World Economy - September 2017Source: OPEC_RP170905 9/12/2017, Location: Europe
Global economic growth momentum has gained traction lately and has become more balanced, with all major economies now showing positive growth this year, a trend that is forecast to continue into 2018. With mainly better-than-expected growth seen recently in the OECD group of economies, global growth for 2017 was revised up to 3.5%, while the economic growth forecast for 2018 remains unchanged.
The OECD’s GDP growth in 2017 was revised up to 2.2%, while the 2018 forecast remains unchanged at 2.0%. This uptick was mainly supported by an ongoing strong growth dynamic in the Euro-zone and the US economy also showed solid growth in 1H17. Additionally, the major emerging economies held up well, as China’s growth in 1H17 was better-than-expected and is now forecast to reach 6.7% in 2017 and 6.3% in 2018. India’s 1H17 growth dynamic was negatively impacted by major structural reforms (GST and demonetisation), but it is forecast to remain considerably supported at 6.9% in 2017 and to rebound to 7.5% in 2018, boosted by ongoing structural reforms. Russia and Brazil will also continue their recovery and are forecast to grow by 1.5% and 0.5% in 2017 and by 1.4% and 1.5% in 2018, respectively, though this also depends on developments in commodity prices and politics, as well as presidential elections in both countries in the coming year.
With the expected continuation of ongoing growth momentum in 2H17, there is still some room to the upside for currently anticipated global growth levels in both 2017 and 2018. At the same time, challenges remain, mainly related to global political developments and upcoming monetary policy decisions, particularly in the US and the Euro-zone. Seemingly high valuations in equity and bond markets, in combination with low volatility, pose a risk at a time when central banks have become more willing to reduce monetary stimulus measures. Debt levels also remain high in some key economies, an issue that will probably require further attention if interest rates continue to rise gradually, particularly in the US. Finally, sustained stability in commodity prices, particularly oil prices, is viewed as necessary for ongoing improvement in global economic growth.
US GDP growth in 2Q17 was revised up to a considerable level of 3.0% q-o-q at a seasonally adjusted annualised rate (SAAR), after a previous estimate of 2.6% q-o-q SAAR. This makes the recovery from 1Q17 GDP growth of only 1.2% q-o-q SAAR even more visible. Consumption was confirmed as the main driver; it expanded by 3.3% q-o-q SAAR. While lower than in 1Q17, exports also performed well, growing by 3.7% q-o-q SAAR, after rising by 7.3% q-o-q SAAR in 1Q17, despite a still relatively strong US dollar. Moreover, investments continued to grow, with a considerable share coming from the energy sector. This positive momentum is now expected to continue in 2H17, albeit at a lower level.
The labour market is continuing to improve and consumer sentiment is positively developing, an important factor when considering that private household consumption accounts for more than two-thirds of US GDP. Additionally, the recently weakening US dollar may lift exports and the energy sector’s rejuvenated investment programmes will also support this trend. In the meantime, it remains to be seen to which magnitude Hurricanes Harvey and Irma may have negatively impacted growth in the current quarter, but based on past experience the negative effect is forecast to be visible, but minor, while the damage may be severe. This damage may, however, result in rebuilding efforts in 4Q17 and 1H18 that may have a positive impact on GDP growth. Another upside risk for the coming quarters may be the implementation of the US administration’s envisaged tax reform, which is supposed to be finalised by the end of the year. This may also provide some upside to growth, but political uncertainties still seem to be great. Even more significant is the challenge of a re-emerging debt ceiling debate after a recent agreement that may only last up to the end of the year. US treasury bills have already started to reflect some uncertainty before the agreement was made and uncertainty may again re-emerge. In addition to a short-term solution on the debt ceiling, the budget for the upcoming fiscal year still needs to be finalised.
While the fiscal side is facing some uncertainties, the US Federal Reserve’s (the Fed’s) monetary policy decisions are an important factor to be monitored. Currently, it seems the Fed may go ahead with its plans to gradually normalise its monetary policy, given the ongoing momentum in the US economy. This normalisation plan not only includes a gradual increase in interest rates, but the managing down of the balance sheet. While the Fed’s intention seems to be to gradually raise interest rates, officials have made clear that this is contingent on continued confidence that the Fed will eventually achieve its 2% inflation goal and in this respect some concern has been raised, as inflation has again started falling in the past months. It stood at 1.7% y-o-y in July, slightly higher than the 1.6% y-oy- recorded in June. Core inflation remained at 1.7% y-o-y for the third consecutive month, below the Fed’s target. Upcoming meetings in the second half of September will provide further insight into the near-term development of the US monetary policy and an interest rate rise seems to be relatively unlikely until the end of the year, while a reduction in the Fed’s balance sheet may be implemented.
The labour market’s positive momentum continued, but progress has been mixed again. Non-farm payroll additions were slightly below expectations at 156,000 job additions in August, after a downward-revised figure of 189,000 new jobs in July and 210,000 additions in June. Average hourly earnings growth for the private sector remained stable as they increased by 2.3% y-o-y, the same level as in the past months. Long-term unemployment numbers improved slightly to 24.7% in August, compared with 25.9% in July. Finally, the participation rate remained at 62.9% in August, the same level as in July.
