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World Economy - May 2017

Source: OPEC_RP170505 5/11/2017, Location: Europe

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The uptick in global economic activity seems to be continuing with ongoing strong growth in the Euro-zone, solid output numbers in China and improvements in commodity exporting economies, also due to the ongoing rebalancing in the oil market. Some weakness appeared in 1Q17 US GDP numbers but it seems to be temporary, based on the latest labour market numbers and other short-term indicators. The Japanese economy’s output is still pointing to a higher level of growth in 2017 compared to last year. China has shown strong output numbers in recent months and the government is aiming to reach somewhere around its target growth rate of 6.5%. India is also forecast to continue growing at a high rate and still has room to the upside, depending on near-term developments in domestic consumption, agricultural output and the success of its structural reforms. Brazil and Russia are forecast to rebound to growth, after two years of recession.

Some of these improving developments have already been reflected in the global economic growth forecast, which remains unchanged at 3.3% in 2017 after growth of 3.0% in 2016. In the OECD economies, US growth is forecast to stand at 2.2% in 2017 after growth of 1.6% in 2016. Following the weaker than expected 1Q17 GDP, growth is forecast to rebound in the remainder of the year. Still, the timeline and the depth of envisaged reforms by the new US administration remain uncertain, but this could lift US growth further. In Japan, rising exports and recent stimulus measures have led to expectations of GDP growth of 1.2% in 2017 compared to 1.0% in 2016. However, an extremely tight labour market and continuing low inflation are keeping growth there from reaching higher levels. In the Euro-zone, the growth dynamic continues to be positive and 1Q17 output was stronger than expected, leading to an upward revision in the 2017 GDP growth forecast to 1.7%, the same level of growth as in 2016. However, ongoing high sovereign debt levels in some Euro-zone economies, several weak banking sector institutions and political uncertainties are all issues that need to be closely monitored.

n the emerging economies, China and India continue to expand at a considerable rate. In China, after a stronger than expected 1Q17 GDP number, 2017 growth was revised up to 6.5% compared to 6.7% in 2016. Meanwhile, India’s growth remains strong and is forecast at 7.0% in 2017 after growth of 7.5% in 2016, unchanged from the previous month. Domestic consumption, investment and governmental support all remain key drivers in these two economies, and they are expected to continue to support growth in 2017. Growth in both Brazil and Russia is forecast to recover in 2017. Brazil is forecast to grow by 0.5% in 2017 after a considerable decline of 3.6% in 2016, while Russia is expected to see growth of 1.2% after a decline of 0.2% in 2016. Both economies are anticipated to benefit from improving commodity markets and a recovery in domestic demand.

Numerous uncertainties for global economic growth remain. Policy issues carry considerable weight, as do monetary policy decisions, which remain particularly important in the near-term. Moreover, global debt levels remain high in some key economies, an issue that will probably require further attention if interest rates continue to rise gradually and the US dollar keeps strengthening. Finally, sustained stability in commodity prices are viewed as necessary for ongoing improvement in global growth.

OECD
OECD Americas
US
In the first of three estimates provided by the US Bureau of Economic Analysis, 1Q17 US GDP growth was seen at only 0.7% q-o-q on a seasonally adjusted annualised rate (SAAR). This was not only lower than expected but also marked the lowest level of GDP growth in three years. While this seems to be a temporary slowdown, the low number also underscores the fact that it may be challenging for the new US administration to lift GDP growth rates to a level of 3% or more – since even with the various envisaged stimulus measures the gap to be closed seems wide. The low growth number was considerably impacted by the slow-down in private household consumption, while the rise in energy-sector related investments had a somewhat positive and counterbalancing effect. After 3% growth in the previous three quarters, private consumption expanded by only 0.3% q-o-q SAAR in the 1Q17. Given that this constitutes more than two thirds of GDP, the impact was certainly large. Positively, exports expanded by more than 3% q-o-q SAAR, despite the relative strength of the US dollar. Private Investments into “structures”, the GDP accounting subsection that includes investments into the oil sector – grew by 22% q-o-q SAAR, after having declined significantly for more than two years. This also helped to mitigate the 1Q17 slow-down, as it added more than 0.5pp – or more than two thirds – to total GDP growth. Since the labour market has continued to improve in April and consumer sentiment has risen over the past months, this slow-down in activity is expected to be temporary. With further data, it will be interesting to see why this slow-down in consumption appeared in the 1Q17. It is, however, likely that some uncertainty among consumers after the election may have led to this development and, hence, a rebound may be expected, particularly as consumer sentiment numbers are still supportive. While constituting only a minor part of total consumption, the consumption of gasoline and other energy related goods saw a sharp decline of 8% in 1Q17, which was remarkable. This also corresponds to weak US oil product demand numbers in the first three months of the year. Importantly, the decline in motor vehicle sales added a large negative impact of 0.5 pp to 1Q17 GDP growth.

