N°16 SEPTEMBER 2014 SCENARIOECO Societe Generale Economic and sectoral studies department Ended the 30th of September 2014 Next issue: December 2014 WAITING FOR 2015… The global economy disappointed in the first-half of 2014. Instead of gathering momentum as initially expected, GDP growth stalled in most countries and even recorded one or two quarters of decline in some of them (such as the US, Japan and Germany, but also Brazil, Russia and Romania). Nevertheless, the trend is still leaning toward a slow pick-up in global growth. On the whole, major central banks remain inclined to maintain highly accommodative monetary policies, especially since inflation remains low. However, in 2015, their policies would take different paths, with the ECB easing further while the Fed and the BoE are set to begin very gradually raising their key interest rates. Rising geopolitical tensions add to uncertainty. A SERIES OF DISAPPOINTMENTS IN H1…. On the growth front, H1-14 was disappointing. These disappointments impacted advanced and large emerging economies alike. For example, the US economy stumbled in Q1. As a result, despite a strong bounce back in Q2, the prospect of US annual growth returning to 3% was pushed back to 2015, though originally it was hoped to happen in 2014. As expected, the Japanese economy buckled under the weight of the consumption tax hike, but investment spending also weakened. And while growth was initially expected to gradually improve in the euro area, instead it only slightly picked up in Q1 before stagnating in Q2. Namely, real GDP contracted in Q2 in Germany, beyond the fallback expected after the boost to construction activity in Q1 which had resulted from unusually favourable weather conditions; meanwhile, France has stagnated during the entire H1 and Italy failed to exit recession. Spain and the UK were the only economies where the recovery momentum was confirmed. Emerging market economies also brought their share of disappointments: Romania fell into recession, Brazil saw a contraction in activity and Russia's economy ground to a halt. On a more positive note, the slowdown in China proved moderate and India confirmed its pickup following a phase of very weak growth. THE SPECTRE OF DEFLATION CASTS ITS SHADOW ON THE EURO AREA In the euro area, disappointing H1 GDP data reports are accompanied by a deterioration in forward-looking indicators from business surveys. For example, Germany's IFO business climate index has been falling since May. Similarly, France's INSEE index has been sliding since April, which does not foresee any improvement in economic activity in the H2. What's more, euro area inflation is drawing dangerously close to 0%. However, this threshold should not necessarily be seen as the frontier with deflation. Indeed, the euro area experienced negative inflation data from June to October 2009, without falling into a deflationary spiral. -2 -1 0 1 2 3 4 5 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 Q1-14 YoY, as % REAL GDP GROWTH US Euro area UK Japan Brazil Russia Source: datastream 70 75 80 85 90 95 100 105 110 115 120 2007 2008 2009 2010 2011 2012 2013 2014 BUSINESS CLIMATE INDICATORS Germany (IFO) France (INSEE) Source datastream
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
N°16 SEPTEMBER 2014
SCENARIOECO Societe Generale
Economic and sectoral studies department
Ended the 30th of September 2014
Next issue: December 2014
WAITING FOR 2015…
The global economy disappointed in the first-half of 2014. Instead of gathering momentum as initially expected, GDP growth stalled in most countries and even recorded one or two quarters of decline in some of them (such as the US, Japan and Germany, but also Brazil, Russia and Romania). Nevertheless, the trend is still leaning toward a slow pick-up in global growth. On the whole, major central banks remain inclined to maintain highly accommodative monetary policies, especially since inflation remains low. However, in 2015, their policies would take different paths, with the ECB easing further while the Fed and the BoE are set to begin very gradually raising their key interest rates. Rising geopolitical tensions add to uncertainty.
A SERIES OF DISAPPOINTMENTS IN H1….
On the growth front, H1-14 was disappointing. These
disappointments impacted advanced and large
emerging economies alike.
For example, the US economy stumbled in Q1. As a
result, despite a strong bounce back in Q2, the
prospect of US annual growth returning to 3% was
pushed back to 2015, though originally it was hoped to
happen in 2014. As expected, the Japanese economy
buckled under the weight of the consumption tax hike,
but investment spending also weakened. And while
growth was initially expected to gradually improve in the
euro area, instead it only slightly picked up in Q1 before
stagnating in Q2. Namely, real GDP contracted in Q2 in
Germany, beyond the fallback expected after the boost
to construction activity in Q1 which had resulted from
1 The annual numbers are seasonnaly and working-day adjusted and hence may differ from the basis used for official projections.
