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This is for investment professionals only and should not be relied upon by private investors
FEBRUARY 2015
Macro update: February 2015
GLOBAL GROWTH
Data: Global growth momentum remained subdued, but the pace of deceleration seems to
have slowed down somewhat over the past month. Consumer confidence improved on
aggregate, likely driven in part by lower energy prices and more supportive policy. Business
confidence remained mixed, but the Euro area, UK and parts of EM saw some improvement.
Inflation continued to fall across the board.
Global leading indicators vs OECD IP
DM vs EM manufacturing PMIs
58
2
DM Manufacturing
PMI
1.5
1
56
EM Manufacturing
PMI
0.5
0
54
-0.5
-1
52
-1.5
GLI momentum,
%mom
OECD IP
(3mma %mom)
-2
-2.5
-3
2004
2006
2008
2010
2012
2014
Chart 1. Source: Goldman Sachs Economics Research, Haver
Analytics
50
48
2010
2011
2012
2013
2014
2015
Chart 2. Source: Markit, Haver Analytics
View: Global growth still looks set to rebound moderately over the next few months, with
the benefits of lower oil prices and more supportive policy becoming more visible around
mid-2015. The strong disinflationary trend should carry on at least throughout the first half
of this year, with the second-half outlook conditional on the oil price trajectory. In this
respect, the growth picture is likely to be mixed in the coming months, with central banks
injecting more liquidity, easing financial conditions. The second half of 2015 will then see a
more synchronised growth improvement, with the US Federal Reserve inching closer
towards hiking rates around year-end.
Developed market (DM) financial condition indices (FCIs)
Anna Stupnytska is the Global
Economist at Fidelity Worldwide
Investment. Before joining Fidelity in
July 2014, Anna was a
macroeconomist at Goldman Sachs
Asset Management. She holds a
degree in Economics from
Cambridge University, and a Masters
of Philosophy in Economics from
Oxford University.
Goldman Sachs US financial conditions Index
100.5
100
Tightening
100.0
98
99.5
96
94
92
2009
GS US FCI
GS Euro area FCI
GS UK FCI
GS Japan FCI
2010
2011
99.0
Easier financial
conditions
2012
Chart 3. Source: Goldman Sachs Economics Research
2013
2014
2015
98.5
Jan-13
GS US FCI
US oil-adjusted FCI
Jul-13
Jan-14
Chart 4. Source: Goldman Sachs Economics Research
Risks to the outlook: The probability attached to key risks has shifted somewhat. While the
uncertainty around Greece will keep markets volatile, it seems that systemic risk is limited for
now, and should not jeopardise the recovery at this point. The risk around the Russia/Ukraine
situation is, however, rising: apart from a serious security challenge in Europe and globally, it
also brings higher likelihood of spillovers through the financial/market channels, as well as
through tougher sanctions in the coming weeks (perhaps going as far as a full trade embargo).
An earlier-than-expected Fed hike is still a key risk, but the likelihood seems to have
diminished due to a number of external factors.
Jul-14
Jan-15
US
Data: Data continued to be mixed over the past month, pointing to some slowdown in
momentum relative to the second half of 2014. Consumer confidence posted another postrecession high, and housing data were generally better than expected (with December new
home sales particularly strong). While the January employment report surprised on the upside,
earnings growth remained below historical averages. ISM manufacturing declined again in
January, but, as before, some of the weakness came from the prices paid component,
implying lower energy prices continue to contribute to data weakness.
US ISM manufacturing declines despite strong non-farm payrolls
400
67.5
200
60.0
0
52.5
-200
45.0
-400
ISM: Nonmfg: Employment Index
(SA, 50+ = Econ Expand, LHS)
37.5
-600
3m Av. Chg. in Total Nonfarm
Employment (SA, Thous, RHS)
-800
30.0
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Chart 5. Source: Institute for Supply Management (ISM), BLS/Haver
View: The US recovery continues, although at a
slower pace than in the second half of last year, as
expected. While lower energy prices account for
some softness in nominal indicators for now, a
related boost to consumption and downward
pressure on production costs should gradually start
becoming more visible in the data over the next few
months. Rising consumer confidence is one of the
first signs of this dynamic.
Despite the strong non-farm payrolls report this
month, a number of labour market indicators – such
as the employment component of the
nonmanufacturing ISM (chart 5), and various
measures of unemployment and earnings – point to
some spare capacity remaining. This, combined with
lower energy prices and a stronger dollar, means
inflationary pressures are still some time away. Low
inflation and a number of external risks (Greece,
Russia, China FX move) mean the Fed is unlikely to
raise rates in mid-2015. My baseline forecast for the
first hike remains towards year-end of 2015.
