China: Soft landing?
GDP growth decelerated to +6.8% y/y in Q4 2015 (from +6.9% y/y in Q3). Services slowed to +8.2% y/y (from +8.6%) and growth of secondary industries accelerated moderately (+6.1%y/y, from +5.8%). After a slight improvement in November 2015, activity indicators point to weaker momentum in December. Growth in retail sales decreased slightly to +11.1% y/y (from +11.2%) and urban fixed asset investment growth slowed to +10% y/y (+10.2% in November). Real industrial production growth weakened to +5.9% y/y in December (+6.2% y/y in November). In 2015, overall GDP growth slowed to +6.9% (from +7.3% in 2014), slightly below the +7% government target. The rebalancing process is ongoing; tertiary industry accounted for 50.5% of GDP (48.1% in 2014) and industry for 40.5% (42.7%). Domestic consumption showed signs of improvement, with nominal retail sales of consumer goods up +10.7% y/y. Going forward, a soft landing still appears likely (+6.5% in 2016). Although weak short-term indicators and financial volatility point to fragility in Q1, economic activity should stabilise thereafter, supported by further macro-economic policies and a gradual increase in private consumption.
Poland: Recent legislative measures – a threat to growth?
Last week, S&P downgraded Poland’s long-term foreign currency sovereign rating to BBB+ from A- and assigned a negative outlook to the new rating, reflecting perceptions that a number of measures taken by the new PiS government have fundamentally weakened the independence and effectiveness of key state institutions, such as the constitutional court, public broadcasting, the civil service and, potentially, the central bank. Moreover, PiS announced lower taxes for individuals and SMEs and a number of expensive new social policies, the financing of which is uncertain. New taxes on banks, insurers and supermarkets will not be sufficient while, critically, they seem to be more focused on predominantly foreign-owned sectors, thereby risking a negative impact on future FDI inflows. In the short term, fiscal loosening may indeed support consumption and growth. In the medium term (perhaps already by 2017), a negative impact on growth is possible because: (i) more selective 'penalty' taxes may be imposed and (ii) investment may decline as investor confidence deteriorates.
Iran: Sanctions relief
On 16 January, the IAEA verified that Tehran is keeping to its terms of the July 2015 nuclear/sanctions agreement (including shipping enriched uranium to Russia and deactivating the Arak heavy water reactor) and now international sanctions relating to the nuclear programme can be rolled back (more specifically they are frozen and can be reapplied if terms of the agreement are broken). Sanctions relating to Iran’s ballistic missile programme and to individuals and groups categorised as sponsoring terrorism will still be subject to U.S. sanctions – with potential impact for non-U.S. companies. Financial assets (perhaps a minimum USD25bn) that were frozen will become available to Tehran, consumption and investment decisions will be given a boost and economic growth will be released from the restraint of sanctions, although structural rigidities limit the speed of the incipient improvement. Meanwhile, oil markets had largely factored in an increase in Iranian supply but will remain volatile, with downside price pressures, and deteriorating relations with Saudi Arabia heighten already tense regional fissures.
UK: Status quo for the BoE until at least H2
The rate of inflation ended 2015 at 0.2% and is expected to remain below 1% in 2016, reflecting lower oil prices compared with 2015 and slower wage growth (+2% y/y in November 2015, from +2.4% y/y in the previous month and compared with +2.8% average growth since 2002). Core inflation came in at +1.4%, a low reading, as weaker oil prices translated into lower prices in the supply chain and GBP appreciation also played a role in dampening price growth. We expect the BoE will delay its first interest rate hike to H2 2016, with a risk of further push back depending on the external environment and the outlook for oil prices. The deceleration in economic growth will continue in 2016 (GDP expansion of +2.1% after +2.4% in 2015) and in 2017 (+1.9%) as a result of a slowdown in private consumption and corporate investment because of negative business confidence related to Brexit fears, as well as slower growth in exports.