​The central bank’s board of directors decided by majority vote to maintain its policy rate unchanged at 7.75%, as we had expected. We continue to forecast BanRep will implement its first rate cut in January, once inflation is below 6% and the uncertainty about the quality of the fiscal reform has dissipated.

Meanwhile, GDP growth slowed to 1.2% y/y in Q3 ‒ slightly slower than our forecast (1.4%). We now expect growth of 1.9% for the year as a whole (previously 2.3%), while we continue to expect an acceleration towards 2.5% in 2017.

Money supply growth weakened to its slowest pace since the start of the ECB’s quantitative easing program, but lending to non-financial firms recovered from the summer slowdown, pointing to increased economic growth in Q4.

François Fillon’s victory in the French conservative party’s primaries is a clear sign France will redefine its economic model with the next president in 2017.

The OECD lifted its global GDP growth forecasts by 0.1pp to 3.3% for 2017 on the back of expected US fiscal expansion.

​Export growth in both nominal and volume terms improved somewhat from September's weak outcome. However, the diverging trends between North Asia and South and South East Asia highlight that the improvement in global trade growth is going to be gradual, with the monthly numbers susceptible to volatility and setbacks.

Overall economic growth held up in October, with investment momentum (FAI) picking up somewhat, in part because of still solid real estate activity. Rising output prices in industry will continue to boost nominal sales revenue and profit growth and reduce industrial enterprises' need for external financing. However, while exports improved somewhat in October they remain unconvincing and household consumption showed signs of slowing.

Looking ahead, the export outlook remains modest, given global demand prospects, while real estate investment is likely to be affected by the recent policy measures to slow fast gains in house prices. However, corporate investment – notably, private investment – has probably bottomed out for now. On current trends China can comfortably meet the target of at least 6.5% GDP growth this year – we expect 6.7%.

The outlook for next year depends a lot on the extent to which the authorities will maintain credit growth. The Trump win creates more uncertainty and challenges for China as a shift in US policy on globalisation and free trade will have repercussions for China's exports. Furthermore, a rapidly strengthening US$ amid firmer expectations of US interest rate rises is increasing the pressure on the CNY.

​The strong US$ has taken its toll on the CNY in recent months, although it has been flat in trade-weighted terms. In a strong US$ world we expect the PBoC to continue to allow some depreciation, but resist significant CNY weakening. We now forecast the CNY/US$ to reach almost 7 by end-2016 and hover around that level throughout 2017.

The CNY depreciation is mostly driven by the surge in the US$ as markets bet on wider fiscal deficits, stronger economic growth and higher interest rates in the US under Donald Trump’s presidency. In fact, the CNY has weakened less than other currencies have, leaving China’s trade-weighted exchange rate broadly constant.

Since 2015 the PBoC’s policy has been to allow some deprecation in the face of pressures but to intervene to manage the pace, reducing FX reserves in the process. Going forward, capital account factors point to further CNY/US$ depreciation. But real economy considerations will lead the PBoC to continue to dampen those pressures.

Meanwhile, the strong US$ will complicate Trump’s aim to shrink US trade deficits, further weakening the case for a major CNY/US$ depreciation, in our view.

To contain FX pressures in this such a setting, policymakers will not shy away from further tighten capital account restrictions if needed. They could also take lower profile steps such as slowing down SOEs’ outbound investment and banks’ overseas lending.

The Chancellor adopted a cautious approach in his first (and last) Autumn Statement, implementing a modest fiscal stimulus package which is unlikely to have a material impact on the outlook. But he should be congratulated for adopting a more pragmatic set of fiscal rules, which offer plenty of wiggle room.

The OBR surprisingly opted to tackle the Brexit question head-on, forecasting GDP to be 2.4% lower by 2021 than it would have been had the UK opted to ‘Remain’. But in our view, the OBR’s chosen approach does not lend itself to a coherent view of the impact of Brexit and the results require sizeable caveats.

Once again the OBR was forced to revise down its forecasts for tax revenues and upgrade its projections for borrowing. However, with the new fiscal rules being much less stretching there is still plenty of scope for slippage in future forecasts.

In light of a better-than-expected performance from the economy since June and the anticipated deterioration in the public finances, it was unsurprising that the Chancellor announced only a modest discretionary fiscal loosening.

