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World Economy Review
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| Making Tracks |
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Industrialized Countries;
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| US |
United States of America;
Despite the most recent turbulence caused by the US budget and debt ceiling negotiations, including the government shut-down and almost last minute agreement to raise the debt ceiling until February of next year, the development of the US economy has progressed better than expected. Advanced GDP numbers from the 3Q were higher than in the 2Q and the labour market improvements in October have also continued. Lead indicators also point at a continued acceleration of the economy. However, conditions remain mixed and some weaknesses in the labour market persist. Declining inflation poses some challenges for future monetary policy of the US Federal Reserve (Fed).
With the latest short-term agreement on budgetary issues, and the debt ceiling debate to be postponed again to mid-February, there is some hope that an agreement might be found in the near future. The debt ceiling now ends February 7 and the funding for the government is authorized up to January 15. A broader budget agreement will now need to be found in Congress by December 13, a deadline set by the bipartisan budget conference. After the latest experience in October, there might be a more fruitful base for negotiations to avoid another government shut-down and the risk of a federal default. But given the experience of the past years, any outcome will still be possible, including once again postponing a broad-based agreement.
The advanced 3Q13 GDP growth level was reported at an unexpectedly high level of 2.8% q-o-q seasonally adjusted annualized rate (SAAR). This was again an increase from 2.5% q-o-q in the 2Q13. However, private household consumption increased only by 1.5% and the large reliance on the inventory rising has put some risk on 4Q13 numbers to be lower. Moreover, it remains to be seen how in the consecutive two publications the 3Q GDP number might also change.
Another important issue is the question of any decision by the Fed upon reducing the extraordinary monetary stimulus measures it is momentarily engaged in. With potentially ongoing challenges in Washington, as well as falling inflation (which was at only 1.2% in September) and the unemployment rate still above 7%, the Fed should be expected to act probably more cautiously than it indicated in the past months. The Fed’s decision is of a global importance as this is impacting not only the local economy but, as has been seen by the global reactions in the past months, it also has the potential of having an unwanted effect on those economies that have largely benefited from US dollar investments.
The unemployment rate has increased to 7.3% in October, compared to the September level of 7.2%, and while the job creation numbers have been uplifting, the participation rate has also again been lower at only 62.8%, the lowest since the 1970s. The still muted — while improving — labour market situation has also caused consumer confidence numbers to retreat, which probably might also be a reflection of the uncertainty over the effects of the government shut-down. The consumer confidence sentiment index of the Conference Board fell to 71.2 in October from 80.2 in September. The other very important consumer sentiment indicator of the University of Michigan fell to 72.0 from 73.2.
The manufacturing sector continues improving. The Purchasing Manager’s Index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), increased to 56.4 in October from 56.2 in September. Also, manufacturing order numbers have increased by 3.0% y-o-y in September, after 6.5% in August. Industrial production increased by a healthy 3.2% y-o-y in September, after 2.8% y-o-y in August. The ISM for the services sector — which constitutes more than two-thirds of the economy — increased to 55.4 in October, from 54.4 in September and, therefore, remains at a high level.
The very important housing sector continues to provide mixed signals, seemingly still negatively impacted by rising mortgage rates. Pending home sales fell again in September by 5.6% m-o-m August. They declined by 1.6% in August, 1.4% in July and also stood at minus 0.4% in June, according to the National Association of Realtors. Pending home sales are considered to be a leading indicator of progress in real estate because they track contract signings. Positively, the yearly change of the house pricing index of the Federal Housing Finance Agency (FHFA) has continued at a high level and remained almost unchanged at 8.5% in September, only slightly lower than the August level of 8.6%.
While the momentum in the 1Q seems to have been significantly impacted by the fiscal drag, the performances of the 2Q and 3Q have pointed at some improvements. However, the ongoing fiscal uncertainty, lowered consumer confidence and the still slow improvements in the labour market lead to unchanged GDP growth assumptions. They remain at 1.6% for 2013 and 2.5% for 2014.
Japan;
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| Japan |
Japan continues its recovery. Supported by an ongoing momentum of rising exports and local stimulus measures, most indicators for the past month’s activity are pointing at an improvement. This positive development of the economy has also been reflected in the most recent sentiment gauges and lead indicators, which are pointing at a continuation of this development. With the recent confirmation that the country will move ahead with a planned sales tax increase in April 2014, the necessity of fiscal consolidation, while striking the balance for also additional stimulus, has been made clear by the government, which said Japan has no choice but to accomplish economic recovery and fiscal consolidation at the same time.
