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A world with higher inflation
Delhi is fastest emerging city, Brisbane fastest advanced
The largest 100 cities: a clear shift Eastwards
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GDP grew by 0.4% q/q (seasonally adjusted) in Q4, unchanged from Q3, bringing growth for 2016 as a whole to 3.2%. As expected, growth was driven by a rebound in public spending which helped to offset a negative contribution from net exports, underpinned by weaker tourism and higher imports.
Looking ahead, we expect tourism activity to recovery from Q4's weak outcome and the public sector to continue to support activity. We expect GDP growth to average slightly above 3.0% this year.
Net financial outflows moderated to about US$57 bn in January, while the stock of FX reserves fell below US$3 trn. We think that policymakers will continue to dampen depreciation pressures via FX intervention and clamp down on financial outflows in order to limit the fall in FX reserves. However, to achieve a turn-around in outflows large enough to stabilize the stock of FX reserves, the authorities are eventually likely to resort to the kind of contentious steps that they have so far been trying to avoid.
China’s current account (CA) surplus is on course to fall to a level that should put the criticism of currency undervaluation to rest. In fact, we expect the CA surplus to almost halve by 2020 which will reduce the buffer against capital outflows and weaken the country’s resilience to financial turmoil.
In our global macro chartbook, we summarise our take on current global themes as well as our key macro and asset views. This month, in particular, we explore the implications of upcoming elections in Europe, the outlook for fiscal policy amid the rise of populism and we review Donald Trump’s campaign promises.
The weaker yen profile and a gradual improvement in global trade is expected to support an ongoing recovery in exports during the course of 2017-18. Moreover, fiscal and monetary policy will remain supportive, with government infrastructure spending set to rise and cash handouts and solid employment to underpin a modest recovery in household consumption. We forecast GDP to grow by 1.2% in 2017, and by 1.3% in 2018 as business investment recovers.
A split in Italy’s Democratic Party looks increasingly likely after former prime minister Renzi called for an early congress of the party to discuss the possibility of an early general election – a solution opposed by the party’s more left-wing members.
Early elections in June look less likely than before, while elections later in the autumn now look the main option to us. If the Democratic Party does split, there is an increasing risk that the Five Star Movement will become the largest single party in Italy.
The South Korean economy grew by 2.7% in 2016. However, a weak outturn for the final quarter suggests that growth momentum is starting to ebb. The construction boom that supported growth throughout last year is showing signs of fading amid a less buoyant housing market and a diminishing appetite for credit. And in the absence of construction investment, there is little impetus from elsewhere, although a pick-up in government spending should cushion on the downside. We expect that GDP growth will cool to 2.4% in 2017 before picking up to 2.9% pa in 2018 and 2019.
January’s 0.3% fall in retail sales volumes disappointed expectations and represented the third successive monthly drop. Moreover, sales fell on a three-month-on-three-month basis for the first time since December 2013.
Rising inflation appears to be squeezing demand, with shop prices rising by 1.9% on a year earlier, a 43-month high. Although retail spending will receive some support from low unemployment and loose credit conditions, intensifying price pressures are setting up the sector for a difficult 2017.
The prospect of aggressive US tariffs against China and Mexico remain a concern, and the economic impacts will ripple far beyond the targeted countries—including potentially the US itself. We examine supply chain linkages across major manufacturing sectors to identify what regions and countries are most at risk.
As expected GDP growth was revised up to 12.3% q/q saar in Q4, from the advance estimate of 9.1%. The revision was underpinned by an upgrade to growth in the manufacturing and service sectors, which more than offset the decline in construction.
Near-term growth prospects are promising, however the recovery in global trade is likely to be bumpy and prone to setbacks. As a consequence, GDP growth this year is again likely to be sub-trend.
Without a new productivity miracle it is hard to see global growth improving much from its modest pace: we expect world growth at 2.6% p.a. in 2016-25, a shade lower than in 2006-15. Stronger growth would require much faster productivity and/or investment growth. But some of the factors depressing productivity gains look deep-seated and there are also new risks from protectionism and slow world trade expansion. A productivity miracle looks unlikely, implying limited upside for global interest rates.
Global growth over the next decade and beyond will face headwinds from worsening demographic trends that can only be overcome by faster growth in the capital stock or productivity growth. But the economic slowdown in China limits the extent to which emerging markets can provide this.
Some other forecasters, notably the OECD, are expecting a strong rebound in productivity and investment growth in the G7 countries over the coming years, but it is unclear to us where this will come from. The slowdown in productivity growth in the advanced economies has now outlived the global financial crisis by several years and indeed appears to have begun before that crisis got underway.
There appear to be deep-seated factors damaging productivity performance in the G7. Lingering effects from the global financial crisis may be one, together with the rise of low-productivity ‘zombie’ firms, linked to weak banks. Our review of the evidence suggests this may be important in some countries including some peripheral Eurozone states. Another factor is a loss of dynamism in the G7 evidenced by slower rates of company formation and labour ‘churn’.
Rising global interest rates may, paradoxically, force some productivity improvements but much broader structural reforms are also necessary. Meanwhile, slow world trade growth will not help the process of dissemination of productivity improvement – and recent trends toward protectionism are a serious additional risk.
