Data, forecasts and analysis on 200 countries, 100 sectors and 3,000 cities and sub-regions
Steady recovery shows no signs of slowing
Africa Risk-Reward Index
Oxford Economics is the world leader in global forecasting and quantitative analysis for business and government, and the most trusted resource for decision-makers seeking independent thinking and evidence-based research.
Yesterday, the deadline for Madrid’s ultimatum to the Catalan government to confirm if independence had been declared ended. The failure to provide confirmation means the Spanish government will activate article 155 under which it will take control of the region. While not officially confirmed, it appears that one of the measures included will be holding regional elections in January.
We will wait for more clarity on the political situation, but this is a clear downward risk. A cut to our 2018 growth forecast is likely.
September delivered a fiscal deficit of £5.9bn compared with £6.6bn a year earlier. This left borrowing in the fiscal year-to-date 7.2% below the same period in 2016-17 and on course to undershoot the OBR’s full-year £58.3bn forecast.
But good news for the Chancellor as he prepares for next month’s Budget will be tempered by the likelihood of the OBR cutting its productivity and growth forecasts. Any serious ‘giveaways’ to support a soft economy look unlikely.
The external environment for emerging markets (EMs) is currently in a ‘sweet spot’ with EM benefitting from stronger world trade, higher commodity prices, more buoyant capital inflows and a weaker dollar. We think external conditions in 2018-2019 will be a bit less favourable, but still see EM growth continuing at a decent pace.
The current coalition talks in Germany are on track to become the longest in recent history. The coming weeks of exploratory talks are likely to be defined by plenty of political noise. At best, they will provide a clearer picture of the policy areas the next government will focus on. But we expect few specifics. The most contentious issues do not pertain to the overall direction of economic policy.
We provide a round-up of major economic policy areas, that are likely to feature in the coalition negotiations. The size of the income tax package will be key in the short-run. We expect it to amount to around 0.5% of GDP, which is included in our baseline. Potential growth would benefit from a sensible immigration law and an improved education system, but benefits would stretch over a long horizon. Infrastructure investment will be limited by capacity constraints.
Though retail sales fell sharply in September, this appeared to be payback for a strong August. The underlying performance of the sector remained surprisingly good given the strength of the headwinds bearing down on consumers. However, the performance of the wider consumer sector may be somewhat weaker in Q3 given the poor figures for new car sales and soft business survey results for the consumer services sector.
As we expected, real GDP growth eased slightly to 6.8% y/y in Q3. We project a cooling of growth through 2018 amid a less accommodative monetary policy.
In his speech at the 19th Party Congress, President Xi outlined his vision for China through to 2050. While committing to cement China’s existing system, he identified key long-term challenges and policy implications, with a need for more emphasis on quality and equality versus quantity. Regarding the short and medium term, his speech did not contain any surprises and implies no material change in the economic policy stance.
While some of the hard data does not fully corroborate the strength shown by surveys, the Eurozone is set to experience another robust quarter in Q3. There is little evidence that the strong euro is yet affecting the industrial and the external sectors, but it will cause inflation to fall significantly in early-2018. We have made a small tweak to our monetary policy call and now expect the ECB to cut monthly QE purchases to €30bn per month from January next year.
Our base case is the Fed only raises rates twice next year. However, since the Fed will likely have gotten three rate hikes under its belt in 2017, a rebound in inflation in 2018 may lead to more than two rate hikes if viewed as being a sustainable increase. Passage of fiscal stimulus could further push the Fed in a more hawkish direction.
our global macro chartbook for October, we summarise our views on current
global themes and asset markets. This month, we focus on the benign global
outlook for 2018, our still bullish outlook for EMs and ongoing political
Concerns about Italian debt sustainability ahead of ECB tapering and next year’s elections are unwarranted. Our scenario analysis shows that Italy now has more fiscal room than generally perceived. The biggest concern would be a majority populist government going on a spending spree and campaigning for a euro exit but this is only a tail risk. That said, this is as good as it gets. There is little political appetite to implement the fiscal tightening and the economic reforms needed to result in a quick and sustained decrease in debt.
Labour market numbers for the three months to August imparted a strong sense of déjà vu. The LFS unemployment rate remained at a 42-year low of 4.3% and employment expanded by 94,000 on the previous three months.
However, headline annual pay growth was unchanged at 2.2%, while the measure for regular pay dipped slightly. The MPC still looks likely to hike rates in November. But support from the jobs market for that move remains limited.
September's industrial production recovered 0.3% following August's hurricane-induced 0.7% decline. September's reading includes a 0.25pp drag from the hurricanes – on top of August's 0.75pp impact – that further restrained growth. The underlying, hurricane-adjusted data shows industrial production was flat in July and August, followed by a 0.5-0.6% gain in September that brings the year-on-year growth rate to an adjusted 2.6%. In Q4 2017 and into 2018, we expect recovery activity to contribute positively.