The debt issue indeed will need an increasing focus in the future, given the fact that not only the public debt level has risen significantly in past years but that since the newly elected government has, together with the Bank of Japan, supported a loose monetary policy, private household debt has also increased to a relatively high level of almost 110% to GDP. According to the latest IMF estimates, gross debt to GDP in Japan will stand at 244% in 2013 and will be only negligibly lower in the coming year. The budget deficit is forecast at 9.5%. These debt levels are extraordinary and can only be sustained as long as Japan is funding most of this debt domestically. But it seems obvious that while it still can enjoy these high debt levels, it will also need to bring it down in order not to risk unwanted financial repercussion somewhere in its economic future.
Industrial production increased by an impressive 4.8% y-o-y in September, after 0.9% in August and 0.4% y-o-y in July. This has been to some extent be fuelled by rising exports, which increased y-o-y by 11.5% in September, 14.6% in August and 12.2% in July. Another important factor has been improving domestic demand. Retail sales in September rose by 3.1% y-o-y, after an increase of only 1.1% in August.
Sentiment is pointing at a continuation of the current growth momentum. The latest numbers from the PMI, as provided by Markit, shows an increase in the manufacturing sector from 52.5 in September to 54.2 in October, and an increase in the services sector from 53.0 to 55.3. Also, the consumer confidence index level in September, as provided by the Cabinet Office, picked up again, moving to 45.1 compared to 43.0 in August and only slightly lower than this year’s record level of 45.6 in May. Inflation has improved significantly over the past several months but remains much below the targeted level for next year of 2%. While it fell by 0.3% y-o-y in May, it rose by 0.7% in September, after 0.8% in August. However, when taking out food and energy, it was still flat. Also of some concern recently has been the fact that the rises in earnings do not match the inflationary trend and, indeed, earnings declined by 0.1% on average in the 3Q.
By taking into account the latest trends, the 2013 GDP growth forecast remains at 1.9% for the current year. While growth for the current year is relatively well established, the potential for the next year remains to be seen. The increase of the consumption tax is expected to largely impact the 2Q14 growth number, which is now expected to be flat, after a more significant rise in the 1Q14 ahead of the tax rise. Taking into consideration this negative impact and its continued drag for the remainder of the year and also some slower underlying momentum in 2014 due to reduced public spending, the economy’s growth forecast for 2014 remains at 1.5%.
Euro-zone;
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| Euro Zone |
The Euro-zone’s recovery continues, after it had moved out of recession in the 2Q. However, as it has been also reflected in the recent statements of the European Central Bank (ECB), the recovery is modest and remains fragile. Some indicators point at an improvement in the Euro-zone’s output, while mainly the situation of the monetary side of the economy is becoming increasingly challenging. The monetary transmission channel is still largely impaired, inflation for the Euro-zone is at a record low (and only slightly positive), and the banking sector remains weak. In fact, it is keeping financial intermediaries from expanding loan creation and instead focused on shoring up their balance sheets. The recovery is also uneven, particularly with Germany recovering faster than other economies. For example, while industrial production has expanded in Germany in September by 0.9% y-o-y and in August by 0.4% y-o-y, still moderate levels, it has declined in France by 0.9% y-o-y in September and even by 2.0% in August. This pattern among the two largest economies in the Euro-zone highlights the ongoing unbalanced recovery levels within the Euro-zone.
This becomes even more obvious, when considering that some of the economies have still been in decline in the 2Q13 — mainly the two large economies of Italy and Spain — while on average the Euro-zone has moved out of the recession lasting six quarters and has expanded by 0.3% q-o-q in 2Q13. Germany was picking up by 0.7% q-o-q in 2Q13, France’s GDP was rising by 0.5% q-o-q, Italy’s GDP declined by 0.2% q-o-q and Spain’s GDP fell by 0.1% q-o-q. In general, in part supported by Germany’s growth, the Euro-zone is expected to continue its slow recovery from very low levels in the near term. However, while the economy is improving tenderly, the main issues of the Euro-zone remains patchy growth, record unemployment and the impaired monetary transition channel, now exaggerated by very low inflation levels of only 0.7% y-o-y, low compared to the ECB’s target of below but close to 2%.
