Our pulse indicators continue to send a positive signal: stability of the INSEE business and consumer confidence surveys in August, even a slight improvement in the composite PMI; a more important than expected fall in Q2 unemployment rate (-0.2 points, at 8.5%); a small but solid rebound in July consumer spending on goods (+0.4% m/m); a slight upward revision of the second estimate of Q2 GDP growth (+0.1 point, at 0.3% q/q), thus running at the same rate as in Q1.
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
According to the recently released Beige Book of the Federal Reserve, the United States should continue to see modest growth. Most indicators are above their long-term average, the manufacturing ISM and industrial production being exceptions.
Based on advance indicators for Q2 2019, Singapore’s GDP barely increased in y/y terms (+0.1%) and declined by 3.4% q/q sa (down from +1.1% and 3.8%, respectively, in Q1). GDP contraction is due to the weak performance of the manufacturing sector, which is hard hit by the effects of US-China trade tensions and weakening global tech cycle.
The sub-Saharan Africa’s largest economy is having hard time to recover. External rebalancing has showed some progress. But imports remain well below pre-crisis levels. In addition, the rebuilding of FX reserves is being accompanied by increased financial vulnerability, which puts pressure on monetary policy as the authorities give the priority to exchange rate stability. Weak public finances are an additional constraint. In the short term, and despite its strong potential, the economy is expected to grow more slowly than the population. As well as improving macroeconomic stability, the authorities will have to address the deep-seated factors that are holding back the economy as a whole.
Since the mid-1990s the Italian economy has seen a significant economic uncoupling, which has worsened since the 2008 financial crisis. Its difficulties include a level of productivity that is one of the lowest in the advanced economies, a demographic decline and a relatively inefficient labour market, which still excludes too many young people. Structural reforms were introduced under the government of Mario Monti, from 2011 on, bringing a recovery in fiscal and trade accounts, but it remains to be seen what the current government will now do.
Growth concerns for both advanced countries and emerging countries have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market. The ECB has also changed its message: with risks tilted to the downside and inflation going nowhere, it considers more easing is necessary.
With the export sector hard hit by US tariff measures and private consumption growth weakening, investment growth has slowed. Although domestic demand could pick up in the short term, bolstered by monetary easing and fiscal stimulus measures, export prospects depend on the outcome of trade talks between Beijing and Washington, which remains highly uncertain. The authorities are bound to use foreign exchange policy sparingly to avoid creating a source of financial instability. Moreover, the current account surplus has improved again in recent months.
Narendra Modi won a major victory in the general elections, further bolstering his legitimacy. His party won a strong majority in the lower house of parliament and could go on to clinch a majority in the upper house by late 2020 as well, if it manages to maintain power in the upcoming State legislative elections. The country’s economic situation was not very favourable for the Prime Minister as his first mandate came to an end. Economic growth slowed sharply in the last quarter of fiscal year 2018-19 and prospects have been revised downwards. The government must accelerate the reform process in order to increase the pace of job creations and encourage foreign investment.
The Brazilian economy has hit a wall. Real GDP contracted in the first quarter and signs of weaknesses are accumulating: investment and exports have retracted, while consumer spending – despite being supported by credit – has slowed down. Business and consumer confidence have been hit by the slow progress of the reform agenda as well as the government’s increasingly tarnished image. In a context marked by fears of recession, growth forecasts have been largely adjusted downwards. On a positive note, the Lower House approved the main text of the pension reform bill after a first round of voting. A final and second vote to approve amendments to the bill is expected to take place shortly. The bill is due for analysis in the Senate by August.
Economic growth slowed sharply in the first 5 months of the year and the central bank has revised downward its forecasts. To boost activity, the monetary authorities lowered their key rates by 25bp in June at a time when inflationary pressures had eased slightly. The government also took major steps to stimulate the potential growth rate, which has declined constantly since 2008-09. Despite the increase in public spending, the government continued to generate a big fiscal surplus in the first 5 months of the year. Although these measures are a step in the right direction, they must be accompanied by the state’s disengagement from the economy and better corporate governance to generate a substantial increase in potential growth.
Mired in stagflation, the Turkish economy might have to forego its “stop and go” tradition given the need for deleveraging in the private sector and a less favourable international environment. Disinflation continues but remains vulnerable to bouts of forex volatility. (Geo)political risks and the dollarization of the economy make monetary policy management more complex. A swelling public deficit and uncertainty about the direction of fiscal policy are sources of concern. Reducing the current account deficit will not suffice to reassure investors since capital inflows and foreign exchange reserves are both diminishing faced with the country’s substantial external refinancing needs.
Counter powers and institutional watchdogs have proved to be quite effective in stemming the government’s business-unfriendly measures and attempts to undermine the Rule of Law. This may pave the way for a more pragmatic and predictable policy stance. Meanwhile, owing to weaker external conditions, a soft landing of the economy is expected in the coming quarters whereas domestic demand should remain dynamic. Despite the lower risk of overheating, macro imbalances must be monitored: inflationary pressure is lingering and the twin deficits may widen even further. The banking system has recovered from times of trouble, and the softening of the bank tax (and other “emergency taxes”) provided significant relief for the business community.