2 Purchasing Power Parity (PPP) is the monetary exchange rate that equalises the cost of a standardised basket of goods between different countries. The GDP
weighting of different countries as a share of world GDP expressed in PPP is based on the latest estimates by the World Bank
26/09/2014 Dec 2014 Jun 2015 Dec 2015 2013 2014 (f) 2015 (f)
Euro area: On the skids… .......................................................................................................................................... 5
Germany: More than a correction? ............................................................................................................................. 6
France: No momentum .............................................................................................................................................. 7
Italy: A third year of recession.................................................................................................................................... 8
Spain: Rising real GDP but declining prices .............................................................................................................. 9
United Kingdom: An unbalanced recovery .............................................................................................................. 10
United States: Towards a shift in monetary policy .................................................................................................. 11
Japan: Growth hard hit by the consumption tax hike .............................................................................................. 12
China: Under control ................................................................................................................................................ 13
Russia: Waiting for supportive policies? .................................................................................................................. 16
Euro area forecasts .................................................................................................................................................. 17
Out side euro area forecasts .................................................................................................................................... 20
SCENARIOECO | N°16 – SEPTEMBER 2014
5
EURO AREA: ON THE SKIDS…
After disappointing in Q1-14, euro area growth has stalled in Q2, thus confirming that the recession exit will be even slower than initially expected. The ECB was forced to step in once again in September, less than two months after its previous measures, as inflation crept dangerously closer to zero.
The euro area has further disappointed in Q2: real GDP stalled
(0,0%), after growing only +0,2% in Q1. And, unlike the previous
quarter, it is difficult to blame one-off factors for this paltry
performance. Furthermore, business confidence, as reflected by
surveys, is again turning down, arguing against any improvement
in the second half. Among the major euro area countries, Spain
was the only one to show renewed momentum.
The euro area would struggle to gain speed in the run-up to 2015,
with growth projected to reach just 1% next year. Companies are
still facing adverse credit conditions in peripheral countries, and
the necessary public and private-sector deleveraging process
would continue to hinder the recovery against a backdrop of
persistently low inflation.
Against this outlook of weak demand and low inflation,(0.3% in
August), the ECB announced a new package of measures in
September, less than two months after those of June. It cut further
its key interest rates, with the deposit facility rate edging a little bit
further into negative territory (-0.2%). It also announced new ABS
and covered bond purchase programmes, whose amounts and
terms of which have yet to be determined.
In spite of these measures, inflation is expected to turn-up only
slowly and to remain below the ECB's target (2%) in 2015.
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
2010 2011 2012 2013 2014
In %
EURO AREA INFLATION
Source: eurostat
-0,8
-0,6
-0,4
-0,2
0,0
0,2
0,4
0,6
0,8
1,0
2010 2011 2012 2013 2014
Q/Q, in % REAL GDP GROWTH
Source:eurostat
70
75
80
85
90
95
100
105
110
115
120
2007 2008 2009 2010 2011 2012 2013 2014
BUSINESS CLIMATE INDICATORS
Germany (IFO) France (INSEE)Source datastream
As % 2011 2012 2013 2014 (f) 2015 (f)
Real GDP 1.6 -0.6 -0.4 0.7 1.0
Household consumption 0.3 -1.4 -0.6 0.8 1.2
Total investment 1.7 -3.8 -2.8 1.2 2.0
Exports 6.7 2.8 1.5 2.7 4.0
Imports 4.7 -0.8 0.4 3.2 4.4
Contribution of inventories to growth 0.3 -0.5 0.0 0.0 -0.1
Households
Purchasing power of disposable income -0.3 -1.7 -0.6 0.8 1.1
Unemployment rate 10.1 11.3 12.0 11.5 11.2
Saving rate 13.3 13.0 13.0 13.3 13.1
Inflation rate 2.7 2.5 1.3 0.4 0.9
Public sector balance (as % of GDP) -4.1 -3.7 -3.1 -2.7 -2.5
Current account balance (as % of GDP) 0.1 1.5 2.4 2.4 2.5
SCENARIOECO | N°16 – SEPTEMBER 2014
6
GERMANY: MORE THAN A CORRECTION?
The real GDP decline recorded by Germany in Q2-14 went beyond the expected fallback after a solid first quarter driven in part by one-off factors. Combined with the downturn in economic surveys, this points to a weakened German recovery with growth of about 1.5% per year.
In the wake of dynamic growth in Q1, buoyed by one-off factors
(such as good weather, which particularly benefited the
construction sector), a fallback was expected in Q2. However, the
correction that took place, which saw a contraction in German real
GDP, went beyond a mere fallback. For example, investment in
construction fell as expected, but unexpectedly household
consumption stagnated and capital goods investment contracted.
