Led by an improvement in the developed economies, the recovery in the global economy continues, but risks became apparent recently with industrialized economies also potentially facing some headwinds. US GDP growth in 1Q14 was reported at only 0.1%, and Japan’s ability to counterbalance its recent sales tax increase still remains uncertain amid slowing domestic demand in addition to some slack in exports.
Moreover, deceleration in the emerging economies continued with Russia being negatively affected by large capital outflows due to the latest geopolitical developments, and output was also slowing in China and Brazil. India, on the other hand, continues to recover from last year’s considerable slow-down.
While global growth risk is currently somewhat skewed to the downside, the global growth forecast for 2014 remains at 3.4%, after growth of 2.9% in the past year. Notable revisions in the current month’s GDP growth expectations took place for the US, fallin from 2.7% to 2.4%, while the tenderly improving output growth in the Euro-zone led to an upward revision from 0.8% to 1.0%. Russia’s growth forecast was again revised down from 1.0% to 0.9%.
OECD;
OECD Americas;
US;
The most recent signs indicated solid and mainly consumer-led growth momentum in the US. The labour market improved, wealth factors such as the equity market and the housing market continued rising, and, consequently, consumption followed. The two main factors denting this positive trend were the cold weather in 1Q14 and some weakness in exports, mainly to China. The most recently announced 1Q14 GDP growth number of only 0.1% q-o-q seasonally adjusted annualized rate (SAAR), however, came as a surprise. Moreover, the latest release of trade statistics indicates that the US economy in 1Q14 may have even contracted. The underlying growth trend and particularly the most recent indicators for private household consumption indicate a rebound in 2Q14 and for the rest of the year, but while the negative factors behind the low growth seen in 1Q14 are being considered as temporary, this remains to be seen.
While the 1Q14 number was indeed surprisingly low, the positive aspect of it was again that personal consumption expenditures increased by 3.0% after an already considerable rise of 3.3% in 4Q13. This however seems to have been influenced to a significant extent by health care spending due to the Affordable Care Act. Even by adjusting for this effect, consumption shows a good underlying momentum, but it certainly would be lower. Therefore, the GDP dynamic in the current quarter will need close monitoring as the US economy will indeed need a significant rebound in the 2Q to achieve the current full-year growth expectations. For the time being, positive momentum in the labour market, rising equities and continuous improvement in the housing market, together with an ongoing low interest rate environment, continue to support the expectation of a recovery in the remainder of the year from the low rate of expansion in 1Q.
The labour market has continued improving. After the unemployment rate stood at 6.7% for the second consecutive month in March, it dropped to 6.3% in April. Also, non-farm payroll additions grew by 288,000 in April, and March numbers were revised up to 203,000. Negatively, the participation rate fell again to a relatively low 62.8%, matching the previous bottom level of December and considerably lower than the March number of 63.2%. On the other side, the share of long-term unemployed has improved again and now stands at 35.3%, after 35.8% in March, and substantially below the 37.0% seen in February. Moreover, the average hourly earnings grew by 2.3% y-o-y in April, comparably higher than the April inflation rate of 1.5%, creating a real net-wealth effect. These positive labour market developments might have contributed to the US Fed’s recent decision to continue its QE tapering by $10 billion.
Housing prices, which also constitute a very important wealth factor for US households, have continued to rise, but the levels of the past months’ record price increases are decreasing slightly. Data from the Federal Housing Finance Agency (FHFA) show that 3Q13 price rises of 8.4% y-o-y constituted the peak level, while since then, price rises moved lower to stand at 7.7% in 4Q13 and at 6.9% in February, the latest available number. Given the expectation of further rising interest rates and with mortgages being the most influential financing tool for the sector, this is an area that will need close monitoring in the future.
Given the relatively positive developments in the labour market and in household income, consumer confidence was also at high levels recently. The Conference Board consumer confidence index stood at 82.3 in April, only slightly lower than in March, when it stood at 83.9. The University of Michigan consumer sentiment index moved to 84.1 in April from 80.0 in March. This is now the highest level it has reached since July last year, when in 3Q13, the US economy expanded by 4.1%, indeed an encouraging indication.
The purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), also posted a rising trend once again in April, moving to 54.9 in April after a level of 53.7 in March. Industrial production rose by a healthy 3.8% y-o-y in March, higher than 3.5% y-o-y in February. In addition, the ISM for the services sector, which constitutes more than two-thirds of the economy, rose to 55.2 in April from 53.1 in March.
Given the weak 1Q14 GDP growth, the GDP growth forecast for 2014 has been revised down this month from 2.7% to 2.4%. This implies that the US economy will need to expand at more than 3% for the remainder of the year. Based on the latest indicators, this seems to be achievable, but further challenges should not be ruled out entirely as some uncertainties related to exports and domestic consumption remain.
Canada;
In Canada, improvements continue as well. Industrial production in February expanded by 3.8% y-o-y, slightly higher than the 3.4% y-o-y level of March. The PMI for manufacturing remains almost unchanged at 52.9 in April, after having reached 53.3 in March. The GDP growth expectation for 2014 remains unchanged at 2.3%, after growth of 2.0% in 2013.
OECD Asia-Pacific;
Japan;
After a strong recovery, the Japanese economy is facing a very important litmus test as it enters the time after the April sales tax increase. First quarter developments have indicated that consumption has been strong ahead of this event, but historic comparison shows that a sales tax increase is able to considerably drag the economy afterwards. The latest retail data have shown that there is a negative trend in consumption already materializing. While this is widely expected based on past experience, the magnitude of it is relatively uncertain and may also depend on the government’s ability to counterbalance this effect via stimulus measures and through further actions by the Bank of Japan, which will also probably introduce new or extend existing monetary supply facilities. In general, the aim of the government to reduce the large public debt pile with an increase in the sales tax should be considered a necessary move towards a healthier approach to debt management. As the fiscal room to manoeuvre, therefore, becomes more limited, the economy’s structural improvements will also gain a more important role to play to continue the current progress.
The negative impact of the sales tax increase is also coming at a time when Japanese exports are being negatively affected by a slowdown in the emerging markets’ trading partners, particularly China. Export growth fell to a level of only 1.8% y-o-y in March, significantly lower than in February and in January, when exports grew by 9.5% y-o-y and 9.8%, respectively. This sharp drop translates into a monthly decline in exports of 2.7% on a seasonally adjusted base. This, in combination with a monthly drop of 3.4% in January and only a limited increase in February, leads to a decline in exports of 1.2% q-o-q in 1Q14.
