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The export outlook has become increasingly worrying. Exports fell by 7.8% on the year in US$ terms in the first twenty days of May and the April PMI suggested orders remain very weak. There are three drivers of the weakness in exports. The main factor is the repercussions of very sluggish Chinese import demand. In addition, the appreciation of the trade-weighted won in recent years has undermined price competitiveness, while some of the country’s leading firms have suffered problems recently with product competitiveness. The disappointingly poor performance of regional trade indicators has prompted us to cut our forecast for Korean GDP growth this year to 3% from 3.2% previously. On a more positive note, the indicators on consumer spending are showing signs of improvement and we expect private spending to grow by 2.8% in 2015, the best performance since 2011. Moreover, we still expect that the pace of quarterly GDP growth will gradually accelerate through the rest of 2015, boosted by the impact of stimulative fiscal and monetary policies and low oil prices.
GDP contracted by 0.2% q/q in Q1, a lot better than our forecast of a 0.8% drop.
The contraction was a lot softer than the -1.1% q/q outturn suggested by the Central Bank’s monthly GDP proxy.
For the time being we are keeping our baseline forecast unchanged at -1.3% for 2015 as a whole, as we expect a deeper contraction to take place in Q2.
Consumer sentiment fell sharply on higher prices at the pump. Sentiment fell back in May on higher gasoline prices and worries about Q1 economic data. Since we see gasoline prices stabilizing and economic momentum picking up, we do not view this latest dip as concerning. Confidence remains high and will support stronger outlays.
GDP growth surprised to the downside, contracting at the sharpest rate since 2009. A sharp drop in investment was the biggest drag on growth. We expect growth will rebound in the coming quarters on rising non-energy activity but a very soft Q1 will weigh on our growth expectations for 2015.
The second estimate of GDP growth in Q1 2015 was unrevised at 0.3%, but with a glaring disparity between the very soft official output data and most other evidence on the state of the economy, we continue to expect Q1 growth to be revised upwards over time. Indeed, early signs on Q2 have been encouraging, most notably the services PMI reaching an eight-month high in April and retail sales volumes continuing to grow at an annual pace of around 5%. The strong performance of the consumer sector reflects the improvement in spending power caused by the temporary absence of inflation, a pick-up in wage growth and a reduction in the tax bill for most workers. We expect the consumer sector to remain a key driver behind economic growth of a solid 2.5%-3.0% this year and next. Meanwhile, the General Election yielded a major surprise with the Conservative party winning a small majority. The Chancellor will present a ‘summer Budget’ on 8 July, possibly altering the way that projected aggregate spending cuts are to be achieved. But with the degree of fiscal consolidation likely to be more or less unchanged from previous plans, this should have little impact on our forecast.
US economy contracts in Q1, but momentum has picked up and will continue to do so in coming quarters. Importantly, consumer spending, business equipment spending and residential investment remain resilient and should accelerate in Q2. International crosscurrents and reduced mining activity will continue to weigh on US activity, but we expect these constraints will gradually dissipate. Oxford Economics has revised its 2015 growth estimate to 2.1%.
Though the Gfk measure of consumer confidence reported an unexpected dip in sentiment in May, the survey remains close to recent highs and is still consistent with a strong consumer performance. And with other consumer indicators continuing to post strong results, the consumer remains on course to play a key role in driving GDP growth this year.
At its June press conference, the ECB is unlikely to announce any major new policy measures and will argue that its past actions are already yielding results.
We estimate that GDP grew by 0.7% on the quarter in Q1, up 2.1% on a year ago – continuing the period of below-trend growth. GDP growth in Q1 is expected to be driven by a solid rise in export volumes and higher investment in dwellings. However, activity will be held back by a sharp fall in mining investment, with non-mining investment also expected to decline, albeit to a lesser degree. Looking ahead, we expect growth to remain uneven. The interest rate cuts in February and May will support solid residential investment and strengthen household spending. However, these positives will be countered by subdued non-mining investment and falling spending by the mining sector. Indeed, the latest 'capex' survey showed that investment intentions for 2015-16 were very weak. However, the survey was taken prior to the government's recent 'Jobs & Small Business Package', which should be positive for non-mining investment. Overall, we forecast GDP to grow by 2.6% this year, before accelerating to 3% in 2016 and 3.1% and 2017.
