Emerging - 30 January 2018
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    In emerging countries as a whole, economic growth has slowed since last summer but is expected to strengthen over the next two years if the global environment remains supportive and the US economy decelerates smoothly in 2019. In the medium term, there is a large consensus on the fact that growth in emerging and developing economies as a whole would be capped at around 5% per year if total factor productivity does not reaccelerate. The rebalancing of China’s economy, the necessity for this country to contain debt and to reduce its carbon footprint imply not only a lasting slowdown in economic growth, but also growth that is less fossil-fuel intensive. Oil-exporting countries will be the most affected by this change in China’s growth regime.
    Brazil’s economy expanded for the third consecutive quarter in Q3 2017 after eight quarters of recession. Our scenario continues to favour a gradual rebound in activity in 2018, buoyed by domestic and global demand. Inflation is under control and monetary easing is winding down. Yet with reforms on hold and elections wrapped in uncertainty, the financial markets may be in for a rough ride in the months ahead. Despite job market improvements in 2017, the economic and political crisis has left deep social and psychological scars that could raise the spectre of a radical election outcome, jeopardising what is already a challenging macroeconomic and fiscal consolidation in 2019.
    Economic growth slowed in the third quarter and all the indicators suggest that this slowdown continued in the final quarter. The economy is still driven by domestic demand, whilst investment has stalled, despite more favourable monetary conditions. The sharp fall in inflationary pressures (reducing inflation below the central bank’s target) has allowed the monetary authorities to cut policy interest rates by 225 basis points. The government continues to focus on the control of public spending in order to reduce its deficit and rebuild its sovereign wealth fund. It hopes to use this fund to uncouple its spending from oil revenue from 2019 onwards
    Economic growth rebounded slightly in India in the second quarter of fiscal year 2017/18. Third-quarter indicators confirmed this recovery, which is driven by industry’s dynamic momentum. In contrast, household consumption slowed and private investment is struggling to pick up again, despite a more favourable institutional and monetary environment than in the year-earlier period. Moreover, with rising inflationary pressures and the risk of budget overruns, the central bank might decide to tighten monetary policy. Despite the economic slowdown and growing social tensions, the NDA, the ruling coalition party, could win a majority in Parliament’s upper house before the 2019 general elections.
    China reported economic growth of 6.9% in 2017, up from 6.7% in 2016, according to the figures released on January 18th. The impact of policy stimulus measures on domestic demand and then the rebound in exports contributed to this slight upturn. However, the slowdown trend at work since 2010 started to resume again in H2 2017. It is expected to extend into 2018 as a consequence of structural factors and tighter domestic credit conditions. Getting “better quality” economic growth, attenuating financial risks and reducing corporate debt must remain the top priorities of the authorities. Yet there will continue to be uncertainty for quite some time over their determination to make the economy less dependent on credit at the price of slower growth.
    Vietnam’s economy is growing very rapidly, driven by booming manufacturing exports and strong domestic demand, which is supported by the rise in revenue and an expansionist policy mix. This dynamic momentum should continue in 2018-19. At the same time, economic growth could dip slightly if the government sticks to its fiscal adjustment plan and the central bank adopts a more cautious monetary policy to contain the surge in domestic debt. These actions seem unavoidable if Vietnam is to maintain macroeconomic stability and continue to improve the health of its banking sector.
    Bank lending to the private sector has finally picked up. The financial crisis, that lasted eight years, is definitely behind. Bank balance sheets have been cleaned up. The quality of assets continues to improve. Lending is boosting the economy, which has accelerated strongly after the slowdown of 2016. Investment growth exceeds 20% thanks to the support of European structural funds. Wage growth is fuelling consumption. Yet labour market and wage pressures, rising real estate prices and the recent increase in foreign funding of banks are all signalling the risk of overheating and must be monitored.