Domestic demand increased significantly ahead of the sales tax increase in April. Retail trade rose by 11.0% y-o-y in March, by far the largest increase in the last decade. Also, the still very strong labour market, with a remarkably low unemployment rate of only 3.6%, is supportive for consumption. It remains to be seen, however, whether the income will follow as a prerequisite for continued rising consumption as the government was successful so far in its aim to push inflation to a level of 2% by the end of 2014. Inflation stood at 1.6% y-o-y in March. So far, earnings are still lagging as they rose only by 0.4% y-o-y in 1Q14, after an increase of 0.9% y-o-y in 4Q13.
Lead indicators have declined considerably. The latest PMI numbers, as provided by Markit, show that the manufacturing PMI in February stood at only below the 50 level in April at 49.4, after 53.9 in March. Also, the domestically very important services sector indicates a contraction. It stood at only 46.4 in April, significantly lower than in March, when it reached a level of 52.2. Moreover, consumer confidence also fell considerably to an index level of only 36.9 in March, from 37.6 in February. This compares to an average level for 2013 of 43.4. These indicators point to the uncertain consequences of the sales tax increase, while, at the same time, exports are also decelerating.
The GDP growth estimate for 2014 remains unchanged at 1.3%, below last year’s growth level of 1.5%. Developments in domestic demand will need particularly close monitoring in the coming months to decide upon the feasibility of achieving this level.
South Korea;
Growth in South Korea seems to be improving. Industrial production rose by 2.5% y-o-y in March, after it stood at only 1.6% y-o-y in February. Additionally, the composite leading index of the National Statistical Office, reached a new record high of 118.0 in March. The manufacturing PMI remained at 53.7 in April, compared to 47.0 in February. The growth forecast for 2014 remains unchanged at 3.1%, but given the slowdown in some of South Korea’s main trading partners in Asia, the growth pattern will need close monitoring.
OECD Europe;
Euro-zone;
Economic development in the Euro-zone is gradually improving. Output levels have improved broadly – albeit from very low levels in the past year – not only in the main economies, but even more so in the less strong peripheral economies. While Germany is leading the rebound, Italy and Spain – the third and fourth largest economies – have improved too. Mainly France is still lagging. It will be seen when it starts to expand at a higher level, but a fully-fledged recovery in the Euro-zone will definitely need its second-largest economy also to recover. Importantly, the smaller peripheral economies are also improving. Greece has just recently accessed the sovereign bond market successfully again, and Portugal has announced that it is leaving the emergency financing programme by 17 May. The two countries remaining under the support umbrella are now Greece and Cyprus. Furthermore, Greece has recently issued a 5-year bond below 5% of interest at the magnitude of €3 billion. Despite this success, the International Monetary Fund (IMF) has warned recently that the Euro-zone economies should not get complacent about this development as many uncertainties remain, and while the situation has improved significantly, it remains fragile, particularly in the bond market.
While output levels have risen recently, one concern has been the low inflation level over the past months. While the European Central Bank’s (ECB) target is an inflation of around 2%, inflation in March fell to a level as low as 0.5% y-o-y. In April, it increased again to a level of 0.7% y-o-y. This low level has been highlighted by many observers to be risky as it might also turn negative and lead to a deflationary level. This assumption was calling for a more aggressive monetary supply policy by the ECB, including measures of quantitative easing. So far, the ECB has not decided to pursue these bold supply measures as it expected inflation to again edge up considerably in the medium term, but it hinted at the possibility of doing so at its upcoming June meeting. The current tender recovery may – positively - also lead to wage inflation as unemployment is falling. Furthermore, income levels seem to have bottomed out in the past months and rising wages should lead to higher core inflation. Moreover, most of the falling inflationary pressure has come from economies that had to adjust their income levels in order to increase their competitiveness. Therefore, while the core economies are currently facing relatively low inflation, deflation has so far been a phenomenon of selective peripheral economies, as can be seen below.
It is, however, worrisome to some extent that in most of the economies, inflation fell from February to March, but as the Euro-zone’s total inflation moved up in April, according to the first estimate, the country-specific inflation level should also be higher in most cases. Another factor to be considered here is the strong euro, which currently makes imports to the Euro-zone relatively cheap.
Industrial output, excluding construction in Germany, expanded by a considerable 2.0% y-o-y in March, lower than the 3.8% y-o-y from February. Also, Spain posted a solid yet lower number of 1.2% y-o-y compared to 2.7% y-o-y in February, still a significant improvement after a decline of 0.5% in January, signalling that the economy is continuing to recover.
Lending of financial intermediaries to private households has remained at around the same rate of decline in March as in February. It fell by 2.6% y-o-y, and while this is still negative on a yearly comparison, it came off its low of -3.2% in November.
The continued high unemployment rate of 11.8% in March, the same level as in February, is a hurdle that remains a significant challenge to the economy for a faster recovery. The difference in unemployment rate levels continues to also highlight the varying speeds of recovery within the Euro-zone.
Lead indicators still confirm some unevenness of the Euro-zone’s growth pattern. The latest PMI for manufacturing, as provided by Markit, stood at 53.1 in April, around the same level as in March. It reached 54.1 in Germany and moved slightly lower to 51.2 in France. In Italy, it reached 54.0, considerably higher than the March number of 52.4.
The recovery in the Euro-zone has gained some traction lately, and the GDP growth forecast for 2014 has therefore been revised up to 1.0% from 0.8%, but given the continued fragility, many uncertainties remain, and the ongoing development will need close monitoring.
UK;
The United Kingdom’s most recent economic performance shows continued improvement and stands above the average level of most of its fellow EU countries. Industrial production increased by 2.8% y-o-y in February, higher than the January level of 2.4% y-o-y. PMI for manufacturing stood at a significant level of 57.4 in April, after 55.8 in March. The important services PMI also rose to a considerably higher level again. It reached 58.7 in April, after it had already stood at 57.6 in March. This positive development has again led to an upward revision in the 2014 GDP growth forecast, which now stands at 2.4%, 0.1 percentage points higher than in the last month.