Meanwhile, economic surveys also deteriorated, underscoring
more than a mere accident of circumstance. This shows that the
German is losing steam: after reaching +2.2% year-on-year in
Q1-14, GDP growth would remain around +1.5%/year.
Though already very low, the unemployment rate would drop
slightly more, thus driving wage momentum. Against a backdrop
of low inflation, gains in household purchasing power would
increase and support consumption.
Despite the hiccup in Q2, the rebound in business investment
should continue, driven in large part by the solid financial position
of German companies and favourable financing conditions. But
the rebound in exports would remain hampered by the weak
Contribution of inventories to growth 0.1 -1.4 0.2 0.2 0.1
Households
Purchasing power of disposable income 1.9 0.0 0.3 1.1 1.5
Unemployment rate 7.1 6.8 6.9 6.7 6.6
Saving rate 9.6 9.4 8.9 9.1 9.0
Inflation rate 2.1 2.0 1.5 0.9 1.3
Public sector balance (as % of GDP) -0.8 0.1 0.0 0.1 0.1
Current account balance (as % of GDP) 5.5 6.1 7.2 6.9 6.7
SCENARIOECO | N°16 – SEPTEMBER 2014
7
FRANCE: NO MOMENTUM
French growth disappointed in first-half of 2014, coming out nil in the first two quarters. And there is no sign of improvement for the coming quarters. Consequently, economic activity would stay at the same sluggish pace in 2014 as it has had in the past two years, and growth would barely accelerate in 2015. Against this backdrop, the public deficit ratio is not likely to be reduced in 2014-2015.
The French economy stagnated in H1 2014 (+0.0% in both Q1 and
Q2). While the paltry performance in Q1 could be partially
attributed to one-off factors such as the impact of the VAT hike on
1 January and mild winter temperatures weighing on household
energy consumption, the rebound expected in the second quarter
failed to take place.
What's more, the business confidence index has turned
continuously worse since May, slipping a little further below its
long-term average,; this does not pave the way for a turnaround in
activity in the second half of the year. As a result, economic
growth would be just as low in 2014 as it was in 2012 and 2013.
In 2015, economic growth would barely pick-up, with no growth
engine seemingly able to jump-start the recovery. After sliding in
H1-14, business investment would continue to be undermined by
weak and uncertain demand as well as the deteriorated financial
condition of corporations. The persistently dire situation in the
labour market is likely to drag household income down and
encourage a cautious approach to consumption as well as
housing investment. The improvement of the economic situation in
other euro zone countries is expected to be slow; and public
spending would remain tight.
Against lower-than-expected growth and inflation, the government
has put off its public deficit reduction targets. As a result, the
deficit as a percentage of GDP will not be reduced in 2014-2015,
and the 3% target has been pushed back from 2015 to 2017.
Contribution of inventories to growth 1.1 -0.6 -0.2 0.3 0.0
Households
Purchasing power of disposable income 0.2 -0.9 0.0 1.2 1.1
Unemployment rate 8.8 9.4 9.9 9.8 9.9
Saving rate 15.7 15.3 15.1 15.9 15.8
Inflation rate 2.1 2.0 0.9 0.7 1.2
Public sector balance (as % of GDP) -5.1 -4.9 -4.3 -4.5 -4.5
SCENARIOECO | N°16 – SEPTEMBER 2014
8
ITALY: A THIRD YEAR OF RECESSION
GDP growth disappointed in Q2 and Italy would remain in recession this year. Domestic demand is flagging: the business investment rate is at an all-time low, still subject to adverse financing conditions, while household consumption is simply not getting off the ground despite tax cuts in favour of modest-income households.
Like the rest of the euro zone, Italy's growth was very poor in Q2.
Household consumption stagnated despite the targeted tax cuts
for modest-income households: the €80 per household paid out in
June were not spent. Households have preferred to save their
money, in the face of falling property prices and a persistently
deteriorated economic outlook.
Furthermore, business investment is still adversely affected by
difficult financing conditions. The banking sector was again hit
with losses in 2013, due to a high provisioning requirement, which
in turn put a squeeze on credit supply. And while loans to the
nonfinancial business sector fell 4% year-on-year, the profit
margin ratio of Italian companies continued to decline, thus
curbing self-financing possibilities.
Relief cannot be sought from the export sector to relaunch growth:
Italy is losing market share owing to insufficient competitiveness
and a lack of wage flexibility, as wages are indexed to inflation.
