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As the Northeast of the United States awoke to a snow-blanketed landscape, Oxford Economics produced a preliminary evaluation of the macroeconomic impact of Blizzard Juno. Although the New York City blizzard turned out to be a damp squib, Boston and New England were pummelled. We estimate the economic impact would be at most 0.1 percentage points off real GDP growth in Q1.
The US economy remains on solid footing with lower gasoline prices boosting consumer confidence and spending. Business investment appears to have moderated towards the end of 2014 on sluggish global demand and a stronger dollar and we may see some further downward pressure from lower oil capex in the spring 2015, but the momentum remains positive. Strong payroll gains and rising wage growth should also support a gradual release of pent-up housing demand. Overall, we see real GDP growth just north of 3% in 2015. The Fed remains on course for rate lift-off in 2015, but we have pushed our call from June to September since we expect a gradual rebound in wage growth, and the transitory downward energy price pressures to push headline CPI briefly into negative territory in mid-2015.
With all the excitement surrounding Greece’s elections, our Spain desk has been feeling a little...well, peripheral, during the past few weeks. However, a confluence of factors makes an examination of the upstart radical party Podemos’ economic policy prospectus increasingly important and feasible. We present such an examination here.
Mariano Rajoy’s has attempted to paint Podemos as extremists, and a risk to stability in Spain in the mould of Syriza (“Choriza”, if you will). This seems a little over the top. Much of Podemos’ agenda calls for more Europe, not less, while the most radical sounding parts of its manifesto would likely be revised on first contact with the reality of government.
Nevertheless, its plans to ease fiscal policy and repeal the 2012 labour market reforms would have detrimental impacts on Spain’s debt dynamics, possibly risking the hard-won stability Spain is starting to enjoy. Just as well Spain’s Treasury is front loading its debt issuance for 2015 – testing times may lay ahead.
Consumer confidence blew through expectations in January. The index jumped to its highest level since 2007. Consumers remain confident in the outlook for the economy, continuing employment gains, and the potential for faster earnings growth. We expect more upbeat consumers will lead to faster consumer spending as GDP growth reaches 3.3% in 2015.
New home sales surged to highest level since 2008. More affordable conditions and ongoing employment gains supported the advance. Looking forward, we expect a gradual rebound in housing activity supported by strengthening wage growth, modest home price inflation, and lower mortgage rates.
Given the extent of the deterioration in public finances and the degree of repressed inflation, the macroeconomic adjustment that has just started will include tax hikes and a realignment of regulated prices. As such, we now expect inflation to exceed 7% in the coming months. This will prompt the central bank to keep interest rates higher for longer. Although these policy changes should be enough for Brazil to avoid a ratings downgrade to junk status, GDP growth will be undermined in the short term, with the expansion this year now forecast at just 0.1% (after zero growth in 2014).
Larry Summers foresees a protracted period of low demand and low real interest rates, causing long periods of less than full employment as central banks are trapped at the zero bound. This worry seems plausible.
There are policy solutions, but probably not the will to execute them. Therefore, 10-20 years with central bank rates averaging 3%, and visiting the zero bound often, is quite possible, if not obviously the most likely outcome.
A supply-side version of the secular stagnation story – associated with Robert Gordon – forecasts a drying up of improvements in technology. This part of the story is highly speculative and dramatic resurgences of productivity growth associated with ICT seem just as likely.
If the supply-side doom-mongery is correct, then there is little policy could do about it. Hence this would translate into a stalling in growth and prosperity and asset prices and very low real rates.
Tony Yates, a consultant to Oxford Economics and formerly senior adviser and forecast manager at the Bank of England, considers the issues.
Sluggish global growth, stronger dollar, and increased volatility weighing on durable goods orders. Across-the-board weakness was exacerbated by a plunge in aircrafts. Activity continues to advance, but the momentum has slowed. Our favored investment gauge points to moderate activity at the end of 2014. We see a stronger currency, sluggish foreign demand, and increased global uncertainty restraining domestic activity in early 2015, but the domestic momentum looks resilient.
