Data, forecasts and analysis on 200 countries, 100 sectors and 3,000 cities and sub-regions
A survey of US primary dealers in October suggested that they saw a 20% chance of the Fed Funds rate falling back to zero within two years of starting to rise. This surprisingly high probability may partly explain the continued low level of bond yields, but how realistic a scenario is this? Since 2010/11, of fifteen significant economies that raised rates only three still have rates at or above their peak levels, while four have indeed seen rates drop back to zero or close to it. In general, these fifteen economies tended to be relatively open economies and experienced a heavy build-up of consumer debt in the 2000-10 period – factors that made them vulnerable to premature rate rises. The US and UK look less vulnerable, being less trade-sensitive and having achieved considerable household deleveraging and reasonable growth in domestic demand. The US also benefits from a high share of fixed rate consumer debt, which will lessen the impact of rising short-term policy rates. So overall the ‘20% chance’ looks overstated for the US and UK, but lingering fear of ‘premature tightening’ might add to dovish tendencies at central banks.
• We estimate that under an extreme scenario, China’s public debt could rise from 45% to 93% of GDP as a result of a three-year financial crisis. Most of the increase would arise from financial sector bail-out costs, but the negative impact on the fiscal deficit and nominal growth also play an important role.
November’s unexpected rise in the Ifo measure of German business sentiment temporarily halted its firm downward trend, but the index remains consistent with broadly stagnant activity. In the near term, then, Germany seems unlikely to kick start the recovery in the Eurozone as a whole.
The monthly GDP proxy (IGAE) fell 0.07% m/m in September, resulting in a Q3 GDP growth of 0.50% q/q – well below estimates, and indicative of a y/y headline expansion of 2.20%. The figures are not terribly surprising given recent signs corroborating a slower-than-anticipated recovery. With today’s release, we’re now revising down our 2014 and 2015 GDP growth target to 2.2% and 3.4%, respectively.
Russian financial markets have been in turmoil due to a combination of falling oil prices, sanctions and capital outflows. The rouble has depreciated by almost 40% since early July, while sovereign Eurobond spreads have widened to levels seen during the Crimea crisis. Continued turbulence poses a broader risk to economic stability. As it is, we have downgraded our GDP growth forecast for 2015 to -0.8% from zero previously. Admittedly, the rouble may have fallen below its appropriate long-run value and could rebound, supported by central bank intervention and further hikes in interest rates. But higher interest rates, together with rising inflation, will weaken investment and consumer spending, the latter having been the mainstay of economic growth in recent years. The poor near-term outlook compounds what are already modest longer-term growth prospects due to structural challenges.
In a clear signal of his reformist intent, President Joko Widodo cut fuel subsidies on 17 November, in a move that was anticipated but nevertheless very encouraging. Cutting the burden of these subsidies (which account for around 20% of government spending) will free up government resources to divert towards important infrastructure projects. However, the move will inevitably increase inflation in the short term and the central bank moved quickly to anchor inflation expectations by raising the policy interest rate by 25bp. Notwithstanding this tightening, the economic outlook remains broadly positive, with GDP growth expected to pick up from 5.1% this year to 5.8% in 2015.
The PBoC has lowered the one-year deposit rate to 2.75% and the one-year lending rate to 5.6%
While the economic slowdown might have influenced the decision we believe that financial stress and currency strength played a central role.
By setting a balance sheet ‘target’, the ECB has pushed its unconventional policy support closer to Fed-style QE. We expect the Bank to pledge to meet this target more quickly than the current implicit horizon, probably at December’s interest rate meeting, and to widen the pool of assets that it is prepared to buy. But we still do not expect the ECB to purchase government bonds.