Adding the impact of international sanctions on Russia, weighing
directly and indirectly on Italian exports, the net export
contribution to growth is expected to be nil in 2014 and 2015 alike.
These paltry economic performances are taking a hard toll on
Italy's public finances. The public deficit is estimated to be around
3.2% of GDP this year, i.e. 0.6pp higher than the initial target
(2.6%) and also up compared to 2013. The public debt ratio is
forecast to be up nearly 5pp to 137% of GDP in 2014 and is
unlikely to stabilise before 2016. Low inflation (-0.2% in August)
coupled with a poor medium-term outlook make it complicated to
consolidate public finances.
14
16
18
20
22
24
26
28
1980 1985 1990 1995 2000 2005 2010
As % of PIBItaly: Corporate investment rate
Source : ISTAT
70
80
90
100
110
120
1999 2001 2003 2005 2007 2009 2011 2013
1999-Q1 = 100 Relative export market shares (at current prices)
France Germany Spain Italy Euro zone (100)Source : Eurostat
0
200
400
600
800
1,000
1980 1985 1990 1995 2000 2005 2010
Index 1980=100Italy: Housing prices
Source : Oxford Economics
As % 2011 2012 2013 2014 (f) 2015 (f)
Real GDP 0.6 -2.4 -1.8 -0.2 0.6
Household consumption -0.3 -4.0 -2.6 0.1 0.6
Capital goods investment 0.6 -9.5 -5.4 -1.7 2.8
Construction investment -3.4 -6.2 -6.7 -2.0 1.5
Exports 6.9 2.0 0.0 1.7 1.7
Imports 1.4 -7.1 -2.9 1.5 2.0
Contribution of inventories to growth -0.1 -0.6 -0.1 -0.2 0.0
Households
Purchasing power of disposable income -0.7 -4.4 -0.8 0.2 1.7
Unemployment rate 8.4 10.7 12.2 12.5 12.3
Savings rate 12.0 11.7 13.3 13.4 14.3
Inflation rate 2.9 3.3 1.3 0.1 0.7
Public sector balance (as % of GDP) -3.7 -3.0 -3.0 -3.2 -2.6
Current account balance (as % of GDP) -3.0 -0.3 1.0 1.5 1.6
SCENARIOECO | N°16 – SEPTEMBER 2014
9
SPAIN: RISING REAL GDP BUT DECLINING PRICES
Spanish growth accelerated in Q2 while the euro area stagnated. Domestic demand has been strengthening, with household consumption turning around and construction appears bottoming out. The recovery is buoyed by employment gains, while the average wage is declining. However, inflation has fallen into negative territory, which complicates both public and private-sector deleveraging by raising real interest rates.
After several years of structural reforms and fiscal efforts, the
Spanish economy is back on the growth track and its
performances are well-received by markets. The 10-year
government bond yield is now at a record low, and has been on
average 20bp below the UST 10-yr yield since mid-August. The
news flow has turned positive: property prices recorded their first
increase since 2008 in Q2-14, the ratio of non-performing loans
turned around in Q1 thanks to a decline for non-financial
companies, the unemployment rate continued to decline to 24.5%
versus 26.3% last year, and new industry orders are on the rise,
which should support business investment in the coming months.
However, the Spanish economy's efforts in terms of
competitiveness have driven wages down, in turn weighing down
on prices. Inflation fell to -0.5% in August and the core inflation
index (excluding energy and fresh products) stood at 0%. More
worrying is that if we adjust the core inflation index for the VAT
hikes that took place in 2010 and 2012 and have artificially inflated
prices, inflation has actually been negative for over a year now.
Such low inflation is weighing on monetary conditions. For
example, despite low nominal bond yields, the cost of funding in
real terms is now 300-bp higher than it was before the crisis. If
current real interest rate levels persisted, and assuming growth
potential of about 1% per year, Spain would have to make an
additional fiscal effort of 5.6% of GDP in order to record a primary
surplus allowing it to stabilise the public debt-to-GDP ratio.
