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With 2014 slowly coming to a close we reflect on the economy’s 3% growth miss with a special emphasis on the disappointing housing sector. After slowing down sharply in the latter half of 2013 and being severely hit in early 2014 by extreme weather, the housing recovery failed to materialize in 2014. Why did this happen? What impact did this have on the economy? Could this repeat in 2015? Using Oxford Economics’ Global Economic Model, we examine the impact of a failed housing lift-off in 2015.
House prices fell by 1% on the month in September and contracted for the first time year-on-year in this downturn (-1.3%). The number of cities experiencing an annual fall in prices increased sharply and is already close to the peak seen in 2011/12. With developers under sever funding pressure and excess supply at a record high, the current downturn will likely be deeper and longer lasting.
This morning’s data confirms that UK growth has peaked and is now gently cooling, but we remain on course for growth of 3% for 2014 as a whole, which is likely to top the G7 rankings. And as ever we would not be surprised if the ONS were to subsequently revise up the latest quarter, particularly for services output. That said, momentum has cooled a little and we are likely to see the economy continue to grow at this slightly slower pace in the short-term.
GDP rose by 0.9% q/q in Q3, in line with our expectations and up from 0.5% q/q growth in Q2. The authorities announced 11.7trn won of stimulus in July and aided by this, private spending and construction both picked up markedly. Very expansionary monetary and fiscal policy will feed through to broader activity in coming quarters but machinery investment fell by 0.8% q/q in Q3, under pressure from the weak external outlook and marking the second decrease in three quarters. Indeed net exports subtracted from headline growth as goods export volumes fell by 3.1% q/q, the biggest drop since 2008. We are becoming increasing cautious about growth prospects in China and subdued Chinese demand is likely to continue to dampen trade prospects for the region.
Although industrial activity fell in September, the pace of decline was less severe than was projected by the Q3 advance GDP estimate of last week. As a consequence, Q3 GDP is likely to be revised up slightly to 2.5% y/y versus the initial estimate of 2.4% y/y.
The September trade figures point to a sharp erosion, with the surplus narrowing to $7.7bn on a 12-month basis, down from $8.0bn in August. Lower global commodity prices, reduced external demand and restrictions on USDs are undermining export growth. We’re thus lowering our trade surplus forecast for this year and 2015.
Inflation continues to push higher, up 0.50% 2w/2w during the first half of October for a headline reading of 4.32%. Much of the upside price surge stemmed from rising electricity rates and seasonal price trends, and we anticipate sustained price pressure throughout the remainder of the year, with a headline CPI forecast of 4.0%.
A broad-based pick-up in trade flows, with the exception of Singapore, should have provided some positive news on Asia, something which is increasingly hard to come by at present. But unpicking the data, and aligning it against survey data on future prospects, suggests further weakness ahead.
The global outlook into 2015 is fraught with noted challenges and rapidly-shifting policy dynamics that threaten to pressure the world economy. However, after a slippery start, a recovery in the Mexican economy is evident and seemingly sustainable into 2015 and beyond. Demographic advantages, productivity gains, the reform agenda and sound macroeconomic stability underscore our constructive view on the long-term Mexican macro outlook. Despite clear domestic and external challenges, the country is well positioned to extend the Mexico moment.
The Philippine central bank has interrupted its tightening cycle after inflation dropped to 4.4 % in September. Lower inflation along with a moderation of money growth will have influenced the stance as previous rate hikes are gradually taking effect. However, in light of the lower target range for inflation next year and higher US interest rates, we still expect another 25bp rate hike this year and further tightening throughout 2015.
The army takeover in May secured short-term stability for Thailand. It revived previously held up government spending and prompted a rebound in consumer confidence. At the same time financial markets have performed strongly and FDI flows have remained substantial. However, although some parts of the economy have picked up quickly, other areas have remained sluggish. The latter is in line with the fact that Thailand’s economic performance since the mid-2000s has been modest compared to its regional peers, with confidence in the future steadily undermined by the political tensions. We expect Thai GDP growth to be under 4% per year in the medium term. Moreover, while there are few hopes of a significant improvement in the political climate, the risk of a disastrous outturn appears far from negligible, such as if the 86 year old king was to die and there was a disagreement over the succession to the throne. A development such as this would cause financial market turmoil, major capital outflows and a deep recession.
After a fairly torrid couple of months when some measures of industrial activity have been slowing appreciably, the latest PMI data suggest activity is close to bottoming out, albeit at a low level. The German manufacturing index was back into positive territory suggesting that the uncertainty shock from Russian sanctions is beginning to dissipate. More disappointingly the French index showed little sign of any improvement despite the sustained fall in the euro in recent months. Separately, the Bank of Spain released its early estimate pointing to a 0.5% q/q expansion in Spain in Q3.
Some of the weakness in September’s retail sales data is likely to be weather-related and should reverse. But there has been a loss of momentum over the summer, which we attribute to the continued squeeze on real wages. However, with inflation remaining low and the first rate rise now some way away, there is scope for consumers to play a stronger part in the UK growth outlook over the next few quarters.
