World Economy - Mar 13

Source: OPEC_RP130305 3/12/2013, Location: Europe

Industrialised countries
While the US economy continues recovering, it is mainly the sustained uncertainty about the budgetary negotiations in Congress that are holding back the momentum to continue at its full potential. With the automatic budget cuts known as “sequester” implemented as of 1 March, negotiations in Congress have resumed. The sequester could have a potential negative impact of around 0.5 percentage points on this year’s assumed GDP, but it seems too early to take all this impact into account for several reasons: First, negotiations on the many budgetary issues have recently exhibited a positive tone. Second, the underlying economy is doing relatively well with the labour market improving. Third, companies are holding record high cash reserves and might start to invest again, after the budgetary uncertainties have been solved.

Nevertheless, the near future will need close monitoring as the potential impact of the sequester might be significant, on both the positive and the negative side. The issue of the budget resolution for the current year and negotiations on next year’s budget will need to be finalized. Also, the debt ceiling issue now has been postponed up to 18 May. So uncertainty prevails and it remains to be seen what the impact of the decisions that have to be taken will be.

4Q12 GDP numbers have been revised from -0.1% to 0.1%. This upward revision of only 0.2 percentage points (PP) is smaller than the average revision from the advance to second estimate of 0.5 pp. The revision reflects an upward revision to exports, a downward revision to imports and an upward revision to non-residential fixed investment that were partly offset by a downward revision to private inventory investment. The underlying momentum of private consumption remains intact at 2.1%, almost at the same level as in the previous first release. It has been confirmed that it was the sharp drop in governmental spending — mainly defence spending from 3Q12 — which caused this sharp and unexpected move down to almost no growth. After governmental spending increased in the 3Q12 by 3.9%, the revised number showed a decline of 6.9% in 4Q12, which is even worse than in the first release of the numbers, when the decline was estimated at 6.6%. Defence spending, which has increased by almost 13% in 3Q12, declined by a stunning 22% in 4Q12. The reasons for this unusual pattern may be manifold, but it highlights mainly the fact that despite the underlying recovery in the economy — and hence the better trend in consumption — the governmental sector has still a large impact on the economy’s growth.

The main support in the economy has come from the labour market and continuing positive developments in the housing market. This was accompanied by some better consumer confidence and industrial production numbers, as well as a continuation of an accommodative monetary policy by the Federal Reserve Board (FED). This, in combination with a record high cash level in the business sector, leads to the conclusion that if the fiscal issues in Congress are being finalized in a positive manner, this could unleash currently unexpected further upside already for the current year.

The labour market has continued improving, when analysing the job creation numbers that have been at 119,000 in January and 236,000 in February. The unemployment rate declined back again from 7.9% to 7.7%. Some more negative developments still highlight the ongoing fragility of the labour market, with for example long-term unemployment increasing again from 38.1% to 40.2%. With slight improvements in the labour market, consumer confidence also increased. The consumer confidence sentiment index of the Conference Board moved from 58.4 in January to 69.6 in February, while the consumer sentiment index of the University of Michigan increased from 73.8 in January to 77.6 in February.

Backed by this underlying momentum and the general expectation that the fiscal issues that are currently being negotiated in Congress will be sorted out in a positive manner, the Purchasing Managers’ Index (PMI) for the manufacturing sector as provided by the Institute of Supply Management (ISM) increased to 54.2 in February from 53.1 in the previous month. The ISM for the services sector even increased to 56.0 from 55.2.

The very important housing sector continues improving. Pending home sales increased by 4.5% in January, after an upward revision of the January number of - 1.9%, according to the National Association of Realtors. Pending home sales are considered a leading indicator of progress in real estate because they track contract signings. The yearly change of the house price index tracked by the Federal Housing Finance Agency (FHFA) has continued its rising trend with a monthly price rise of 5.8% y-o-y in December, the largest increase since July 2006.

The current environment of political uncertainty might lead to muted growth in 2013, which is expected to be below this year’s level of 2.2%. It is estimated that 2013 GDP will rise by 1.7%, which is a downward revision of the previous month’s forecast, which stood at 1.8%. This mainly takes into consideration some slight effect from the sequester, which actually could push GDP levels down by 0.5 percentage points. If, however, a general agreement on the fiscal issues could be worked out relatively soon, the economy should benefit via increased business spending and investment, leading to higher growth.

