World Economy – March 2017Source: OPEC_RP170305 3/14/2017, Location: Europe
Global economic growth has stabilised and the estimated growth dynamic has been confirmed recently with the forecast for global GDP growth remaining unchanged at 3.2% for 2017 and 3.0% for 2016. OECD economies are holding up well in general with an unchanged growth forecast of 1.9% for 2017, after reaching estimated growth of 1.7% in 2016. Still more upside to OECD growth may come from fiscal stimulus in the US, but the magnitude and timeline of this remain uncertain. Growth in India may also improve after the impact of demonetisation has been digested. China has reiterated its intention to target a higher growth level than is currently accommodated for in the global growth forecast. The stabilisation of the oil market is also supporting global growth, as oil producers are now benefitting from a recovery in output values and once again rising oil sector related investments.
As for emerging economies, India has seen higher-than-expected 2016 growth of 7.5%, making some deceleration in 2017 more likely, with some dampening effects from demonetisation materialising in the 1Q. While China is forecast to grow by 6.2% this year, after seeing growth of 6.7% in 2016, official sources have reiterated a growth target of around 6.5%. Brazil is now expected to improve slightly this year and growth has been revised up to 0.5%, while Russia’s growth rate has been held at 1.0%, though further stabilization of oil market economics may lead to slightly higher growth.
Among the most important uncertainties for global economic growth, policy issues across the globe bear considerable weight, as do monetary policy decisions, which remain important in the near-term. It is expected that normalisation of US Federal Reserve (Fed) monetary policy will continue in 2017, given the inflationary support coming from the ongoing rebalancing of the oil market. This may also apply to other major central banks, though a relatively more accommodative stance is expected from some banks, particularly the European Central Bank (ECB) and the Bank of Japan (BoJ). Moreover, global debt levels remain high in some key economies, an issue that will probably require further attention as interest rates may rise gradually and the US dollar may continue to strengthen.
US GDP growth has been confirmed at 1.9% q-o-q on a seasonally adjusted annualised rate (SAAR) in 4Q16. This is considerably lower than the 3Q16 level of 3.5%, while the current growth dynamic of the 1Q does not seem to be significantly higher; it is expected at slightly more than 2%. Uncertainty about the level of growth in 1Q16 remains high, ranging between slightly more than 1% to almost 3%. Asset markets are certainly heading towards a positive outcome and as valuations have achieved high levels, asset prices may weaken if expectations do not materialise. Positively, sentiment indices remain high and while industrial output is just slowly recovering, manufacturing orders point at continued improvements and the labour market points to a strengthening economy. These indications have also supported the likelihood of a Fed rate increase at the upcoming March meeting. While positive sentiment was also supported by numerous announced economic plans by the new administration that may turn out to be supportive for the domestic economy, uncertainties remain about the depths of these envisaged economic reforms and their implementation timeline. With numerous support measures having been announced, some upside could be possible, though the details of such initiatives remain to be seen. The upcoming budget negotiations will provide more inside in this respect.
The main support for economic growth in the US economy currently is coming from private household consumption, while investments may keep the growth dynamic going, given that energy-sector related investments are recovering. Consumption increased by 3.0% in 4Q16, the same level as in 3Q16. Moreover, private investment also grew by 9.2% q-o-q seasonally adjusted annual rate (SAAR). Exports have weakened after significantly expanding by 10.0% q-o-q SAAR in 3Q16, while the 4Q16 number has shown a decline of 4.0% q-o-q SAAR, impacted by the strength of the US dollar. Over the course of the quarters in 2017, no major pickup in growth levels are expected on average, as productivity growth remains subdued, the labour market remains tight and further governmental-led growth initiatives remain uncertain.
The labour market’s positive momentum continued to be seen in the latest February numbers. The unemployment rate fell back to 4.7% in February, while non-farm payroll additions rose by 235,000, after being upwardly revised to 238,000 in January. Average hourly earnings rose by 2.8% y-o-y, a solid increase, to reach $26.09/hour. Support is also provided by the mining and logging sector, which includes oil-related employment. The sector started to add jobs again last November, with 21,000 new jobs since then. Long-term unemployment also reached a new low of only 23.8% of total unemployment, the lowest level since March 2009. Participation rates also increased to reach 63%, another sign of a healthy labour market.
While a somewhat slowing pace in improvements previously kept the Fed from raising interest rates, the current momentum in labour markets, as well as inflation, very likely support a rate-hike at the Fed’s upcoming 15 March meeting. Total inflation stood at 2.5% in January and core inflation, excluding food and energy, was still up by 2.0%, which is approximately the Fed’s envisaged level of inflation. Moreover, if fiscal stimulus is implemented in the current economic environment, the economy may be faced with further inflationary challenges. First, the labour market currently seems to be relatively tight. With a reduction in immigration levels, it could become more expensive for employers to fund additional working hours. In addition, some initiatives like tax adjustments and infrastructure investments will require financing, but it is not yet entirely clear how this will be achieved. Given the current economic situation, it is likely that such measures may lift inflation via various channels. In the end, this may put the Fed under pressure to raise interest rates, probably quicker than currently anticipated.