The October figures and historical revisions represent rare pieces of good news on the public finances. But the damage wreaked in the first six months of the fiscal year has been so great that it’s no longer a question of whether borrowing overshoots the OBR forecast, but of how large that overshoot will be
The outlook for Turkey has improved over the past month. The slide in oil prices is expected to persist into the medium term and this will have a positive impact on a number of problems facing the economy – lowering the inflation rate by about 0.5% point and reducing the current account deficit by US$5-10bn. The developments in the oil price would typically lead to looser central bank (CBRT) policy. However, the CBRT reduced interest rates prematurely in mid-2014 when inflation was staying stubbornly high, so we think it may take the opportunity now to signal a more hawkish stance without having to actually raise interest rates (which would be politically sensitive). But we do expect one modest rate cut in Q2 2015 to 8% as a concession to political pressures, before remaining at that level until 2016, by which time inflation should be below 7%. GDP growth is expected to be around 3% pa in both 2014 and 2015 before accelerating to 5% in 2016.
The Monetary Policy Committee of the South African Reserve Bank announced today that the key policy interest rate of 5.75% will remain unchanged. The lower inflation trajectory and the continued weak state of the economy reduced the pressure to raise rates. We expect a 25bps rate hike at the next meeting in January, though this is less likely than before.
While there were some signs of improvement in a couple of countries, the overall regional trade situation remains subdued, constrained by modest Chinese demand. One positive was the strong m/m increase in Japanese export volumes but we do not expect this to mark the start of a marked upward trend. In Taiwan and Singapore, exports disappointed in October and we will need to see a sustained improvement in demand from China before regional trade can build stronger momentum.
Existing home sales rise to their highest level in a year. Lower rates, reduced home price inflation, ongoing labor market strength and gradually firmer wage growth should continue to support the housing market in the coming months. This being said, the housing recovery will be gradual in nature.
GDP fell by 0.1% in Q3, in line with expectations, following on from a decline of 0.2% in Q2. And the economy will continue to contract in Q4, with the manufacturing PMI dropping below the 50 expansion-contraction line in October and the Eurozone unlikely to grow any faster than Q3's lacklustre pace of 0.2%. We forecast that GDP will shrink by 0.3% this year and increase by only 0.1% in 2015. On a more positive note, government bond yields are trading at historical lows and the draft budget for 2015 contains some measures that improve competitiveness, such as the corporate tax cut and the introduction of lower social contributions for firms that hire new workers. However, uncertainty remains over the extent of fiscal savings, while spending cuts could lead to more taxation by regional governments.
Inflation flat despite lower energy prices. The recent plunge in crude oil prices has led to a sharp decline in gasoline price – a boon for consumers ahead of the holiday season. Outside of energy prices, we are seeing a broad-based increase of core prices indicative of building economic momentum. Oxford Economics sees inflation gradually firming in 2015, with wage growth accelerating, and the Fed raising rates in mid-2015.
The release of Banxico’s Q3 Quarterly Inflation report was in line with expectations, with the bank trimming its mid-point growth forecasts for 2014 and 2015, and alerting that the output gap will remain negative through 2016. The bank’s tone with respect to inflation remained positive, with no key changes. All in all, the report corroborates our view that Banxico is in no hurry to hike rates, and the expected policy normalization process in late 2015 will certainly lag the US Fed.
After stagnating throughout the first half of the year, GDP expanded at a faster-than-expected pace of 0.3% in the third quarter, boosted by robust growth in government spending. Growth in private consumption continued to support the economy as well, albeit at a slower pace of 0.2% after 0.3% in Q2, while the contributions from investment and net trade were negative. PMI data suggest that private sector activity remains sluggish in Q4, and growth for 2014 as a whole is forecast at just 0.4% for the third year in a row. The recovery is expected to gain momentum only slowly in 2015, with export growth constrained by slower growth in some key trading partners and the planned cut in government spending – if implemented – removing one of the more resilient pillars of activity until now. At 1%, economic growth will remain weaker than in the Eurozone as a whole next year, with the positive impact of recent reforms to boost business competitiveness materialising only over the medium term.