Industrial production improved again in July, rising by 2.2%, compared with 2.1% y-o-y in June and May. It was again supported by a better situation in the energy sector. Mining – which includes oil sector-related output – rose by 10.2% y-o-y compared with 9.3% y-o-y in June and 6.9% y-o-y in May. Manufacturing, another important sub-group of industrial production, rose by 1.4% in July, after reaching 1.5% y-o-y in June. Domestic demand was also supported by retail sale numbers, which stood at 4.2% y-o-y in July, after reaching 3.4% y-o-y in June. The generally positive trend in domestic consumption was also visible in the Conference Board’s Consumer Confidence Index, which rose to 122.9 in August, after hitting 120.0 in July and 117.3 in June.
August Purchasing Managers’ Index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), also indicated ongoing support in the underlying economy, with stronger numbers in both the manufacturing and non-manufacturing sectors. The manufacturing PMI increased to 58.8 in August, compared with 56.3 in July and 57.8 in June. The important index for the services sector, which constitutes more than 70% of the US economy, rose to 55.3, after being retraced to 53.9 in July.
The GDP growth forecast for both 2017 and 2018 remains unchanged at 2.1% and 2.2%, respectively. While the 3Q17 growth may be negatively impacted by the two current hurricanes, further GDP growth may materialise via reconstruction efforts after the hurricane season and particularly if the government successfully pursues envisaged reforms, predominantly tax reforms. However, numerous uncertainties remain, mainly in political decisions, but also for monetary policies. To some extent these are dependent on the potentially re-emerging debt ceiling debate towards the end of the year.
US trade policies and global trade
Global trade is once again attracting attention. The new US Administration has decided to review numerous trade agreements, including the North American Free Trade Agreement (NAFTA), to withdraw from the Trans Pacific Partnership (TPP), open discussions on trade with China and announce a potential change in its trade agreement with South-Korea (“Korus”). Furthermore, a border adjustment tax with neighbouring Mexico has also been debated over the past months, however this idea is currently not being pursued further. While these US-driven initiatives indicate a trend toward a more protectionist global trade regime, China is pushing to finalise a large trade agreement in Asia-Pacific – the Regional Comprehensive Economic Partnership (RCEP) – by the end of this year.
Global trade has been very supportive to global economic recovery and 2Q17 trade growth of 4.3% marked the largest rise since 2011. The ongoing NAFTA negotiations, in combination with US trade talks with China need close monitoring, given that the main trading counterparts for the US – Canada, Mexico and China – not only account for around 47% of its imports, but also for 42% of its exports. It should be noted that due to the elimination of tariffs between the participating NAFTA nations, the US was able to import much of its oil more cheaply from Mexico and Canada. However, should the US Administration insist on one of its demands to impose higher tariffs on goods imported from Mexico, this could have severe impacts on the cost of imported goods in the US in the short term. In turn, Mexico could revert to the high tariffs it had before NAFTA, which would impact US exports of many commodities, including oil products, for which Mexico is the one of the largest export destinations.
In addition, long-standing global trade arrangements may also be impacted by the ongoing Brexit negotiations as well as the discussion of additional sanctions imposed by the US on several world economies affecting global trade patterns. Depending on the outcome of all these developments, the results may have a significant impact on global economic growth, oil-trade and oil-demand.
Economic development in Canada continued to improve significantly. GDP growth in 2Q17 was reported to reach a considerable level of 4.5% q-o-q SAAR, after achieving an already high level of 3.4% q-o-q SAAR in 1Q17 GDP. Private household consumption was a significant driver of this positive development at 4.6% q-o-q SAAR and 4.7% q-o-q SAAR. Additionally, exports turned out to be very supportive in 2Q17 with a growth rate of 9.6% q-o-q SAAR, compared with 1.5% q-o-q SAAR in 1Q17. Industrial production increased by 7.4% y-o-y in June, after reaching 10.3% y-o-y in May, marking the highest rate since 2000 and compared with 4.6% in April. Retail trade also continued to expand to the considerable level of 7.4% y-o-y in June, after reaching 7.3% y-o-y in May and 7.0% y-o-y in April, all at a seasonally adjusted level. The PMI for manufacturing remained at a significant level, standing at 54.6 in August, after reaching 55.5 in July and 54.7 in June. Taking this positive momentum into consideration, the GDP growth forecast for 2017 was revised up to 2.5% from 2.3% Growth in 2018 remains unchanged at 1.9%.
OECD Asia Pacific
Japan’s recovery seemed to continue, as GDP for 2Q17 was reported at 2.6% q-o-q SAAR, compared with 1.2% q-o-q SAAR in 1Q17. While this underlines solid momentum and strengthening of the Japanese economy, it is much lower than the initial growth estimate by the Statistical Office of 4.0% q-o-q SAAR for 2Q17. This revision was obviously due to a considerable markdown in corporate capital spending. Private consumption, which makes up 60% of GDP growth, rose by 3.4% q-o-q SAAR, significantly more than in 1Q17, when it only increased by 1.5% q-o-q. The positive trend is also visible in the latest labour market developments, with ultra-low unemployment and open jobs to application rates that are at a record high. Besides these improving circumstances on the domestic front, exports are also doing well, and a rise in investment and ongoing monetary and fiscal stimulus are all currently shoring up growth for this year and the next. However, the upside to the current annual growth rate of more than 1% still seems to be limited by tightness in the labour market and very high utilisation rates in the industrial sector.