Another issue reflecting the impaired channel of the monetary financial intermediaries to the private sector has to do with lending to the private sector relative to GDP. This has been at a record low again in September, although the ECB indicated that by October it might turn around. The latest available data from September shows a decline of 3.3%, about the same level as in the preceding two months. Rising market interest rates — as recently observed — are therefore a very unwelcome development. The ECB has made clear again in its latest meeting at the beginning of November that it would not tolerate rising interest rates as this could easily dent the still fragile recovery. Consequently, the weak situation in combination with low inflation has led to the ECB’s decision to lower its key policy rate from 0.5% to 0.25% in this meeting. If the situation continues, it is likely that more extraordinary supply measures might be coming.
The lagging indicators of the labour market have not improved based on the latest data release. The unemployment rate remains at 12.2% in September, unchanged from August. Youth unemployment stood at 24.1% in September, the highest level on record. Among the larger economies, Spain recorded again the highest unemployment rate at 26.6% general unemployment and 56.5% youth unemployment, both unsustainable for the long-term. Taking into consideration that these numbers are harmonized, and taking into account that they do not consider unemployed that have moved out of the social security system or are in education, it becomes clear that there is increasing pressure for reviving growth again in the Euro-zone. Despite the still very weak situation of the labour market, retail trade has increased on a yearly base in September for the first time since April 2011, when it rose by 0.3% y-o-y.
Some of the most recent lead indicators are also pointing to some improvement. The latest PMI for manufacturing stood at 51.3 in October, after 51.1 in September and 51.4 in August. The services’ sector index remained at almost the September level of 52.2, as it reached 51.6 in October. Industrial production for the Euro-zone improved by 1.0% m-o-m in the August and also future production in the Euro-zone’s largest economy (Germany) is indicated to pick up with a manufacturing order growth number of 8.2% in September and 3.0% in August.
Taking into consideration the 2Q GDP number and the ongoing trend, the forecast for 2013 remains -0.3%. The 2014 GDP growth forecast stays also unchanged at 0.7%. It remains to be seen to which extent the economy will manage to rebound in the coming months as many uncertainties prevail. But it will certainly need the larger economies of Germany and France to be able to improve, with the other peripheral economies supporting growth, too.
Emerging markets;
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| Emerging Markets |
Considering Brazil’s first half real GDP growth figure, and the available economic indicators of the 3Q of the year, the forecast of 2.5% for 2013 remains intact. The forecast for 2014 remains unchanged as well at 2.8%. As for Russia, the available data for the second half of the year support saying that a strong pick-up in the economy is now less likely to materialize. Hence, we are revising down our projection for Russia’s 2013 GDP growth this month to 1.7%, down from last month’s figure of 2.0%. Prospects for notable economic improvement in 2014 remain in place. However, the flow of investment into Russia remains a critical factor to its economic growth. The Russian economy is now forecast to grow at a rate of 2.6% in 2014, from the 2.8% forecast of last month. On the Indian demand side, investment and savings have dried up and resuming robust capital spending will be essential to revive India's growth momentum.
The economy is, therefore, expected to grow revised down from 5.0% to 4.7% this year and from 5.8% to 5.6% in 2014, but still there are some positive signs that will perhaps have beneficial effects on India’s GDP growth rate in the next year. China's National Bureau of Statistics (NBS) issued GDP data for the 3Q13, showing that growth reaccelerated to 7.8% y-o-y between July and September. This was unexpectedly strong given that the authorities are in the process of rebalancing the economy towards more consumer-driven growth. Also, domestic risks to the projections stem mainly from monetary and financial developments, including rising local government debt and according to NBS announcements regarding further improvements in October’s PMI, confirms momentum improvement in the Chinese economy through late summer gaining speed in the 4Q.
Brazil;
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| Brazil |
The recent fiscal performance of Brazil’s federal government aimed at supporting the economy is having a negative effect. The government has cut taxes and increased spending to revive economic growth that continues to falter amid above-target inflation. The budget balance of the federal government, excluding interest rate payments, surged to a deficit of 10.5 billion reals from a surplus of 87 million reals a month earlier, according to the National Treasury’s report. This might endanger the country’s credit rating, putting it at risk of being downgraded which would be considered an indication of higher investment risk and lead to higher borrowing cost and less investment inflows. Already last month, Moody’s lowered its outlook of Brazil from positive to stable, while Standard & Poor’s’ placed Brazil’s rating on negative outlook in June. Brazil’s gross general government debt as a percentage of GDP stood at 57% in August, higher than a 45% median for other economies with the same rating. Merchandize exports rebounded after two months of deceleration to grow by almost 5% y-o-y in September while the unemployment rate marginally rose to 5.4% y-o-y, from 5.3% in the previous month.
