PMIs take a break in the eurozone, Brexit negotiations get underway and Chinese shares join the MSCI indices

Macro Highlights - 6/27/2017

In short
  • PMIs take a break in the eurozone, Brexit negotiations get underway and Chinese shares join the MSCI indices
  • Russian Focus: Persistent structural imbalances

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

PMIs take a break in the eurozone, Brexit negotiations get underway and Chinese shares join the MSCI indices

  • In the eurozone, the manufacturing PMI is up, but the composite index is down slightly. These surveys confirm our scenario for solid growth over the second part of 2017 in the eurozone
  • Brexit negotiations have got underway, confirming the European Union’s strong position. This negative asymmetry for the UK could adversely affect the pound exchange rate
  • The inclusion of local Chinese shares in the MSCI indices is a positive sign, but it will take a long time for the whole market to be integrated. The impact on incoming capital flows is therefore expected to be moderate

Eurozone: manufacturing PMI sees further growth

In the eurozone, the latest data indicate that the acceleration seen in terms of economic activity for nearly a year now has taken a break in June. Markit’s composite purchasing managers index (PMI) recorded its first drop since September 2016, down from 56.8 in May to 55.7 in June. However, this indicator is still firmly in positive territory and is still at its highest level for the past six years for the whole of the second quarter. While the composite index is down, this reflects a contraction in the services PMI, from 56.3 in May to 54.7 in June, faced with a slowdown in new orders for the service sector. The manufacturing index has continued with the sustained growth seen since August 2016, climbing from 57.0 in May to 57.3 in June. This trend reflects the change in the European Commission’s Economic Sentiment Indicator, which dipped slightly in May due to a minor drop in confidence for services and retail sales. [...]

Brexit: pre-trade agreement negotiations launched on 19 June

The negotiations concerning the conditions for the Brexit got started this week and have already confirmed the asymmetry in terms of the balance of power between the European Union and the UK.

Firstly, the British negotiator D. Davis agreed to several demands put forward by his European counterpart, M. Barnier. The negotiations therefore started off well, as planned, on 19 June, despite the UK’s political instability following the Conservatives’ failure in the general election. The British negotiator also agreed to the sequencing for negotiations requested by the European Union, with a first phase to establish the terms of the UK’s exit from the EU before the phase to negotiate new relationships can be launched.

Secondly, there is a growing divide in the UK between different points of view on how to proceed with the negotiations. Chancellor of the Exchequer P. Hammond has clearly distanced himself from the position set out by Prime Minister T. May, declaring himself in favour of a “soft” Brexit. The main concern of the British Minister of Finance is to ensure that the UK’s exit from the European Union does not see part of London’s financial services - particularly its clearing houses trading in euros - relocate to the eurozone. While the European Commission presented a proposal for the supervision of clearing houses with the relocation of “super-systemic entities” last week, P. Hammond and the Governor of the Bank of England, M. Carney, have advocated maintaining the “current models” with increased “regulatory and supervisory cooperation”. [...]

China: local shares in the MSCI indices

In China, the inclusion of local shares, or A-shares, in the MSCI indices validates the Chinese authorities’ efforts to make it easier for international investors to access their domestic markets. However, a total inclusion looks likely to take years due to the constraints involved with the repatriation of capital that has been invested, the need for better corporate governance and the management of liquidity flows. The impact on incoming capital flows is therefore expected to be limited.

To enjoy reading the full analyse of Matthias van den Heuvel, Economist, Sophie Casanova, Economist, Central Banks, and François Léonet, Economist, Emerging Markets:





Persistent structural imbalances

  • According to preliminary figures, year-on-year real GDP growth came to 0.5% in the first quarter for Russia, confirming its emergence from the recession, in line with the trend that began at the end of 2016

  • This strengthening of growth is expected to continue over the coming quarters, supported by domestic growth and the upturn in business investment

  • Over the longer term, the potential for growth is still being held back by the country’s dependence on energy prices, non-optimal redistribution of oil revenues and unfavourable demographic trends


After seven consecutive quarters in negative territory, Russian GDP growth saw positive growth of 0.3% in the last quarter of 2016. The first quarter of 2017 confirmed its emergence from the recession, with preliminary figures showing GDP growth of 0.5%.

This turnaround in Russian growth is expected to continue over the coming quarters thanks to the strengthening of private consumption and business investment. Up from an average of USD 45 per barrel in 2016 to USD 53 in the first part of the year, the level of oil prices is more favourable for the Russian economy. The slowdown in inflation – cooling from 7.3% to 4.1% year-on-year thanks in particular to the rouble’s appreciation, versus an average of 15.2% in 2015 – is driving improvements in real wages for households.

Indeed, real wage growth comes to 3.5% over 12 months. In this area, retail sales have partly caught up with wage growth, and this trend looks set to continue, particularly since consumer confidence is picking up (see right-hand chart). Wage growth is expected to be reinforced in a tight job market, marked by the decline in the working population. Despite the economic recession from the past few years, Russia has a low unemployment rate of 5.2%. Business investment is also expected to pick up again, buoyed by the improvement in profits for businesses accompanying the increase in commodity prices.

With the Central Bank of the Russian Federation maintaining its accommodating monetary policy, based on cutting its key rates, this is also expected to help limit the real cost of debt for domestic businesses. From this perspective, the banking environment is showing encouraging signs of improvement. For instance, the trend for non-performing loans has reversed and the Russian authorities have continued to withdraw banking licences from credit institutions considered to be at risk. These advances are likely to support the creation of credit in Russia. [...]

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