Business sentiment is holding up well and supporting the current growth trend. Inflation rose in the last available month of July, although it remained very low. Wage growth also remained very low, despite tightness in the labour market. In the meantime, the Bank of Japan (BoJ) continued its monetary stimulus with negative or ultra-low interest rates. Ongoing geo-political tensions on the Korean-Peninsula may add some risk to the growth dynamic in the Japanese economy. So far these developments have not impacted economic activity, but continued turmoil raises the risk of a yen appreciation, with a consequent negative effect on exports and lower investments.
Inflation was higher in July, increasing by 0.5%, compared with 0.3% y-o-y in June and 0.4% y-o-y in May. Despite tight labour markets, wages rose slowly in the past months, up by 0.2% in July, the lowest level in the past four months. This is certainly also a concern and is keeping inflation from moving higher in Japan. Core inflation (which excludes food and energy) actually fell by 0.1% y-o-y in July, however this is still the highest level in five months and above the -0.2% seen in June. Core inflation now remains negative for the sixth month in a row as low inflationary or deflationary trends remain persistent. Given this muted price environment, the BoJ revised its inflation target lower in the past months and now expects only to reach 2% inflation by around 2019. The unemployment rate remained at the extremely low level of 2.8% for a second month in a row.
Japanese exports rose by a large 13.3% y-o-y in July after hitting 9.7% y-o-y in June and after already seeing strong growth in the previous months of the year. The rise in exports was again very much supported by the export of industrial goods and capital equipment, which mostly backed this positive trend in trade. Additionally, industrial production continued its recovery, rising for the twelfth consecutive month, up by 4.9% y-o-y in July, after a rise of 5.2% y-o-y in June. This was supported again by a strong trend in manufacturing, which climbed by 4.6% y-o-y in July, compared with 5.5% y-o-y in June. A continuation of the positive trend is expected, when considering that manufacturing orders – a front-running indicator – rose by 4.9% in June and 8.3% y-o-y in May.
Some improvement was also reflected in domestic demand. Retail trade rose by 1.9% y-o-y, but the expansion trend is decelerating after reaching 2.2% y-o-y in June and 2.1% y-o-y in May. While near-term growth is uncertain, given wage developments, the trend still seems solid.
The latest PMI numbers confirmed a healthy trend as they remained almost unchanged and above the growth-indicating level of 50 in August. The manufacturing PMI stood at 52.2 in August, after reaching 52.1 in July. The services sector PMI slowed a bit, moving down to 51.6 in August from 52.0 in July.
The most recent developments confirm a solid underlying growth dynamic in the Japanese economy, but uncertainties in the 2H17 remain. Hence the 2017 GDP growth forecast remains unchanged at 1.4% Moreover, numerous issues persist, and given the tight labour market situation and high-capacity utilisation rates, further growth advancements seem challenging. Moreover, the income situation – in combination with consumption and inflation – will need to be closely watched in the coming months. The 2018 growth forecast was lifted slightly, now standing at 1.2% compared with 1.1% in the past month.
South Korea’s economy continues to perform well, but geopolitical concerns on the Korean-Peninsula and some economic indicators are sending mixed signals that indicate challenges still persist. So far the ongoing conflict with its neighbour had little economic impact, as consumer sentiment is holding up well and industrial production and some lead indicators also support a good trend in the short-term. Industrial production rose by 2.3% y-o-y in July, much better than the 1.6% y-o-y in June and 1.7% y-o-y in May. The latest PMI number for the manufacturing sector in June indicated some slow down, remaining below the growthindicating level of 50, while at the same time improving to 49.9 in August from 49.1 in July. GDP growth was confirmed at 2.9% y-o-y in 1Q17 and 2.7% y-o-y in 2Q17. While some softening signs remain, solid 1H17 momentum led to an upward revision in 2017 GDP growth to 2.7% in 2017 from 2.6% the previous month. Growth figures for 2018 remain unchanged at 2.4%.
The Euro-zone’s economic performance remained stronger than expected. Momentum from robust growth in 1H17 was carried over into 2H17. This positive trend is visible in all economies at varying rates, with improving performance not only in the major economies, but also in the so-called peripheral economies, which are all recovering to some extent and are supporting the growth trend. The labour market improved in the past months, leading to better domestic consumption, and while positive developments lifted economic activity, room to the upside remained. On the sensitive price front, core inflation remained low, but this could provide further room for improvement. While the European Central Bank (ECB) hinted again that its monetary stimulus will potentially be reduced at some point, the low inflation pattern probably makes it more flexible. Business sentiment reflects the bettering situation, with the European Commission’s economic sentiment index improving to 111.9 in August from 111.3 in July. This – in combination with comments by the ECB’s president about possibly reducing monetary stimulus, at least to provide further details on phasing out quantitative easing in the upcoming October meeting, and the latest developments in the US, which is considerably negatively impacted by the hurricane season and the Fed now expected to lift rate rates only in the coming year – has impacted the Euro, which rose to its highest level since the beginning of the year, standing at more than $1.20/€ at the beginning of September. Challenges in the Euro-zone remain. While concerns about sovereign debt levels in some Euro-zone economies have gone away somewhat, sovereign debt levels in several economies remain high and issues may re-emerge again if current economic improvements slow.
Labour market developments continued to improve and the unemployment rate remained at 9.1% in July for the second month in a row, marking the lowest level since 2009. So far, the improving labour market seems to have been a positive driver for inflation. But while job additions have been an important support factor, further evidence of rising wages must still be seen. Moreover, developments differ widely within the Euro-zone. Germany’s unemployment rate stood at 3.7% in July, down from 3.8% in June, while in Spain, it was still at 17.1% in July, unchanged from June. Inflation improved, but remains muted. The recent August number has, however, improved in this respect, moving up to 1.5% from 1.3% in July. Core inflation – that is, the consumer price index (CPI), excluding energy, tobacco and food – remained unchanged at 1.2% y-o-y in August, the same level as in July. Both numbers must be compared with the ECB’s approximately 2% inflation target.