The central bank raised the benchmark Selic rate last month to 9.5%, signalling the fourth straight 50 basis points increase. It is now widely expected in the financial markets that the rate will be raised to 10% this month as higher living costs have weakened consumer and business confidence forcing policy-makers to implement the largest tightening cycle among major currencies even as growth sputters. The real appreciated 12% since 22 August, when Brazil announced a $60 billion intervention program of swaps and credit lines to buoy the currency and curb import price increases. The programme proved to be too successful as the Brazilian currency appreciated the most among all of the world’s currencies during the previous period, which made the countries’ factories less competitive by hiking export prices. Brazil since April has raised borrowing costs by 225 basis points from a historic low of 7.25%.
Inflation eased in September to 5.7% y-o-y from 6.1% in the previous month. This marks the slowest monthly price gain since September 2012. The central bank estimates inflation will remain above its 4.5% target through the 3Q15. Last month, It reiterated its commitment to ensuring inflation meets its target and to seeking slower consumer price increases next year compared with 2013. Operating conditions across Brazil’s manufacturing economy improved in October, albeit fractionally. The HSBC Brazil’s manufacturing PMI increased last month to 50.2 up from 49.9 in the previous month. The survey showed the output growth registering its strongest reading in five months. New orders stabilized, but the decline in export business accelerated as export orders fell at the fastest pace since July.
The risk to our forecast for Brazil’s GDP growth for 2013 and 2014 is now skewed to the downside due to the risks of inflation and increasing debt-to-GDP ratio. While the former is capping domestic spending growth, the latter threatens the country’s credit rating and hence the inflow of foreign investment. For 2013 and 2014, the forecast stand unchanged this month at 2.5% and 2.8%, respectively.
Russia;
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| Russia |
Russian economic growth slowed significantly during the first half of this year. The economy grew by only 1.4% y-o-y compared with 4.6% y-o-y over the 1H12. This was a result of weaker demand, from both the domestic market and abroad in addition to the decelerated investment. Retail sales growth decelerated in September to grow by 3.0% y-o-y, much lower than August’s 4.0%. This came in line with the increase in unemployment rate from 5.2% to 5.3% in the same month. Unemployment rates were fluctuating within a narrow range between 5.2% and 5.4% over the five months through September, suggesting a stabilized labour market which actually is running at nearly full capacity. More importantly, however, is that the humble economic outlook and slower pace of disposable income increase are encouraging consumers to stay on the side-lines and have discouraged banks from lending for small- to medium-sized projects. Consumer prices rose in September in September by 6.1% y-o-y, signalling the slowest price gain since August 2012.
Industrial production improved in Russia by 0.3% y-o-y in September while domestic new orders have driven a rebound in production last month in Russia. Having slowed to a marginal pace in September, the rate of expansion in Russian manufacturing new orders accelerated sharply to an eight-month high in October. The HSBC Russia manufacturing PMI rose above the no-change mark of 50.0 in October, having spent the entire 3Q in negative territory. October’s reading of 51.8 indicates a moderate overall improvement in business conditions. However, the survey showed that new export business declines at fastest rate in over four years.
The available data on the second half of the year support saying that a strong pick-up in the economy is now less likely to materialize. Hence, we are revising down our projection for Russia’s 2013 GDP growth this month to 1.7%, down from last month’s figure of 2.0%. Prospects for notable economic improvement in 2014 remain in place as Russia could be one of the countries that will benefit considerably from a recovery in Europe along with economic stabilization in China. However, the flow of investment into Russia remains a critical factor to its economic growth. The Russian economy is now forecast to grow at a rate of 2.6% in 2014, from a 2.8% forecast of last month.
India;
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| India |
The wider economic picture in India is looking even less promising, adding to the external sector vulnerabilities. The deceleration is broad based, but the industrial sector has borne the brunt of the slowdown. Manufacturing growth, hit by weak export demand and tight credit.
