity. However, these usually imply an expansive fiscal stance, which is not feasible in the current environment of high levels of public debt. This leaves European economies vulnerable to potential future shocks.
Consumer confidence plunges in November with much reduced expectations for the labor market. Confidence overall remains high on a historical basis but expectations look downbeat. We urge caution in drawing drastic conclusions about the state of the consumer, and will be following the Black Friday/Cyber Monday sales to gauge the impact of reduced confidence on spending.
We think that the negative repercussions of the emerging market slowdown on the German economy are widely overstated. Next year, we expect German GDP growth to pick up to 2.2%, well above the consensus forecast of a 1.8% gain.
Although we expect net trade to act as a modest brake on the economy in 2016, the domestic economy appears to be in a self-sustaining recovery – strong household spending growth is boosting service sector sentiment and this in turn is likely to prompt firms in the sector to expand their operations. What is more, the economy is benefiting from pro-cyclical fiscal boost as the government increases migration-related spending.
To cap it all, there are also signs that the sustained negative influence from firms reducing their inventories may be coming to an end. Even if firms just reduce their stocks at a slower pace than in the past, this will provide the economy with a modest boost next year, compared to the likely drag over 2015 as a whole.
GDP growth continued at near six-year lows of 4.7% in Q3. However, the national accounts detail show there was a broad-based pick-up in most components of GDP, with the statistical discrepancy weighing on the headline growth figure. Though we are of the view that government spending will support growth in Q4 and thus have maintained our annual 2015 growth forecast at 4.8%, recent monthly data suggest there are downside risks to the growth outlook.
Bank Indonesia (BI) has maintained a tight policy bias due to external risks, most particularly the looming Fed rate hike. However, at the November meeting, BI eased reserve requirements, signalling its intent to shift the policy stance if the external situation becomes more favourable. As a result we believe that if there was a muted reaction to higher interest rates in the US, then the BI might ease policy sooner than currently expected to support growth in 2016.
There are some signs that the recession in Russia may be close to bottoming out, with supply-side indicators, while still firmly negative, showing smaller falls in Q3. However, we remain very cautious about the short-term outlook.
Given the weakness of domestic demand, as flagged up by the dismal retail sales data in October, we expect the economy to contract by 3.8% in 2015. In addition, the renewed downward pressure on global oil prices since mid-2015, falling to just US$45pb in recent days will dampen investment and government expenditure programmes and has also undermined the rouble, which in turn has pushed up inflation and led to a pause in the central bank’s easing cycle.
And a contractionary budget planned for 2016 (to preserve the oil funds) will likely dampen growth. Against this background we forecast the economy will shrink another 0.9% on average in 2016.
While the detailed German GDP release confirmed that the pace of growth eased in Q3, thanks to a large drag from net exports, it also confirmed that domestic demand continued to expand at a healthy pace. With the main Ifo business climate index rising to its highest level since mid 2014 and the equivalent services index at a record high, we maintain our view that GDP growth will accelerate to an above consensus 2.2% in 2016.
Yesterday, Argentineans chose progress. Mr. Macri's victory represents an important step towards a more sustainable growth pattern. But tackling the many macroeconomic imbalances will require willingness, political capital and short-term economic pain. Time will tell.
Existing home sales take a breather in October, but the trend remains favorable.
Looking into 2016, we see strong payrolls, firming wage growth, cheerful consumers and low rates supporting a gradual release of pent-up housing demand, but tight inventories and moderate price pressures will constrain the upside.
While large net financial outflows led to sizeable declines in reserves in August and September, the pressures on China’s FX market eased in October.
We expect net financial capital flows to stay negative into 2016, but to remain moderate compared to the levels in August and September, implying relatively neutral overall pressures on the FX market in the coming six months.
November’s PMIs suggest that momentum in the Eurozone has been accelerating with improvements in both services and manufacturing. The latest figures leave the index pointing to an acceleration in GDP growth to at least 0.4% in the initial stages of Q4, but is unlikely to stop the ECB from announcing further policy measures in December.
This report explores how international business has changed since HSBC first opened its doors in Hong Kong over 150 years—and what may come next.
The objective of this … more
African & Indian cities grow fast. Shanghai, Beijing grow in stature.
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This study analyses the use of certain business-to-business and business-to-government services in the UK, by industrial sector of the client. The activities covered, known as ' … more
From the Wall Street Journal:
WASHINGTON—Orders for long-lasting goods rose in October, a gain that represents a big jump in the volatile aircraft category and a modest pickup … more
From the Financial Times:
World trade is on track to grow at its slowest rate since the aftermath of the financial crisis, according to researchers, underlining the fragility of the global … more
The S&P/Case-Shiller index of home prices out Tuesday is expected to show continued increases, and a looming interest rate increase from the Federal Reserve raises … more