Industrial production remained flat in January, though it was supported by a better situation in the energy sector. Mining, which includes oil sector-related output, rose by 0.4% y-o-y, the first increase of this subgroup level in almost two years.
A positive trend in private household consumption was supported considerably by the latest retail sales numbers. Retail sales growth in January stood at 5.6% y-o-y, even higher than the already strong December level of 4.4% y-o-y. This positive trend was also visible in the Conference Board’s Consumer Confidence Index, which rose to a multi-year high of 114.8. This is the highest level since 2001, providing a strong indication that economic conditions have been improving.
July’s Purchasing Manager’s Index (PMI) for the manufacturing sector as provided by the Institute of Supply Management (ISM) also indicated improvements in the underlying economy. The manufacturing PMI moved higher to reach 57.7 in February, compared with an already high level of 56.0 in January. The important services sector index also rose to an index level of 57.6, from 56.5 in January.
Signs have appeared that the momentum will lead to higher growth in the current year. This was already anticipated in the previous month, thus the GDP growth forecast remains unchanged at 2.2% for 2017, after achieving growth of 1.6% in 2016. More data over the coming months, as well as better insights into the fiscal stimulus plans of the incoming administration, will provide a sounder overview for a more detailed assessment of the situation of the US economy.
The economy of Canada continues to improve slightly, supported by a better situation in the oil sector and the stronger economy of its most important trading partner, the US. In 4Q16, the GDP was reported to be 2.6% q-o-q SAAR. This continuing the strong growth from 3Q16, providing an overall GDP growth rate of 3.8%. Hence, annual growth stood at 1.4%. Industrial production increased by 1.5% in December, after hitting 2.1% y-o-y in November. Output from the mining, oil and gas sectors remained an important driver, with overall sector growth of 1.7% y-o-y, after seeing a rise of 4.4% y-o-y in November. Importantly, the PMI for manufacturing improved, rising to a significantly higher level of 54.7 in February, after reaching 53.5 in January. The GDP growth forecast for 2017 remains unchanged at 1.7% but may see an upward revision if momentum continues.
OECD Asia Pacific
After a period of subdued or even negative growth in most areas of the Japanese economy, momentum seemed to gain slight traction, with output numbers improving, domestic demand holding up well and exports recovering. Inflation is still low but is likely to increase in the coming months, not only due to rising commodity prices but also supported by a considerable tightness in the labour market, which should lead to rising wages. With the still-low inflation rate, the BoJ will also be in a position to continue providing monetary support. It remains to be seen if the momentum will continue and is sustainable. However, the combination of a low yen and improving OECD-supported exports, as well as monetary and fiscal stimulus, seems to finally have positively supported economic development and the coming months will show if this will be a sustainable trend.
Inflation rose only slightly in January by 0.5%, up from its December level of 0.3%. With the combination of a tight labour market, which should lift core-inflation via rising income levels and strengthening commodity prices, this upward trend may continue. However, when excluding the two volatile groups of energy and food, the country’s core inflation figure remained low at 0.1% in January, though slightly up from December, when it stood at 0%. Positively, real income continued to rise with pay increases in January of 0.9% y-o-y, following a rise of 1.1% y-o-y in December. The rising income pattern is also the outcome of a very low unemployment rate, which stood at only 3.0% in January, even lower than the rate of 3.1% recorded in December.
Japanese exports rose in January by 1.3% y-o-y, after showing already strong growth of 5.4% y-o-y in December. This recovery comes after more than a year of decline. This dynamic has been supported by a fall in the value of the yen and improvements in OECD economies. The export of industrial goods and capital equipment mostly supported this positive trend in trade. Also, industrial production continued its recovery, rising for the sixth consecutive month, up by 3.2% y-o-y in January, reaching the same healthy level as in December. This was also supported by a strong trend in manufacturing orders, which rose by 8.6% y-o-y in January and 10.7% y-o-y in December, pointing to the likelihood of continued rising industrial output.
The improving environment has also been reflected in domestic demand levels. Retail trade had already recovered in November when it rose by 1.7%. It continued to rise in December at a rate of 0.7% and increased by 1.0% y-o-y in January after almost a year of decline.
The latest PMI numbers provided by IHS Markit confirmed ongoing economic improvements. The PMI for manufacturing rose to 53.3 in February from 52.7 in January. The services sector PMI remained strong but retraced slightly to 51.3 in February from 51.9 in January.
The most recent improvements point to some upside potential for Japanese growth. Numerous challenges persist and it remains to be seen to what extent current improvements will hold in the global economy and whether the ongoing stimulus measures by the BoJ will be able to lift growth above current forecast levels. For this month, the economic forecast remains unchanged at 1.0% for 2016 and 1.1% for 2017.
