External liquidity is comfortable even though the recent years have been less favourable for external asset accumulation. Years of very high current account surpluses (almost 20% of GDP on average during 2005-2014) have resulted in a high level of FX assets at the central bank. In the short term, SAMA[1] FX assets are expected to decline for two reasons: More than a third of reserves (USD 181 bn in 2018) are government assets used to finance part of the fiscal deficit. The decline in oil production linked to the strike on oil facilities (September 14th) should turn the current account surplus into deficit (0.4% of GDP in 2019). At end-2019, SAMA FX reserves should reach around USD 470 bn (24 months of imports of goods & services)
For the first time since 2014, aggregated net income of the five largest Portuguese banking groups[1], which account for about 80% of the banking system’s consolidated total assets, was positive in 2018 (EUR 375 millions). Losses recorded in Portugal (EUR -14 millions) were more than offset by profits from international activities (EUR 389 millions).The assets located abroad of Portuguese banks have, on average since 2014, represented 13% of their total assets. In 2017, the simultaneous decreases in this proportion and the net income from international activities are, amongst other things, due to a valuation effect of assets accounted at their fair value
Private consumption is the biggest component of eurozone GDP: 54% in 2018. It is also more resilient to shocks than GDP. This characteristic is particularly important when activity is slowing. A key driver of household spending is real disposable income, which in turn very much depends on employment growth (wages also play a role obviously). Employment growth has been declining since the second half of 2017, which more or less corresponds to the peak of the eurozone growth. Judging by the employment component of the IHS Markit composite PMI, which is highly correlated with growth in employment, growth of the latter should continue to go down and hence weigh on consumer spending growth.
The government’s 2019 budget growth target of 3.1% is clearly out of reach. Indeed, real GDP growth stood at only 1.1% during the first six months of the year. Except tourism and to a lesser extent agriculture, most sectors have stalled, or even contracted (industry). Headwinds will remain powerful in the coming months, starting with the subdued demand from European countries. Despite signs of inflation stabilization, the monetary environment will also remain restrictive amid strong pressure on external accounts. Above all, uncertainties linked to presidential and parliamentary elections scheduled in September-October will continue to weigh on the business climate and thus investment. The economic recovery expected in 2020 will greatly rely on a steadfast implementation of reforms
The share of residential loans to individuals whose value at the origination represents more than 90% of the value of the property acquired continued to grow in the first quarter of 2019. This credit category then represented 4.5% of outstanding home loans compared with 4.4% in the previous quarter and 3.3% a year earlier. The increase in their weight in the first quarter of 2019 prolongs the trend observed since the low point reached at the end of 2009. It also goes hand in hand with the increase in the proportion of real estate loans whose value represents between 75% and 90% of the value of housing. The growing financial constraint of households is otherwise illustrated by the increase in the proportion of loans with a high loan to income ratio
Since the 3rd quarter of 2017, a year of strong economic growth, non-financial corporations’ margin rate* in the euro area has fallen steadily. In the 1st quarter of 2019 they hit their lowest point since early 2014, at less than 40% of value added. This trend echoes the increase in unit labour costs, which has resulted both from increasing wage growth and slowing labour productivity. Forming part of a wider pattern of slowing growth in the euro area over a number of quarters and with high level of uncertainty, this narrowing of margins reflects the difficulties companies are experiencing in passing higher costs through to prices. Underlying inflation remains particularly inert. If it continues, this narrowing of margins could affect trends in investment
The political appeasements along with several reforms to improve the business climate have allowed a macroeconomic recovery since 2018 in Kenya. However, the fiscal position remains weak: on one side, budget deficits have reached an average of 8% of GDP over the last five years; on the other side, debt interests have attained 21% of estimated revenues in 2018 against 13% in 2014. Moreover, the increasing tapping of non-concessional external loans is a growing vulnerability: in May, Kenya issued its third Eurobond for an amount of 2.1 billions of dollars, in two tranches with 7-year and 12-year tenors
Since October 2017, the Federal Reserve (Fed) has no longer been rolling over all of the debt maturing in its securities portfolio. In other words, it is proceeding with net asset sales (tapering). By 26 June, its holdings of US Treasuries had declined by USD 355 billion while Agency debt securities and Agency mortgage backed securities were down by USD 249 billion. The shrinking of the Fed’s balance sheet has had a notable impact on money market rates due to the pressure it is placing on central bank liquidity. Pressures have picked up since last fall, when declining yields reduced investors’ appetite for Treasuries. As a result, there has been a big increase in the net position of primary dealers in Treasuries: inventory increased by USD 140 billion between October 2018 and June 2019
