India: Pulling the trigger?
On Tuesday, the Reserve Bank of India announced a large cut in the repo rate, to 6.75% from 7.25%. Inflationary pressures have declined significantly in relation to the official target (6% or below in January 2016), with CPI inflation at 3.7% y/y in July and August. The economic outlook is subject to cyclical headwinds, including weaker growth in external demand and in investment (+4.9% y/y in Q2 2015). Monetary policy has eased significantly since the beginning of the year (-75bps from January to August) but has not translated into strong growth in credit; domestic bank credit increased by around +9% y/y between January and September compared with +12.4% in 2014. The latest rate cut comes at a time when external fundamentals have improved: lower current account deficit, lower currency risk and improved credibility of economic management. The rate cut was accompanied by regulatory changes to encourage foreign investment, with easier access to government bonds. In addition to the boost to investment through credit, such changes will strengthen investor confidence. We expect GDP growth will accelerate over the next quarters, pushing overall expansion to +7.7% in FY2015/16.
U.S.: Consumer strength, Fed likely to move in December
Q2 GDP growth was revised upwards to +3.9% q/q annualised (from +3.7%), driven by non-residential business investment (+5.1%), residential investment (+9.4%) and robust consumption (+3.6%). Real personal consumption continued to grow in July and gained +0.4% m/m in August as disposable incomes increased by +0.3%, boding well for Q3. In addition, consumer confidence improved by another +1.8 points in September, after +10.8 in August. The present situation index improved +5.3 to 121.1, the highest in eight years. Meanwhile, consumer price inflation remains dormant at 0.3% y/y, while the core inflation rate remains at 1.3%. However, inventories increased in H1 at the fastest pace on record, likely tempering Q3 consumption gains. Housing data were mixed as new home sales gained +5.2% m/m in August, the highest level of the recovery, but prices of existing homes fell -0.2% m/m for the third consecutive month. Fed Chair Janet Yellen and two other Fed voting members gave speeches strongly suggesting a rate hike in 2015, which Euler Hermes expects in December.
Eurozone: More ECB stimulus is likely by year-end
Inflation fell back into negative territory in September (-0.1% y/y) for the first time since April 2014. The fall was mainly driven by the decline in energy prices (oil prices down -16% in July, which is equivalent to -0.3pps from the inflation rate over the following 2-3 months). Excluding energy, food and tobacco, inflation remained stable and at a low level (0.9% y/y). Looking at the data already available, consumer prices in Spain (-0.9% y/y) and Germany (0% y/y) subtracted -0.1pps from overall Eurozone inflation. There were slight increases in Italy (+0.1pps to 0.3%) and Belgium (+0.2pps to 1.1%). We believe the probability that the ECB will expand its QE programme beyond September 2016, most likely until mid-2017, has increased and that the magnitude of the monthly asset purchases will increase from EUR60 bn. Indeed, bank interest rates on company loans are falling, but the recent EUR appreciation is limiting the potential for further improvements in financing conditions. Moreover, lack of demand remains a constraint for company investment and limits company credit demand (+0.4% y/y in August).
France: Against all the odds, France is back
In September, business confidence in the industrial sector improved to 104 (from 103), reaching its highest level since August 2011. As such, it corroborates the large increase (2.1pts) in this month's manufacturing PMI. Forward-looking components reached four-year highs. Business confidence in the retail sector again improved, gaining 2pts to 109. In the services sector, confidence fell back -2pts to 97 and it has not crossed the 100-threshold since August 2011. Meanwhile, after five months at a standstill, the consumer confidence index improved by 3pts to 97, its highest since October 2007. The improvement was broad-based but particularly notable was the 4pts gained in the “major purchases intentions” index. This is probably linked to declining fears about unemployment; the corresponding balance decreased (for the 2nd consecutive month) by 6pts, although remaining above its long-term average. The surveys underpin our GDP growth forecast of +1.2% in 2015. To do so requires growth of around +0.4% q/q (the current trend) for the next two quarters.