Emerging and Developing Economies
After revising it down from 2.3% to 2.0% last month, the forecast for Brazil’s GDP growth rate in 2014 is unchanged this month at 2.0%. The downward pointing signals of this month clearly suggest that this figure is skewed to the downside. However, these signals still need to be thoughtfully monitored until after the World Cup, before coming up with a further revision.
Economic and political uncertainty has pushed capital out of Russia in 1Q14 at an estimated record level. The recent overall trend in economic indicators remains unpromising this month, combined with the ongoing geopolitical uncertainty in the region. Pressured currency and rising inflation could dampen consumer spending. Russia’s GDP growth in 2014 has been slightly reduced this month to 0.9%. It should be noted, however, that any forecast related to the 2014 GDP growth of Russia should have a wide range of risk due to the uncertainty over the path that geopolitical developments might take.
Despite the excitement and uncertainty of the general election that is currently underway (the results of which will be known on 16 May 2014), the activity data in India continue to disappoint. The momentum in the manufacturing sector held steady, with domestic demand countering a slowdown in export orders. Encouragingly, inflation pressures eased, however that does not mean the Reserve Bank of India (RBI) can take down its inflation guards.
China’s economic growth in 1Q14 was weaker than expected as a whole expanding by 7.4% y-o-y. But even this seemingly buoyant figure masks some of the underlying weakness. It seems momentum is building for Chinese exports to developed markets, signalling a brighter trade environment in 2Q14.
Brazil;
Exports from Brazil decelerated in April by 4.4% y-o-y. This marks the second drop in a row. At the same time, sentiment among consumers has shown further deterioration last month. The consumer confidence index reading of April dropped to its lowest since May 2009. This came while the central bank increased its benchmark interest rate by 25 basis points to 11%, aiming to curb inflation. Consumer price inflation increased in March to 5.6% despite the tightening cycle implemented since mid-2013. The unemployment rate, on the other hand, stood at 5.0% in March, far below the corresponding month in the past few years.
Business expectations in Brazil’s services sector reported a steep decline in April. The services PMI dropped last month to its lowest mark in three months. It posted 50.4 in April, from 51.0 a month earlier. Survey participants reported an increase in new orders, although there were mentions that tough economic conditions had weighed on growth. Business conditions in the Brazilian goods-producing economy deteriorated last month. Production was lowered in line with falling new orders, and companies cut their workforces as a consequence. The HSBC manufacturing PMI fell to 49.3 in April, down from 50.6 in March, the lowest reading in nine months. The survey signalled that export orders were broadly unchanged from March levels, while the general new business was lower. The recent deceleration captured in April’s PMI on the softening of the majority of its components suggests that the Brazilian economy lost momentum as it entered 2Q14.
After revising it down from 2.3% to 2.0% last month, the forecast for Brazil’s GDP growth rate in 2014 is unchanged this month at 2.0%. The downward pointing signals of this month clearly suggest that this figure is skewed to the downside. However, these signals still need to be thoughtfully monitored until after the World Cup before coming up with a further revision.
Russia;
Standard & Poor’s cut Russia’s credit rating last month following the $64 billion capital outflow in 1Q14. The rating agency lowered Russia’s sovereign debt rating to BBB-, the lowest investment grade that is just above junk status. Moreover, the new rating indicates a negative outlook as the tense geopolitical situation could lead to further money outflows of domestic and foreign capital. Last month, the central bank raised the interest rate for the second consecutive month. The key rate increased by 50 basis points to 7.5%. This move was aimed at taming the inflationary pressures from currency depreciation and lending support to the currency. Inflation jumped in April to 7.3%, from 6.9% in March. This marks the first breach to the 7.0% inflation rate since May 2013 and would put a limiting factor on the country’s household consumption. Retail sales were on an upward trend during February and March, growing by 4.0% y-o-y in March, from 3.9% y-o-y in February. Still, however, the growth in retail sales is less than the March 2013 figure of 4.5% and remained fluctuating under the 5.0% growth level since November 2012.
The unemployment rate posted 5.4% in March, notably lower than the same month of last year when it registered 5.7%. Industrial production increased at a slower rate of 1.4% in March, down from a 2.1% increase in the previous month. The Russian manufacturing sector continued to contract in April with the HSBC manufacturing PMI posting 48.5 last month, slightly up from 48.3 in March. This extends the downturn in the country’s goods-producing sector to a sixth successive month. All the main variables — output, new orders, exports, employment, backlogs and purchasing — continued to decline last month. In the meantime, the survey showed that inflationary pressures remained sharp, heavily linked to the weakening rouble exchange rate. Input price inflation eased slightly, but output price inflation hit a three-year high.
Economic and political uncertainty has caused a capital outflow from Russia in 1Q14 at an estimated record level. The recent overall trend in economic indicators remains unpromising this month combined with the ongoing geopolitical uncertainty in the region. Pressured currency and rising inflation could dampen consumer spending. Our forecast for Russia’s GDP growth in 2014 is slightly reduced this month to 0.9%. It should be noted, however, that any forecast related to the 2014 GDP growth of Russia should have a wide range of risk due to the uncertainty over the path that the geopolitical developments might take.
India;
After months of weakness and disappointment, industrial production (IP) finally gained meaningfully in January due to increasing consumer goods production. A second strong harvest was expected to boost rural demand and help engineer some turnaround in the IP cycle in January. Unfortunately, February IP thwarted those hopes. IP slumped 2.2% y-o-y, seasonally adjusted (SA), giving up all the gains incurred in January (+6%, y-o-y, SA).
In terms of trade deficit, on the face of it, a widening trade deficit in March should add to the IP gloom. But there are important caveats. First, the trade deficit widened from an excessively low $9.7 billion, SA, in February to a still-very-contained $14.5 billion, SA. To put this in perspective, such a run-rate of the monthly trade deficit is consistent with an annual current-account deficit of just over 1% of GDP. Secondly, the deficit widened for the “right reasons.” Non-oil (petroleum, petroleum products and related material import growth was +17.7% y-o-y in March from -3.1% in February) and nongold (gold import growth was -18.4% y-o-y in March from -75.7% in February), which have been sluggish in recent months, reflecting weak demand impulses in India, surged for the second time in three months.