EURO AREA
Data: Incremental improvement in the data continued over the past month, with the area-wide
composite PMIs edging higher in January, driven by notable increases in manufacturing
indices in France and Italy and in services indices in Germany, Italy and Spain. December IP
came in stronger than expected in Germany, France and Italy. Inflation fell further into the
negative territory, while core edged down slightly.
Euro weakness raises level of euro area real GDP
82.5
6
90.0
4
2
97.5
0
105.0
-2
112.5
120.0
1995
EA 19: Euro Nominal Effective Exchange
Rate (NSA, 1999=100, inverted, LHS)
-4
EA18 : Real GDP (SA, % y/y, RHS)
2000
2005
Chart 6. Source: European Central Bank, Eurostat/Haver
2010
-6
2015
View: A cyclical pick-up is set to gradually gain
pace over the next few months, helped by lower
commodity prices, EUR weakness and easier
policy. In terms of numbers, estimates suggest that
a 10% depreciation in the effective EUR exchange
rate raises the level of euro area GDP by around
50-60bp after two years. A 10% fall in oil prices
lowers CPI by 20bp and raises the level of real
GDP by around 30bp over two years. Given the
10% EUR NEER depreciation and the 40% fall in
EUR price of oil since mid-2014, the euro area
growth could be boosted by around 1.8% over the
next few quarters, all else being equal. As noted
before, while the impact of lower oil prices is
already feeding into inflation and nominal indicators,
the impact on growth will be felt with a lag and is
likely to take another 3-6 months to become visible.
The main risks to the outlook are still related to Greece and Russia. Given developments
over the past month, the latter has now become the key risk. While the uncertainty around
Greece will keep markets volatile, it seems that systemic risk is limited for now and should
not jeopardise the recovery at this point. The risk around the Russia/Ukraine situation is far
more concerning and it is rising, with the potential to pose serious security challenges and
an increasing likelihood of spill-overs through financial and market channels. Tougher
international sanctions over the coming months could go as far as a full trade embargo.
UK
Data: Some stabilisation in the data emerged over the past month, with January PMIs
rising above expectations. Construction PMI ticked up, mortgage approvals rose, house
prices accelerated for the first time since June 2014. December industrial production data
remained weak.
UK housing data stabilised somewhat in January
67.5
80
60
60.0
40
20
52.5
0
45.0
-20
-40
UK PMI: Construction (SA,
50+=Expansion, RHS)
37.5
-60
UK: RICS Survey: New
Buyer Enquiries chg (SA, %
Bal, LHS)
UK: RICS Survey: 3m price
chg, England & Wales (SA,
% Bal, LHS)
30.0
-80
-100
22.5
-120
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
View: Accelerating real wage growth, helped by
lower energy prices, should stimulate consumption
over the next few months. In terms of numbers, the
fall in oil prices since mind 2014 is likely to boost the
level of GDP by 1-1.5% over a period of two years.
The housing sector indicators could be close to
bottoming out, although price weakness could
persist for a few months as suggested by leading
indicators (chart 7), capping growth upside. The
headwind of political uncertainty will also weigh on
confidence in the run-up to elections. Interestingly
for investors, whoever wins will have to do much
more fiscal tightening than has been done so far.
Given the strong disinflationary trend and external
uncertainties (Europe/Greece, Russia/Ukraine), the
BoE is unlikely to start thinking about hiking rates, at
least until later in the year.
Chart 7. Source: CIPS/MKT, RICS/Haver
JAPAN
Data: Consumer confidence improved for the second month and Economy Watchers
survey edged up. Employment grew sharply in December, but mainly driven by part-time
workers. Nominal wages increased on winter bonuses, while real wage growth remained
negative. Trade data pointed to a gradual recovery in export volumes. Inflation continued
slowing further (as shown in the chart 8).
Japanese inflation slows further
3
30
Japan: CPI: General, ex. Food & Energy
(NSA, % chg y/y)
2
20
Japan: CPI: Energy (NSA, % chg y/y)
1
10
0
0
-1
-2
2008
-10
-20
2009
2010
2011
2012
2013
Chart 8. Source: Ministry of Internal Affairs and Communications/Haver Analytics
2014
2015
View: Tentative signs of data stabilisation are
emerging, but it will take another few months for
growth acceleration to come through. As inflation
continues to fall, the BoJ might need to do more in
the spring – the risk is they decide not to, which
would likely disappoint the market. The spring wage
negotiations should boost nominal wage growth (like
in 2014) and, in combination with lower inflation,
should also help real wage growth recover.
However, as before, structural reforms aimed at
boosting productivity are key in ensuring wage
increases are sustainable.
