Positive trends in Switzerland, recapitalisation in India, political risk in Brazil and manufacturing moderation in China

Macro Highlights - 11/10/2017

Positive trends in Switzerland, recapitalisation in India, political risk in Brazil and manufacturing moderation in China Consumption’s potential for acceleration is expected to be limited for the coming quarters
  • The outlook for the Swiss economy is continuing to improve and prices look set to continue rising, following the Swiss franc’s depreciation since July
  • In India, the Ministry of Finance has announced a programme to recapitalise public sector banks. This is expected to be positive for the credit cycle and domestic investment
  • Political uncertainty remains high in Brazil, raising doubts about the Temer government’s ability to get the pensions reform approved in Congress. In China, the official manufacturing PMI moderated

In Switzerland, leading indicators are continuing to show a very dynamic level of economic activity, confirming our scenario for growth to accelerate over the second half of 2017. The manufacturing PMI has continued to climb, reaching 62 points in October. This is the fifth consecutive month that this index has been above 60, a level that has until now only been seen in periods of very dynamic economic growth. The KOF Economic Barometer also shows that the outlook for the Swiss economy is continuing to improve. Thanks to improvements in the banking sector and processing industry, the index is up to a seven-year high of 109.1.

Alongside this, inflation remained at 0.7% in October, its highest level since 2011. This acceleration in price growth since June (when inflation was 0.2%) has notably been driven by the Swiss franc’s depreciation, pushing up prices for imported goods – which represent 24% of the basket for Swiss consumers – by more than 2% between August and October.

In India, the Ministry of Finance has announced a INR 2,110 billion programme (representing USD 32 billion or 1.3% of GDP) to recapitalise public sector banks over the next two years. These public banks account for nearly 65% of total assets and 90% of total non-performing loans for the Indian banking industry. This recapitalisation programme is expected to be positive for domestic credit, whose growth rate has been slowing down since 2006 faced with the banking sector’s undercapitalisation and the increase in non-performing loans. It is also expected to encourage the investment cycle, whose contribution to the country’s overall growth has recently declined significantly. 64% of the funding for this programme would come from recapitalisation bonds, with an “off-balance sheet” approach, which could be neutral in relation to the country’s fiscal accounts. This point still needs to be confirmed.

In Brazil, the Chamber of Deputies voted on 25 October to not pursue the charges against President M. Temer for obstructing the course of justice and participating in a criminal organisation with the Supreme Court. In August, the deputies had previously voted to drop the corruption charges against him. This time, the weaker level of support from the Chamber of Deputies is undermining M. Temer’s position, raising doubts about whether Congress will be able to secure approval for the unpopular social security and pension system reform, a necessary step for the country’s fiscal consolidation. Social security represents 42% of government spending and accounted for 65% of the increase in the country’s primary spending between 1991 and 2015. This reform aims to ensure a stable level of social security spending for the next 10 years, while Brazil has an ageing population and its retirement age of 59.4 is one of the lowest among OECD countries. If this reform is put back again or a watered-down version is adopted, this would raise questions about the government’s ability to effectively manage its fiscal deficit. This could see the country’s credit rating downgraded. From an economic perspective, the recent key rate cut – from 8.25% to 7.5% – is expected to further strengthen the gradual upturn in private consumption.

Lastly, in China, the manufacturing indicators point to a moderation of its growth trends. More specifically, this can be seen in the official indicator, down from 52.4 to 51.6 for October, reflecting the adverse impacts of stricter environmental regulations on industrial activity and less accommodative credit conditions.   

Matthias van den Heuvel, Économist and François Léonet, Économist, Emerging Markets


US focus: Consumption’s potential for acceleration is expected to be limited for the coming quarters

  • Household consumption growth cooled from 2.9% to 2.6% between the first and third quarters of 2017, despite a drop in the household savings rate…
  • …which was down to 3.1% of disposable income in September, its lowest level since 2008. This could limit its future support for household consumption
  • Alongside this, real wage growth is expected to be moderate. The tax cuts on their own are not expected to be enough to drive any significant acceleration in consumption

Representing 70% of GDP, household consumption is the backbone of the US economy. However, consumption growth has cooled slightly in 2017, down from 2.9% for the first quarter to 2.6% in the third quarter, while the household savings rate dropped from 4.1% of disposable income in February to 3.1% in September chart). Households have saved less in order to consume. While their confidence is at historically high levels, thanks in particular to the positive outlook on the job market and a positive wealth effect, some of the fundamentals underpinning consumption trends have deteriorated. For instance, the household savings rate is close to its pre-crisis levels and well below its long-term average of 6.5%. This lower level of household savings contributed 0.5 and 0.7 percentage points to consumption growth in 2016 and 2017 respectively (see right-hand chart). Since the savings rate will not be able to fall much further and we expect the acceleration in nominal wages to be partially offset by rising inflation, consumption growth could stabilise in 2018. The tax cuts could be one of the only catalysts for accelerating US consumption.

The lower savings rate can be explained by several factors. On the one hand, real disposable income growth has slowed from an average of 3.9% for 2014-2015 to just 1.3% for 2016-2017. This slowdown is notably due to the fact that the gradual upturn in inflation has been stronger than the increase in nominal wages. The contraction in business profits between 2015 and 2016 has also pushed dividends down, reducing their contribution todisposable income growth. Lastly, a wealth effect, factoring in the appreciation in prices for both real estate assets and financial securities, has significantly strengthened consumer confidence, contributing to the reduction in their savings rate.

While the savings rate cannot continue falling indefinitely, the factors that could drive a strong acceleration in consumption are becoming scarce.

  • Consumer credit is not expected to see any significant acceleration again over the coming months. On the one hand, the banks are tightening up their conditions for consumer finance, and on the other hand, they are seeing a drop in demand for consumer loans (see left-hand chart, p.6). If the slowdown in credit card borrowing growth, already seen in 2017, was to continue, this could have a negative impact on consumption growth as it is closely correlated with credit trends. This trend could therefore continue, despite a relatively low level of household debt, representing 104% of their disposable income, compared with over 130% in 2007.
  • The acceleration in wages that we are forecasting could be offset by an upswing in inflation. Slack in the labour market has decreased significantly in 2017. On the one hand, full employment has been reached since mid-2016 according to Congressional Budget Office estimates, with 4.1% unemployment in October, while on the other hand, underemployment, which counts discouraged jobseekers and part-time employees for economic reasons, is down, dropping from 9.4% in January to 7.9% in October. Wages are expected to accelerate over the coming months faced with these tensions on the job market. However, inflationary pressures are also expected to take shape, with a positive output gap (GDP higher than its potential). Alongside this, the dollar’s depreciation by 7.1% since January 2017, based on the nominal effectiveexchange rate, looks set to push up prices for imported goods. The increase in the consumer price index could therefore weaken the positive impact of the acceleration in wages.
  • In addition, while a wealth effect, benefiting from an increase in financial markets and real estate, may have contributed to consumption growth for the past few quarters, we do not expect the coming gains in terms of the wealth effect to be significant enough to kick-start consumption, since valuation levels for financial assets are already very high.


  • The drop in the savings rate may have boosted consumption growth for the past few quarters. It is now close to its pre-crisis levels. We therefore estimate that it is not likely to drive consumption growth in the same proportions as for the last few quarters.
  • We expect the increase in nominal wages over the next few quarters to have a limited impact on consumption growth, given that inflation looks set to rise over the same period.
  • However, certain cyclical elements are expected to pave the way for consumption growth to continue. The good job market figures and high level of consumer confidence are expected to continue to be supporting factors. In addition, the government’s proposed tax cuts could boost consumption slightly in the short term.