Macroeconomic and Country Risk Outlook Economic Outlook no. 1214 January 2015 www.eulerhermes.com Overview 2015 Not such a Grimm tale but no fabled happy ending Economic Research Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Euler Hermes Contents 3 edIToRIal 18 Tale # 5 - The Fox and the Cat 4 oveRvIew 18 ◼ Russia: The Fox has many tricks 8 CounTRY RISk ouTlook 19 ◼ Poland: The Cat scaled the tree 10 Tale #1 - killing the goose that laid the Golden egg? 20 Tale # 6 - The Tortoise and the Hare 20 10 ◼ united States: The Fed will raise rates in 2015 ◼ ethiopia: First a Tortoise, now a Hare. Next? 21 11 ◼ united kingdom: BoE tightening; gently does it... ◼ South africa: Forever the Tortoise and never crossing the finishing line? 22 12 Tale # 2 - The boy who cried wolf/Growth Tale # 7 - The ant and the Grasshopper 22 ◼ China: Kick the saving habit 23 ◼ India: Restructuring the economy and achieving potential - Modi-nomics economic Research euler Hermes Group economic Outlook no. 1214 macroeconomic and Country Risk outlook The economic outlook is a monthly publication released by the Economic Research Department of Euler Hermes Group. This publication is for the clients of Euler Hermes Group and available on subscription for other businesses and organizations. Reproduction is authorised, so long as mention of source is made. Contact the Economic Research Department Publication director and Chief economist: Ludovic Subran macroeconomic Research and Country Risk: David Semmens (Head), Frédéric Andrès, Andrew Atkinson, Ana Boata, Mahamoud Islam, Dan North, Daniela Ordóñez, Manfred Stamer (Country Economists), Lukas Boeckelmann (Research Assistant) Sector and Insolvency Research: Maxime Lemerle (Head), Farah Allouche, Yann Lacroix, Marc Livinec, Didier Moizo (Sector Advisors), Sergey Zuev (Research Assistant) Support: Lætitia Giordanella (Office Manager), Arthur Stalla-Bourdillon (Research Assistant) editor: Martine Benhadj Graphic design: Claire Mabille Photo credit: Allianz For further information, contact the Economic Research Department of Euler Hermes Group at 1, place des Saisons 92048 Paris La Défense Cedex – Tel.: +33 (0) 1 84 11 50 46 – e-mail: [email protected] > Euler Hermes Group is a limited company with a Directoire and Supervisory Board, with a capital of EUR 14 509 497, RCS Paris B 388 236 853 Photoengraving: Imprimerie Adelinet – Permit January 2015; issn 1 162–2 881 ◾ January 20, 2015 2 12 ◼ brazil: Yelling “Growth” 13 ◼ mexico: Running for Growth 14 Tale # 3 - The Sleeping beauty and the Prince 24 eConomIC ouTlook SeRIeS and oTHeR PublICaTIonS 14 ◼ France: Can investment jolt Sleeping Beauty back to life? 26 SubSIdIaRIeS 15 ◼ Germany : A prince with blind spots? 16 Tale # 4 - Hansel and Gretel lost in the woods 16 ◼ Spain: Leading the search for Growth 17 ◼ Italy: Trailing behind in the hunt Euler Hermes Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook edIToRIal Once upon a time… ludovIC SubRan As the nights become increasingly dark, at least in the northern hemisphere, those of us with children may pass the time telling fables and short-stories by the fireplace – heaters work too. Euler Hermes’ seven fairy tales on the 2015 economic outlook is a Tiger Mom’s best companion to start (albeit very early) the development of her child’s economic skills. It all starts with: Once upon a time in a global economic mess, and ends with and the Central Banker lived happily ever after. More seriously though, 2014 ended in horror story mode. The end of the balance sheet magic conducted by the Federal Reserve, the twists of political hotspots and the enchanted lower oil prices changed the plot for many companies around the globe. As we turn the page to 2015, hopefully we foresee a happier ending. In high school, I had to read The Uses of Enchantment by Bruno Bettelheim – I had a weird teacher that year: I know. The book unveils the impact of dark fairy tales such as the ones by the Brothers Grimm for children. The darkness of abandonment, death, wicked witches, and injuries are supposed to allow children to grapple with their fears and toughen up all the way to adulthood. Let us hope that our macroeconomic fairy tales will help countries grow. [Our] NeverEnding Story starts in the US and the UK which find it hard to eventually kill the goose that laid the Golden Egg: their aggressive monetary policy. In the Americas, Brazil is much like the boy who cried Wolf: it has been shouting growth for quite some time without much happening, while Mexico has been acting on it. In Europe, Spain and Italy are our Hansel and Gretel, lost in the forest, in spite of some light at the end of the tunnel: the long-awaited Quantitative Easing. In the merry go round of money printing, it is indeed the ECB’s turn! One question remains though: Will the German Prince awake the French Sleeping Beauty? Flying east, Russia’s many tricks have not prevented it being hunted by the market hounds, while Poland scaled the tree like a cat. In Africa, the South African hare may never cross the finishing line while the (many) unconventional tortoises such as Ethiopia are doing wonders. Our volume 1 of economic fairy tales ends in Asia where the fable of the Ant and the Grasshopper depicts China’s old habits of savings (which die hard) while Modi-nomics may be India’s spring. Again, looking at 2015, story-telling (and hope) will be key as growth continues to be fragile without the assistance of a Fairy God Mother. 3 Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Euler Hermes oveRvIew overview 2015 Not such a Grimm tale but no fabled happy ending DAvID SEMMENS 2015 global growth should show a marginal improvement to 2.8%, before finally expanding by 3.1% in 2016. While the world started 2014 with much optimism it was ultimately a year of persistent economic disappointment and frustration across the globe. This year we anticipate that policy action from both the European and Japanese central banks will boost growth, inflation and inflation expectations but all of these are part of a multi- +0.2% year recovery scenario. We believe cautious optimism remains vital, as in 2014, only Spain, the UK, Ireland and India Forecast GDP growth in Russia in 2014 truly outperformed our broadly below consensus expectations and even then these outperformances were modest. In 2015 advanced economies can be expected to grow at 2.1%, the fastest pace since 2010. We look for the US (3.1% in 2015) to expand over 2.5 times as fast as the Eurozone which we anticipate will finally rise above the 1.0% mark at 1.1%, the highest in four years. We expect more supportive Pre versus Post crisis consumption growth and importantly decisive policy to come from both the BoJ and Japanese government, which will boost GDP from an 10% 9% China Average private consumption growth, 2009-2014 7% to expand 3.9% in 2015. Emerging markets will show two 6% crucial, albeit very different, slowdowns. Firstly China’s policy 5% driven and well managed slowdown to 7.3% in 2015 vs. 7.4% 4% Brazil in 2014 will continue the focus on more domestic driven 3% 2% growth and crucially lessening over investment and excess U.S. capacity. This contrasts strongly with the collapse in Russian Germany 1% Japan 0% 0% 1% France 2% 3% UK 4% GDP, with economic sanctions, capital flight and the near 5% Average private consumption growth, 2000-2007 Sources: IHS, Euler Hermes 4 anemic 2014 at 0.1% to 1.0% in 2015. Emerging Economies will barely recover from a sub-par 3.8% performance in 2014 8% 6% 7% 8% halving of the value of both the RUB and oil saw a paltry 0.2% Euler Hermes Economic Outlook no. 1214-1215 | December 2015-January 2015 | Macroeconomic and Country Risk Outlook into a dire drop of -5.5% in 2015, followed by -4.0% in 2016. +7.3% Developed market demand: Time is the greatest healer China’s growth 2015 forecast to be the slowest in 25 years in 2014, however these problems will only be compounded Despite recovering since the recession, across the board consumer demand is still weaker than previous experience would have expected at this point in the cycle. US, UK and German consumers are slowly returning towards trend levels but their caution following the depth of the recession is un- boost inflation expectations, increase liquidity in the market likely to wane in the near term. This pick up in brightest in and create appetite for portfolio diversification, lower the the US, where the pass through of lower oil prices has a more spread between peripheral yields, increase credit to non-fi- direct impact on consumer spending and sentiment, howe- nancial sector and investment appetite. These moves should ver there is still significant underemployment and wage also see further Euro weakness (1.12 at year end 2015) and growth broadly remains unthreatening. help Eurozone exports through competitiveness gains. In Europe the continued slowness of the recovery and the lack of impetus means consumers are caught in a cycle of