India’s GDP growth has been under 5% for the past seven quarters, while manufacturing output has fallen on a monthly basis for the past three months. Most hopes for a recovery are now pinned on a change of government. Judging by recent record-high share prices, financial markets are expecting the probable winner, Modi’s opposition Bharatiya Janata Party (BJP), to improve business conditions.
The easing inflation trend in 1Q14 has been largely driven by moderating food price pressures, but with seasonal factors kicking in, food prices appear to have reached their bottom, and further deceleration in food inflation is unlikely. India’s consumer price index (CPI) and wholesale price index (WPI) would likely re-accelerate in the next few months due to firm food prices and sticky core inflation. As it turned out, headline CPI inflation rose to 8.3% in March, from 8.05% in February. In fact, the WPI re-accelerated more than markets had expected, printing at 5.7% y-o-y, hurt by an unfavourable base effect and the fact that food prices increased more than high-frequency data had suggested.
A sharp narrowing of the current account deficit and a partial return of foreign capital has helped the Indian currency to strengthen in January–March 2014, with the Indian Rupee (INR) gaining around 4.00% vis-Ã -vis the US dollar between end-January and end-March. The rapid improvement in the current account has started gradually waning, with merchandise exports now showing contraction from a year ago. However, imports also continued to fall in January and February, reflecting weak domestic demand and contributing to sustained improvement in the trade balance, but in March, some progress was seen. As long as import demand remains weak, the fundamental support to the rupee from the narrowing current account will keep the currency stable.
The Reserve Bank of India (RBI) is expected to intervene in order to prevent an overvaluation or avoid sharp depreciation pressures leading to the INR to be traded more range-bound (with liquidity estimates suggesting FX intervention to the tune of $7?8 billion in the month of March alone). If this persists, the INR is likely to come under pressure again.
Despite the excitement and uncertainty of the general election that is currently underway (the results of which will be known on 16 May), the activity data in India continue to disappoint. The momentum in the manufacturing sector held steady, with domestic demand countering a slowdown in export orders. However, a build-up in finished goods inventories could weigh on output growth in coming months in the absence of a pick-up in demand. Encouragingly, inflation pressures eased, but that does not mean that the RBI can take down its inflation guards.
The reform momentum is stalled for a protracted period even following the formation of a new government after the May 2014 elections, which would translate into weaker investment recovery, lower foreign capital inflow, higher inflation and slower growth recovery. GDP growth is expected to remain unchanged at around 5.6% in 2014, but perhaps high inflation, sluggish investment and private consumption have become the main drag on growth.
China;
Growth in China slowed to 7.4% y-o-y in 1Q14, with a q-o-q growth rate of just 1.4%, the weakest growth rate since 4Q08. Net trade subtracted 1.4 percentage points (pp) from growth following a poor export performance. The contribution from investment slowed to 3.1 pp from 4.1 pp in 4Q13. Despite a fall in retail sales growth from 18.6% yo- y at the end of December to 13.5% y-o-y in March, the contribution from consumption actually increased sharply, from 3.9 pp to 5.7 pp. This makes the path for consumption this year particularly hard to forecast. A poor trade performance coupled with weak investment is behind the slowdown, while consumption growth was strong despite moderating retail sales. Growth expectations for GDP were left unchanged for this year at 7.5%, with consumption unable to make up for a weaker impetus from the external sector. There are upside risks to this forecast if the authorities lose their nerve and pursue a more traditional credit stimulus towards the end of the year.
According to a State Council meeting related to the ‘mini stimulus’ subject in early April 2014, the package included extensions to existing tax breaks on small businesses, drawing attention to some of the infrastructure spending measures set out in China’s urban development plan (which stretches to 2020), and lowering the reserve requirement ratio for rural financial institutions. The government quickly switched to calling it a ‘new economic package’ to divert accusations of another credit-fuelled stimulus.
The inflation rates of newly-constructed residential and commercial properties have been steadily moderating in most of the major cities. With a bank run at a small cooperative bank in March, the possibility of a slump in property prices leading to a wider banking crisis remains as China negotiates its way to a slower growth path.
Sharp moves in China’s currency over the past few weeks have led to great uncertainty about the near-term prospects for the renminbi and the future of the exchange rate regime. Looking at the recent volatility, the renminbi is seen to now be more or less at its equilibrium value. In mid-March, the People’s Bank of China (PBoC) announced a move to widen the exchange rate band to 2% around its midpoint, from 1%. This followed a surprise depreciation of the renminbi over the previous few weeks. The exchange rate has since fallen further, to 6.25 against the dollar, taking the level back to that of March 2013. Like many things in China, the move has more than one aim. It is to stop the one-way bet on China’s currency through the carry trade. It is also a further step towards the liberalization of China’s capital account after the January 2014 Yuan appreciated to the level of February 2013.
Chinese exporters are seeing stronger demand from developed markets, indicating that expected trade strengthening that failed to materialize in 1Q may help sustain growth this quarter. According to data issued by China’s General Administration for Customs, exports to the EU and US surged, growing by 15.1% y-o-y and 12% y-o-y, respectively; together, the two trade partners account for one-third of Chinese export demand. Export growth rates to Hong Kong, India, Korea and Taiwan also improved relative to a month prior, although trade with Hong Kong still shows negative growth due to false-invoicing issues from last year that authorities curtailed in May. Monthly exports to Australia and ASEAN decelerated, although they still experienced positive growth. In cumulative terms, exports to all partners except Hong Kong (which had data reliability issues through April 2013) grew by 5.4% y-o-y through April 2014.
The final reading of the China Manufacturing PMI stabilised at 48.3 in April, up slightly from 48.1 in March. The latest data implied that domestic demand contracted at a slower pace but remained sluggish. Meanwhile, both new export orders and employment sub-indices contracted and were revised down from the earlier flash readings. These indicate that the manufacturing sector and the broader economy as a whole continue to lose momentum. Over the past few days, Beijing has introduced more reform measures, which could support growth by inducing more private sector investment. Bolder actions will be required to ensure the economy regains its momentum.
The banking crisis could lead to a sharp slowing in GDP growth. The government deficit is expected to remain below 3% of GDP, but the economy will be supported by low-inflationary pressure, a pick-up in export growth and high external debt.