Meanwhile, on the demand side, investment and savings dried up and resuming robust capital spending will be essential to revive India's growth momentum. Rising domestic savings, followed by strong investment have been the key to the country's sustainable high growth in the past decade. However, savings and investment patterns have worsened substantially since the 2008 global financial crisis, with the share of fixed investment to GDP falling to 29% in FY 2012, down from a peak of 33% in FY 2007, with almost a half of it taking place in the less productive household sector.
With a number of emerging economic problems having a cyclical nature (particularly in context of the prolonged monetary tightening over the course of 2009-2012), the recent slowdown in India's economy has been structural, requiring a series of deeply thought structural reforms for many of the imbalances to be addressed. Energy sector reform is also required in order to narrow the rising power gap and reduce the high oil imports bill, which contributes greatly to the trade deficit. Meanwhile, India's deep fiscal imbalances and structurally high inflation is another concern.
Growth in domestic demand is forecast to ease from 5.5% in 2012 to 2.3% in 2013, affected by high inflation. The loss of monetary policy support and tighter credit conditions and sharp weakness in financial markets in Q3 is likely to have exacerbated the already prevailing sense of gloom about India’s economic prospects, denting business and consumer confidence, and in turn making both households and businesses less likely to spend.
Although the overall impact of the sharp rupee fall this year will be negative due to its adverse impact on confidence, inflation and monetary policy, it should at least make exports of goods and services more competitive. Indeed, y-o-y growth in merchandise exports was 11.2% in 3Q and the share prices of India’s IT companies (which are large exporters of services) have risen strongly since June. Meanwhile, goods imports in 3Q fell by 8.8% y-o-y, leading to a sharp narrowing in the trade deficit and suggesting that net external trade will contribute to growth this year.
The economy is therefore expected to grow revised down from 5.0% to 4.7% this year and from 5.8% to 5.6% in 2014. But still there are some positive signs that will perhaps have positive effects on India’s GDP growth rate in the next year.
Also HSBC India Composite Output Index declined to its lowest mark in four-and-a-half years, from August’s 47.6 to 46.1 in September, signalling a sharp deterioration in business activity across the country’s private sector. September data pointed to a weaker degree of positive sentiment in the Indian service sector, with the index measuring business sentiment dropping to its lowest mark since February 2009. Although panel members expressed optimism for output growth in the coming year, concerns about exchange rate fluctuations weighed on confidence.
China;
China's National Bureau of Statistics (NBS) issued GDP data for the 3Q13, showing that growth reaccelerated to 7.8% y-o-y between July and September. This was unexpectedly strong given that authorities are in the process of rebalancing the economy towards more consumer-driven growth. The rebound was driven primarily by gross fixed capital formation and consumption. Both of those indicators showed marginal improvements over the last quarter, while exports' contributions fell into negative territory again, dragging growth down by 0.1 percentage points. That composition is reflective of economic conditions within and outside of China. China’s rapid growth and urbanisation over the past three decades have created growing environmental challenges, with regard to air pollution, energy intensity and carbon emission, water scarcity and water pollution. Managing such challenges properly is vital if China is to maintain its long-term growth potential and a good quality of life for its citizens. Rapid urbanisation has placed a particular strain on resources around cities, as the incidence of smog and regular food quality scandals illustrate.
According to the World Bank’s China 2030 report, written jointly with China’s Research Development Centre of the State Council (NDRC), China’s environmental depletion and degradation cost 9% of gross national income (GNI) in 2009. This is over ten times higher than the cost in Korea or Japan. Air pollution was the biggest problem. Its detrimental effects on health cost 2.8% of GNI.
China will face rising economic costs if it fails to reduce its air pollution, ensure the sustainability of its water resources and reduce the energy intensity (and carbon emissions) of its productive activities. These issues are of increasing concern to younger generations in China, so the authorities also risk social instability and political dissent if they cannot address their environmental problems soon.
Also, domestic risk to growth projections stem from monetary and financial developments, including rising local government debt. Some of the warning signs include the growth in shadow banking, sharply falling property prices and local governments further in arrears. External risks stem from the US Fed tapering quantitative easing, which could dry up capital inflows, heighten risk aversion and undermine business confidence.