Emerging market demand: Companies and ded by anemic inflation and a lack of wage pressure. This consumers need more encouragement to take maintains a lack of impetus in demand, stunting investment their hands out of their pockets righteous caution with their spending intentions, compoun- growth. It is this vicious cycle that the ECB intends to break. First for the good news, 2015 is likely to see Chinese consu- We look for the ECB to provide additional monetary support mer spending rise strongly, Euler Hermes anticipates 8.0% by purchasing sovereign debt in Q1-2015, possibly followed y/y. This is supported by strong wage growth but the rate of by non-financial corporate purchases later in the year, to further increases in consumer spending will remain muted 5 Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Euler Hermes RUB and Oil, hand in hand Real GDP growth, annual change, % Weekly 2016f RUB/USD 1.4 1.7 2.1 2.2 emerging economies 38 4.2 3.8 3.9 4.5 north america 25 2.2 2.4 3.1 2.9 United States 23 2.2 2.4 3.1 3.0 Canada 3 2.0 2.3 2.4 2.3 latin america 8 2.7 0.9 1.3 2.3 Brazil 3 2.5 0.0 0.5 1.3 Mexico 2 1.1 2.3 3.2 3.7 western europe 23 0.0 1.2 1.3 1.6 United Kingdom 3 1.7 2.6 2.5 2.2 Sweden 1 1.3 1.8 1.5 2.1 17 -0.4 0.8 1.1 1.4 Germany 5 0.2 1.5 1.3 1.6 France 4 0.4 0.4 0.9 1.2 Italy 3 -1.9 -0.4 0.3 0.8 Spain 2 -1.2 1.4 1.9 1.9 Netherlands 1 -0.7 0.7 1.0 1.4 Central and eastern europe 6 1.9 1.3 -1.1 -0.1 Russia 3 1.3 0.2 -5.5 -4.0 Turkey 1 4.1 2.8 4.3 4.0 eurozone members Poland 1 1.7 3.2 3.0 3.2 asia 29 4.9 4.3 4.7 5.2 China 11 7.7 7.4 7.3 7.3 Japan 8 1.6 0.1 1.0 1.5 India 3 5.0 5.8 6.4 6.8 oceania 2 2.1 2.7 2.7 2.9 Australia 2 2.1 2.7 2.6 2.9 middle east 4 2.7 3.2 3.6 3.6 Saudi Arabia 1 4.0 4.5 4.0 4.5 africa 2 4.1 4.0 4.5 5.4 South Africa 1 1.9 1.5 2.5 3.0 Morocco 0 4.4 3.0 4.2 4.5 * Weights in global GDP at market prices, 2013 Sources: IMF, IHS Global Insight, Euler Hermes forecasts Regional growth rates % Eurozone U.S. BRIC Africa Asia ex-Japan forecasts 12 10 8 6 4 2 0 -2 -4 -6 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Sources: IHS, Euler Hermes 6 while there is little downward momentum in the savings rate. This increase will be enough in our opinion to offset the much slower growth in government spending (3.2% vs. 7.1%). We are not concerned by the managed slowdown, but remain watchful for any signs of weakness, in particular insolvencies. India’s continued Modification should see growth accelerate further, rising 6.4% in 2015 and 5.8% in 2014. Continued improvement in policy credibility, both on the monetary (inflation targeting) and fiscal (greater openness to FDI and infrastructure investment) fronts, has boosted investment and consumption. By contrast, Brazil is likely to see growth of 0.5% in 2015 and 1.3% in 2016, below our expectations for the Eurozone. Unfortunately much of Brazil’s economic boom was driven by consumer spending rather than industrial di- 110 25 30 100 35 90 40 80 45 70 50 60 55 50 60 40 65 Dec-14 62 Oct-14 advanced economies 20 Nov-14 3.1 Apr-14 2.8 May-14 2.5 Mar-14 2.4 Jan-14 100 Feb-14 woRld GdP GRowTH WTI 120 Sep-14 2015f Jul-14 2014e Aug-14 2013 Jun-14 weights* Sources: Bloomberg, Euler Hermes versification. The new government will need to address the structural issues that are indicative of stagflation, make it difficult to tackle the chronic under investment and ultimately are crippling consumer sentiment. Global liquidity: The flood will continue but from different clouds Global liquidity has been an ever-rising tide since the Federal Reserve first began to cut interest rates in September 2007. Late 2014 saw an end to ultra-easy monetary policy in the US and 2015 is likely to see the US central bank hike interest rates for the first time since 2006. At the same time the BoJ has just increased its annual rate of QE purchases to JPY80trn from JPY60-70trn, and we anticipate that weak growth and deflationary concerns in the Eurozone will force the ECB to act and trigger purchases of sovereign debt. This will be supportive for financing in JPY and EUR but will also see USD strength as a firmer medium term trend. A stronger USD brings its own problems as seen in taper tantrum in the summer of 2013, however Emerging Markets’ import coverage is firmer, Russia and venezuela are notable exceptions. We cannot stress the importance of vigilance enough during these changing times as the inter-linkages of financial markets frequently give rise to very real corporate impacts. The ending of the EURCHF FX floor, earlier this year, is one such event. The appreciation of the CHF will benefit those earning it and holidaying abroad, but on the flip side Hungarian corporates have around Euler Hermes Economic Outlook no. 1214-1215 | December 2015-January 2015 | Macroeconomic and Country Risk Outlookisk Outlook Oil price USD/barrel 130 year average spot end of year 120 112 110 100 100 100 109 90 80 73 70 60 57 60 50 40 13 14 15 16 Euler Hermes forecasts Sources: IHS, Euler Hermes forecasts EUR4bn or 18% of total loans denominated in CHF, unhedged companies are likely to see a negative impact on profitability and their investment capabilities. Oil: Black gold or lead weight? The recent drop in oil prices, circa USD50 at time of writing, reflects the purest economic problem. The combination of weaker than anticipated economic demand, coupled with greater than expected supply was always going to drive prices lower, but this much lower was a true shock. So where does this leave us? While lower prices will provide some boost to growth, optimism needs to be tempered by the fact that it was also weaker demand that drove prices lower. More importantly, there are those that will benefit, the US, Western Europe (ex-Norway), China and Japan, those who will lose revenue but can afford to, Saudi Arabia and Qatar, those who it will be inconvenient for, Mexico and Brazil, and those who cannot afford to, namely Iran, venezuela and Russia. Going forward we look for Brent prices to average USD60 in 2016 and to end the year at USD73, before edging back to USD100 by the end of 2016. While Russia has the funds to cover the shortfall in the short to medium term, Iran’s budget needs oil at around USD135 and venezuela’s circa USD120 to break even. Both Iran and venezuela are likely to face heightened unrest at home, but their fiscal genetics are only going to add to companys’ reluctance to provide the investment both countries so desperately need to diversify their economies. Political risk: What we know worries us and what we don’t worries us more Geopolitical uncertainty was an ever present theme in 2014; with our outlook for 2015 equally as spikey. We remain cautious about the rate of improvement in the situation in Russia and the Ukraine, with current sanctions unlikely to be removed or even reduced anytime soon. Interestingly as part of its three-year monetary policy strategy, the Central Bank of Russia is already anticipating the sanctions to continue until the end of 2017. Russia’s FX reserves remain ample, but capital flight remains a greater issue with investors unlikely to feel brave anytime soon. Furthermore trade relations between Russia and the US/EU are likely to take significant time to repair. Continued conflict in the Middle East and political uncertainty in the region saw 2014’s growth continue to perform below long term potential, with only modest improvement anticipated in 2015. Islamic State (IS) represents an existential threat in the region and is a source of potential imported terrorist activity worldwide. EH does not expect a quick resolution to problems in the area. Even if IS is defeated, or at least contained, infrastructure and lives still need to be rebuilt. It is important to highlight the potential for future escalation of currently simmering events for a low probability but high severity event. In particular, any escalation of tensions in the South China Seas, the evolution of the Ebola virus (into an airborne mutation) and the potential for venezuelan political tensions spurring greater civil unrest. There is also the potential for the elections in Sri Lanka, Turkey, Burma, Argentina and Thailand to throw up some surprises. Similarly the UK could elect a government more favorable towards an exit from the EU, creating more issues for Europe. The continent sees elections in Greece, Spain and Portugal, all of which are unlikely to be without their own surprises and are likely to see increased market focus and volatility. Be careful out there, you never hear the shot that kills you. ◽ 7 Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Euler Hermes Country Risk Outlook 4th Quarter 2014 k11 15 changes in country risk ratings 4th Quarter 2014 countries with improved ratings maCRoeConomIC ReSeaRCH and CounTRY RISk Team medium term risk: the scale comprises 6 levels : aa represents the lowest risk, d the highest. l4 el Salvador Short term risk : the scale comprises 4 levels : 1 represents the