    Sebastian Piñera, of the centre-right party, won last December’s presidential election and will replace Michelle Bachelet in March. The latter’s term has been marked by a number of economic and social reforms coupled with a growth slowdown and slight deterioration in macroeconomic fundamentals. The new President’s aim is to reverse this decline by giving priority to rebuilding public finances and encouraging investment. However, his party’s weak standing in Parliament, and the lack of any ‘natural’ coalition, will force the government into numerous compromises. It therefore seems unlikely that we will see any radical change in Chile’s economic policy in the short term.
    Growth slowed in 2017 because of El Niño and political instability, but the outlook for 2018 is better. Growth should be boosted by the mining sector and the government stimulus plan, while the country’s solid macroeconomic fundamentals should remain intact. However, the political crisis has not been resolved. Tension has increased late 2016, when a corruption scandal broke out in connection with Brazilian company Odebrecht. All political parties have been tainted by the affair and the President, who has been directly implicated, looks increasingly vulnerable.
    Lifted by an expansionist fiscal policy and a buoyant international environment, GDP growth could approach 7% in 2017. Signs of overheating have already appeared. Robust domestic demand, the Turkish lira’s depreciation amidst (geo)political tensions, and the rebound in oil prices have fuelled a sharp upturn in inflation and a wider current account deficit. The economic slowdown that seems to be taking shape in 2018 would be welcome. Despite inflation’s inertia and the risk of currency depreciation in the face of market sentiment, a better coordinated policy mix – with a more neutral fiscal policy and a persistently relatively restrictive monetary policy – should lead to slight disinflation.
    The main objective of the Bank of Israel, the country’s central bank, is to maintain price stability. In the short term, inflation should remain well within the central bank’s target range. As a result, the authorities should be able to maintain an accommodating monetary policy. Repeated current account surpluses have fuelled the shekel’s appreciation, to the detriment of export market shares. The central bank’s foreign currency purchasing policy has limited the shekel’s appreciation, but not enough based on recent trends. In the short term, divergent interest rate trends relative to the United States should help stabilise the shekel, but in the medium term, the high technology sector and potential natural gas exports will continue to put upward pressure on the shekel.
    Côte d’Ivoire has had to deal with a number of shocks, both domestic and external, but its economy has so far proven resilient. Growth remained firm at 7.8% in 2017 and the outlook, according to the IMF, is still bright for at least the next three years. However, sources of weakness abound, including the sharply lower cocoa prices and deteriorating public finances. There is also the risk of further socio-political tensions ahead of elections in 2020 and 2021.
    The Angola political transition is followed by a lot of expectations albeit remaining full of unknown. The new president will face several challenges in a context of dearth of hard currency. The country’s growth outlook remains constrained despite higher oil prices, due to lack of investment and persistent fx shortage. In order to preserve its foreign reserves, the BNA was obliged to abandon the kwanza peg to the US dollar, while maintaining capital controls in place. But the kwanza still remains overvalued despite the recent depreciation, which is fueling inflationary pressures. The weak banking sector is under restructuring but bad loans are piling up.
    Emerging - 24 October 2017
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    Foreign exchange reserves in emerging countries (excluding China) have increased rapidly since year-end 2015. Commodity-exporting countries have rebuilt their reserves, even though they have not returned to the record highs of early 2013. For commodity-importing countries, the upward trend since the beginning of this year has regained a second breath. Yet, as always, this overall consolidation masks a few weak spots.
    The recession is technically over. After eight quarters of contraction, real GDP rebounded in H1 2017. Households have seen a gradual improvement of their financial statements, but corporations and the public sector are still having trouble. Economic recovery has not yet firmly taken root, which, combined with disinflation, should encourage the central bank to continue to ease its monetary policy. Assuming no further escalation in the political crisis, an orderly election process next year, further deployment of reforms, supportive monetary policy, and a still benign global environment, we expect GDP growth to accelerate gradually, propelled by consumption and exports.
