LSR Global Leading Indicators A guide to global growth prospects November 2014
Highlights The global lead indicator confirms trade data that points to
continued expansion, but at a slowing pace Lead indicators suggest further downward revisions to
consensus growth forecasts for the euro area are likely Japanese lead indicators refuse to validate talk of recovery,
while yen depreciation buffets Korea US growth to remain robust – small upside surprises possible New sections compare lead indicators and consensus growth
estimates, confidence intervals are added to lead indicator growth projections
Index November 2014 Summary Data Trends
3
World
4
USA
6
China
8
Euro area
10
Japan
12
Canada
14
UK
16
Germany
18
France
20
Italy
22
Spain
24
Korea
26
India
28
Australia
30
Brazil
32
Mexico
34
This Lombard Street Research report is intended to encourage better understanding of economic policy and financial markets. It does not constitute a solicitation for the purpose of sale of any commodities, securities or investments. Although the information compiled herein is considered reliable, its accuracy is not guaranteed. Persons using this report do so solely at their own risk and Lombard Street Research shall be under no liability whatsoever in respect thereof. The contents of this publication, either in whole or in part, may not be reproduced, stored in a data retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without written permission of the Managing Director.
www.lombardstreetresearch.com
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Summary Data Trends Data Trends
GLIs emphasise importance of US recovery The consensus expectation is that the US will be the fastest growing developed economy during the first half of 2015. Our GLIs suggest that even this optimism may be underdone. The downgrading of euro area forecasts seems likely to continue.
US growth likely to be maintained, euro area downgrades to continue
Consensus expectations are for growth in the US to remain robust but slow marginally in early 2015. Our lead indicator suggests that the risks around this consensus expectation are that growth may actually be moderately stronger during early-2015. In turn, stronger US growth is expected to especially benefit Canada and Mexico. Support from a growing US economy and growth-friendly domestic reforms make Mexico one of our most favoured emerging markets. The consensus expectation continues to be for a significant recovery in euro area growth during early-2015. The European Commission recently downgraded its own 2014 and 2015 forecasts but still expects a (moderate) acceleration in growth. Our GLI results suggest that these growth downgrades may still have some way to go. Consensus growth forecasts relative to LSR GLI outturns Consensus % change q-o-q
Q2 2014a
Q3 2014
Q4 2014
Q1 2015
LSR GLI
US
1.1%
0.9%
0.8%
0.7%
Above consensus
Euro
0.0%
0.2%
0.3%
0.6%
In line
Japan
-1.8%
1.2%
0.5%
0.4%
Below consensus
Canada
0.8%
0.7%
0.7%
0.6%
Above consensus
UK
0.9%
0.7%
0.7%
0.5%
Above consensus
Germany
-0.2%
0.4%
0.5%
0.5%
Below consensus
France
0.0%
0.1%
0.2%
0.3%
In line
Italy
-0.2%
0.3%
-0.1%
0.3%
Below consensus
Spain
0.6%
0.4%
0.4%
0.5%
In line
Australia
0.5%
0.6%
0.6%
0.9%
In line
Korea*
3.5%
3.2%
3.5%
3.5%
In line
India*
5.8%
5.2%
5.4%
5.7%
Above consensus
Brazil*
-0.9%
-0.3%
-0.1%
0.4%
Above consensus
Mexico*
2.7%
2.9%
3.6%
3.9%
In line
Source: Consensus Economics, Bloomberg, LSR * GDP seasonality means we are required to use annual growth estimates for these countries. Table excludes China as we use the LSR GDP series in our lead indicator analysis. This cannot be compared to consensus expectations for the official series.
A note explaining the methodology and construction of the Global Lead Indicators can be found here.
Richard Batley
[email protected]
LSR Global Leading Indicators | November 2014
3
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World World – trade cycle slows Our global lead indicator fell slightly in October. World economic growth still has the potential to increase from current levels during the near-term. However, growth is likely to slow later during 2015. US strength should keep global growth accelerating – for now
The global lead indicator has reversed some of its strength over recent months but remains comfortably above its level at the start of 2014. Growth momentum, particularly from the US, is likely to keep growth accelerating into 2015, with a slowdown in this pace of growth likely during the second quarter of the year. World trade volume growth has already slowed; volume growth remains robust in the US and Asia, although on a 3-month/3-month basis, exports from the euro area are now declining in absolute terms. Export demand has been a key source of demand growth for the euro area. The size of the euro area’s trade surplus with the rest of the world – even though it has declined slightly in recent months - is greater than that of China and is the largest of any economic region. Global current account balances $bn
EA
China
US
600 400 200 0 -200 -400 -600 -800 -1000 1999
2002
2005
2008
2011
2014
Source: Datastream, LSR
German yields fundamentally part company with US and UK levels
Further reflecting the paucity of domestic demand in the euro area, inflation expectations, growth and, consequently, yields, continue to drift lower in that region. As recently as Q4 2012 German yields were the same level as the US. Since then Treasury yields have increased and bund yields have moved closer to ‘deflationary’ Japanese levels. This reduced differential between German and Japanese yields is likely to be maintained, and may even narrow further as the debt-deflation dynamics of the euro area intensify.
Richard Batley
[email protected]
LSR Global Leading Indicators | November 2014
4
World Data Trends Global lead indicator points to slowing Leading indicator
Confidence interval around our lead indicator GDP
4%
75%
50%
25%
10%
GDP qoq
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
-2%
-2%
-3% 2008
2010
2012
2014
-3% 2009
2010
2011
2012
Source: Datastream, LSR
Source: Datastream, LSR
World trade recovery stalls
Global exports take a turn down
3-month percentage change
3-month percentage change
6
Asia
5
6.0
4
4.0
3
2013
Euro area
2014
US
2.0
2
0.0
1 0
-2.0
-1
-4.0
-2 2010
2011
2012
2013
2014
-6.0 Jul-12
Jan-13
Jul-13
Source: CPB
Source: Datastream
Germany turns Japanese, US UK buck the trend?
Subdued Baltic freight index
10-year nominal yields, %
000s
Germany
UK
Japan
US
3.5
Jan-14
Jul-14
12 10 8
3.0 2.5
6
2.0 1.5
4
1.0
2
0.5 0.0 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Source: Datastream
0 Oct-04
Oct-06
Oct-08
Oct-10
Oct-12
Oct-14
Source: Datastream
LSR Global Leading Indicators | November 2014
5
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USA Jobs momentum carries US forward US growth should accelerate from the past four quarters’ 2¼% to 3% or more. While exports may slow after the past year’s strength, consumer spending could be buoyed by jobs growth, falling inflation and a lower savings rate. 3% growth likely
Strong exports, weak consumer spending in the past …
… to be reversed in future …
… aided by lower savings …
… and lower inflation
Our leading indicator continues to suggest strong US growth. Q3 growth at a 3.5% annual rate only carried on the recovery from Q1’s surprise drop. Probably the best measure of the past is therefore the four-quarter growth of 2.3%. But the end of serious fiscal tightening over the past few quarters is combining with continued easy money (despite the end of QE) to make sustained growth of at least 3% likely. In the past couple of quarters, GDP has been favoured by rapid export growth, but held back by surprisingly weak consumer spending, clearly the more important of the two demand elements. As exports were part of the Q1 slump, the four-quarter growth is probably the best measure – but at 4.6% (over 6% for goods alone) it is testimony to US competitiveness in a relatively sluggish world, helped by energy production (shale fracking) though that mostly expresses itself in lower imports. It is unlikely that exports will be so supportive in future quarters. The reverse is the case for consumer spending. It is only up 2.3% over four quarters, despite good jobs growth and buoyant real incomes. The labour force may still be suffering from ‘GFC-shock’, as the decline of unemployment below 6% has not led to any acceleration of hourly pay gains above the past couple of years’ 2-2¼%; no doubt the overhang of discouraged workers no longer in the labour force is part of the explanation. One result is rapid growth of jobs, as labour prices itself into work. Jobs growth is now over 2%. Average hours are also on the up, so that nominal labour income is rising by well over 4%. With core inflation of 1½%, real incomes are rising by about 3%. Only an upswing in the savings rate (see chart overleaf) is holding back consumer growth. But both the savings rate and inflation are likely to subside in future months. The savings rate ‘predicted’ by the current level of household wealth is about 3%, versus Q3’s actual 5.5%. As consumers gain confidence from the growth of jobs and the economy, some narrowing of this gap can be expected – and in the form of less savings, not a relapse of wealth. Meanwhile the cyclically adjusted growth of hourly productivity is about 1½%, so that hourly pay gains of 2-2¼% suggest only ½% or a little more on unit labour costs. So core inflation could head down from 1½%, while the cut in energy costs and cheaper imports as the dollar appreciates should cause headline inflation to undershoot the core. All this is very favourable for consumer prospects. With business cap-ex growing faster than GDP, housing up somewhat, and government spending no longer falling, US growth is secure for several quarters.