Despite the latest political turbulence, the South Korean economy seems to have weathered challenges relatively well. Exports rose significantly in February by 12.7% y-o-y, after an already significant rise of 9.1% y-o-y in January. This marks the largest increase in exports since 2012. Industrial production rose by 3.6% y-o-y in January, after hitting 3.5% y-o-y in December. However, the latest PMI number for the manufacturing sector in February still indicates declining momentum in the manufacturing sector. The index rose slightly, but remained below the growth-indicating level of 50 with a figure of 49.2, only marginally higher than the 49.0 recorded in January. While near-term developments warrant close monitoring, the GDP growth forecast for this month remains unchanged at 2.6% for 2016 and 2.5% for 2017.
While the Euro-zone’s growth dynamic continues, political debate is currently at the forefront of public discussion, with upcoming elections in the Netherlands, France, probably Italy and general elections in Germany in September. Certainly also Brexit is an important subject in this regard. In the meantime, growth continues to be supported by healthy domestic demand, while exports are still benefitting from a relatively weak euro. The current growth dynamic seems to be quite broad-based, while potential uncertainties about the outcome and consequences of the upcoming elections in key economies have not materialised in lower growth so far. The most recent momentum, in combination with a weaker euro and rising commodity prices, have also led to higher inflation. However, given the still relatively low core inflation rate, it seems the European Central Bank (ECB) is in no rush to significantly reduce its monetary stimulus anytime soon, especially since growth could still benefit from more support and given the fact that expectations of sharply rising inflation have not yet materialised. Negatively, the sovereign debt situation of Greece seems to have gained complexity again with differing views between the International Monetary Fund (IMF), the EU and Greece itself about how to proceed. This subject may also re-emerge in other economies, namely Italy.
The Euro-zone’s expansion continues to grow at a solid pace. However, the 4Q16 GDP growth level was revised down slightly from a 0.5% q-o-q seasonally adjusted (sa) growth rate to 0.4% q-o-q sa growth. Despite this slight downward revision, GDP growth in 2016 remained unchanged at 1.7%.
The unemployment rate remained at 9.6% in January, the same as in December. Positively, it has remained below 10% for six consecutive months. Additionally, banking sector-related weakness seems to have abated to some extent, while in Italy challenges remain, with large institutions demonstrating capital needs. Also, the looming exit of the UK from the EU is adding some concern as it remains unclear how the process will unfold.
The latest industrial production figures confirmed that the business environment remains in expansionary territory. After growth of only 1.0% y-o-y in October, November’s appreciation stood at a considerable 3.0% y-o-y and 1.8% in December. Manufacturing growth stood at a solid 1.3% and construction output rose by 2.4% y-o-y. Retail sales growth in value terms increased as well, up by 2.8% y-o-y in January, after reaching 2.1% y-o-y in December. This signals ongoing improvements in the underlying economy. Some support may still come from slight improvements in the labour market.
Inflation increased to a healthier level of 2.0% in February, after reaching 1.8% y-o-y in January. However, core inflation – that is, the consumer price index (CPI), excluding energy, tobacco and food ? stood at only 0.9% y-o-y, the same level as in January. This inflationary dynamic will remain an area that the ECB will consider closely during its upcoming monetary policy decision-making meetings as well as at the most recent meeting, when the ECB kept its main policy rate at 0% and the deposit facility rate at -0.40%. The bond buying programme will continue until at least the end of 2017, and the monthly QE-programme is due to drop from €80 bn to €60 bn from April, as previously announced. Furthermore, the ECB’s president highlighted that he sees no signs yet of a convincing upward trend in underlying inflation, so current stimulus measures are expected to continue for a while. The effectiveness of monetary stimulus – not only in terms of inflation but also in terms of credit supply – has increased lately. In January, credit supply increased by 1.5%, only slightly below the December level of 1.6% y-o-y. This is the fifth consecutive month with growth higher than 1%, after recovering from levels below 1% for all of 2016 prior to September.
The latest PMI indicators point to a continuation in Euro-zone improvements as well. The manufacturing PMI rose slightly to 55.4 in February from 55.2 in January. The important services PMI increased considerably to 55.5, compared with 53.7 in January, already a high level.
The 2017 GDP growth forecast for the Euro-zone remains at 1.6%, compared with a 2016 growth level of 1.7%. The lower level of growth in the current year anticipates potential challenges posed by political developments in 2017, given key elections in major economies, as well as the vagueness regarding Brexit procedures, which may all lead to rising uncertainty. This is to be seen in combination with the likelihood of rising inflation and, hence, a potential reduction in monetary stimulus towards the end of the year.