Japan’s economy is benefiting from the global recovery and from the newly elected government’s push for improvements in the domestic economy. Indicators across the board have improved in previous weeks and this, in combination with a new presidency at the Bank of Japan (BoJ) that is dedicated to more monetary easing and a stated inflation target of 2%, as well as a weakening yen, provides optimism for more to come. However, it remains to be seen whether the global recovery in trade will continue considering the weakness in the Euro-zone and the fiscal uncertainties in the US. Furthermore, it is not entirely clear yet that the push for inflation and increasing domestic consumption will work so easily.

Historically, the correlation of the yen and inflation has been relatively low and the effect on GDP remains to be seen. While the yen has weakened by around 20% since November of last year, and even though some of its effects have been visible already in improving exports, higher import prices might put pressure on the economy. This could be the case at least in the short-term and as long as fossil fuels need to be imported to compensate for the shortfall in nuclear capacity, which provided around a third of the electricity supply for the economy before the tragic events of 2011.

Moreover, it remains to be seen if the BoJ will quickly adjust its policy — after its announcements — after many years of actually having pursued a less aggressive strategy, especially given its experiences from the 1990s when large monetary easing was not necessarily significantly successful. In addition, it must also consider the aging population that is probably fearful of negative interest rates eroding their personal wealth. There is a lot of pressure being put on the BoJ as the fiscal side will be hardly able to support the economy given the very strained debt situation of the government. This debt situation, in combination with the ageing population, might make it difficult to see significant short-term improvements without additional more structurally focused measures.

The economy continues to improve slightly from its lows of the 2H12. It is too early to gauge the exact magnitude of the rebound, but while most of the indicators have been pointing to a decline — or at least a deceleration — in most areas of the economy over the past months, the recovery in global trade combined with the stimulus efforts of the newly elected government seems to suggest that the momentum has accelerated. In the past, Japan has remained highly dependent on its foreign trade and domestic stimulus efforts had a limited impact over the medium-term. This time, however, the government has announced aggressive measures to stimulate the economy. The inflation target of 2% compares with the yearly inflation in December of -0.2% and one would need to go back for quite some time to find inflation levels in Japan significantly above the 0% level. The current plan of reviving the economy has been compared to the effective stimulus that was enacted in the 1930s by then Finance Minister Takahashi, which included foreign exchange rate adjustments, as well as monetary and fiscal measures. At that time, the BoJ also underwrote government bonds as a strategy of supporting sovereign debts. The main difference today is certainly that the current high debt level seems not to allow such bold measures on the fiscal side.

Exports increased 6.4% y-o-y on a non-seasonally adjusted base in January, while on a monthly comparison the positive trend is even more visible, with a seasonally adjusted increase of 3.5% and 3.6% in December and January, respectively. Retail sales, however, declined in January by 1.1% on a yearly base, after an increase of 0.3% y-o-y in December. Industrial production increased in January on a monthly base by 1.0%, after 2.4% in December on a seasonally adjusted rate. All these indicators point to a trend of soft recovery, which seems to need more momentum to really push the economy above its medium-term trend growth level of around 1.0%. This current recovery is also reflected in the PMI for manufacturing, which remains largely below the growth indicating 50 level for the ninth consecutive month at 48.5 in February, after posting 47.7 in January. The services sector PMI remains at an encouraging level of 51.1 in February, after an already solid 51.5 in January.

By considering these slight improvements and, to some extent, in anticipation of further monetary stimulus, the growth forecast has been revised to 0.8% for this year from 0.7% in the past month. 2012 has been adjusted — based on the recent actual numbers — to 1.9% from 2.0%. It remains to be seen what the detailed effect of the just announced stimulus and policy measures will be. While currently there is a positive momentum, most indicators remain negative when comparing them on a yearly base. If, however, the tender momentum from the past weeks is able to continue, growth might potentially have to be revised upwards again.