Charles Dumas
[email protected]
LSR Global Leading Indicators | November 2014
6
USA Data Trends Our US leading indicator still strong Leading Indicator
Confidence interval around our lead indicator GDP, qoq
3% 2%
3%
1%
2%
0%
1%
75%
50%
25%
10%
GDP qoq
0%
-1%
-1%
-2%
-2%
-3% 1994
1998
2002
2006
2010
2014
-3% 2008
2010
2012
2014
Source: Datastream, LSR
Source: Datastream, LSR
US 4-quarter real GDP growth, with contributions
US durable goods orders & equipment spending
GDP bus. cap-ex net exports
consumer sp. inventories
4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 2010 Q3
2011 Q3
2012 Q3
2013 Q3
2014 Q3
3-mth/3-mth change, % saar
non-def'ce cap'l gds orders ex-airc'ft equip't spending, real 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Sep-99
Sep-02
Sep-05
Sep-08
Sep-11
Source: BEA, Datastream, LSR
Source: Datastreat, LSR
US personal savings rate, % of pers disp inc
US broad money & private bank credit
'predicted' by regression v wealth/PDI ratio
12-month % change
predicted
LSR M3 bank credit from private sector
actual
12%
Sep-14
15%
10%
10%
8% 6%
5%
4%
0%
2%
-5%
0% 1982 1986 1990 1994 1998 2002 2006 2010 2014 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Source: BEA, Fed, Datastream, LSR
-10% Sep-94
Sep-98
Sep-02
Sep-06
Sep-10
Sep-14
Source: Fed, Datastream, LSR
LSR Global Leading Indicators | November 2014
7
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China China's domestic weakness Our LI ticked up slightly on the month but components with a longer lead show weakening further out. Liquidity has tightened as capital left China in droves in Q3, deflation has intensified and domestic demand remains in the doldrums. Domestic economy weak and jury still out on external drivers
Changing nature of Chinese growth means care over LI interpretation
Aggressive easing abroad could force China’s hand on RMB devaluation
Our LI showed a mild uptick. The brighter spots were in real M1 growth in H1, equities and cement production. However, all of these are showing weakness further out. Cargo growth and business climate survey already show moderation. The picture is mixed on the external front. Continued strength of the US LI point to further export upswing, while the real effective exchange rate disagrees. While a short lived and moderate uptick may be fair, our LI is probably over predicting the level of growth. The characteristics of Chinese growth are evolving. Externally, the historical relationship between the US LI and Chinese GDP may be less useful as the massive loss of competitiveness China has suffered over the last decade means increasing exports to the US is now an uphill struggle. Recent export strength and strong profits growth have been impressive in this context. The deflation of export prices may have been enough to stem the loss of competitiveness at the level of output prices, if not in terms of unit labour costs. The pickup in the US had appeared to be helping to ease this deflation, easing the margin squeeze. But even in PPI terms, China’s real effective exchange rate is above its long run averages and PPI has recently re-deepened its deflation. Granted, this return to more aggressive deflation could in part be driven by the weakness of commodity prices. It also has not yet been reflected in export prices themselves. But the export price indices are quite unreliable over short periods of time. Moreover the export upswing has stalled in the last couple of months. On the domestic side, our LI is weighted more toward the ‘old guard’ drivers. These drivers are quickly running out of steam so their old relationships with growth may be misleading. In any case, real M1 and then cement have the longest lead out of the components included and show weakening further out. Annual broad money growth too has slowed to 12.9% in September, down from average rates of 14.1% in the year before. Our M3 figure may have been artificially boosted by the return of shadow banking products. But there is also good reason for liquidity to have tightened. The authorities have actually been supporting the RMB against large capital outflows (perhaps by more than a net $200bn) in Q3 by selling FX reserves. However, the authorities are unlikely to continue this behaviour for long. A substantial portion of these capital outflows may well have been deleveraging FX liabilities. Keeping the RMB high effectively subsidises these operations. But the pressures of overvaluation continue to damage growth prospects. Moreover, the renewal of the Japanese QE program and yen devaluation will entail a further round of deflation exporting for Japan and China is particularly exposed to this. In fact, Japan’s renewed QE program did tempt the PBOC into a slightly lower RMB fixing.
Freya Beamish
[email protected]
LSR Global Leading Indicators | November 2014
8
China Data Trends LI probably put out by changing nature of growth Leading indicator
As China leaders seem to be accepting lower growth
GDP qoq
7% 6%
75%
50%
25%
10%
GDP qoq
8%
5%
6%
4% 3%
4%
2% 2%
1% 0%
0%
-1% -2% 2004
2006
2008
2010
2012
2014
-2% 2008
2010
2012
Source: DS, CEIC, LSR
Source: DS, CEIC, LSR
Broad money growth slowed sharply in Sep
Record "hot" net capital outflows in Q3
LSR M3 YoY
change in reserves less current account + FDI balance, $ bn 4-quarter moving average
3m a r
50% 40%
200
30%
100
20%
0
10%
-100
0%
-200
-10% Sep-05
Sep-08
Sep-11
2014
Sep-14
-300 2009 Q3
2010 Q4
2012 Q1
2013 Q2
2014 Q3
Source: CEIC, LSR
Source: CEIC, LSR
Export upswing stalled in last three months
Cement production growth showing weakness further out
Level US$ bn
Exports
Imports
250
Cement production, month on 3m average, 3m ago
200
15%
150
10% 5%
100
0% 50
-5%
0 May-00
-10% Dec-03
Jul-07
Source: CEIC, LSR seasonal adjustment
Feb-11
Sep-14
-15% Mar-07
Sep-09
Mar-12
Sep-14
Source: CEIC, LSR seasonal adjustment
LSR Global Leading Indicators | November 2014
9
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Euro area Euro area flirts with deflation Euro area data remain sluggish but there is nothing to suggest the region is on the verge of a new recession. Nevertheless, with inflation close to zero and oil prices continuing to slide, the ECB remains under pressure in its battle with deflation. Growth is low but no sign of new recession
Over the past month, much of the news on the euro-area economy has come from policy decisions rather than economic data. The ECB has been particularly busy, publishing its much anticipated Comprehensive Review of euro-area banks while simultaneously starting to buy private-sector assets. On balance, these are positive developments but they are unlikely to radically alter the economic outlook. That outlook remains weak, but not recessionary. Overall, the latest data continue to point to tepid but positive growth, rather than outright contraction. For example, both the services and manufacturing PMIs remain at low levels, having edged down through the course of 2014, but they are well above typical recession levels. The European Commission’s surveys paint a broadly similar picture. And while official production data dropped sharply in September, this was caused by erratic German distortions. The euro area's dismal recovery Real GDP, 2008=100
GDP
Continuation of 2000-2008 trend
120 115 110 105 100 95 90
global crash
85 80 00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Source: Eurostat
Deflation risks have intensified with oilprice drop
Our LI also signals a recent loss in momentum, but it remains consistent with continued expansion during the second half of the year. Nevertheless, this is an environment in which the ECB is sure to continuing missing its inflation target by a wide margin. In October, euro-area inflation remained close to zero, at just 0.4%. With oil prices continuing to slide lower, the risk of a negative CPI print has clearly increased, compounding deflation fears and piling more pressure on the ECB. Just a few weeks into its ABS and covered bond purchasing scheme, there is already speculation that the central bank could soon announce a plan to buy a wider range of corporate bonds. This is possible but it is unlikely to be a ‘game changer’. We think only a large programme of government bond purchases would provide the scale needed to fight euro-area deflation.
