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Banking business climate and loan demand indices from the Chinese bankers’ confidence survey. In 2009, the Chinese authorities engineered a massive monetary stimulus, the impact of which is still felt five years later. The Chinese economy is still driven very much by credit demand.
The index of banking business climate stood at 70.7 in Q4 2014, the lowest reading since 2006.
Existing home sales fell back in November after two strong months – reaching the slowest pace since May. A continued decline in mortgage rates and slower home price inflation were unable to lure buyers into the market. Though housing has underperformed in 2014, Oxford Economics believes faster wage growth, low mortgage rates and reduced home price inflation will boost sales in 2015.
The plunge in the oil price is set to drive inflation sharply lower over the coming months – not least through its impact on petrol prices, which should continue to fall until early 2015. It will also reduce production costs across a range of sectors, and as such we expect CPI inflation to average just 0.4% in Q1 2015. This will provide a substantial boost to household purchasing power, giving renewed momentum to GDP growth. We have revised up our GDP forecasts to 2.7% and 2.8% in 2015 and 2016, respectively, from 2.6% and 2.5% last month. Meanwhile, lower inflation will provide the MPC with a dilemma. Stronger wage growth and further declines in unemployment appear to fulfil the criteria it had set for interest rates to start rising. However, we think it unlikely that the Committee will want to put up interest rates at a time when inflation rates are so low. Therefore, with inflation expected below 1% for almost all of next year, we now expect the first rate hike to come in Q1 2016, rather than Q3 2015.
At its unscheduled meeting on 15th of December, the CBR raised policy interest rate by 650bps to 17%. This decision follows a 100bps rate increase on 11th of December.
This suggests that the CBR might be losing control of the currency market – which could make the rouble even more vulnerable. Although the central bank is no doubt trying to take decisive action to see the crisis off, this emergency move may turn out to be too little, too late.
Despite the above, the rouble has strengthened in last several days mainly due to rising oil prices. However, if oil prices start falling again, the CBR might tighten monetary policy further.
Below we highlight our top five predictions for the LatAm region in 2015, emphasizing that Brazil will not lose its investment grade status and that lower oil prices will not materially undermine the Mexican economic outlook next year. We also believe Venezuela will not default, the Argentina debt saga will continue, amid positive electoral results, and Colombia will outperform the region. Our key wildcard prediction is that President Maduro will be removed from power.
The appointment of a credible and orthodox finance minister suggests that the fiscal stance will be tightened. As a result, public debt will stabilise from 2015 onwards, but lower government spending and tax increases will hurt consumption and investment in the coming years. Reflecting this, we have cut our GDP growth forecasts in 2015 and 2016 to 0.7% and 1.8% respectively from 0.9% and 2.4% previously.
With US economic fundamentals strengthening, we see the US accelerating to a 3% pace in 2015. Stronger wage growth, ongoing payroll gains and rising private sector confidence will boost household outlays and housing activity. Business investment should maintain its end-of-year momentum. Global trade flows should pick-up modestly, but downside risks loom. The Fed’s countdown to a mid-2015 rate lift-off has started
Brent crude oil prices have fallen by nearly 50% since their peaks in June as a result of both supply and demand factors. This Research Briefing examines the extent to which some of the recent trends in fundamentals, in particular Chinese demand weakness and US supply strength, may persist and the implications for oil prices. It concludes that oil prices are likely to be lower over the longer term than forecast three months ago.
Although government borrowing remains very high, November’s data offered some cause for cheer, with the monthly deficit falling on last year’s level for the second consecutive month. And there are good reasons to believe that the fiscal positon will see a further improvement over the remainder of the fiscal year. But whether the OBR’s borrowing forecast for 2014/15 is achievable remains a tough call
Lower oil prices are a net plus for the US economy as the boost to demand largely outweigh the drag from production. However, the net effect of the recent plunge in oil prices on the US economy is more ambiguous than many realize since it is highly dependent on the international context.