The Euro-zone seems to continue to be significantly entangled in its sovereign debt crisis. With the 4Q12 GDP showing a decline of -0.6%, as well as a political gridlock in Italy after the most recent elections and a European Central Bank (ECB) which is still rather downbeat about this year’s recovery, it is unclear when — and if — the Eurozone this year will start showing any considerable improvements. Most indicators are still pointing at a continued deceleration. A recession this year is more likely than positive GDP growth.

The Italian elections were certainly the latest act in the Euro-zone drama, which made clear that due to the fragile political situation in some of the member states a change in policy could easily lead to the re-emergence of the previous year’s sovereign debt challenges. Sovereign debt yields of Italy and Spain have risen in anticipation of the election and shortly after. It remains to be seen how the political gridlock in Italy will end and what the future of the economic strategy will be, as it is clear that any significant disruption in the Italian economy could have a global impact. Italy is the third largest debtor in the global economy, after the US and Japan, and it could have an impact, particularly within the Euro-zone, since its debt sits largely on balance sheets of banks and insurance companies, which are very sensitive to any change in the bond valuations.

The weaknesses of Germany, as well as, to some extent, the deceleration in France, remain the major forces keeping growth in negative territory in the Euro-zone. While some of the ailing peripheral economies are improving, the two largest economies have so far provided a backstop for the Euro-zone. But it became obvious that by the 2H12 these larger economies were facing a lagging effect from the decline of their peripheral trading partners. Industrial production from October to January in Germany has been negative on a yearly base, reaching -1.3% y-o-y on a seasonally and workday adjusted rate. The trend in manufacturing orders has been negative for a year and only recently in January reached a new multi-month low of -2.1%, pointing at continued challenges. In France, the negative trend for manufacturing orders ended already in September and increased by 0.9% y-o-y in January. Industrial production, however, remained negative since May 2012 and the latest available number shows again a decline of 2.1% for December.

Despite the ongoing issues and the recovery losing steam again, the ECB has again kept its key policy rate at 0.75% at the March meeting but amid low inflation in February of only 1.8%. With this recent softening in the economy, the likelihood of further monetary easing has risen. The still dire situation in the credit sphere could also support the decision to increase the monetary supply. The lending of financial intermediaries to the private sector has been negative now since the beginning of the previous year and had a record decline of 1.6% y-o-y in January, the largest decline over the past several months — and even bigger than the decline in October 2009, shortly after the bankruptcy of Lehman Brothers. Industrial production in the Euro-zone has declined in all of the past twelve months and reached the largest decline in the month of November with -4.0% y-o-y, while it improved to “only” -2.2% in December. The main indicator for future production developments, the PMI, remains below the growth indicating level of 50, with the latest PMI number for manufacturing standing at 47.9 in February, the same as in January, after 46.1 in December. The PMI for the services sector declined to only 47.9 in February, after 48.6 in January. It seems that a lot more momentum will be needed for lifting the index above the 50-line and keep the economy growing again. This low industrial activity again leads to a high unemployment rate of 11.9% in January, the highest on record.

The assessment that the economy will rebound at 0.1% in 2013 had to be revised to a negative growth forecast of -0.2%. This is certainly subject to revisions over the coming weeks and the risk here seems to be currently skewed clearly to the downside. The estimate for GDP in 2012 has been revised further based on the official number to -0.5% from -0.4%.

Emerging markets
The outlook for economic growth is gradually improving in most parts of the world, led by evidence of a more sustainable recovery in the US and also a modest rebound in Chinese growth. But troubles in the Euro-zone continue to overshadow economic prospects in Transition regions. Several countries contracted in 2012 and the Commonwealth of Independent States (CIS) is the sub-region that has been least affected, as its trade and investment linkages to Western Europe are less strong and its economies have reaped benefits from high energy prices. Recession and uncertainty about the future of the Euro-zone have been acting as a brake on economic activity in the region, through declines in trade, investment and bank financing. Exports and industrial output have weakened, and business and consumer sentiment are fragile. There is some scope for countries in the region to provide stimulus by loosening monetary policy, as Poland is currently doing. But most governments have been tightening fiscal policy as part of consolidation programmes designed to put their public debt dynamics on a declining path.

