- Despite robust economic activity statistics in the US, the ISM indicator pointed to a further slowdown in employment growth, in line with our scenario
- In Switzerland, although inflation accelerated slightly due to the depreciation of the franc, it remains clearly below 2%, which should lead the SNB to maintain its policy unchanged
- Manufacturing indicators in India have exceeded their pre-demonetisation levels. In the euro zone, PMIs remained at high levels
United States – robust economic activity statistics, but the ism index points to a further slowdown in employment growth
Initial US data published at the start of this year for December 2017 were encouraging. Business confidence continued to increase, new capital goods orders were up 7.9% compared to last year, and vehicle sales remained high. The increase in the ISM Manufacturing Index from 58.2 in November to 59.7 in December was driven above all by the improvement in the outlook for production (up from 63.9 to 65.8) and new orders (up from 64 to 69.4).
The only sub-component of the ISM Manufacturing Index that lost ground was employment. Since its high of 60.3 in September 2017, the ISM employment sub-component has deteriorated little by little each month. Although the December level, at 57, still indicated expansion, the trend of this sub-component is in line with the slight slowdown in employment that we have observed over the past quarters in the employment reports.
- Job creation has slowed. On average, 238,000 jobs were created per month between 2014-2015. In 2016, this average fell to 187,000, then to 171,000 in 2017. This slowdown took place after a catch-up effect following the financial crisis.
- The percentage of small businesses with few or no qualified candidates increased from 24% in January 2010 to 50% in December 2017.
These figures are consistent with the maturity of the US job market. However, the tension did not lead to a marked increase in nominal wage growth in 2017, which remained flat at 2.6% on average. In 2018, shortages in skilled labour could lead to a slight acceleration in wages. The increase in inflation that we anticipate is nevertheless likely to limit the rise in real wages. Thus, weak purchasing power and the slowdown in job creation are set to limit growth in household spending. We maintain our forecast that corporate investment will be the main factor supporting GDP growth in 2018, which we anticipate at 2.5%, as companies, rather than households, will benefit from the new tax measures.
Switzerland – despite the depreciation of the franc, inflation remains contained
In Switzerland, inflation continued to grow slightly, reaching 0.84% in December after 0.79% in November. However, although the drop in the franc favours price increases, inflation remains moderate and is unlikely to lead the Swiss National Bank (SNB) to change its accommodative monetary policy. Indeed, at its last monetary policy meeting on 14 December 2017, the SNB raised its 2018 inflation forecast just slightly, from 0.4% to 0.7%, and maintained its forecast at 1.1% for 2019. It does not expect inflation to reach its target objective of 2% before the second half of 2020 despite the recent depreciation of the franc. Moreover, the SNB highlighted the fact that the drop in the reference interest rate applicable to lease contracts in June is weighing on rent increases, which slowed to 0.7% y-o-y in November vs. 1.4% in August. As rents represent 20% of the consumer basket, this is set to contribute to limiting the rise in inflation and thus support the SNB’s decision to maintain its monetary policy unchanged.
India, China and the Euro zone – strong leading indicators
Leading manufacturing indicators in India continued to rise, and stand at 54.7, which is higher than the level before the demonetisation operation of end-2016. At the same time, the return of the leading indicators related to services to expansion levels, at 50.9, is also encouraging, and underpins our scenario of a gradual normalisation of economic activity in India following the shock of the demonetisation and introduction of a unified VAT in July 2017. In China, leading indicators illustrate the good health of services and dynamic manufacturing activity in December. In the euro zone, the composite PMI reached 58.1 in December, its highest level since February 2011. This indicator highlights the favourable short-term outlook of the euro economies, which benefit from stronger domestic demand. This outlook could nevertheless deteriorate somewhat in the coming months. According to our scenario, the appreciation of the euro is likely to weigh on economic activity in 2018.