The combination of the Ukraine crisis and sharply lower oil prices has triggered a balance of payments crisis and lurch towards recession – risks we identified in March. The rouble has depreciated 47% since January, and interest rates have risen to 17%. Currency pressures look likely to continue. Analysis using the Oxford Global Economic Model suggests that oil prices sustained at US$60 per barrel would see the Russian current account swing into significant deficit next year. We also expect a deep recession in 2015. Our forecast is already for GDP to slump by over 3% next year but a further significant downgrade is pending. The danger of sharply higher inflation and nominal interest rates is significant – further monetary tightening would be the ‘orthodox’ reaction to the current situation. But less orthodox responses such as exchange controls are also a risk, and there is also the possibility that the currency crisis could rapidly morph into a debt crisis.
Over the past two decades, output growth increasingly became dependent on debt. In many countries, this became unsustainable and came to an end in the Great Recession. In the future, we may see growth based much less on debt. This would have important implications for the financial sector; and for markets.
There is a possibility that the world is facing a secular change, where the debt-based growth model is coming to an end. Some of the consequences of such a shift would involve lower long-term interest rates; a change in the role of banks; and possibly also shifting housing patterns.
For banks, it could herald a trend towards more investment bank and private equity activity. In terms of housing, it could stimulate a return to more rental accommodation, notably in the Anglo-Saxon economies.
Secular changes tend to take place over long periods. Nevertheless, some of the trends involved are already occurring and affect financial markets, in particular the slower growth of credit.
House prices contracted for the seventh month in November, falling by 0.6%. But the pace of monthly declines has decelerated for four months now as the authorities' support to the real estate market appears to be having an impact.
There is still considerable oversupply in the market and the amount of new construction started still exceeded sales by one-third in November.
Investment in the real estate sector will have to slow much further, continuing to dampen GDP growth.
The pick-up in the German headline Ifo index, coupled with a strong rise in the less closely watched services index would appear to support the view that the economy is emerging from its sticky patch. We remain confident that the German economy will gather steam in 2015 and outperform the consensus.
The frantic scrabbling for bargains on November’s ‘Black Friday’ proved a boon for retailers ahead of the Christmas period. Retail sales volumes increased by 1.6% on the month, while electrical goods in particular saw a storming performance. However, given Novembers strength, retailers may face a hangover in the run-up to Christmas
In line with our expectations, the FOMC signalled it is likely to initiate interest rate lift-off in mid-2015, despite the turbulence in the financial markets. We continue to foresee the large under-pricing of Fed tightening by the bond market leading to a bear market flattening in the yield curve in 2015.
The FOMC emphasized that the slack in the labor market continues to diminish. While headline inflation remains below the long-run 2% target, the FOMC attributes part of the underperformance to the sharp decline in energy prices.
The FOMC dropped its "considerable time" assurance but replaced it with forward guidance that states the FOMC will be "patient in beginning to normalize the stance of monetary policy." Yellen says "patient" means at least for the next two meetings.
The median "dot plot" estimates for the fed funds rate moved modestly lower, more in line with Oxford Economics' forecast.
Notably absent was reference to the financial market turmoil or concerns about global growth.
Although the worsening Russian turmoil is likely to have serious implications for those with large financial market exposures to Russia, the crisis there does not appear to pose a severe systemic risk to the Eurozone banking system. We do not think that the crisis warrants a downward revision to our above consensus Eurozone GDP growth forecast for 2015.
Despite surprisingly robust GDP growth of 0.3% in Q3, there is little sign of a meaningful economic recovery in France. This is because the main drivers of GDP growth have been the volatile inventory component and government spending, with the latter likely to fade in the period ahead. Contributions from other spending components were generally downbeat in Q3, with investment continuing to decline, private consumption growth easing and net trade negative, the latter despite the weakening euro. We expect GDP growth to weaken slightly in Q4 and to reach 0.4% for the year as a whole. Next year, the recovery is forecast to gain momentum only slowly, driven by a pick-up in consumer spending helped by the boost to real incomes from lower energy prices. GDP growth is seen rising to 1%. But France’s structural problems – including a loss of export competitiveness, rigid labour markets and the slow pace of fiscal adjustment – are such that its economic recovery will remain modest and more fragile than elsewhere in the Eurozone.
Inflation drops sharply on lower gas prices, but core inflation well anchored. The recent oil price plunge has led to a sharp decline in gasoline prices – a boon for consumers ahead of the holiday season. Outside of energy prices, strengthening domestic fundamentals, including stronger wage growth, support core inflation. Oxford Economics sees inflation gradually firming in 2015 as the temporary energy price effect dissipates, wage growth accelerates, and activity picks up.