The CEA's recent analysis of the impact of corporate tax reform on household wages appears overly optimistic. We believe reducing the statutory tax rate from 35% to 20% may boost real households' average annual income by 0.3%, or $300 in the long-run, well short of the $4,000 to $9,000 presented by the CEA.
We have updated our odds for the next Fed Chair following press reports that President Trump was very impressed with candidate John Taylor after meeting with him. We have raised Taylor's odds to 20% (previously we saw just 5% probability).
Concurrently we have sharply lowered Kevin Warsh's odds to 15% (previously he was the leading contender at 40%).
Given that Yellen will now be part of the recent round of interviews and Trump previously commented favourably about Yellen, this lifts her odds of remaining Fed Chair. We now place her odds at 25%, up from 15%.
We give similar odds of 25% to Fed Governor Powell, who essentially shares Yellen’s dovish stance on monetary policy, but he is more open to rolling back portions of the post-crisis financial market regulation.
Import prices were led higher by expected gains in fuel-related products. The import price index rose 0.7% over August to 2.7% year-over-year. Beyond transient fuel-related impacts, nonfuel import prices continue to firm from 2015 lows, but remain at a subdued 1.3% y/y pace. Reduced deflationary pressures from Chinese imports are one reason for the change.
The ZEW followed in the footsteps of the Sentix during October, with the expectation index rising to 17.6 (from 17 previously). The increase largely reflects waning downside sentiment in the scandal-hit automobile sector and paring back of the euro’s appreciation. We still see the German economy expanding 0.4-0.5% per quarter in the final half of the year.
Despite the sharp drop in car registrations in the Eurozone during September, we maintain our GDP growth forecast of 0.5% q/q for Q3. While we have seen weak hard data out of the consumer sector contrast with strong sentiment indicators, we think seasonal factors are partly to blame.
Inflation in the Eurozone was confirmed at 1.5% y/y in September, with our estimate of the supercore also holding steady at 1.3%. We think September probably marks the peak in headline inflation, with the rates set to fall in the first half of 2018 reflecting the euro’s earlier appreciation. This is likely to justify the ECB continuing with QE through to September next year.
Our analysis of global fixed income markets suggests the squeeze will continue to ease.Central bank action, particularly ECB tapering,will limit demand growth and the financial sector has been issuing more debt again since last year. Our note highlights that this supply-side contribution to low yields has often been overlooked: between 2009 and 2016 we saw a massive $4trn decline in bonds outstanding by developed-market banks and shadow banks.
CPI inflation reached a five-and-a-half year high of 3.0% in September, following a sharp rise in food prices. Though CPI will probably temporarily move higher in October, we still expect inflation to steadily slow as we move through 2018. Today’s release is unlikely to have a material impact on November’s MPC decision. Though in our view the case for a rate hike is weak, we expect the MPC to press on regardless.
The momentum in goods export volumes moderated in September, with softer growth recorded across both re-exports and non-oil domestic exports. But despite the surprise weakness in electronics exports, near-term prospects are still firm. The latest PMI surveys continue to signal relatively strong external demand, notably in the electronics sector. However, we do look for growth to moderate going into 2018 as Chinese demand eases.
Despite the current recovery in GDP growth, the MAS maintained its policy of zero appreciation in the SG$NEER at its October meeting. Given subdued inflationary pressures we look for the MAS to keep policy on hold till late-2018.
With policy on hold and the USD to be relatively weak in 2018 we expect the SG$NEER to be broadly unchanged next year. This is consistent with a modest depreciation in the SGD to 1.38 per US$ by end-2018.
We expect consumers to be generous spenders this holiday season, as we forecast holiday sales to rise a solid 3.8% this year. A strong labor market, rebounding wage growth, ebullient consumer sentiment, and a record-high equity market provide the positive underpinnings.
Adding further support, there will be 31 shopping days between Thanksgiving and Christmas -- the most since 32 in 2012. However, it isn't clear if brick-and-mortar outlets are anticipating a longer and more active holiday period. More clear, on-line retailers are likely to reap more of the activity even if it is at the expense of traditional stores. Transportation companies are gearing up for a spike in warehouses to home deliveries.
Venezuela is likely to face additional US sanctions following the contested results of yesterday’s gubernatorial elections. We think the Trump administration will continue with its approach of applying sanctions gradually, which would not trigger a default in the short term.
President Nicolas Maduro’s PSUV party claimed to have won 17 of the country’s 23 governorships, despite reports of irregularities and projections that opposition candidates would win a majority of the races. Sanctions that would lead to an immediate default will become much more likely if next year’s presidential election is found to be fraudulent.
The stand-off between the Catalan and the Spanish government continues and could see Madrid taking control of the region in the coming days. Although the risk of secession is remote, the unprecedented political crisis is likely to hurt the economy. We are not yet revising our forecasts until there is more clarity on the political front, but a downgrade to our 2018 outlook looks increasingly inevitable in the coming months.
