First-half learnings & challenges for the summer

Macro Highlights - 7/26/2017

Key Takeaways of the week with Lisa Turk, Economist - United States, Sophie Casanova, Economist - Central Banks, François Léonet, Economist - Emerging Markets and Matthias van den Heuvel, Economist

First-half learnings & challenges for the summer


  • In the US, the economic activity has strengthened and GDP growth could reach 2.3% for the first half of the year. During the summer, the Fed could release further information on its forthcoming moves

  • In the eurozone, the economic activity has been dynamic, but the ECB remained accommodative. This summer, comments from ECB officials regarding a tapering will be key for the euro and yields

  • The Swiss and Japanese economies have been supported by their exports, but monetary conditions should remain accommodative due to the low inflation environment

  • In China, the growth environment has continued to show positive trends despite tighter financing conditions. In Brazil, the political risk is still present. In India, VAT has just been introduced


United States

In the US, the first half of 2017 was satisfactory. GDP saw year-on-year growth of 2.1% for the first quarter, compared with an average of 1.6% for 2016. The first six months were marked by industrial production growth moving back into positive territory, averaging out at 1.2% versus -1.2% in 2016, as well as the dollar depreciating 7% in terms of its nominal effective exchange rate, and inflation making its return, with 2.2% on average since the start of the year, compared with just 1.3% in 2016. The upturn in consumer prices has notably enabled the Federal Reserve to raise its Fed Funds rate by 25 basis points on two occasions this year, while in June it announced future plans to scale back its balance sheet. Lastly, the job market continued to strengthen over the first half of the year. Unemployment and underemployment dropped from 4.8% and 9.4% respectively in January to 4.4% and 8.6% in June.

GDP growth is expected to accelerate to 2.4% for the second quarter according to our forecasts, driven primarily by an increase in business investment. This scenario is supported by the latest activity figures, such as the acceleration in new capital goods orders in April and May or the reactivation of 96 rigs in the second quarter. Overall, GDP growth could therefore climb to 2.3% on average for the first half of the year, before dropping slightly over the second half of the year, with an average of 2%. [...]


During the first half of the year, the eurozone benefited from the upturn in the manufacturing cycle, linked in particular to the slight acceleration in Chinese growth. The mood of optimism has also benefited from the increase in new orders, the signs of reflation and therefore increasing output prices. These positive dynamics are reflected in the Markit PMI and European Commission surveys. The composite PMI climbed to a six-year high in the second quarter (average of 57), while confidence levels among industrial operators and households are up to their highest levels on record since 2007, just before the financial crisis.

These stronger surveys are reflected in improved real activity figures. For instance, GDP growth accelerated in the first quarter of 2017 to 1.9% year-on-year and 0.6% quarter-on-quarter. This growth was once again driven by domestic demand. Private consumption has continued to support growth, benefiting from the improvements on the job market (9.5% unemployment for the first quarter of 2017, versus 10% in 2016) and the increase in household confidence. According to real activity indicators, these solid growth trends continued in the second quarter. Illustrating this, industrial production showed 4% year-on-year growth for May, its highest rate since 2011, while retail sales and vehicle registrations both saw their growth accelerate. [...] 


With annualised quarter-on-quarter growth of 1.0%, Japanese GDP recorded its fifth consecutive quarter of positive growth between January and March, for the first time in more than 10 years. At the start of 2017, the Japanese economy was able to count on a good performance of its export sector. As Japan has a comparative advantage for producing capital goods, it has fully benefited from the improvement in the global manufacturing cycle and the yen's depreciation (-10% against a basket of currencies since October 2016).

Manufacturing production and exports of goods delivered average year-on-year growth of 4.7% in volume and 11.1% in value respectively for the first half of the year. With 3.7% year-on-year growth for the first quarter, business investment has accelerated on the back of this increase in production volumes. At the same time, the job market is showing signs of tensions: the number of job offers per applicant was 1.49 in May, its highest level since 1974. Despite the workforce shortage, businesses are still reluctant to increase pay levels due to weak potential growth and the fact that the majority of jobs are guaranteed for life. This weak wage growth is therefore continuing to undermine private consumption and inflation. [...] 


