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In our March Global macro chartbook we highlight our key calls, summarise selected research and assessment, and provide our latest favourite charts.
A stronger dollar might help exports for some emerging markets, but through other channels it could have a negative impact on growth and financial stability. Our analysis suggests a re-run of the crisis conditions of 1998-99 is unlikely, but there are areas of significant vulnerability. The dollar’s strength reinforces our view that emerging growth will slow in 2015, to the slowest pace since 2009 – with risks to the downside.
Dollar strength may be negative for emerging markets via several channels – by increasing the burden of dollar-denominated debt, by lowering key commodity prices, by choking off capital inflows and forcing up interest rates and by triggering private sector deleveraging. These channels will operate to different degrees in different countries, though overall emerging markets look less risky than they did at the end of the 1990s.
Highly indebted countries with inflation problems and high commodity dependence are the most at risk from dollar strength. Looking across the various indicators of vulnerability we see Malaysia, Chile, Turkey, Russia and Venezuela as most vulnerable. Among the countries better placed to weather a strong dollar are China and India.
Consumers see past a soft Q1. Confidence ticked up in March on upbeat expectations for the labor market. The present situation index fell slightly but remains near its recent multi-year high. Firmer earnings growth, rising employment, and lower gas prices will keep consumers confident and underpin their spending over the course of 2015.
We extend our December Oil-ipedia note, providing even more of what you need to know about the impact of oil prices declines. We run simulations on the Oxford Economics macroeconomic model: scenarios at $50pb, 40 30 and 20; results for 45 large economies; for GDP, inflation, nominal GDP, policy rates, bond yields. All (and more) are available in spreadsheet form to GMS and GSS clients. We focus on global monetary policy responses, which have significantly more limited than suggested by model simulations.
Flash data for March show prices in the Eurozone falling less quickly, at -0.1% y/y, than in February, supporting our view that a period of entrenched deflation in the region is unlikely. Meanwhile, the unemployment rate for February, at 11.3%, was reported to be the lowest since May 2012. The gradual improvement in the labour market in the region should support ongoing domestic healing.
Against a run of good economic news, the UK’s sizeable current account deficit continues to be perceived as one of the major risks to the economy’s prospects. But the UK’s deficit on its overseas account could arguably be seen as a sign of economic strength, not weakness. The flip side of the large current account deficit is an equally large financial account surplus, a reflection of the UK’s attractiveness to foreign investors. Moreover, the measurement of the current account ignores the significant foreign currency earnings generated by the sale of property to overseas buyers.
Q4’s National Accounts saw GDP growth in the final three months of 2014 revised up from 0.5% to 0.6%. Meanwhile, the economy also looked a little better balanced, with a surprisingly strong boost to GDP from net exports. Going forward, with the economy benefiting from a broad set of props, we remain confident in our prediction that output will expand by close to 3% this year.
A modest monthly reading, but momentum looks solid and set to accelerate! Real consumer spending and disposable income rising at 3% & 4% y/y clip, respectively. Cautious approach to spending and rough weather will weigh on Q1 growth, but strong employment and rising wage growth will support real economy in 2015.
The Eurozone’s EC survey results for March provided another positive surprise for the currency bloc. The robust start to the year suggests that a quarterly rise in GDP of 0.5% to 0.6% in Q1 is on the cards.
Meanwhile, the latest German and Spanish HICP data point to a less negative annual Eurozone inflation reading in March, supporting our view that entrenched deflation in the region is unlikely.
February’s household borrowing numbers provide further evidence that activity in the housing market may be regaining some momentum after the slowdown seen at the end of 2014. But UK households remain a long way from a credit splurge.
Our modelling suggests that, based upon the three main parties’ economic and fiscal plans, the outcome of the election would have a modest, but not immaterial, impact on the UK’s economic and fiscal outlook.
The Liberal Democrat plans would deliver the strongest GDP growth, followed by Labour, but both would also involve higher debt servicing costs and a higher level of government debt than the Conservatives.
But in our view these premiums on debt and borrowing costs are so small that it is very difficult to argue that the UK should pursue a more austere fiscal policy and reject the opportunity of stronger growth.