    The economy continues to consolidate. Economic growth accelerated significantly in Q2 2017, and inflationary pressures fell sharply, allowing the central bank to lower its key rates by 150 basis points since the beginning of the year. Although the banking sector is still in a fragile situation, it continued to improve in H1 2017. The share of risky assets is declining, the supply of new loans is accelerating, and bank profitability is picking up. At the same time, the government is still determined to consolidate public finances, as illustrated by the decline in the fiscal deficit (even excluding oil and natural gas revenues). Under this environment, Fitch switched to a positive outlook for its sovereign rating for Russia.
    Economic activity has slowed sharply since January. This deceleration is the result of the combination of two temporary shocks: demonetisation and the introduction of GST. However, it also reflects a slowdown in investment, which continues to be hampered by overcapacity in manufacturing industry and the growing problems at public-sector banks. The government’s scope of action to stimulate activity and support its banks remains limited if it wants to avoid weakening the public finances. The deficit for the first five months of the 2018 fiscal year is already 96% of the full-year target. In addition, government finances could be significantly affected by the writing off of loans to farmers.
    The authorities have activated all leverages to guarantee stability in 2017, in preparation for this month’s 19th National Congress of the Communist Party. Economic growth accelerated slightly in the first half. In the financial system, monetary and regulatory tightening has triggered deleveraging among banks and non-bank institutions, which should help curtail some of their most risky activities. While household debt continues to rise, but remains moderate, the increase in corporate debt has slowed. The authorities have also managed to reduce capital outflows and to stop the fall in foreign exchange reserves, while the yuan has rebounded against the dollar since the beginning of the year.
    The political crisis is at a pause: the royal succession went smoothly; the new constitution was introduced in April and elections will probably take place by the end of 2018. However, this appearance of stability does not prefigure a return to democracy in Thailand. Political and social conflict has been smothered rather than resolved, and a new phase of political instability cannot be ruled out. On the economic front, real GDP growth is benefiting from the recovery in global trade, but domestic demand remains weak and the scale of the recovery is limited given the structural challenges that the country faces.
    Economic growth rebounded in H2 2016-H1 2017 and is projected to reach in 2017 its strongest rate in the past seven years. The external environment has become more supportive given the revival in trade flows and the recovery in Chinese tourist arrivals. Domestic credit growth has picked up again since mid-2016 and the property market has rebounded after a short period of correction. Economic growth is expected to weaken again in the short term, especially as China’s economic growth should slow, credit conditions should tighten as the result of US monetary policy normalization and the government should take actions to cool the property market and improve housing affordability, which has deteriorated severely in recent years.
    The Czech Republic has reported solid performances since 2014, and economic growth is well balanced between consumption and investment. The economy is operating at full employment: the unemployment rate is at an all-time low, which is driving up wages. Even so, wage growth is not as strong as in neighbouring countries. The speculative positions on the Koruna were not as lucrative as expected. Given the amounts at stake, unwinding these speculative positions will complicate the central bank’s task. The country reports both a fiscal and current account surplus. The regional environment is buoyant, bolstered by EU structural funds.
    The country reports record-high economic growth for the European Union. Consumption is the main growth engine, followed by private investment. Public projects, in contrast, are at a standstill despite the availability of European structural funds. Wages are rising, buoyed by public-sector salary increases. Fiscal policy favours boosting consumption via wage increases, to the detriment of investment spending. The government will have to adopt a more restrictive stance in the future to avoid the risk of macroeconomic destabilisation.
    Relations with the United States are still tense, and negotiations over Nafta are far from the endgame phase. The climate of uncertainty will only grow with the approach of Mexican elections. At the same time, macroeconomic fundamentals are relatively healthy and economic growth was rather resilient in the first half of 2017, buoyed by dynamic exports and decent growth in private consumption, in keeping with the renewed confidence of economic agents. The second half promises to be more difficult, while 2018 will be handicapped by low carry-over effect at the end of 2017, the lagging impact of higher interest rates and the wait-and-see attitude of investors in search of greater economic and political visibility.