lowest risk, 4 the highest. b1 b2 countries with deteriorated ratings Growth is subdued and public accounts are deteriorating. The current account deficit is expected to widen to -5.4% of GDP in 2015 while reserves only cover 3 months of imports and capital inflows are decelerating. As the economy is dollarized, liquidity shortages are a major risk. → oTHeR CHanGeS bahamas belize Gambia macedonia malawi Seychelles Togo 8 bb1 bb2 d4 d3 d4 d3 d4 d3 d4 d3 d4 d3 d4 d3 uruguay bb1 Rwanda bb2 Economic slowdown is expected with +2.7% GDP growth in 2014 and +2.9% in 2015. Private consumption is hindered by elevated inflation, while exports are suffering from downside pressures on commodity prices and weak performance of major trading partners (Brazil, Argentina). d4 C3 Poverty and reliance on commodities remain an issue but political stability has helped raise economic growth by +6.8% on average over the last 5 years. The risks of non-payment are lower while the ease of doing business is comparatively high. Euler Hermes Economic Outlook no. 1214-1215 | December 2015-January 2015 | Macroeconomic and Country Risk Outlookisk Outlook R lithuania b2 U S S I A Russia bb2 The recovery following the 2009 recession has been strong and resilient to the Eurozone crisis. Despite the Russian crisis, Lithuania is forecast to reach +3% growth in 2014 and +2.8% in 2015. Accession to the Eurozone in January 2015 will reduce external liquidity risk. C3 C4 The RUB slide in H2 2014 escalated into a currency crisis in December and severe liquidity shortages among domestic banks. A deep recession of -4.5% is forecast in 2015. Capital and foreign exchange controls are possible in 2015. Source: Euler Hermes, as of December 17, 2014 ethiopia d4 bangladesh d3 Despite high poverty and periodic famines, GDP growth has been very strong and Ethiopia remains a favoured destination of global FDI flows, particularly from Asia. The government recently issued a (oversubscribed) sovereign bond. d4 Cambodia d3 Economic growth reached +6.1% in the FY2014 despite political tensions. The economy is expected to pick up in 2015, supported by rising public infrastructure investment and gradual improvement in global demand. The external position remains solid thanks to remittances while reserves cover 6 months of imports. d4 d3 Strong economic growth projected (+7.3% in 2015) with external trade the key driver. Domestic demand should pick up due to credit growth, long term investment inflows and low energy prices. The current account deficit (-11% of GDP), although large, is not a concern in the short-term. 9 Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Euler Hermes Tale # 1 killing the goose that laid the Golden egg? United States: The Fed will raise rates in 2015 10 dan noRTH Golden monetary stimulus In the midst of the Great Recession, the Federal Reserve embarked on an aggressive course of monetary policy easing by using Quantitative Easing (QE), and by setting the Fed Funds interest rate to zero percent. These efforts provided unprecedented liquidity to the financial system and kept interest rates near record lows, stimulating the economy and supporting asset prices. Monetary policy had become the goose that laid the gol- Low U.S. inflation allows Fed to move slowly % Core PCE y/y Federal funds rate 10 8 6 4 2 0 84 89 94 99 Sources: IHS, Euler Hermes 10 04 09 14 den egg. Now the time has come to consider beginning to raise the Fed Funds rate for the first time in ten years, and the Fed will have to do so without causing that goose any harm, much less killing it. Raising the Fed Funds rate too soon could choke off economic growth, but raising it too late could create inflationary pressures. but the golden effect won’t fade too quickly EH expects that the Fed is more likely to avoid raising rates too soon since that has been the Fed’s historical pattern, this recovery has been particularly fragile, and inflation remains subdued. Expectations are that the Fed will start raising the Fed Funds rate at the end of Q2-2015, and continue to raise it at a slow, measured pace thereafter. An earlier tightening could result from rapidly rising inflation or faster than expected growth. A later tightening could result from a relapse in the labor market or extended global weakness. But whatever the Fed decides about the Fed Funds rate, the stimulative effects of QE won’t fade for some time The number of years since the Fed started to tighten since the liquidity it created, which took six years to build, won’t disappear rapidly. The goose will keep laying golden eggs. The outlook for 2015 EH expects U.S. GDP growth of 3.1% in 2015, buoyed by higher employment with a resulting increase in income and consumption, higher consumer confidence, and continuing low energy prices. Furthermore, inflation is likely to remain close to the 2% target since slack will remain in the labor market (the U.S. should have 5-10 million more jobs at this stage of the recovery despite rising employment,) keeping wage pressures at bay. A weak global economy, a firm U.S. dollar, and the fall in energy prices will also put downward pressure on inflation. Euler Hermes Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook 5.8% Unemployment rate in 2015, a level not seen since 2008 United Kingdom: BoE tightening gently does it… ana boaTa Still one of the fastest growing western european economies in 2015-16 GDP growth is expected to remain strong, at +2.5% in 2015 and to slow further to 2.2% in 2016. Private consumption will remain the major growth driver, supported by the adjustment in savings and the continued labor market strength (unemployment rate expected at 5.8% in 2015). However, wages growth remains subdued on the back of continued weak productivity growth but lower inflation rate BoE Interest rates 8 Rates on credit to firms Rates on credit to households 8 BoE key interest rate 7 7 6 6 5 5 4 3 4 The BoE announced the QE program and cut interest rates at 0.5% 3 2 2 1 0 04 Record low interest rates at least until Q3/Q4 2015 05 06 07 08 09 Sources: IHS, Euler Hermes 10 11 12 13 14 1 0 boosts household real purchasing power. Looking at gross value added by sector, increasing activity in the services sector represent more than 50% of the overall economic recovery since 2013. The boe would rather tighten later and earlier Momentum in the construction and manufacturing sectors has shown signs of weakness recently. For the former, building engineering has been hit the most with production on the downside but the trend should be only short-lived thanks to the additional support from the National Infrastructure Plan for 2015-16 (GBP55bn, i.e. 2.9% of GDP). Further, homebuilder’s activity has also lost ground, but should see support from strong demand thanks to the extended Help to Buy mortgage guarantee scheme, renewed willingness by banks to lend to home owners and stamp duty reform. For the manufacturing sector, one of the main drags remains the strong GBP/EUR on exchange rate when it comes to trade with the eurozone (~40% of total exports), but slower growth in the emerging markets (25% of exports) has also been a significant constraint for order books. The capacity utilization rates in industry fell at 81.7% at end-2014 (from 84.2 in Q3) and productivity gains have persistently remained very weak. However, a positive trend is notably within the automotive sector with GBP4.2bn of new investments since 2012 on the back of expanding activity of local, but mainly foreign brands, attracted by the flexibility of the labor market and the supportive fiscal regime. Production in the sector is on a positive trend and it will be essential for the policy mix to remain positive. The extension of the Funding for Lending Scheme that focuses incentives towards supporting SME lending until 2016 is very welcomed. Further, the BoE is likely to maintain the status quo at least until Q3 2015 (with a risk of delay into Q4) given that inflation is expected to average 1.0% in 2015 on the back of low oil prices. 