In 2012, growth in Asia and Australasia moderated compared to 2011. In those regions, there has been a broad-based slowdown due to sluggish demand in the West. The region's two largest economies, China and India, both decelerated. China's slowdown in particular has had ramifications for other countries in the region given its size and role as a catalyst of regional and global growth. Asia's economic fundamentals are sound. Levels of debt (both government and private) are in most cases low compared with those in the West, and Asian banks are in good shape. Even though China has entered a new phase of its development, which will be characterized by more balanced and slower output growth, it will still have a galvanizing effect on other economies in the region (EIU, March 2013).

China's recovery will also benefit South American economies. Chinese demand will sustain volumes and prices at high levels, even if the era of sustained annual increments has now run its course as China enters a less-commodity phase of its development. Historically low OECD interest rates, coupled with growing investor interest in the region, will continue to benefit those Latin American economies that are integrated into global financial markets. One striking development in the past two years has been the reversal of fortunes in the region's two largest economies, Brazil and Mexico. Brazil, the poster child of the boom period, has faltered as it has run into capacity constraints stemming from policy deficiencies. Mexico, which fared poorly for much of the past decade, is experiencing a period of stronger growth based on its success in regaining a larger share of the US market. Previously, it was only Brazil, the region’s biggest economy that complained about the competitive devaluations generated by money-printing in the West, the so-called currency wars. Now, however, as Japan joins the rush to print money and devalue, the more orthodox and freetrading Latin economies such as Mexico, Chile, Colombia and Peru also fear being a victim of interventions into currency markets. The issue was also raised in recent G20 meetings in Moscow, given that Asian exporters such as South Korea are also worried about currency appreciation.

As the second anniversary of the onset of the Arab Spring approaches, the political landscape across the Middle East and North Africa remains fragile. In the face of the turmoil surrounding the Arab Spring, governments initially implemented a host of fiscal measures, including a raft of tax cuts, pay rises for public-sector workers and new infrastructure programmes. However, the inevitable corrosive impact on the fiscal accounts is now forcing a number of governments to reverse these measures, with, for example, Egypt raising taxes and hiking petrol prices and Jordan ending fuel subsidies entirely.

In the first week of March 2013, emerging market stocks fell the most that they have in seven months, erasing 2013 gains, after the US Federal Reserve sparked concerns that the US may curtail its monetary stimulus programme and declining commodity prices dragged producers lower. Even the index of shares for the BRICs slipped lower with the MSCI BRIC Index of shares sank 1.9% to the lowest level since 27 December. Emerging market stocks may enter a more “significant correction” after underperforming developed nation shares this year, according to JPMorgan (March 2013).

After a weak 4Q, Brazil’s GDP grew by less than 1% in 2012. Our forecast that GDP growth will reach 3.2% in 2013 assumes that private investment will accelerate owing to a reduction in electricity tariffs, cuts in payroll costs and improving global conditions. Policies will be supportive: Interest rates have been at a historical low of 7.25% since October 2012 in spite of the mounting inflationary pressures. It is expected that Brazilian Central Bank will maintain rates for the time being. Even so, risks to our 2013 forecast are on the downside. An electoral cycle and the staging of the World Cup in 2014 should boost the economy in that year, before it moderates afterwards. Among the challenges for the economy in the medium-term are a deceleration in labour force growth, a tighter labour market, less dynamic Chinese demand (dampening the termsof-trade gains that Brazil has enjoyed in recent years), and slower credit growth. This leaves growth to be driven more by productivity gains, which Brazil will continue to struggle to generate. However, in spite of a slowing economy, unemployment is still at quite a low level. According to the Financial Times (5 March 2013), it is hard to find an ordinary Brazilian who is concerned about the future of the economy. More Brazilians have formal jobs than ever before, with unemployment hovering near a record low in January of 5.4%. Wages are still rising, people are shopping and the government’s popularity ratings are at highs. The 4Q growth for last year, at 0.6% compared with the 3Q, was below analysts’ expectations, placing the economy on track for growth this year of 3% or slightly above — below Brazil’s potential growth rate of 4% or higher.