The flash HSBC manufacturing PMI index edged up slightly in October. However, at 50.4 it is only slightly above neutral and growth is likely to continue to come under downward pressure from a deteriorating real estate market. The authorities will need to lower their growth targets for 2015 and beyond as the stimulus required to sustain a higher pace of growth could lead to a sharper correction later.
Retail sales rose in August by 4.4% y/y, beating market estimates and supporting evidence of improving private consumption trends in the Mexican economy. Important methodological changes to the series could undermine the headline figure, but underlying trends due point to firmer consumption dynamics into the 2H period.
As the end of US quantitative easing approaches, have some emerging economies missed the reform boat? This article looks at what reform really means and what emerging markets need to do next. Continued improvements are the key to sustaining growth, but progress gets harder the more advanced an economy becomes, regardless of how supportive foreign capital flows might be.
This has been no ‘normal’ consumer recovery. The emphasis on rising employment levels, rather than wage growth, to drive the improvement in real incomes means that while the collective spending power of UK households has strengthened, many individual households continue to feel squeezed. A tightening labour market and emerging skills shortages will improve workers’ wage bargaining power, but progress will be gradual and, for many workers, limited by the impact of further strong growth in the labour supply. Therefore, with little scope for households to further reduce the share of income saved, consumer spending growth is likely to remain relatively subdued, lagging well behind the growth rates achieved over the decade prior to the financial crisis.
Inflation still in check. Consumer prices rose in September on higher food and shelter costs. Energy prices fell further, preventing an otherwise more robust rise of the headline index. Inflation remains modest and continues to pose little threat to the economy. Subdued inflationary pressures will keep the Fed in an accommodative stance well into next year.
Goods exports rebounded strongly in September. Some of this will be distorted by the new iphone release, however a broad-based rise beyond electronics provides some encouragement that the depreciating yen may be translating to better exports volumes. Imports also posted strong growth, widening the trade deficit in the process, but a pick-up in capital goods imports bodes well for industrial production, while falling oil prices should ease the burden of fuel imports going forward.
On the face of it, the minutes of October’s MPC simply continued a theme, with two Committee members once again dissenting and voting for a hike in Bank Rate. But the majority doves on the MPC are looking ever more dovish, and the possibility of inflation dropping further puts Messrs. Weale and McCafferty in an increasingly awkward position. With disinflationary forces dominating, we think the MPC will stick to no change in policy until well into 2015.
Consumer prices rose by 0.5% q/q in Q3. This took the headline annual inflation rate to 2.3%, down from 3% growth in Q2. Today's outcome will reinforce the RBA's message that 'a period of stability in interest rates' is needed, and we still expect rates to remain on hold well into 2015.
October IPCA-15 inflation printed at 0.48% m/m, below consensus, but still indicative of a headline 6.62% figure. Underlying inflationary trends remain worrisome and we continue to forecast a year-end inflation rate of 6.55% in 2014. To that, our Selic rate call for 2014 and 2015 remains unchanged at 11%, with some upside risks to 2015.
Existing home sales rise to their highest level this year. Sales recovered in September as abating price pressures and low interest rates pulled buyers back into the market. However, very low inventory continues to hold back a further increase in sales. While slow housing sector activity remains a clear risk to the economy, Oxford Economics believes existing home sales will trend higher in coming months as economic activity rises and wage growth gradually materializes.
GDP expanded by 7.3% in Q3, supported by the services sector continuing to expand faster than headline growth and the secondary sector remaining broadly stable. But with signs of the sluggish state of domestic demand increasing, the authorities will have to lower their 2015 target sharply.
The spot price for Brent, an important marker for crude oil, fell below $85 per barrel (pb) in mid-October, down more than $30 from its peak in June. The collapse is more shocking because Brent had been moving within a fairly narrow range around $105 pb for much of the previous two years. Now, consumers, suppliers, investors and government officials all want to know what caused the break and where the price of Brent is going from here. We think there are reasons to believe that oil prices will settle close to $90 pb in the medium term, given the weaker fundamentals brought about by softer demand growth and increased availability of non-conventional liquids. The latter might also result in a more diverse, competitive global oil market, less prone to supply disruptions.
Another dire set of figures for the public finances have put the Chancellor in an awkward place ahead of the Autumn Statement in early December. Deficit reduction has not just stalled but started to go into reverse and it looks likely that the OBR will have to make some hefty upward revisions to their borrowing forecasts, not just for this year but for future years as well. There is certainly no room for pre-election sweeteners and further difficult decisions may have to be made.
Extreme volatility in the markets is back. This time, however, much of the dislocation stems from rising growth tantrum threats, particularly related to the weaker growth in China, deflationary risks in the EU and Japan, and fears that the US recovery will not be strong-enough to propel global growth. A recent simulation using Oxford Economics’ Global Economic model suggest that the while LatAm is not immune to a global slowdown, the depth of the downturn would be less-acute than feared.