Trade flows were generally sluggish across Asia in November.
A combination of weak Chinese imports and softer demand for oil are the primary drivers behind the weakness.
The latest regional PMI manufacturing data suggest that momentum continues to move in the wrong direction.
While, November’s final Eurozone inflation release confirmed that the headline rate fell to 0.3%, the substantial fall in the oil price since then suggests that inflation will head into negative territory in December.
This, along with the weak TLTRO auction and subdued business sentiment, supports our view that the ECB will step up the pace of asset purchases in January. But comments made yesterday by Jens Weidmann support our view that the Bank will not announce government bond purchases.
The rapid improvement in the jobs market evident over most of 2014 seems to be abating, with the jobless rate unchanged for the third successive month. Meanwhile, although pay growth saw another rise, albeit to a still modest level, this can be partly explained by a chunky increase in the minimum wage.The need for a further rise in pay growth was cited in the minutes of December’s MPC meeting as being necessary for the 2% inflation target to be achieved. And with plummeting oil prices set to push inflation ever closer to zero, the 7-2 majority voting to keep rates on hold looks like persisting over the entire course of 2015.
Exports rose for the first time in three months in November driven by non-oil domestic exports. Nonetheless, external demand remains sluggish and region PMIs suggest that trade will end the year on a weak note. Meanwhile, an ongoing decline in intermediate imports indicates that manufacturing may be very weak in the coming quarters.
Germany appeared to suffer a classic uncertainty shock in the middle of the year partly in response to the Russia-Ukraine crisis, as well as weakness in some other emerging markets. The recovery in equipment investment, which had already lost momentum in Q2, went fully into reverse in Q3. Yet other survey and hard data suggest that businesses’ caution may not have been fully warranted, and that investment could rebound over the next couple of quarters. Elsewhere, the outlook for domestic demand seems quite favourable. Employment continues to rise and 2015 should see healthy wage growth thanks partly to the introduction of the minimum wage. In addition, the plunge in the oil price will ensure that households’ incomes stretch further in real terms. Given all of this, we think that the consensus forecast for GDP growth of 1.4% next year is too cautious: we expect a gain of 1.8% in 2015 and 2.1% in 2016.
Not a great month for housing starts. Starts suffered another decline on a drop in the single-family segment while permits, a signal of future activity, also fell back. We believe housing activity will rebound next year, though it is clear the sector will take time to build momentum.
With US economic fundamentals looking stronger, the Fed will want to clarify the future path of monetary policy in the upcoming FOMC announcement and press conference. Oxford Economics believes the Fed will underscore the labor market progress and adopt a more dovish tone signaling a rate hike in June 2015. While the recent slide in oil prices has market participants on edge, we believe this will be a net positive for US GDP growth in 2015. However, should the oil price plunge and anticipation of a Fed rate hike lead to severe market dislocations, we wouldn't be surprised to see the dovish Fed delay its rate hike.
Key data elements
At its unscheduled meeting yesterday, the CBR raised its policy interest rate by 650bps to 17%. This decision follows a 100bps rate increase last week.
Impact and outlook
After an initial rally, the rouble weakened to about 80 against the dollar this afternoon. The ineffectiveness of the rate hike is no doubt partly linked to the weakness of oil prices, which have continued to fall. Nevertheless, should the rouble continue to weaken, we think that the CBR could continue to push interest rates even higher. In the worst case scenario, non-standard measures such as exchange controls might be introduced.
Nor has currency market intervention − which the CBR has recently started to use again in order to smooth exchange rate volatility − provided much support. Moreover, the central bank is slowly running out of liquid reserves it can use to intervene on the currency market.
Currency markets aside, it is unlikely that interest rates can be sustained at current levels for a considerable period of time without major damage being done to an already distressed Russian economy. We were already predicting a GDP decline of 3.5% in 2015 – now it could be much worse.
Moreover, such a significant rate hike only days after the policy meeting suggests that the CBR is losing control of the currency market – which could make the rouble even more vulnerable. Although the central bank is no doubt trying to take decisive action to see the crisis off, this emergency move may turn out to be too little, too late.
