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Financial turmoil will not derail expansion
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The Thai economy came in marginally below expectations in Q4 at 4% y/y. Both fixed investment and government consumption struggled to make any progress, while the contribution from net exports edged lower despite an acceleration in exports (to 7.4% y/y),as imports strengthened more. Consumer spending continued to grow steadily, albeit up a relatively modest 3.5% y/y.
We maintain our 2018 GDP forecast of a slowdown to 3.2% growth. Support from external demand will moderate but investment will become a bigger driver, albeit there remain doubts whether the infrastructure plans will really get going.
Gregory Daco, Chief US Economist, and Kathy Bostjancic, Chief US Financial Economist, discuss the US economic outlook for 2018. In light of recent financial market volatility, they discuss the outlook for the US economy and highlight several key risks, including the potential for late-cycle fiscal overdrive.
Yesterday, the US Senate failed to pass a bipartisan immigration compromise trading protection of unauthorized immigrants in the DACA program for funds for Trump’s border wall. While not our baseline assumption, there is a risk that up to 690,000 Central American beneficiaries of DACA could be deported if the US Congress fails to find a solution before March 5.
Although there is no guarantee that all beneficiaries of DACA would be deported, if they were, it could cause severe economic distress for El Salvador and Honduras, where US remittances account for more than a fifth of domestic consumption. In a worst-case scenario, their GDPs would see a permanent loss of 1.4% and 1.1%, respectively. The loss in US$ inflows would be so brutal that dollarized El Salvador could be forced to seek funding from the IMF.
Import prices rose a stronger-than-expected 1.0%. While higher fuel prices continue to drive a bulk of the monthly gains, the important nonfuel import index is now up 1.9% y/y, the most since 2012. Going forward, we expect higher import prices to feed through to firming producer and consumer prices domestically.
Following a weak Christmas period for retailers, January delivered another subdued performance. A 0.1% monthly rise in volumes barely ate into December’s 1.5% fall and pushed down annual growth to 1.6%, the weakest year-on-year rise for a January since 2013.
The prospect of a steady fall in inflation this year might auger for better times ahead. But rising interest rates and slower employment growth mean that 2018 will present headwinds of its own in constraining any retail resurgence.
Central banks moving from their cautious crisis stance back to more ‘standard’ policy setting rules would trigger a significant jump in short-term rates, our analysis shows. Adding asset prices would push rates up even further. We don’t expect a radical policy rule shift soon but factors such as the strength of the global economy would warrant central bank thinking shifting in this direction – with the most room for higher rates in the US and UK.
The resignation of President Jacob Zuma on 14 February has averted a messy parliamentary vote.
Now all eyes are on the incoming Cyril Ramaphosa. What will he do to improve governance, and how soon? Unless the new ANC leadership urgently walks its recent talk, we expect little more than a honeymoon in terms of financial market response and economic progress.
Industrial production started 2018 on a soft note, down 0.1% in January. Mining output took a breather while manufacturing was flat and utilities normalized.
The outlook for industrial production is still solid. Upbeat global and domestic growth, tax cuts, a more competitive dollar and a firmer oil price environment will support industrial output growth of around 3.7% in 2018.
The economic recovery of the Eurozone continued to be broad-based in Q4. This was confirmed by today’s release of the Eurozone and Italian trade balances for December, which showed further strong growth of intra and extra-European trade.
This year, a strengthening euro and moderating world trade growth are likely to keep Eurozone export growth slightly below the annual growth rate of around 5% seen in 2017.
The recent stock market correction and renewed volatility do not detract from the US economy’s strong fundamentals. We believe the economy will grow around 3% in 2018 supported by the 0.4 percentage point boost from the Tax Cuts and Jobs Act and a generous government spending boost from the Bipartisan Budget Act of 2018. With inflation moving closer to the Fed’s 2% target, we believe the Fed will a slightly more hawkish stance than in 2017. Risks on the horizon include a prolonged stock market correction with knock-on effect on household outlays, rising borrowing costs stemming from a tighter Fed stance and wider budget deficits, increased trade protectionism and fiscal fatigue as we move into 2020.
Housing remains a key risk for Canada’s economy, with home prices and mortgage debt burdens in key regional markets at multi-year highs. We are cautious about the outlook for property prices and debt given the changing financial and economic backdrop.