Dario Perkins
[email protected]
LSR Global Leading Indicators | November 2014
10
Euro area Data Trends Leading indicator edging down
Confidence interval on leading indicator
percentage change on quarter
percentage change on quarter
Leading Indicator
GDP, % q/q
2%
75%
50%
25%
10%
GDP qoq
2%
1% 0%
1%
-1%
0%
-2%
-1%
-3%
-2%
-4% 1994
1998
2002
2006
2010
2014
-3% 2008
2010
Source: LSR estimates
Source: LSR estimates
Credit contraction
Industrial slowdown
percentage change on year earlier
percentage change on 3-months
M3
15% 12% 9% 6% 3% 0% -3% Sep-74
Sep-82
Sep-90
Sep-98
Sep-06
Sep-14
Manufacturing PMI (RHS) 15 10 5 0 -5 -10 -15 -20 -25 Aug-08
65 60 55 50 45 40 35 Aug-10
Source: ECB
Source: Eurostat
PMIs fade
Confidence holds up
above 50 signals growth
consumer confidence index
services
2014
Industrial output, YOY% (LHS)
Bank credit to private sector
18%
2012
Aug-12
30 Aug-14
Confidence
manufacturing
Reported major purchases
56.0 54.0
20
52.0
10
50.0
0
48.0
-10
46.0
-20
44.0
-30
42.0 Jan-12 Source: PMI
Jan-13
Jan-14
-40 Sep-08
Sep-10
Sep-12
Sep-14
Source: European Commission
LSR Global Leading Indicators | November 2014
11
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Japan Abe, Kuroda & ¥ take the plunge After April’s consumption tax increase practically destroyed Abenomics, further QE and yen depreciation was essential – but other currencies are not standing still.
Consumption tax increase paradoxically thwarted sustained higher inflation
1% YoY real GDP growth in 2013 – less in 2014
Without further yen decline, inflation to relapse toward zero
But other currencies are joining in …
… ‘race to the bottom’
Abenomics, at best a high-risk policy from the start, was directly conflicted by the previous government’s delayed fiscal tightening – the consumption tax increase from 5% to 8% last April 1st. (Another increase to 10% is scheduled for October 1 st next year.) As the goal is to establish sustained 2% inflation, the artificial gains in the CPI caused by the higher tax rate do not count, but they have sharply reduced real household incomes and consumption – much reducing the chances of achieving the overheating needed to ensure sustained 2% inflation. Mr Abe acknowledged the damage over a year ago by saying he would offset the implicit fiscal tightening by easing corporation tax and enhancing investment incentives. In determining business cap-ex, investment incentives are trumped by profitability and pressures on capacity. So the collapse of consumer spending since April is reinforced by capital spending. The by no means vigorous 2013 real GDP growth of 1%, year-on-year, is likely to be followed by less this year, despite the Q1 boom as consumers pre-empted the tax increase. As the charts overleaf show, real personal consumption was more than 2% down on the year before in the summer months, and new car sales have been down likewise. Machinery and equipment orders, having boomed until Q1, have been falling at about a 35% annual rate since then, and are down year-on-year. Private construction has also weakened, as has housing. While exports at last resumed growth in Q3, they have only just exceeded end-2013 levels despite the massive yen depreciation. It has been clear for several months that further major yen depreciation would be needed to achieve the inflation target. Without it, first, exports are clearly not going to grow much; second, consumers will cease to dip into savings to offset falling real incomes, as import price increases outweigh the modest pace of wage gains; third, the fallback of capital spending – well justified anyhow, given Japan’s extremely low capital productivity – would have no obvious limit. While Mr Kuroda excited the markets last Friday with his announcement of an increased rate of QE to 80 trillion yen (annualised) he had in fact been running QE at this rate for at least three months (see chart overleaf) and this has been reflected in renewed yen depreciation. But while it is down nearly 10% against the dollar from the prevailing rate in January-June, the decline is less significant on a trade-weighted basis, as others are also down, notably the euro, yuan and numerous other emerging market currencies. Japan initiated this ‘race to the bottom’, but is far from sure to win it.
Charles Dumas
[email protected]
LSR Global Leading Indicators | November 2014
12
Japan Data Trends Our LI refuses to validate talk of recovery Leading indicator 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% Sep-07
Confidence intervals of our leading indicator 75% 10%
GDP qoq
50% GDP qoq
25%
6% 4% 2% 0% -2% -4% Jan-10
May-12
Sep-14
-6% 2008
2010
2012
Source: Datastream, LSR
Source: Datastream, LSR
Broad money & credit still sluggish
QE jump started in mid-summer
12-month % change
3-month moving average of incr BoJ hldgs
M2 + CDs
2014
yen/dollar (lh scale) Incr BoJ hldgs of gov't paper, %/GDP
Private sector credit
6% 4% 2%
112
20%
104
15%
96
10%
88
5%
80
0%
0% -2% -4% -6% Sep-04
Sep-06
Sep-08
Sep-10
Sep-12
Sep-14
72 Sep-10
Sep-11
Sep-12
Sep-13
-5% Sep-14
Source: Bank of Japan, Datastream, LSR
Source: Bank of Japan, ESRI, LSR
Real consumer spending still way down
Machinery & equipment orders still slumping 3-mth/3-mth %, saar
personal consumption volume new car sales (rhs, 2-mth average)
80%
110
200
60%
108
180
40%
106
160
20%
104
140
0%
102
120
-20%
100
100
-40%
98 Jan-12
Sep-12
Source: Datastream, LSR
May-13
Jan-14
80 Sep-14
-60% Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Source: Datastream, LSR
LSR Global Leading Indicators | November 2014
13
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Canada Canada's exports helped by dovish BoC The recent weakness in oil prices suggests some downside risks to Canada’s economic growth. But the strong US recovery and a relatively weak currency, reinforced by the dovish central bank rhetoric, should offer some support to exports. Weak oil prices will weigh on growth...
… but the economy should benefit from strong US growth
Our leading indicator slipped back in September, but remained at a level consistent with above-trend growth over the next two quarters. However, the recent weakness in oil prices, if it persists, will have an impact on output growth. The BoC has estimated that crude oil prices of $85/barrel will knock ¼ pp off growth in 2015. That has been factored in their latest forecasts, where the BoC expects 2015 growth to be 2.4%. Our view is that global demand deficiency and shale-fracking should continue to keep oil prices depressed. In such case, it will take longer for the output gap to be eliminated, perhaps during 2016. Despite this, activity outside oil & gas production has been firm. Growth of output excluding mining, quarrying and oil and gas extraction was tracking at 3% on a 3month over 3-month annualised basis in August. But the underlying strength of the economy could be stronger than the figure suggests due to maintenance shutdowns in some auto and oil and gas companies during the summer. More importantly, export growth, which tends to lead to business investment growth, has accelerated in recent months, thanks to the strong US recovery. That suggests businesses may be spending more to support growth going forward. Survey signals stronger business investment Business investment, % yoy, lhs
Business investment in next 12m, rhs
30%
40
20%
30 20
10%
10
0%
0
-10%
-10
-20% -30% Q399
-20 -30 Q203
Q107
Q410
Q314
Source: Datastream, LSR
While some monetary policy accommodation is still warranted, with house prices rising 5% and few signs of mortgage growth cooling off, the BoC may soon start to worry about household vulnerabilities. Not surprisingly, in his recent speech, the Governor (like some other central bankers) emphasised that macroprudential measures have made the system much safer than before. Facing an economy with spare capacity, perhaps this is the only game in town to deal with financial risks.