OPEC Member Countries;
The non-oil producing private sector in Saudi Arabia showed a further solid improvement in its operating conditions in April. The SABB HSBC PMI posted 58.5 in April, up from 57.0 in March. The survey highlighted a faster growth rate in both output and new work orders. The robust figures are mainly attributed to improving economic conditions. The survey also showed a fall in input cost inflation to a 43-month low. Meanwhile, the latest survey data signalled a further rise in inventories of raw materials and other pre-production materials. A renewed rise in job creation was reported, following a month of fractional job shedding.
Inflation in Angola slowed to 7.3% in March, down from 7.5% in February 2014. This makes more room for a possible cut in lending rates to spur investment. The benchmark interest rate has been unchanged at 9.25% since November 2013. The government expects a 9% expansion in the country’s non-oil industries this year. In Ecuador, the non-oil producing sector led economic growth in 2013 by advancing 4.9% y-o-y. Despite the slowdown of GDP growth in 4Q13 to 1.2% y-o-y, the 2013 figure stood at a strong rate of 4.5%, driven mainly by gross fixed capital formation and exports.
The manufacturing PMI in the United Arab Emirates (UAE) increased to an all-time high of 58.30 in April 2014 from 57.70 in March 2014. It averaged 54.77 from 2011 until 2014. Sharp output and new order growth boosted the headline PMI in April, with the respective rates of expansion the highest and joint-second highest on record. Activity rose amid reports of increased order intakes and improving market conditions, while higher sales team efforts and a good economic environment were the main reasons behind the strong rise in new business. Stronger demand led to the latest solid rise in employment levels at the UAE’s non-oil private sector companies, with 15% of the survey panel reporting increased workforce numbers. In line with the trend for total new orders, new export business rose markedly. The rate of growth in new export orders accelerated since March and was only fractionally weaker than February’s series high.
Other Asia;
In Indonesia, the Central Bureau of Statistics announced the 1Q GDP growth of 5.2% y-o-y, while market estimates averaged at 5.6%. The government last month announced plans to cut its GDP growth in 2014 to 5.8% y-o-y, down from 6.0%. Last year, the Central Bank of Indonesia implemented the most aggressive rate-tightening cycle in eight years. This policy has helped curb the current account deficit and put a ceiling on inflation. The tightening policy, however, has impacted investment. Investment increased by 14.6% y-o-y in 1Q, slower than last year’s 27%. This, in turn, is to have a negative effect on lending.
Indonesia’s Financial Services Authority plans a bank lending target growth of about 17% for this year, compared with 22% last year. In addition, the moderation in the demand for commodity exports will put additional pressure on growth in 2014. Furthermore, the decision to ban exports of raw mineral ores as of January 2014 has affected the economic growth in 1Q14. Mining and quarrying have contracted by 0.4% y-o-y in 1Q.
During April 2014, the operating conditions in Indonesia’s manufacturing economy showed its strongest rate of improvement in 11 months. The manufacturing PMI rose to 51.1 in April, up from 50.1 in March. Manufacturers indicated that recent floods, combined with the elections and shortages of some raw materials, led to falling output in April. However, the survey signalled a faster increase in incoming new orders and a return to growth in both staffing numbers and stocks of purchases.
In Taiwan, operating conditions among manufacturers signalled the eighth successive monthly improvement in overall business conditions during April. The manufacturing PMI stood at 52.3 last month, down from 52.7 in March. The survey showed a decrease in the pace of output growth, but it remains solid. Total new business and new export orders both rose at faster rates in April.
Vietnam’s manufacturing economy showed a strong expansion last month, with the PMI rising to 53.1, from 51.3 in March. The latest reading of the index represents a new series record on the back of record rises in new orders and purchasing activity. Job creation returned to growth among manufacturers last month, whereas cost inflation quickened at the sharpest pace since September 2013.
Africa;
In South Africa, a three-month strike in the platinum industry together with higher imports of oil pushed the trade balance into a deficit in March 2014. The South African Revenue Service announced that the trade deficit reached 11.4 billion rand ($1.1 billion) compared with a surplus of 647 million rand in February 2014. The country posted a current account deficit of 5.8% of GDP last year. The government forecasts a gap of 5.9% of GDP this year. The country’s PMI dropped last month to a 10-month low, signalling a deterioration in operating conditions. This is the first contraction in 8 months. The headline PMI dropped from 50.3 in March to 47.4 in April, the lowest reading more than last two years. The survey showed the second successive monthly fall in activity during April and the sharpest since last September.
Furthermore, new business intakes also declined in April showing the fastest pace of contraction in South Africa’s PMI history, while the rate of cost inflation was the weakest since December of last year.
In Egypt, operating conditions deteriorated in April for the second month running. The PMI decreased slightly to 49.5 in April from 49.8 a month earlier. The survey showed a marginal contraction in output with a further deceleration in the intakes of new orders, while new export business had a sharper drop.
Latin America;
Mexico posted a $1.03 billion trade surplus in March as higher shipments of manufactured and agricultural goods offset a decline in petroleum exports and increased imports. Exports rose by 4.5% y-o-y to $33.314 billion, as non-oil sales advanced 6.9%, while oil shipments fell 11.1%. In 1Q14, exports increased by 2.9% y-o-y, and imports rose at a faster 3%. The country’s trade deficit increased to $1.19 billion. The central bank left the benchmark interest rate unchanged at 3.5% for the fifth consecutive month. Inflation in Mexico slowed to a five-month low of 3.5% in early April. Inflation expectations for 2014 have been revised downward, while those for the longer term have remained stable. The central bank noted that after a weak start of the year, economic growth was improving on rising exports and increased public spending. The manufacturing sector in Mexico showed a slight improvement in April with the PMI at 51.8, up from 51.7 in March.
In Argentina, foreign direct investment decreased to $445.09 million in 4Q13, down from $777.64 million in 3Q13. Foreign direct investment in Argentina averaged $603.03 million from 2003 to 2013. Moody’s rating agency downgraded the rating of Argentina’s public debt by one step to Caa1, citing the increased risk to debt service for government bonds given a significant deterioration in the country’s foreign exchange reserves. Inflation, on the other hand, increased by around 2.6% m-o-m in March 2014, while it increased by nearly 10% when compared to the last month of 2013. In Peru, the unemployment rate decreased to 6.9% in March, down from 7% in February 2014, whereas inflation grew to 3.5% y-o-y in April, from 3.4% y-o-y a month earlier.
