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Durable goods surprise but core weakness remains. Headline orders rose strongly in March on a gain in the volatile components. However, another drop in core orders points to soft business investment through the end of Q1. We believe business spending will slowly gain momentum after a rough start to the year, but a stronger dollar and feeble global demand will weigh on the outlook.
Counterparts analysis shows that lending to both the US private and the public sectors is picking up and supporting accelerating broad money growth. This is particularly true for corporate borrowing, which on some measures is growing faster than in the run-up to the Great Recession.
While consumer credit growth is weaker, it is still healthy by the standards of the past three years.
Historically, both markets and the Fed itself have underestimated the size and speed of tightening cycles. This may again turn out to be the case, in a risk to our main forecast of a cautious normalisation of monetary policy.
In Q1 2015, Chinese broad money growth was the weakest in 28 years, supporting our forecast of a considerable slowdown in output growth in 2015 and 2016.
The PBoC cut the Reserve Requirement Ratio by 1% on 19thApril. There will be further monetary policy easing, but growth will continue to decelerate.
Chinese QE is unlikely to occur and – more to the point – unlikely to have much impact on activity.
The rise in the German Ifo index in April contrasts with the modest fall in the composite PMI over the same period and should temper fears that the recovery in the Eurozone’s largest economy is losing steam. The big picture is that the business surveys remain consistent with healthy growth in the early stages of Q2.
Low oil prices, easing inflation, interest rate cuts and improved levels of confidence all point to a broadly favourable outlook for the Indian economy. We expect that GDP growth will accelerate from 7.2% in 2014 to 7.5% in 2015 and average 7% a year in 2016-19. The Prime Minister has visited a wide range of countries in recent months, including the US, Japan, Germany and France, in an effort to increase bilateral trade and encourage FDI. However, this marketing campaign will need to be followed up by steady efforts to improve the business environment – as India ranks poorly on many criteria relative to other leading emergers.
Monthly new home sales playing yo-yo but underlying trend is steady. The monthly reading showed a sharp decline in March in the wake of three solid monthly gains. Sales are back in line with their moderate trend. Housing activity will gradually pick up this year as wage growth firms and affordability remains historically high.
The Eurozone composite PMI edged down to 53.5 in April from March’s 11-month high of 54. The slowdown was broad-based across sectors but not across countries. Weaker rates for Germany and France are behind this, with the rest of the Eurozone enjoying the fastest expansion since 2007. We still maintain our view of a robust 2015.
March’s retail sales numbers showed that growth in sales volumes slowed sharply in Q1 compared to the last quarter of 2014. That said, a quarterly rise in volumes of 1% in Q1 was above the long-run average. And strong growth in real incomes of the back of ultra-low inflation along with record low interest rates and burgeoning levels of consumer confidence still point to 2015 being a good year for UK retailers.
Another strong set of public finances data for March meant that borrowing for 2014-15 as a whole came in almost £3bn lower than the OBR’s forecast. Though the data will continue to be revised for some time to come, we remain convinced that the OBR’s view of the economy and public finances is unduly pessimistic. This suggests that whichever party takes power after May 7th will probably require a lesser degree of fiscal consolidation to achieve its borrowing targets than is currently assumed.
The flash HSBC manufacturing PMI edged down in April to a 12-month low. The outlook over the coming months also remains bleak, with the survey suggesting that sluggish domestic demand will continue to weigh on activity. The PMI data follows swiftly on the heels of the PBoC's announcement of a further 100 basis point cut to banks' reserve requirement ratio.
However, today's survey will add to growing concerns over the extent of the current slowdown in economic growth and we expect additional policy action in the months ahead. This would include interest rate cuts and further reductions in reserve requirement ratios. A widening of the RMB trading band is also forecast.
A welcome improvement in existing home sales. Sales thawed in March as they rose to their highest annualized pace in eighteen months. Oxford Economics forecasts housing activity will slowly strength in the coming months as wage growth firms and the economy bounces back from a soft start to the year.
Leading indicators suggest only sluggish growth in Q1 2015, with weak consumer and business confidence weighing on consumption and investment decisions. In addition, intensifying uncertainty about the political situation in the run-up to the parliamentary elections in June has put further pressure on the lira, paving the way for some of the key risks to our forecast to materialise. The weaker lira has slowed the pace of disinflation, reducing the scope for aggressive monetary easing this year to support growth. We now expect that inflation will average 6.7% this year, up from 5.9% previously. And, although our baseline forecast for GDP growth in 2015 is still 3.3%, we are increasingly concerned that the rebalancing of the economy is proceeding more slowly than expected, and that a key opportunity to put the economy on a more secure footing, provided by lower global oil prices, may be being partially wasted.