Oil prices are now around 60% down from their latest peak in June 2014 and we expect prices to remain subdued over the coming years. Chinese exports will benefit from lower oil prices as consumers in export markets will have more money to spend on goods. In addition, the profitability of Chinese companies will be helped by lower input costs. As a result, we have increased our GDP growth forecast for 2015 to 6.8% (from 6.5% last month) and 6.1% in 2016 (5.9% previously). However, despite this short-term upgrade, we continue to expect that GDP growth will be below 6% by 2017. In our opinion, there are a number of serious imbalances that would pose a threat to the economy's stability if the authorities tried to keep growth close to 7% in the medium term.
India's economic prospects have improved noticeably over the last month or so. Global oil prices have plunged further, which will help to narrow the current account deficit; this, combined with low inflation and declining inflation expectations, prompted the RBI to cut interest rates by 25bp in mid-January (ahead of the meeting scheduled in February). We expect the interest rate to be cut by a further 75bp over the course of 2015, bringing the repo rate to 7% by the end of the year. As a result of these positive developments, we have raised our GDP growth forecast from 5.7% to 6.3% in 2015, after estimated growth of 5.3% in 2014.
Experience suggests that we shouldn’t read much into this morning’s surprisingly weak preliminary estimate for Q4 GDP. The data has been particularly revision-prone of late and other sources point to greater underlying strength in the UK economy. But even if we take the data at face value there is little cause for concern, with the collapse in the price of oil set to give the UK economy renewed momentum in 2015
The chart shows the balance sheet of the European Central Bank (ECB).The ECB announced intention to purchase €60bn of public and private sector assets per month between March 2015 and September 2016 last week. This means that the overall size of its purchase programmes will be about €1.1trn.
Syriza’s emphatic victory has left it in a position to form a coalition without the stabilizing forces of a moderate party. The gaining of power may prompt Syriza to moderate its stance. But the risk that talks with the Troika collapse and eventually prompt Greece to leave the Eurozone have certainly grown and the road ahead will be bumpy to say the least.
Meanwhile, the rise in the German Ifo index suggests that the likely acceleration in German GDP growth in Q4 has continued in the early stages of 2015.
Excluding the volatile biomedical segment, manufacturing production ended 2014 in the red as sluggish intra-regional trade and a loss of competitiveness continues to weigh on the output. While lower oil prices are a positive tailwind for improving manufacturing conditions this year, much needed restructuring, to improve export competitiveness will continue to weigh on production and will limit the forecast improvement in manufacturing and exports this year as global trade conditions improve.
Exports in China and Japan ended the year on a high note. However, exports for the rest of Asia are little changed and are little more than 3% higher than 2011. While lower oil prices are a positive tailwind for improving exports this year, this optimism is tapered by the latest regional PMI manufacturing data, which suggest that momentum continues to move in the wrong direction.
Existing home sales finished 2014 to the upside. Sales grew in December as lower mortgage rates drew buyers back into the market. Higher prices and lower inventories were a drag on activity. Oxford Economics foresees faster wage growth, low mortgage rates and lesser home price pressures will spur more sales this year.
What distinguishes Ukraine’s likely default form almost every other in history is the extent of uncertainty over how big a haircut is needed to make debt sustainable. In such circumstances, the right policy is a “reprofiling now, bigger haircut later” when the resource envelop is clear. Bondholders should not take too much comfort from the reprofiling. When the main haircut eventually arrives, it will probably be very painful.
To our surprise, monthly retail sales growth remained positive in December, despite expectations that the November’s ‘Black Friday’–related surge in sales would make for a disappointing Christmas for retailers. As a result, 2014 as a whole saw the fastest pace of retail sales growth for a decade. And with consumers continuing to receive a boost from the slide in oil prices, prospects for the retail sector in 2015 look bright.
Just as Syriza’s popularity appeared to be shunting the opposition out of the way to reach the threshold required for overall majority, a slightly wacky TV advert by a small party, previously on the verge of parliamentary oblivion, appears to have pushed Syriza’s train into the sidings. This makes coalition government more likely, but it might not be the coalition we envisaged a few days ago. We predict election outcomes, and implications for GGBs.