11 Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Euler Hermes Tale # 2 The boy who cried wolf/Growth Brazil: Yelling “Growth” danIela oRdóñez a reality slap Brazilian economy largely benefited from raw material revenues and large capital inflows over 20032008, and scored an average annual growth of +5%. These resources were however very demand-oriented as consumption (public+private) accounted for over 70% of real growth, while investment remained relatively weak. Less favorable external conditions (slowdown of China, fall in commodity prices, normalization of Fed’s policy, BRL depreciation) highlighted the weaknesses inherent to the Brazilian economic model. Local production could not keep up the momentum of domes- Flatlining Brazilian Exports Exports, USD bn, over 12 months Brazil Mexico 400 350 300 250 200 150 100 06 07 08 09 10 11 Sourcs: INEGI, Central Bank of Brazil 12 12 13 14 tic demand, generating internal (inflation) and external (current account deficit) imbalances, and finally weighing on growth. The main problem is lack of investment Euler Hermes estimates that the investment deficit cumulated by the Brazilian economy over the 10 past years reaches USD1100 bn. A resources reallocation from consumption and imports to investment would have allowed Brazil to increase its investment rate to almost 35% since the early 2000s. However, the latter has remained low and stands currently at 17%, the lowest among the BRICs and well below the Latin American average of 23%. The lack of investment in infrastructure combined with the persistent problems of protectionism, excessive bureaucracy, high labor costs, and a complex and punitive tax system greatly hinders the national business environment and cripples competitiveness. Trying to go back on track? The newly re-elected President Dilma Rousseff pledged to combat inflation (+6.3% y/y in 2014) in her second term. Consequently, the monetary policy tightening cycle begun by the Central Bank in 2014 (the SELIC has been raised by +75bps to 11.75%) is expected to be pursued in 2015. Alongside, the new Finance Minister, Joaquim Levy, committed to address fiscal accounts. The target is to reach a primary surplus of +1.3% of GDP in 2015 and +2% in 2016-2017. Along with huge ongoing investment programs, these policies are a welcomed first step to address macroeconomic imbalances. However, they will also weigh on overall activity levels, at least in the short term. Euler Hermes expects real GDP to grow by only +0.5% in 2015, after stagnating in 2014. USD 1,100bn Estimated investment deficit cumulated over the 10 past years Euler Hermes Economic Outlook no. 1214-1215 | December 2015-January 2015 | Macroeconomic and Country Risk Outlook Mexico: Running for Growth 1.3% danIela oRdóñez of GDP Run, mexico, run! During 2003-2008 Mexico (real growth of +3% per year) was well behind in the Latin American race for growth (+4.5% per year), but the wind seems to be changing. Euler Hermes expects Mexican activity to expand by +2.3% in 2014 and by +3.2% in 2015, largely outperforming the regional average (+0.9% and +1.5%). In 2015 the main driver will be the recovery of the U.S., but the activity is expected to strengthen thereafter thanks to two main structural changes: Mexico marches on (i) Mexican industry competitiveness is back in the game. Significant wage moderation has allowed the hourly cost in the local manufacturing sector (USD6.4/hour in 2012, according to the U.S. BLS) to go below those of several Eastern European countries (Poland: USD8.3, Hungary: USD8.9, Czech Republic: USD11.9), and to become much more competitive than other Latin American peers (Brazil: USD11.2, Argentina: USD18.9). Although it remains still far above Philippines’, India’s or China’s (below USD3.0), the cost gap has significantly decreased since the early-2000s. Industrial Production, 100=2006, over 12 months Mexico Brazil 120 115 110 105 100 95 90 06 07 08 09 Sources: INEGI, IBGE 10 11 12 13 14 (ii) Mexico engaged in 2012 a very ambitious structural reform agenda that includes opening the energy and telecommunication sectors to foreign capital, increasing labor market flexibility and strengthening public finances. These reforms have driven foreign investment inflows (FDI and portfolio) that have averaged 7% of GDP per year since 2012, against 5.5% over 2010-2012, and below 4% during 2005-2008. Additional fiscal constraint if oil prices remain low (at 60USD/barrel over 2015) Going for the regional lead? Although Brazil remains by far the largest Latin American economy (7th in the world), the positive developments in Mexico (15th in the world) raises the question of the leadership in the region. Notably, the divergence in industrial production trend between Brazil (dropping) and Mexico (accelerating) is striking, while the share of Mexico on regional exports and FDI inflows is increasing since 2012, at the expense of Brazil’s. The way ahead is still long However, important weaknesses remain. The Mexican economy is still very dependent on the U.S. business cycle (>70% of exports), while public finances rely heavily on oil revenues (30% of total revenues). Also, security issues related to drug-trafficking, low rule of law and high levels of corruption remain major challenges for the business environment. 13 Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Euler Hermes Tale # 3 The Sleeping beauty and the Prince France: Can investment jolt Sleeping Beauty back to life? FRÉdÉRIC andRÈS EUR 78bn Corporate investment gap Residential and public investment will continue to stifle the recovery in 2015... One explanation behind France’s sleepy economic performance is an acute lack of investment. In real terms, investment is -9.7% below pre-crisis levels. This deficit is broad-based, echoing throughout all components of investment. First, residential investment by households has declined for 11 consecutive quarters and is now -24% below the previous peak in December 2007. Following a 150% rise in hou- French corporate investment gap EUR bn Real Investment from NFCs Quarterly Investment Gap (R) Real Investment, adjusted-pre-crisis trend forecasts 0% 340 320 -5% 300 280 -10% 260 -15% 240 220 -20% 200 180 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: INSEE 14 -25% sing prices between 1999 and 2011, a correction has barely begun, as evidenced by the modest -3.7% fall since 2011. Prices-to-income ratios remain close to all-time highs and about 27% above long-term average, pricing most French households out of the market. Second, as usual in a post-electoral year, public investment is falling markedly. As such, orders books in private works are about 1.5 standard deviations below their long-run average, the lowest they have been since 1996. ...but corporate investment might finally show signs of life More worrying though is the lack of corporate investment. According to our forecasts, the corporate ‘investment-gap’ will continue to widen in 2015, up to a cumulative EUR 78 billion (or 3.5% of GDP)! The only two sectors where investment has recovered from the crisis are Business services and Information & Communication. Investment remains in the doldrums in the equipment goods (-16% below Q1 2008 levels), construction (-12%) and ‘Other industrial products’ (-9%) sectors. The explanation behind this lack of investment is twofold. First, there is a clear lack of aggregate demand stemming from a lackluster nominal growth rate (c. 1% in 2014). Second, corporate margins remain at a very low level. We believe they will recover in 2015, on the back of a moderation in input costs. The CICE will lower labor costs by 2-3% whereas lower oil prices will be a boon to many sectors. We estimate that a sustainable fall of 25% in oil prices could lead to c. 9bn increase in total value-added and an increase of c. 0.35pp in margins on average. The main beneficiaries would be the Transport sector (+2.4pp rise in margins), then the 'Manufacturing of other industrial products' (+1.2pp). However, we believe that the 'Loi Macron' will benefit neither investment nor growth in 2015. Even though its aims are noble (e.g., liberalization of regulated professions, reforms of labor tribunals, opening of bus transport), its scope is probably too wide and diluted by political haggling. As such, we expect it to bolster GDP growth by +0.05pp (at most) per annum for the next five years. Euler Hermes Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Germany: A prince with blind spots? lukaS boeCkelmann on course for a moderate recovery... After 2 years of stagnating growth, Germany looks ahead to a path of a modest recovery. Consumer spending has remained a sword with a sharp blade so far. Wage and employment growth are expected to remain solid. On the one hand the introduction of the new minimum wage at EUR8.50, will help lift wages 3.3% y/y. On the other hand we predict 274,000 low-wage jobs will be eliminated by this change, but unemployment will Continued German labor market improvement to support growth True participation rate (in %, LHS) UE rate rate with constant participation rate (in %, RHS) Participation rate (in %, LHS) True unemployment rate (in %, RHS) 55.0 13 54.5 12 11 54.0 10 53.5 9 53.0 8 52.5 7 52.0 6 51.5 51.0 5 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Sources: Bundesbank, Euler Hermes 4 stay low, circa 6.5%. Consumer spending should gather further momentum, reaching full-year expansion of +1.3% in 2015 after an increase of +1.1% in 2014. After a disappointing performance in 2013, deducting -0.5% from GDP growth, net exports are about to regain its role as one of Germany’s growth engines – or as the Prince’s horse to stay with the picture. Trade sanctions in Russia, the slowing growth in China and Brazil and the erosion of the competitive position are certainly negatives. However, the depreciation of the Euro and the impact of lower oil price