While the UK’s efforts to leave the EU have gained some traction lately, the latest decision in the House of Lords that the Peers would like to see parliament have a final say in Brexit negotiations and guarantee the rights of EU citizens in the UK has opened up a debate that may continue. In the meantime these requests were rejected by the Commons and amended accordingly by the Lords. Now the Prime Minister is expected to start negotiations soon. In addition to this debate, Scotland wants to call for a second independence referendum. Thus, some uncertainty will remain for the coming months.
The UK’s economy has been only slightly impacted by Brexit so far and has remained robust. But early signs of some slow-down have emerged. The PMI for manufacturing remained at a considerable level, standing at 54.6 in February, somewhat below the 55.7 of January. Positively – and probably even more important for economic growth in the UK – the services sector PMI fell back to 53.3 after reaching 54.5 in January and 56.2 in December. This was the lowest reading in five months. Domestic consumption held up well, but signs of weakening have become apparent as retail values increased by 2.9% y-o-y, the lowest increase since September of last year. The underlying assumption of a severe negative impact of Brexit on the UK economy in the short-term has not changed. But it seems that the fallout will be spread over a longer time horizon and may be counterbalanced by governmental support, at least to some extent. The 2017 growth forecast remains unchanged at 1.3%, significantly lower than growth in 2016 of 2.0%.
Brazil’s GDP contracted by 2.5% y-o-y in 4Q16, marking the 11th consecutive quarter of deceleration in the country’s longest and deepest recession ever. This brought the overall contraction for 2016 to 3.6% y-o-y.
Brazil’s trade surplus increased in February to $4.5 bn, 50% higher than the same month of the previous year. This was also the highest trade surplus recorded in February. While imports increased by 5.9% y-o-y in February, exports rose by 15.9%. The economic activity indicator published by Brazil’s central bank showed a decline of 1.8% y-o-y in December 2016, confirming an easing trend in the country’s contraction. The deceleration in GDP seems to have bottomed out in 4Q15 when the economy contracted by 5.8%. The pace of contraction gradually eased to 5.4%, 3.6%, 2.9% and 2.5% in 1Q16, 2Q16, 3Q16 and 4Q16, respectively. Consumer price inflation dropped to 5.4% in January, the first sub-6% reading since May 2014. This downward inflationary path left some room for the central bank to reduce its high interest rate from 13.75% to 13.00% in January and to 12.3% in February. The unemployment rate increased once again in January to another record-high of 12.6%.
The services sector in Brazil continued to remain in recession during February for the 24th consecutive month, according to the Markit Brazil Services Business Activity Index. Nevertheless, the index showed a slower rate of reduction and recorded its highest level since March 2015 to 46.4, up from 45.1 in January. The manufacturing sector also continued to face challenging operating conditions in February as the Markit Brazil Manufacturing PMI remained in contraction territory. However, the deceleration in production and new orders was slower in February compared with a month earlier. The survey also showed strong optimism among manufacturers, 73% of which foresee production growth by next year. The consumer confidence index was again positively affected by slowing inflation and showed another improvement in February, increasing to 82.4 from 81.9 in January.
The deep recession for more than two years, which brought GDP down to less than the level registered in 2Q12, seems to be changing course, and the economy finally appears to be sending signs of a gradual reversal. Throughout the past months, Brazil has experienced slowing inflation, which helped consumer sentiment and allowed the central bank to lower its benchmark interest rate. It is still high, even after a recent 75 basis point reduction, meaning there is plenty of room to stimulate the economy via further adjustments in the interest rate. While remaining in recession, both the services and manufacturing sectors are likely to turn a corner before mid-2017, with a slower pace of contraction and strong optimistic sentiment seen in February. This gradual process of cyclical recovery is anticipated to induce minor growth in GDP of 0.5% y-o-y in 2017.
In January, inflation reached its slowest rate of increase since June 2012 at 5.0% y-o-y. In February, inflation eased further to 4.6% y-o-y. The central bank remained determined to continue and sustain the downward trend in inflation, keeping its benchmark interest rate unchanged at 10.00% in February. This sent an important message to the market, confirming the expectations of notably lower inflation in 2017. The Russian ruble appreciated by 2.4% m-o-m against the US dollar for the third month in a row in February.
The services sector extended its expansionary streak for the 13th month in a row in February. The Markit Russia Services Business Activity Index posted 55.5 points in February. However, the sector stood short of the previous month’s growth, which was the fastest since before the Great Recession. Reflecting strong performance in the services sector, together with slowing inflation, retail sales continued dropping in January, though by the least since the beginning of 2015. Retail sales declined by only 2.3% y-o-y in January 2017 compared to an average drop of 5.2% y-o-y in 2016.
