Eurozone: Need to exit the steady moderate growth phase
GDP growth slowed to +0.3% q/q in Q3, below consensus expectations of +0.4%, with a mixed picture by country. Growth is likely to have been balanced through consumer spending, company investment and exports, although the latter is expected to be outpaced by stronger imports. Data for Germany (+0.3% q/q), France (+0.3%) and Spain (+0.8%) are in line with expectations but surprised slightly on the downside for the Netherlands (+0.1%), Italy (+0.2%), Belgium (+0.2%), Portugal (0%) and Finland (-0.6%). Greece was the only positive surprise as GDP contracted much less than anticipated (-0.5%), suggesting a weaker-than-expected recession this year but higher next year, given base effects. Against this background, it is now more likely that the ECB will announce further QE measures in December, particularly as the positive effects from lower oil prices and weaker EUR start to fade. We expect an increase in the pace of monthly asset purchases to at least EUR80bn (from EUR60bn) and an extension of the duration of the QE programme to mid-2017 (from September 2016). A cut in the deposit rate - further into negative territory - is also likely. This should help the EUR to move lower (close to parity with the USD) and therefore offset the negative impact from lower external demand from emerging markets. Our forecasts of +1.4% in 2015 and +1.6% in 2016 remain unchanged.
Japan: Tightrope walking?
GDP decreased -0.2% q/q in Q3 (-0.2% in Q2). Domestic demand weakened (-0.3%) reflecting lower non-residential investment and a decrease in inventories (-0.5pps from growth). Private consumption was resilient (+0.5%) and net exports added +0.1pps. Demand fundamentals showed positive signals in September and October but further policy support will be needed. Wage indicators improved recently, with cash earnings up in September (+0.6% y/y, +0.4% in August). Surveys point to a gradual improvement. The Nikkei Markit Manufacturing PMI increased to 52.4 in October (51 in September) with improvement in both employment and new order components. Consumer confidence is recovering from weak levels (41.5 from 40.6). However, downside risks remain through weak external demand and deflationary pressures. Real exports contracted -3.9% y/y in September and consumer and producer prices (-3.8% y/y in October) remain weak. Policy support will gain traction in the short term through an extra-budget (equivalent to around 0.6% of GDP) and further monetary policy easing.
U.S.: Housing and manufacturing positive, inflation subdued
Consumer price inflation (CPI) was 0.2% m/m in October, as expected. As energy prices fell -17% y/y, CPI on a y/y basis is also only 0.2%. After stripping out volatile food and energy prices, core CPI was up 0.2% m/m and 1.9% y/y, around the rate for seven of the past eight months. Meanwhile, the NAHB Housing Market Index fell for the first time in six months, to 62 in November (from 65), but still markedly above the 50-level signifying expansion. While both the current and expected sales components fell they are still at strong levels of 67 and 70, respectively. The foot traffic component still lags but gained +1 to 48. Manufacturing output increased in October after falling the previous two months (down four of the past six months), gaining +0.4% m/m. Capacity utilisation continued to hover around 76%, below the long-term average of 78.4% that has not been seen since the recession. Total industrial output fell -0.2% m/m in October, due to a sharp -2.5% decline in utilities as a result of warm weather.
Russia: GDP decline eased slightly but remained steep in Q3
A flash estimate by RosStat indicates that Q3 real GDP contracted by -4.1% y/y, following -4.6% in Q2 and -2.2% in Q1. A full breakdown by GDP sub-components is not available as yet but accelerating declines in Q3 of retail sales (-9.5% y/y, after -9.2% in Q2) and expenditure on fixed investment (-7% y/y, after -6.5% in Q2) suggest that domestic demand remained weak. The only impetus to the economy is coming from net exports as real exports have managed to grow slowly while real imports have slumped. On the supply side, a modest reduction in the decline in industrial production to -4.2% y/y in Q3 (-4.9% in Q2) and growing agricultural output (+1.5% y/y, after +2.5% in Q2) have helped to ease the recession slightly. But early indicators for Q4 do not bode well. In October, the decline in industrial production (-4.1% y/y) was steeper than in September (-3.8%), led by a deterioration in the manufacturing sector (down to -5.9% y/y from -5.4%). Euler Hermes expects full-year GDP will contract by -3.7% in 2015, followed by -0.3% in 2016. A return to modest growth of +1% is forecast in 2017.