Despite this weakness at the beginning of the year, it seems the Fed will continue to gradually lift its interest rate level. While the 1Q17 weakness will certainly need monitoring, early indicators point to a rebound in 2Q17 and with the latest labour market numbers strong again, consumer sentiment is holding up well. In addition, exports have recovered despite the relative US dollar strength. The depth and the duration of upcoming economic reforms planned by the new US administration may also influence decision making at the Fed. The most important near-term stimulus measures the administration wants to implement are tax cuts and increased infrastructure spending, but it remains unclear how and at what pace a political consensus may be found around these measures. Certainly any increase in spending, combined with a lower tax burden for companies and households, could lift both growth and inflation – which could, in turn, lead the Fed to raise interest rates more quickly than currently anticipated.

Inflation as a key element of the Fed’s upcoming interest rate decisions remains around the central bank’s envisaged inflation rate of around 2%. This is not only visible in total inflation but also in the core inflation level (which excludes food and energy). Total inflation stood at 2.4% in March and core inflation was also up by 2.0%, which is in line with the Fed’s inflation target level of around 2.0%.

Also, the labour market’s positive momentum continued to be seen in the latest April numbers. The unemployment rate fell back to 4.4% in April, the lowest since 2007. Non-farm payroll additions recovered as well, rising by 211,000, after a downward revision in March of only 79,000. Average hourly earnings increased by a solid 2.3% y-o-y to reach $21.96/hour. Ongoing support was also provided by the mining and logging sector – which includes oil-related employment – which added 10,000 jobs in April. Long-term unemployment also reached a new low of only 22.6% of total unemployment, the lowest level since the end of 2008, while the participation rate declined slightly to 62.9% from 63% in March.

On the domestic side, industrial production increased in March by 1.5% y-o-y after a rise of 0.3% y-o-y in February. It was again supported by a better situation in the energy sector. Mining – which includes oil sector-related output – rose by 3.0% y-o-y in March, the strongest performance of this sub-group since the beginning of 2015. Manufacturing, another important sub-group of industrial production, rose by 1.0% y-o-y in March. Domestic demand, in turn, was supported by the latest rising retail sales numbers. After retail sales growth in February stood at only 1.1% y-o-y, it rose by 4.6% y-o-y in March. The general positive trend in domestic consumption was also visible in the Conference Board’s Consumer Confidence Index, which declined slightly but remained at a high level of 120.3 in April after 124.9 in March. This also provides some indication that economic conditions have been improving and may continue to do so.

April’s Purchasing Manager’s Index (PMI) for the manufacturing sector as provided by the Institute of Supply Management (ISM) also indicated some support in the underlying economy, albeit at a slower pace. The manufacturing PMI fell back to 54.8 in April from 57.2 in March. This is the lowest level this year and, since this trend is softening, it will require attention in the near-term. On a positive note, the important index for the services sector, which constitutes more than 70% of the US economy, rose to 57.5 in April, compared to 55.2 in March.

The uptick in the yearly growth average is already anticipated in the current forecast numbers, thus the GDP growth forecast remains unchanged at 2.2% for 2017, after achieving growth of 1.6% in 2016. While currently the upside to the 2017 GDP growth forecast seems to be limited, more and better insights into the fiscal stimulus plans of the new US administration, as well further information on the planned tax reform, will provide a more sound overview of the US economy – in order to provide a more detailed assessment of the situation.

Canada
The economy of Canada continues to improve. Industrial production increased by 2.7% y-o-y in February, compared to 2.5% in January and 1.7% y-o-y in December. This positive momentum was supported by rising exports, which have been boosted by improvements in the oil-sector and the improving US market, Canada’s most important trading partner. Exports rose by 12.9% y-o-y in March, up from 4.3% y-o-y in February. Retail trade also continued to expand at a healthy level of 3.1% y-o-y in February, albeit slightly lower than in January, when growth stood at 5.1% y-o-y. The PMI for manufacturing improved, rising to a significantly higher level of 55.8 in April, up again from an already considerable level of 55.5 in March and 54.7 in February. Taking the positive momentum into consideration, the GDP growth forecast for 2017 was revised up to 1.9% from 1.8%.

OECD Asia Pacific
Japan
The Japanese economy continues to provide positive indicators that confirm the current forecast of slightly higher growth in 2017, when compared to last year, as both the economy and prices are firming, albeit at a low level. As structural reforms and other important government-led stimulus measures have been undertaken as part of the government’s current economic agenda (labelled “Abenomics”), reforms have started to pay off slowly. But numerous challenges remain apparent. The extremely tight labour market, for example, is an outcome of some economic improvements but, at the same time, it limits growth potential. In addition, productivity gains have only been gradual in the economy, which is currently running a manufacturing utilisation rate of around 100%. So while current economic growth should be considered a success, only medium- to long-term improvements will be able to raise the current growth level further. Inflation is still low and may be supported by rising commodity prices, particularly oil. The tightness in available resources may support rising prices, along with an increase in wages, in the future. Domestic demand has also started to improve in March. After low levels of growth, this is a weak sign that rising wages may lead to more activity on the consumer side. Finally, the weakness of the yen has been an important driver for exports as well. It is forecast that some of the positive developments from international trade will also filter through to domestic demand and support economic growth.