The confluence of rising interest rates, tighter macroprudential regulation and slower job growth stands to pose a headwind for home prices and household balance sheets in 2018. We continue to expect a “soft landing”, but the more adverse environment means the risks of a downturn are elevated.
Business inventories posted another 0.4% gain in December. The inventories-to-sales ratio held at its three-year low of 1.33 as sales remained solid at the end of 2017. Inventories likely weighed a little less on Q4-17 real GDP growth than the BEA initially estimated. We expect a mildly positive contribution on average in 2018.
The CEE economies had a strong end to 2017, according to flash GDP releases for Q4. Hungary surprised to the upside, growing by 4.2% on average last year, while Poland’s 4.6% y/y gain was in line with the earlier estimate. In Q4, growth was likely driven by ongoing strong momentum in both domestic and external demand, and in Poland also by the delayed upswing in fixed investment.
Falling productivity has been the main drag on economic growth in Italy and this is unlikely to change any time soon. Yes, the country is in much better shape heading into the election thanks to past reforms and the economic data continues to be positive. But our baseline scenario remains that the new government won’t give the economy the reform push needed to jolt productivity. Potential growth will therefore be capped at 1% in the medium term, meaning Italy will remain one of the laggards in the Eurozone.
The message from today’s monetary policy meeting was clear; rate hikes are coming, slowly but surely. But the subsequent communication indicated that H2 will be the time of the first repo rate increase. As a result, we have now pushed back the timing of the first repo rate increase from April to July.
Nevertheless, we maintain our view that Sweden’s ultra-loose monetary policy is out-of-sync with the economy. In addition, the longer the Riksbank waits, the faster it will have to raise rates. Thus, we now expect a 25bp increase for the first rate rise, with the potential to exit negative interest rates this year.
The Q4 GDP releases for the Eurozone and Germany confirm that the area topped off a great 2017 on a high note (growing by 0.6% q/q). Although Italian growth fell a little short of expectations, business and consumer surveys remain extremely positive and, as a result, we will likely see a larger gain in Q1.
We expect private-sector credit growth in Gulf Cooperation Council (GCC) economies to recover over the next 12 months, in line with higher oil prices and increased government spending. This will contribute to the region's aggregate GDP accelerating to 2.4% in 2018, up from 0.1% last year.
GDP gains will likely become more visible in H2, based on the lag of six to 12 months between the pick-up in new credit and economic growth seen over the last few years.
As expected, real GDP growth moderated in the last quarter of 2017, weighed down by weaker public investment. In addition, both export and import volumes lost some impetus. However, private consumer spending surprised on the upside, increasing by 7.0% year-on-year.
For 2018, we continue to look for a slowdown in GDP growth from the strong average pace of 5.9% recorded last year. But the robust momentum in private consumption raises the risk that the deceleration may not be as sharp as we currently anticipate (to 5.0%).
After two strong quarters, GDP growth eased to 0.1% q/q in Q4, reflecting rising imports and some normalisation in changes in inventories. Growth was broader-based however, as consumption recovered from its temporary decline in Q3 and business investment remained solid. Going forward, with export momentum expected to ease, we look for domestic demand to become an increasing driver of growth in 2018.
Over the past few years hopes have been raised that electric vehicle sales are set to rise exponentially. This risks putting strains on existing supply chains for battery materials -- notably lithium and cobalt -- which threatens to disrupt commodity markets more broadly.
CPI inflation remained unchanged at 3% in January, with a higher reading for core inflation offsetting downward pressures from food and petrol prices. But that stronger outturn for core inflation was largely due to base effects and will soon reverse. And with the sterling impulse fading, oil prices set to stabilise and scant evidence of any build up in underlying pressures, we continue to expect CPI inflation to drop back below the 2% target by the autumn.
The recent boom in house prices has led to a sharp increase in households’ mortgage liabilities, which has raised questions about long term sustainability. But our analysis suggests that these concerns are over-blown - a 1 percentage point increase in interest rates would raise average mortgage repayments by just 1% of income. Given that we expect no move from the RBA until 2019 Q4, we see minimal risk to the immediate outlook (2.4% GDP growth this year and next) from unsustainable household debt servicing requirements.
Industrial production growth surprised on the upside for the second consecutive month in December, while inflation remained above 5% in January. This further strengthens our view that growth will rebound sharply in 2018 to 7.5%, with CPI inflation averaging 5.3%. This is higher than the RBI’s inflation projection for FY19 and should lead to two rate hikes from the central bank.
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