Lisa Turk - Economist, the United States
Matthias van den Heuvel - Economist
François Léonet – Economist, Emerging countries
Political hopes, structural challenges
The December 2017 elections saw the victory of Cyril Ramaphosa, South Africa’s deputy president, as the new leader of the African National Congress (ANC), the party currently in power. He replaces Jacob Zuma, South Africa’s president, and leader of the party since 2007. Jacob Zuma has been under pressure from his party to abandon his mandate before the end of his term, with the aim of strengthening the cohesion of the party ahead of the general elections in 2019. Corruption allegations against him, as well as other scandals, have weakened the ANC, which lost control of Johannesburg and Pretoria in the municipal elections in 2016.
The new leader of the ANC, Cyril Ramaphosa, is considered to be pro-growth and favourable to investment, as illustrated by the appreciation in the rand and the easing of bond yields that followed his election, despite the downgrading of the country’s credit rating by Standard & Poor’s in November. However, the close result of the vote – Cyril Ramaphosa won by just 179 votes (2,440 votes vs. 2,261) more than his opponent, Nkosazana Dlamini-Zuma, the ex-wife of Jacob Zuma – and the equal balance of the six key positions held among Ramaphosa’s and Dlamini-Zuma’s supporters leaves him little room for manoeuvre to carry out his structural reforms, particularly with regard to economic stimulus and the budget. This factor is all the more critical as the country has recorded a budget deficit since 2009, currently at 4.2% of GDP, along with an increase in the public debt burden, from 29.7% to more than 50% at present. This is a reminder of the importance of Moody’s upcoming review in March of the country’s credit rating, currently under negative watch. A downgrade would mean South Africa losing its investment grade status – both for domestic and foreign currency debt – and the country’s exclusion from bond indices, which would lead to capital outflows and forced sales, notably by index funds. In light of this, the presentation of the 2018 budget at end-February will be crucial to the credit review and future direction of the country’s fiscal policy. The target budget deficit for 2017-2018 has been revised upward, from 3.1% of GDP to 4.3%, under the effect of a drop in budgetary revenue due to the slower pace of growth in the country.
In terms of real growth, structural difficulties are still present, such as the decrease in the country’s productivity over the past few years. Representing close to 60% of the South African economy, private consumption continues to be restricted by a continuing high unemployment rate, which currently stands at 27.7%, and at more than 50% for the 15-24 year age bracket. Household indebtedness remains high, at 72.5% of disposable income, keeping consumer credit growth trends moderate. Weak consumer confidence is also visible at the corporate level, maintaining the investment cycle of private companies in negative territory. The capacity utilisation rate is below its pre-crisis level, which does not encourage companies to invest. The trend in exports is partly linked to the growth path in China – the country represents 10% of South African exports, for the most part minerals and metals – for which we anticipate a moderate deceleration in 2018. The current account deficit, at 2.1% of GDP, is thus set to prevail in 2018, raising the question of its financing through external capital and conceding increased importance to Moody’s decision in March. Lastly, in light of the Treasury’s restrictive tone, intended to stabilise public debt below 60%, it is highly unlikely that budgetary leverage will be used to any significant extent.
- Political renewal brings hope, especially after the corruption scandals, the deterioration of public accounts and the downgrading of the credit rating the country has been hit with over the past few years. While the most recent figures of the leading manufacturing indicators, down from 48.6 to 44.9, reflect a deterioration in activity in December, the “expected business conditions” component jumped from 50 to 61.9, indicating an improvement in the business climate, which could support corporate investment in the upcoming months.
- The appreciation of the rand is also set to have a positive effect in the short term by maintaining inflation within the central bank’s target range of 3-6%, enabling the South African Reserve Bank to maintain its key rates unchanged at 6.75%, or even lower them in the first quarter of 2018.
- In the medium term, the country nevertheless remains under the threat of a downgrade of its credit rating, especially as Cyril Ramaphosa’s room for manoeuvre within the ANC appears limited and structural obstacles remain. For these reasons, after the appreciation phase of the past weeks, we expect that the rand will be subject to downward pressure in the upcoming months.