The Swiss economy’s recovery has continued to move forward, although more slowly than expected in the first quarter of 2017. However, quarterly GDP growth accelerated compared with the previous two quarters to reach 0.3%. This acceleration reflects strong growth for both exports (3.7% versus the fourth quarter of 2016) and investment in capital goods (1.7%). According to the latest KOF and PMI leading indicators, which both came in well above their long-term averages in June, GDP growth is expected to consolidate in the second quarter, confirming our forecast for quarter-on-quarter growth of 0.5%. However, certain more structural elements are continuing to undermine Swiss economic growth. On the one hand, the property market slowdown is putting the brakes on residential investment, and on the other hand, the household savings rate remains high, limiting private consumption growth.

In terms of monetary developments, inflation has moved back into positive territory following two years of deflation, averaging out at 0.4% for the first half of 2017. The Swiss franc has depreciated following E. Macron's election – which has reduced the political uncertainty in Europe – and the ECB's decision to abandon its easing bias on rates. The EURCHF is currently close to 1.10, its highest level for over a year. Indicating that the Swiss National Bank is satisfied with the franc's current level, it did not carry out any transactions in net terms on the foreign exchange market during May and June, while it increased its stock of foreign currencies by nearly CHF 54 billion between January and April to tackle the strong franc. [...]


Real GDP growth in China has come in surprisingly high, with 6.9% for the first two quarters of 2017. The Chinese economy seems to be in a position to deliver GDP growth in line with its official target of 6.5% for 2017. Industrial production accelerated significantly in June to 7.6%, compared with 6.9% on average for the first five months of the year. Producer price inflation peaked at 7.8% in February before dropping to 5.5% in June, paving the way for industrial business profits to achieve average growth of 18%, compared with -2% in 2015 and 8.9% in 2016.

Support from exports has helped this extension of the Chinese economic cycle. Exports show average growth of 14.9% for the first half of the year in yuan. According to official figures, China's net exports climbed from a -0.4% contribution to GDP in 2016 to a positive contribution of 0.3% for the first two quarters of 2017. This upturn has been driven primarily by exports of electrical and electronic goods.

Linked to the good level of Chinese exports to the US, up by around 10% in nominal terms since the start of the year, China's trade surplus with the US has increased in the past few months, raising fresh questions about Chinese-US trade relations under the Trump administration. Following the agreement reached in April between D. Trump and Xi Jinping, with a 100-day plan to reduce the United States' trade deficit with China – and which has led to very specific agreements such as the resumption of US beef exports to China – the Comprehensive Economic Dialogue from 19 July between the two countries has not had any tangible results. [...]


In Brazil, the manufacturing purchasing managers’ indices have moved back into their zone for economic expansion, confirming our scenario for GDP growth to return to positive territory in 2017. GDP recorded positive quarterly growth over the first part of 2017, after contracting for the eight previous quarters, buoyed primarily by exports. However, business investment and household consumption are still contracting.

However, the slowdown in the manufacturing purchasing managers’ indices in June highlights the fragile nature of Brazil's recovery and its dependence on the judicial developments concerning the Temer administration. The next few weeks will therefore be decisive for the President, who could be found guilty of passive corruption by the Supreme Court if two thirds of the members of parliament vote in favour of the charges mid-August. While the assembly's current configuration seems favourable to M. Temer, minimising the probability of him being relieved of his duties, these developments are undermining the government and are likely to delay the adoption of the reforms required for the country's budget consolidation, including the unpopular pension reform. [...]


India's economic activity slowed down in the first quarter of the 2017 calendar year, with real growth dropping from 7.0% for the last quarter of 2016 to 6.1%. This slowdown is partly linked to the demonetisation from November 2016, when INR 500 and INR 1000 notes were withdrawn from the economy, which had a bigger than expected impact on household consumption. The first quarter's contraction in business investment highlights the delicate situation facing India's public banks, whose non-performing loans represented almost 10% of the loans awarded at the end of 2016.

Under these conditions, Indian credit is seeing weak growth, with around 6% over 12 months, which will continue to undermine private investment. The purchasing managers’ indices for the services segment show a significant increase for the first six months of this year, indicating a still encouraging environment for growth. At 1.5%, consumer price inflation is down to an all-time low, reflecting the contraction in food prices, which is giving the Reserve Bank of India additional leeway to boost local activity. [...]


Analyses of Lisa Turk, United States Economist, Sophie Casanova, Economist, Central Banks, François Léonet, Economist, Emerging Markets and Matthias van den Heuvel, Economist