CHINA
Data: China’s January official PMI posted its lowest reading in more than two years and
profits in the industrial sector declined 8% year-on-year in December. January inflation fell
to its lowest level since 2009, driven by lower food prices as well as by Chinese New Year
distortions (relative to 2014). Trade surplus posted a record high, with exports falling
moderately, and imports contracting sharply (as shown in chart 9). Following strong RMB
appreciation in trade-weighted terms, exports to Europe and Japan fell sharply.
Record high Chinese trade surplus as exports fall and imports contract
China: Merchandise Trade Balance (NSA, mil. US$, LHS)
China: Merchandise Imports, (NSA, % chg y/y)
China: Merchandise Exports (NSA, % chg y/y)
100%
80,000
60,000
75%
40,000
50%
20,000
25%
0
0%
-20,000
-25%
-40,000
-50%
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
Chart 9. Source: China Customs/Haver
View: Latest data prints pose a number of policy
dilemmas for the government. The fall in inflation
and collapsing imports are partly driven by
commodity price weakness, but also partly indicative
of sluggish domestic demand. This explains the
PBOC’s RRR cut at the start of February. But while
broader rate cuts are good news for shorter-term
growth, it is bad news for longer-term growth
sustainability.
This will certainly somewhat undermine all the
efforts to reign in credit over the past year or so as
lower rates will continue fuelling up debt. But
because banks, businesses and consumers know
that tightening is still ahead, the lending channel
transmission is unlikely to be as efficient as before,
capping the growth upside.
It still seems that weakening the currency (perhaps
by adjusting the trading band) could be a better
shorter-term solution in the current environment,
given the USD appreciation trend (helping exports
and inflation domestically but further supporting
disinflation globally). Overall, given the
government’s focus on growth stability, a hard
landing remains unlikely at this point, but at the
same time the focus on reform means stimulus can
be withdrawn quickly with any signs of growth
improvement.
EMERGING MARKETS
Data: EM aggregate PMI edged up slightly in January, mainly driven by improvements in
Mexico, Poland and South Africa, while Russia, Turkey and China saw weaker PMI
numbers in the below-50 territory (chart 10). Korean exports growth, a leading indicator for
global industrial production, remained suppressed. A strong disinflationary trend continued.
EM PMIs edged up, driven by Mexico, Poland and South Africa
58
Latest PMI
Mexico
56
Poland
South Africa
54
India
DM
52
Taiwan
Korea
EM
Turkey
50
-3.0
-2.0
-1.0
China
0
Brazil
+1.0
Indonesia
Russia
48
46
Chart 10. Source: Markit, Haver Analytics
View: Falling inflation is good news for EM, giving
central banks room for policy easing. Over the past
month, India, Egypt, Peru, Turkey, Romania,
Pakistan and China saw rate cuts (as well as Russia
but for different reasons). Together with easier
policy, lower commodity prices will lend some
support to growth in commodity importing countries
over the next few months. A pick-up in developed
markets, driven by the euro area and Japan, should
bode well for small open economies such as Korea.
+2.0
+3.0
+4.0
Latest PMI
vs previous
3month
average
The headwind from a slowdown in China could
recede somewhat on the back of policy-induced
growth stabilisation there. But commodity exporting
countries will continue facing headwinds, with
Russia and Brazil still in the most vulnerable
category.
RISKS FOR 2015
Russia-related risks
Russia’s deep recession/crisis spills over to Europe via trade and financial
channels.
No peace agreement with Russia results in tougher sanctions, including a full
trade embargo (Iran-style), leading to a complete economic collapse, spilling
over to the global economy. This is becoming increasingly likely.
US agrees to provide military aid to Ukraine, provoking Russia further with
war spreading across Ukraine (and perhaps the Baltics).
A regime change ends the Ukraine conflict and brings about a democratic
government in Russia (still unlikely at this point, but this would be a very
bullish scenario).
EU/Greece negotiations break down, leading to Grexit.
The Fed hikes earlier and faster than expected, jeopardising growth prospects
elsewhere (via tighter financial conditions globally).
Faster-than-expected slowdown in China.
Policy stimulus in Europe and/or Japan proves insufficient to escape the low
growth/low inflation equilibrium (e.g. BoJ steps back from pursuing the inflation target).
EM currency weakness vs USD puts pressure on EM corporate whose liabilities are
USD-denominated.
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IC15/22
THINGS TO WATCH IN FEBRUARY
Yellen’s Congressional
testimony (24-25 Feb)
BoJ (Feb 18)/ECB (5
Mar)/FOMC (17-18 Mar)
Greece-related negotiations
Russia/Ukraine ceasefire
observance and
implementation