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Asia Construction Forecasts
Analysis and outlook for 12 key markets
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Substantive decisions are unlikely to be announced after the first ECB meeting of 2018, on Thursday. The key thing to watch will be Mario Draghi’s characterisation of the ECB council’s debate over the path of policy normalisation. With hawkish rhetoric dominant in recent weeks, we expect Draghi to give a more balanced assessment with emphasis on the muted inflation outlook, that will drive a glacial policy normalisation path. However, he is unlikely to change the perception that the end of QE purchases in 2018 is a done-deal.
The CDU/CSU and SPD continue to edge closer to a renewed coalition – a deal that would end the longest government formation in German history. The parties’reluctance to join forces and the already buoyant economy is likely to result in a government lacking ambition. Beyond a moderate fiscal splurge, they are unlikely to take meaningful steps to address Germany’s medium-term challenges. Indeed, the coalition’s impact on Europe might well prove to be more consequential than anything they do at home.
A new German government by mid or late-March remains our baseline expectation after the SPD voted yesterday to start coalition negotiations with Chancellor Merkel’s CDU. Discussions are to begin tonight, witha relatively narrow window of opportunity to get serious on European reform before EU parliamentary elections. However, the reluctance of the SPD was apparent in the very narrow majority that prevailed, and might still derail the formation of a government.
Although some decline in retail sales volumes in December was expected given the previous month’s Black Friday-related boost, a 1.5% monthly slump was unexpectedly large, leaving growth for 2017 at a four-year low of 1.9%.
Moreover, December’s performance pointed to the retail sector making almost no contribution to GDP growth in Q4 2017. Falling inflation suggests better times may be ahead this year. But a strong resurgence in sales is unlikely.
Many Asian economies are now more substantially driven by domestic demand than is often realised, marking a change in the region’s longstanding trend of export-led growth. The shift has resulted from global trade growth lagging domestic demand in several economies over the last 10 years, in contrast to trends in Europe. As a result, assessing Asian economies’ growth prospects will require a greater focus on domestic developments than global factors.
Prospects for key drivers suggest this period of macro-stability is as durable as the so-called Great Stability (1990-2006), which in turn may prolong the boost to the global economy and asset prices. We think the probability of a continued melt-up this year is bigger than a melt-down. But this stability will continue to grate, given weak trend growth, inequality, and political and asset-price risks.
Changes at the top of the Fed have started to reshape the outlook for US monetary policy. The Board of Governors will soon have an almost entirely new lineup, and two District Banks recently gained new Presidents.
The new Governors could swing more hawkish in their views of monetary policy and favor a roll back of some of the post-financial crisis regulation. Trump's nomination of Powell as Chair suggested that a sharp swing to the hawkish side of the spectrum might not be severe, but recent speculation about other nominations for Governors' seats may change that inference.
Two of the five voting District Bank Presidents in 2018 are new to their offices. Without substantive public comment, it will take a little time to understand their policy leanings. However, as we discussed in prior research, the new voting FOMC members look to be leaning to the hawkish side.
Congress hopes to pass its fourth stop-gap spending measure before the end of the week to prevent a government shutdown. The measure faces stiff opposition, mainly from conservatives in the House and Senate Democrats. The odds of a shutdown have increased to 50%.
If a shutdown does occur, about 850,000 federal workers would be furloughed. A shutdown lasting a week would shave 0.1pp from GDP growth.
Congress may avert a shutdown this weekend, but the stakes only get higher from here. Deadlines for DACA and the debt limit will bear down in early March.
With the election less than two months away, the political situation in Italy remains very uncertain. The most likely outcome remains a centrist grand coalition, but other options (such new elections at the end of the year or a centre-right victory) are possible. While leaving the euro is now only a tail risk, we think that none of the scenarios will help improve fiscal sustainability or implement structural reforms needed to tackle sluggish productivity.