Michelle Lam
[email protected]
LSR Global Leading Indicators | November 2014
14
Canada Data Trends Leading indicator signals strong growth ahead Leading indicator
Confidence intervals of our leading indicator
GDP
3%
75%
50%
25%
10%
GDP qoq
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
-2%
-2%
-3% 1994
1999
2004
2009
2014
-3% 2008
2010
2012
2014
Source: Datastream, LSR
Source: Datastream, LSR
Household sector has persistently run a deficit
Inflation at target but largely due to one-off factors
Sectoral financial balances, % GDP
CPI inflation, % yoy
Current account General government Household Business
Headline
Core
5% 4%
8%
3%
4%
2%
0% -4%
1%
-8%
0%
-12% 1984 Q2
1991 Q4
1999 Q2
2006 Q4
2014 Q2
-1% Sep-99
Sep-02
Sep-05
Sep-08
Sep-11
Sep-14
Source: Datastream, LSR
Source: Datastream, LSR
Household debt at record high
Money and credit trends supportive of growth
Household debt, % gross disposable income
Broad money and credit, 12-month change
Total debt (% GDI) Mortgage debt (% GDI) 180%
LSR broad money measure Household and business credit 20%
160% 140%
15%
120% 10%
100% 80%
5%
60% 40% Q290 Q293 Q296 Q299 Q202 Q205 Q208 Q211 Q214 Source: Datastream, LSR
0% Sep-79
Sep-86
Sep-93
Sep-00
Sep-07
Sep-14
Source: Datastream, LSR
LSR Global Leading Indicators | November 2014
15
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UK UK holding up despite headwinds Our LI suggests the UK should continue to grow above its trend rate, though at a slightly slower pace. Given subdued price pressures and weaker euro area growth, the BoE is likely to remain on hold this year. Growth has slightly moderated
Our leading indicator slipped back to below 1% in September and suggests some moderation in the current recovery. Indeed, the latest GDP data show that growth started to lose some momentum in Q3 – output growth slowed to 0.7% qoq from 0.9% in Q2. That is not a surprise given that our leading indicator has been signalling weaker momentum for some time. The somewhat weaker picture in the manufacturing sector suggests a stronger sterling and weaker euro area growth have begun to bite. In Q3, while service-sector output expanded at a rate consistent with its average since the recovery began in 2013, manufacturing production rose at the slowest pace since then. Goods, unlike services which compete more on quality than on price, are more sensitive to the currency movements.
Softer domestic demand possible
With growth outside the US still tepid, domestic demand becomes the important source of growth. But weak wages and a cooling housing market suggest households may not offer a strong boost, at least in the near term. In H1, household consumption rose at a solid 2.5% annualised pace, but recent retail sales data suggest it may soften in H2. Moderating consumer prices should provide some support, but the current weak wage growth may be holding back consumption. In addition, housing activity appeared to have stabilised in recent months, adding some downside risks to residential investment. Meanwhile, the upward revision to business investment in recent years suggests some downside risks to the BoE’s investment forecast, as less investment might be needed for the future than previously estimated. Moreover, despite the significant improvement in credit conditions of large and medium-sized businesses, those of small businesses remain tight. Nearly half of the small businesses continued to report that credit was unaffordable. That may also limit the strength of business investment.
Subdued price pressures mean the BoE should remain on hold in 2014
While the moderation in growth has reduced the Bank’s urgency to tighten policy, perhaps more importantly, there have not been apparent signs of rising price pressure. Domestically, unit labour costs, stripping out the base effects of tax forestalling last year, have only been broadly flat in the year to Q2. Externally, low import price inflation and falling commodity prices have continued to exert downward pressure on prices. However, with hiring difficulties and the vacancy-to-unemployment ratio edging higher, the tightening of the labour market should eventually be translated to some real wage growth next year. This should prompt the Bank of England to tighten policy rates in H1 2015.
Michelle Lam
[email protected]
LSR Global Leading Indicators | November 2014
16
UK Data Trends Leading indicator signals above-trend growth
Confidence intervals of our leading indicator
UK leading indicator & GDP qoq
Leading indicator
GDP qoq
3%
75% 10%
50% GDP qoq
25%
3% 2%
2%
1%
1%
0%
0%
-1%
-1%
-2%
-2%
-3%
-3% 1994
1998
2002
2006
2010
2014
-4% 2008
2010
2012
2014
Source: Datastream, LSR
Source: Datastream, LSR
Inflationary pressures have been subdued…
…partly reflecting weak wages
CPI inflation, % yoy
Average weekly earnings of the private sector, % yoy, 3mma
CPI Overall
CPI All Services
CPI All Goods 6 5 4 3 2 1 0 -1 -2 Sep-98
Regular pay
Total pay (inc. Bonus)
8% 6% 4% 2% 0%
Sep-02
Sep-06
Sep-10
Sep-14
-2% Aug-02
Aug-05
Aug-08
Aug-11
Aug-14
Source: Datastream, LSR
Source: Datastream, LSR
Credit availability for small businesses fell
Credit growth improving in the household sector
Credit availability to small businesses
M4 lending, 12-month change
Past 3m 30 25 20 15 10 5 0 -5 -10 -15 Q1 2010
PNFCs
Next 3m
Secured lending to households Unecured lending to households 25% 20% 15% 10% 5% 0% Q3 2011
Source: Datastream, LSR
Q1 2013
Q3 2014
-5% Sep-98
Sep-02
Sep-06
Sep-10
Sep-14
Source: Datastream, LSR
LSR Global Leading Indicators | November 2014
17
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Germany German slowdown spooks investors Awful German industrial and export data for August compounded investor fears of a global slowdown, but seasonal distortions are mostly to blame. That said, the economy has less underlying momentum than earlier in the year. Summer holidays have distorted German data
German industrial production, factory orders and exports plunged in August, leaving some investors worrying about a new global recession. In fact, this was eerily reminiscent of the collapse in factory orders that marked the 2008 crash. But this time, temporary forces seem to have driven the deterioration. In particular, an unusual summer holiday pattern in Germany led to the simultaneous shutdown of a number of factories. As a result, car production dropped sharply (-25%) but has since rebounded. On this basis, production should recover strongly in September. Still, abstracting from this short-term volatility, our leading indicator suggests the economy has lost underlying momentum since the start of the year. German summer slowdown percentage change on year earlier
production
orders
30 20 10 0 -10 -20 -30 -40 Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Source: Bundesbank
But underlying growth is weaker than earlier in the year
Though the weak orders data are included in our leading indicator, it is survey data that has caused the trend deterioration. The IFO index has been sliding all year and the composite PMIs, while somewhat volatile recently, have also tracked lower. The problem is undoubtedly Germany’s continued reliance on exports. Demand from China and many other EMs has been soft recently, while geopolitical uncertainty and new sanctions on Russia have hit activity in central and eastern Europe. Deteriorating export demand has also become a drag on investment, which earlier in the year seemed to be the economy’s best hope of sustained recovery. Meanwhile, consumer demand hasn’t been strong enough to compensate for this drag despite relatively buoyant confidence and the robust jobs market. With consumers reluctant to borrow or reduce their saving, weak real incomes have held back spending. In the short term, declining oil prices may provide a boost to real incomes, but this will eventually fade. So while Germany may not be on the brink of recession, neither can it provide the growth engine the euro area so desperately needs.