The government has tried to stimulate a rebound by pushing down interest rates, encouraging state bank lending to consumers, slashing taxes on new cars and home appliances, cutting social welfare taxes on salaries and reducing energy prices. It has also tried to boost investment through tax breaks and by tendering grand infrastructure schemes. But investors have remained on the sidelines, with fixed investment declining 4% last year compared with a year earlier as industry contracted because of Brazil’s high costs. In the meantime, the economy has been saved from recession by its alternative engine of growth, services. As Brazilians have gotten richer, they have increased their consumption of services. This has pushed down the unemployment rate and boosted consumption. The country’s President has released a series of stimulus measures to encourage consumption while also trying to kick-start flagging investment through the privatization of big infrastructure projects. Returning the economy closer to its long-term growth pattern of around 4% is seen as an urgent priority for a president who is expected to stand for a second term in elections next year. In addition to agricultural and livestock activity, there are signs of strength in the industrial sector. But while some commodity and consumer-related imports to Brazil remained strong, trade related to domestic industry or global manufacturing was weak. Brazilian export and import volumes by sea grew a total of 2% last year against a year earlier but contracted 1.2% in the 4Q versus a year earlier after growing only 0.2% in the 3Q. In the 4Q, while exports fell 3.1%, imports rose 0.6%.

Consumer inflation rose to 7.3% on annual basis in February pulling the inflation rate up from 7.1%. Food inflation increased only marginally to 8.7% on annual basis from 8.6%. The transmission of higher grain prices into end product while alcohol prices continued to increase on the back of an excise tax increase in January. The indexation of regulated tariffs and energy prices continued to push up headline inflation. Petrol prices increased on the back of a higher global oil price and the increase in the excise tax at the start of the year. Seasonally adjusted core CPI also accelerated by 0.43% m-o-m from 0.39% the prior month. Still, the dynamics remain fairly moderate and, given the weakness in the real economy, it is expected that this uptick will be temporary. Food prices have continued rising but are gradually losing steam, while alcohol prices continue to increase on the back of an excise tax hike in January (JP Morgan, 8 March 2013). The Russian Central Bank (RCB) is targeting inflation of 5-6% for 2013. Deflation is likely to be slow, as a result of increased demand and adjustments in regulated prices. Strong nominal wage growth resulted in double digit increases in annual average real wages during the past decade. Following a crisis-induced decline in 2009, real wage growth has resumed and will continue, albeit at much lower rates than before 2009.

In early 2012, the rise in oil prices underpinned a resumption in the underlying trend of real appreciation. The real effective exchange rate (REER) appreciated by more than 5% in the 1Q. However, as in other emerging economies, Russia experienced some weakening of its currency in the 2Q in reaction to the uncertain global outlook and flight from risk, as well as decline in oil prices. The REER was then broadly stable in the 2H12. The RCB estimate for the January-September current account surplus was revised downwards, from $74.6 bn to $63.9 bn and this impacted on the full- year figure. During the 4Q of 2012, $9.4 bn left Russia, a slight increase from the outflows in the 2Q and 3Q, which stood at $6.4 bn and $7.6 bn, respectively. Pre-election political uncertainty contributed to a $33.3 bn outflow in the 1Q. In 2012, capital inflows were boosted by a sharp increase in foreign fundraising by Russian banks, which borrowed heavily and recorded net inflows of $23.6 bn for the year. This compares with a $24.2 bn outflow in 2011. In the non-financial sector, however, there was a net outflow of $80.4 bn, the highest on record and well above the $56.4 bn recorded in 2011. The biggest outflow in the non-financial sector was in the 4Q, undermining hopes that the investment climate is improving (EIU, March 2013).

Meanwhile, business surveys continue to indicate firm growth in manufacturing. The manufacturing PMI was unchanged at 52.0 in February, with output and new orders inching down but employment recovered from 47.1 to 49.4. Importantly, both input and output price indices continued to move down, indicating decreasing supply-side inflation pressures.