The bulk of the action was on the spending side, including the creation of a ‘National Productivity Investment Fund’. While this will deliver a helpful kick to public sector investment, it will still leave average investment spending as a share of GDP in this parliament below that of the previous five years.

There was some row-back on previously announced cuts to working-age benefits. But this will only go a small way to relieving the hit to benefit recipients from the remaining cuts, a hit that will only intensify in an environment of faster inflation.

Meanwhile, there was little to report on tax policy, with a rise in some ‘stealth’ taxes offset by a continued freeze on fuel duty and a reaffirmation of the election pledge to raise income tax personal allowances.

French consumer confidence remained at its post-crisis peak of 98 in November, showing that household sentiment is benefiting from the labour market recovery. This adds to a number of already-released surveys corroborating our view that GDP growth in Q4 will bounce back to around 0.4-0.5%.

Meanwhile, the French centre-right party Les Republicains is holding its second round of primaries on Sunday, with François Fillon, winner in the first round last weekend, favourite to clinch the nomination.

​A change in government and fiscal reforms provided a huge boost to policy credibility in 2016, and the further improvements will likely come via passing the test of time. Further rebalancing of the fiscal-monetary policy mix will be more gradual, but we think bond yields to fall by 150-200 basis points to 10% by end-2018, a slower pace of convergence with international norms, but still lucrative for investors.

In particular, we think that, as of now, the bond market is not pricing in enough rate cuts by the central bank (BCB). Market consensus and our estimates suggest that, by having regained control of expectations, the BCB will be able to cut the policy rate to single digits in 2018 whilst keeping inflation at the target. With short rates expected to fall by another 475 bps in the next 24 months, bond yields have room to fall considerably below this year's low of 11%, meaning an opportunity to buy.

Another factor reinforcing our call is the increased predictability of fiscal policy brought by the 20-year spending cap. By ensuring that government expenditure will be flat in real terms in the long term, authorities managed to spread the cost of a 5% of GDP fiscal tightening over several years. As such, the debt-to-GDP ratio will fall steadily from 2020 onwards without the need for tax hikes, hence minimising the cost to growth.

Risks are significant but not sufficiently big to undermine our positive view. Domestic risks are a U-turn towards populism in the 2018 general elections, or the escalation of the 'lava jato' corruption scandal and its impact on President Temer's mandate. Exogenous risks include a sustained increase in US yields that could spark a return to a global risk-off trade similar to the 2013 'Taper tantrum' which could also lead to a spike in EM yields, with high-Beta Brazil one of the most affected countries.

Quarterly GDP growth in Q3 was left unrevised at a reasonable 0.5%. And the expenditure breakdown delivered a much better-balanced picture than of late, with business investment up and a healthy contribution from net trade.

Granted, as higher inflation starts to bite, prospects for growth look set to deteriorate. But Q3’s performance suggest that the supposed adverse effect of uncertainty on activity may not be as great as previously feared.

​Headline inflation rose 0.2% y/y in October, up from the -0.5% fall in the previous month. Although this marks the first positive inflation figure since March it was primarily driven a temporary surge in fresh fruit and vegetables. Excluding fresh food inflation was down -0.3% on the year.

Inflation is expected to slowly edge up over 2017 as the large drag from low energy prices on headline inflation fades. The recent depreciation of the Japanese yen should also help lift consumer prices. However, overall inflation is still projected to remain low, rising a modest 0.1% next year.

​The FOMC minutes from the November 1-2 policy meeting support our view that officials will lift interest rates by 25 basis points at the December 13-14 FOMC meeting. Economic data released since the meeting point to firmer economic activity and moderately faster inflation. Q3 real GDP is likely to be revised up to 3% and incoming data suggests a similar 3% pace of growth for Q4. Overall CPI has accelerated to a 1.6% annual pace as of October, and wages - as measured by the Atlanta Fed - are running at a near 4% pace as the labor market continues to tighten.

The policy meeting took place before the November 8 elections, so there was no discussion about possible future economic policy changes or the dramatic shift in financial market sentiment. At the upcoming December 13-14 meeting policymakers still won't know what economic policies a new Trump Administration and Congress will implement. So they will decide the near-term course of monetary policy based on current economic data and financial market developments.