Dario Perkins
[email protected]
LSR Global Leading Indicators | November 2014
18
Germany Data Trends Leading indicator down sharply
Confidence interval on leading indicator
percentage change on quarter
Percentage change on year earlier
Leading Indicator
GDP, qoq
3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% 1994
1998
2002
2006
2010
2014
75%
50%
10%
GDP qoq
3% 2% 1% 0% -1% -2% -3% -4% -5% 2008
2010
Source: LSR estimates
Source: LSR estimates
Subdued credit
IFO signals slowdown
percentage change on year
100 = long-term average
Nominal M3
Private credit
Current conditions
16%
25%
2012
2014
Expectations
125 12%
115
8%
105
4%
95
0%
85
-4% Sep-98
Sep-02
Sep-06
Sep-10
Sep-14
75 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14
Source: Bundesbank
Source: IFO
PMIs have eased
Consumers still confident
above 50 signals growth
difference from long-term average
Manufacturing 58 56 54 52 50 48 46 44 42 40 Jan-12 Source: PMI
Jul-12
Jan-13
Jul-13
services
Jan-14
Jul-14
25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 Sep-86 Sep-91 Sep-96 Sep-01 Sep-06 Sep-11 Source: European Commission
LSR Global Leading Indicators | November 2014
19
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France France - picking the least worst option The French lead indicator has declined slightly. Growth should remain positive, but a significant acceleration during the next two quarters now seems unlikely. Monetary indicators continue to flat-line.
Tight monetary conditions in the real economy
Money and private sector lending remain stuck around their current levels, with no significant growth in either variable for the last year. This tightness of monetary conditions is reflected in the inflation expectations of households. These have been declining for the last two years and took a further leg down during the last month. The relative healthy report given to French banks in the recent Asset Quality Review conducted by the ECB emphasises the point that the main factor limiting French credit growth is not the supply of, but the demand for, credit. Interest rates charged to private sector borrowers are not materially higher in France than in Germany. Lower inflation expectations are also a factor helping to reduce wage growth. The relatively inflexible nature of the French labour market, however, means that these declines have been slight and, as they have been matched by falling productivity growth, have had almost no impact on unit labour costs. The inability of France to improve its competitiveness means that the recovery in exports after the financial crisis has been both shallower and shorter than most euro area economies. In fact, export values peaked in 2013 and have moderately declined over the last twelve months, despite continued growth in global trade. As a result, the overall trade balance also stopped improving around a year ago. Over the last month the French government has been under pressure from the European Commission to produce a budget that is fiscally tighter and would move the deficit back toward the 3% of GDP limit in the Growth and Stability Pact. The budget deficit is currently above 4% of GDP and the IMF forecast it to remain around this level for the next two years.
The difficult choices facing French policymakers
The French government faces a series of policy dilemmas. With the private sector unable or unwilling to borrow to invest and spend, the government deficit is a key source of final demand stability for the French economy. Greater austerity at this point would further restrict the ability of companies and households to undertake the deleveraging that is required in order to return to a balanced pattern of growth. Similarly, the type of labour market reforms that are required to increase the economy’s long run rate of growth would negatively impact wages in the short term and, by implication, household demand. Such policies would be likely to be unpopular in even the most opportune of economic circumstances. With deflationary pressures building any labour market reform that was undertaken in the near future would be all the more painful and unpopular.
Richard Batley
[email protected]
LSR Global Leading Indicators | November 2014
20
France Data Trends Lead indicator weak but steady
Confidence intervals of our leading indicator
Leading indicator
GDP, qoq
2.0% 1.5%
3%
1.0%
2%
0.5%
75%
50%
25%
10%
GDP qoq
1%
0.0%
0%
-0.5% -1.0%
-1%
-1.5%
-2%
-2.0% 1994
90%
1998
2002
2006
2010
2014
Source: Datastream, LSR
-3% Nov-87
Nov-96
Nov-05
Nov-14
Source: Datastream, LSR
Monetary expansion at stall speed
Wage inflation falls in line with productivity
% y/y
%y/y
M3
MFI lending to private sector
20
Hourly earnings
Labour productivity
6
15
4
10
2
5
0
0
-2
-5 -10 2002
2004
2006
2008
2010
2012
2014
-4 2000
2002
2004
2006
2008
2010
Source: Datastream, LSR
Source: Datastream
Export improvement halts and begins to reverse
Inflation expectations falling
€bn
Consumer price expectations, next 12-months
Annual export value
Inflation expectations
460
2012
2014
12-month MA
10 420
0 -10
380
-20 -30
340
-40 300 2006
2008
Source: Datastream
2010
2012
2014
-50 2010
2011
2012
2013
2014
Source: Datastream
LSR Global Leading Indicators | November 2014
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Italy Italy stuck in recession While Italy is no longer in technical recession, it isn’t growing either. LSR’s leading indicator has dropped sharply and, together with recent business surveys, points broadly to stagnation in GDP during the second half of 2014. The Italian economy remains stagnant
The good news is that Italy is no longer ‘technically’ in recession. Thanks to a small upward revision to GDP in 2014 Q1, the country has no longer recorded two consecutive quarterly declines in output. The bad news is that this technicality is rather meaningless. Data released over the past month confirms that the economy is struggling to grow and while output has stabilized since the recession in 2011-13, there is no real ‘recovery’ to speak of. Survey data remains at weak levels, industrial orders have started to deteriorate again and credit remains tight. LSR’s leading indicator, though stable in September, has dropped sharply since the spring and now points to stagnation in GDP during the second half of the year. Italy’s malaise looks set to continue. No real signs of recovery percentage change on year earlier
GDP
Household consumption
Investment
Govt consumption
10 5 0 -5 -10 -15 00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Source: National sources
Cyclical and structural forces are to blame
Italy’s weakness is a combination of structural and cyclical factors. On the structural side, the economy has suffered from a sclerotic labour market, an inefficient services sector, low levels of R&D and a trend decline in competitiveness. These have contributed to a structural deterioration in productivity. But cyclical problems are also compounding these factors, especially a weak banking sector and tight macro policies. Italian banks were one of the euro area’s weakest links in the ECB ‘s recent AQR, accounting for a third of the region’s total capital shortfall. This explains why banks have continued to restrict credit and private-sector borrowing costs have remained higher than in other core euro-area countries. Monetary and fiscal policy are too tight given the cyclical position of the economy. Italy’s real exchange rate is at historically high levels and the government is restricted to running a primary budget surplus.