The economy grew 0.5% in 2014. This was a surprise but even the official data suggest more worrying trends below the surface; with the impetus to growth only coming from rising government spending and plunging imports. We now forecast no growth in the economy this year. Current activity trends still point to struggling exports and sluggish industrial production, while wage growth and retail sales trends suggest depressed domestic demand conditions. Notwithstanding the stronger performance in Q4 than we had expected, in our opinion the economic outlook remains poor. The country still faces the severe problems of uncompetitiveness brought about by high inflation, excessive government intervention, unsustainable macro policies and an unfavorable external situation. And while October's elections hold out some hope of change, there is no guarantee that the economy's prospects will be noticeably better in 2016.
Judging by past experience, US home sales and house prices could continue to rise even after the Fed begins to raise interest rates.
House prices should continue to benefit from a pent-up demand for household formation, high affordability and rising employment and wages.
Rising house prices had by Q4 2014 taken owner’s equity in housing above its post-1990 average.
A decline in sentiment as gasoline prices rose. Consumer sentiment declined for a third consecutive month but the gauge remains near a multi-year high as the economy retains its solid footing. We expect that low energy prices, continuing employment gains, and gradually accelerating wage growth will support consumer spending growth of 3.0% this year.
A modest end to 2014 and an even more modest start to 2015, but forward momentum very much alive. Growth in Q4 was unchanged but consumer spending growth was revised up on stronger services outlays. International crosscurrents are weighing on US activity, but strong domestic fundamentals should outweigh these constraints. Oxford Economics expects GDP growth just shy of 3% in 2015.
The Ukrainian economy shrank by 14% on the year in Q4 2014, taking the decline for all 2014 to 5.5%. The collapse in activity has continued into 2015, with industrial output down over 20% on the year in February. This again highlights the downside risks to Ukraine’s GDP target for 2015, agreed with the IMF, of a 5.5% contraction.
February’s retail sales data provides strong reassurance that January’s weakness was a temporary hiatus. Sales volumes rose by a surprisingly hefty 0.7% on a month earlier, taking annual growth to 5.7%. Shoppers’ purchases were supported by average store prices falling at the fastest rate since records began 18 years ago. And with low- or ‘no-flation’ set to persist through 2015, the retail sector should continue to reap the rewards of rising real incomes.
Durable goods orders fall and indicate broad weakness. Our favored business investment gauge points to moderate activity in early 2015 as a stronger dollar, sluggish global growth and poor weather restrained activity. That being said, Oxford Economics believes the forward momentum has not completely dissipated and expects a gradual re-acceleration in 2015.
Despite some signs of improving domestic demand conditions, the high-frequency data released thus far in 2015 still point to a predominantly one-dimensional recovery, with the external sector providing the key impetus, helped by the strengthening US economy. But private spending should gradually increase and we continue to project a 3.1% expansion in GDP this year; with the risks seemingly well-balanced. However, we have become more cautious about the pace of expansion in 2016 and 2017 given the still low level of business confidence, the declining popularity of the government (causing problems to its reform agenda) and difficulties in the oil sector. We now look for GDP growth of 3.5% in 2016 and 3.4% in 2017, down from 4% and 4.1% respectively.
A key reason for optimism about Eurozone prospects has been the sharp acceleration in broad money (M3) since April last year. A broader measure of money – equivalent to the British M4 – is growing more slowly, but still supports the optimism.
The M4/M3 difference shows that some M3 growth is due to funds being moved from less liquid accounts to more liquid ones. This could be because at current interest rates there is no penalty on liquidity. However, it could also be a pre-cursor to higher spending.
The recent rise in credit to the non-bank private sector supports the more optimistic interpretation. This is also good news for Eurozone financial assets.
March’s healthy rise in the German Ifo index follows hot on the heels of a solid monthly rise in the composite PMI and is consistent with a further pick-up in German GDP growth in the early stages of this year, supporting our view that GDP should expand by a robust 2.4% or so in 2015.
What’s more, the stronger-than-expected rise in French business confidence in March also made encouraging reading, suggesting that the currency bloc’s second largest economy may also provide the region’s growth prospects with a bit of a boost in Q1.
The Chancellor presented the final Budget of the parliament on 18 March. Mr Osborne revisited regular themes with a further increase in the tax fee personal allowance and more help for savers, balanced against additional revenues from banks and tax avoiders. But the macroeconomic impact of the measures is likely to be negligible. We continue to believe that the ‘rollercoaster’ spending plan outlined for the next few years is unfeasible, and that post-election cuts will need to be moderated. Meanwhile, inflation slowed to zero in February, the lowest reading for 55 years. But the chances of low inflation becoming entrenched still look relatively low: base effects will drag inflation back up again towards the end of the year and underlying inflationary pressures show few signs of weakening. As such, we still expect the next move in interest rates to be upwards and for that rate hike to come in early 2016.