January’s PMI data show the Eurozone recovery is proceeding much as expected, with our expectation for a modest upturn in the composite PMI above 52 fulfilled. The upturn was broad-based in one sense, with both the services and manufacturing components ticking up. But in another, probably more important sense, the recovery remains narrowly focused on Germany and (we expect) more competitive peripherals.
The flash HSBC manufacturing PMI index suggests that deflationary pressures intensified in January, while output remains modest as the industrial sector continues to slow.
The authorities will need to resist the urge to be overly-zealous. The Chinese economy is amidst a structural rebalancing and further stimulus could risk fueling a financial bubble.
The central bank (CBRT) cut its key policy interest rate by 50bp to 7.75% on 20 January. Although recent developments in domestic financial markets gave the CBRT some room for manoeuvre, we consider the easing to be premature given the still high level of core inflation. Moreover, the move, coming shortly after the President called for lower interest rates, further detracts from the CBRT's credibility. Given the background of intense political pressure on the central bank and the likely sharp fall in headline inflation during H1 (triggered by the plunge in oil prices), interest rates will be cut again. The premature easing of policy and the boost to consumers' purchasing power from lower inflation may push GDP growth up to 3.9% this year.
Pesident Maduro unveiled new changes to the country's FX regime mechanisms, but the measures did not include a unification of the multi-tiered FX regime. We view the changes as minimal, and while still lacking in details, they seek to address the ongoing USD drought. We still don't expect a unification of the multi-tiered exchange rate system until 2016, but a deepening crisis may eventually prompt the government to take action sooner than it would like.
Since the ECB announced its plan to expand its balance sheet by about €1tn over a two year period, the euro has depreciated by about 17% against the dollar and 9% against its main trading partners. Rumours in December last year of a possible €500bn programme of asset purchases including sovereign bonds have accelerated the downward pressure on the euro. This Research Briefing describes the three main channels though which Quantitative Easing (QE) may impact on exchange rates: effects on yields, cross border flows and risk appetite. It concludes that if the ECB surprises the markets by announcing more than a €1trn QE programme of sovereign QE – involving monthly purchases of €50bn over the next 22 months–, then there is a scope for the euro to fall further.
While the ECB may have belatedly joined other central banks at the QE party, a closer look at the expanded asset purchase programme suggests that it is not quite as big as it initially seems. It appears designed primarily to meet the existing balance sheet target, rather than blow it out of the water.
Nonetheless, the additional asset purchases of almost €50bn or so of per month will be predominantly used to purchase government bonds. No additional private sector assets have been added to the buy list and purchases of ABS and covered bonds, which have averaged about €12bn per month up until now, are being rolled into the new programme. Accordingly, the new measures could prompt government bond yields to fall substantially further.
A further fall in UK unemployment in the most recent data raises the question of just how far joblessness can decline before pay growth and inflation take off. We think that there is plenty of room for unemployment to continue dropping before that eventuality arises. Institutional developments, a more compliant workforce, changes in consumer behaviour and globalisation will all weigh on the ability of firms to raise prices and workers to demand higher wages. Moreover, the collapse in the price of oil, if sustained, could feed through into weaker pay settlements at the same time as boosting activity and job creation. So a sustainable unemployment rate of 4 to 4½%, not seen since the early 1970s, seems a realistic possibility.
President Obama delivered his penultimate State of the Union address on Tuesday, a strong speech long on ideals but short on details. Oxford Economics does not anticipate any substantive policy change as Washington readies itself for the 2016 elections.
Chinese GDP growth in 2014 was the slowest for a quarter of a century, but the slowdown still has some way to go. In our view, the ‘new normal’ growth rate will not be around 7%, but considerably lower. Official data probably still overstate growth, as suggested by a variety of indicators, and the old ‘rules of thumb’ that said that China needed 8% or even 7% GDP growth to preserve social stability are out of date. With population growth slowing, the rate of growth needed to preserve urban employment is likely to slow to around 5% by 2020 – and possibly as low as 4%. A smooth adjustment to slower growth is not guaranteed - unemployment problems could emerge as the economy shifts away from declining and overheated sectors - but blanket stimulus policies in response risk creating financial bubbles. More likely are further ‘targeted’ measures aimed at specific sectors or regions. So a rebound in global commodities thanks to major reflation in China looks unlikely. Some policy surprises are possible though – especially with regard to the exchange rate.