Dario Perkins
[email protected]
LSR Global Leading Indicators | November 2014
22
Italy Data Trends Leading indicator down sharply
Confidence interval on leading indicator
percentage change on quarter
Percentage change on quarter
Leading indicator 2% 2% 1% 1% 0% -1% -1% -2% -2% -3% -3% -4% 1994
GDP, qoq
75%
50%
25%
10%
GDP qoq
3% 2% 1% 0% -1% -2% -3% 1998
2002
2006
2010
2014
-4% 2008
2010
2012
Source: LSR estimates
Source: LSR estimates
Weak monetary developments
Stagnant Italian trade
percentage change on year
volumes, percentage change on year earlier
M3
Exports
Private-sector credit
15% 10% 5% 0% Sep-94
Sep-99
Sep-04
Sep-09
Sep-14
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: Bank of Italy
Source: Eurostat
Orders declining again
Consumers staying confident
Difference from long-term average
difference from long-term average
Domestic 20 10 0 -10 -20 -30 -40 -50 -60 -70 -80 Oct-96
Imports
20 15 10 5 0 -5 -10 -15 -20 -25
20%
-5% Sep-89
2014
Export
125 120 115 110 105 100 95 90 85
Oct-00
Source: National sources
Oct-04
Oct-08
Oct-12
80 Sep-99
Sep-04
Sep-09
Sep-14
Source: European Commission
LSR Global Leading Indicators | November 2014
23
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Spain Spain – the end of quick wins The Spanish leading indicator was little changed on the month, growth is likely to remain positive during the near-term, but the slowing of export demand growth is likely to impact the overall pace of expansion. Monetary conditions improve – very slowly
Our lead indicator for Spain suggests that growth should remain around its current level heading into 2015. Monetary conditions in the real economy remain very tight – with annual broad money growth flat and private sector lending continuing to decline. However, the pace of this contraction is progressively lessening and this will ultimately have a positive impact on economic activity. In the absence of private sector deleveraging we would expect persistent downward pressure on lending growth and other monetary aggregates. It would seem that very rapid jobs and/or wage growth is required to overcome this structural impediment in the Spanish economy.
Fiscal deficit likely stuck around current level
The IMF recently downgraded its expectations for a narrowing of the Spanish budget deficit, with only a marginal improvement now expected during 2015. As the slowdown in external demand continues this will make it politically difficult for the Spanish government to continue tightening fiscal policy. A continued acceptance by the EU Commission that Spain will not meet the 3% of GDP deficit limit of The Growth and Stability Pact seems likely. Spain is among a group of countries in the euro area, most prominently including France, where the anticipated pace of fiscal tightening has slowed over the last year. Job vacancy levels that declined sharply during and immediately after the financial crisis have stopped falling over the last year. An increase in hiring from its current low level of around 30,000 jobs per month is essential if the current glacial pace of reductions in unemployment is to accelerate during 2015.
Post-crisis ‘quick wins’ are over...
... growth will now require
This is a critical component of the potential rotation toward domestic demand as current labour market improvements are not consistent with wage increases. Wage growth has been approximately flat since the start of the year and some improvement in this variable will be essential if domestic demand is able to expand on a sustainable basis. During 2014 trade has actually been a small net negative on overall GDP growth, overall growth has remained positive because of the improvement in domestic demand away from the very low, euro crisis-induced levels of 2012 and 2013. The period of these ‘quick wins’ in terms of annualised growth rates is drawing to close. A more substantive improvement in domestic economic conditions than is currently evident will be required to prevent a slowing rate of growth.
Richard Batley
[email protected]
LSR Global Leading Indicators | November 2014
24
Spain Data Trends Leading indicator stabilises
Confidence intervals of our lead indicator
Leading Indicator
GDP qoq
2.0% 1.5%
3%
1.0%
2%
0.5%
1%
0.0%
75%
50%
25%
10%
GDP qoq
0%
-0.5%
-1%
-1.0%
-2%
-1.5% -2.0% 1994
90%
1998
2002
2006
2010
2014
-3% Nov-08
Nov-10
Nov-12
Source: Datastream, LSR
Source: Datastream, LSR
Monetary conditions improving slowly
Vacancies still not back at 2011 levels
% y/y
Nov-14
Unemployment rate M3
Private sector lending
Vacancies (000s, RHS) 30
120
25
100
20
80
15
60
-5
10
40
-10
5
20
10 5 0
-15 2009
2010
2011
2012
2013
2014
0 2006
0 2008
2010
2012
Source: Datastream
Source: Datastream
Budget deficit improvements to level out?
Trade improvement turns around
Budget deficit, % GDP
Monthly trade balance (€bn)
12
Monthly trade balance
10
2014
3-month MA
1
8
0
IMF forecast
6
-1 -2
4
-3
2
-4 -5
0 2008 2009 2010 2011 2012 2013 2014 2015 Source: IMF
-6 2011
2012
2013
2014
Source: Datastream
LSR Global Leading Indicators | November 2014
25
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Korea Korea buffeted by Japan - again Our LI is pointing to continued weak growth as stimulus continues to disappoint. Deflation is re-emerging. Consumer demand has shown some recovery but not enough to carry the economy forward. Meanwhile, Japan heaps on the pressure. Stimulus disappointing but will probably continue
Our LI is showing the stimulus is not going according to plan. Real M1 is indeed indicating stronger growth. The positive reform story and promise of dividend payouts was initially taken well by markets. However, Korea did poorly in the recent global sell off and continues to suffer as Japan promises more QE. The export basket is positively exposed to the recovery in the US and this is picked up by the presence of the US LI in our Korean LI, but the alarming build up in the inventory to shipment ratio indicates all is not well. Korea has done surprisingly well against Japan’s first round of Abenomics but with the renewal of efforts from the BoJ the pressure is starting to mount. In fact, Japan’s manufacturing sector already appears competitive in productivity adjusted labour cost terms vis a vis its own history and potentially against Korea. Korea's loss of competitiveness vis a vis Japan is leading to greater BoK aggression Unit labour costs, US$, manufacturing sector only, 1973-Oct 2014 average = 100, NB post 2012 are nominal exchange rate moves only)
Japan Korea Japan currency moves from 2012
200 150 100 50 0 1974
1984
1994
2004
2014 to oct 31
Source: BLS, LSR
BoK – difficult task of balancing domestic and external problems
Exports to China were up mildly in Q3 and in a brief recovery mode. The rest of Asia was a mixed bag but the US continues to provide a sturdy source of demand. Meanwhile, the value of exports to Europe slumped 11% in Q2. Deflation has already re-emerged in Korea at the producer price level, with PPI down -0.4% on the year and 3m annualised rates of deflation at 1.6%. Prices in the Korean economy are particularly sensitive to oil prices so some of the decline can be attributed to global oil price weakness. But CPI inflation has also dropped yet further away from the BoK’s medium term target to 1.2%. Despite a household debt problem and already sufficient monetary growth, the BoK will likely have to continue being more aggressive as Korea is dragged into the currency wars.