Rather than providing a pleasant surprise, today’s PMI data offered a more downbeat view of the Eurozone’s performance than the markets were expecting. Even more depressingly, it underlined that France’s positive Q3 performance should not be taken as evidence that the laggard is catching up with the rest of the Eurozone. None of this is likely to change the ECB’s mind though, with policymakers preferring to wait and see what 2015 brings.
The beneficial nature of the disinflationary forces affecting the UK economy was demonstrated in October’s retail sales numbers. Prices in the retail sector fell at the fastest annual rate in 12 years, contributing to sales volumes rising at the strongest pace since April. Evidence that wage growth may finally be picking up, combined with the likelihood that inflation will fall further, suggest that the retail sector is on course for a healthy expansion in the final quarter of 2014.
The flash HSBC manufacturing PMI index fell to a six-month low in November. The survey suggests growth is likely to continue to come under further downward pressure from sluggish domestic demand, with the possibility that external demand may also be less supportive over the coming months. With the survey pointing to a further deterioration in employment the authorities may introduce additional stimulus, however GDP growth is still likely to slow over the coming years. We expect GDP to grow by 7.4% this year, missing the government's 7.5% target.
Vietnam’s rapid growth rate – an annual average
of almost 7% a year since 1990 – prompted many to see it as a new Asian powerhouse.
But then the financial crisis hit and growth momentum flagged. Now its economy
is picking up again. Some see the country as a competitive threat to China
because of its cheaper labour costs. Christine Shields, who for many years ran the Country Risk Research function at Standard Chartered Bank, argues that this is only part of the
story. Vietnam's resource endowment offers huge potential, especially in the longer
term. It has just announced plans to issue its first sovereign bond for almost
five years, a big step for financial development and recognition of its
progress towards macroeconomic stability. But the economy needs more, and
faster, structural reform, not least in its troubled banking sector, while
inefficient state-owned enterprises remain a big drag on economic prospects. Some
macroeconomic strains are also emerging, especially from high public debt (which
the government is starting to address). A telling challenge will be the part-privatisation
of the state airline. And how well relations with China recover from a
territorial spat earlier this year will determine whether Vietnam’s outlook is
one of cooperation or of regional disharmony. In a world where GDP growth is
patchy, this matters, especially given Vietnam’s regional trade links. If it can
meet these challenges the outlook should be bright, making the economy more
attractive to investors.
With the time approaching when children will be busy writing letters to Father Christmas, the Governor of the Bank of England will be starting to think about writing a letter of his own. But Mr Carney’s letter will be a rather different one, explaining to the Chancellor why inflation has sunk more than 1% below the target. Our latest forecasts suggest that this letter will have to be written when the February data is published in mid-March, though it could come sooner if commodity prices continue to tumble. The MPC are clearly troubled by such a low inflation backdrop and are unlikely to move until there are clear signs that inflation is trending upwards once more.
Don’t judge housing by its starts. Housing starts fell to 1.0 million on a decline in the volatile multi-family segment, but more importantly (and statistically significant) housing permits rose on gains in both single- and multi-family permits. While housing activity still has some downside risks, we believe sector activity should rise at a more robust pace next year when faster wage growth materializes.
The Eurozone recovery is still tentative, with a combination of external factors weighing on industrial firms in particular. Activity in the service sector has shown more resilience, yielding total GDP growth of 0.2% in the third quarter. We expect the same in the fourth quarter and growth of 0.8% for 2014 as a whole. Looking ahead, there are reasons to expect a steady pick-up in growth next year, to 1.2%. Household budgets will be supported by lower oil prices, and combined with the modest improvement in labour markets, this will allow consumer spending to gather pace. In addition, exporters will start to feel the full benefits of a weaker euro, as well as stronger demand in advanced economies. Finally, we expect the ECB’s policy measures to help support an expansion of bank lending and, in turn, business investment. Of course, despite this generally improving climate, the outlook remains vulnerable to a number of downside risks, including the slowdown in the Chinese economy and an escalation of tensions between Russia and Ukraine. Moreover, with inflation forecast at just 0.7% next year, it would not take an especially powerful shock to push the region back towards deflation.