The manufacturing sector registered growth for the seventh consecutive month, according to the Markit Russia Manufacturing PMI. However, the index reading of 52.5 in February was lower than January’s sixyear high of 54.7 and the lowest in four months on slower increases in production, new business and employment. Still, February’s reading is well above the index average, since it was first published in January 2012. Actual data regarding industrial production seems to be very much in line with the conclusions of the manufacturing PMI survey. Industrial production increased by 2.3% y-o-y in January, extending a series of expansions started in February 2016. February’s rate of expansion is the third highest in the indicated period.
The economy of Russia seems to be in reasonable shape and is heading towards expansion territory in 2017 following two years of recession which brought the GDP down to nearly 4Q11 seasonally adjusted levels. GDP growth is projected to be at 1.0% in 2017. The recent extension of positive indicators created more room for an upward revision in the coming months.
India’s annual GDP growth increased above expectation to 7.3% y-o-y in 4Q16, while for 2016 GDP growth stood at 7.5%, implying a negligible impact from recent demonetisation. In the midterm, India’s annual GDP growth rate is projected to trend at around 7.0% in 2017. The main reason behind the 7.3% GDP growth in 4Q16 is a rebound in consumer spending despite a severe liquidity shock in the cash-intensive economy, following demonetisation. Real private consumption growth nearly doubled from the previous quarter, up 10.1% y-o-y in 4Q16, according to the Central Statistics Office. As with private consumption growth, real fixed investment appears to have shown a turnaround during the December quarter, up by 3.5% y-o-y, following three quarters of contraction. On the supply side, strong manufacturing growth in the 4Q probably still reflects the cost effects against real manufacturing GDP growth of 8.3% y-o-y, given that the volume growth measured by the manufacturing component of the industrial production index was significantly lower, at 0.4% y-o-y. The impact of demonetisation was most evident in the construction sector, which showed a slowdown in growth to 2.7% y-o-y after a short-lived recovery in 3Q16.
In January, India’s CPI recorded its smallest y-o-y increase since the start of the current survey in 2012. Meanwhile, core inflation picked up in January, supporting the central bank's recent shift to a neutral policy stance. The CPI decreased 3.17% y-o-y in January of 2017, easing from a 3.41% rise in December and remaining below market expectations. This is the lowest inflation rate since the series began and is due to a sharp slowdown in food prices. A year ago, the inflation rate was higher at 5.69%, while on a monthly basis, consumer prices have edged down 0.08%. The weaker-than-expected inflation result is unlikely to move the Reserve Bank of India (RBI) from its recent shift towards a neutral monetary policy stance. This shift was based on concerns about re-emerging domestic core inflation pressures as seen in January, as well as other global factors. The wholesale price index rose 5.25% y-o-y in January of 2017, following a 3.39% gain in December while the markets expected a 3.89% rise. It was the tenth straight monthly increase and the highest level since July 2014. The increase was driven by a faster increase in the costs of manufactured products and a surge in the costs of petrol. Food prices, meanwhile, fell less than in the prior month.
Indian merchandise exports stood at $22.1 bn in January, up 4.3% y-o-y, marking the fifth consecutive month of growth, following a prolonged period of contraction. Improving global prices for oil and other commodities was the major reason behind the rise. Imports of goods increased by 10.7% y-o-y to $32 bn during the month, reflecting a sharp rise in oil purchases, following a gradual recovery in global oil prices. The merchandise trade deficit narrowed to $9.8 bn last month, down from $10.4 bn in December 2016. An expected further recovery in global oil prices is likely to be the main factor in India's 2017 external trade dynamics. As a result, the trade and current account deficits are likely to widen only slightly from current levels, with the latter expected to remain under 2% of GDP in 2017. One factor that could potentially disrupt the balance is a sharp increase in gold imports, something that in the past has driven the current account deficit above 5% of GDP.
India posted a current account deficit of $3.4 bn, or 0.6%, of GDP, in 3Q16 compared to $8.5 bn, or 1.7%, of GDP, during the same period a year ago. The merchandise trade deficit fell sharply to $25.6 bn compared to $37.2 bn a year ago. Meanwhile, the balance of payments posted a surplus of $8.5 bn for the JulySeptember quarter compared with a deficit of $900 mn a year ago.
India's monthly index of industrial production (IIP) data remained volatile and provided only limited insight into the true effects of demonetisation. The December contraction in industrial output is not drastic, particularly when seen in the context of already shrinking output prior to demonetisation and the unfavourable base effects from December 2015. Yet the third consecutive month of sequential monthly declines in the output of consumer durable goods does seem to confirm a slowdown in consumer demand. India's industrial output slipped 0.4% y-o-y in December, bringing the full-year growth to a mere 0.4%, the lowest since 2009. The 2.0% y-o-y contraction in manufacturing production was responsible for the overall drop in December, while both mining and electricity generation showed growth above 5.0%.