The raft of data published today offered room for encouragement over the Eurozone outlook, with the composite PMI nudging up in December, German firms professing a greater degree of confidence, and evidence that the slowdown in external demand might not be as severe as previously feared. Taken in aggregate, today’s data therefore offers tentative evidence of a turning point in the recent soft patch. We retain our forecast that Eurozone GDP will expand by 0.2% in 2014 Q4, with an (uneven) acceleration in growth in 2015.
There was a major downside surprise on inflation in November, which makes it odds-on that the Governor will have to write a letter of explanation to the Chancellor next month. The main impact of falling oil prices is still to feed through and the CPI rate could get close to zero in the new year
We now expect GDP to shrink by 0.4% in 2014 and increase by only 0.1% in 2015. But while we think that the economy will exit its three-year recession we forecast quarterly growth of just 0.1% during the first half of 2015. And any deterioration in confidence or slowdown in external demand could easily lead to Italian GDP shrinking once more. In 2015 Italy will post the weakest growth performance within the Eurozone, even worse than Cyprus (which contracted significantly in 2014). It will continue to underperform the Eurozone, continuing a trend that has been in place since the start of 2000. While labour reforms have been approved by Parliament, actual implementation will require secondary legislation to be passed – and this could take some months and also be vulnerable to substantive changes during the process. In early December, Standard and Poor's downgraded Italy's sovereign rating to BBB-, placing the country now only one notch above 'junk' status.
We expect the FOMC to prepare the financial markets for a mid-2015 interest rate lift-off in its Dec. 17 policy statement and post-meeting press conference despite the turbulence in the financial markets. The large under-pricing of Fed tightening by the bond market should lead to a bear market flattening in the yield curve in 2015.
The Fed is making progress on its dual mandate. The slack in the labor market continues to markedly diminish and wages are growing more broadly and at a faster pace. Outside of the steep drop in oil prices, inflation and inflation expectations remain near 2%.
We anticipate the dovish and hawkish "dot plot" rate estimates converge towards the median expectations.
We note that a significant broadening in global market dislocations or a sharper-than-expected global growth slowdown could delay the Fed rate hike
The BCB's IBC-Br GDP proxy fell by 0.26% m/m for a headline -1.2% y/y print. The figure confirms our forecast for a paltry 0.2% q/q Q4 2014 GDP reading. Importantly, we now sense downside risks to our 2015 growth targets are rising.
Industrial production came in below expectations at 2.1% y/y in October, but on a sequential-basis, activity expanded by 0.9% m/m. Manufacturing activity continued to show steady strength, while the construction sector is now beginning to show more sustainable growth trends. We look for the Q4 data to reveal greater industrial production strength, offsetting the slowdown observed in the prior quarter.
The BCCh kept its main policy rate unchanged at 3.0% last week, in line with expectations. The release of the Q4 Inflation Report, however, revealed yet another downside revision to 2014 and 2015 GDP growth. Our current base case scenario for 2015 does not include any changes to monetary policy, but risks to this call are clearly on the rise. Markets are now pricing a resumption of the rate-cutting cycle in H1 2015.
The Australian economy grew by only 0.3% on the quarter in Q3, and GDP would have contracted without a solid contribution from net exports. While the recent plunge in global oil prices will provide a slight boost to activity in 2015, the overall sharp weakening in the country's terms of trade through 2014 will exert a drag on growth. This, together with a weaker outlook for private investment, has prompted us to reduce our Australian growth forecasts for 2014 and 2015 to 2.8% and 2.6% respectively, down from 3.1% and 2.7% in early November. The downgrade to GDP growth might have been even larger were it not for the A$'s bout of weakness since early September. Lower growth expectations and a relatively high level of slack in the labour market may mean that the RBA keeps interest rates on hold at 2.5% until 2016.
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"The Russian ruble reached a historic new low on Tuesday, despite efforts by the country's central bank to defend the currency. We talk to the experts about what's threatening the … more
"The net effect of the recent plunge in oil prices on the U.S. economy is more ambiguous than many realize."
"For a net oil importer like the United States, lower crude oil … more
"FRANKFURT — On paper, the vulnerability of European banks to the sinking Russian ruble is manageable, less than their exposure to Greece during the height of the eurozone debt … more