-2
-1
0
1
2
3
4
5
6
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Year-on-year growth, in %
Spain: consumer prices
Global index Core index corrected for taxationSource : Eurostat, SG calculation
-2
0
2
4
6
8
10
12
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
in % Spain: 10-years government bond yields
Real Nominal Source : Datastream and SG calculation
0
5
10
15
20
25
30
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
As % of active population
Spain: unemployment rate
Source : Minis try of the economy and Finance, Spain
As % 2011 2012 2013 2014 (f) 2015 (f)
Real GDP 0.1 -1.6 -1.2 1.0 1.4
Household consumption -1.2 -2.8 -2.1 1.9 1.2
Total investment -5.4 -7.0 -5.1 0.6 3.3
Exports 7.6 2.1 4.9 3.0 3.6
Imports -0.1 -5.7 0.4 4.6 3.0
Contribution of inventories to growth -0.1 0.0 0.0 0.0 0.0
Households
Purchasing power of disposable income -2.5 -5.2 -2.0 1.3 1.5
Unemployment rate 21.4 24.8 26.1 24.5 23.1
Savings rate 12.7 10.4 10.4 10.0 10.3
Inflation rate 3.2 2.4 1.4 -0.1 0.3
Public sector balance (as % of GDP) -9.6 -10.7 -7.1 -5.7 -6.0
Current account balance (as % of GDP) -3.7 -1.2 0.8 0.1 0.5
SCENARIOECO | N°16 – SEPTEMBER 2014
10
UNITED KINGDOM: AN UNBALANCED RECOVERY
The UK economy has maintained its momentum in the first half of 2014 and is not expected to weaken in the second half. Nevertheless, this rapid growth is coming with imbalances and a new reduction in the household savings rate. This points to a slowdown as soon as 2015.
UK growth stayed the course in first-half 2014, maintaining an
annualized pace of more than 3% per year. In its wake, the
unemployment rate declined further to 6.4% in May 2014
compared to a peak at 8.4% in November 2011. The
unemployment rate has thus erased two-thirds of the increase it
had recorded during the crisis years. Against this backdrop, the
Bank of England is expected to raise its interest rates as early as
H1-15, even ahead of the Fed.
However, this recovery has come at a cost of imbalances.
Employment may be on the mend, but at the expense of a drop in
productivity. Furthermore, the stabilization in bank credit to the
private nonfinancial sector credit masks a continuous decrease in
loans to the business sector. Property prices have kept right on
climbing (+12% over the past 12 months) and are now 10% higher
than their peak during the property bubble in the 2000s. And t the
rebound in consumption has been at the expense of a sharp drop
in the household savings ratio.
Given this imbalanced growth pattern and the expected monetary
policy tightening, economic activity is expected to slow in 2015. In
particular, investment spending by businesses and households
alike would slow down following the steep rises recorded in 2014.
This slowdown may even be more severe if, despite low
unemployment, wage increases were not sufficient to sustain
household income and, in turn, household consumption.
5,0
5,5
6,0
6,5
7,0
7,5
8,0
8,5
9,0
2008 2009 2010 2011 2012 2013 2014
As %ILO UNEMPLOYMENT RATE
Source: ONS
75
80
85
90
95
100
105
110
115
120
2008 2009 2010 2011 2012 2013 2014
2008Q1 = 100
AMOUNTS OUTSTANDING OF BANKS' LOANS TO NON BANKING PRIVATE SECTOR
Non residential fixed investment -1.3 3.9 -1.0 11.8 5.4
Residential investment 0.4 -3.6 4.4 8.9 6.3
Exports 4.5 1.7 0.5 1.4 3.9
Imports 0.3 3.4 0.2 0.2 3.1
Contribution of inventories to growth 0.5 -0.2 0.4 -0.1 0.0
Households
Purchasing power of disposable income -1.2 2.5 -0.3 1.1 2.4
Unemployment rate 8.1 8.0 7.5 6.0 4.7
Saving rate 6.7 7.3 5.2 4.8 4.9
Inflation rate (HICP) 4.5 2.8 2.6 1.6 1.9
Public sector balance (as % of GDP) -7.6 -6.1 -5.8 -5.2 -4.5
Current account balance (as % of GDP) -1.5 -3.9 -4.5 -4.3 -3.9
SCENARIOECO | N°16 – SEPTEMBER 2014
11
UNITED STATES: TOWARDS A SHIFT IN MONETARY POLICY
After disappointing at the beginning of the year, the US economic recovery was back on track in the second quarter. However, growth is expected to continue at a relatively moderate pace, leading the Fed to only gradually alter its policy. Fed’s asset purchase programme would end in October, and the rate hikes would start from mid-2015.
The two forces weighing on the recovery – household
deleveraging and a restrictive fiscal policy – would diminish in the
coming quarters, allowing growth to take a more permanent hold.
Companies would be more prove to increase capital expenditures,
given rising capacity utilization rates and the ageing capital stock.
They would also benefit from the still extremely accommodative
monetary and financial conditions.
At the same time, the labour market would improve, supporting
household consumption. Even so, the employment rate would
remain poor, thus preventing a significant rise in wages. Plus, even
if US households have deleveraged since the housing market
bubble burst, they still have a low savings rate that limits how
much consumption can improve beyond gain in real income.