China’s leaders look unlikely to be committed to the types of policies needed to lift productivity growth. The possibility also remains that GDP growth will decelerate sharply in 2013-14. In addition, political unrest, problems in the housing sector and rising concern about another liquidity squeeze are the most likely sources of such a slowdown. Although the government’s capacity to counteract economic crises is strong, doing so could aggravate other economic imbalances.
China’s PMI has not any significant changes compared to previous month but according to the China's NBS, the latest readings show a 0.1 point improvement to 51.4, making October the fourth consecutive month of improving conditions among Chinese manufacturers. Improvements in the official PMI was driven primarily by a 1.5 point surge in output to reach 54.4 in October; this increase was the largest for the sub-index since December 2011.
October’s HSBC Flash China Manufacturing PMI rose to a seven-month high of 50.9 on the back of broad based modest improvements. This implies that China’s growth recovery is becoming consolidated into the 4Q following the bottoming out in 3Q. According to an NBS announcement, a further improvement in October’s PMI confirms the momentum in the Chinese economy through late summer gaining speed in the 4Q. This momentum is likely to continue in the coming months creating favourable conditions for speeding up structural reforms.”
Regarding all positive and negative aspects of China economy, the real GDP growth expectation increased from 7.6% to 7.8 for 2013 and 7.7% to 7.8% for 2014.
Other Asia;
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| Other Asia |
The economy of Taiwan grew at the slowest pace in a year in the 3Q due to reduced exports. GDP rose 1.6% in the 3Q from a year earlier, after increasing 2.5% y-o-y in the 2Q according the statistics bureau of Taiwan. Private consumption increased 1.6% in the 3Q from a year earlier and manufacturing rose 1.7% from last year. The central bank held the benchmark interest rate at 1.87% for a ninth straight month in September, the longest period of inaction. In August, Taiwan lowered its forecast for growth this year to 2.3% from 2.4%. Data showed that exports contributed 0.65 percentage points to GDP growth, down from 2.08 in the 2Q. Last month, the central bank of Thailand pared its estimate for GDP growth this year to 3.7%, from a July projection of 4.2% as efforts to bolster growth with $64 billion of state spending on infrastructure have stalled.
Alongside with China and South Korea, other Asian economies showed signs of strength in their manufacturing sector last month in a sign that growth risks are abating in Asia and expansion may pick up this quarter. Asian economies are benefiting from a demand pick-up aided by the US Fed’s extension of monetary stimulus even as global risks remain in place from budgetary disputing in the US. The improved fundamentals in the Euro-zone are also supporting the recovery momentum in Asia.
The Indonesian manufacturing economy gained momentum last month, with the PMI rising to its highest level in four months. October’s HSBC Indonesia PMI rose from 50.2 in September to 50.9, highlighting a moderate improvement in operating conditions across Indonesia. Stronger domestic demand and the launch of new product lines both resulted in higher levels of new orders placed at Indonesian manufacturers during October. New orders increased for the first time since June.
Operating conditions in Taiwan’s manufacturing sector improved for the second successive month in October. Moreover, the rate of improvement quickened from the previous month to the strongest since March 2012. The PMI posted at 53.0 last month, up from 52.0 in September, and signalled a solid improvement of business conditions in Taiwan’s manufacturing sector. The survey showed that both output and new orders expanded at faster rates.
Vietnam’s manufacturing sector experienced a return to output growth during October, as new offers rose at a record rate following an upturn in demand. Vietnam’s headline seasonally adjusted PMI was unmoved last month at a level of 51.5, matching September’s second highest reading in the survey history. The latest data showed that new work had increased for the second successive month, with the rate of expansion the best in the survey’s history. It was the second consecutive month in which a rise in export orders has been recorded and growth remained solid.
Africa;
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| Africa |
South Africa’s manufacturing PMI had improved marginally last month after a sharp fall in September. The index rose to 50.7 from 50.0 in the previous month. The modest recovery came after the index fell to an eight-month low in September as a strike in the auto sector hurt new sales orders. The index is still remained below the average reading of 52.7 for the 3Q13. It is expected that conditions will remain restrained as some labour disputes from September spilled over into October. Further strikes by mining and construction workers are possible in the coming few weeks. Gold companies last month reached a wage pact with all labour groups except the Association of Mineworkers and Construction Union which represents 19% of miners.