more than offset those. In 2015 as a whole, Euler Hermes expects exports to rise by +4.1% and imports by +3.8%. As a result, net exports should contribute 0.4-0.5pps to overall growth in 2015. ...but investments are a blind spot On the downside, low private investment activity is holding Germany back from higher GDP growth. This reflects: i) a weak industry production (down to -0.5% y/y in November from +4.8% y/y in January) and a capacity utilization rate that remains little above its long term average (83%), suggesting that economic activity is not buoyant enough to support additional investment into equipment; ii) insufficient additional demand on the back of weak GDP growth in the last three quarters of 2014; and iii) cautious surrounding the economic outlook caused by geopolitics. While much needed public investment continues to be delayed, residential investment increased since 2010 by 5.9% on average each year. Given the resilient labor market, a supply bottleneck in urban housing and positive financing conditions we expect a continuation of residential investment growth in 2015. +1.3% Growth of consumer spending in 2015 15 Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Euler Hermes Tale # 4 Hansel and Gretel lost in the woods Spain: Leading the search for growth SaRaH boSSe-PlaTIÈRe, danIela oRdóñez The sun is finally rising After 5 years of recession combined with difficult adjustments and reforms, the Spanish economy appears to have finally found the way out of the economic woods. Euler Hermes expects real GDP to expand by +1.4% in 2014, before picking up to +1.9% in 2015 and +1.9% in 2016, outperforming Germany, Italy and France. Investment and exports - further boosted by the lower euro - will continue to be the main drivers of the recovery, Spanish consumer confidence and retail sales % 10 Real retails sales growth (y/y, %, left axis) Consumer confidence (%, balance of opinion, right axis) 0 -5 5 -10 -15 0 -20 -25 -5 -35 -40 -45 06 07 08 09 10 11 Sources: Central Bank of Spain, INE 16 but the way back is very steep... The recovery begins from very low levels. The real GDP still stands -6% below pre-crisis level, while GDP per capita has fallen to 2003 levels. More worrying, both industrial production and retail sales stand approximately at -30% below pre-crisis level and the recovery is very gradual. Public and private debts remain very elevated, while financing conditions for corporations are still stretched. Credit to NFC is still contracting (-13% y/y in November 2014) and interest rates remain high despite ECB action. Last but not least, despite on a downward trend, insolvencies remain more than five times above 2007. -30 -10 -15 05 also helped by the fall in oil prices. Private consumption should also continue growing, but without accelerating since consumer confidence is on a downward trend since June 2014. 12 13 14 -50 ...and full of risks Several risks hamper our central scenario. Lower than expected performance of trade partners (Eurozone, but also Latin America) could -25% Gap of the credit to the private sector relative to pre-crisis levels limit export expansion. If the ECB actions do not succeed to address deflationary pressures, the ongoing deleveraging process could be obstructed. Finally, political issues are not to be underestimated. Notably, Catalonia’s (20% of GDP) potential independence could remain a major issue in the near term, notably as we get closer to the December 2015 general elections. Euler Hermes Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Italy: Trailing behind in the hunt ana boaTa Three straight years of recession to finally end in 2015... GDP growth is expected to turn positive in 2015 (+0.3% after -0.4% in 2014) thanks to slowly recovering private consumption and positive net exports. Although, Italian exports still lag peer group performance on the back of slow competitiveness adjustment, Italy will be one of the main winners from a lower euro (expected at 1.12 in Q4 2015) given that 60% of total exports are extra-eurozone and that the export structure remains highly Italian investment and capacity utilization rates in industry 4Q/4Q Investment Q4/Q4 (lhs) Capacity utilization rate (rhs) forecasts 80 4 78 1 76 -2 74 -5 72 70 -8 68 -11 66 -14 64 -17 -20 62 07 08 09 10 11 12 13 14 15 16 Sources: IHS Global Insight, Euler Hermes forecasts 60 sensitive to price variations. Further, the Italian export culture has strongly developed over the past years with 212,000 exporting companies compared to 120,000 in France and 270,000 in Germany. …but more than 10 years will be needed to fill in the investment gap We do not expect investment growth to turn positive until 2016, continuing the major drag on growth after eight consecutive years of contraction (-28% decline in real terms since Q1 2007 peak). In 2015, the total investment gap compared to 2007 would reach EUR60bn. Part of the issue seems to be structural as even prior to the crisis GDP growth has been very weak (+1.5% on average on real terms between 2000 and 2007 and 2% of average inflation). As a consequence, firms’ turnover growth has been flat and even dropped by -20% over the past ten years for durable consumer goods. Indeed, weak long-term consumer spending growth (+1.1% pre-crisis average) has impaired volumes and increasing deflationary pressures since 2016 slightly positive investment growth for the first time in eight years 2013 have amplified downside pressures on firms’ revenues. Further, over the past years, the environment has increased the constraints from expenses. First, firms’ high indebtedness (70% of GDP) and the weak state of the banking sector have been a major drag on financing. Second, still elevated fiscal pressure (total tax rate stands at 65% of profits vs 44% in the eurozone) have added to already very high input prices. Profitability stands at record lows and although we are still far from a happy ending, a slightly positive trend is expected in 2015 thanks to lower oil prices, a slight improvement in financing conditions, stabilizing wages and payment terms (although at an elevated level of 100 days). 17 Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Euler Hermes Tale # 5 The Fox and the Cat Russia: The Fox has many tricks manFRed STameR -5.5% GDP contraction expected in 2015 lack of structural change backfires Russia has avoided serious economic transformation ever since the dissolution of the Soviet Union in 1991. Large windfall oil revenues thanks to the rapid rise of global oil prices from 2000 to 2008 helped the “fox” to achieve a lasting boom, large current account surpluses and the consolidation of its public finances after the 1998 sovereign default, but also aggravated its dependence on hydrocarbon products and its vulnerability to economic and political shocks. The unwillingness to improve the un- Russian GDP growth and current account balance forecasts 20 GDP growth Current account balance (% of GDP) 15 10 5 0 -5 -10 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Sources: Central Bank of Russia, Euler Hermes 18 favourable economic structure in good times backfired heavily during the Great Recession when the global financial crisis combined with sharply lower oil prices pushed Russia into a severe recession (-7.8% in 2009). baseline scenario: Currency crisis will cause a sharp recession in 2015 In 2014, U.S. and EU sanctions against Russia combined with sharply falling global oil prices since mid-year have pushed the Russian economy again on the brink of a severe recession. Market confidence has deteriorated with increasing speed, reflected in large net capital outflows, sharply falling investment, rising borrowing costs for Russian banks and companies and the depreciation of the RUB which turned into a full-fledged exchange rate crisis in late 2014. Real GDP growth, already on a downtrend in 2013 (+1.3%), will come in at just +0.2% in 2014 and Euler Hermes expects a swing to a sharp contraction of about -5.5% in 2015. The much weaker RUB in 2015 will result in marked declines of consumer spending and investment while lower oil prices will limit potential fiscal stimulus. Both exports and imports are forecast to decrease but the latter will drop more sharply owing to the depreciated currency. The introduction of capital controls on investment flows and foreign exchange controls (forced RUB buying by companies) is likely in 2015. However, a sovereign default in not expected in 2015 as the government’s reserves are much higher than in 1998. The recession is forecast to continue in 2016, with GDP declining by about -4.0%. downside risks of a black Swan event While the probability of a ‘Back to normal in 2015’ scenario is negligible, there are considerable downside risks to our baseline scenario. An escalation of Western sanctions (for example on the SWIFT payment system) or full-fledged capital controls (including current account transactions) would most likely result in a