Although the headline Eurozone Economic Sentiment Indicator was unchanged in May, it remained consistent with solid GDP growth and the breakdown provided one or two other reasons for optimism. In particular, the further pick-up in employment intentions suggests that household spending may continue to expand at a solid pace even as the sugar rush from the lower oil price fades.
Against expectations of an upward revision, the ONS second estimate of GDP growth in Q1 was left unrevised at a soft 0.3%. Moreover, the latest numbers showed that while growth in domestic demand in Q1 remained robust, net trade exerted the largest drag on output in 18 months.
The shale sector has replaced the function of swing producer with a competitive process that should improve the supply-demand balance for the foreseeable future.
On May 11, the Energy Information Administration (EIA) published a new drilling productivity report that finally applies a date to the long anticipated downturn in shale oil production. EIA predicts that oil production will decline by 54,227 barrels per day (bpd) in May and a further 86,000 bpd figure in June.
A Saudi official, interviewed in Riyadh on May 14, reacted by saying that our "strategy of squeezing high-cost rivals such as US shale producers is succeeding." The official went on to say, "There is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including US shale, deep offshore and heavy oils."
We think the Saudi official might have misread the signs. The EIA announcement in combination with a recent increase in the price of crude oil and a slowdown in inventory build-up suggests that excess supply is being eliminated by market forces – a positive development for consumers. In addition, most of the shale oil producers have managed to survive the downturn – a positive development for the sector. OPEC countries remain important crude oil suppliers, but they have lost their leverage to extract economic rent.
This paper looks at how shale oil producers adjusted production in an orderly way while avoiding massive financial failures because of the low price environment. As such, for the first time in four decades, the adjustment was not contrived by an OPEC swing producer. The episode demonstrates that the shale oil sector can adapt to low prices by reducing capital expenditure, drilling in more productive areas and increasing efficiency.
The Abenomics strategy to strengthen corporate governance and capital efficiency has put shareholders’ return at the centre of a set of new reforms - the latest being the introduction of a new Corporate Governance Code in June this year. All these new initiatives are set to boost dividend payments and share buybacks. We forecast the Topix index to be up by 13% in local currency and by 8% in US dollar terms by the end of this year.
The new measures, coupled with attractive relative valuations, positive earnings momentum and portfolio shifts by Japanese institutional investors toward local equities are likely to provide a lift to stock prices in the second half of 2015. An important driver will also be the further depreciation of the yen against the US dollar, set to reach 130 by the end of the year, which is non-consensus call. As a result of all this, we shall be revising up our Japanese equity price forecasts.
The overnight rate was left unchanged in May. The Bank of Canada did not materially change its view of the economy, seeing growth at a standstill in Q1 but rebounding thereafter. Inflation should gradually accelerate in the coming months as the effect of lower energy prices fades.
The key short-run calls on Greece are finely balanced and binary (either agreement or no agreement). We draw implications for Greece and GGBs based on a detailed assessment of the forked tongue that is Greek popular opinion. According to our detailed scenario analysis, current GGB prices are consistent with a near 78% probability of agreeing a new programme, a 67% probability of staying on track, and a 38% exit probability over a 2-year horizon. We think these prices are over-optimistic.
We expect the Eurasia region to contract by 2.7% this year, hit by the recession in Russia, the key economy in the region and the main trade partner and source of remittances for many of the other countries in the area.
Continuing development of the region’s large endowment of natural resources will support the recovery in the area – Eurasia has more than a quarter of the world’s coal reserves, and almost a third of gas reserves. In addition, many countries are gradually diversifying beyond commodities and we expect this trend to continue.
But downside risks are high, most notably if tensions escalated between Russia and Ukraine or if commodity prices fell further. Ageing populations will also weigh on growth prospects.
Lower oil prices will send a chill down the spine of the Canadian economy, hurting energy-related investment, exports, incomes, and labor markets. While lower oil prices are a net negative for growth we see rising non-energy sector activity, a weaker currency, and rebounding US demand partially offsetting the impact.
The political landscape that has characterised Spain in the past three decades has been transformed by the elections held on May 24. While the ruling Popular Party and its traditional rival the Socialist Party remain the most voted groups, the emergence of new political forces at a local and regional level reshapes the political landscape ahead of the national elections that will take place later this year.
While there are no immediate implications for our short-term outlook, as economic policy is established at a national and European level, the result does confirm the notion already suggested by several polls that the traditional bipartisan system that has dominated in recent decades has ended. This may lead to greater uncertainty over the medium term if these results are confirmed at the national elections.