Transition region;
In Hungary, the central bank cut its benchmark interest rate last month by 10 basis points to 2.5%. Last year’s cut in the household utility prices by a total of 20% has played a significant role in reducing inflation. Consumer price inflation eased by 0.1% y-o-y in March. Hungary’s manufacturing PMI rose to 54.6 in April, from 53.7 in March, according to seasonal adjustment data. The PMI index has expanded since July of last year. The new orders index went up slightly in April and was the fifth highest value for the month since 1995.
Poland’s
manufacturing PMI remained in the expansion territory in April, though it fell to 52.0 from 54.0 in March. April’s reading of the index marks the lowest since July 2013. Growth rates for production, new orders, new export business and purchasing activity all slowed for the second month running, while employment in the goods producing sector also increased at a weaker pace. The latest survey results also indicated an absence of inflationary pressures. In April, the Czech manufacturing PMI rose to 56.5, from 55.5 in the preceding month, signalling a robust improvement among manufacturers.
Oil prices, US dollar and inflation;
In April, as in the previous month, the US dollar was relatively resilient compared to its major currency counterparts on average. Interesting developments were once again observed in the emerging market currencies. While the slight decline of the yuan continued, the Indian rupee also continued its recovery from its decline that started last year and remained at a level of only slightly above INR 60/$.
Compared to the major currencies, the US dollar changed only slightly on a monthly average. Compared to the euro, the US dollar fell by 0.1% in April and stood at a monthly average of $1.3812/€. Versus the Japanese yen, it gained 0.3% to reach ¥102.564/$. Compared to the pound sterling, it fell again for the fifth consecutive month by 0.7%, while compared to the Swiss franc, it increased by 0.1%. With the ongoing recovery in the US, the tapering of the US Fed, the expectation of continued monetary stimulus from the ECB and the ongoing efforts to stimulate the economy by the BoJ, and given the current slow-down in the emerging markets, the US dollar should be expected to appreciate in the coming months. However, capital inflows into the peripheral economies of the Euro-zone have kept the euro unexpectedly strong so far.
In nominal terms, the price of the OPEC Reference Basket (ORB) remained almost unchanged. It rose by a monthly average of $0.12/b, or 0.1%, from $104.15/b in March to $104.27/b in April. In real terms, after accounting for inflation and currency fluctuations, the ORB rose by 0.4%, or $0.27/b, to $62.34/b from $62.07/b (base June 2001=100). Over the same period, the US dollar remained flat against the import weighted modified Geneva I + US dollar basket* while inflation fell by 0.3%.
China’s Finance Minister reaffirmed the country’s growth target of 7.5% for 2014 at the recent National People’s Congress (NPC). Growth in consumption (both public and private) should remain firm in 2014. China's export performance will also firm as external demand conditions improve, especially in North America and the EU. However, the tightening of credit conditions is likely to ensure a significant slowdown in investment growth in 2014. Industrial production and investment growth continued to slow in January and February. Retail sales were also weaker, up less than 12% over the year, and the flash PMI for March came in at an eight-month low of 48.1.
In terms of private consumption, China’s first urbanization plan was announced after the NPC meetings. As expected, one major objective is to register more urban residents under the “Hukou” scheme, allowing them to access local health, education and social security. The plan, covering 2014?20, envisages Hukou coverage increasing from two-thirds to three-quarters of the urban population. The reforms should provide additional stimulus to private consumption and constitute a crucial aspect of economic rebalancing as the government continues to focus on infrastructure investment. Regarding the recent shadow banking problem, it seems the fragilities within China's financial sector have become clearly visible during March. The financial system is vulnerable because of interconnections between local government debt, inflated property prices, the banking system and corporate debt.
Chinese authorities continue to proclaim their commitment to reform. This month, they announced plans to liberalize deposit rates further and to set up five private banks. They also reiterated their intention to establish a bank deposit protection scheme related to the grand reform agenda at the 3rd Plenum of the 18th CPC Party Congress. Most recently, Beijing has introduced a series of pro-growth measures to stabilize growth as a mini stimulus package, including:
· Accelerating fiscal expenditure in infrastructure.
· A compositional shift in fiscal expenditure by cracking down on extravagance expenditures and administrative expenses.
· Accelerating administrative reform.
· Service sector reform.
· Resource pricing reform that aims to fix the distortions of a government controlled resource product pricing mechanism.
These reforms may be connected to the recent depreciation of the renminbi (RMB). It seems that markets are confused and concerned about these mentioned reforms, and recent market data from China is contradictory.
The final reading of the China Manufacturing PMI in March confirmed the weakness of domestic demand conditions. This implies that 1Q GDP growth is likely to have fallen below the annual growth target of 7.5%. It seems Beijing plans to fine-tune policy sooner rather than later to stabilize growth. February data also confirm that growth in China is slowing. Industrial output rose by 8.6% in January and February together, while investment rose by 17.9% and retail sales were up by 11.8%. All were lower than 4Q growth. We expect output to be moderate this year, but if the current pace of deceleration in industrial production continues (based on business cycle analysis), the risks in the near-term may be to the downside and for this reason the GDP growth forecast has been slightly revised down to 7.5% for this year, compared to 7.6% as projected last month. This is in line with the government’s 7.5% target. China’s economic slowing reflects short-term pain as new leaders attempt to steer economic restructuring. Several factors could have contributed to the softened growth momentum:
· Normalizing the monetary policy and addressing credit imbalances have caused the economy to slow;
· The manufacturing industry is facing overcapacity and declining rates of return. Cutting capacity in “old China” industries is hurting growth momentum while the ''new China and high value-added” sectors are picking up.
· Encouraging public consumption as well as public investment.
· Household income growth, especially for urban households.
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Exports from Brazil exhibited an 8.8% y-o-y decline last month to register the sharpest drop since February 2013. Consumer confidence, on the other hand, remained largely stable at a low level last month. The consumer confidence index posted 108.0 in March, up from 107.8 a month earlier. This suggests a stagnation in consumer spending in Brazil. The unemployment rate stood at 5.1% in February, a much lower reading than in the same month of the past few years. The Central Bank has kept its benchmark interest rate unchanged at 10.75, signalling that the end of its tightening policy is close. March’s consumer price inflation inched up at 5.6% from 5.4% in February. An ease in inflation to around 5.0% is less likely with an end of interest rate increases together with a tight labour market and high utilization capacity. In addition, the World Cup is expected to add further upward pressure on inflation.
