By opting to leave the European Union (EU) without any exit plan, the United Kingdom has come face to face with an impossible choice. Week after week, the Brexit impasse has revealed the British Parliament’s incapacity to make decision, starting with the ratification of the divorce terms, the fruit of 2-years of negotiations by Prime Minister Theresa May. In the end, the Brexit was simply postponed. First set for 29 March, then 12 April, the deadline for exiting the EU has now been extended to 31 October (a Halloween treat?). This date could be moved forward if the UK finally manages to ratify the withdrawal agreement, which it has rejected time and again. But the most probable scenario is that the UK will extend its participation to the EU, at least for a while…
Real GDP growth will remain weak this year due to expected cut in oil production. Non-oil GDP should get a boost from public expenditure, especially investment spending, and from a slight growth in private consumption. Inflationary pressures could increase slightly but will remain moderate. High fiscal surpluses are funnelled into the sovereign funds, which guarantee the Emirate’s long-term solvency. Faced with this situation, the government has little incentive to set up fiscal consolidation measures. High and recurrent trade and current account surpluses ensure the stability of the dinar.
President Trump has argued that the US economy would get a boost if the Federal Reserve were to cut rates. The minutes of the FOMC show the members are confident about the growth outlook. The outlook for inflation, against a background of global uncertainties, allows them to be patient in terms of policy. The IMF in its latest Global Financial Stability Report expresses concern about how high debt levels weigh on the resilience when faced with significantly slower growth or higher borrowing costs. This implies that Fed policy will not only be confidently patient but also patiently vigilant.
After contracting in January, the credit impulse picked up very slightly in February 2019. This trend is due almost exclusively to lending to non-financial companies, whereas the credit impulse has remained relatively flat for households since November 2018. Demand is expected to increase in second-quarter 2019 for all loan categories, stimulated by the easing of financing conditions, except for home loans, for which lending conditions are expected to tighten slightly.
Strong job creation in March in the US has brought relief after the disappointing data the month before. The Chinese manufacturing indices have rebounded and crossed the 50 level. In the eurozone, the pressure on the manufacturing sector continues but the services PMI has improved. Retail sales have beaten expectations. For the manufacturing sector, a lot will depend on how uncertainty evolves. In this respect there are hopeful signs. The likelihood that an agreement will be reached between the US and China has increased whereas in the UK, cross-party negotiations seek to avoid a hard Brexit.
The German economic sky seems brightening up as the Pulse indicators are moving towards the northwest quadrant of the chart. However, for the moment, the improvement is largely located outside the country’s large manufacturing sector.
Brexit started as a surprise, with the majority Leave vote in the UK referendum on June 23, 2016. In the financial sphere, more specifically, Brexit implies a loss of European passporting rights for the UK and thus less integration between the European Union and the leading financial centre of London. The trade in financial services between the two zones will now have to meet the requirements of two separate sets of regulatory and supervisory authorities, rather than just the requirements of a single regulatory framework as at present. At the very least, this will hold operational uncertainty for some time to come
Narendra Modi’s term as India’s prime minister has been broadly positive economically. In the last five years, he has pushed through some important reforms, taking advantage of his majority in the lower house of Parliament. However, to achieve a significant increase in GDP per-capita and reduce India’s vulnerability to external shocks, it is necessary to carry out further reforms in order to create a more conducive environment for domestic and foreign investment. The latest polls suggest that no party could win a majority in the lower house of Parliament in the general election scheduled for April and May. Mr Modi’s party still looks likely to win the most seats, but could be forced to govern alongside the Congress Party
GDP has been stagnant since the mid-2018, largely because of the falling industrial activity. In March, the manufacturing PMI reached 44.1, pointing to the sharpest contraction in output since mid-2012. However, the tide could be changing. For example, the IFO business climate indicator strengthened in March, following six consecutive months of decline. Nevertheless, confidence in the manufacturing sector remained on a downward trajectory. Industrial orders started the year rather weak, as they came in 3.6% lower in January than in previous month. Nonetheless, they were at about the same level as during the preceding six-month period. Based on past experiences, this stabilisation could announce an imminent turning of the cycle
In 2018, according to preliminary INSEE estimates, France’s fiscal deficit narrowed by 0.3 points compared to 2017, to 2.5% of GDP. This is a good surprise compared to the government’s target of 2.7%. Mandatory levies and public spending both declined slightly as a share of GDP, by 0.2 and 0.4 points, respectively. The public debt ratio levelled off at 98.4% of GDP. Although the ratio has yet to decline, at least it did not increase either, for the first time since 2007. Thanks to the better-than-expected figure for 2018, the temporary slippage of the fiscal deficit above the 3% threshold in 2019 is likely to remain limited.
After last week’s poor flash PMIs, data published this week show a mixed picture. The European Commission’s Economic Sentiment Index continues to decline in a large number of countries and for the eurozone as a whole as well. IFO data for Germany show an improvement in the overall climate though manufacturing continues to go down. INSEE data for France show a stabilisation or even some modest improvement. All in all there are some hopeful signs but it would be premature to conclude that the growth slowdown is about to end. April data will be particularly important.
In South Korea, real GDP growth reached 3.1% in Q4 18, driven by the set of supportive measures implemented by the government. Real GDP growth should slow in the first quarter of 2019.
