Macro Highlights July 06th 2015

Analysis - 7/7/2015

Our Investment Research Department publishes a weekly newsletter with a round-up on the main economic developments and news flow.

The Greek crisis intensifies

As agreed, Greek voters were called to the polls yesterday to say yes or no in a referendum to the latest bailout plan put forward by the country’s creditors. If the yes side had won, an agreement could have been reached among the parties concerned, an agreement that we could sum up as follows: "financial aid in return for reforms". The markets would have much preferred that outcome.

But that is not what happened: the no side won with a 60% majority. To some extent the magnitude of this victory can be put down to the low turnout, but that does not change the result. The question that all investors are asking themselves now is the same one that keeps coming back relentlessly. Will the Greek people’s decision mean that their country will automatically leave the Euro Zone? (...)

The economy is growing

In recent months investors’ interest in the Euro Zone has been confined to the political wrangling between Greece and its creditors. The heated debate has tended to drown out significant improvements made on the economic front. Leading indicators, including gauges of business and consumer confidence as well as lending volume (see chart), are clearly turning up. They are now compatible with annual GDP growth in the 1.5-2% neighbourhood, right in line with our economic scenario.

The main factor underlying the upturn in GDP growth is the buoyancy of private consumption. Although the drop in the unemployment rate from 12% to 11% is nothing to write home about, it has added to households’ purchasing power and enabled them to open their wallets a bit more. The improvement in the labour market has moreover bolstered confidence about the sustainability of the economic upswing, a “feel-good effect” that has not been observed since the 2008 financial crisis. (...)

Taking the pulse of PMIs

By and large, the purchasing managers indices compiled by HSBC for the major emerging economies’ manufacturing sectors project an encouraging image. While the aggregate gauge remains below 50 points (the dividing line between expanding and contracting economic activity), the BRICs have seen the outlook for their manufacturers stabilise, suggesting that economic conditions are not deteriorating to any great extent.

The HSBC PMI for China stands at 49.4 points, marking a minor month-over-month increase. While optimists view this as an early sign of domestic recovery, we will have to wait for next month’s reading to determine how strong and sustainable the upturn in momentum will be. (...)