Indian manufacturers benefited from recovering demand and raised production volumes in response to another expansion in inflows of new work. February is the second successive month in which the health of the sector improved after the demonetisation-related contraction recorded at the end of 2016. February data indicated that Indian manufacturing production continued to increase, as a rebound in export demand contributed to a stronger expansion of total new orders. There was evidence of an intensification of inflationary pressures, with input costs rising at their quickest pace since August 2014 and output charge inflation climbing to a 40-month peak. The PMI reached 50.7 in February, up from 50.4, above the neutral 50 level for the second month running, an indication that the health of the sector has improved to a greater extent than in January. That said, the latest reading was much weaker than the long-run series average of 54.2, largely reflecting below-trend rates of growth for output and new business.
With 4Q16 GDP growth at 7.3%, India’s real GDP growth for 2016 was 7.5%, and hence was 0.4 percentage points (pp) higher than the expectation set out in last month’s MOMR. With some negative effects from demonetisation expected to materialise in 1Q17, the 2017 GDP growth forecast was revised down to 7.0%, from 7.1% in the previous month.
China’s GDP growth momentum remained solid at the start of 2017 with goods export and import volumes rising. But GDP growth is expected to slow to 6.2% this year as the tightening of housing purchase restrictions in many large cities will weigh on real estate investments, and policymakers are moving to place somewhat more emphasis on reducing overcapacity. Fast economic growth continues to be supported by rapid gains in leverage. Overall credit, including local government bond issuance, grew 15.8% in January, only slightly down from the 16.1% increase in December. The Chinese Premier announced that the government aims to deliver economic growth of around 6.5% in 2017, compared with last year’s goal of 6.5% to 7%. In the coming years, it seems the Chinese GDP growth rate will face two strong downward risks. The first is related to China’s ambitious growth target, which will rely on further stimulus and tighter policies for rapid credit growth. The second risk is related to the new US administration’s policy on international trade channels.
Net financial outflows moderated to about $57 bn in January, while the stock of foreign exchange reserves fell below $3 trn. It seems policymakers will continue to dampen depreciation pressures via foreign exchange intervention and clamp down on financial outflows in order to limit the fall in foreign exchange reserves. The People’s Bank of China (PBoC) has spent nearly $800 bn over the past two years to control the pace of the yuan’s depreciation against the US dollar, depleting the country’s foreign exchange reserves and raising concerns about the sustainability of such a policy. The PBoC has allowed interbank rates to increase somewhat, signalling that it does not want monetary conditions to be too loose, owing to concerns about financial risk.
Consumer spending is becoming an increasingly important driver of growth as households get richer and demand for services is expected to remain strong. Indeed, the services sector has outpaced industry since 2012. Consumption may continue to lead China's economic growth in 2017 but at a moderated pace. However, it seems the contribution of consumption to GDP may decline in 2017 because of a predicted rebound in investment.
The Chinese government targets average GDP growth of at least 6.5% in 2016-20 to achieve the objective set in 2010 to double both GDP and per capita income by 2020. But these growth targets are overly ambitious, given the various external and domestic headwinds, including those coming from the new policy of the US administration, which could lead to excessive reliance on the stimulus noted above.
Chinese exports and imports have rebounded in line with expectations with the fastest monthly growth rate since February 2015. This compares with a 2016 contraction of 7.7%, or a 15.2% contraction in January 2016. The improvement was overwhelmingly the result of much slower contractions of exports to Hong Kong, and a swing into modest growth for exports to the European Union. Somewhat faster growth in exports to the US and somewhat slower contractions in exports to ASEAN also played a role, albeit much smaller, in this improvement. Most products showed improved growth relative to the prior month, although a majority of the export improvements were due to mechanical and electrical product exports accelerating from -6.1% to 4.4% growth and high-tech products accelerating from -8.0% to 2.3% growth in line with expectations. Meanwhile, merchandise imports expanded 16.1% in January in US dollar terms.
China's current account surplus fell to 1.9% of GDP in 2016, according to a press release by the State Administration of Foreign Exchange. The figure is the lowest since a 1.5% surplus-to-GDP ratio in 2013, and compares with a 3.0% ratio in 2015. In nominal terms, the 2016 surplus was $210.4 bn. China's weakening current account surplus reduces the chance it will be labelled a currency manipulator by the US. Under existing rules, a country's surplus exceeding 3% of GDP is one of three criteria to launch a further investigation. China has been at or below that level since 2011.
China’s government has made progress in cutting excess capacity in coal mining and steel, but more capacity reduction is needed. The government plans to extend its policy-driven initiative to other sectors within the country’s heavy industry this year.
The producer price index (PPI) rose 6.9% y-o-y in January, driven by rising prices in coal mining and heavy industry, while the m-o-m gain moderated for the first time since July 2016. The spurt in prices is expected to run out of steam in 1H17 and CPI inflation is forecast to remain below the likely target of 3% in 2017, suggesting no major monetary policy implications.