Seasonally adjusted data has shown a partial rebound in Brazil's industrial production in January by 2.9% m-o-m. This improvement was driven by strong growth in capital goods production (up 10.0% m-o-m). Output in the other two categories - intermediate goods and consumption goods - expanded 1.2% m-o-m and 2.3% m-o-m, respectively. Nevertheless, when compared to January 2013 and using raw data, industrial production shrank by 2.4%, and capital goods was the only category that expanded while intermediate and consumption goods declined.
This month’s forecast for Brazil’s GDP growth rate in 2014 has been slightly pared back from 2.3% to 2.0%. An important trigger of this revision is the softening sentiment in the domestic economy, which represents more than 60% of the country’s GDP. On the other hand, however, the comfortable stock of foreign currency reserves is seen as helping Brazil to cope with uncertainties and volatility in international markets and to appease investors that otherwise would be tempted to take their capital out of the country.
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After the cold snap-related slowdown in the United States’ economy at the beginning of the year, the growth dynamic has regained traction. Moreover, the latest release of the 4Q13 GDP numbers has indicated that firstly, the momentum was better in the fourth quarter than initially indicated, and that secondly, the crucial private household consumption was also higher. Also, the latest job additions have been supportive for this year’s recovery, and the agreement on budgetary issues leading to a less severe fiscal drag all point to a continued recovery for the remaining quarters of the year.
Some downside to current growth estimates could still come from a spill-over of global economic issues, geopolitical events or effects from a further tightening of monetary stimulus. Due to the strength of the US economy and the depth of capital markets, this possibility however, at least currently, seems relatively limited, and it is expected that the US economy itself might turn out to be a vital growth engine for the global economy. While the positive development in the US economy is continuing, there is still a gap between current growth and the economy’s potential output level. This gap, however, could be closed by next year, if the current growth trend continues.
The third and last release of 4Q13 GDP stood at 2.6% q-o-q, seasonally adjusted annualized rate (SAAR), better than the second release number of 2.4% q-o-q SAAR, but still significantly lower than the first estimate of 3.2% q-o-q SAAR. Also, as a comparison, GDP grew by 4.1% q-o-q SAAR in 3Q13. While the 3Q13 quarter numbers have also confirmed a significant recovery from the sluggish 1H13, they have been largely driven by inventory building and to a lesser extent by consumption of private households, which constitutes the main factor for US GDP growth. The latest set of 4Q13 numbers, however, showed an improvement in the composition of GDP supporting factors. Consumption increased by 3.3%, more than the 22-year average of 3.0% in consumption growth. Private household consumption also provided the largest single contribution to 4Q GDP growth at 2.2 pp. On average, consumption (i.e. private household expenditures), accounted for around 70% of US GDP, thus the current development indicates that the trend is going back to normal.
At the latest meeting of the US Federal Reserve (US Fed), it was highlighted that an interest rate increase could potentially happen earlier than previously directed in its forward guidance. This comes also as a result of the better-than-anticipated US recovery. However, it was emphasised that the situation is still not entirely robust, but that the development so far has been encouraging. This also led to the decision to again reduce the extraordinary monetary stimulus by $10 billion. The continuation of this strategy is supported by the slowly improving labour market with ongoing job additions. Inflation, however, has again retreated somewhat and now stands at only 1.1%, slightly lower than in January at 1.6%. It is obvious that in the past quarter, the inflationary trend, while not alarmingly low, has been clearly below the 2%-level that the US Fed is aiming for. Positively, excluding the volatile price factors of food and energy, inflation stood at 1.6% y-o-y in both January and February.
While the labour market has continued improving, the dynamic is still mixed. After the unemployment rate moved from 6.6% to 6.7% in February, it remained at this level in March. On the other hand, non-farm payroll additions grew by 192,000 in March and positive February numbers were revised up to 197,000 from 175,000 previously. The participation rate has remained at a relatively low 63.2%, but has improved from 63.0% in February and is now increasing from its bottom level of 62.8% in December. The share of long-term unemployed has also improved and now stands at 35.8%, substantially below the 37.0% seen in February.
The purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), has also posted a rising trend once again in March after having declined significantly in January to 51.3 due to the cold snap. In February, the important lead indicator improved to 53.2, confirming the view that the January dip might have been temporary. In March, it stood at 53.7. Industrial Production rose by a healthy 3.0% y-o-y in February, the same level as in January, while manufacturing orders were weak in February, declining by 0.7% y-o-y, after an increase of 1.7% y-o-y in January. On the other hand, the ISM for the services sector, which constitutes more than two-thirds of the economy, rose to 53.1 in March, compared to 51.6 in February.
When reviewing the latest indicators, the momentum leads to considerably higher growth this year, and this should be expected to continue. Consumer confidence, as provided by the Conference Board, reached 82.3, the highest level seen since January 2008. These positive developments have led to a rising GDP growth level this year, which is forecast to be 2.7%, compared to 2013 growth of 1.9%.
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The tourism sector in Morocco registered record arrivals in 2013 of more than 10 million, a 7% increase over the previous year. In 2014, official forecasts point to an 8% increase. The sector generated more than 20,000 jobs last year and was expected to continue being a key driver of the economy, accounting for around 9% of the GDP. In Tunisia, the unemployment rate edged lower during 4Q13 but remained elevated at 15.3%, as shown by the National Institute of Statistics. This figure compares to 15.7% unemployment in 3Q13 and 16.7% in 4Q12. The number of jobs created rose to 27,500 in 4Q13, from 25,900 in the previous quarter, while Tunisia's labour force grew by 16,800. The service sector accounted for the major share of employment at 51%, followed by manufacturing (19%), agriculture (15%) and the non-manufacturing sector (15%).
Egypt's urban consumer price index inflation moderated to a 9.8% annual rate in February, from 11.4% y-o-y in January and 11.7% y-o-y at the end of 2013, according to recent data from the country's Central Agency for Public Mobilization and Statistics (CAPMAS). On a monthly basis, consumer price inflation continued apace, rising 1.0% during the second month of 2014. The economy’s PMI showed a fractional deterioration in private sector business conditions with the headline index falling slightly from February’s 50.0 to 49.8. The survey indicated that the rate of job shedding has eased to an 18-month low.