    After slowing sharply in 2016, the Saudi economy will probably enter recession in 2017. This downturn is mainly due to the drop in public investment caused by lower oil revenues. In the non-oil sector, economic prospects are still mixed in the short term. The fiscal reform process is bound to slow, and companies and the banking sector are paying the consequences of this economic slowdown. The need for further fiscal consolidation and the slow pace of economic diversification will continue to strain economic activity in the medium term.
    Morocco’s macroeconomic fundamentals remain sound. The balance of payments has been subject to some pressure, but the risk of external instability is low. The current slowdown in import growth should help stabilise the current account deficit, while pressures on forex reserves have abated since the authorities postponed the exchange rate reform. Fiscal prospects are also looking much better after a poor performance in 2016, and the economy is benefiting from better external conditions and the rebound in agricultural output. In the non-agricultural sector, however, growth is still too sluggish.
    The unprecedented Supreme Court decision to cancel last presidential election’s outcome has been welcomed as a triumph of democracy in Kenya. But today Mr. Odinga’s withdrawal from the next rerun together with the controversial changes to electoral legislation has rather the bitter taste of a political crisis. The climate of political uncertainties is weighting on Kenya’s economic growth prospects and on its public finances. Growth already slowed down significantly in the first semester and there is good reason to fear that the economy has fallen into recession since the elections at the beginning of August. Moreover, the introduction of the interest rate cap has led to a vicious cycle between higher NPLs and greater banks’ risk aversion.

On the Same Theme

Tensions flare up 1/25/2018
It looks like 2018 will be a year of strong growth across the globe, with very few countries left behind. In the United States and the eurozone, business climate indicators are close to the peaks last seen in the mid-2000s. Although pressure on production capacity has been rather mild so far, business leaders are beginning to feel it more acutely. Asset prices – both financial and real estate – continue to rise, and some now fear the emergence of bubbles. The time is ripe for the normalisation of monetary policies. The central banks are cautiously pulling out of the government bond market, which is likely to spark an upturn in interest rates. This risks placing a damper on activity as of 2019.
The recovery continues, but… 7/11/2017
A wave of optimism is sweeping the economy, especially in the eurozone, where growth is accelerating and spreading to all member countries. As we enter summer 2017, all economic indicators are looking upbeat, job creations are picking up, and unemployment is declining at a faster pace. The horizon looks bright, with just one exception, China, where a few clouds are forming. Beijing is taking action to curb credit growth again, which is bound to strain activity, notably in the real estate sector. Heavy industry is already showing a few signs of relapsing, and global commodity prices are easing.
Stronger momentum 4/25/2017
Economic indicators are picking up in most of the developed countries. Eurozone growth is more robust, at an annualised rate of nearly 2% in first-quarter 2017. The rebound is also better distributed, as the economic cycles of the 19 eurozone member countries are tending to move more in sync. The United States reported an upturn in oil and shale gas- related activities, and corporate investment in this sector probably rebounded at the beginning of the year. Inflation rebounds, approaching or overshooting the official 2% target. The central banks keep calm, however.
Change of scenery 1/24/2017
Donald Trump’s election as president of the United States opens a vast range of possibilities, including a possible surge in activity in the short-term. Consequently, we are raising our outlook for US growth, inflation and interest rates for the horizon 2017 and 2018. Upcoming tax cuts – the size of which remains to be seen – will occur at a time of quasi full employment, which is bound to accentuate wage and price pressures. Inflation is likely to rise above the official 2% target, which would encourage the US Federal Reserve (Fed) to raise its key rates a bit faster. This would boost the dollar, notably against the euro, whose weakness is largely due to the European Central Bank (ECB).
#Brexit 10/13/2016
Three months after the UK referendum, it might be tempting to call the Brexit vote an economic non-event. Yet it is much too early to measure the consequences, other than its downward pressure on GBP. For the UK, the challenge is to continue attracting international investors, at a time when the country risks losing access to the European market. This task will be especially difficult given that monetary policy is geared towards holding down interest rates, and public finances are bound to deteriorate. All of this points towards a long depreciation of GBP, which will provide scant economic support while undermining the country’s attractiveness.

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