According to EIU (March 2013) the perception of both current and future economic conditions worsened in the 4Q12. Around 41% of those surveyed felt that current conditions were worse than a year ago, up from just under 39% of those surveyed in September. More worryingly, nearly 32% of respondents believed that economic conditions would worsen in the next 12 months, compared with 28% in the previous quarter. However, the outlook for income and households improved slightly: when questioned about their household circumstances, 46% of respondents thought that these would improve in the coming year, up from 44.1% in September, while 54.5% felt that their income would rise, compared with 51.9% previously. A slim majority of consumers (51.5%) anticipated increased future expenditure, compared with 57.9% in the 3Q. According to the survey, the cost of services and durable goods were the most commonly cited factors influencing changes in spending.

In January, India's automotive industry recorded its worst performance in almost a decade as car sales fell by 12.5% y-o-y to 173,420 units, according to data released on 11 February by the Society of Indian Automobile Manufacturers (SIAM). This marks the third consecutive month that car sales have fallen, after an average decline of 10.4% y-o-y in November-December 2012. Meanwhile, sales of vans were 5.9% lower on an annual basis in January, while total sales of commercial vehicles fell by 9.5% to 63,218 units. However, SIAM noted that overall vehicle sales grew by 5.3% to 1.56 million units in January. Overall, car sales in the first nine months of fiscal year 2012- 13 (April-March) fell by 1.8% y-o-y, even as overall passenger vehicle sales grew by 6.8% in the period, largely driven by sales of utility vehicles.

Even though the government kept to its fiscal targets in late February, there were no bold measures to restore macroeconomic stability and boost growth by spurring infrastructure investment. Boosting infrastructure investment and household financial savings, and inducing more capital flows to fund the current account deficit, were rightly seen as key imperatives in many economic surveys. However, the budget laid out several measures. On infrastructure, it indicated tax-free bonds of Rs 500 billion (0.4% of GDP) will be permitted this year. In addition, Infrastructure Debt Funds (IDF) are to be encouraged and a regulatory authority for the road sector is to be introduced. More generally on the investment side, companies will be able to deduct an investment allowance of 15% on investments on plant and machinery. And on the savings side, the Rajiv Gandhi Equity Savings Scheme (which offers incentives for first-time equity investors below a certain income level) was liberalized. The government’s budget also said the government would introduce inflation-indexed bonds in the near future and proposed the creation of a policy framework to help accelerate coal production, which has been a key constraint for the power sector.

While there have been steps in the right direction, it seems they are not bold enough or comprehensive enough to boost savings or investments. Furthermore, there was almost nothing in the budget on the external side, with no mention of rationalizing withholding taxes, floating a rupee-denominated bond or generally attracting more capital flows in lieu of the bloated current account deficit. The wholesale price index (WPI) inflation is expected to moderate further, but CPI is to stay elevated. Year-onyear industrial production growth has languished in recent months, but this has masked a sequential uptick in the industry that was evident in the 4Q GDP growth rates. Markets are closely monitoring whether this continues into January IP. Exports rose sharply in January and would need to stay on that trajectory to help narrow an unsustainably high current account deficit (see table on macroeconomic performance of BRIC above). Yet there has been news of export orders stumbling in the last few months.

The events of the last few weeks have increased expectations that there will be another 25 bp policy rate cut in March. First, January headline and core inflation surprised sharply on the downside and the momentum of core inflation has fallen all the way to 2% on a quarterly basis. Nevertheless, CPI inflation is still in the double digits and core CPI inflation is at 8% but this has not been a deterrent to previous rate cuts, with the Reserve Bank of India (RBI) using WPI inflation as its key metric to assess pricing power. Second, the pace of activity remains well below the trend. It seems clear that GDP growth accelerated in the 4Q12, but the output gap is still thought to be negative.

On 5 February, the State Council (China's cabinet) published a list of policy guidelines aimed at reducing income inequality. Income inequality is a major concern, partly because higher levels of inequality are perceived as increasing the risk of social unrest. The government claims that China's Gini coefficient (a measure of income inequality running from 0 to 1, where a higher figure represents greater inequality) fell to 0.47 in 2012 from 0.49 in 2008. But this relied on official income series that are thought not to capture fully the earnings of wealthy individuals (EIU, March 2013). A study last year by the Southwestern University of Finance and Economics in Sichuan province put the country's Gini coefficient at 0.61, making it one of the most unequal in the world. There has been much debate over the new guidelines, which represent ambitions not hard targets. The fact that they took so long to publish suggests that vested interests may frustrate their implementation. Some of the most controversial elements touch on state-owned enterprises (SOEs). Executive pay in SOEs is supposed to be capped and such entities will be required to hand over 5% more of their earnings to the public purse as dividends by 2015. Other businesses may be nervous about the goal of raising the minimum wage from 30% of average salaries in 2011 to 40% by 2015, with minimum pay rates also being introduced on an industryby-industry basis and collective bargaining extended to 80% of the private sector by that year.