The PBoC announced that it would permit a lower reserve requirement ratio (RRR) from 27 February for selected banks that participate in lending in rural areas and to small businesses. Some banks that have failed to supply sufficient credit to these sectors since 2014 would face a move in the opposite direction, becoming subject to a higher RRR.
China's foreign exchange reserves increased by $7 bn to $3.005 trn in February 2017, from $2.998 trn in January, challenging expectations of a fall to $2.969 trn. It was the first rise since June of last year, following the imposition of administrative controls.
China unexpectedly reported a $9.15 bn trade deficit in February of 2017 compared to a $28.2 bn surplus a year earlier, missing market expectations of a $25.75 bn surplus. It was the first monthly trade gap since February 2014 as imports surged while exports fell. In February, exports declined by 1.3% y-o-y, following a 7.9% rise in January while markets expected 12.3% growth. Imports jumped 38.1%, after growing 16.7% in the prior month, to settle way above the consensus of a 20.3% rise. In January 2017, China posted a trade surplus of $51.35 bn. Trade in January and February could be distorted by the week-long Lunar New Year holiday, with businesses slowing down weeks ahead of time and companies scaling back operations.
In terms of China’s non-financial corporate debt, it could serve as a downward risk, since it has risen to 142% of GDP. In addition, leverage in some sectors has been very high. Furthermore, large volumes of lending to firms in the heavy industry sector suffering from excess capacity have led to a significant increase in the stock of non-performing loans. While the risk of a systemic financial crisis remains low, a lack of progress in reining in credit growth could eventually lead to more pronounced financial stress and raise the risk of market turmoil. Meanwhile, a move to dampening credit growth would mean slower, albeit more sustainable, GDP growth.
China's CPI improved to 2.5% y-o-y in January on the acceleration seen across all sub-sectors. According to an official statement, the m-o-m acceleration mainly came from transportation and telecommunications, as well as the tourism and food components, owing to a ‘Spring Festival’ effect. Meanwhile, the oil price rise in January contributed to the acceleration of related transportation components. The services CPI experienced a larger acceleration, improving by 0.7 pp from December to January, compared with the 0.4 pp acceleration in consumer goods.
China's PPI accelerated to 6.9% y-o-y in January, largely owing to the low base effect in 2016.
China's total automobile production and sales volumes weakened in January relative to a year ago, according to data published by the Ministry of Industry and Information Technology (MIIT).
China’s PMI rose to 51.7 in February, up 0.7 points from the previous month. This is the second highest level in four years. The output and new orders sub-indices rebounded from a month ago. Beyond the headline business activity index, other notable changes included weaker total new orders, despite new export orders expanding for the first time in three months, as well as a backlog of orders contracting at a faster pace. Employment continued to contract for a second month, following a short-lived stabilization during the final quarter of 2016.
OPEC Member Countries
In Saudi Arabia, inflation was slightly in the negative in January 2017 at 0.4% y-o-y as a result of the baseline effect where adjustment to prices of electricity, gas and other fuel, together with water supply, were introduced in early 2016, pushing the overall inflation index higher. Growth in the country’s non-oil private sector accelerated in February, according to the Emirates NBD Saudi Arabia PMI. The index registered 57.0 in February, up from 56.7 a month earlier, due to a surge in new orders and output.
In Nigeria, GDP shrank 1.5% y-o-y in 2016, according to the National Bureau of Statistics. However, the non-oil private sector started 2017 on a positive note where the Stanbic IBTC Bank Nigeria PMI reading on February was the highest in 14 months. The survey outcomes highlighted an increase in new orders accompanied with a quick rise in output. The index stood at 52.2 in February, up from 51.9 in January, whereas it spent most of 2016 in contraction territory.
Operating conditions in the non-oil private sector in the United Arab Emirates was moving from strength to strength at the beginning of 2017. The respective PMI index rose to a 17-month high of 56.0 in February due to notable growth in new orders and the strongest upturn in output in one-and-a-half years.
The economy of Indonesia grew by 5.0% y-o-y in 2016, slightly higher than 2015’s growth of 4.9%. Despite the fact that growth in general government consumption expenditure declined from 5.0% y-o-y in 2015 to just 0.7% in 2016, Gross Fixed Capital Formation (GFCF) accelerated by 5.3% in 2016 compared to 3.0% in 2015. The slowdown in exports continued but eased in 2016, reaching 1.7% y-o-y compared with a decline of 2.1% y-o-y in 2015. Imports, on the other hand, dropped by a smaller rate of 2.3% y-o-y in 2016, while 2015’s decline in imports stood at 6.4%. Consumer price inflation was at 3.8% y-o-y in February, lower than the 4.4% inflation rate recorded one year ago.