The Chinese economy decelerated further in Q1, expanding by 7% after 7.3% growth in Q4. The consumer slowdown remains less marked, however, with retail sales volumes more than 10% higher in Q1 and growth in the services sector continuing to outpace that of the overall economy. But the correction in the real estate sector is increasingly affecting domestic demand: both industrial production and investment growth in urban areas continue to decelerate. Moreover, with the excess supply in real estate much greater now than in 2014, the sector will have to adjust further this year, dampening GDP growth. Indeed, the Chinese central bank is now loosening monetary policy more decisively to stabilise growth. However, there are other risks to the growth outlook from financial imbalances in the economy, such as the surge in the domestic stock market (in part is driven by higher leverage), and the centrally-imposed limits on local governments accumulating more off-balance sheet debt, which could cause a rapid deceleration in infrastructure spending. Reflecting these heightened concerns we have cut our GDP growth forecast for this year to 6.6% from 6.8% last month.
Trade flows were again disappointing in March. In China, export growth was weaker than expected, falling by nearly 8% y/y in US$ terms, while exports fell for the sixth successive month in the Asia ex-China region.
The Chinese economy continues to slow apace, a trend that authorities are desperately trying to manage smoothly, as the transition to a 'new normal' redefines the landscape for regional trade patterns.
The situation in Japan continues to improve however, with exporters reaping the benefits from an ongoing depreciation in the yen.
The confluence of rising consumer spending, a weaker currency, growing non-energy exports, and supportive financial conditions will lessen the impact of reduced oil and gas sector activity. Overall, we forecast headline GDP growth of 2.2% in 2015. The Bank of Canada believes the negative impact of lower energy prices will be "front-loaded" with the impact apparent in the early part of this year. We do not expect any further policy easing this year and see the central bank beginning to tighten in the first quarter of 2016 as activity accelerates and inflation reaches the 2% target.
Claims that political uncertainty stemming from the general election would translate into upheaval in the economy and financial markets have so far proved to be very wide of the mark. Indeed, the recent performance of relevant financial indicators has been impressive both in absolute terms and relative to run-ups to past general elections. But given the historically large but practically modest differences between the platforms of the political parties, their self-imposed restrictions on influencing economic policy and the lack of evidence that governments actually make much difference to the economy’s underlying performance, a lack of market angst is unsurprising.
While the German ZEW measure of investor sentiment is not an especially reliable growth indicator, the continued strength of both the current conditions and expectation indices in April bodes well for Q2.
Meanwhile, the reduction in the Eurozone budget deficit to 2.4% of GDP, its lowest ratio since 2008, is encouraging. Nonetheless, government debt continues to climb and some of the peripheral economies have plenty more to do to ensure that they have enough wriggle room to be able to loosen fiscal policy in the future.
The economy grew by a lacklustre 1.5% in 2014, held back by strikes in important export sectors, electricity shortages and several other major structural problems (including skill shortages, poor industrial relations and growing uncertainty over property rights and foreign investment). The expansion this year will be helped by a boost from low oil prices, cutting inflation temporarily, and flattered by comparison with a strike-depressed H1 2014. However, even so we only expect GDP growth of 2.1% in 2015 as a whole. And the outturn could be lower if the problems in the electricity sector intensify.
The PBoC cut the reserve requirement ratio for banks by 100bp – double the move that most analysts had expected. The cut will release more than RMB 1tn.
But with capital outflows expected to continue and a surge of IPOs absorbing funds, more RRR cuts will be needed over the coming months.
Italy has often been described as one of the least competitive countries in the Eurozone. This may be true if we look at the real effective exchange rate deflated by unit labour costs or export prices, but less clear-cut if we look at the measure using relative prices in manufacturing or developments in export market shares.
Italy's relatively poor export performance when compared to Germany since the introduction of the euro or Spain more recently could be associated with the low level of productivity in the whole economy. Among other structural factors, this could be related to the low level of investment and innovation – which in turn may be influenced by the generally small scale of Italian companies.