Survey data continue to suggest the Eurozone is enjoying its best growth ever, and some of the hard data that had been lagging are now catching up as well. This has led to a new set of GDP revisions which are likely to have taken 2017 growth to 2.5%. On the monetary policy front, we now expect a period of calm following the cut in QE purchases that started this month.
A solid Q4 brought overall GDP growth to 6.9% in 2017, up from 6.7% in 2016. This first pick-up in growth since 2010 was driven by stronger net external trade. Domestically, investment growth slowed in 2017 but consumption remained robust. In 2018 we expect the favorable external setting to continue to support China’s exports. While domestic demand should cool on tighter financial policy, China’s policymakers want the slowdown in credit and the economy to be gradual. We project GDP growth to slow to 6.4% this year.
China’s Treasury holdings declined $11.5 billion in November. Is this a sign that China plans to back away from the Treasury market? It’s too soon to tell, but other more timely data point in that direction.
The Bank of Canada lifted the policy rate by 25 basis points to 1.25%, with a dovish tone. The economy is on a solid track and inflation is firming, but policy makers are growing more concerned about the uncertainty related to NAFTA. We expect the Bank of Canada to continue raising rates this year as the economy is likely to maintain solid momentum, assuming the US does not withdraw from NAFTA.
Following recent optimistic comments on UK productivity from Silvana Tenreyro, an external member of the MPC, Michael Saunders, another external appointee, has added to the positivity by predicting that unemployment will fall further and pay growth accelerate by more than the consensus expects.
Granted, Mr Saunders has long been relatively bullish on the UK jobs market. Moreover, his position as one of MPC’s more hawkish members means that his comments do not presage a radical shift of monetary policy view. But they do reinforce the proposition that upside risks for the economy are far from absent.
The final estimate for Eurozone inflation confirmed that price growth eased back slightly in December. As expected, a weaker energy component caused headline CPI inflation to fall to 1.4% with core inflation remaining stubbornly weak at 0.9%. But considering the pace at which slack in the economy is diminishing, we are confident that inflation will pick up again after Q1 2018.
Dovish comments from ECB’s Vice President Vítor Constâncio confirmed our view that markets’ repricing of the first rate hike for Q1 2019 was premature. But neither Constâncio’s comments nor the temporary dip in inflation should cast any doubts regarding the ECB’s QE exit in September this year.
In a more backward-looking view, Eurozone car sales saw a sharp drop in December. But not much can be read into a single move of the highly volatile series and with record-level consumer sentiment in December, we continue to believe that consumers had a solid contribution to GDP growth in Q4.
The recent report on the Section 232 steel investigation has raised the probability of sector-specific trade protection, which will have the effect of raising steel prices and possibly improve profitability of US steelmakers. But these price increases will dent the cost competitiveness of many other steel-consuming sectors that are arguably facing similar, if not more intense, competitive headwinds, and hence run counter to a strategy to strengthen US manufacturing more broadly.
foresee the US economy growing 2.8% in 2018, following a 2.3% advance in 2017.
Consumer spending and business investment will be supported domestically by
strong fundamentals and a fiscal stimulus package and externally by ongoing
strength in global activity. On the monetary policy front, we continue to
expect three interest rate hikes in 2018, accompanied by ongoing passive and
predictable balance sheet normalization. Risks include financial market stress, trade protectionism (NAFTA, China) and "growth exhaustion" as we approach 2019.
The first speech of 2018 from a MPC member delivered a dovish message. Silvana Tenreyro, an external member of the Committee, offered some positivity on the UK’s productivity prospects, a shift from the supply-pessimism that underpinned the MPC’s hike in Bank Rate last November.
That the risks to productivity growth are skewed to the upside is consistent with our own analysis. It also offers another reason, alongside the prospect of a marked drop in inflation this year, for the Committee to hold fire on further rate increases in 2018.
Having reached a five-and-a-half year high of 3.1% in November, the CPI measure of inflation dropped back to 3.0% in December and we expect this to mark the beginning of a sustained cooling in price pressures. Though oil prices have continued to rise, the impact on inflation will be more than offset by strong base effects. Core pressures are cooling and, with little evidence that this trend is likely to change, we should see CPI inflation move back below 2% by the autumn.