Growth in Malaysia’s GDP registered 4.2% y-o-y in 2016, lower than the 5.0% rise in 2015. Private consumption growth was unchanged at 6.1% y-o-y in 2015 and 2016. In contrast, the government’s final consumption expenditure increased by only 1.6% y-o-y in 2016 compared to 4.5% in the previous year. Growth in GFCF also increased at a lower rate in 2016, growing by 2.6% compared to 3.8% in 2015. Exports barely grew in 2016, rising by 0.1% y-o-y compared to the 0.6% increase a year earlier. Imports also witnessed notable declines in growth last year compared to 2015, dropping by 0.4%, compared to 1.2%.
In South Africa, the rand appreciated by 2.7% m-o-m against the US dollar in February. Business conditions in the South African private sector continued to improve last month, yet at a slower pace, according to Standard Bank South Africa PMI. The index remained in the growth territory for the sixth month in a row, posting 50.5 in February, down from 51.3 in the first month of the year. Surveyed firms reported weaker increases in output and new business, especially for exports as new export orders declined further.
In Egypt, the pound appreciated 9.2% m-o-m against the US dollar last month, after depreciating 97% in the three months from November 2016 through January 2017. The currency depreciation sent inflation towards a nearly 30% y-o-y surge in January. The Emirates NBD Egypt PMI showed that while operating conditions in the non-oil private sector kept worsening, the pace of decline softened somewhat. The index survey revealed reduced declines in output and new business. Reductions in employment also continued but at a slower pace.
In Argentina, the outlook for government bonds was recently improved as the Moody’s rating agency lifted the country’s rating from a stable to a positive outlook. This development was largely due to policy measures taken at the beginning of 2016, which are seen as supportive of growth returning in 2017.
In Chile, the central bank kept its benchmark interest rate unchanged in February at 3.25%. The rate was lowered in January from 3.50%, aiming to support economic growth amid an easing of inflation. The CPI increased 2.8% y-o-y in January, compared to a 4.8% increase twelve months before.
The GDP of the Czech Republic grew by 2.4% y-o-y in 2016, according to the country’s Statistical Office. This is lower than the 4.5% economic growth registered in 2015. Household consumption growth slowed from 3.1% y-o-y in 2015 to 2.9% in 2016. Government consumption also showed a similar trend, growing by 1.6% y-o-y last year, down from 2.0% in 2015. GFCF witnessed a steep contraction of 3.3% in 2016, compared with an increase of 8.9% one year earlier. Growth in the exports of goods and services went from 7.7% in 2015 to 4.3% in 2016. Imports were the only improved part of the GDP equation as they grew by a slower pace of 3.3% in 2016 compared to an 8.2% rate in 2015. The manufacturing sector PMI in February highlighted strong growth in production, as well as new business and job creation in the sector. The index rose to 57.6 in February from 55.7 a month earlier, marking the highest reading since April 2011.
Oil prices, US dollar and inflation
The US dollar declined for the second consecutive month in February against both major and emerging market currencies. On average, the US dollar declined by 1.5% against the Japanese yen – down 2.4% since December. The dollar lost slightly 0.2% against the euro and 0.6% against the Swiss franc. The dollar declined against the British pound sterling by an average of 1.1% on signs of some economic deceleration and uncertainties regarding the Brexit discussion in parliament, as well as calls by government officials from Scotland to hold a second independence referendum.
Compared with the Chinese yuan, the US dollar dropped by 0.3% m-o-m on average in February, its second decline this year. It decreased by 1.5% m-o-m against the Indian rupee. Compared with the currencies of commodity exporters, US dollar declines have been more accentuated. The dollar decreased by 2.9% m-o-m against the Brazilian real – down by 7.4% since December – and by 2.4% against the Russian ruble – down by 5.9% since December.
Against the currencies of NAFTA trading partners, the US dollar on average lost by 4.6% against the Mexican peso undoing its January gains. But it is still 7.5% higher on average than in October. The peso strengthening mainly reflects the friendlier tone of US officials regarding trade relations with Mexico. Meanwhile, the US dollar decreased by 0.6% against the Canadian dollar.
The decline in the value of the US dollar for the second consecutive month in February mainly reflected market expectations of a slower path of interest rate increases by the Fed during the month. However, at the end of February and the beginning of March, speeches by Fed officials have translated into market participants looking with greater likelihood at an interest rate hike at the upcoming March meeting, which has strengthened the currency. Fed chairwoman Janet Yellen said at the beginning of March that during the next Fed meeting, the FOMC “will evaluate whether employment and inflation are continuing to evolve in line with expectations, in which case a further adjustment of the federal funds rate would likely be appropriate”.
In nominal terms, the price of the OPEC Reference Basket (ORB) increased by 97¢, or 1.9%, from $52.40/b in January to $53.37/b in February. In real terms, after accounting for inflation and currency fluctuations, the ORB increased to $37.37/b in February from $36.90/b in January (base June 2001=100). Over the same period, the US dollar declined by 0.5% against the import-weighted modified Geneva I + US dollar basket 1 , while inflation advanced by 0.1%.
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