Mexico’s economic growth prospects are deteriorating: slower growth in the US, fiscal austerity and low investment levels have dragged down growth in the last two quarters. The slowdown is likely to continue, despite support from consumer spending. The threat of trade tensions with the United States and the lack of clarity in Mexico’s economic policy, as shown by the troubled implementation of its energy reforms, are adversely affecting the investment outlook. The increase in Mexico’s medium-term sovereign risk has been recognised by Fitch, which has cut its sovereign credit rating. Fortunately, external vulnerability is limited.
Economic growth slowed in Q1 2019, but for the moment the economy seems to be fairly resilient to the decline in world trade. In the short term, dynamic household consumption, stimulated by measures to boost purchasing power, will continue to offset the slowdown in exports. In the longer term, real GDP growth is hardly expected to exceed 5-5.5%. After his recent reelection, it is vital for President Widodo to take advantage of his clear cut victory to push through the necessary reforms to stimulate foreign investment and foster growth, while reducing the country’s dependence on volatile capital flows. Foreign direct investment has declined for the past six quarters and no longer suffices to cover a swelling current account deficit.
Given its dependence on foreign trade and its integration within Asian supply chains, the Vietnamese economy is squeezed by the weakening in global demand and Sino-American trade tensions. Real GDP, exports and industry have all registered a growth slowdown in recent months. Yet Vietnam could also benefit from China’s troubles: in the short term, it could benefit from some carry-over effects if merchandise is shipped directly to US businesses seeking to avoid the new tariff barriers. Vietnam could also benefit from new foreign direct investment projects of international groups seeking to manufacture outside of China. Moreover, Vietnam’s external financial position is also expected to continue to improve.
The Saudi economy has recorded weak performances over the past three years. It has had to deal with the combined impact of reforms undertaken as part of the Vision 2030 plan and rather unfavourable oil market conditions, which have eroded public finances. Non-oil GDP growth has been slowing since 2016 due to sluggish domestic demand. Activity should pick up gradually in 2019 thanks to fiscal stimulus efforts and the steady normalisation of the labour market. Under this environment, fiscal deficits are accumulating, but the government’s solvency is still solid.
The Tunisian economy has begun to show signs of stabilisation. Inflation is falling, exchange rate pressures are easing and the government finally managed to uphold its commitment to fiscal consolidation in 2018. Yet the country’s prospects are still very fragile. Although the support of international donors is reassuring, the persistence of major external imbalances exposes the economy to shocks. Bank liquidity is already under pressure due to the tightening of monetary policy, and the high level of public debt calls for further reduction in budget deficits that could be hard to achieve. Above all, economic growth is still sluggish.
The credit impulse picked up very slightly in May 2019 in the euro area for households whereas it declined for non-financial corporations. The annual growth of loans to private non-financial sector stabilized at around 3.3%. Demand for credit is expected to rise in the third quarter of 2019 across all loan categories, stimulated by the easing of financing conditions, except for home loans, for which lending conditions are expected to tighten slightly.
A sigh of relief followed the publication of first quarter GDP data. However since, growth concerns have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from concerns over the extent of the slowdown and its consequences in terms of economic risks. It also emanates from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market
Although household consumption remained rather buoyant at springtime, foreign trade as well as investment may have weakened. In June, the business survey results were lacklustre, while the Federal Reserve opened the door to cutting interest rates. Already back on the campaign trail, President Trump is unlikely to soften his hard line on tariffs, although he will surely remain as unpredictable as ever. The economy is likely going to need some support.
Although Japan’s economic openness is relatively limited, the high concentration of Japanese exports to China, and the other Asian countries in general, creates a major external risk for the dynamics of Japanese growth. This situation is squeezing the manufacturing sector, but for the moment, its difficulties do not seem to have carried over to the other sectors of the economy. The VAT increase planned for October should encourage households to make some early purchases, while the high level of uncertainty is hampering corporate investment. In this environment, the Bank of Japan is expected to maintain a very accommodating monetary policy, although this is unlikely to trigger a sustainable upturn in price inflation.
The months pass but nothing seems to change. Growth in the manufacturing sector is struggling to accelerate in a persistently uncertain international environment, while buoyant domestic demand is boosting activity in services. The stronger-than-expected first quarter performance sends a more optimistic message than economic surveys. Faced with a downturn in inflation expectations and the downside risks to the Eurozone’s economic scenario, the European Central Bank (ECB) has been proactive again. It is prepared to ease monetary policy further and the new measures have been set up much earlier than expected. Yet faced with stubbornly mild inflation and only limited manoeuvring room, the ECB is bound to take a frugal approach.
As international trade slows, the economy is mainly supported by expansionary fiscal and monetary policies and real disposable income growth. After a mild contracted in Q2, the economy is expected to grow modestly in the second half of the year. In 2020, exports may strengthen again and growth could return to close to potential. Due to its deep integration in global value chains, Germany is relatively hard hit by the global trade slowdown. This integration has undoubtedly brought benefits by improving productivity and skill-intensity. However, it has also accentuated income inequality.