severe economic collapse, with real GDP declining by as much as -15%. A sovereign default would be possible in 2016 in such a worst case scenario. Euler Hermes Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Poland: The Cat scaled the tree +3% manFRed STameR Cats tend to land on their feet In the early 2000s, Poland was often referred to as the laggard in Central and Eastern Europe (CEE), trailing its fellow EU members in the region in terms of GDP growth and reforms. But thanks to embarking on sound monetary policy, including a flexible exchange rate, and adequate fiscal policy, combined with an enhanced structural reform agenda, Poland has overtaken its regional peers since 2007. Supported by solid economic policies and less dependence on external demand as compared to the peers, Polish GDP growth the Polish economy showed marked resilience to the 2009 global economic crisis, being the only EU economy that avoided recession in that year. Notably, Poland got access to a USD20 bn arrangement under the IMF’s Flexible Credit Line (FCL) in 2009, a facility which is only offered to strongly performing economies with a solid record of timely and effective economic policy adjustments. Meanwhile, the FCL has been increased to USD34 bn and extended until January 2015. While the authorities have never tapped the FCL, the precautionary arrangement provides important insurance against external risks. % Poland Central Europe EU ex. Poland forecasts 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Sources: IHS Global Insight, Euler Hermes Rebound in 2014 despite negative impact from Russia Following a slowdown to average annual growth of +1.8% in 20122013, the economy rebounded to +3.4% y/y growth in the first three quarters of 2014, driven by robust private and public consumption and surging investment. The contribution of net exports shifted into negative territory as real import growth accelerated to +8% y/y, outpacing real exports which in- GDP growth in 2015 creased by +5.2% y/y, roughly the same as in full-year 2013. Russia is the main reason why export growth did not pick up. While Polish total nominal exports of goods rose by +4.7% y/y (those to the EU by +7.4% y/y) in the first 10 months of 2014, exports of goods to Russia contracted by -13% y/y, reducing the Russian share in Polish exports to 4.4% from 5.3% in 2013. Growth to remain resilient Going forward, Euler Hermes expects the servant-turned-princess Cinderella to remain one of the fastest growing CEE economies in 2014-2016. Real GDP is on track to expand by about +3.2% in full-year 2014. Robust consumer spending and investment should continue to support the economy in the next two years while a further decline of exports to Russia will weigh somewhat on external demand, so that annual growth of about +3% is forecast in 2015-2016. 19 Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Euler Hermes Tale # 6 The Tortoise and the Hare Ethiopia: First a Tortoise, now a hare. Next? andRew aTkInSon +10.9% left behind at the gun? now hare-like rate of growth Despite its geographic size and large population (almost 92 million in 2012), Ethiopia was seen as a sleeping giant among regional economies. Media coverage of drought and human distress did little to dispel that image. Annual real GDP growth averaged only +2.9% in 1991-2000 but +9% since that latter year. Moreover, annual GDP growth was in double digits in seven out of the ten years up to end- Ethiopia inward FDI flows USD mn 1,000 800 600 400 200 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Sources: UNCTAD, IHS, Euler Hermes 20 2013 and the annual average over that period was +10.9%, compared with an average +5.1% for Sub-Saharan Africa as a whole. Such high growth rates reflect factors that include: (i) the low starting base, (ii) external debt relief that freed up resources for more productive use, (iii) improved economic management and (iv) large inflows of FDI. Indeed, the Ethiopian tortoise (slow to get going) is likely to continue with hare-like economic expansion, with GDP growth this year of +8.5% and +8% in 2015. ethiopia is the africa Rising story, but for how long ? In a 2014 assessment, UNCTAD listed Ethiopia as one of the world’s top destinations for FDI. Total inflows in 2013 were USD953 million, with a large proportion coming from Asia to boost the country’s industrial base and improve and extend infrastructure. Moreover, a recent sovereign bond issue of USD1 billion was heavily subscribed, suggesting that investor confidence in the country’s potential remains strong. Ethiopia is living the dream, or fable. Ethiopia’s annual avearge GDP growth 2004-13, compared with… The longer-term outlook for growth is generally positive, although much depends on maintenance of domestic and regional stability and on uncertain availability of water supplies. The World Bank estimates that Ethiopia has hydropower generation potential second only to DR Congo in Africa. The government has ambitious plans for the country to become the “water tower of Africa”. A 25year programme to increase hydroelectric capacity to 37,000 MW by 2037 includes a 6,000 MW Grand Ethiopian Renaissance Dam on the Blue Nile (scheduled for completion in 2018). However, there are environmental concerns relating to dam building on major rivers and Egypt, in particular of neighbouring countries, is concerned about the control of Nile waters that will be exerted if these projects are completed. Euler Hermes Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook • South Africa: Forever the tortoise and never crossing the finishing line? andRew aTkInSon …South Africa’s +3.4% annual average GDP growth 2004-13 a successful political transition is not enough South Africa’s metamorphosis from an apartheid state to a rainbow nation was almost unilaterally applauded. Indeed, it was a significant political/social transition. However, long-term (1999-2013) average annual GDP growth is +3.3%, compared with a generally accepted minimum of around +5% each year required to be able to provide a background to generate jobs and address well-established social inequalities. We expect GDP growth of +1.5% in 2014 and +2.5% in 2015, so the outlook remains markedly below potential (tortoise-like) and also below requirements of an emerging nation. GDP growth this year will be the lowest since the recession in 2009 and the outlook does not appear likely to bring about hare-like rates of expansion. This partly reflects global developments (weak demand for commodities and weak prices) but also domestic structural factors (including large income inequalities, an active labour movement, weak job growth, stubborn inflationary pressures and power shortages). Policymakers have to contend with a deteriorating investor climate and dependence on external capital, with financial markets under pressure, exemplified by current ZAR weakness. The tortoise looks likely to remain a tortoise. others in the race Ethiopia and South Africa are but two in the race. Ethiopia’s track record (slow to get going but putting in a current sprint) is not without some regional competition. Some who were relatively quick out of the starting blocks (including Ghana and Zambia) are having a breather at the side and taking on IMF water but others (including Angola, Mozambique, Nigeria, Rwanda and Tanzania that also recorded annual average GDP growth of over +7% in 2004-13) appear likely to carry on recording hare-like rates of growth. But who will hit the marathon’s infamous ‘wall’ and stagger off course and who will get over the finishing line? In reality, of course, it is not a race with a winning line and medals, it is a development process. There will always be hares and tortoises and countries will sometimes be one and sometimes the other. So, the winner in our fable is…Africa! South Africa and Ethiopia GDP growth in % South Africa GDP growth South Africa GDP per capita average growth Ethiopia GDP growth Ethiopia GDP per capita average growth 14 forecasts 12 10 8 6 4 2 0 -2 -4 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Sources: IHS, Euler Hermes forecasts 21 Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Euler Hermes Tale # 7 The ant and the Grasshopper China: Kick the saving habit maHamoud ISlam USD 3.6 trillion Household consumption economic growth is supported by rise in external trade and policy stimulus Economic growth remained resilient in 2014 (+7.4%) supported by improving external demand and accommodative macro-policies. EH expects the economy to stabilize at 7.3% in both 2014 and 2015. Investment is set to decelerate further reflecting onging adjustment in real estate and construction, and local governement deleveraging. Exports are set to pick up speed with the gradual improvement in China national saving rates (% GDP) 60 forecasts 50 40 global demand. The policy mix will likely remain accomodative to keep growth in an acceptable range (7% to 7.5%) , maintain absolute employment growth (+10 million jobs per year) and ease deflationnary pressures (inflation at +1.5% in December far below 2014 target of +3.5%). Fiscal stimulus will focus on supply side measures (tax cuts for SME) and rising infrastructure spending to limit distortions. Monetary policy will likely be more accomodative. PBOC move in November (-40 bps policy rate cut) showed a shift in the authority’s strategy. Whereas previously its goal has been to use only targeted measures, it now aknoweledged the need to use more conventional measures to keep growth steady. With elevated deflationary pressures and surveys pointing to weak demand growth in the short term, further support in H1 2015 is likely. 