Confidence surprised to the upside. Consumer confidence rose in May on a more optimistic view of current economic conditions. Though the expectations sub-index inched lower, consumers overall remain very confident about the economic outlook. Rebounding economic activity alongside accelerating wage growth and rising employment will underpin household spending growth in 2015.
New home sales bounce back but pace remains hesitant. Sales rebounded partially in the wake of their March plunge and are now in line with their previous moderate trend. Housing activity will gradually pick up this year as wage growth firms and affordability remains historically high.
In a major surprise to Poland’s political landscape, a relative ‘dark horse’ candidate of the conservative and nationalist Law and Justice Party (PiS) Andrzej Duda defeated the incumbent Bronislaw Komorowski of the centre-right Civic Platform Party (PO), who was expected to win comfortably just a few weeks ago.
There are no immediate implications to our outlook for 2015-2016, as the president plays a limited role in Poland’s policy making. The result does, however, serve as a litmus test for the October 2015 parliamentary elections, signalling that the governing PO-PSL coalition may lose power, and thus there is now greater uncertainty about the medium-term outlook for fiscal policy.
Headline drop hides underlying momentum for orders and shipments. Core orders and shipments show initial signs of rebound as we enter Q2. We believe business spending will slowly gain momentum as international crosswinds gradually dissipate, but don't expect a breakout year.
The April trade data in Taiwan, China and Korea were extremely gloomy. In Taiwan's case, sales to China, South East Asia and the EU all showed double-digit year-on-year falls. Moreover, even stripping out all the sectors most affected by falling prices (such as oil, chemicals and metals), Taiwanese exports in US$ terms were down 6.8% on a year ago, whereas they were up 3% in Q1 and 5% in Q4 2014.
Taiwan achieved respectable quarterly GDP growth in Q1 and even continued growth in export volumes at a time when overall Chinese imports were dismally weak. Taiwan continues to benefit from producing components used in many leading electronic products and should gain if the US economy really starts to gain momentum.
However, these positive factors will be overwhelmed if the slowdown in the Chinese economy speeds up, as this will depress Taiwanese exports not only to the Mainland but also to the rest of the region, which in turn will depress business investment and job creation and lead to GDP growth falling back to well below the current level of over 3%. The risks of a gloomy outturn materialising now appear quite high; Taiwanese industrial output slumped 4% on the month in April and the May HSBC flash manufacturing PMI for China continued to point to contraction.
GDP growth slowed to just 4.7% in Q1 2015 as domestic and external factors weighed on economic activity. While a deteriorating outlook for regional trade will hold back exports, the government is struggling to implement a large infrastructure stimulus package that was expected to reinvigorate the domestic economy. As a consequence, we have cut out growth forecast for 2015 from 5.5% to 5.1%.
Q1 GDP growth was revised up to a better than expected 3.2% annualised from the advance estimate of 2.1%. Nonetheless, this still marks a slowdown from the 4.9% growth recorded in Q4.
Despite the upgrade to Q1 GDP growth we have not changed our forecast of 2.9% for 2015 as a whole. Export growth is forecast to slow sharply over the coming quarters, consistent with sluggish demand in the region. Meanwhile a correction in the housing market is expected to weigh on investment over the coming quarters.
Consistent with a steep decline in Chinese demand, export growth across Asia fell by 8.9% y/y in US$ terms. The latest regional PMIs suggest that trade conditions across the region are likely to deteriorate further in the short-term, before an expected modest recovery in H2 2015.
Meanwhile, the situation in Japan continues to improve, with exporters reaping the benefits from an ongoing depreciation in the yen.
With the BCB likely to wait until inflation expectations for 2016 converge to 4.5% before halting the rate-hike cycle, we ask ourselves what could cause inflation (and expectations) to fall faster.
Our Global Economic Model validates our suspicion that the answer lies on the labour market. Our simulation results confirm that if the recent surge in joblessness exacerbates, inflationary pressures can wane a lot quicker than most expect. This should give the central bank a green flag to stop hiking rates.
IPCA-15 inflation rose by 0.6% m/m in May, taking the annual rate to 8.2% – unchanged from last month.
We think that today's result has little relevance to the outlook for inflation this year due to pressures stemming from regulated prices and the pass-through from a weaker BRL.