Inflation rose only slightly in March, increasing by 0.2% y-o-y, the same low level as in February. Despite tight labour markets, rising wages are only now slowly turning into rising consumption and rising prices. Core inflation (which excludes food and energy) even declined by 0.3% y-o-y, after a decline of 0.1% y-o-y already in February. However, with the combination of a tight labour market, rising income levels and possible continuation of strengthening commodity prices, this trend should turn. So far, underlying deflationary – or, at least, low-inflationary – forces remain persistent. An important factor is also falling house-prices, dropping by 0.2% y-o-y in March.

The country’s rising income pattern is also receiving support from the very low unemployment rate, which in March stood at only 2.8% for a second consecutive month. Real income has continued to rise modestly with pay increases in March at 0.4% y-o-y, following a rise of 0.5% y-o-y in February. The ratio of open jobs to applicants rose 0.02 points to 1.45. This is the highest level since the end of 1990. While the Bank of Japan (BoJ) target of achieving inflation of around 2% remains in the distance, it has continued with its monetary stimulus measures, highlighting that it is still too early to move away from such measures as the current economic environment needs further monetary support. The BoJ has kept its overnight interest rates at a minus 0.1% cap and the 10-year bond yields at about zero percent. Furthermore, it has decided to continue purchasing government bonds at a pace of ¥80 trillion a year. More support for ‘Abenomics’ may also come from the fact that the two BoJ members who dissented from this latest decision will be replaced by the Prime Minister when they retire this summer, in yet another move to ensure the decision-making body of the BoJ supports government-led policy.

Japanese exports in March rose by 12.0% y-o-y, after already showing strong growth of 11.3% y-o-y in February. 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 eighth consecutive month, up by 3.3% y-o-y in March after 6.7% y-o-y in February. This was also supported again by a solid trend in manufacturing, which rose by 3.3% y-o-y in March. However, manufacturing orders point at some slow-down as they fell by 0.9% y-o-y in February, the latest available data point, after rising 8.6% y-o-y in January and 10.7% y-o-y in December.

Some improvement has also been reflected in domestic demand levels. Retail trade rose by 2.1% y-o-y in March after increases of only 0.2% y-o-y in February and 1.0% y-o-y in January. This is an important rebound after an annual decline of 0.6% in 2016.

The latest PMI numbers provided by IHS Markit confirmed some improvements in manufacturing. The PMI for manufacturing rose to 52.7 in April compared to 52.4 in March. The services sector PMI remained strong but retraced slightly to 52.2 in April from 52.9 in March.

The most recent developments confirm the solid underlying growth dynamic in the Japanese economy. 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 government and the BoJ will be able to lift growth further. Having already taken some improvement in the Japanese economy into consideration, the 2017 GDP growth forecast remains at 1.2% compared to 1.0% in 2016.

South Korea
While South Korea so far continues to show solid growth rates, domestic political developments combined with rising uncertainties in the region may dampen economic growth in the coming months. Moreover, economic policies in particular will need to be reviewed after most recent elections. Exports were especially a driving force for the economy’s continued solid growth. They rose again significantly in April, increasing by 23.2% y-o-y after 8.8% y-o-y in March and 9.5% y-o-y in February. Industrial production rose by 4.0% y-o-y in March after 3.1% y-o-y in February. However, the latest PMI number for the manufacturing sector in April indicates an ongoing contraction in the sector, with the index remaining below the growth-indicating level of 50 for a ninth consecutive month, despite it having improved to 49.4 after 48.4 in March. Given the near-term uncertainties, the GDP growth forecast for 2017 was revised down to 2.4% from 2.6% after growth of 2.8% in 2016.

OECD Europe
Euro-zone
While political developments – such as the latest rounds of Brexit talks between the UK and the EU, French presidential elections and upcoming German elections – remain at the forefront as factors influencing economic developments, the latest release of 1Q17 GDP figures showed that the recovery in the Euro-zone remains significantly positive and robust. It is clearly overtaking the growth levels in the US economy but also the UK economy. 1Q17 GDP stood at a 0.5% q-o-q seasonally adjusted rate of growth, even better than the 4Q16 GDP growth level of 0.4% q-o-q. As political uncertainties continue and sovereign debt issues – particularly in Greece – remain, the economic situation will need monitoring. But it is obvious that the improving trend has firmed. Growth continues to be supported by healthy domestic demand, exports are still benefitting from a relatively weak euro and the labour market – still with some room to the upside – is improving. On a positive note, inflation is also higher than last year but still low enough to keep the European Central Bank (ECB) from reducing its monetary stimulus. In addition, sovereign debt spreads have improved and, hence, the situation in the banking sector has also improved. Business sentiment has lately improved as well as the European Commission’s April economic sentiment index rose by 1.6 points to 109.6 in April, its highest level since September 2007. This positive sentiment has also impacted the euro which rose to its highest level in six months at the beginning of May at almost $1.10/€.