30 20 10 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Source: National Statistical Office 22 unlock savings will be key to enhance long term growth Counter-cyclical macro policies will be accompanied with structural reforms to generate self-sustaining growth in private demand. With national saving averaging 50% GDP, China has the potential to generate a firm domestic consumption ledgrowth model with its own resources. However, structural bottleneck including weak social security system and still highly regulated financial market continue to fuel precautionary saving (and thus limiting consumption growth). Going forward, the government is set to accelerate reforms to address these issues. November’s rate cut was accompanied with two positive developments on the financial liberalization front: the Central Bank raised the maximum deposit rate to 1.2 times the benchmark (from 1.1 times previously); the authorities issued a draft of plan to insure up to RMB500,000 per saver at each bank covered. Removing control on deposit rates will be pivotal for future consumption with higher returns for savers. While household’s consumption represented circa 36.4% GDP (USD3.6 trillion ≈ German GDP) in 2014, EH expects a gradual increase from 2015 onwards (+9% in nominal terms in 2015). Euler Hermes Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook 2.3% GDP Cost of subsidies (FY2013-2014) India: Restructuring the economy and achieving potential – Modi-nomics maHamoud ISlam Phase 1: lower inflation and stop capital outflows (2014) Economic fundamentals are improving with evidence being show in stronger GDP growth (above 5% y/y in Q2 and Q3 2014) supported by services activities and private consumption. Inflationary pressures have eased significantly (CPI y/y at 5% in December 2014 compared to 9.9% end 2013) due to monetary tightening and weak commodity prices. The current account deficit narrowed (-1.5% GDP in 2014 from -2.3% in 2013) reflecting a rise in exports and a reduction in commodities imports bill. India policy rate and domestic bank loans 16 Policy rate (lhs) Domestic bank loans (y/y; rhs) 40 14 35 12 30 10 25 8 20 6 15 4 10 2 5 0 02 03 04 05 06 07 08 09 10 11 12 13 14 0 Sources: IHS Global Insight, Euler Hermes The combination of more proactive central bank policy and the change of leadership have strengthened confidence, sustained capital inflows (FDI inflows up to 2% GDP in 2014 from 1.5% in 2013) and helped stabilize the currency. The outlook is broadly positive for 2015 and 2016 with growth to exceed 6%. Rising demand in the US and the Eurozone will support further improvement in the trade balance. Private consumption is set to recover gradually on the back of lower inflation. vulnerabilities to external shocks have eased with import cover exceeding 6 months, twins deficit reducing and increased policy credibility. Phase 2: Rebuild buffer to support growth (2015 onwards) Fostering investment will probably be the first priority of the authorities in 2015. Despite a rise in confidence, investment growth did not really pick up - mainly due constrained by difficult credit conditions and concerns about the global environment. The government will need to build a sufficient buffer to raise public investment without worsening debt sustainability. It is also vital to take further steps to improve the business environment to make India more attractive for foreign direct investment. Regarding these two items, the Modi government has made significant progress ending diesel subsidies and increasing foreign direct investment limits in key sectors (Defense, insurance, real estate and railway infrastructure). This progress should accelerate in 2015 as the Expenditure Management Commission should deliver recommendations to reduce the deficit in February and reform subsidies (which cost 2.3% GDP in FY20132014). Regarding monetary policy, the Central Bank stance will have to provide greater support to credit growth while ensuring macro-financial stability: Bank credit decelerated to 11% y/y in H2 2014 from 14% in H1. Falling commodity prices will probably keep inflation below 6% In H1 2015 (RBI target is 6% by January 2016) allowing monetary easing. However, ongoing fiscal consolidation, divergence in advanced economies monetary policies and uncertainties about oil prices suggest a gradual approach with another rate cut (-25bp) in H1 2015, after a first one (- 25bp) in January 2015. 23 Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook Macroeconomic, Country Risk and Global Sector Outlook economic Research euler Hermes Group Euler Hermes Business Insolvency Worldwide Economic Outlook no.1210 Economic Outlook no. 1208-1209 August September 2014 June-July 2014 economic outlook and other publications Special Report www.eulerhermes.com www.eulerhermes.com www.eulerhermes.com Growth: A giant with feet of clay December 2014 October-November 2014 Special Report www.eulerhermes.com Economic Outlook no.1213 Economic Outlook no. 1211-1212 The global automotive market 10 industry short stories expose macroeconomic fragility International debt collection Back on four wheels The Good, the Bad and the Ugly A rotten apple can spoil the barrel Payment terms, past dues, non-payments and insolvencies: What to expect in 2015? Economic Research Economic Research Economic Research Already issued: no. 1195-1196 ◽ macroeconomic, Risk and Insolvency outlook The world at a crossroads no. 1197 ◽ Global Sector outlook Reconciling economic (dis)illusions and financial risks no. 1198 ◽ Special Report The Mediterranean: Turning the tide no. 1199 ◽ macroeconomic and Country Risk outlook Half-baked recovery no. 1200-1201 ◽ business Insolvency worldwide Patching things up: Fewer insolvencies, except in Europe no. 1202-1203 ◽ macroeconomic and Country Risk outlook Top Ten Game Changers in 2014: Getting back in the game no. 1204 ◽ Global Sector outlook All things come to those who wait: Green shoots for one out of four sectors no. 1205-1206 ◽ macroeconomic and Country Risk outlook Hot, bright and soft spots: Who could make or break global growth? no. 1207 ◽ business Insolvency worldwide Insolvency World Cup 2014: Who will score fewer insolvencies? no. 1208-1209 ◽ macroeconomic, Country Risk and Global Sector outlook Growth: A giant with feet of clay no. 1210 ◽ Special Report The global automotive market: Back on four wheels no. 1211-1212 ◽ business Insolvency worldwide A rotten apple can spoil the barrel Payment terms, past dues, non-payments and insolvencies: What to expect in 2015? no. 1213 ◽ Special Report International debt collection:The Good, the Bad and the Ugly no. 1214 ◽ macroeconomic and Country Risk outlook Overview 2015: Not such a Grimm tale but no fabled happy ending To come: no. 1215 24 ◽ Special Report Economic Research Euler Hermes Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook weekly export Risk Outlook The Economic Talk N N https://www.youtube.com/watch?v=xYS8qaNrUaU http://www.eulerhermes.com/economic-research/economic-publications/Pages/Weekly-Export-Risk-Outlook.aspx Economic Insight Country Report ◽An aditional USD88bn of U.S. exports in 2015 > 2014-12-02 ◽Chinese growth - What could possibly go wrong? > 2014-12-02 ◽U.S. businesses’payment behaviors point to slowed GDP and mixed picture for key industries > 2014-11-18 ◽Spain: Cautiously taking the bull by the horns > 2014-10-08 ◽Chinese exports 2014-2015: Another US300bn > 2014-10-07 ◽Russia and the West: Tough Love? > 2014-09-12 ◽Non-payments in Italy: It’s not over… yet! > 2014-09-04 ◽Don’t cry too much for Argentina > 2018-08-08 ◽ Fertilizer: The seed growing secretly > 2014-08-05 ◽ Road transport: Labor costs explain the large gap in profitability in Europe > 2014-07-08 ◽The European electricity market under strong pressure > 2014-07-05 ◽Thailand: Another coup challenges the country’s economic resiliencel > 2014-06-06 ◽2014 World Cup : more inflation than growth in Brazil > 2014-06-06 ◽Tire industry on a roll >2014-04-17 ◽Putinomics: Tightrope walking > 2014-04-10 Industry Report ◽Azerbaijan > 2014-12-17 ◽Bangladesh > 2014-12-17 ◽Cambodia > 2014-12-17 ◽Denmark > 2014-12-17 ◽El Salvador > 2014-12-17 ◽Ethiopia > 2014-12-17 ◽Gabon > 2014-12-17 ◽Germany > 2014-12-17 ◽Honduras > 2014-12-17 ◽Iceland > 