Freya Beamish
[email protected]
LSR Global Leading Indicators | November 2014
26
Korea Data Trends Our LI continues to show weak growth Leading indicator
As stimulus continues to disappoint
GDP qoq
5%
6%
75% 10%
50% GDP qoq
25%
4% 4%
3% 2%
2%
1% 0%
0%
-1% -2%
-2%
-3% -4% Sep-05
Sep-08
Sep-11
Sep-14
-4% 2008
2010
2012
2014
Source: Datastream, CEIC, LSR
Source: Darastream, LSR
Broad money and non-financial private credit growth has gained strength
Korea’s break from deflation coming to an end PPI 3m annualised CPI YoY
Annual broad money growth Annual private non-financial credit growth 25% 20% 15% 10% 5% 0% May-02
Jun-06
Jul-10
Aug-14
10% 8% 6% 4% 2% 0% -2% -4% -6% -8% May-11
Jan-13
Sep-14
Source: CEIC
Source: Datastream
The won has weakened on a trade weighted basis but pressure coming from Japan’s devaluation
Weak car growth points to continued domestic demand weakness
REER, month on 3m previously GDP (rhs)
10% 5% 0% -5% -10% -15% -20% -25% Sep-06 Source: Datastream
May-09
Jan-12
4% 3% 2% 1% 0% -1% -2% -3% -4% Sep-14
Cars, month on 3m previously GDP (rhs) 80% 60% 40% 20% 0% -20% -40% Sep-06
May-09
Jan-12
4% 3% 2% 1% 0% -1% -2% -3% -4% Sep-14
Source: Datastream
LSR Global Leading Indicators | November 2014
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India India's recovery hopes strengthen While the 8% rate of real growth in Q2 is unsustainable, there are increasing signs that India’s recovery is on track and that the economy will continue to outperform many emerging markets. India benefits from improved macro fundamentals, political stability and policy credibility; external windfalls to also help
The Indian economy is benefitting from improved macro fundamentals, political stability and policy credibility. It also stands to gain from external windfalls, in particular lower gold and oil prices. We expect India to continue to outperform many of its emerging market peers. However, for growth to pick up to a sustainably higher 7% rate, a more concerted reform effort is required. India’s total debt is relatively low, as is the economy’s vulnerability to China’s structural slowdown. A young population and a declining dependency ratio hold out the prospect of a demographic dividend. There is scope for easy productivity gains given the tremendous potential for catch-up growth and improved competitiveness. Since last year’s taper tantrum India has chalked up the most progress of any major emerging market in reducing its immediate external vulnerabilities. The general election held in May has given a huge boost to India’s medium-term growth prospects. The country’s strong government (the largest majority in three decades), make it easier to enact reforms. More importantly, the new government’s policies implemented so far show that Prime Minister Modi and his Bjartiya Janata Party are more reform-minded than their predecessors. The compact nature of Modi’s cabinet was a good step towards enhancing coordination and efficiency amongst relevant ministries. The government’s first budget, with its emphasis on fiscal consolidation, reduction in subsidies, and a push for investment, was another step in the right direction. Policymakers are yet to propose big bang reforms, but they are taking incremental steps. They have announced measures to reduce red tape and labour market rigidity. They have introduced time-bound processing online of environmental and forest clearance permits. New Delhi has acted to increase foreign direct investment (FDI) in the railway, insurance, defence and construction sectors and has set timelines for ruling on FDI applications. Financial reforms are also moving in the right direction.
But for growth to reach a sustainable 7%, tougher measures are needed
While there are clear signs of growth recovery and rebalancing, we have highlighted that the 8% rate of increase in real GDP in Q2 is unsustainable. More recent data points vindicate our view. Public spending, which was the key growth driver in Q2, has slipped as fiscal consolidation gets underway. Industrial production, while gradually picking up, is still subdued. After a strong pick up during May-August, car sales have eased in September. Our leading indicator has turned around modestly. Indeed for growth to reach a sustainable 7%, tougher measures are needed.
Shweta Singh
[email protected]
LSR Global Leading Indicators | November 2014
28
India Data Trends Leading indicator turning round modestly
Confidence intervals of our leading indicator
GDP qoq (Smoothed) Leading indicator (Smoothed)
6%
75% 10%
50% GDP qoq
25%
4% 4%
3%
2%
2%
0%
1% 0% 2000 2002 2004 2006 2008 2010 2012 2014
-2% 2008
2010
2012
Source: CEIC, DS, Bloomberg, LSR
Source: CEIC, Datastream, LSR
Industrial production still subdued
Exports show strength
2014
IP, sa, 3M/3M (l.h.scale)
Exports, sa, 3M/3M (l.h.scale)
IP, nsa, Y/Y, 3MMA (r.h.scale)
Exports, sa, Y/Y, 3MMA (r.h.scale)
6%
20%
30%
60%
4%
15%
20%
40%
2%
10%
10%
0%
5%
0%
-2%
0%
-10%
-4%
-5%
-20%
-10%
-30% 2008
-6% 2008
2011
2014
20% 0% -20% -40% 2011
2014
Source: DS, Bloomberg, LSR
Source: CEIC, LSR
Mixed signals for private consumption
Credit growth slows sharply, but broad money growth supportive of trend growth, %y/y
Passenger car sales, 3M/3M
Nominal M3
Two-wheeler sales, 3M/3M
Private commercial credit
20% 30% 25%
10%
20% 0%
15% 10%
-10%
5% -20% 2012
2013
Source: Bloomberg, CEIC, LSR
2014
0% 2006
2008
2010
2012
2014
Source: Bloomberg, CEIC, LSR Source: CEIC, DS, LSR
LSR Global Leading Indicators | November 2014
29
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Australia Aussie dollar battles lower Our LI shows weak growth as most of the components tick lower. China has provided some support to exports in Q3 but this seems likely to be a short rebound after the softness earlier in the year. US strength has helped tame the Aussie dollar. Weakness in domestic demand
AUD depreciation winning out for now
Ample liquidity but nowhere useful to go
China supportive in Q3
Our LI continues to point down, with commodity prices, equities, consumer confidence, cars and orders all weakening. On the other hand, real M1 growth has levelled out but remains high. This is included in our LI rather than broader gauges due to the better fit with short term movements. Our Chinese LI is actually not included in the Australian LI. The relationship appears to be too erratic. In fact, US industrial production proved more useful over the relevant time period and this is the bright spot in our Oz LI. The Aussie dollar continues to be buffeted as a currency particularly exposed to the weaknesses and strengths of other economies. As the US activity picks up and China slows, the pressure of AUD overvaluation should ease and these effects have dominated over recent months. But Australia is receiving large inflows from China as the economic slowdown and crack down on graft drive money out. In Q3 Chinese capital outflows were particularly large. Meanwhile, the US may well be picking up but the rest of the world isn’t. The response has been to foist liquidity on economies that have shown little sign of rebalancing. Consequently, this money continues to seek a home abroad. Australia is a prime destination so while the recent devaluation will help, the RBA may still find cause to re-assert the need for a lower currency. Nevertheless, annual broad money growth continues to run at around 8%, more than enough to support growth at trend. Credit growth has been driven mainly by housing but there has also been some stronger business credit growth. The ample liquidity seems to be feeding more into asset price inflation (real estate) than goods price inflation, which continues to decelerate. Wage growth remains at lows. Overall the labour market remains soft and sending mixed signals. Participation has increased, a positive sign for the longer term but a depressant on wage growth for now. This puts unit labour cost growth at roughly zero. Business confidence and conditions weakened in recent months but without the margin pressure associated with rising ULCs, there is some positive movement in non-mining capex. However, this has not been enough to offset the decline in mining capex. And vacancies growth is not yet re-asserting itself as positions being destroyed while mining declines and public jobs are cut back are not being adequately offset by creation of new positions elsewhere. Weaker commodity prices are also keeping a cap on inflation. Chinese domestic demand remains weak as the authorities seem to be accepting slower growth. Meanwhile, the aggressive Australian iron ore supply side has carried on seemingly regardless, being further down the cost curve than the Chinese producers. The result has been a continual decline in prices. The Australian economy may receive a recovery boost in Q3 though as exports to China crawl out of the trough.