Furthermore, the unemployment rate in March remained at an eight-year low for the second consecutive month at 9.5%. Since it remains at an elevated level, it still offers some room to the upside, providing further growth potential to the economy. This is also the eighth consecutive month below 10%, showing a relatively consistent trend. Wages remain low as well but should be expected to pick up at a later stage in this recovery. Wages increased by 1.6% y-o-y in 4Q16, which was the highest level in 2016 compared to precrisis levels of 2% and more. The gently improving labour market is also a positive driver for inflation and a signal of an improving economic environment, with inflation levels have risen in the past months. Inflation stood at 1.9% again in April, rising from a March level of 1.5% y-o-y. This was influenced by rising energy prices, a change which is expected to be only temporary. However, core inflation – that is, the consumer price index (CPI), excluding energy, tobacco and food – also rose sharply to 1.2% y-o-y, compared to 0.7% y-o-y in March.

Such inflation-related developments, in combination with a trend of underlying improvements, will remain an area that the ECB will consider closely in its upcoming monetary policy decision-making meetings. So far, senior policymakers in the ECB have highlighted that it may be too early to change the course of accommodative monetary policy now, and that is likely that the ECB will keep its main policy rate at 0% and the deposit facility rate at -0.40% in the coming months. Officials also said recently that the bond buying programme will continue until at least the end of 2017. After the ECB’s latest rate-setting meeting at the end of April, its president said that the cyclical recovery of the Euro-zone economy has become increasingly solid and that the downside risks have diminished further. Furthermore, it was highlighted that underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend. Support from monetary stimulus – not only in terms of inflation but also in terms of credit supply – has continued. In March, the credit supply increased by 1.8%, rising from 1.4% y-o-y in February. This was the highest increase since the end of 2011. Also, banking sector related weakness seems to have abated to some extent within this improving environment.

Industrial production grew by 1.2% y-o-y in February, after no growth in January. Retail sales growth in value terms was again an important support factor for Euro-zone growth, increasing by 4.1% y-o-y in March, after an already considerable level of 3.6% y-o-y in February. This signals ongoing improvements in the underlying economy, though continued support may still come from improvements in the labour market, particularly from the wages side at a later stage. The latest PMI indicators point to a continuation of Euro-zone improvements as well. The manufacturing PMI rose to its highest level since initiation of the index, reaching 56.7 in April. Also, the important PMI for the services sector, which constitutes the largest sector in the Euro-zone, increased to 56.4 in April from 55.9 in March, also the highest level since the start of the index.

The 2017 GDP growth forecast for the Euro-zone was lifted to 1.7% from 1.6% in the previous month. This is now the same level of growth as in 2016, with some further room to the upside. Political developments will need continuous monitoring, but with the French election now over, with a pro-European candidate having been elected as president, some of the uncertainty has decreased. Still, the vagueness regarding Brexit procedures and the upcoming German elections remain important factors. These factors need to be seen in combination with the potential of again rising inflation and, consequently, a potential reduction in monetary stimulus towards the end of the year.

UK
With the start of Brexit negotiations over recent weeks, it has become clear that the process of the UK leaving the EU will be intensive and probably challenging for all concerned. The EU has provided an ‘exit bill’ of 100 billion euros, which the UK has strongly opposed. Furthermore, questions over the status of Scotland in particular but also Northern Ireland have become apparent again as both members of the UK have voted to remain in the EU. In the meantime, economic indicators have softened, with 1Q17 growth now falling to 0.3% q-o-q at a seasonally adjusted rate after 0.7% q-o-q in 4Q16.

While these early signs of a slowdown have emerged, the UK economy has remained relatively robust. Exports have largely benefited from a weakening pound and, hence, have benefitted from an improving competitive position. Exports again increased by 16.5% y-o-y in February. Also, the PMI for manufacturing rose again and now stands at a considerable level of 57.3 in April after 54.2 in March. This is the highest level this year. Positively – and probably even more important for economic growth in the UK – the services sector PMI rose to 55.8 in April, higher than the 55.0 seen in March. Domestic consumption rose considerably again as well in March, rising by 5.2% y-o-y, only slightly below the February number of 6.4% y-o-y. Industrial production rose by 2.8% y-o-y in February, only slightly below the 3.3% y-o-y seen in January. The underlying assumption of a severe negative impact on the UK economy stemming from Brexit has not changed. But it seems that the fallout will be spread over a longer time horizon and may even be counterbalanced by governmental support, at least to some extent. Taking the still better than expected economic dynamic into consideration, the 2017 GDP growth forecast has been increased to 1.5% from 1.4%, but it is still lower than the 1.8% growth of 2016.

Non-OECD
Brazil
The trade surplus of Brazil increased by 43% y-o-y in April reaching $6.96 billion. Imports increased by $10.7 billion, while exports posted $17.68 billion increase due to the large increase in the export of basic products. Iron ore exports had the biggest increase, rising by 87.5%, followed by crude oil and copper. Exports of manufactured and semi-manufactured goods also increased. Total exports to China increased by 46.8% y-o-y during January–April 2017.