Against this backdrop, the housing market would continue to
recover, owing to stronger demand.
The Fed is expected to end its asset purchase programme
(“QE 3”) in October and to raise the fed funds rate from mid-2015.
Inflation is seen to remain subdued, allowing monetary policy to be
tightened at a very gradual pace.
65
70
75
80
85
2000 2003 2006 2009 2012
As %INDUSTRY : CAPACITY UTILIZATION RATE
Source: Fed
57
58
59
60
61
62
63
64
65 3
4
5
6
7
8
9
10
11
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
LABOUR MARKET
Unemployment rate (unemployed / labour force) (LHS)
Employment ratio (employed / population>16ans) (RHS, reversed)Source: BLS
As % As %
0
1
2
3
4
5
6
2003 2005 2007 2009 2011 2013 2015
FEDERAL FUND RATE
Source : Fed, SG
(F)
As % 2011 2012 2013 2014 (f) 2015 (f)
Real GDP 1.6 2.3 2.2 2.1 3.0
Household consumption 2.3 1.8 2.4 2.3 2.7
Non residential fixed investment 7.7 7.2 3.0 6.3 7.5
Contribution of inventories to growth -0.1 0.1 0.0 0.1 0.1
Households
Purchasing power of disposable income 2.5 3.0 -0.2 2.6 2.6
Unemployment rate 8.9 8.1 7.4 6.3 5.7
Saving rate 6.0 7.2 4.9 5.2 5.3
Inflation rate 3.1 2.1 1.5 1.9 2.0
Public sector balance (as % of GDP) -10.7 -9.0 -5.7 -4.6 -3.9
Current account balance (as % of GDP) -3.0 -2.9 -2.4 -2.7 -2.7
SCENARIOECO | N°16 – SEPTEMBER 2014
12
JAPAN: GROWTH HARD HIT BY THE CONSUMPTION TAX HIKE
Following the plunge in economic activity recorded in Q2, real GDP growth is projected to slow to 1.1% in 2014 and to 1.0% 2015. Inflation is expected to jump to 2.8% in 2014 and 1.8% in 2015 due to higher consumption tax rates and import prices, as well as improved conditions in the labor market.
Real GDP fell by 1.8% QoQ (2% YoY) in Q2-14 following the
consumption tax (CT) hike in April. Private consumption, which
accounts for 60% of the economy, contracted by 5% QoQ along
with residential and non residential investment (- 10.4% QoQ and
-5% QoQ respectively). The latest indicators (retail sales,
consumers’ confidence) suggest that a strong rebound in
consumer spending is unlikely.
CPI inflation has averaged 3.5% YoY since April, reflecting the full
pass-through of the CT hike to consumers. The rise in import
prices of food and energy resulting from renewed depreciation of
the JPY (-4% against USD since mid-August) has also contributed
to the CPI rise. Improvement in labor market conditions (as
suggested by rising nominal average monthly cash earnings in
August) if sustained would be key in raising inflationary
expectations. Inflation is expected to average 2.8% in 2014. It
would then recede to 1.8% in 2015 as base effects would fade out
and as the second CT hike if implemented as initially scheduled
would be smaller (from 8% to 10%) and later in the year (October
2015).
Economic growth would slow to 1.1% in 2014 due to the
contraction in household consumption. It is projected to stabilize
at 1% in 2015 as the improvement in private consumption and
investment would be largely offset by the contraction in public
investment. Nonetheless, further policy easing could not be ruled
Non residential fixed investment 4.1 3.6 -1.4 5.3 4.6
Residential investment 5.1 2.9 8.8 -3.9 -0.9
Exports -0.4 -0.1 1.5 7.2 4.7
Imports 5.9 5.3 3.3 5.2 4.2
Contribution of inventories to growth -0.2 0.1 -0.3 0.4 0.3
Households
Purchasing power of disposable income 0.7 0.7 1.6 0.2 1.5
Unemployment rate 4.6 4.3 4.0 3.7 3.8
Saving rate 2.7 1.3 0.8 1.7 2.8
Inflation rate (CPI) -0.3 0.0 0.4 2.8 1.6
Public sector balance (as % of GDP) -8.8 -8.7 -9.3 -8.4 -6.7
Current account balance (as % of GDP) 2.1 1.1 0.7 0.5 0.8
SCENARIOECO | N°16 – SEPTEMBER 2014
13
CHINA: UNDER CONTROL
Real GDP would gradually slow to 7.3% in 2014 and 7.0% in 2015. Low inflation provides the authorities with an opportunity for monetary relaxation. However, rising leverage of the economy is likely to limit the scope of monetary support.