The ECB will provide further details about potentially phasing out its quantitative easing programme in its upcoming October meeting. As the ECB’s inflation expectation moves up in the coming months, a reduction in monetary stimulus towards the end of the year remains the most likely scenario, as has been indicated already. In addition to the somewhat softening inflation trend in the Euro-zone, credit supply growth from financial institutions to the private, non-financial sector appears to be decelerating again to stand at 1.3% y-o-y in July, the lowest level since November 2016 and the fourth consecutive month of slow down. While this remains at a good level, it may indicate a softening investment environment, given the importance of bank lending to the Euro-zone economy. Moreover, banking sector-related issues remain, and while the banking sector in the rest of the Euro-zone seems to be in a relatively better situation compared with previous years, the sector is only slowly healing.
Industrial production grew by 2.7% y-o-y in June, after reaching 4.0% in May. Retail sales growth in value terms were once again an important support factor for Euro-zone growth, increasing by 3.3% y-o-y in July, after reaching 3.8% y-o-y in June. As these indicators remained at considerable levels over the past months and demonstrate a healthy dynamic, ongoing improvements in the underlying economy are forecast to be carried over into 2H17 and the coming year. However, it remains to be seen if the trend will stay as strong as in 1H17 or, as currently expected will slow down somewhat.
The latest PMI indicators confirmed ongoing expansion in the Euro-zone. The manufacturing PMI increased to 57.4 in August, matching June levels, which were the highest of the index since its initiation, and compare with 56.6 in July. The important PMI for the services sector, which constitutes the largest sector in the Euro-zone, retraced only slightly, remaining at a high level of 54.7 in August, after seeing 55.4 in July.
The underlying momentum has led to an upward revision in the 2017 GDP growth forecast for the Eurozone, which now stands at 2.1%, compared with 2.0% in the previous month. The 2018 GDP growth forecast remained unchanged at 1.8%. Political uncertainties, Brexit procedures and the upcoming German elections, as well as monetary policies remain important factors to monitor.
As Brexit negotiations continue, little progress has been made so far and the most sensible among all the numerous issues currently seems to be the break-up bill, which has been subject to negotiations lately. The UK reemphasised its case against the EU’s Brexit bill of up to €100bn, while EU officials seem to consider this to be a conditio-sine-qua-non. Numerous important issues have not been touched yet, while already about a quarter of the negotiating time has elapsed since kicking-off the two year negotiation period in March. As some shift in the UK has become visible in the past weeks towards a soft exit over a hard-exit, the probability of a solution via, for example, the UK participating in the framework of the European Economic Area (EEA) or the European Free Trade Association (EFTA) is again a possibility. In this respect, the UK’s chief negotiator did not rule out that Britain would continue paying into the EU’s budget after Brexit in March 2019.
After GDP growth of 0.2% q-o-q seasonally adjusted (sa) in 1Q17, GDP growth in 2Q17 was confirmed at 0.3% q-o-q sa. Interestingly, household expenditures retraced to only 0.1% q-o-q growth, the lowest level over the last two-and-a-half years. However, for the time being the unemployment rate remains very low at 4.4%, as shown in the latest available number from May. Positively, wage growth in May and June stood at 2.0% and 2.8% y-o-y, respectively. This compares to inflation numbers of 2.6% y-o-y in both May and June, i.e. approximately matching these levels. Rising inflation will remain a very sensitive issue for the Bank of England when considering changing its monetary policy stance in the next months. The GfK consumer confidence index improved slightly, but remained at a low level of -10 index points in August, compared with -12 in July. Given the low sterling pound value, exports compensated some domestic economic challenges, as exports increased by 9.6% y-o-y in July, after reaching 11.1% y-o-y in June. In connection to this more positive development, the PMI for manufacturing increased to 56.9 in August, after an already high level of 55.3 in July. The services sector PMI declined slightly, but remained high at 53.2 in August, after reaching 53.8 in July. With indicators supporting a gradual slowdown in the UK economy, the growth forecast remains unchanged at 1.5% for 2017. Growth in 2018 is forecast at 1.4%.
The economy of Brazil grew by 0.3% y-o-y in 2Q17, signalling its first expansion since 1Q14. This improvement came on the back of the first acceleration in private consumption in more than two years. It grew by 0.7% y-o-y in 2Q17 versus a 1.9% y-o-y contraction in the previous quarter. Trade was also growth-supportive in 2Q17 as exports increased by 2.5% and imports dropped by 3.3% y-o-y. However, contractions in government consumption and gross fixed capital formation (GFCF) mitigated the final growth figure. Government consumption declined by the highest rate since the onset of the recession, reflecting efforts to streamline public spending. It slid by 2.4% y-o-y in 2Q17 compared with 1.3% in 1Q17. The GFCF also declined by 6.5% y-o-y in 2Q17 from a contraction of 3.7% in the previous quarter. The trade surplus of Brazil widened in August to $5.6 billion, representing a 35.3% increase from a year earlier. Exports increased by 14.7% y-o-y, supported by manufactured products, which increased by 12.6%. Primary products also posted a high rate of growth of nearly 19%, whereas growth in semi-manufactured products slowed to 8.7% in August from more than 20% a month earlier. The trade surplus increased by more than 53% in 1H17, reaching $107.7 billion due to the record harvest of soy and higher prices of a number of main exports like iron ore, soy and oil. Exports to China, Brazil’s top trading partner, increased by around 41% y-o-y in August. Imports, on the other hand, grew at a lower rate of 8.0% y-o-y in August.