The government's recent reform measures address some of these issues. They will help reduce the 'duality' in the labour market, and improve the incentives for small companies to increase their level of investment. But other measure will be needed, including the pending reforms to the justice system, public administration and the constitution. Moreover, the reform agenda needs to be implemented decisively, so the government conveys to companies and households alike that it is committed to improving the economy's performance.
The IMF argued at the release of their April World Economic Outlook (WEO) this week that macroeconomic risks have decreased since October. We take issue with this. The statement seems at odds with their own analysis showing a greater degree of risk in many areas. Our view on the global economy also suggests an increase (or at least little decrease) in many key risks, especially with regard to both Greece and emerging countries.
While our baseline forecast is positive on the Eurozone outlook, the emergence this year of a high probability of a Greek euro exit represents a substantial downside risk. We would also note that recent world trade indicators are less than promising, that US equity valuations have become increasingly stretched and that there is a wide gap between market expectations of upcoming US rate hikes and the Fed’s own ‘dot plot’ projections.
Meanwhile risks in emerging markets – half of global GDP – have in our view clearly increased since last October. China’s slowdown has worsened, commodity prices have slumped and the dollar surge has intensified risks for indebted countries. Emerging growth ex-China will be only around 2% this year, with risks still to the downside.
Inflation is well anchored. Headline CPI inflation rose in March on higher gasoline and core prices. Core CPI were 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.
Recent news confirms that the Eurozone economy will grow at a very robust pace in Q1 and looks set to prompt a flurry of upward revisions to economists’ GDP growth forecasts. Our detailed bottom-up inflation forecast model suggests that inflation could provide the region’s next major upside surprise. A sharp rise in inflation could be the catalyst for renewed rises in markets’ interest rate expectations and bond yields.
The final Eurozone CPI inflation release for March provided no real surprises, confirming that energy developments pushed headline inflation up to -0.1%. We expect inflation to hover around the zero mark over the coming months and to then rise sharply in the autumn.
The latest labour market numbers delivered a mixed picture for the jobs market. The unemployment rate dropped from 5.7% to 5.6% in the three months to February. But pay growth softened, with average earnings growth slowing further from January’s already mediocre rate. That said, ‘noflation’ means that the picture for real pay is brighter.
Still stuck in a rut on housing. Better weather helped generate only a mild rise in starts as activity remains sluggish. Although building permits also disappointed, a rise in the single-family segment was encouraging. We expect housing to improve over the course of the year but caution that the rebound will be tepid.
Indicators from Q1 suggest growth of only 0.4% on the quarter, significantly weaker than would typically be expected at this stage of a recovery. However, we remain optimistic on growth going forward – ultra-loose monetary policy, a less restrictive fiscal stance, the weak yen and a smaller drag from destocking should see growth reach 0.8% for 2015 and accelerate to 1.8% in 2016. The main risk is a slide back into deflation – the weakness of recent data reinforces our view that the Bank of Japan will add to QE in October to head off this threat.
The overnight rate was left unchanged at the conclusion of the April meeting. The Bankof Canada now sees the impact of lower oil prices as being “more front-loaded than predicted in January, but not larger”. A more upbeat inflation forecast lessens the chance of another rate cut.
Figures for industrial activity in March came in stronger than expected, with seasonally-adjusted IP growing on a monthly basis for the first time in eight months.
While overall industrial activity still contracting on a year-on-year basis, the pace of deterioration seems to be moderating, in line with our forecasts of a less severe recession in 2015.
Industrial production disappoints. Reduced mining and utilities output outweigh very modest uptick in manufacturing. Overall, industrial production contracted 1.0% in Q1 as manufacturing activity remained subdued and lower oil prices weighed on mining output. Though we expect some of the temporary growth constraints will dissipate, we expect 2015 will be a bland year for IP.
April’s ECB press conference was a bit of a balancing act for President Draghi – while he understandably took comfort from the recent run of upbeat economic data and rising inflation expectations he made repeated attempts to scotch the idea that this could trigger an early tapering of the Bank’s QE programme.
We still expect asset purchases to continue until September 2016, but that the bar to an extension of the programme beyond then will be high, making an extension unlikely.
The monthly GDP proxy came in above expectations in February, but retail sales figures continue to point to sluggish private consumption patterns. Such trends are consistent with our recent downside revisions to 2015 GDP growth to -1.3% from -1.1%, with Q1 activity expected to exhibit broad weakness.
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