China: Tough start
To date, 2016 has been challenging. December 2015 data renewed concerns of a further slowdown. In particular, both Markit/Caixin Manufacturing and Services PMI deteriorated, highlighting difficult operating conditions for companies. Price data indicate persistent deflation, with producer prices declining for the 46th consecutive month (-5.9% y/y). Although USD-denominated exports (-1.4% y/y from -6.8% in November) and imports (-7.6% y/y from -8.7% in November) showed some improvement, it is too early to conclude that a trade recovery is emerging as regional economies (Taiwan and South Korea) continued to report export contraction in December (-13.9% and -13.8% y/y, respectively). Against this background, financial markets have been extremely volatile. On 13 January, the Shanghai composite closed at 2949 (-17% below its reading at the end of December 2015) and the RMB was at 6.58 (6.49 end-December). In the short term, there is still scope for volatility. The recent flow of economic news has not been supportive, with GDP growth in 2015 estimated at +6.8%, following +7.3% in 2014. Investor sentiment is still nervous as misperceptions on policy orientation persist.
Germany: Continued robust growth in 2015
First official estimates indicate that real GDP increased by +1.7% in 2015 and by +1.5% in calendar-adjusted terms (2015 had more working days than 2014), following +1.6% in 2014, and above the average of the past 10 years (+1.3%). Domestic demand was the main growth driver in 2015, with private consumption expanding by +1.9% and government consumption by +2.8%. Fixed investment increased by +1.7%, with machinery and equipment up by +3.6% while construction investment slowed to +0.2%. However, inventories subtracted -0.4pps from growth in 2015. Both export and import expansion picked up, to +5.4% and +5.7%, respectively, so that net exports made a moderate contribution of +0.2pps to 2015 growth. Euler Hermes expects an acceleration in full-year growth of +1.8% in 2016, supported by additional public sector spending related to the refugee influx. Low oil prices for an extended period pose an upside risk to this forecast, but related deflationary pressures are a downside risk. Headline inflation fell to 0.3% y/y in December (0.4% in November).
U.S.: Strong jobs, but still no wage growth
The December employment report was stronger than expected with 292,000 jobs created, above expectations of 200,000, and included upward revisions of 50,000 jobs to the previous two months. Even manufacturing rebounded moderately, with 8,000 new jobs, the most in five months. Unemployment remained at 5%. However, hourly wage growth disappointed, edging down to USD25.24 in December from USD25.25 in November. The December hourly wage growth was +2.5% y/y but this includes a temporary boost because of weaker data in the earlier period and next month’s y/y wage growth is likely to be less positive. The employment report is mixed news for the Fed as it shows job growth, but not wage growth. Similarly, the Fed’s “Beige Book” of anecdotal evidence reported “little overall change in wage and price pressures” and also noted that growth of consumer spending and holiday sales ranged from “slight to moderate.” We expect interest rate increases this year will be gradual, with two or three hikes at most, less than Fed projections of four separate moves.
Saudi Arabia: A busy start to the year
The state budget for 2016 indicates a period of relative austerity, with projected expenditure down -14% on the 2015 outcome and revenues down -15.5%. Fiscal consolidation is seen as necessary over a protracted period, with energy subsidies to be reduced over a five-year period. The same time horizon extends to privatisation of state assets. However, with almost immediate effect, petrol prices, electricity tariffs for the wealthiest consumers, water costs and energy prices for industrial use were all increased. Moreover, recent announcements that a partial sale of state oil company, Saudi Aramco, is being contemplated suggest that a concerted reform agenda is taking shape. Meanwhile, fractured diplomatic and some trading relations with Iran and continuing military action in Yemen indicate regional tensions will remain heightened. We expect the fiscal deficit will improve to around a still challenging -12% of GDP in 2016 (-16% in 2015), further drawdown in financial assets controlled by SAMA, further debt issuance but that the exchange rate peg to the USD will remain unchanged, for now.