Some indicators suggest downside risks to near-term world trade growth as we near year-end. The OE export indicator, which leads official trade data by 1-2 months, slipped in October to its lowest level since last May, continuing a recent downward trend. There are also some negative signals from container trade data and from recent import volume figures for the advanced economies. Other evidence is more mixed, with (most notably) air freight trends relatively positive. OE continues to expect world trade growth to gradually pick-up over the next two years to roughly its long-term average pace, although the long-term elasticity of trade with respect to GDP growth is likely to remain below the average of recent decades both in the short and longer runs. But several factors appear to be weighing on the short-term outlook – slower growth in China, the unwinding of Japan’s pre-consumption tax import boom, and weaker trade growth in eastern Europe as a consequence of the Ukraine conflict and the related tensions between Russia and the West.
The minutes of November’s MPC meeting struck a surprisingly hawkish tone, highlighting a degree of disagreement even among those voting to keep Bank Rate on hold. But we think the concerns expressed by some Committee members about potential inflation pressures are overblown. Indeed, recent comments by the Governor and other MPC members have emphasised risks in the opposite direction. So November’s minutes do not dissuade us from our view that the first rate rise won’t happen until well into 2015.
Following Q2's downwardly revised 1.9% contraction, GDP fell by 0.4% in Q3, pushing Japan back into recession. Destocking was the main drag on growth, but the other expenditure components were also dismal. Growth for 2014 as a whole is likely to come in at only 0.3%. However, Prime Minister Abe has announced that he will postpone the second sales tax hike until April 2017. This looser fiscal stance will mitigate the near-term downside risks to growth and inflation, and should allow growth to rise back to 1.9% in 2016.
The economy was relatively subdued in Q3, with GDP falling 0.1% on the month in August and flat in July. This weakness has been led by the oil and gas sector, affected by maintenance activity at refineries, but we expect production to rebound in the coming months. Looking ahead, we forecast that the economy will grow steadily in 2015. Underpinning this will be domestic demand, with investment expected to rebound to 3.1% growth after stagnating this year, and exports, buoyed by a solid US recovery. Encouragingly, in October, employment growth was surprisingly strong, pushing the unemployment rate down to 6.5%, its lowest level since November 2008. The increase in employment was relatively broad-based, with a healthy rise in the number of full-time employees (following on from the large gain in September but in marked contrast to the weakness seen through most of the period April to August).
Producer prices jumped unexpectedly, but inflation remains tame. PPI final demand rose on a spike in services prices, namely the margins of wholesale and retailers. Excluding these volatile components, lower energy prices weighed on headline inflation while core inflation remains contained. Oxford Economics expects inflation to slowly firm over the coming months as the economy continues to grow, but this increase will be gradual in nature.
After Joko Widodo last night fulfilled a key election promise to cut fuel subsidies, the central bank today convened an extraordinary meeting that culminated in a 25bp hike to the policy rate in order to keep inflationary pressures under control and anchor future expectations.
House prices contracted for the sixth month in October, falling by 0.8%. This is slightly less than the 1% decline in September, and might hint that the current property market correction is gradually fading. But fundamentals suggest that prices and investment in the real estate sector will continue to fall as excess supply is still rising. We estimate that it would take more than 4.5 years to sell all the housing now under construction if the current pace of sales continues.
The better than expected rise in the German ZEW investor sentiment indicator in November provides some hope that the pause in the German economic recovery could be coming to an end. Meanwhile, we doubt that yesterday’s acknowledgement by President Draghi that the ECB can buy government bonds marks a change in stance by the central bank.