China's exports grew by 25% y-o-y in January and 21.8% in February. Imports climbed by 28.8% in January while imports growth dropped. The two first months of the year’s average for export and imports were 23.6% and 5%, respectively. At face value, the January and February exports numbers are extraordinarily strong. Yet the data have been artificially boosted by seasonal factors. Chinese New Year festivities, which occured in mid-February this year, fell in January in 2012. Shipments will thus have been brought forward to avoid the New Year break this year, and January also had more working days than 2012.

China’s Premier Wen delivered his last annual government work report at the National People’s Congress (NPC) on 5 March. The report highlighted that the 2013 GDP growth target will stay at 7.5%. The Premier emphasized that the 7.5% GDP growth target is intended to be consistent with the economy’s growth potential as well as with the pace of growth in factors of production and sustaining the environment. In addition, the report highlighted that a priority this year continues to be economic restructuring, focusing on the support of domestic demand, including both household consumption and (high-quality) investment. On macro policy, the Premier reiterated the combination of a “prudent” monetary policy and a “pro-active” fiscal policy stance for 2013, while emphasizing the continuity and stability of macro policy, which should be forward-looking, targeted and flexible. In particular, the 2013 CPI inflation target has been set at 3.5% on an annual basis, modestly lower than the 4% inflation target for last year. The Premier noted that the 3.5% inflation target takes into account rising costs of factors of production, import inflation pressure, especially amid further expansion of accommodative monetary policy by the major advanced economies, and the room for price reforms for energy and resources.

The government will attempt to keep the registered urban unemployment rate below 4.6% and to create 9 million urban new jobs. Urban and rural household incomes are to grow at the same pace as the overall economy. Labour compensation growth should be consistent with labour productivity growth. The 2013 fiscal budget deficit was set at 2.0% of GDP. The international balances of payments should be improved further. The M2 growth target was set at 13%. Affordable housing targets in 2013 were set at 6.3 million units new starts and 4.7 million units completed, compared to 7 million and 5 million units, respectively, in 2012. NDRC announced FAI growth at 18% in 2013, vs. the target of 16% and actual growth at 20.6% in 2012. Economic restructuring and focus on domestic demand The priority for economic work this year continues to be economic restructuring and quality/sustainability of growth. The government continued to highlight the importance of household consumption, by raising consumers’ spending ability and strengthening household willingness to consume. Meanwhile, the Premier also highlighted that the importance of investment in supporting sustainable economic growth should not be underestimated. China’s ability to invest and its demand for investment remain strong, but it is important to improve the quality and efficiency of investment through various means, including further liberalization of market entry for private investment.

Asia Pacific
Indonesia’s fiscal position has improved in recent years, leading to a decline in government debt relative to GDP. But oil prices remain a source of fiscal uncertainty, given the country’s high fuel subsidy bill. In 2012 the government initially expected to record a budget deficit equivalent to 1.5% of GDP; but its forecast was revised twice, ending up at 2.3-2.4%. Since exports account for a relatively small proportion of its GDP, Indonesia should cope better than most of its neighbours with the still subdued global economy during 2013, when we expect the country's real GDP to grow by 5.9%. Markit reported that the seasonally adjusted PMI edged back above the nochange mark of 50.0 during February, posting 50.5 (up from 49.7 in January). The latest reading indicated an improvement in the health of the manufacturing sector, albeit only slight.