While most policy makers said it "could well become appropriate to raise the target range for the federal funds rate relatively soon", the minutes also highlight the ongoing divide between the current hawks and doves on the FOMC committee.

The German Q3 GDP breakdown points to strong domestic demand and a drag from net trade. Sentiment indicators remained strong in November in Germany and France, further pointing to a pick-up in Eurozone activity in Q4.

The ECB financial stability report highlights the resilience of the financial industry over the past six months despite market turbulence.However, it also suggests that political risk, bank profitability concerns and heightened risk in the shadow-banking sector all raise the possibility of financial stress in the near future.

Since Trump’s election victory the yen has depreciated nearly 8% against the USD. We have lifted our short term ¥/$ projection but based on a more modest increase in US fiscal spending than current priced in, we see US yields lower and the yen drifting back to 104 mid‑2017.

That said, global uncertainties have risen and the possibility of stronger US growth, higher yields and a weaker-than-projected-yen have increased.

A weaker yen would be good news for the BoJ but it could also necessitate further tweaking in the BoJ’s monetary policy stance. If Japanese yields were to rise on the back of higher US yields, we would expect the BoJ to increase its asset purchases to maintain its 0% 10-year yield target. But there are operational limits to ‘unlimited asset purchases’, which could give rise to concerns that once again that the BoJ is running out of ammunition.

​Q3 GDP growth was revised higher from the advance estimated but still showed a contraction in the quarter, with growth down 2% quarter-on-quarter (saar). The service sector, which accounts for two thirds of the economy has now contracted for three consecutive quarters.

We expect a modest improvement in manufacturing and further fiscal spending to help the economy avoid a recession, but another negative quarter cannot be ruled out. With elevated global uncertainties following Trump's election victory we expect the recovery in global trade, and service sector activity, will be bumpy and there will be setbacks. GDP is forecast to grow 1.4% this year with a modest improvement in 2017.

The relative rankings in the EM vulnerability scorecard have not changed much over the last six months. Turkey, South Africa and Brazil remain at the bottom of the rankings i.e. the most vulnerable, while Thailand, the Philippines and Korea score as the least vulnerable.

However, it seems likely that the rankings will be more volatile over the coming twelve months as the EMs get shaken up by the economic and financial repercussions of President Trump.

Of the three most vulnerable countries currently, Brazil may be the best placed to weather the likely turbulence, notwithstanding its many problems. It has the advantage of being a relatively closed economy, inflation is now on a firm downtrend – providing scope for interest rate cuts, macro policy management has clearly improved over the last year and the current account deficit is not much more than 1% of GDP.

By contrast, South Africa and Turkey's external deficits are 4% of GDP or more and highly reliant on funding from the global financial markets; and at the same time political developments in both countries are eroding their respective medium-term growth outlooks.

Meanwhile, if the US Congress allowed President Trump to implement a highly protectionist agenda, Korea's position, currently ranked as least vulnerable in the scorecard, would be undermined, while less trade-dependent Asian economies (such as India and the Philippines) might be better placed.

Although Mexico is currently mid-table in the vulnerability scorecard (albeit in the bottom half), its position could deteriorate markedly if President Trump follows through on some of his campaign policies – as these would reduce Mexican growth, push up inflation, widen the external deficit and encourage capital outflows.

​New home sales were softer than expected in October, but were still up 17.8% year-over-year.  Improving inventory conditions will support growth in new home sales, although higher mortgage rates will probably take a toll at the margin.

​Consumer sentiment rises in post-election rebound, conditions improved both for current and expectations. Inflation expectations remained low, but well-anchored. 

October durable orders surged by 4.8% owing to a near doubling of civilian aircraft orders. The underlying data after subtracting the volatile civilian aircraft orders continues to reveal a disappointingly flat trend. While most Fed officials have been disappointed with the weakness in capital spending, the recent strength in consumer spending has been welcomed. The October strength in overall durable orders keeps a December rate increase on track

The Eurozone composite PMI rose to an 11-month high in November, suggesting that growth is likely to accelerate in Q4. So far we only have country level readings for Germany and France, with the latter showing signs of a recovery from earlier in the year. As it stands, growth in Q4 should increase to 0.4-0.5%, reflecting the pick-up in other confidence and sentiment indicators released earlier in the month.