Real GDP growth remained sustained at 7.5% YoY in Q2 thanks to
stronger public investment in the aftermath of the mini fiscal
stimulus implemented in April. In July, exports continued to
improve, especially toward the European Union and the United
States which account for 1/3 of total exports and the PMI reached
its highest level since April 2012. However, property prices
continue to rapidly slide and financing sources of the economy
(bank credit and non bank credit) decelerated notably.
Inflation remained stable at 2.3% YoY in August 2014. Core
inflation (excluding food and energy prices) remained low
(1.7% YoY) suggesting the absence of inflationary pressures.
Wages growth moderated to 10% YoY in Q2-14 (from 15% in
Q2-11). Inflation is likely to remain subdued, averaging 2.5-3% in
the next two years.
Low inflation provides the authorities with an opportunity for
monetary policy relaxation to support the economy. In July, the
People’s Bank of China reduced the reserve requirement ratio by
50bps to 19.5% of deposits for commercial banks that focus on
lending to small business and the agricultural sector. However, a
massive easing of the monetary policy stance is unlikely given the
rising indebtedness of corporate and local governments (150% of
GDP and 33% respectively).
Against this backdrop, growth is expected to decline to 7.3% in
2014 and to 7.0% in 2015. The biggest risk to economic growth is
a further deterioration in the housing market as the
property/construction sector represents nearly 20% of GDP. Yet,
the risk seems manageable as many cities have now eased
restrictions limiting the number of properties purchases per
resident. Up to now, the central government has refrained from a
nationwide relaxation, reflecting its concerns on affordability
General Government Balance (as % of GDP) 0.6 0.2 -0.9 -1.0 -0.8
General Government Debt (as % of GDP) 36.5 37.4 39.4 40.8 41.9
External Debt (as % of GDP) 9.5 8.8 9.1 9.7 10.2
Current Account Balance (as % of GDP) 1.9 2.6 1.9 1.8 2.0
SCENARIOECO | N°16 – SEPTEMBER 2014
14
INDIA: CONSOLIDATING STABILIZATION GAINS
After two consecutive years below 5%, economic growth is expected to rebound to 6% in 2014 and to 7% in 2015. Private consumption would remain the main driver while private investment would be boosted by regained investors’ confidence in structural reforms.
Real GDP growth stabilized at 5.8% YoY (5.7% at factor costs) in
Q2-14, mainly supported by private consumption. Latest
indicators (RBI’s quarterly industrial outlook survey, retail sales,
and imports) paint an improvement in the economic outlook.
The consumer price index continued to decline to 7.8% YoY in
August 2014, led by lower food and energy prices which weigh for
43% and 10% in the index respectively. Despite a weak monsoon
which is likely to drive up food prices, inflation is expected to ease
later this year due to base effects. Inflation would average 7.5% in
2014 and 2015, reflecting structural supply side constraints.
Declining current account deficit, lower inflation, and investors’
perceptions of a revival of structural reforms have induced large
capital inflows since June. The authorities have limited upward
pressures on the INR (which has appreciated by 13% against the
USD since September 2013) by building up forex reserves.
Economic growth is expected to recover to 6% in 2014 and to 7%
in 2015. The main risk would be that reviving domestic demand
translates into widening current account deficit and rising inflation
if tight policy mix is not kept in check. The challenge would be
especially difficult if the global environment becomes more
adverse with: (i) renewed market volatility stemming from the Fed’s
policy normalization and (ii) higher world oil prices due to
geopolitical risks in the Middle East and Russia/Ukraine as oil
Current Account Balance (as % of GDP) -4.2 -4.7 -1.7 -1.5 -2.0
SCENARIOECO | N°16 – SEPTEMBER 2014
15
BRAZIL: STAGFLATION
The October presidential election will take place amid a deteriorated economic environment. In fact, with a negative first-half year 2014, GDP is projected to be sluggish for full-year 2014 while inflation will remain high. The BCB could hike its key rate after the elections if inflationary pressure persists.
In the first six months of 2014, the economic situation continued
to deteriorate. GDP dropped another 0.6% QoQ (-0.9% YoY) after
the slide of -0.1% QoQ in Q1-14. This poor performance was
mainly due to the sharp contraction in investment (-5% QoQ) hurt
by the public holidays resulting from the World Cup and the drop
in business sentiment. Growth will remain very low over the course
of the next two years, where the only positive factor will be private
consumption. Making matters worse, inflation, at around 6.5%,
will continue to be at the upper limit set by the monetary
authorities.
