Brazil: Deeper recession
Data released earlier this week by the statistical agency IBGE show a deeper recession than initially announced. Real GDP growth for Q1 and Q2 were revised downwards to -2.1% y/y (compared with -1.6% initially) and -3% y/y (-2.6%), respectively. In Q3, real GDP fell by a further -4.5% y/y, the deepest contraction since 1995. In q/q terms, GDP fell by -1.7% in Q3. Private consumption contracted by -1.5% q/q, reflecting weak household confidence because of high inflation (9.9% y/y in October), increasing unemployment (7.9% in October, compared with 4.7% a year ago) and contracting real payrolls (-2% y/y). Investment fell -4% q/q and inventories shaved -0.7pps from overall growth. Public consumption was the only demand component to show even meagre growth (+0.3% q/q). Despite a decline in exports (-1.8% q/q in Q3 after +3.1% in Q2), net exports again contributed positively to growth, given the marked fall in imports (-6.9% q/q after -8% in Q2). Given these latest data, the carry-over for 2015 stands at -3.5%. We now expect the economy will contract by -3.8% this year and it will remain in deep recession in 2016, with GDP contracting by at least -2%.
Eurozone: Just a bit more, but not enough
We were expecting the ECB to lower the deposit rate, to expand the QE duration and increase the monthly asset purchases from the current EUR60bn but only the first two of these were implemented on 3 December. The ECB announced that the range of assets that are purchased is wider (taking into account regional and local governments) and that the principal payments are reinvested before and post March 2017, which will allow liquidity to remain abundant up to 2018, at least. However, market reaction was muted, with the prospect of more action next year as economic growth remains weak; private consumption is supported by low inflation and low oil prices, but the main boost is behind us and further support of this kind now seems limited. We remain cautious about the strength of exports as the potential for a much lower EUR/USD seems low (expect 1.05 in 2016 from 1.1 in 2015) while global demand lacks momentum. ECB forecasts for GDP growth remain unchanged at +1.5% in 2015, +1.7% in 2016 and +1.9% in 2017, but inflation forecasts have been revised downwards (to +1% in 2016 and +1.6% in 2017). Forecasts for both indicators remain slightly above our expectations.
China: SDR inclusion, first step on long journey
The IMF announced that, effective from October 2016, the RMB will be included in its Special Drawing Rights (SDR) basket, with a weighting of 10.9%, compared with 41.7% for the USD and 30.9% for the EUR. The decision’s symbolism is strong as it endorses the role of China as a key driver of the global economy and acknowledges positive improvements in the internationalisation of the RMB. In economic terms, the impact is yet to be assessed. In the short term, adjustments to the Central Bank balance sheet are likely to lead to an additional USD30bn RMB demand. This may increase significantly if the RMB becomes a full global reserve currency. To do so, China will have to open fully its capital account and loosen its grip on the currency. This is likely to be gradual and effectively communicated to avoid the type of currency and financial market volatility seen in August. The currency is still subject to strong downward pressures in response to weak economic news (such as manufacturing PMI) and the upcoming Fed hike. Greater clarity and more guidance on the RMB’s internationalisation will be crucial.
Switzerland: Faltering investment dampens growth
Real GDP stagnated q/q in Q3 after increasing by +0.2% in Q2, as sharply declining gross investment offset improving consumption and external demand. Private consumption growth picked up to +0.4% q/q (+0.3% in Q2) and public spending surged by +1.8% q/q (-0.1%). Fixed investment fell by -0.2% q/q (+0.8% in Q2) as investments in construction dropped by -0.9% q/q while those in equipment were up by +0.2%. Inventories subtracted a heavy -2.2pps from Q3 q/q growth. Exports increased by +5.4% q/q (-4.1% in Q2) while imports increased by +3.3% q/q (-6.9%) so that net exports contributed +1.8pps to Q3 growth (+1.2pps in Q2). These high and volatile trade activity growth rates are explained by valuable items, which account for approximately 25% of Swiss external trade and that fluctuate strongly, rather uncorrelated with the business cycle. Excluding valuables, exports expanded by +0.6% q/q (+0.3% in Q2) and imports by +0.2% (-1.2%) – providing a better picture of the economy. Euler Hermes cut its full-year GDP growth forecast to +0.8% in 2015 and maintains +1.2% for 2016.