To help accelerate growth in East Africa’s biggest economy, Kenya plans to spend as much as $15 billion in boosting electricity production fourfold over the next 40 months, according to Kenya’s energy ministry. To support double-digit growth, it is estimated that Kenya needs to increase its power capacity to more than seven thousands megawatts from its existing capacity of around 1,700 megawatts. The country is preparing to sell its inaugural Eurobond to raise as much as $2 billion by early next year to fund infrastructure development.
Ghana’s economy will expand 7.2% y-o-y, less than the previous estimate of 7.9%, according to official figures. This will limit the government’s ability to narrow its budget deficit. The targeted budget gap is of 9.2% of GDP this year and 6% next year. GDP is expected to grow at a faster pace in 2014. The government expects tax revenue to grow next year as business investments expand which will allow for notably reducing the budget deficit. Ghana’s credit rating was cut last month by Fitch Ratings after rising government wages and falling revenue from gold prevented the government from narrowing the budget gap to its 9% target. The deficit had ballooned to 12.1% last year because of increases in public sector wages, which consume about 70% of tax revenues. Ghana slashed subsidies on fuel, water and power to curb the budget deficit this year. While the removal has cut government spending, the impact of the higher prices is being passed on through inflation, which quickened to 11.9% in September, the fastest pace all year.
Last month’s data signalled a return to output growth in Egypt’s non-oil producing private sector, ending a 12-month period of contraction. Egypt’s manufacturing economy edged close to stabilization in October with the headline PMI posting 49.5, up from September’s 44.7. While operating conditions have now deteriorated for 13 straight months, the latest rate of deterioration was the weakest since last November. The survey showed a prolonged decline in new orders, though at the slowest pace in almost a year. New business from abroad also fell at a weaker rate. The survey also showed an ease in job shedding among Egypt’s manufacturers last month.
Latin America without Brazil;
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| Latin America without Brazil |
Mexico’s central bank cut the benchmark interest rate by 25 basis points to a record low of 3.50% last month. The central bank signalled that this will be the last reduction in borrowing costs in the foreseeable future. Six-month interest rate swaps rose seven basis points to 3.83% after the rate decision. The central bank’s signal that it will not reduce interest rates further means Mexico will be counting on government spending to spur an economic rebound. Annual inflation in the first half of October eased to 3.27%, the lowest since January. Annual inflation has slowed in each of the past five months to 3.39% in September. The central bank targets inflation of 3%. The government has lowered its 2013 economic growth forecast by more than half as a drop in public spending, stalled exports and the devastation from twin hurricanes curtailed demand and investments. The government cut its growth forecast to 1.7% from 3.5% at the start of the year, after industrial production contracted 0.6% in the 2Q and retail sales shrank in two of the past three months. Mexico’s manufacturing sector continued to stagnate in October, with business conditions improving only slightly since September. The PMI registered 50.2, up marginally from 50.0 in September. The survey showed that new orders continued to rise at a modest pace. However, both output and employment fell over the month. Notably, this was the first indication of net job losses since data collection began in April 2011. The government plans to step up spending next year and run a budget deficit in a bid to jump-start an economy that expanded in the first half of the year at the slowest pace since contracting in 2009 amid global financial crisis. In the 2Q13, Mexico’s GDP shrank for the first time in four years by 0.74% q-o-q, from 0.03% growth in the previous three months.
In Chile, signals of slower growth, combined with easing inflation, prompted the central bank of Chile to cut its benchmark interest rate by 25 basis points to 4.75%. This is the first cut since January 2012. In the 2Q13, the Chilean economy expanded 4.1% over the previous year, the slowest expansion in seven quarters, as the recovery in manufacturing and agriculture was not enough to offset a contraction in fishing, restaurants and hotels’ activities.
Transition region;
Eastern European central banks are diverging as their economies show varying degrees of health. Poland left borrowing costs at a record low for a second meeting this month as policy-makers assess recovery from a slowdown, while Romania cut its benchmark for a third month in September to bolster growth. In Hungary, the central bank cut late last month its benchmark interest rate to a record low of 3.4% from 3.6%. Monetary policy-makers in Hungary have lowered borrowing costs for 15 straight months, slashing the benchmark by more than half to buoy recovery from a recession last year. Aiming at taming inflation, the government imposed a one-fifth reduction in utility costs in 2013. The government ordered an 11.1% cut in utility charges starting this month, adding to a 10% reduction at the start of this year. The GDP rose 0.1% from the previous three months in the 2Q after a 0.6% advance in the January-March period. The inflation rate, which increased to 1.4% in September from 1.3% the previous month, has remained below the central bank’s 3% medium-term target since February. This helped keep inflation below the central bank’s target and may let policymakers further trim the rate to near 3%. In addition to rate cuts, the central bank is providing around $13 billion of interest-free funds to commercial lenders to boost credit to small and medium-size companies.