Concerns over the future policy stance of Donald Trump continue to rise, according to the results of our latest quarterly survey of global risk perceptions. The survey was conducted during the first three weeks of Trump’s presidency.
In the upcoming elections, a surprise win for the centre-right opposition front runner, Guillermo Lasso, would result in a rally for Ecuadorian bonds, but a win for the government's candidate, Lenín Moreno, would mean just a continuation of the status quo. Markets do not seem to have priced in this upside risk.
According to the latest polls, it is very likely that Lenín Moreno will have to face Guillermo Lasso in a run-off election on 2 April, as Moreno is unlikely to gather sufficient support to win the presidency in a first round vote on 19 February. If this is the case, then an opposition victory in April is quite plausible.
The rise in Eurozone car registrations in January suggests that the recovery in employment may be helping to offset the negative impact of higher inflation on consumer spending.
Centre-left French presidential candidate Macron will in March present an alternative reformist approach to that of Republican Fillon. He has vowed to cut the budget deficit by 3pp of GDP during his five-year term.
Reflecting recovering commodity prices and rising volumes, export receipts in US$ terms grew at the fastest pace in more than 5 years in January. Similarly, the import bill rose at a pace not seen since mid-2012, albeit the trend in import volumes was lacklustre.
GDP growth rose a solid 1.4% q/q (seasonally adjusted) in Q4, as household spending and investment rebounded. However, government spending slowed sharply as the government moved to meet its 2016 fiscal target.
Today's solid Q4 GDP outcome may improve sentiment among investors and help support the MYR which has come under pressure since Donald Trump's win. However, amid capital outflows from the region, a constrained fiscal position and possible political uncertainty ahead of the elections, we expect USD/MYR to once again rise above 4.5 this year.
Industrial production declined by 0.3% in January, reflecting a 5.7% weather-related plunge in utilities output. Excluding this plunge, IP would have been up between 0.2% and 0.3% in January. Overall, IP is on a modest upward trend. Fed policy-makers will likely be forgiving of the weather-related decline in January IP.
Although German survey data remain at robust levels, we continue to expect growth to slow during 2017 as rising inflation squeezes real incomes. We forecast growth to ease from 1.8% in 2016 to 1.5% this year and then 1.4% in 2018.
January data confirm our view that the underlying momentum in retail activity
remains positive but caution that rising inflation will increasingly bite into
household spending power. Based on these data, we see
Q4-16 GDP tracking 2.0% annualized, little changed from the advance estimate of
1.9%. In Q1-17, we expect real PCE
to be up around 2.1%. Our estimate for Q4 GDP growth is 1.8%.
Headline CPI was up 0.6%, the
strongest monthly gain in about four years. Core CPI rose 0.3%, slightly firmer
than expected. Overall CPI was up 2.5% y/y, the strongest pace since March 2012.
Core was up 2.2% y/y, above the 2% threshold for a 14th consecutive
month. The latest readings are
supportive of the FOMC’s expectation that inflation will move up to 2% over the
Disappointing economic data released for December reinforce the message that South African GDP growth in 2016 was indeed the slowest since 2009. The economy nearly ground to a halt in Q3, with an annualised increase of just 0.2%, while Q4 seems to have been nearly as dismal, with both the mining and manufacturing sectors contracting. However, growth is expected to pick up modestly in 2017, to an average 1.2%, and some indicators in January were quite positive.
Leaving the euro is not going to solve Italy’s economic problems, despite what the populist Five Star Movement is telling voters. We would argue that it’s not a lack of price competitiveness that is weighing on growth, but a deeply entrenched confluence of structural problems: high public debt, low productivity, political clientelism and a dysfunctional banking system. While none of these are caused by the euro, leaving the single currency would exacerbate them.
Following yesterday’s rather hawkish remarks by Fed Chair Yellen, monetary policy divergence has been back in the spotlight in the FX market, with dollar strength bringing the euro-dollar exchange rate down to a one-month low. This, in combination with political uncertainty in the region should help the push the euro to parity in 2017.
The euro area trade surplus increased by €1.8bn in December, with Germany and France the biggest contributors. The figures will once again highlight concerns over internal imbalances, with the German trade surplus within the EU by far outpacing that with extra-EU.
Q4’s labour market numbers delivered a little more in the way of good news than recent releases. The LFS jobless rate was unchanged at 4.8%, but the employment rate ticked up to a new record high and the claimant count measure of unemployment saw the biggest monthly drop in over three years.
But pay growth slowed a touch, consistent with the Bank of England’s recent decision to cut its view of the ‘equilibrium’ rate of joblessness. With inflation rising, the anticipated squeeze on real earnings growth is biting harder.
The economy continues to exhibit signs of weakness, with monthly indicators suggesting that there was not a major rebound in activity in Q4 after the contraction in Q3. Moreover, confidence is likely to remain subdued ahead of a referendum on the constitution now scheduled to take place in April. Tightening measures by the central bank have managed to support the lira (TRY), but the pass-through from the earlier plunge will translate into higher inflation in 2017.