Freya Beamish
[email protected]
LSR Global Leading Indicators | November 2014
30
Australia Data Trends Our LI points to weaker growth Leading indicator
Growth has been more stable since China's 08-09 stimulus petered out
GDP qoq
2.0% 1.5%
75%
50%
25%
10%
GDP qoq
2%
1.0% 0.5%
1%
0.0% -0.5%
0%
-1.0% -1.5% May-08
Jul-11
Sep-14
Source: DS, RBA, LSR
Broad money growth nevertheless remains buoyant Broad money, YoY
3m annualised
14%
-1% 2008
2010
2012
2014
Source: DS, RBA, LSR
Orders point to more weakness NAB actual orders
GDP qoq (rhs)
15
1.5%
10
12%
1.0%
5
10%
0
8%
-5
0.5% 0.0%
-10
6%
-15
4%
-0.5%
-20
2%
-1.0%
-25
0% Mar-2011
May-2012
Jul-2013
Sep-2014
-30 Feb-08
-1.5% Aug-14
May-11
Source: RBA
Source: DS
Our USLI indicates weaker but still strong growth
The economy is still struggling to create jobs
US LI 2.0%
1.5%
1.5%
1.0%
20%
1.5%
0.5%
10%
1.0%
0%
0.5%
-10%
0.0%
-20%
-0.5%
-30%
-1.0%
1.0% 0.5% 0.0%
0.0%
-0.5%
-0.5%
-1.0% -1.0%
-1.5% -2.0% Jan-08 Source: DS, LSR
Job vacancies, month on 3m average previously GDP qoq (rhs)
GDP (rhs)
May-11
-1.5% Sep-14
-40% Nov-08
Oct-10
Sep-12
-1.5% Aug-14
Source: DS
LSR Global Leading Indicators | November 2014
31
Back to Contents
Brazil Brazil's rebound remains elusive Slowing growth and uncomfortably high inflation and current account deficit are symptoms of Brazil’s acute cyclical and structural headwinds. With the least reformist presidential candidate re-elected, the economy’s rebound remains elusive. Real growth in August rose at a below-trend rate
The sharp pickup in real growth in July was driven by base effects and was unsustainable, as highlighted in our last GLI publication. Indeed, economic activity in August rose at a below-trend 1.1% rate, significantly slower than the 6.6% pace of increase in the previous month. The economy continued to contract on a 3m/3m basis and our leading indicator does not forecast a meaningful turnaround over the next 36 months. Brazil is battling fierce cyclical and structural headwinds as both domestic and external growth drivers have lost steam. The result of the recently held presidential election dispels turnaround hopes. The hard-commodity supercycle led by China is past its peak, hurting the metalsdependent Brazilian economy. Brazil has also lost more competitiveness than many of its EM peers due to faster wage gains and slower labour productivity growth. It suffers from some of the highest tariff, tax and interest rates of any EM as well as one the lowest investment rates. Its savings rate is also inadequate and the current account deficit is unsustainably high. These macroeconomic imbalances have worsened due to the interventionist and populist policies of centre-left President Dilma Rousseff who won a second term in office.
Inflation expectations are inching up
Inflation expectations are inching up and headline CPI inflation has exceeded the upper limit of the target (4.5%-/+2%) for four months in a row despite the government’s price caps. Should the new government fail to undo the existing excesses and embark on productivity-enhancing reforms with urgency, growth may be stuck at a 1% rate at best for 3-5 years. The surprise 25 bps hike in the policy Selic rate in the October monetary policy meeting is a good start, albeit a lot more is required. Inflation pressures and expectations uncomfortable high and rising Headline CPI (%y/y) Core CPI, trimmed mean smoothed, (%y/y) CPI IPCA inflation in 12 months (%y/y) - Central Bank Survey 8% 7% 6% 5% 4% Oct-08
Oct-10
Oct-12
Oct-14
Source: DS, Bloomberg, LSR
Shweta Singh
[email protected]
LSR Global Leading Indicators | November 2014
32
Brazil Data Trends Leading indicator points to weak growth
Confidence intervals of our leading indicator
Leading indicator (Smoothed) GDP, qoq (Smoothed) 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% 1994
75%
50%
25%
10%
GDP qoq
6% 4% 2% 0% -2% -4% 1998
2002
2006
2010
-6% 2008
2014
2010
2012
2014
Source: DS, LSR
Source: Datastream, LSR
Growth slows in August
Industrial production continues to struggle
Index of economic activity (IBC-BR)
(%MoM, sa) (l.h.scale) (%YoY, sa) (r.h.scale)
(%MoM, sa) (l.h.scale) (%YoY, sa) (r.h.scale)
2
4%
10%
5 1
3
0
1
-1
6% 0%
2% -2%
-4%
-1
-2 Aug-11
Aug-12
Aug-13
-3 Aug-14
-6% -8% Aug-11
Aug-12
Aug-13
Source: DS, LSR
Source: DS, Bloomberg, LSR
Exports losing sheen
Monetary conditions ease slightly
-10% Aug-14
%3m/3m
Exports
M4 (y/y)
Imports
Private credit (y/y)
40%
15% 10%
30%
5% 20%
0% -5%
10%
-10% -15% Sep-11 Source: DS, LSR
Sep-12
Sep-13
Sep-14
0% Aug-04 Aug-06 Aug-08 Aug-10 Aug-12 Aug-14 Source: DS, LSR
LSR Global Leading Indicators | November 2014
33
Back to Contents
Mexico Mexico recovery in motion In spite of some pullback in August, we remain optimistic on Mexico’s growth outlook. Inflationary pressures are rising and will likely nudge the central bank towards a hawkish tone. We expect the August slowdown to be temporary
Real economic activity eased a little in August, although we expect the slowdown to be temporary. Our leading indicator forecasts a healthy pace of growth over the next 3-6 months led by the manufacturing sector. Indeed, the strength in industrial production, in particular manufacturing, is one of the key reasons underpinning our constructive outlook on Mexico. Economic recovery in the US will gather pace and will be a tailwind for Mexican manufacturing. Almost 80% of Mexican manufactured goods are bound for the US. Mexico has also made more gains in competitiveness than many of its trading peers, especially China. A strong start, apart from geographical proximity and free trade agreements, raises Mexico’s chances of enjoying a greater share in US imports. Equally important is Mexico’s healthy progress on domestic structural reforms which have the potential of boosting productivity, reducing costs and enhancing competitiveness. The chart below shows that our story is playing out well.
Inflationary pressures are building
Meanwhile, inflationary pressures are building up as domestic demand strengthens. Headline CPI inflation has exceeded the upper limit of the central bank’s target (2±1%) three months in a row and would have likely surpassed it last month as well. The Mexican peso is more exposed to US$ strength than many other EMs due to the dominant role played by the US in its exports, exposing the economy more to exchange rate pass-through. Besides, the pickup in core services inflations reveals demand pull pressures. As economic growth gather pace, the negative output gap will narrow, nudging the central bank sooner than later towards a hawkish stance. The US boost to Mexican manufacturing US New Orders
Mexico industrial production (%YoY, 3MMA, r.h.scale)
80
8% 4%
60
0% 40
20 2006
-4% -8% 2008
2010
2012
2014
Source: DS, Bloomberg, LSR
Shweta Singh
[email protected]
LSR Global Leading Indicators | November 2014
34
Mexico Data Trends Leading indicator points to economic strength
Confidence intervals of our leading indicator 75% 10%
Leading indicator (Smoothed) GDP qoq (Smoothed)
4%
50% GDP qoq
25%
4% 3%
2%
2% 1%
0%
0% -1%
-2%
-2% -3% 1998
2002
2006
2010
2014
-4% 2008
2010
2012
2014
Source: DS, LSR
Source: Datastream, LSR
Private consumption gradually recovering
Exports show base effect-driven pullback Exports, sa, USD terms, %3M/3M, saar (l.h.scale) Exports, sa, USD terms, %YoY, 3MMA (r.h.scale)
Auto sales (%YoY, 3MMA), (l.h.scale) Same store sales, %YoY, 3MMA 40%
16% 11%
20%
6% 0% 1% -20%
-4%
-40% 2002
-9% 2005
2008
2011
25% 20% 15% 10% 5% 0% -5% -10% -15%
2014
6% 4% 2% 0% 2012
2013
2014
Source: DS, Bloomberg, LSR
Source: DS, LSR
Inflation pressures building up
Monetary conditions supportive of trend growth
Headline inflation (%YoY)
Nominal M4, %YoY
Core inflation (%YoY)
Non-financial bank credit (%YoY)
7%
8%
25%
6% 15%
5% 4% 3% 2%
5%
Central Bank's target (3-+1%)
-5%
1% 0% 2006 Source: DS, LSR
2008
2010
2012
2014
-15% Sep-04
Sep-09
Sep-14
Source: DS, LSR
LSR Global Leading Indicators | November 2014
35
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