December’s headline public finances numbers capped off a disappointing 2014, with monthly borrowing of £13.1bn coming in well above expectations as well as the £10.3bn recorded a year earlier. That said, a £2.9bn surcharge paid to the EU budget accounted for the entire year-on-year deterioration. And while the OBR’s full-year forecast for 2014/15 looks very challenging, January should deliver several windfalls for the public finances. So the fiscal position should start 2015 on a (relative) high.
Oxford Economics sees the oil price plunge as a net positive for the US economy, but we stress the importance of the different domestic components as well as the international context which make this shock unique. Given low oil prices, we should expect strong consumer spending, modest business investment, a net negative from trade, low inflation and narrow spreads in 2015. DISCo will be the tune in 2015 – Depressed Inflation and Strong Consumers with economy reaching its fastest pace in a decade at 3.3%.
The one-two punch of plunging oil prices and modest wage growth increases the risk of a later Fed rate lift-off than our previous June 2015 forecast. However, we expect just a slight delay until September. The labor market continues to heat up and there are signs that wages are poised to rise. FOMC to stay its current course at next week's meeting.
Housing ended 2014 on a positive note. Starts reached their highest level since 2007, an indication that although the pace of activity remains slow, housing remains on the right path. Reinforcing this, single-family permits also rose to a multi-year high in December. While the recovery is likely to be slow, activity should rise at a healthier pace this year.
To better understand the present, you need to know about the future! A Syriza government? A new programme? Off-track or on track? PSI2? OSI? More elections? And if there is an exit, negotiated or chaotic? We develop a scenario tree, and attach probabilities and bond valuations to no less than 18 “end-games.” We think there is an 18% probability of Greece exiting the Eurozone in the next two years, and that 52 is fair value for the benchmark 2032 GGB. That is 6% below the closing price on January 19th.
The decision of the two MPC hawks to stop voting for a rate hike comes as a major surprise and confirms that a rate hike is well and truly off of the table for the foreseeable future. This morning’s labour market data would also have reinforced the resolve of the doves, with the pace of job creation slowing and a rather underwhelming pickup in wage growth.
Fighting has intensified again in Ukraine, centred around Luhansk and Donetsk – in particular Donetsk airport which both rebels and the Ukrainian army now claim they control.
The rouble has weakened again over the last week to around 65/US$ as oil prices continue to hover just below US$50/barrel. The central bank of Russia now estimates that capital flight from Russia totalled US$150 billion in 2014, double 2013’s level. This underlines the pressure on both parts of the Russian balance of payments (current and financial account) from low oil prices, sanctions and financial instability.
Ukraine’s currency remains near record lows as concerns about debt default mount – a very likely outcome in our view.
Surveying local government leaders worldwide, Oxford Economics, CIMA, and AICPA looked at the evolving role finance is playing in helping government leaders address key performance … more
This study, commissioned by the BVRLA, the trade body for the vehicle rental and leasing sector, investigates the economic contribution the full-service leasing and rental sector … more
This report sets out the contribution of the Emirates Group, Dubai Airports, and the aviation sector as a whole to the economy of Dubai in 2013. It assesses the value of the activity … more
Businessweek: "There is a sense of 'domestic healing' working its way through the European economy, says James Nixon of Oxford Economics Ltd. He talks with Manus Cranny on Bloomberg … more
CNBC: "'Three of the biggest problems that Greece faces are a lack of competitiveness, a huge private sector debt burden and limited political support for relentless austerity,' … more
CNN: "Oxford Economics looked at the impact of cheap oil on the world's 45 largest economies, and found that the U.S. economy would grow a full percentage point faster if oil drops to $40 … more