Chair Yellen's semi-annual monetary policy testimony was mildly hawkish, but still points to gradual rate hikes this year. We maintain our call that the Fed tightens in June, but see rising risk they could tighten as early as May. Yellen reiterated "waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly."
With regard to the Fed's balance sheet, Chair Yellen confirmed the FOMC's intent to "passively and predictably" shrink the balance sheet by allowing securities to roll-off as they mature. She ruled out an outright selling of Treasury or mortgage-backed securities.
Our central view is the risk of a Marine Le Pen victory in the French presidential elections remains small and only increased a bit recently. Yet in the past two weeks, bookmakers and markets have priced in an increase in the likelihood and impact of a Le Pen victory that is disproportionate to her support in opinion polls. We assess the risks that could deliver another populist victory.
Despite the quick formation of a new government after the failed referendum on Senate reform and Renzi's resignation, political uncertainty remains high, with a chance of elections in mid-2017 – which would result in a weak government. However, the economy remains relatively resilient (certainly when compared to a few years ago) and, after a reasonable H2 2016, we have raised our 2017 growth forecast to 0.8%.
The flash Q4 GDP releases paint a diverging picture of growth across Central & Eastern Europe (CEE). Quarterly growth picked up significantly in Poland and Romania, but remained broadly similar to Q3 in the Czech Republic and Hungary. While the breakdown is not yet available, high frequency data suggest that the industrial revival seen in the Eurozone in Q4 likely translated into stronger external demand for the CEE, adding to solid consumer spending.
January inflation releases in Poland and Hungary showed that inflation continues to accelerate sharply, to 1.8% y/y and 2.3% respectively. As such, we continue to expect inflation to be close to target in both Poland and Hungary in Q1, but to then soften in H2. This will allow both central banks to keep their policy rates on hold throughout the year.
In Q4 2016 GDP growth once again fell below 5% as government consumption contracted at the sharpest pace since 2010, while private spending growth remained fairly modest. We do not expect Indonesia's economic outlook to change much in 2017 and forecast growth to average 5.1% (up from 5% in 2016), supported by a modest improvement in global demand and some pick-up in private consumption and capital spending.
The Trump administration has wasted no time in drafting a multitude of executive orders and memorandums shaping the economic landscape. However, major policy changes will require support from Congress, and thus take time. Our latest baseline outlook sees a delayed fiscal stimulus, more stringent trade regulation and a tighter immigration stance. On net, these will translate into a smaller boost to economic activity in 2017 than we had previously thought.
The latest Eurozone hard data revealed that GDP expanded by 0.4% in Q4, a touch weaker than previously estimated, partly in response to a weak end to the quarter from industrial production.
While the Q4 GDP outturn was still solid by Eurozone standards, the latest data provided a reminder that the surveys can often provide an exaggerated picture of growth dynamics. With inflation set to be far higher this year than last and uncertainties likely to remain for some time, in 2017 the region will be hard pushed to maintain the pace of growth recorded last year.
Inflation came in a little below expectations in January following some unusual seasonal patterns in clothing discounting. But otherwise the story was pretty familiar, with base effects in the petrol and food sectors continuing to exert upward pressure on inflation.
We expect the impact of the weaker pound to steadily feed through to consumer prices as we move through the year, with the CPI measure of inflation set to move close to 3% in H2 2017.
2016 ended on a positive note, with INEGI's flash estimate for Q4 showing GDP expanding by 0.6% q/q, slightly faster than expected, resulting in a 2.0% expansion for the year as a whole. As a result of the carryover effect, we now forecast GDP growth for 2017 at 1.9%, up from 1.8% previously, while that for 2018 remains unchanged at 2.0%. With higher inflation squeezing the consumer, GDP growth will slow down through 2017, while heightened uncertainty and tighter monetary policy will also weigh on investment.
US economy maintains solid momentum at the start of the year with elevated
private sector confidence, solid employment growth and firm stock valuations
supporting outlays. What are the upside and downside risks stemming from the new Trump administration?
The latest data points support our view that the RBI’s shift to a neutral policy stance is, perhaps, premature. Nonetheless, the central bank is now focused on keeping inflation close to 4%, the mid-point of its inflation target range.
In line with this and given that we expect consumer inflation to rise back above 5% in H2-2017, we do not expect any more rate cuts this year. Though, we would not be surprised to see the central bank change back to an accommodative stance, if activity indicators disappointed in the near-term.
With Republicans in charge of the White House and Senate, Fed Governor Tarullo's resignation from the FOMC board was anticipated. There are two large implications. First, President Trump can fill the Vice Chair for Supervision with a proponent of his deregulation agenda for banks. Second, Trump can now fill three out of the seven FOMC board of Governor seats.
Despite President Trump's previous criticism of the Fed, we expect his nominees to be more pragmatic than ideological. We see incoming economic and market data being the main determinant of the path for interest rates.
Anyone hoping that more populist victories around the world will spark further Trump-like rallies will likely be disappointed. The US President wooed markets with promises of fiscal largesse, which other populist leaders will not be able to match, either because of institutional barriers or lack of fiscal space, our analysis of populist movements in 20 large economies shows.
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