Economic activity expanded for a fourth consecutive month in November, growing by 0.5% on the month, in line with market consensus and our own estimates. On an annual basis, the IBC-Br rose by 2.9% – the best since 2013.
Even after we account for a slight moderation in growth in December, on the back of weaker retail trade and exports, our Q4 GDP growth estimates remain unchanged at 0.6% q/q. We therefore reaffirm our GDP growth forecasts of 1.1% for 2017 and 2.5% for 2018, which are broadly in line with consensus.
Eurozone exports complete the picture of hard data bouncing back in November after a weak October. Together with Friday’s upward revision of Q3 GDP growth and elevated sentiment, it corroborates our expectation of a solid last quarter to 2017.
With orders for export goods still rising, it seems that the strong euro has not weighed on export activity (yet). While upward wage pressures should pose a risk to European competitiveness, they are slow to materialize, and we see the strong trade momentum carrying over into 2018.
In the first round of the presidential elections, the populist incumbent Milos Zeman won most votes, but fell short of the 50% needed for an outright victory. With most other candidates backing his more liberal and pro-EU opponent Jiri Drahos, Zeman will face a tougher task in the second round on 26-27 January.
While Czech populism is far from the outright illiberalism in Hungary and Poland, in the long run an informal alliance between Babis and Zeman, backed by strong euro-sceptic popular opinion, could add the country to a central European “belt of resistance” to the EU’s common values, perhaps even questioning its EU membership. In the short run, however, it is ‘business-as-usual’ given the traditionally unstable Czech politics – any meaningful impact on the near-term economic outlook or asset prices is unlikely.
The introduction of 5% VAT on 1 January in Saudi Arabia and the UAE will lift inflation by some 2-4 percentage points in the GCC's two largest economies. But the VAT will have little impact on GDP growth, given the counter-measures undertaken by the authorities; we still expect Saudi Arabia and the UAE to grow by 2.0% and 3.3% respectively in 2018 (up from -0.3% and 1.7% in 2017).
The UAE stands to generate up to AED18bn (US$4.9bn) from VAT this year according to our estimates, equal to 1.5% of non-oil GDP, while Saudi Arabia is expected to generate close to SAR30bn (US$7.9bn), representing 1.5% of non-oil GDP.
Export growth dropped further in December, while import growth stayed strong, pushing the trade balance into deficit (IDR -0.3bn) for the first time in five months. In spite of a disappointing Q4, we expect the favourable global trade outlook to support Indonesia’s exports in 2018. Meanwhile, the solid import momentum adds to the signs of an improvement in domestic demand.
Inflation continued to rise at a strong pace in December, in line with our expectations. Industrial production growth, however, staged an unexpectedly strong rebound in November.
Latest data points support our view of a sharp growth recovery in 2018 as one-off disruptions from last year’s demonetisation and GST introduction fade. This, in turn, underpins our view of inflation averaging around 5% this year and two rate hikes from the RBI.
A unilateral US exit from NAFTA is a real possibility. Negotiations are slow and difficult, and the recent passage of the Tax Cuts and Jobs Act may embolden the administration to take a more protectionist approach in 2018.
Our scenario modelling suggests that a US exit from NAFTA would reduce real US GDP growth by 0.5pp in 2019, while constraining growth in Mexico and Canada by 0.9pp and 0.5pp, respectively.
The impact would lessen over time as supply chains would re-adjust to account for higher tariffs between the US, Mexico and Canada. By the end of 2022, the US output shock would diminish, but Mexico's GDP would be 2% smaller.
A withdrawal from NAFTA would not significantly reduce the US trade deficit. The trade gap would remain at 3.2% of GDP in 2018 and 2019, compared with a modest widening to 3.3% of GDP in the baseline in 2019.
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From the Wall Street Journal:
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From the Telegraph:
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