2014-12-17 ◽Israel > 2014-12-17 ◽Laos >2014-12-17 ◽Latvia > 2014-12-17 ◽Lithuania > 2014-12-17 ◽Mali > 2014-12-17 ◽Mozambique > 2014-12-17 ◽Myanmar > 2014-12-17 ◽Norway > 2014-12-17 ◽Norway > 2014-12-17 ◽Paraguay > 2014-12-17 ◽Rwanda > 2014-12-17 ◽Sri Lanka > 2014-12-17 ◽Sweden > 2014-12-17 ◽Switzerland > 2014-12-17 ◽Taiwan > 2014-12-17 ◽Trinad & Tobabo > 2014-12-17 ◽Turkey > 2014-12-17 ◽Uganda > 2014-12-17 ◽Uruguay > 2014-12-17 ◽The paper industry in Italy: Time to turn the page > 2014-12-16 ◽Consumer electronics: Only a timid rebound in 2015 > 2014-12 ◽Construction in Italy: Only a timid rebound in 2015 > 2014-12-02 ◽Textile & Clothing in Germany: A two-geared reality > 2014-10-31 ◽Textile & Clothing in Italy: Bronze medal on the international podium, but facing obstacles > 2014-10-31 ◽Italian car sector: Time to do an oil change > 2014-10-22 ◽U.S Automotive > 2014-10-03 ◽U.S. Construction > 2014-10-03 ◽Italian steel at a crossroads > 2014-09-30 ◽Der Automobilweltmarkt: Wieder auf allen vier Rädern > 2014-09-19 ◽Agrifood in the Netherlands The bumpy road continues > 2014-09-18 25 Economic Outlook no. 1213 | December 2014 | Special Report > argentina Solunion Subsidiaries Av. Corrientes 299 Registered office: Euler Hermes Group 1, place des Saisons 92078 Paris La Défense - France Phone: + 33 (0) 1 84 11 50 50 Buenos Aires www.eulerhermes.com C1043AAC CBA, Phone: + 54 11 4320 9048 > australia Euler Hermes Australia Pty Ltd Level 9, Forecourt Building 2 Market Street Sydney, NSW 2000 Phone: + 61 2 8258 5108 > austria Acredia Versicherung AG Himmelpfortgasse 29 1010 Vienna Phone: + 43 5 01 02-1111 Euler Hermes > Czech Republic Euler Hermes Europe SA organizacni slozka Molákova 576/11 186 00 Prague 8 Phone: + 420 266 109 511 > denmark Euler Hermes Danmark, filial of Euler Hermes Europe SA, Belgien Amerika Plads 19 2100 Copenhagen O Phone: + 45 88 33 33 88 > estonia Please contact Finland > Finland Euler Hermes Europe SA Suomen sivuliike Mannerheimintie 105 Euler Hermes Collections GmbH Zweigniederlassung Österreich Phone: + 43 1 90 227 14000 > bahrain Please contact United Arab Emirates > belgium Euler Hermes Europe SA (NV) Avenue des Arts — Kunstlaan, 56 1000 Brussels Phone: + 32 2 289 3111 1155, René-Lévesque Blvd West Phone: +1 514 876 9656 / +1 877 509 3224 > Chile Solunion Av. 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Unit 2103, Taiping Finance Tower, No. 488 Middle Yincheng Road, Pudong New Area, Shanghai, 200120 Phone: + 86 21 6030 5900 > Colombia Solunion Calle 7 Sur No. 42-70 Edificio Fórum II Piso 8 Medellin Phone : +57 4 444 01 45 Mumbai 400 051 Phone: +91 22 6623 2525 > Indonesia PT Asuransi Allianz Utama Indonesia Jakarta 12190 > Ireland Euler Hermes Ireland 1, place des Saisons Allianz House F-92048 Paris-La-Défense Cedex Elm Park Phone: + 33 1 84 11 50 50 Merrion Road Dublin 4 > Germany Euler Hermes Deutschland AG Friedensallee 254 22763 Hamburg Phone: +353 (0)1 518 7900 > Israel ICIC 2, Shenkar Street 68010 Tel Aviv Gaastraße 27 22761 Hamburg Phone: + 49 40 8834 9000 Euler Hermes Collections GmbH Zeppelinstr. 48 14471 Postdam Phone: + 49 331 27890 000 Euler Hermes Rating GmbH Friedensallee 254 22763 Hambourg Phone: + 49 40 8 34 640 Euler Hermes Liaison Office at AGCS Allianz Global Coroporate & Specialty AG Fritz-Schäffer-Straße 9 81737 München Phone: + 49 89 38 00 12 159 > Greece Euler Hermes Hellas Credit Insurance SA 16 Laodikias Street & 1-3 Nymfeou Street Athens Greece 11528 Phone: + 30 210 69 00 000 > Hong kong Euler Hermes Hong Kong Services Ltd Suites 403-11, 4/F Cityplaza 4 12 Taikoo Wan Road Island East Hong Kong Phone: + 852 3665 8901 26 Bandra Kurla Complex Bandra (East) Phone: +62 21 252 2470 ext. 6100 Bureau 2810 Montréal Québec H3B 2L2 Opposite Income Tax Office > France Euler Hermes France SA Euler Hermes Collection Euler Hermes World Agency Euler Hermes Aktiengesellschaft > Canada Euler Hermes North America Insurance Company 5th Floor, Vaibhav Chambers Summitmas II. Building, 9th Floor Avenida Paulista, 2.421 — 3° andar Phone: + 55 11 3065 2260 > India Euler Hermes India Pvt.Ltd Jl. Jenderal Sudirman Kav 61-62 Phone: + 49 40 8834 0 São Paulo / SP 01311-300 Phone: +36 1 453 9000 Phone: + 358 10 850 8500 > brazil Euler Hermes Seguros de Crédito SA Jardim Paulista Kiscelli u. 104 1037 Budapest 00280 Helsinki Handelskai 388 1020 Vienna > Hungary Euler Hermes Europe SA Magyarrorszagi Fioktelepe Euler Hermes Magyar Követeléskezelõ Kft. (trade debt collection) Phone: +97 23 796 2444 > Italy Euler Hermes Europe SA Rappresentanza generale per l’Italia Via Raffaello Matarazzo, 19 00139 Rome Phone: + 39 06 8700 1 > Japan Euler Hermes Deutschland AG, Japan Branch Kyobashi Nisshoku Bldg. 7th floor 8-7, Kyobashi, 1-chome, Chuo-Ku Tokyo 104-0031 Phone: + 81 3 35 38 5403 > kuwait Please contact United Arab Emirates > latvia Please contact Sweden Euler Hermes Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook > lithuania Please contact Denmark > Poland Towarzystwo Ubezpieczen Euler Hermes SA Avda. General Perón, 40 > united arab emirates Euler Hermes c/o Alliance Insurance (PSC) > malaysia Euler Hermes Singapore Services Pte Ltd., Malaysia Branch ul. Domaniewska 50 B Edificio Moda Shopping Warba Center 4th Floor 02-672 Varsaw Portal C, 3a planta Office 405 Phone: + 48 22 363 6363 28020 Madrid PO Box 183957 Phone: +34 91 581 34 00 Suite 3B-13-7, Level 13, Block 3B Plaza Sentral, Jalan Stesen Sentral 5 50470 Kuala Lumpur Phone: +603 2264 8556 (or 8599) > Spain Solunion > Portugal COSEC Companhia de Seguro de Créditos, S.A. > Sri lanka Please contact Singapore Avenida da República, nº 58 > mexico Solunion 1069-057 Lisbon Phone: + 351 21 791 3700 Torre Polanco Mariano Escobedo 476, Piso 15 Colonia Nueva Anzures 11590 Mexico D.F. Phone: +52 55 52 01 79 00 > morocco Euler Hermes Acmar 37, bd Abdelatiff Ben Kaddour > Qatar Please contact United Arab Emirates > Romania Euler Hermes Europe SA Bruxelles Sucursala Bucuresti Str. Petru Maior Nr.6 Sector 1 London E14 5DX Klarabergsviadukten 90 Phone: + 44 20 7 512 9333 101 64 Stockholm Phone: + 46 8 5551 36 00 > Switzerland Euler Hermes Deutschland AG, Zweigniederlassung Zürich Euler Hermes Reinsurance AG 011264 Bucarest Richtiplatz 1 Phone: + 40 21 302 0300 Postfach > The netherlands Euler Hermes Nederland > Russia Euler Hermes Credit Management OOO P.O. Box 70751 5201CZ’s-Hertogenbosch Phone: + 7 495 9812 8 33 ext. 4000 > Taiwan Please contact Hong Kong > Saudi arabia Please contact United Arab Emirates > Thailand Allianz C.P. General Insurance Co., Ltd 30th Floor 1100 AL Amsterdam > Singapore Euler Hermes Singapore Services Pte Ltd Phone: +31 (0) 20 696 39 41 12 Marina View Bangrak, Bangkok 10500 #14-01 Asia Square Tower 2 Phone: + 66 2638 9000 Level 1, 152 Fanshawe Street Auckland 1010 Phone: + 64 9 354 2995 Silom Road Singapore 018961 Phone: + 65 6297 8802 > Slovakia Euler Hermes Europe SA, poboka poist’ovne z ineho clenskeho statu > Tunisia Please contact Italy > Turkey Euler Hermes Sigorta A.S. 2012: Plynárenská 7/A Büyükdere Cad. No:100-102 82109 Bratislava Maya Akar Center Kat: 7 Esentepe Holbergsgate 21 Phone: + 421 2 582 80 911 St. Olavs Plass 0130 Oslo Phone: + 47 2 325 60 00 > oman Please contact United Arab Emirates > vietnam Please contact Singapore 323 United Center Building > norway Euler Hermes Norge P.O. Box 6 875 Phone: + 1 877 883 3224 Phone: + 41 44 283 65 65 Office C08, 4-th Dobryninskiy per., 8, > new zealand Euler Hermes New Zeland Ltd 800 Red Brook Boulevard Owings Mills, MD 21117 Phone: + 41 44 283 65 85 (Reinsurance) Moscow, 119049 P.O. Box 12473 > united States Euler Hermes North America Insurance Company 8304 Wallisellen Pettelaarpark 20 De Entree 67 (Alpha Tower) 1 Canada Square P.O. Box 729 Phone: + 212 5 22 79 03 30 Euler Hermes Bonding > united kingdom Euler Hermes UK > Sweden Euler Hermes Sverige filial 20 050 Casablanca Phone: + 31 (0) 73 688 99 99 / 0800 385 37 65 Dubai Phone: + 971 4 211 6005 > South africa Please contact Italy 34394 Şișli/ Istanbul Phone: +90 212 2907610 > South korea Euler Hermes Hong Kong Services Korea Liaison Office Rm 1411, 14/F, Sayong > Philippines Please contact Singapore Platinum Bldg. 156, Cheokseon-dong, Chongro-ku, Seoul 110-052 Phone: + 82 2 733 8813 27 Euler Hermes Economic Outlook is published monthly by the Economic Research Department of Euler Hermes Group 1, place des Saisons, F-92048 Paris La Défense Cedex e-mail: [email protected] - Tel. : +33 (0) 1 84 11 50 50 This document reflects the opinion of the Economic Research Department of Euler Hermes Group. The information, analyses and forecasts contained herein are based on the Department's current hypotheses and viewpoints and are of a prospective nature. In this regard, the Economic Research Department of Euler Hermes Group has no responsibility for the consequences hereof and no liability. Moreover, these analyses are subject to modification at any time. www.eulerhermes.com Economic Outlook
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