The INSEE has just developed a new graphical tool, a tracer of business confidence, that helps position the French economy within its cycle and track economic trends. The recent past is characterized by changes in the economic situation of limited magnitude but quickly evolving: the cyclical upturn in 2017 was followed by a slowdown as soon as 2018 before going back into the expansion zone since the start of 2019 but timidly so (close to the frontier with the “slowdown” quadrant). What stands out from this chart is therefore more the hesitant, “caught in-between”, feature of the current economic situation in France rather than its favorable (and resilient) aspect
Prospects for the economic growth in Mexico are deteriorating, owing to slower economic activity in the US, a tight fiscal stance and a persistent weakness in private investment. Real GDP growth for Q1 slowed to 1.2% y/y, from 1.7% y/y in Q4 2018. For the whole year, real GDP growth should reach 1.5% (from 2.0% in 2018) and risks are tilted to the downside. On the one hand, trade tensions with the US (following the US President’s announcement to impose tariffs on Mexican imports) will have a detrimental effect on business sentiment, even if the two countries have so far reached an agreement
The Bank of England's (BoE) aggregate balance sheet statistics for the Monetary and Financial Institutions (MFIs) provide a macroeconomic picture of the UK banking system. They illustrate the contraction of bank balance sheets until December 2015 (-19% compared to January 2010). This was mainly the result of the decline in outstanding loans to the resident non-financial private sector, whose debt was returning to more sustainable levels. Non-resident claims and interbank transactions also contributed to the decline in bank balance sheets
Interest rates on US federal government debt have declined significantly in recent months. With the yield on 10-year Treasuries at 2.1%, the Federal government’s cost of borrowing has fallen to the lowest level since September 2017. President Donald Trump is bound to be pleased. The supremacy of the dollar offers him the privilege of being able to widen the deficit almost endlessly, at a time when the appetite for US Treasuries seems to be inexhaustible. Yet the stronger demand for Treasuries is also a warning signal: it indicates that investors are seeking safe havens as they form more cautious expectations. In the United States, the decline in yields is also a faithful indicator of a deterioration in the business climate.
Chart (a) shows short-term dynamics in non-resident net portfolio investments (equities and bonds) following the elections in Brazil, Chile, Colombia and Mexico (ie LAC-4). In Brazil, a rebound occurred after the election which followed a period of increased risk aversion as a result of the truckers’ strike (May 2018) and emerging market sell-off (August/September 2018). However, confidence remains very fragile as Brazil stands out as the country where, on a twelve months rolling sum, non-residents have remained net sellers (chart b). Net purchases have also turned positive post-elections in Colombia and Mexico however with a lag in the latter case owing possibly to concerns over NAFTA and commitment to fiscal responsibility under the new administration
An increasing share of the outstanding amount of loans granted to Portuguese households for house purchase consists of loans with an original maturity over 30 years. Between 2009 Q1 and 2018 Q4, the proportion of loans with the longest original maturities have increased from 51% to 71% of the total outstanding amount. The change has been caused by the outstanding amount of loans over 30 years remaining stable, while the outstanding amount of shorter-term loans has fallen by 45%. Hence, the average maturity of new loans for house purchase has increased from 30.8 years to 33.3 years between 2014 and 2017 according to the Bank of Portugal’s latest figures1
Since Q3 2018, private payrolls gains have been on an upward trend (+31k in Q3 2018, +54k 2018 in Q4, +66k in Q1 2019), contrasting favorably with the stability of GDP growth over the same period. Nearly 900,000 private payrolls were created on a net basis since the 2013 trough. The prospects for 2019 are encouraging judging by the latest Pole emploi study on manpower requirements, which reports another sharp rise in staffing plans of 15% after an impressive gain of 19% in 2018. These plans represent 2.69 millions of potential hiring. Their number is up in every sector and in a particularly dynamic way in the construction, industry and business services sectors. The large increase in recruitment projects on open-ended contracts (+24%) is also noteworthy (+8% for fixed-term contracts)
After a precipitous 42% decline against a euro-dollar average between January and August 2018, half of which occurred in the month of August alone, the Turkish lira (TRY) rebounded by 15% in September-December, following a massive interest rate hike by the Turkish central bank (CBRT). Nonetheless, the TRY has depreciated again by 10% over the past two months amid stagflation. FX volatility has spiked owing to uncertainty about the true level of “free” FX reserves. Net outflows of non-resident portfolio investment in local currency amounted to USD 1.4 bn in March-April as non-resident investors pulled out of the local equity market and, above all, the local bond market. They now hold only 12% of domestic public debt (vs. more than 20% through 2014).
