Eurozone: More will soon follow, but how much?
The ECB left the door open for further policy action amid renewed weakness in oil prices and increasing deflationary pressures. We believe a move will occur as soon as March, including an extension by six months to September 2017 of the EUR60bn monthly asset purchase programme and a further cut in the deposit rate (from the current -0.3%). However, an increase in the size of the monthly purchases (to EUR80bn) will be a positive; it was already priced in for last December. The main concern relating to additional monetary easing is that core inflation has remained very low for too long. Indeed, apart from a four-month period in 2011, it has been below 2% since 2008. A marked pick-up in inflation is unlikely (oil prices will remain low for longer and the regional economy is in slow recovery mode). We expect inflation will be 0.8% on average in 2016 and that, at its March meeting, the ECB will lower its current forecast of 1%. Additional monetary support will further weaken the EUR (we expect EUR/USD1.05 on average in 2016) and slightly improve 2016 GDP growth from +1.7% currently. In terms of financing, interest rates on bank loans for SMEs have reached a nine-year low and credit supply and demand have both improved considerably.
Argentina: Full of hope…and patience
After one month in office, President Mauricio Macri introduced significant measures in an attempt to revitalise the economy afflicted by soaring inflation, anaemic growth and non-access to global capital markets. In particular, capital controls were lifted in mid-December 2015 and most export taxes were curbed. This led to a sharp depreciation of the currency, which immediately lost -40% against the USD, although the exchange rate has been broadly stable at around 13.8ARS/USD since then. Also, Macri resumed talks in January with the “vulture” funds in order to reach an agreement on the outstanding defaulted debt. Meanwhile, stringent cuts in public spending and subsidies were announced, with a target of limiting the fiscal deficit to -1% of GDP this year, compared with a 30-year record of -5.8% in 2015. These economic adjustments and reforms will be painful in the short term. Higher inflation because of the ARS depreciation and less fiscal and monetary support will weigh against economic activity. Indeed, we expect GDP will contract by -1.5% in 2016.
Canada: BoC on hold
November 2015 retail sales increased faster than expectations of +0.2% m/m, gaining +1.7%, and bolstering Q4 GDP. The gains were broad based as virtually every sector improved except gasoline sales, which were hit by falling prices. The gains were also widespread geographically as all 10 provinces recorded increases. Retail sales were up a solid +3.2% y/y nationwide and only the provinces of Alberta and Saskatchewan were down, at -4.1% and -1%, respectively, and elsewhere sales increased by +5.1% y/y. Manufacturing sales increased +1% m/m in November, the first gain in four months, putting the y/y rate at -0.5%, an improvement after -3.5% the previous month. New orders also rose for the first time in four months, gaining +3.5% m/m. Motor vehicles were once again a standout, rising +3.8% to a robust +18% y/y. The BoC left its overnight interest rate unchanged at 0.5%, probably in part to put a floor under the declining CAD, but also because of the notion that deflationary (falling oil prices) and inflationary (weakening CAD) pressures are coming into balance.
Ukraine: Recession is slowing but risks remain high
Contraction in industrial production decelerated to an estimated -4% y/y in Q4 2015 from -8% in Q3 and compared with an average -13.4% in 2015 as a whole. Construction output was down -15% in 2015, although it rebounded at year-end, rising by +10% y/y in December. Retail turnover is recovering much slower, declining by -21% in 2015 and still by -13% y/y in December, reflecting the ongoing slump in private consumption. External trade activity has remained very weak, with both exports and imports contracting by -31% y/y in the first 11 months of 2015, after -14% and -28% in full-year 2014, respectively. Meanwhile, the USD17.5bn IMF Extended Fund Facility programme is off track. Completion of the second review (scheduled for September) and the third review (December) and the disbursement two USD1.7bn tranches were delayed pending agreement on the 2016 budget, which is subject to an ongoing internal government dispute. Even if the budget is agreed eventually in the coming weeks, there is a high likelihood of further IMF programme disruption in the course of 2016