Adding further points of debate for the upcoming ECB December meeting, the survey revealed that price pressures in the region are increasing as firms are less willing to absorb higher costs, contradicting weak October inflation figures revealed earlier this month.

​Bank Negara left its policy rate unchanged at 3%. Today's outcome was not a surprise given the sharp depreciation in the MYR since the US election.

The MYR is among the most vulnerable currencies among EM Asia due to a large proportion of debt held by foreign investors. We look for the MYR to remain elevated against the USD for the coming months and expect Bank Negara to remain on the side lines at least until uncertainty surrounding Trump's policies ease.

​Existing home sales increased 2.0% in October to their strongest pace since 2007.  Stronger than expected readings on housing starts and home sales have contributed to an upward revision to our forecast for Q4 GDP.

The speed of the ongoing housing market recovery in the Netherlands is starting to raise concerns about whether the Dutch are headed toward another sharp correction. For now, we see little risk of overheating. Price indicators are still well below their (unsustainable) pre-crisis peaks, while indebtedness ratios – although at very high levels compared to peers – are on a downwards trajectory. Our forecast is that house prices will rise by a robust 5% in 2016 and another 4.3% next year, as demand holds up, while supply continues to lag.

Following a painful crash in 2013, the Dutch housing market recovery is gathering momentum again. Prices rose by 5.7% on the year in Q3 2016, and residential property investment is booming. There are three main factors underpinning the current recovery: solid economic fundamentals, accommodative monetary policy and, as its consequence, low mortgage interest rates and finally, improved affordability. While the first two are set to support demand further in the near-term, affordability will obviously deteriorate as house prices continue to rise.

On the whole, we see house price growth decelerating to around 3% in the medium term, as the recovery levels off. Given the relatively positive demographic picture (average 0.3% population growth rate up to 2020), demand is likely to hold up. Furthermore, even with soaring private dwellings investment growth at the moment, supply is struggling to keep up. These factors should ensure that house prices continue to edge up in the medium term.

Nevertheless, there are a number of downside risks: risky consumer behaviour, relaxation of lending standards which were tightened after the crisis, an economic downturn or the escalation of already overheating regional markets – such as Amsterdam – could all tip the housing market once again.

​The market reaction to the US election result has been relatively positive for advanced economies, but for emerging markets (EM) mostly negative. EM market moves lean more towards expectations of a ‘malign’ Trump presidency featuring protectionism and weaker world growth rather than a more ‘benign’ one centred on fiscal stimulus and deregulation. 

The impact of a Trump presidency on EM may operate through a number of channels – higher external funding costs, lower capital inflows, balance sheet effects, commodity prices and protectionism. 

A ‘benign’ Trump scenario focused on fiscal stimulus and deregulation might benefit some EM assets. However, it is hard to see much upside for EM assets in a ‘malign’ Trump scenario featuring a sharp rise in protectionism. And the reaction of Mexican assets suggests markets are taking this risk seriously. 

We have constructed a scorecard for 28 EMs based on sensitivity to ‘benign’ and ‘malign’ Trump policy mixes. Countries at risk include those with weak external liquidity positions and/or high levels of manufactured exports to the ​US, e.g. Mexico, Malaysia, South Africa and Turkey. In the ‘malign’ scenario, prospects for Asian countries such as Thailand, Indonesia and even China deteriorate. 

Potential relative ‘winners’ include industrial metals exporters like Chile (especially in the ‘benign’ scenario) and also exporters of commodities facing inelastic demand such as oil. This is especially so in the more ‘malign’ case.

Comparing recent moves in EM currencies and sovereign spreads with the sensitivity scores from our scorecard suggests these markets pricing in more ‘malign’ than ‘benign’ Trump outcomes. The contrast between this and the positive reaction of advanced economy markets suggests scope for further sharp market moves ahead.

Venezuela's national oil company PDVSA missed coupon payments on its 21s, 24s and 35s bonds. However, we believe the delayed payments are just a technical mistake and the coupons will be paid within their 30-day grace period and not entail an event of default.