The Brazilian real depreciated by 0.27% m-o-m vs. the US dollar in April. Consumer price inflation eased from 4.7% y-o-y in February to 4.6% in March, the lowest reading since September 2010. This downward inflationary path left some room for the central bank to continue reducing its benchmark interest rate to 11.25% in April from March’s 12.25%. The unemployment rate for the fifth month in a row in March posting 13.7%.

Brazil’s Markit Manufacturing PMI stood in the expansion territory in April for the first time since January 2015. The index posted 50.1 in April, up from 49.6 in March. The survey showed that production increased for the second month in a row. Manufacturers increased their purchasing activities for the first time since January 2015. New orders also showed continued growth, while employment continued to fall for the 26th consecutive month, although at its slowest pace. After 25 consecutive months of contraction, business conditions in Brazil’s services sector finally returned to the growth territory in April, according to Markit Brazil Services PMI. The index rose to 50.3 in April, up from 47.7 in March. The survey highlighted solid growth in new orders received by service providers, increasing at its quickest pace since February 2015. The inflation rate eased to lower levels, thus reducing the positive marginal effect on consumer sentiment and bringing the issue of high unemployment to the forefront. The consumer confidence index fell in April to 81.8 from 85.3 in March.

Brazil’s GDP is currently anticipated to show cyclical but minor growth of around 0.5% y-o-y in 2017. Positive signals from both the manufacturing and services sector started to accumulate for the third month in a row, supporting a return-to-growth view.

Russia
The trade surplus of Russia increased in February by more than 40% y-o-y, rising from $7.2 billion in February 2016 to $10.17 billion in February 2017. While imports increased by $2.7 billion, or 28% y-o-y, exports rose $5.6 to reach $25.7 billion in February or 28% y-o-y.

Russia’s GDP has returned to growth territory in 4Q16 after seven consecutive quarters of contraction, supported by an increase in gross capital formation. GDP grew 0.3% y-o-y in 4Q16. In April, the ruble appreciated vs. the US dollar, with the ruble gaining 2.9% m-o-m vs. the dollar and accumulating a 13% gain since last December. A downward inflationary trend continued in April, posting a consumer price inflation of 4.1% y-o-y, the lowest since June 2012. Although the inflation rate is close to target level the set by the central bank, the monetary authority did not ease its benchmark interest rate in April, which remained at 9.75%.

Operating conditions in the country’s manufacturing sector continued to improve in April for the ninth consecutive month, according to Russia’s Markit Manufacturing PMI. The index stood at 50.8 in April, down from 52.4 a month earlier. Amid less optimistic business confidence, the index survey showed a slower pace of growth in production and new business. Employment in the manufacturing sector dropped by the quickest pace seen since March 2016 and for the second consecutive month. Industrial production increased by 0.8% y-o-y in March. The Markit Russia Services Business Activity Index posted 56.1 in April, slightly lower than March’s 56.6, indicating continued growth but at somewhat slower pace. Retail sales dropped in March by 0.4% y-o-y, the lowest rate in the long streak of contraction started in January 2015.

The economy of Russia seems to be on a gradual path towards a modest recovery in 2017, following two years of recession. GDP growth is projected to be 1.2% y-o-y in 2017.

India
India’s real GDP growth slowed to 7.0% y-o-y in 4Q16 (not seasonally adjusted) from an upwardly revised 7.4% in 3Q16, which matches expectations and model estimation results. (On a seasonally adjusted basis, elaborated by Haver Analytics, real GDP growth is seen at 7.3% y-o-y in 4Q16 compared to 7.0% in 3Q16.) In contrast to other sources, the Secretariat did not consider India’s GDP growth on a seasonally adjusted basis as a benchmark. Thus, all expenditure categories have shown significant improvements, with private and government consumption both registering double-digit annual growth rates (10.1% and 19.9%, respectively) and investment expanding for the first time since 4Q15.

Indeed, the growth slowdown was largely driven by discrepancies, with a little support from net exports. The growth of real gross value added sustained well in the 4Q. At 6.6% y-o-y, it was largely unchanged from the previous quarter, while growth in the services sector decelerated to 6.8% from an average of 8.6% in the first three quarters of 2016. Manufacturing growth rose to 8.3% from 6.9% in the 3Q and agriculture grew at the fastest pace recorded in more than four years, in part owing to a good monsoon period in 2016.

The immediate economic impact of demonetisation seems to be very significant, in line with trends witnessed in the ‘bottom-up’ indicators. It is possible that the first set of growth estimates has not captured this impact adequately and may eventually be revised lower. In addition, demonetisation is likely to widen India’s tax base, enabling the government to continue focusing on increasing infrastructure spending, even while adhering to fiscal consolidation. It seems the following factors will support India’s economy in 2017 and 2018:
- Pick-up in consumption
- Higher infrastructure spending
- Private investment
- Cautious outlook for exports

Recent data suggests that both urban and rural consumption have turned a corner, although rural demand continues to lag the recovery in urban areas. Auto sales, a widely followed indicator of India’s consumption demand, were up 5% q-o-q in the 1Q17, after contracting 18.3% in 4Q16.