In Vietnam, after inflation peaked at 23% in August 2011, it has slowed dramatically, bottoming out at 5.0% last August before moving higher to 7.1% last month. Inflation is set to increase but is forecast to average 8.3% this year versus 9.1% last year and 18.7% in 2011. At the same time, Vietnam’s trade balance was in surplus last year for the first time in two decades. Through February this year it has been reported that loan growth in the country is down 0.2%. The weakness in credit growth has been evident in GDP growth, too, as the economy grew just 5.0% last year and is expected to grow only 5.3% this year. After adjusting for seasonal factors, the HSBC Vietnam Manufacturing PMI posted 48.3 in February, down from 50.1 in January. This is below the neutral 50.0 mark and signals a contraction for the second time in the past three months.

Egypt’s economy is facing several challenges. The country’s budget deficit rose for the first half of the current fiscal year — July to December 2012 — by 24% to $13.7 billion. Total government expenditures have risen to $36 billion, inflation during December increased by 4.7% over the previous month and foreign reserves have fallen from $15 billion in December to $13.6 billion in January. Meanwhile, Egypt is hoping to secure a $4.8 billion standby credit from the IMF. Egypt’s economy is estimated to have grown by 1.9% in 2012 and is forecast to expand by 2.0% in 2013.

The Bahrain Economic Development Board (EDB) said that the country’s economy grew 4.4% in the first three quarters of 2012 mainly driven by a strong recovery in the non-oil sector. Real full-year growth is estimated at 3.9%.

OPEC Member Countries
Saudi Arabia is estimated to have expanded by 6.0% last year. The headline PMI posted 58.5 in February, up from 58.1 in January. Output and new order growth remained solid, and employment levels continued to rise. Meanwhile, purchasing activity increased at a sharp rate. Employment levels at non-oil producing private sector firms also rose further during February.

The UAE’s exports to Japan grew by almost 3% to Dh161.9 billion ($44.1 billion) in 2012 compared to Dh156.78 billion ($42.72 billion) in 2011, according to the head of the Abu Dhabi Economic Development Department. The low exchange rate of the dollar against the Japanese yen had contributed to the rise in trade exchange between both countries, which has been boosted further by the high level of public spending by the Japanese government to encourage businesses and investments in the country.

The most recent budget for this year assumes a real GDP growth rate of 7.1% — a slowdown from the official growth estimate of 8% in 2012 — and a benchmark oil price of $96/b, much higher than the conservative $77/b used in the 2012 budget.

Angola’s central bank, the Banco Nacional de Angola (BNA) has several goals, one of which is to reduce the level of dollarisation in the economy and thus improve the effectiveness of monetary policy. The passage of a law in 2012 requiring international oil firms to channel their payments through domestic banks will also help to boost liquidity, although the changes are being phased in over 12 months ending in October 2013.

Oil prices, US dollar and inflation
The US dollar in February gained largely in value against the Japanese yen and the pound sterling but declined slightly when compared to the euro and the Swiss franc. On an average monthly base, the US dollar fell by 0.5% compared to the euro and by 0.4% versus the Swiss franc, but it gained 4.5% compared to the yen and 3.1% to the pound sterling. The impressive development of the US dollar versus the yen has continued and, at the monthly average rate, in February stood at ¥93.466/$. With the newly incoming presidency of the BoJ, this momentum could continue. At the beginning of March it already stood at ¥96.005/$ The continued weakness in the Euro-zone has put pressure on the euro recently and it moved from the levels of February of almost $1.34/€ to below $1.30/€. The weakening situation of the Euro-zone compares to improvements in the US and a further decline of the euro could therefore be expected. This development of the euro combined with the weakening of the yen and the expected continuation of both major currencies declining, in addition to the announcements of the incoming newly appointed governor of the Bank of England (BoE) to probably increase the monetary easing measures, should all strengthen the US dollar in the future. Considering the usual correlation of the US dollar to oil prices, this development could put some downward pressure on oil prices.

In nominal terms, the price of the OPEC Reference Basket rose by $3.47/b, or 3.2%, from $109.28/b in January to $112.75/b in February. In real terms, after accounting for inflation and currency fluctuations, the Basket price rose by 3.7%, or $2.46/b, to $69.38/b from $66.91/b (base June 2001=100). Over the same period, the US dollar gained 0.7% against the import-weighted modified Geneva I + US dollar basket while inflation rose by 0.2%.

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