It would simply not make sense to default on US$404 million coupon payments just a few weeks after paying US$2.1bn in bond maturities while still having US$10.8bn in foreign exchange reserves. Thus, we think that yesterday's 4.5% fall in PDVSA bonds could be a good short-term buy opportunity.

Delivering the ECB annual report at the European parliament, President Draghi defended once again the extraordinary level of monetary stimulus as a key element in supporting the economic recovery. Although Draghi acknowledged inflation will continue to rise in the coming months, he remained dovish, stating the ECB does not see a sustained strengthening in underlying price dynamics.

Draghi also reiterated that a return of inflation towards the ECB target is still dependant on the continuation of the current level of monetary support, all but ensuring that the ECB will extend its QE programme beyond March.

October’s borrowing figures provided the Chancellor with a rare piece of better news ahead of tomorrow’s Autumn Statement. But borrowing still looks likely to come in well above the OBR’s Budget forecast for 2016-17 as a whole.

The pace of deficit reduction remains frustratingly slow and is likely to encourage the Chancellor to take a cautious approach tomorrow.

​In our November global macro chartbook we summarise our views on key global themes and asset prices. We also highlight the contributions of our recent research.

GDP growth registered a relatively robust 0.7% q/q in Q3 2016, underpinned by strong domestic demand, in particular private investment, offsetting a negative contribution from net exports. The better than expected Q3 outturn has prompted an upgrade to our full-year GDP forecast for 2016, but fundamentally our outlook for Korea has not changed, and we expect overall growth to slow over the next 12 months.

In particular, recent growth has been underpinned by a construction boom that is unlikely to be sustained going forward. The housing market is now showing signs of cooling. Meanwhile, the ongoing corporate restructuring of shipbuilding and other financially vulnerable sectors will constrain corporate profitability and weigh on non-construction investment growth. Private consumption has shown steady growth recently, but here too we expect growth to slow, undermined by rising inflation, weaker employment growth, and high levels of household leverage. Furthermore, sentiment is likely to deteriorate as the government is embroiled in a political scandal that will likely drag into next year and may bring down President Park Geun-Hye. However, the difficult background will mean that fiscal and monetary policy remains supportive of growth in the short term.

After a solid start to 2016, the French economy has suffered a series of setbacks including strikes, terrorist attacks and floods and GDP rose by a disappointing 0.2% q/q in Q3 following a small decline in Q2. Despite this softness, however, other key indicators point to underlying improvement with consumer spending supported by a gradual fall in unemployment and investment underpinned by recovering credit growth, rising capacity utilisation and corporate profitability. GDP growth is therefore still expected to edge up to 1.3% this year.

We have, however, nudged down our 2017 growth forecast to 1.4% on the back of fresh uncertainty generated by Donald Trump’s election win – particularly on investment and trade. And there is also rising uncertainty on the domestic political scene, as politicians and parties manoeuvre ahead of presidential elections next year.

On balance, the weekend’s political events in Germany and France are good news for those fearing that mainland Western Europe in 2017 may prove the next key victory ground for populism.

The news that François Fillon has ended Nicolas Sarkozy’s political career and will probably be the centre-right candidate for French president perhaps lessens the chances of a Le Pen victory in the presidential elections next year. Meanwhile, Angela Merkel’s decision to stand for a fourth term suggests that the broad status quo in the Eurozone’s largest economy will be maintained after the Federal election in around a year’s time.

​GDP growth slowed to 3.2% in Q3, undershooting consensus expectations, although not ours. Government consumption recorded its largest year-on-year decline since the national statistics series began. However, a large positive contribution from net exports and a more modest rise in private consumption enabled seasonally adjusted GDP to increase by 0.6% on the quarter. Looking ahead, growth is likely to remain around 3% over the next year, albeit temporarily softer in Q4 2016 reflecting the economic impact of the King’s death.

Q3 GDP growth came in at 5%, below our forecast. Government consumption contracted, pulling overall growth lower. Lower government spending was also evident in cooling capital investment growth. Given the fiscal consolidation in Q3, we may see some pick-up in government spending in the final quarter of the year, although we do not expect it to offset the sharp decline in Q3.