The Reserve Bank of India (RBI) shifted to a ‘neutral’ stance in February and reiterated its focus to bring inflation closer to 4% on a sustained basis, the mid-point of its inflation target range. In line with this, there is a high possibility that CPI inflation will rise above 5% in 2H17, though no further interest rate cuts are expected. Indeed, the RBI may hike the repo rate towards the end of the year, if inflation and growth pick up.

The CPI in India increased 3.81% y-o-y in March 2017, following a 3.65% rise in February. This was below market expectations of 3.98%. Food inflation slowed to 1.93% from 2.01%. India’s wholesale price index (WPI) eased to 5.7% y-o-y in March following three months of acceleration. But with food inflation slowly inching up and with consumer prices also on the rise, the March softening in the WPI will not change the RBI's policy stance. Food prices will increasingly be at risk in the coming months, particularly if projections of a possible below-average summer monsoon season from a forming El Ni?o weather pattern materialises. However, the India Meteorological Department (IMD) forecasts a "normal" June–September monsoon season with rainfalls expected to be around 96% of their 50-year average (the IMD classifies rainfalls between 96% and 104% as normal.) Fuel prices will likely continue to recover from their 2016 lows, adding upward pressure to headline inflation.

Merchandise exports accelerated by 27.6% y-o-y in March, amid strong exports of iron ore, petroleum and engineering goods. Yet imports also expanded strongly by 45.3% y-o-y, driving the trade deficit to $10.4 billion. Merchandise exports stood at $29.2 billion in March, up 27.6% from a year ago, marking the highest level since March 2014 in US dollar-denominated terms. The recovery in oil prices pushed petroleum product exports 69.1% higher than in the previous year. The shipments on engineering goods also expanded strongly, up 46.7% y-o-y. Meanwhile, iron ore exports more than quadrupled from March 2016 to reach $245 million.

Merchandise imports stood at $39.7 billion, up 45.3% y-o-y. Imports of crude oil and petroleum products more than doubled from March 2016 to $9.7 billion. Imports of gold also grew sharply to $4.2 billion, over three times the amount of gold imported in March 2016. The merchandise trade deficit widened to a fourmonth high of $10.4 billion in March from $8.9 billion in February. Despite a sharp acceleration in petroleum and iron ore shipments, the pick-up in exports is fairly broad-based, indicating stronger global demand in addition to a recovery in commodity prices. Given a strong pick-up in gold imports following the government's demonetisation announcement, as well as rising oil prices, it seems imports growth continue to outpace exports in 2017, contributing to a larger trade and current account deficit, which is expected to widen above 1.0% of GDP in 2017 from 0.6% of GDP in 2016.

The Nikkei manufacturing PMI suggests a muted impact of demonetisation on industrial activity. However, industrial production has varied in recent months and the growth momentum remains weak. There is also no sign of a turnaround in private investment, which has been a drag on growth since late 2015. According to published data, manufacturing conditions in India improved for the fourth straight month in April. Slower increases in output, stocks of purchases and employment were offset by stronger growth of new orders and lengthening delivery times.

India’s GDP growth expectation for 2017 kept unchanged at 7.0%.

China
China’s GDP growth accelerated to 6.9% y-o-y in 1Q17 from 6.8% in 4Q16. Economic growth accelerated in January–March, helped by a stronger manufacturing performance. The y-o-y rate of expansion was the most rapid since 3Q15. Owing to price inflation, the pick-up in nominal terms was even more notable, with GDP growth accelerating to 11.8% from 9.6% in 4Q16.

The secondary (industrial) sector’s value added rose by 6.5% y-o-y, the strongest outcome since the same quarter of 2015. Manufacturing has been buoyed by firmer global demand for merchandise exports, which have increased in value by 14.8% in the 1Q. The mining and steel sectors have also been performing strongly, owing to surprisingly resilient investment in property development and supply shortages that have driven production increases.

By contrast, the tertiary (services) sector output softened to 7.7% y-o-y in January–March, dropping from 8.3% in 4Q16. Real disposable income growth among urban residents slowed to 6.3% in January–March, which was notably below the pace of real GDP expansion. Spending on property may have also crowded out room for expenditure on non-essential services. Primary (agriculture) sector output rose by 3% in 1Q, up from 2.9% in 4Q16. China’s new financing growth decelerated in February as the government stressed risk management. In terms of monetary policies, money supply growth slowed to 11.1%, down from 11.3% in the previous two months. Officials are targeting 12% money supply growth for 2017, although it is worth noting that in 2016 they targeted 13% money supply growth but only achieved 11.3%.

As mentioned in the initial data release on 17 April, most of the industrial acceleration came from slower contractions or minor rebounds in heavy manufacturing. Given the still-weak volume growth, this is likely the result of supply consolidation policies that have increased prices and margins – and which have thus increased the scope of potential value-added per unit of output. The housing market is expected to decelerate and then contract over the next year, which will bring headwinds for related industries when it does. April’s data release further confirms the view that the 1Q rebound is unsustainable.