Though CPI inflation ticked up in October, this was largely due to base effects, and the downward trend is likely to reassert itself over the next couple of months. It looks increasingly likely that the CPI measure will temporarily dip below 1% in the early months of 2015, necessitating a letter of explanation from the Governor to the Chancellor. This low inflation environment is likely to encourage the MPC to sit on its hands for a prolonged period.
The chart shows the rouble exchange rate against the US dollar and Brent crude oil price. The Russian rouble has depreciated by around 35% since early July and 13% over the past month alone.
Headline industrial production disappoints, but it’s not all bad. Industrial output fell on a decline in mining and utilities output while manufacturing posted a modest gains on stronger durables and nondurables output. While September production data were also revised down slightly, the overall trend remains strong at 4%. Weaker global economic activity may be weighing on growth, but we see strong domestic fundamentals supporting activity.
The flash GDP release for the third quarter confirmed that the German recovery stalled around the middle of the year. Nonetheless, we think that the air of gloom hanging over Germany, which has been exacerbated by both the government and the EC recently slashing their growth forecasts, is not fully justified. Some of the recent weakness in the industrial sector likely reflects a temporary ‘uncertainty shock’ related to the Russia-Ukraine crisis, which should fade. What’s more, the domestically focussed sectors of the economy are faring rather better. As a result, we see Germany surprising to the upside over the next year, with growth reaching a pretty solid 1.6% in 2015 from 1.4% this year, and 2% in 2016. Meanwhile, although inflation inched down to 0.7% y/y in October, it would probably require a further major shock – over and above the recent drop in oil prices – to push German CPI inflation into negative territory. And the chances of sustained and generalised price falls appear to be very small. Against this backdrop, German policymakers are likely to remain particularly resistant to the idea of the ECB implementing full-blown QE.
The minutes from BanRep’s monetary policy meeting last month, in which the policy rate was unanimously maintained at 4.5%, speak to continue neutrality in the coming months. These manifestations are largely in line with expectations, with BanRep continuing to emphasize the inter-play between weakening external demand dynamics, robust private consumption trends and well-anchored inflation expectations. We continue to expect no changes in the policy rate this year and look for BanRep to resume the policy-tightening cycle in the Q2 2015.
Non-oil domestic exports edged up by 1.1% m/m in October but the level of sales was lower than a year ago, as has been the case for most of this year. The picture remains very subdued with weakness recorded across the board reflecting sluggish external demand, most notably from Indonesia and Malaysia. Meanwhile, an ongoing decline in intermediate imports indicates that manufacturing may be very weak in the coming quarters. We will need to see a sustained improvement in demand from China before regional trade can build momentum.
Thailand grew by 1.1% q/q in Q3, slightly weaker than our forecast of 1.3% q/q. This was below the government’s forecast of 1.5-2.0% y/y growth and as a result the official forecast for 2014 has been cut to 1%, closer to our more cautious forecast of 0.6%. Private spending and fixed investment rose in Q3 but government spending fell by 0.3% q/q, likely reflecting delays in the implementation of state projects. Net exports subtracted from Q3 growth as goods export volumes fell on weaker demand and services export volumes fell by the most since Q1 2009. We expect Thailand to grow by 4.1% next year, underpinned by firmer domestic activity and tourism though risks remain high.
The Fed has ended its asset purchases; and the impact will live on longer if it is the stocks rather than the flows than that matter. Tony Yates, a consultant to Oxford Economics and formerly senior adviser and forecast manager at the Bank of England, considers evidence from several sources.
Central bankers viewed QE as a ‘stocks’ policy, though they were mindful not to disrupt markets by buying assets too quickly. Theory also stresses stocks, but has been built on shaky assumptions. The empirical evidence also leans towards the stocks effect dominating in the long run, but there are hints of some flow effects too. And QE might have elements of smoke and mirrors: signals that could relate to stocks or flows, but really communicate things about future interest rates.
If it is the stock that matters over anything but short periods, monetary stimulus remains very high and will unwind only gradually as the Fed’s assets mature and the proceeds are not re-invested.
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