With inflation hovering well above the 4.5% target, we expect the central bank to raise the Selic policy rate by 25bps at the next meeting in June.
Private consumption increased by 0.4% in Q1, but is little changed from three years ago – well before the April 2014 rise in the consumption tax. Wages are falling and there will be negligible positive wealth effects from a buoyant stock market. Despite the BoJ’s aggressive monetary easing the underlying picture remains one of falling prices. An end to deflation and labour market reform are prerequisites for a consumer revival
Consumer spending continued its modest recovery in Q1 but is still little changed from its level three years ago.
Fundamentals remain poor as the underlying picture is still deflationary, despite the efforts of the Bank of Japan. A distorted labour market leaves bargaining power in the hands of employers, despite low headline unemployment.
Wealth effects from the surging stock market will not do much for consumers since they hold a relatively small proportion of their assets in the form of direct equity holdings.
Inflation gearing up for second half rebound. Headline CPI inflation rose modestly on a pick-up in core prices. Core CPI was up on broad-based gains, signaling strengthening domestic activity. We expect headline inflation to hover near zero through mid-year and rebound thereafter as the effects of a stronger dollar and low energy prices fade.
Continued weakness in UK productivity growth is now being matched by a slower rate of productivity improvement across the Atlantic. But at the same time, growth in labour supply in the US has been catching up with the UK’s robust performance.
This development offers backing to the argument that a more plentiful supply of cheaper workers leads firms to put less weight on employee efficiency. So a continuation of the UK’s recent slowdown in workforce growth and a pick-up in pay rises may contribute to finally spurring a recovery in productivity.
We think that the recent pick-up in Eurozone government bond yields from their record lows mainly reflects a mispricing of yields in the early stages of this year, rather than a temporary rise caused by ‘technical factors’. In response to Benoît Cœuré’s, recent comments we have revised down our near-term Eurozone bond yield forecasts a touch, but we still see yields rising steadily in 2016 to about 1.3% by the year end.
Although early days, public sector net borrowing of £6.8bn in April, the smallest April deficit since 2008, should give the Chancellor heart that his deficit reduction plans for 2015/16 are more than achievable. And with the first post-election Budget approaching on 8 July, the possibility that the OBR will cut its borrowing forecasts means that squaring the circle of deficit reduction and election-giveaways should be that much easier.
Germany’s Q1 GDP breakdown revealed that the slowdown at the beginning of the year was down to firms reducing their stocks. Indeed, if inventories are stripped out of the figures then growth accelerated at the start of the year thanks in part to a pick-up in investment. With May’s Ifo survey broadly unchanged at a solid level, we still see the Germany recovery gathering momentum in Q2.
The minutes of the April FOMC meeting revealed that participants were disappointed with the sluggish pace of economic activity in Q1. However, they remain generally upbeat about growth prospects, and believe that the economy will rebound as transitory factors fade.
We expect consumer spending will rise on the back of accelerating wage growth, upbeat confidence, and lower gasoline prices.
The stronger dollar, reduced energy sector investment, and sluggish global growth will weigh on business investment, but rising domestic activity will provide a partial offset.
Meanwhile, housing sector activity should gradually firm as wage growth strengthens, affordability remains historically, and pent-up demand is slowly released.
The latest inflation readings indicate subdued prices pressures, but core inflation remains well-anchored. We expect headline inflation will rise at a stronger pace in the latter of this year as the effects from a stronger dollar and lower oil price dissipate.
As such, we expect the Fed will move ahead with rate-liftoff in September.
Today, some 3.3 million salaried workers across the US retail and restaurant industries can be exempted from the right to receive overtime pay because they earn at least $455 per week—the … more
London’s economy is growing strongly, easily outpacing both the UK and its nearest European rivals such as Paris and Frankfurt. Significant investments in public infrastructure, … more
This research paper from IBM’s Institute for Business Value and the University of California at San Diego is based on a survey conducted in late 2014 by Oxford Economics for the IBV. … more
From the Wall Street Journal: "America’s gross domestic product, the broadest sum of goods and services produced across the economy, shrank at a 0.7% seasonally adjusted annual rate in … more
From CNN: "The rollercoaster ride that is Greece's debt crisis lurched lower again Friday with a stark warning from the International Monetary Fund."
"According to Oxford … more
From the Guardian: "The US Treasury secretary has said he will use the G7 finance ministers’ meeting on Thursday and Friday to press Greece and its European creditors to end their … more