Inflation continued its easing trend, reaching its lowest ever rate of 2.1% y-o-y in July. This represents a quick fall in inflation from June’s 2.6%. To catch up with rapidly declining inflation, the central bank lowered its benchmark interest rate by a full 10 percentage points in July for the second month in a row, to stand at 9.25%. The unemployment rate posted its fourth back-to-back fall in July, registering 12.8% versus 13.0% in June.
In August 2017, business conditions in the manufacturing sector continued to improve, posting solid factory orders, especially in new orders for export, which were at their highest level since April 2016. The IHS Markit Manufacturing PMI for the country rose to 50.9 in August, up from 50.0 in July. The services sector remained in contraction territory in August, though showing its best performance in three months. The IHS Markit Brazil Services JPMI Business Activity Index registered 49.0 in August, from 48.8 in July and 47.4 in June. The survey showed a marginal uptick in the inflow of new orders, together with an output decline which slowed over the past three months.
Household consumption is anticipated to continue improving next year due to low inflation and a reduced interest rate. While the GFCF deceleration highlighted a notable slowdown since 2Q16, the rate of contraction remained sizable with no obvious trend towards easing.
Brazil’s GDP is expected to grow by 0.5% and 1.5% in 2017 and 2018, respectively.
Russia’s GDP posted growth of 2.5% y-o-y in 2Q17, up from 0.5% in the previous quarter. This represents the fastest rate of growth since 3Q12, and it is the preliminary estimate of the Federal Statistics Office and no further details are available yet. Household consumption posted its first growth in 1Q17 after two consecutive years of contraction. It grew by 2.7% y-o-y in 1Q17, compared with a 3.2% y-o-y contraction in the previous quarter. The GFCF also increased in 1Q17 for the first time in nearly three years. It expanded by 2.3% y-o-y in 1Q17, from a 0.3% y-o-y drop in 4Q16.
The ruble was largely stable on average in August, appreciating by only 0.1% m-o-m. Inflation eased in July to 3.9% y-o-y, from June’s 4.4%. As the easing inflationary trend was interrupted in June, when it moved away from the central bank’s target of 4.0%, the central bank kept its benchmark interest rate unchanged at 9.0% last month.
The IHS Markit Russia manufacturing PMI continued to show improvement in the sector’s business conditions in August. However, growth in new orders and production were slower than in the previous month. As such, the index decreased to 51.6 in August, from 52.7 in July. The index survey showed the sixteenth consecutive month of increase in production, while the workforce showed some weakness. Industrial production rose for the fifth consecutive month, up by 1.1% y-o-y in July. The services activity PMI suggested solid growth in the services sector in August, highlighting the ninth consecutive month of improvement. The index stood at 54.2 in August, up from July’s 52.6. The survey highlighted an acceleration in output together with a strong increase in new orders and muted price pressure. For the fourth month in a row, retail sales increased in July. The rate of increase was 1.0% y-o-y, which represents the second-fastest growth in retail sales since December 2014.
The GDP of Russia is anticipated to grow by 1.5% and 1.4% y-o-y in 2017 and 2018, respectively.
Indian GDP growth slipped to 5.7% y-o-y in 2Q17, which is below the 6.1% seen in 1Q17, although market expectations were for about 6.6% to 6.8%. It remains the weakest growth rate since 1Q14 due to a slowdown in consumer spending and exports. On the production side, manufacturing and agriculture eased. Figures for 2Q17 mark the third consecutive period of slowing growth as a result of the demonetisation programme started in November 2016, which removed about 90% of India's currency in circulation as well as the implementation of the Goods and Services Tax (GST) in July this year. Growth has been slowing for five quarters now, and the government’s target of over 7% for 2017 suddenly appears unsound. It seems that a reason for the GDP growth weakness in 2Q17 is related to people’s reaction against demonetisation and the GST implementation. However, the GST pushed the buying of gold up and manufacturing down. Manufacturing companies sent out their old stocks to market, holding back on production. This brought down manufacturing sector growth from 5.3% in 1Q17 to 1.2% in 2Q17. The reasons behind low GDP growth in 2Q17 include; the medium- and short-term shocks caused by demonetisation and the GST on private consumption; poor consumer demand and low capacity utilisation.
The fact that Gross Value Added (GVA) (GDP minus product taxes) growth in 1Q17 was the same as in 4Q16 suggests that the waning demonetisation impact was offset by rising anxiety over the GST. It seems the decline in growth in 1Q17 is transitory and the economy will slowly move in an upward trajectory over the next few quarters as the impact of demonetisation and destocking fades and the positive efficiency gains from GST start kicking in. A normal monsoon, softer interest rates and inflation, and latent demand (demand postponed due to demonetisation) will also support consumption-led growth in the remaining quarters of this fiscal year. That said, the economy is likely to grow at a slower pace than 7.0% in fiscal 2017, and will be largely consumption driven. Other macro parameters such as inflation, the current account deficit and the fiscal deficit of the central Government will remain at comfortable levels. Stimulating the investment cycle and tackling bad debt will be the key challenges in the current fiscal year. Investment growth did pick up in 1Q17 of this fiscal year, from a 2.1% decline in the preceding quarter, but it still trails overall GDP growth. Two months ago, we saw gold (valuable) imports rise sharply. Household savings moving away from physical assets, especially real estate, may not suit the economy. The second largest job creator after agriculture is the real estate sector and construction growth has already tapered.