The Chinese government set a goal to cut the tax burden on enterprises by approximately CNY350 billion in its March 2017 work report. This was further emphasised by Premier Li, who stated that the country will strive to reduce taxes and charges by CNY1 trillion in 2017. China's efforts to ease the tax burden on enterprises seem to be paying off. According to the National Bureau of Statistics, China's GDP grew 6.9% during 1Q17, entirely driven by the industrial sector. Meanwhile, industrial profits growth surged to 31.5% during the first two months, a six-year high on account of the rising profit margin and declining costs. Further tax cuts will support industrial profit in scientific and innovative enterprises, and will help with China's supplyside reforms and its efforts to restructure the economy away from heavy industry. However, its contribution to the headline industrial production may be limited, given its relatively small share compared with that of heavy industry.

China's CPI improved slightly y-o-y to 0.9% in March from 0.8% in February. The People’s Bank of China (PBoC) attributed the weak CPI to lower food prices, which fell 2.4ppin March owing to higher-than-average temperatures in March. Non-food prices growth edged up 0.1 pp from February, with clothing, health care and education prices rising significantly. Meanwhile, the services CPI rose to 2.7%, compared with the 0.1% contraction of consumer goods. The CPI slowed from 2H16, which will set a declining base for 2017 growth. China targeted a 3% CPI growth for 2017.

China's producer price index (PPI) moderated y-o-y to 7.6% in March, the first deceleration in 18 months. Slower growth in major sectors – including petroleum and natural gas extraction, ferrous metals processing, petroleum processing, non-ferrous metals smelting and processing, and chemicals – was the main contributor to the headline deceleration.

China reported a trade surplus of $23.9 billion in March of 2017 compared to a $25.2 billion surplus a year earlier and above market expectations of a $10 billion surplus. Exports increased by 16.4% y-o-y, following a 1.3% fall in February, while markets expected 3.2% growth. Imports rose 20.3%, after jumping 38.1% in the prior month and were above the consensus estimate of an 18% rise.

In February 2017, China posted a trade deficit of $9.15 billion. Exports from China increased by 16.4% y-o-y to $180.6 billion in March 2017, following a 1.3% decrease in February, while markets expected a 3.2% growth. Considering the first three months of 2017, exports went up 8.2% from the same period a year earlier with sales increasing to Hong Kong (0.9%), India (14.2%), Japan (4.8%), South Korea (17.4%), Taiwan (10%), ASEAN countries (11.4%), EU countries (7.4%), South Africa (16.5%), Brazil (35.8%), Russia (22.4%), Australia (8.7%) and New Zealand (6.5%). The US was the main export partner, with sales rising 10%. In yuan-denominated terms, exports went up 22.3%. Imports to China increased 20.3% from a year earlier to $156.68 billion in March 2017, compared to growth of 38.1% in the prior month and an aboveconsensus rise of 18%. The EU was the main import partner, with imports rising 15.5%, followed by ASEAN countries (27.1%).

The latest data indicated that Chinese manufacturers started the 2Q17 with a further slowdown in production and new business growth. The downward pressure on manufacturing gradually emerged in April, with all indicators weakening. The Chinese economy may be starting to embrace a downward trend in the near-term as prices of industrial products decline and active re-stocking comes to an end. Employment across the sector meanwhile declined at its fastest pace since the start of the year and input buying rose only slightly. At the same time, optimism towards the 12-month outlook was the weakest seen in 2017 so far. Cost pressures continued to ease from the peaks seen at the end of last year and contributed to only a modest rise in prices. The PMI was down 0.9 points to 50.3 in April 2017, the lowest point since September. China's official manufacturing PMI fell to 51.2, a 6-month low, according to data published by the National Bureau of Statistics.

China's official non-manufacturing PMI fell 1.1 points to 54.0 in April, a 6-month low. The most significant retreats were observed among new orders, new export orders and with regard to expectations for future activity, all of which grew at a slower pace. While overall activity grew less rapidly, price growth and employment conditions improved relative to one month earlier.

China’s GDP growth expectation, due to some positive potential such as strong exports as well as GDP growth in 1Q17 were revised up to 6.5% from 6.3%.

OPEC Member Countries
Inflation in Saudi Arabia posted a negative reading in March, similar to the first two months of the year, as a result of the increasing baseline effect in some public goods and energy prices in 2016. Inflation stood at negative 0.4% y-o-y in March. So far, after a sharp jump in 2016, slowing inflation holds positive prospects for higher purchasing power, leading to improvements in spending and investment. The country’s private sector continued reporting improvements in its operating conditions as suggested by the Emirates NBD Saudi Arabia PMI. The index rose to 56.5 in April due to strong growth in output and new business.

In the United Arab Emirates, the non-oil private sector reported continued improvements in the health of the sector in April. The Emirates NBD UAE PMI on April registered 56.1, down slightly from 56.2 in the previous month. The index survey showed strong increase in growth of output and new business. Manufacturers also increased their stock of purchases to a survey record high. Employment in the sector also rose in April for the twelfth month in a row.

In Nigeria, the Stanbic IBTC Bank Nigeria PMI rose in April to its highest level in 16 months at 53.6, up from 53.0 in March. This improvement was due to a sharp acceleration in new business and output. The survey also demonstrated some easing in input and output price inflation. It also revealed a strong increase in exports by private sector firms for the first time in 16 months in April.