New home sales surged in February, but don't get too excited. As always, monthly new home sales data should be approached with caution. Sales rose to their highest in seven years despite the poor weather as home price inflation moderated and mortgage rates remained low. Housing activity will gradually pick this year as wage growth firms and affordability remains historically high.
Low inflation is not deflation, especially if transitory. Headline CPI inflation rose in February as gasoline prices rebounded and core prices firmed. Core CPI inflation remains well anchored around 1.7% y/y. Oxford Economics see headline inflation hovering around zero through June and rebounding in the second half of the year.
CPI inflation dropped to zero in February, its lowest rate in 55 years, and there is a strong chance that it will turn negative over the coming months. Some will see the drop in core inflation as a reason to worry about low inflation becoming entrenched, but in reality the February fall was due to base effects and should not be a cause for concern. We concur with the Bank that these low rates of inflation will be temporary and that they will be an important source of momentum for the UK economy.
March's healthy rise in the flash Eurozone composite PMI, which was mainly driven by a sharp rise in the German index, underpins our view that Eurozone GDP will expand by an above consensus 1.6% this year. And the robust services reading confirmed that the recent improvement largely reflects domestic factors.
The plunge in oil prices since the middle of last year continues to have positive effects on Turkey's macroeconomic outlook. Lower oil prices will facilitate a rise in private consumption, help to narrow the large current account deficit and put downward pressure on headline inflation. Meanwhile, ongoing monetary easing should provide additional support to private consumption and investment, and fiscal policy looks set to remain accommodative. However, the strong rebound in exports seen in 2014 will probably moderate this year as ongoing geopolitical tensions and lower energy prices continue to suppress demand from Russia and Middle East trade partners. In addition, the slide in the TRY this year will lead to less of a fall in inflation than we had expected in January. We now forecast that GDP growth will rise to 3.3% from an estimated 2.6% in 2014, albeit in January we had expected growth of 3.9%. Moreover, downside risks to the forecast persist, as a combination of domestic and external forces could drive the currency lower.
Existing home sales still soft. Sales rose even as inventories remained low and financial conditions tightened slightly. The annualized pace of sales remains below 5.0-million, indicative of still sluggish housing sector activity. We believe housing activity will accelerate over the course of 2015 though caution the recovery will be slow.
With labor market activity moving forward at a solid pace, the Fed's focus has shifted to inflation. In this context, Oxford Economics uses its near term monthly inflation model to evaluate the path of headline and core PCE and CPI inflation in the coming months. We find that unless oil prices take another notable dive in Q2 or domestic demand falters (beyond some of the weather disruptions observed recently), the Fed is likely to pull the rate trigger in September.
The Russian central bank eased interest rates by a further 1% to 14% at the end of last week. This move was made possible thanks to the stabilisation of the rouble over recent weeks at around 60/US$. However, the recent slippage in Brent crude oil prices to US$55/barrel could herald a renewed period of currency pressure.
The EU agreed to maintain its sanctions against Russia unless the ceasefire agreed last month is fully implemented; current sanctions are due to expire in July.
The nature of the inevitable debt restructuring in Ukraine is unclear. Given the uncertain economic and political situation, there is a case for delaying a final deal. A possible alternative approach could be a three-year moratorium on payments to private creditors until the situation becomes clearer.
This report takes a deep look at China’s growth prospects and the consequences for financial markets, drawing on the full range of our recent research.
We are cautious on China’s growth prospects in both the short and long terms and see significant downside risks to our already below-consensus forecasts over the next few years.
The impact of the Chinese slowdown is already being felt in financial markets, especially commodity markets, and more severe consequences would follow if slowdown morphs into crisis.
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Bloomberg: "Oxford Economics Director of Asset Management Gabriel Stein discusses the outlook for equities amid the back drop of Greece’s ‘poker game’ with its creditors. He … more
The Wall Street Journal:
"Central banks around the world have been alarmed at how inflation has plummeted in the last year, in many cases into negative territory. Though much of that is due … more
International Business Times: "The Fed will also release its updated projections for the U.S. economy over the next three years. Economists are likely to hone in on two key details: growth in … more