Given recent disappointing data, both at a national and Eurozone level, we now forecast that GDP will fall by 0.1% in Q3, following on from a decline of 0.2% in Q2. As a result, we think that the economy will contract by 0.3% in 2014 as a whole. We then expect activity to improve only very gradually, with GDP expanding by 0.1% in 2015. However, the draft budget for 2015 is moving in the right direction, with some cuts to tax burdens and new incentives to take on full-time employees. These could provide an upside risk to our GDP forecast.
Economic activity has been stagnating since the beginning of the year, with no sign of either an upturn or a relapse in Q3. Private sector output declined further in September with both manufacturing and services PMIs remaining below the 50 “no change” mark. No positive contribution is set for net exports in Q3 or for 2014 as a whole – despite the weakness of the euro since May – further highlighting the steady erosion of France’s competitiveness. Looking ahead, only private consumption is set to show reasonably solid growth next year – though even here, there are risks to spending patterns from lower prices: core inflation dropped to 0% in September and we have revised down our inflation forecasts for the remainder of 2014. With GDP growth of just 0.4% this year and 1% next, France continues to lag the Eurozone – both in terms of the speed of recovery and the pace of structural reforms.
The chart shows UK consumer price inflation.CPI inflation dropped to 1.2% in September from 1.5% in August and 2.6% on average in 2013. The fall was mainly driven by volatile components such as food and transportation.
Fighting in eastern Ukraine (especially, over the strategically important Donetsk airport) continues despite the supposed ceasefire. However, the fighting less intense than a few months ago.
President Putin met his Ukrainian counterpart in Milan on 17 October, but there was no breakthrough. The two sides remain at odds over the issues of gas supplies and Ukraine’s territorial integrity. Parliamentary elections are due in Ukraine on 26 October, with rebels in eastern Ukraine planning their own polls on 2 November. These elections could be further flashpoints.
Probability of negative conflict scenario: 15% (last week: 15%)
Domestic fundamentals suggest the US economy is finally poised to reach the coveted 3% sustainable growth path. However, plunging commodity prices, equity prices and bond yields have provided an early Halloween fright that global growth is much slower than expected. While the US is a relative bright star, it is not immune to a sharp global slowdown. Running a global slowdown scenario with Oxford Economics' Global Economic Model suggests US growth is dampened, but a recession would be avoided.
As expected, the BCCh delivered a 25bps cut in the policy rate to 3.00%. The tone of the communique however, points to a more neutral policy stance that corroborates our forecast for no additional policy easing this year. We sense deeper growth constraints would be needed to push the BCCh towards a more dovish stance
With Jokowi set to be officially inaugurated as president, all eyes will be focused on whether he can be true to his word and implement much-needed reforms to boost Indonesia’s gradually slowing economy. Despite his appeal to the electorate, Jokowi has struggled to win over allies in parliament. He will lead a minority coalition in the House of Representatives, facing up to a potentially hostile opposition. Cutting fuel subsidies will be his first major challenge, and failure to do so would damage Indonesia’s growth prospects.
Housing starts and permits back over the million mark. The rise in housing starts was primarily driven by multi-family as single-family starts failed to accelerate much. Building permits reflected a similar tone as multi-family permits rose and single-family declined. Despite this monthly uptick, housing activity remains under stress and is still a key risk for the economy.
World growth forecasts have steadily slipped lower during 2014, a recurring pattern over recent years. Will this pattern break in 2015? Our forecasts suggest growth will pick up next year, but the acceleration will be modest and highly uneven across countries. The latest cyclical indicators support this view, as do forward-looking credit and money supply indicators. US indicators are broadly supportive of growth reaching the 3% mark next year, but there are once again warning signals coming from the Eurozone. And emerging market growth looks likely to remain very subdued, with 2014-15 being the weakest pair of years since 2001-02. Downside risks continue to prevail in the emergers, with contraction in Brazil and Russia and in China some cyclical indicators suggesting growth is already running somewhat below the ‘official’ rate.
Non-oil domestic exports moderated in September and in this case, the devil is most definitely in the detail, giving us little to be cheerful about. While exports to half of Singapore's top 10 trading markets fell, the sharp decline in intermediate imports does raise the red flag that manufacturing activity may be very weak in the coming quarters.
Recent data prints continue to point to an economy that is struggling to gain traction. While the retail sales report was better than expected, prevailing trends still show that consumption continues to weaken. Importantly, the August IBC-Br GDP proxy and the September CAGED report point to sustained weakness into the 2H period.
US industrial production shining in a lackluster world. Industrial production posted a healthy gain in September on broad-based gains. Total industry activity continues to grow at a solid pace above 4% y/y, and we expect the trend to continue in the final months of this year. We are conscious that weaker global activity could impose a drag on the US economy, but remain confident that the US economy could withstand a modest global slowdown.
Aggregate financing recovered in September, supported by traditional bank lending. But non-bank lending declined sharply in Q3 and three-month annualised broad money growth fell to an all-time low. Subdued demand and a decline in the effectiveness of the PBoC's easing measures are probably the main reasons for the marked deceleration.
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