Business conditions in Poland’s manufacturing economy showed an ongoing upturn for the fourth month running in October. Moreover, the headline figure rose for the sixth month in a row to 53.4, the highest since April 2011. The upward movement in the PMI reflected stronger growth of new orders, which in turn reflected a surge in new export business. New export orders rose for the fifth month running in October, the longest sequence of growth in nearly two and a half years.
Manufacturing business conditions in the Czech Republic continued to improve last month, according to the HSBC manufacturing PMI. The PMI remained above the neutral level of 50.0 in October, extending the current sequence of improving business conditions to six months. Moreover, having fallen to 53.4 in September, the headline index rebounded to 54.5, signalling the strongest expansion since June 2011. For the third month running, all five components of the PMI provided positive contributions.
OPEC Member Countries;
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| OPEC Member Countries |
Ecuador’s credit rating was increased one notch by Fitch Ratings on the outlook for faster economic growth amid increasing financial stability. Fitch raised the long-term foreign debt rating to B from B- with stable outlook. The upgrade reflects the country’s continued healthy growth performance, which is growing by more than 3% since 3Q10. It also highlights the monetary and financial stability in Ecuador. The country is also benefiting from the availability of financing from China and multilateral lenders.
Ecuador obtained a $1.2 billion, four-year loan from China in August and expects an additional $400 million in credit in both 2014 and 2015, according to the Finance Ministry. Public expenditures, forecast by the finance ministry to increase 7.8% this year, are likely to continue driving growth. The finance ministry expects the economy to expand 4.05% this year.
The SABB HSBC Saudi Arabia PMI of October signalled a further improvement in the operating conditions at Saudi Arabian non-oil producing private sector companies. The headline index posted 56.7 compared to 58.7 in September. The rate of improvement in October was the slowest in three months. The survey showed a slower pace of growth of both output and new orders, whereas new export orders rise at fastest pace in survey history.
Last month, the UAE announced a three-year federal spending plan of about $38.1 billion, a 15% increase over the previous plan for 2011-2013. As part of the three-year plan, the budget of 2014 is also announced with total expenditures of around $12.6 billion. Around 51% of the budget is announced to be assigned to social development and welfare projects. The UAE’s non-oil producing private sector companies reported a solid rise in order intakes during October, with the rate of growth in new work the second-highest recorded in the survey history. The PMI of last month indicated a further increase in output. The pace of expansion eased to the slowest in three months, but remained sharp overall. The index remained in the expansion territory in October posting 56.6.
Oil prices, US dollar and inflation;
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| The US Cabinet |
While most recently the US dollar has started rising, on average, versus the major currencies, on average it declined in October. Compared to the euro, the US dollar fell by 2.1% on a monthly average in October, declined by 1.4% versus the Japanese yen and retreated at the same level compared to the pound sterling. Also, versus the Swiss franc, the US dollar declined by 2.3%. Versus the euro it stood at $1.3353/€ in September and at $1.3637/€ in October, while for the yen it declined from around almost ¥100.0/$ in September to ¥97.851/$ in October on average.
The uncertainty of the budgetary issues in October and the debt ceiling situation of the US economy have pushed the US dollar lower. However, since these topics have been postponed again, the US dollar has re-gained strength. Moreover, the momentum of the recovery in the Euro-zone and the progress in Japan will play an important role in its value in the near future. Certainly the Fed’s future policy on its quantitative easing measures will provide an important guideline for the US dollar’s future.
In nominal terms, the price of the OPEC Reference Basket declined on a monthly average in October. It fell by $2.04/b, or 1.9%, from $108.73/b in September to $106.69/b in October. In real terms, after accounting for inflation and currency fluctuations, the Basket price declined by 3.2%, or $2.15/b, to $64.39/b from $66.54/b (base June 2001=100). Over the same period, the US dollar declined by 1.3% against the import-weighted modified Geneva I + US dollar basket while inflation remained flat.
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