In South Africa, the South African Chamber of Commerce and Industry's business confidence index increased to 91.9 in February, after slowing to 90.5 in January; however, the expected trade activity index remained unchanged over the same period. The First National Bank and Bureau of Economic Research business confidence index, which measures confidence on a quarterly basis, sank back to 41 in the first quarter, following a reading of 43 index points in the previous quarter. Retail trade in South Africa showed a slow start to the year.
Latest official data shows South Africa's seasonally adjusted real retail sales were up 6.0% y-o-y in January, from 4.1% y-o-y in December 2013; however, this increase only reflects the previous year's low base. A more accurate picture can be gained from the slowdown on a monthly basis, as growth slowed to 0.8% m-o-m in January, from an increase of 1.0% m-o-m in the previous month. Inflation in South Africa increased to 5.9% y-o-y in February 2014 from 5.8% y-o-y in January 2013. On a monthly basis, prices accelerated by 1.1% m-o-m from 0.7% m-o-m in the previous month. The rise in inflation is attributed to the more expensive fuel and health insurance. Fuel price increases added 0.3 pp to the overall rise in monthly inflation, while miscellaneous goods and services, mainly an increase in health insurance prices, added 0.6 pp. Services inflation jumped 1.5% m-o-m and goods inflation by 0.8% m-o-m between January and February 2014. The PMI survey showed that mining strikes caused a contraction in private sector output in March. The seasonally adjusted headline PMI fell from February’s 51.5 to 50.2 in March, signalling the weakest improvement in operating conditions in the current six-month period of growth.
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Last month, the Central Bank in Vietnam reduced the refinance rate from 7% to 6.5%. This was intended to support business by spurring credit growth. The central bank data showed that lending contracted by 1.05% in March from the end of 2013, while the government’s growth target stands at between 12%?14% in 2014. In its attempts to attract more foreign investment, Vietnam is trying to create favourable conditions for foreign investors to take part in the sale/purchase of bad debt. Earlier this year, foreigners were allowed to buy larger stakes in the country’s banks. The new entity bought bad debt of around $1.9 billion worth last year and may buy more than four times this amount in 2014. Furthermore, a legal framework is to be set up to help create a regulated market for bad debt. The successful management of bad debt would support lending and businesses, in addition to providing a less risky environment for foreign investment. Inflation in Vietnam registered 4.7% y-o-y, signalling the slowest pace since November 2009, while exports perked up by 12.3% y-o-y in January and February of this year. The HSBC manufacturing PMI showed that new orders rose at the fastest pace since October 2013. The reading was up slightly from 51.0 in February and pointed to a seventh consecutive monthly improvement in operating conditions.
The recent months’ increases of electricity tariffs and subsidized fuel are putting pressure on inflation in Malaysia. Inflation climbed by 3.4% y-o-y in January, the fastest pace since October 2011. Thus, the more downside risks to the nation’s GDP growth are now officially acknowledged by the central bank, which brought down its lower range of 2014’s growth to 4.5% from 5.0%. Accordingly, the officially forecasted range now stands between 4.5% and 5.5%. Last year, portfolio investment outflow from Malaysia amounted to around 2.8 billion ringgit against an inflow of 58.4 billion ringgit in 2012.
In Indonesia, inflation eased to 7.8% in February, dipping below 8% for the first time since October of last year. Bank Indonesia maintained the reference rate at 7.5% on the back of slowing inflation and a strengthening rupiah. The Ministry of Finance expects a possible growth slowdown this year of 5.5%?5.8%, the least since 2009, as the government is trying to limit the current account deficit. The country’s manufacturing sector continued to grow, but at a slower pace, with the manufacturing PMI dropping slightly, close to 50. The PMI posted 50.1 last month, down from 50.5 in February, with output contracting despite faster growth seen in new orders.
In Taiwan, the PMI in March showed that business conditions improved at the slowest pace in six months, posting 52.7, down from February’s 54.7. The survey indicated that both output and new orders have expanded at weaker rates.
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It's that handsome combination of IOU (inefficient, old and ubiquitous) technology, the potential for inexpensive solutions and the "wow" factor that green design techniques lend buildings like the California Academy of Sciences that lay at the heart of the market. Building hasn't been as popular with VCs as solar or biofuels -- but many believe we are on the verge of a two-decade boom in retrofits and new types of construction. (It's why we are holding our Green Building Summit next week on June 11.)
Besides, if the economics won't drive it, legislation will. In California, new homes will likely have to meet net-zero energy standards by 2020 and commercial buildings will have to hit it by 2030. An estimated $21.65 billion is baked into the American Recovery and Reinvestment Act. And to get grants in other parts of the program, applicants have to show they are "shovel ready."
But it's also a more complex market with more moving parts than solar or biofuels. We've broken it down into five segments.
1. Construction and Design;
If you talk to contractors and architects, they claim that most energy savings can be accomplished through proper design and construction. While that point can be debated, green construction has clearly become commercially attractive. Various studies report that LEED-certified or LEED-like buildings generate higher rentals and property values. Employers claim environmental construction reduces sick days and serves as a recruiting tool. A much-touted retrofit of the Empire State Building dropped energy consumption by 38 percent.
In China, A skyscraper being erected in Shanghai will have municipal parks on most floors while buildings by upscale developer Shui On Land can rent for 1.5 times that of competing properties, according to sources. Retrofitting or building green also does not necessarily add costs.
Source: Department of Energy
Limbach Energy Solutions, a large HVAC contractor in Pittsburgh, has begun to take a program developed in Ohio for cash-flow neutral energy retrofits. In the commercial market, large builders like Webcor and Weitz already gain a substantial portion of their revenue from LEED. A few startups like Project Frog, which builds energy efficient schools, have also emerged.
The consumer space has moved slower than commercial or government. Prior to the economic downturn, mass home builders such as Lennar reported fairly strong sales of homes equipped with solar panels. Since then, it's been tough to sell homes. Michelle Kaufmann Designs, one of the early modular home builders, recently went under while others such as Living Homes and Zeta Communities are in startup mode.
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