This stagflation has put the monetary authorities in a
growth/inflation quandary. The Central Bank stopped its rate hike
cycle, which had gone from 7.25% in April 2013 to 11% in April
2014, due to soft economic activity and the recent easing of
inflationary pressure. However, upwards tension on inflation could
continue in the next few quarters due to the increase in
administered prices and the weakness of the currency. Against
this backdrop, the BCB could resume its tightening cycle once the
general elections are over.
The sluggishness of the economic activity has drawn attention to
the flagging demand-driven growth model and the economy's loss
of competitiveness, which is weighing on investment and exports.
The marked increase in real wages was not based on
PRODUCTIVITY AND REAL WAGES OF THE INDUSTRIAL SECTOR
Productivity (per capita) Real wages Sources :IBGE, SG
As % 2011 2012 2013 2014 (f) 2015 (f)
Real GDP 2.7 1.0 2.5 0.5 1.3
Households consumption 4.1 3.2 2.3 2.0 1.6
Government consumption 1.9 3.3 2.0 2.5 0.4
Investment 4.7 -4.0 6.3 -6.0 1.0
Exports 4.5 0.5 2.5 2.0 4.0
Imports 9.7 0.2 8.4 3.0 3.0
Inflation rate (CPIA) 6.6 5.4 6.2 6.4 6.0
Public balance (as % of GDP) -2.6 -2.5 -3.3 -3.6 -3.3
Current account balance (as % of GDP) -2.1 -2.4 -3.7 -3.3 -3.0
SCENARIOECO | N°16 – SEPTEMBER 2014
16
RUSSIA: WAITING FOR SUPPORTIVE POLICIES?
The impact of the Ukrainian crisis and tensions with the EU and the United States has exacerbated an already bleak macroeconomic situation. Public spending is the only factor that could support growth in the next few quarters. On the upside, the combined effect of trade sanctions and the depreciation of the ruble could facilitate a partial recovery in the manufacturing sector.
The country's macroeconomic situation deteriorated amid a
climate of growing uncertainty. Economic activity is stagnating
and has become increasingly reliant on public spending while
private investment is contracting and consumption slowing. GDP
growth is expected to be close to zero this year and is forecast to
be a paltry 1% in 2015. GDP in the first two quarters of 2014
recorded low growth of 0.9% and 0.8% at an annualised pace. At
a quarterly rate, GDP contracted 0.3% in Q1 but grew 0.5% in Q2
on the back of, notably, a positive contribution from external trade
and an increase in public spending. The public spending
component risks being the primary growth driver in future quarters
or even years. Manufacturing activity inched higher, due to 1)
imports being substituted by domestic goods, a movement which
has ramped up since this summer and 2) public sector orders.
Restrictions on imports and the depreciation of the ruble have
resulted in fresh inflationary pressure. However, such pressure has
yet to materialise on the weekly inflation index. This could be due
to the delay in price hikes on regulated prices (notably in
transportation and utilities). Inflationary pressure could be partially
offset by the freeze in regulated prices, which will have a negative
impact on either investment in the relevant sectors or on the
budget.
The budget is expected to be leveraged in the next two years to
support growth in certain sectors, such as the defence industry.
Moreover, pension increases and other transfers are also under
Société Générale | Economic studies | 75886 PARIS CEDEX 18 http://www.societegenerale.com/en/Our-businesses/economic-studies Tel: +33 1 42 14 55 56 — Tel: +33 1 42 13 18 88 – Fax: +33 1 42 14 83 29 All opinions and estimations included in the report represent the judgment of the sole Economics Department of Societe Generale and do not necessary reflect the opinion of the Societe Generale itself or any of its subsidiaries and affiliates. These opinions are subject to change without notice. It does not constitute a commercial solicitation, a personnal recommendation or take into account the particular investment objectives, financial situations. Although the information in this report has been obtained from sources which are known to be reliable, we do not guarantee its accuracy or completeness. Neither Societe Generale nor its subsidiaries/affiliates accept any responsibility for liability arising from the use of all or any part of this document. Societe Generale may both act as a market maker or a broker, and may trade securities issued by issuers mentioned in this report, as well as derivatives based thereon, for its own account. Societe Generale, including its officers and employees may serve or have served as an officer, director or in an advisory capacity for any issuer mentioned in this report. Additional note to readers outside France: The securities that may be discussed in this report, as well as the material itself, may not be available in every country or to every category of investors.