Meanwhile, domestic activity indicators including those on private consumption have been patchy in recent months. Against this backdrop, we do not expect to see a significant pick-up in growth in Q4 and have thus lowered our annual GDP growth forecast for 2016 to 5% from 5.1% previously. Given the lacklustre growth outlook, we now expect the central bank to cut interest rates in Q1 2017.

While we continue to expect major divisions at December’s ECB meeting over the future of the QE programme, we now think the events of the past couple of weeks will have swung the argument decisively in favour of the more dovish contingent on the governing council.

Therefore, our new baseline view is that the ECB will announce that it plans to continue to purchase €80bn of assets per month until September 2017 –six months beyond the current planned termination date.

As we had expected, at its November policy meeting Mexico's central bank raised its policy rate by 50bp to 5.25% to counter the additional inflationary pressures stemming from the peso's depreciation following the US elections.

Going forward, we cannot rule out a reactive 25bp rate hike in December if the US Fed implements its long-awaited second rate rise. More importantly, we expect Banxico to continue increasing its policy rate to 6.0% by mid-2017 in an effort to ensure that inflationary pressures and expectations are contained.

GDP rose 0.5% on the quarter in Q3, underpinned by a solid rebound in exports while domestic demand remained sluggish.  The data, together with a modest upward revision to the outlook for exports and business investment, have prompted an increase in our GDP growth forecasts to 0.8% this year and 0.9% in 2017, compared to 0.6% pa last month.

The yen has depreciated by around 5% against the USD since Mr. Trump's victory in the US elections. We look for some of this to be reversed and for the JPY to edge towards 104 in H1 2017; however, the risk of a weaker than expected yen has risen.

President Draghi sees inflationary dynamics still significantly subdued in the Eurozone and the recovery very reliant on monetary easing. This suggests the ECB is likely to extend its QE programme beyond March 2017.

Sunday’s French centre-right party primary election has become a three-way race between former prime minister Alain Juppé, François Fillon and former president Nicolas Sarkozy.

The most recent activity data support our view that the economy went through a soft patch in Q3, with real retail turnover falling 0.1% q/q and the PMI surveys showing modest declines in August and September. Uncertainty over the direction of US policy following the election of Donald Trump will also weigh on growth in the near term. The strong start to the year means we still expect GDP growth of 2.9% this year, but we have downgraded next year to 2.4%.

The RBA held the policy rate at 1.5% at its November meeting. The Board noted the increased uncertainty in the international outlook and the ongoing transition of the economy to the end of the mining boom. But it was somewhat more positive on the outlook for the economy, and expects it to grow at around trend pace in the near future. Given this assessment we expect the policy rate to remain on hold until H1 2018, when GDP growth is set to outstrip potential and inflation pressures will begin to build. We expect rate normalisation to occur gradually, finishing in the early 2020s.

​Housing sales growth and price increases both slowed in October, amid fierce tightening measures imposed by 20+ local municipalities over the past month. Although new construction and investment held up so far, we expect the tightening to eventually affect real estate investment and the real estate growth engine should shift into a lower gear. That said, the risk of a sharp property downturn is limited in the absence of a significant co-ordinated national-wide policy tightening.

In this note we discuss recent developments in the housing market, identify the key causes and consequences of the latest housing rally and draw implications.

The latest housing rally, which began in the second half of 2015, has been a crucial driver for China’s economy. However, the recovery – which owes a lot to nationwide policy stimulus aimed at reducing the stock of unsold housing in lower-tier cities – caused prices to surge in Tier-1 and some Tier-2 cities.

While fundamental demand remained strong in large cities – underpinned by urbanisation trends, stronger income growth and still favourable demographics – price increases were amplified by speculative demand, excess liquidity and easy credit as investors chased a limited choice of ‘safe assets’.

However, in lower-tier cities, inventory levels remain sizable. At the root of this two-sided picture are the uneven land supply policies across different types of cities. Small cities are heavily reliant on land sales revenues, while large cities are supposed to contain their expansion and have incentives to contain land supply so that prices remain high.

​Housing starts jumped 25.5% in October, with strong gains in both single- and multi-family starts.  While the October pace of starts might not be repeated in November, this report marks upbeat residential investment activity at the start of Q4.