The growth projections of the FOMC members have been revised downwards and the unemployment projection has seen an upward revision. The projections for the federal funds rate (the “dots”) have dropped 50 basis points. The Fed chairman considers the outlook to remain favourable, adding that it is a great time to be patient. Markets are less upbeat. They interpret patience as an underlying concern about downside risks and price a rate cut in the course of next year. We expect the policy rate to stay at its current level, this year and next.
The latest economic data are globally in line with, or even above, expectations. Some indicators remain at a high level compared to their long-term average. The further and significant deterioration in manufacturing activity draws our attention.
The French economy lost a lot of steam between 2017 and 2018, and the big question is whether it has returned yet above its potential. On the one hand, core inflation has barely increased, suggesting that the output gap is still negative. According to survey data, on the other hand, production capacity and factors are still under strong pressure, which suggests to the contrary a rather advanced position in the cycle. Although it is unclear whether the economy has reached on end-of-cycle phase, it is widely agreed that the external environment has deteriorated and is straining growth. The big fear is that the current slowdown could degenerate into recession in 2019, but we do not think this is the most likely scenario
The plethora of data released this week didn’t remove concern about the Chinese growth slowdown. Lunar holiday bias and the recent fiscal stimulus measures imply it is too early to draw firm conclusions. The matter is important for the global economy given China’s weight. It is also important for key exporters to China such as Germany. Against this background, reaching a trade agreement with the US becomes key.
The latest economic indicators all surprised favourably (positive z-score on the x-axis), reinforcing the global picture of a slow but resistant French growth and, consequently, our Q1 growth forecast of 0.3% QoQ.
Denmark, a small, open economy, reported growth of only 1.2% in 2018, the lowest level since 2013. A patent export in first-quarter 2017, however, has sharply distorted Denmark’s GDP growth profile in 2017 and in 2018. GDP growth averaged 1.7% over the past two years, which provides a better picture of Denmark’s relatively strong growth momentum, buoyed by a favourable international environment and the strong growth of domestic demand. Denmark will benefit from a relatively high growth carry-over in 2019. In contrast, it will be hit by slowing growth at its main trading partners in the quarters ahead. Yet the size of the slowdown will depend on the progression of protectionist policies and world trade
Thanks to the upturn in oil prices, the growth of private sector lending has accelerated since mid-2017 in the Gulf Cooperation Council (GCC) countries. Oil revenues are a key determinant of economic and banking activity. Yet trends are mixed. The strong growth in lending in Qatar is due to the rebound in commercial activity 18 months after the embargo began. In Bahrain, the construction sector and households are fuelling lending. In contrast, lending has increased very feebly in Kuwait due to the lack of economic opportunities, while Oman has failed to restore its fiscal and external accounts. In Saudi Arabia, reforms are straining private sector activity, resulting in a small increase in lending
The latest survey data show a very mixed picture. In the manufacturing sector, China saw some signs of stabilisation, whereas Japan experienced a deterioration. In Germany, manufacturing remains under pressure. The picture in the eurozone is quite diverse, depending on the country and the sector. Looking at the broadest survey indicator for the eurozone, one observes a stabilisation. Whether this will be confirmed depends to a large degree on developments in China and on the well-known sources of uncertainty (trade, Brexit).
Negative surprises were in abundance in industry in February. Contrary to expectations, industrial production weakened further in December due to a sharp decline in construction activity. The only hopeful sign was the strong rebound in the car industry (+7%). The forward-looking indicators also surprised on the downside.
In recent years, Germany has posted substantial current account surpluses, well above the level justified by economic fundamentals. This can be attributed to a substantial increase in savings of the government and the corporate sector. Many observers consider Germany’s current account surplus as a threat to the eurozone economy and urge the German authorities to reduce it by boosting wages and investing in infrastructure. These demands have largely been ignored. Supported by model simulations, the German authorities argue that these measures would be detrimental to the German economy, while having hardly any effect on the other eurozone countries. They call for more structural reforms in the European Union, such as a further opening of the services sector.
The first year in office of the new president Joao Lourenço’s reveals a rather positive shift in economic policies, given his determination to clean up politics and the scope of the economic reforms engaged so far. The abandon of the currency peg has eased some pressures on the fx market though they still remain important. The financing package recently signed with the IMF will help to implement structural reforms aimed at diversifying the economy by fostering the development of the private sector. Nevertheless, the overall near-term economic outlook remains embedded in international oil price developments due to the lack of economic diversification. Additionally, the still ailing banking system keeps on straining the private sector
Considering its considerable weight in world GDP, slower growth in China causes spillover effects. Over the past 12 months, countries which are more exposed to China in terms of exports have seen a bigger drop in their new export order assessment. In Germany there is a close correlation between the Chinese purchasing managers index and the assessment of exports in the PMI. This shows that Germany and, by extension, Europe as a whole should hope that recent Chinese growth support measures will be successful.
In the United States, positive cyclical surprises have become rare: employment figures and the ISM purchasing managers’ index were the only statistics that surpassed expectations in January. Yet these are solid indicators. Moreover, although industrial output and retail sales were disappointing, they were probably caused by poor weather conditions (extreme cold wave) or temporary factors (government shutdown). For the moment, the US economy still seems to be poised for a smooth landing.