The United Kingdom has had positive trade balances with the rest of the world since 1966 and the European Union (EU) since 2005. The financial services sector is a major contributor. As far back as the Office of National Statistics (1966) statistics of foreign trade in financial services show, the sector has always had a trade surplus. The same has been true for the EU since 1999, for which this surplus even increased fivefold until 2011 (GBP 21.5 bn). The decline observed between 2012 and 2014 was almost erased between 2015 and 2018 (GBP 20.4 bn). The UK financial services sector has a surplus vis-à-vis each of the major EU economies, starting with France, the EU market with the largest surplus in the EU since 2014 (GBP 4.5 bn in 2018)
May Day is approaching. It is the occasion to celebrate progress made in improving workers’ rights. It can also be an opportunity to recall how much the quality of social dialogue matters for a well-functioning of the labour market. According to 2018 Global Competition Review of the World Economic Forum, the quality of labour-employer relations is relatively high in continental northwest Europe and Japan. At the same time, these countries score very well in terms of labour market outcomes. The lightly regulated labour markets in the English-speaking countries have also achieved low unemployment levels, although jobs are less well protected. In the southern European countries, the social dialogue seems to function less well. Unemployment in these countries has remained persistently high
Over the last six months the rupiah has gained more than 7% against the dollar (14,085 rupiah per dollar on 16 April), taking it to just 2% higher than it was a year ago. Over the same period, foreign exchange reserves have increased (by USD 9 bn) taking them back close to their levels of a year ago. They remain sufficient to cover the country’s short-term external financing needs (1.3 times) despite the increase of the latter due to the sharp rise in the current account deficit.Although the figures on international trade suggest a sharp fall in the current account deficit in Q1 2019, the improvement in external accounts reflects mainly the return of portfolio investments. But this consolidation also reflects the country’s dependence on volatile capital
At year-end 2018, auto loans outstanding peaked at US 1,274 billion in the United States. This is the third largest debt category for American households, behind mortgage loans (67%) and student loans (11%). At 9% of total loans outstanding, their weight has increased constantly since 2010. The Federal Reserve Bank of New York recently released unpublished data broken down by lending sector. In Q3 2018, non-bank finance companies originated 12% of loans outstanding, half of which were subprime loans*. These auto finance companies, which are generally highly leveraged, remain highly exposed to credit risk (only 17% of loans outstanding are securitized)
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
Industrialized Asian countries are hit by a severe slowdown in their external trade. Signs of weakening have been visible since the beginning of 2018 and aggravated since November, following the last series of US tariff hikes on imports of Chinese goods. In fact, Asian exporters have been severely affected by the contagion effects of these US tariff hikes, as well as by the economic slowdown of the main world trade partners and by the down cycle in the global electronic sector. In January-February 2019, total exports of goods in USD collapsed in China (-5.2% year-on-year), in South Korea (-8.7%) and Taiwan (-4.1%). Export growth slowed down significantly in other countries, including Vietnam (+3.9%)
The Portuguese banking system’s non-performing loan ratio continued to decline, to 11.7% as of Q2 2018 (and 11.3% as of Q3 2018), after peaking at 17.9% as of Q2 2016. This 6.2 percentage points contraction in the NPL ratio is mainly due to a nearly 40% reduction in non-performing loans outstanding amount, compared to a 2.1% decline in total loans outstanding amount. According to the Bank of Portugal’s data, 42% of the decline in the NPL ratio is due to write-offs. Sales and securitisations accounted for 23% of the ratio’s decline. Nearly two thirds of the cleaning up of Portuguese bank balance sheets occurred via the removal of non-performing loans from the banking system
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
Weekly charts highlighting points of interest in the world economy