India’s CPI inflation accelerated to 2.4% y-o-y in July after bottoming out at 1.5% y-o-y in June. Food prices excluding beverages deflated, decreasing 0.3% y-o-y, but the fall in food prices was much smaller than in the previous month. The costs of housing, energy and clothing rose further and food prices fell at a softer pace. In tandem with retail inflation, WPI inflation accelerated to 1.9% y-o-y in July, up from 0.9% y-o-y in June. A surge in food prices offset a slowdown in the cost of manufactured products and fuel. On a monthly basis, wholesale prices increased by 1.1%, after declining by 0.1% a month earlier. Meanwhile, manufactured product inflation eased marginally to 2.2% y-o-y from 2.3% y-o-y in June. In the longer term, the bigger question is whether India has witnessed a structural change to lower inflation. The second edition of the Government's economic survey for the fiscal year 2016/17 (April–March) argues that India may be undergoing a paradigm shift to low inflation as price pressures arising from food and fuel are easing. Accordingly, it seems the supply-side bottlenecks and rapidly rising demand will put some upward pressure on prices in the years ahead.
India's trade deficit widened sharply to $11.45 billion in July 2017 from $7.76 billion in the same month of the previous year and below market expectations of a $12 billion gap. India's merchandise exports stood at $22.5 billion in July, up 3.9% on a y-o-y basis. However, in sequential terms, merchandise exports declined by 4.3% from June. Merchandise imports stood at $34 billion, down from $36.5 billion in June. In annual terms, imports grew by 15.4%, down from the 19% y-o-y registered in June. Oil imports stood at $7.8 billion, up 15% y-o-y. Meanwhile, gold imports nearly doubled y-o-y to $ 2.1 billion in July from $1.1 billion a year earlier. The merchandise trade deficit narrowed to $11.4 billion from $13 billion in June.
The trade deficit stood at $79.6 billion for the first seven months of 2017, up sharply from $45.7 billion during the same period a year ago. India has been recording sustained trade deficits since 1980, mainly due to the high growth of imports, particularly of crude oil, gold and silver. The new GST regime impacted India's merchandise exports. Although exports are technically excluded from the GST, many shipments have been held up due to the confusion related to customs procedures, the input tax credit mechanism and other related paperwork.
The appreciation of the Indian rupee vis-à-vis the US dollar is another deterrent to exports, making Indian goods more expensive abroad, particularly in the US, one of India's major export markets. A stronger currency and the GST-related disruptions would likely keep Indian exports subdued in coming months, but import growth should remain contained, given the muted outlook for global oil prices and the slowdown in domestic demand.
India's industrial output shrunk for the first time in four years in June, down by 0.1% y-o-y following an upwardly revised 2.8% rise in the previous month. The slowdown is largely attributed to the disruption in the manufacturing sector amid the uncertainty over the GST. The high-base effect from last year when the IIP grew 8.0% y-o-y in June 2016 exacerbated the decline. The manufacturing sector contracted 0.4% y-o-y in June, while mining and electricity growth were also weak. On a use-based approach, all but the output of consumer non-durable goods and infrastructure and construction-related items declined in June, with consumer durable goods down by 2.1% y-o-y. Weaker industrial output in June was expected and contraction in the IIP will probably extend into July and possibly August, as producers and retailers adjust to the new pricing and filing requirement.
The Nikkei Manufacturing PMI in India unexpectedly jumped to 51.2 in August from 47.9 in the previous month, as disruptions stemming from confusion over a new national sales tax eased. The figure beat market estimates of 49.3, supported by a rebound in output and new orders while new export orders increased for the third consecutive month and employment expanded to the greatest extent since March 2013. Also, buying levels rose at their fastest pace since May. At the same time, worries about the possibility of unexpected policy decisions weighed on confidence from July’s 11-month high. The Nikkei Services PMI in India came in at 47.5 in August from 45.9 a month earlier. It was the second straight month of contraction in service activity as the sector was impacted by the goods and services tax (GST) introduced in July.
China’s economy started 2H17 on a softer note compared with that seen in 1H17. Export growth weakened amid slower demand in Asia. Real estate activity slowed notably, housing sales were flat compared to last year while housing starts declined. Overall, industrial value added slowed to 6.4% in July, with the slowdown in the value added in manufacturing particularly pronounced. Meanwhile, private consumption remained healthy, with real retail sales up around 10% y-o-y and car sales growth accelerating further.
Private consumption remained healthy in July, with real retail sales up by 9.6% y-o-y (10% y-o-y in June) and car sales growth picking up further after the earlier slowdown.
Real estate activity in the smaller cities remained flexible, fuelled by a still-accommodative housing policy. However, it appears that a less expansionary overall monetary policy stance will weigh on housing sales in 2H17.
CPI inflation eased slightly last month to 1.4% y-o-y in July of 2017, following a 1.5% rise in June. It was the lowest inflation rate since April, as the cost of non-food slowed and the cost of food continued to fall. On a monthly basis, consumer prices edged up by 0.1%, after declining 0.2% a month earlier and slightly below estimates of a 0.2% rise. Although PPI inflation held steady at 5.5%, trend-wise it eased notably from 7.4% in 1Q17 to 5.8% in 2Q17, and we expect it to continue to ease in 2H17 as the spill-over of price increases in the heavy industry into other sectors remains limited.
