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Weekly Export Risk Outlook: Brazil; Canada; China; Germany



​Canada: Victorious Liberals plan to spend and stimulate

Justin Trudeau led the Liberals in a sweeping victory over the Conservatives in Canada Monday night, to take the Prime Minister’s seat, and a majority in Parliament. The collapse in commodity prices and negative GDP in Q1 and Q2 were perhaps the factors which pushed Canadians toward a new government, along with a general fatigue of ten years of Conservative rule under Stephen Harper.

Trudeau plans to run budget deficits for at least three years to finance CAD60bn in infrastructure spending and stimulate the economy, in contrast to his predecessor who had intended on balancing the budget even in the face of a weak economy. The deficits will be paid for by increasing taxes on higher incomes and by cancelling other Conservative programs, even as he plans to lower taxes for the middle class. Trudeau also intends to repair relationships with the U.S. which had soured somewhat under the Harper administration. Furthermore, the incoming PM will seek to remove Canadian troops from combat against ISIS and to legalize and regulate marijuana sales.

China: Not yet out of the woods

China’s GDP increased by +6.9% y/y in Q3 (from +7% in Q2). The breakdown revealed that GDP growth was supported by the service sector (+8.6% y/y from +8.5% in Q2). The manufacturing industry decelerated further to +5.8% y/y (from +6.0%). In particular, industrial production decelerated to +5.7% y/y in September (from +6.1% in August). On the demand side, hard frequency indicators suggest that growth was supported by an increase in government expenditures and solid private consumption growth (+10.9% growth for retail sales). Investment decelerated further, the trade balance remained large (USD60.3bn in September) but this reflects a strong decrease in imports. Going forward risks are tilted to the downside. First, business surveys in the manufacturing sector continue to signal weak new orders and moderate demand acceleration overseas does not bode well for a strong exports recovery. Second, pressures on companies’ margins persist with high deflationary pressures (PPI declined for 43rd consecutive month in September). Against this background, authorities are expected to step up easing measures in the next quarters including higher infrastructure spending and monetary easing (-50bp policy rate cut). We maintain our 2015 GDP growth forecast at +6.8%. 

Germany: Growth rests upon the thrifty schwäbische Hausfrau becoming less thrifty

Germany’s industrial production fell by1.2%m/m in August, despite the sharp rise in durable consumer goods’ production (+6.8%m/m). However, investment goods production fell (-2.1%m/m), as did non-durable consumer goods production (-1.8%m/m). Meanwhile, manufacturing orders fell by 1.8%m/m in August. Interestingly, whereas orders from the Euro area went up by +2.5%, orders from outside the Euro area decreased (-3.7%m/m). Coupled with the -2.8% fall experienced by manufacturers of capital goods, this probably reflects genuine weakness in China and other emerging markets. However, according to the economics ministry, calendar effects may have distorted the domestic order figures. Finally, the ZEW Indicator of Economic Sentiment declined again in October. It fell by 10.2 points compared to the previous month and the index now stands at a level of 1.9 points (vs. a long-term average of 24.8 pts). Nevertheless, another engine of growth is private consumption. Although retail sales fell -0.4% in August, they still hover around +2.5% y/y. This successful rebalancing away from exports and investment underpins our +1.6% Real GDP growth forecast for 2015 and +1.7% in 2016, in spite of the industrial sector’s downside risks evidenced by the latest indicators.

Brazil: consumption sharply contracts

Private consumption worryingly continues to contract in Brazil, with retail sales falling by -6.9% y/y in September, nearing -10% since the last peak of November 2014. Inflationary pressures persist although the SELIC target interest rate has been kept stable at 14.25% since July 2015 (after an increase of +300bps from October 2014). Consumer prices, which increased by +9.5% y/y in September, are expected to rise slightly in October, fueled by the recent large Brazilian real depreciation (-35% y/y against the U.S. Dollar), and upward pressures on food and controlled prices (partly due to the decrease in energy and fuel subsidies). High inflation is coupled with significant labor market deterioration. The unemployment rate stood at +7.6% in August, +2.7pps y/y, while employment contracted by -1.8%. The near-term outlook for private consumption remains negative, with the FGV Consumer Confidence Index falling steadily and reaching a new record low in September (76.3 against a medium-term average of 102).