Japan's proximity and vulnerability to Korean conflict might be expected to weigh on the yen. But experience and logic suggest the opposite – heightened tensions have typically been accompanied by yen appreciation over the past decade, consistent with the currency's safe-haven attributes.
Eurozone trade data for August corroborate recently released national figures. Exports continued to recover on a monthly basis after their summer lull, and overall, export momentum remains solid and regionally broad-based. Increasingly solid intra-European demand should soften the negative effects of the appreciation of the Euro and points to a more self-sustaining European recovery.
Austria and Germany are headed for noisy coalition talks after their recent parliamentary elections. But the economic and market implications should be minor as both enjoy a very encouraging economic background. And irrespective of the eventual coalition outcomes, we do not expect any material changes to either Germany’s or Austria’s macroeconomic trajectory.
Unlike some developed economies, we do not expect the RBA to begin tightening policy in the near term (our previous article discusses the interest rate outlook ). And when the cash rate does begin to rise, we expect the RBA to be cautious, with a slower pace of tightening than seen in previous cycles. We are also now forecasting a lower neutral rate in the long run, with the weaker outlook for long-run growth weighing on the cash rate.
We see the US economy continuing to grow around 2% underpinned by moderate consumer spending, firmer business investment and a brighter global backdrop. Hurricanes Harvey and Irma will shave a combined 0.6pp off growth in Q3. We expect a modest fiscal stimulus package will lead GDP growth to accelerate to 2.4% in 2018 – though policy uncertainty remains an important downside risk. Soft inflationary pressures due in part to still-moderate wage growth will limit the Fed's willingness to proceed with additional rate hikes this year. However, balance sheet normalization is set to start in October.
Business inventories increased 0.7% in August, as expected. An equivalent gain in business sales left the business inventories-to-sales ratio steady at a relatively high 1.38. A boost in inventories should provide a mild positive contribution to Q3 real GDP growth, which we forecast is running at 2.4%.
September headline CPI advanced in line with our expectations, while core inflation was a bit weaker. Overall prices rose 0.5% on the month and 2.2% from a year ago, boosted by an expected large jump in gasoline prices (+13.1%) stemming from the hurricanes. Core CPI only moved up 0.1%, keeping the year-on-year rate at 1.7% for the fifth consecutive month. The Fed is likely to look through the temporary headline increase and focus on trend inflation which remains below its target. That said, the Fed has indicated it is likely to raise rates again in December. However, if low inflation readings persist, it supports a slow pace of tightening in 2018.
Retail sales jumped 1.6% in September, underpinned by stronger auto and gasoline sales stemming from the recent hurricanes. Outside the hurricane impact, consumers continue to spend at a moderate pace.
Real consumer spending likely grew at a 1.7% annualized pace in Q3, supporting real GDP growth of around 2.4%.
Opposition candidates are expected to win a majority of the 23 states in the gubernatorial elections on October 15. Unlike the electoral fraud that occurred when the National Constituent Assembly election was held in July, we think the Maduro regime will recognize the opposition's wins in this weekend's elections for fear of incurring additional US sanctions, which could bring about a default.
Recognizing the opposition's victories in most states would allow the regime to save what little face it can on the world stage and raise expectations of a fair presidential election in 2018. Maduro uses the governors to distribute rents and maintain loyalties. But conceding the ruling party's electoral losses would be a small price to pay amid the threat of tougher sanctions.
Overall export growth rose to 8.1% y/y in US$ terms in September, consistent with the strong export performances in South Korea and Taiwan. In terms of destination, growth of exports to the US and EU rebounded last month, while shipments to emerging Asia picked up pace. Meanwhile, goods imports growth held up well, suggesting that China’s domestic demand may be more resilient than expected in the run up to this month’s National Congress.
CPI inflation rose less than expected in September, while IP rebounded in August. The strong IP print likely reflects post-GST restocking and may reset lower in coming months. But we expect future prints to show a sustained recovery in manufacturing from GST disruptions. That said, focus on monetary policy and possibility of more cuts is likely to continue, given the benign inflation print. We look for a prolonged pause, however, given upside risks to CPI and fiscal slippage concerns.
The demands of the global and digital economy have multiplied the finance function’s core responsibilities. At the same time, CFOs are expected to partner with their C-suite colleagues to … more
This report for Universities UK investigates the contribution of the the higher education sector to the UK economy. It identified that in 2014-15, Universities directly employed 404,000 … more
Cities are becoming increasingly large as tourism destinations and are accounting for a greater proportion of global tourism demand. This research, conducted by Oxford economics in conjunction … more
From The The BBC:
"China's one-child policy advanced and amplified a demographic transition," explains Louis Kuijs of Oxford Economics. "Falling birth rates and an aging … more
From The The Financial Times:
“Guillermo Tolosa is an adviser to Oxford Economics and a former IMF Resident Representative in eastern Europe. Evghenia Sleptsova is senior economist at Oxford … more
From The The Washington Post:
“It's a "synchronized Goldilocks upswing" that's likely to fuel more growth and better stock market performance around the world, said … more