China's trade surplus fell to $46.74 billion in July of 2017 from $48.61 billion in the same month a year earlier, but remained above the market consensus of $46.08 billion. Exports rose by 7.2% from a year earlier to $193.6 billion, down from June's 11.3% growth, while imports rose 11% to $146.9 billion, down from the previous month's 17.2% gain. As to the export outlook, while global demand momentum has improved recently, China’s export growth probably peaked in 3Q17, in real terms, and is likely to be more moderate in 2H17. Moreover, downside risks to exports remain, in particular in the area of US-China trade relations following strong growth in Chinese exports to the US (a full 11% increase y-o-y in 1H17 and remaining solid at 9% y-o-y last month). This, along with ongoing US-North Korea tensions, may trigger US trade protectionist measures against China. The slowdown in China’s economy and imports will make things difficult for the global economy. Europe and the US will continue to grow but, going forward, growth in the developed world is unlikely to be strong enough to offset the cooling in China. Global trade growth peaked in 1Q17, when China’s import growth was at its strongest, and will ease in the second half of this year.
Liquidity conditions in China will remain moderately tight in the coming quarters. The government's deleveraging campaign and regulatory crackdown on shadow banking appeared serious and has the support of China's top political leadership. The government has also indicated that it is comfortable with the current lower level of credit growth. As the economic growth slowdown has stabilised, the Chinese authorities should continue their efforts to mitigate financial-sector risk. Nevertheless, should the economy decelerate more sharply than expected, the Chinese government is likely to swing towards the growth support end of the policy balance and loosen monetary policy.
Profits of industrial enterprises in China rose by 21.2% y-o-y in 1Q17, compared with an increase of 22% in the first six months of the year.
The Caixin Manufacturing PMI in China rose to 51.6 in August from 51.1 in July and beat the market consensus of 50.9. It was the third straight month of expansion in manufacturing activity and the fastest since February, as new orders surged to an over 3-year high and new export orders increased by the greatest extent since early 2010. Also, business confidence hit a 5-month high and companies expanded their production of schedules. The official non-Manufacturing PMI in China fell to 53.4 in August 2017 from 54.5 in July. It was the weakest reading since May 2016, as new orders’ growth slowed (50.9 from 51.1 in the prior month) while new export orders contracted (49.0 from 52.1) and employment (49.5 from 49.5) declined for the eighth straight month. Also, orders in hand (44.0 from 43.9) continued to drop amid softening suppliers' delivery time (51.1 from 51.7). At the same time, business sentiment remained strong (61.0 from 61.1) and selling prices (51.5 from 50.9) increased for the second month in a row. The Caixin China Services PMI rose to 52.7 in August of 2017 from 51.5 in July, beating the market consensus of 51.8. It was the fastest rise in services activity since May, as new orders increased solidly, employment increased by the highest level in four months and business confidence strengthened.
China’s GDP growth expectation remains unchanged at 6.7% in 2017 and 6.3% for 2018.
OPEC Member Countries
Inflation in Saudi Arabia posted -0.3% y-o-y in July, maintaining its notable easing since the beginning of the year due to the baseline effect, which could be a supporting factor for private consumption. The non-oil private sector grew at a solid pace in August. The Emirates NBD Saudi Arabia PMI for August registered 55.8, up from 55.7, suggesting continued solid improvement in the business conditions of the non-oil private sector. The index survey showed a sharp rise in output and new orders accompanied by a record increase in inventories. The survey showed that private sector firms faced further capacity pressure for the tenth consecutive month in August, which led to payroll rise. The increase in salaries together with the rise in prices of purchased input have raised the cost burden, which eventually transferred to consumers. Yet, price increase was negligible. The index average of 1H17 stood at 56.0, highlighting a higher growth rate compared with the first six months of 2016. Further increase of demand have encouraged optimistic expectations over the coming 12 months outlook by the country’s non-oil private firms.
After five quarters of recession, the economy of Nigeria registered 0.6% y-o-y growth in 2Q17, from a contraction of 0.5% y-o-y in the previous quarter, according to the National Bureau of Statistics. Inflation is on an easing trend since the beginning of the year, posting 16.1% y-o-y in July vs 18.7% in January. The naira was largely stable after depreciating by 50% in June–August 2016. It appreciated slightly by 0.1% m-o-m in August. In another positive note, the country’s private sector registered its fastest pace of growth in 26 months in August as suggested by the Stanbic IBTC Bank Nigeria PMI. The index jumped to 55.0 in August, from 54.8 in July and 52.9 in June because of the fast pace of expansion in both output and new orders. Despite the pace of acceleration in new business somewhat eased last month, growth achieved could still be deemed as strong. The survey also suggested a contraction in new export orders for the second consecutive month in August and most of the demand came from the domestic market.