Other Asia
In Indonesia, inflation in April registered its highest reading since March 2016 at 4.2% y-o-y. It is likely that the increase was due to the rise in the categories of fuel, electricity and water, and transportation, communication and financial services. The first category posted a 9.4% y-o-y rise in March 2017 compared to 0.25% y-o-y in March 2016, while the later had a 5.1% y-o-y increase in April 2017 vs. a negative 1.5% y-o-y drop in April 2016.

In the Philippines, the solid growth of its manufacturing sector persisted in April, according to Nikkei Philippines Manufacturing PMI. This optimism prompted manufacturers to increase employment and purchases. The index stood at 53.3 in April, down slightly from 53.8 a month earlier. The slight drop reflects a lesser rate of expansion in production, new business and job creation. The domestic market was reported to be the main factor behind manufacturing growth as demand for exports had just moderate growth in April.

Africa
In Egypt, the Egyptian pound depreciated 2.1% m-o-m vs. the US dollar in April, following March’s depreciation of 4.4%. Inflation continued to increase by a very high rate in March, rising by 32.5% y-o-y as a result of the sharp currency depreciation seen since November 2016. Business conditions in the country’s non-oil private sector remained in the contraction territory in April. The PMI reading stood at 47.4 in April, up from 45.9 in March. The survey confirmed the persistent decline in output and new orders but also showed a rise in exports for the first time in approximately two years.

In South Africa, the rand lost 4.1% m-o-m of its value vs. the US dollar in April, signalling the highest level of depreciation since May 2016. The reserve bank of South Africa kept its policy rate unchanged at 7.0% in April, while inflation eased slightly to a 6.1% y-o-y in March, down from 4.5% in February. Business conditions in the private sector posted a minor improvement last month as activities slowed close to the neutral PMI line. The Standard Bank South Africa PMI fell to 50.3 in April, down from March’s 50.7.

Latin America
In Argentina, the central bank’s monetary policy target rate remained unchanged in March at 24.75%. Meanwhile, the CPI increased 2.4% m-o-m in March, up from a largely similar rate in the previous month. The bank’s inflation target is 5.0%. The rate of increase in retail sales slowed in February to 16.3% y-o-y, down from the rate of more than 20% recorded since April 2013.

In Chile, the central bank reduced its benchmark interest rate by 25 basis points to 2.75% in April, signalling the lowest interest rate since October 2010. Inflation remained within the central bank’s target boundaries of 2.0% and 4.0%. In addition, inflation posted a 2.7% increase in February and March. As economic activities remain muted and inflation is projected to stay within the target limits, the reduction was needed to lend support to economic growth before the middle of the year.

Transition region
A solid expansion in production and the fastest growth in new business in 35 months, together with muted input inflation, have reinforced the manufacturing sector in the Czech Republic in April, according to the Markit Czech Republic Manufacturing PMI. The index registered 57.5 in April, which was similar to March’s reading. The index showed a sharp acceleration in export orders, which were seen at their quickest pace since the beginning of 2015. The Czech currency appreciated slightly vs. the euro in April, rising by 0.7% m-o-m after being completely stable in the previous two months. Inflation stood at 2.6% y-o-y in March, its highest reading since November 2012.

Oil prices, US dollar and inflation
The US dollar generally declined in April, against both major and emerging market currencies, especially in the first half of the month following data showing some deceleration in the US economy in 1Q17. This translated into a downward adjustment to market expectations for the path of interest rate increases by the US Fed. On average, the dollar declined by 2.6% against the Japanese yen, but in the second half of the month it reversed some of the losses following receding geopolitical concerns. The dollar lost 0.3% on average against the euro but, after the results of the first round of the French presidential elections the pace of decline increased. Meanwhile, the dollar was relatively flat on average against the Swiss franc, but it declined against the pound sterling by an average of 2.4% – especially after the UK Prime Minister called for an early election.

The US dollar declined by 0.1% m-o-m on average against the Chinese yuan in April. It decreased by 2.1% m-o-m against the Indian rupee and is down by 5.0% since the beginning of the year. The dollar advanced by 0.3% m-o-m against the Brazilian real and declined by 2.9% m-o-m against the Russian ruble. Against both currencies, the dollar is down by 6.4% and 9.3%, respectively, since the beginning of the year.

Against NAFTA trading partners’ currencies, the US dollar lost 3.3% on average against the Mexican peso and has declined by 8.6% since the beginning of the year. Meanwhile, the US dollar gained 0.3% against its Canadian counterpart.

In nominal terms, the price of the OPEC Reference Basket (ORB) increased by $1.02, or 2.0%, from $50.32/b in March to $51.34/b in April. In real terms, after accounting for inflation and currency fluctuations, the ORB increased to $35.51/b from $35.16/b (base June 2001=100). Over the same period, the US dollar declined by 0.8% against the import-weighted modified Geneva I + US dollar basket 1, while inflation advanced 0.2%.

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