Inflation in the United Arab Emirates (UAE) eased from nearly 3.0% y-o-y in March to 2.0% y-o-y in June. The ease in prices of housing, water, electricity and gas was behind the fall in the overall index. The subcategory of housing, water, electricity and gas showed notable decline from 1.5% y-o-y in May, to 1.0% y-o-y in June. In addition, prices of the recreational, cultural goods and services was in the negative territory since December 2016. It declined by 7.8% y-o-y in June, following the 5.4% y-o-y drop a month earlier. Most of other categories of consumer prices were largely stable in June. Expansion in the country’s non-oil private sector rose in August to its quickest pace since February 2015, according to the Emirates NBD UAE PMI. The index stood at 57.3 in August, up from 56.0 in July on a large expansion in new orders. The survey also showed that new export orders increased for the first time in three months, with other GCC countries are perceived as major international markets. The current expansionary trend in new orders was reflected into slightly higher employment. The firms’ upbeat sentiment towards short-term outlook have led to large increase in their inventories by fastest rate in history of the survey, preparing for episodes of greater output.
In Indonesia, the GDP registered growth of 5.0% y-o-y in 2Q17, similar to 1Q17. Growth in household consumption expenditures was unchanged from first quarter at nearly 5.0%. However, general government consumption expenditures dropped by 1.9% y-o-y in 2Q17, compared with 2.7% growth in the previous quarter. The GFCF, on the other hand, accelerated to 5.4% y-o-y growth in 2Q17, up from 4.8% in 1Q17. Trade was also supportive of growth as net exports of goods and services climbed by more than 36% y-o-y in 2Q17. While exports increased by 3.4% y-o-y in 2Q17, imports posted a slow increase of only 0.6% y-o-y. Consumer price inflation posted a 3.8% y-o-y increase in August, down from the previous month and the lowest in five months. The Bank of Indonesia interest rate was unchanged in July at 6.5%.
In Thailand, the GDP registered its fastest growth in 2Q17 since 1Q13, growing by 3.7% y-o-y, up from 3.3% in the previous quarter. Despite a slowdown in the private consumption expenditure pace of growth, greater government consumption expenditures and trade led to higher GDP growth in 2Q17. Government consumption accelerated from 0.3% y-o-y in 1Q17 to 2.7% in 2Q17. Exports posted their fastest growth since 4Q12, up by 6.0%, whereas imports increased by 8.2% y-o-y in 2Q17. Consumer prices increased by 0.3% y-o-y in August from July’s 0.2%.
At the time of writing, the UN is in the process of considering further sanctions on North Korea. However, barring a dramatic escalation in tensions, the sanctions being considered are not expected to have a significant impact on the global economy in 2017 and 2018, due to the country’s negligible share in the world economy.
Two large African economies posted encouraging GDP growth in 2Q17. In Nigeria, the GDP saw 0.6% y-o-y growth in 2Q17, following five quarters of recession, according to the National Bureau of Statistics.
In South Africa, the GDP grew at its fastest pace since 3Q15 in 2Q17. Growth stood at 0.8% y-o-y, up from 0.2% in the previous quarter. Private consumption increased by a notably faster pace of 1.7% y-o-y to reach its highest point since 4Q15. Public consumption slightly increased by 0.1% y-o-y in 2Q17 vs a 0.3% contraction posted the previous quarter. The GFCF, on the other hand, remained in contraction territory in 2Q17. Trade was not supportive of growth in 2Q17, as exports declined by 0.6% y-o-y from growth of 0.7% in 1Q17, while imports increased by 4.7% y-o-y in 2Q17, up from 0.6% in the previous quarter.
In Egypt, the pound slightly appreciated by 0.9% m-o-m in August against the dollar after accumulating depreciation of nearly 95% from November 2016 through to April 2017. Inflation continued posting readings north of 30% for the sixth consecutive month in July and is expected to rise further in the coming months due to a recent reduction in subsidies for some fuel/energy items and public services. The country’s non-oil private sector markedly improved in August as suggested by its respective PMI due to an increase in new orders from abroad and the weakest decline in output. The index registered 48.9 in August, up from July’s 48.6.
In Chile, the GDP expanded by 0.9% y-o-y in 2Q17, up from 0.1% in 1Q17. While government consumption showed slower growth at a rate of 2.7% y-o-y in 2Q17, private consumption growth picked up to 2.6% in 2Q17 vs 1.8% in the previous quarter. The contribution of GFCF to growth continued to be negative in 2Q17 for the fourth consecutive quarter. The GFCF contracted by 4.1% y-o-y in 2Q17 vs a 2.4% contraction in 1Q17. Trade also did not provide support for higher GDP growth in 2Q17, with exports of goods and services dropping by 3.5% y-o-y and imports of goods and services increasing by 7.0%. In 1Q17, the GDP of Chile grew at its slowest pace since 3Q09 during the global financial crisis. The economy posted growth of just 0.1% y-o-y in 1Q17 due to a decline in private consumption and GFCF.
In Hungary, the 1Q17 GDP posted relatively strong growth, though less than the previous quarter. GDP grew by 3.2% y-o-y in 2Q17 vs 4.2% in 1Q17. Private consumption continued to increase in 2Q17 as public expenditures kept declining. Public expenditures dropped by 2.3% y-o-y in 2Q17, whereas private consumption grew by 4.6% y-o-y over the same period. The GFCF continued to be an influential factor behind GDP growth, increasing by 21.2% y-o-y in 2Q17. Both exports and imports of goods and services inched up in 2Q17 by 3.5% and 5.1% y-o-y, respectively. In 1Q17, Hungary’s GDP showed its highest growth since 2Q14, thanks to a sharp increase in investment and balanced changes in trade. The GDP grew by 4.2% y-o-y in 1Q17. The Hungarian forint appreciated for the fourth month in a row in August, by 3.4% m-o-m versus the dollar, appreciating more than 11% since May 2017.
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