China: Easy does it
The official manufacturing PMI in February was down to 49.0 (49.4 in January) with a broad-based deterioration and the non-manufacturing PMI declined to 52.7 (53.5). The Markit/Caixin manufacturing PMI confirmed this trend, registering 48 (from 48.4). The PBoC lowered its Reserve Requirement Ratio (RRR) by -0.5bps to 17% for the largest lenders. This cut, the first since October 2015, is intended to boost liquidity by USD100bn, thereby stimulating economic activity. Going forward, we believe the government will increase its support, being more aggressive in relation to fiscal assistance and providing gradual help on the monetary front. Further pro-growth measures will be unveiled at the next top legislature meeting, particularly on the fiscal side, with further tax cuts for companies and increased spending on infrastructure and social welfare. The projected fiscal deficit will be increased to around -3.5% of GDP (the target last year was -2.3%). Accommodative monetary policies will be maintained, with scope for further interest rate cuts (-50bps for the policy rate and -50bps for the RRR). However, to limit potential financial volatility, policy adjustments are likely to be more gradual than during last year.
Sweden: Growth in 2015 the highest in five years
GDP increased by +1.3% q/q in Q4 2015, above expectations. Growth was mainly driven by domestic demand (+0.9pps) with net exports contributing +0.4pps. While private consumption continued to be dynamic (+0.9% q/q after +0.6% in Q3), government spending picked up (+0.9% q/q/ compared with +0.3% q/q in the previous quarter) mainly as a result of the inflow of migrants. Investment growth (mainly in equipment) also accelerated in Q4 2015, to +2.3% q/q from +1.5% in Q3. The Q4 data put the 2015 growth rate at +3.8%, one of the highest rates in the EU-28, which is the strongest pace in five years. Meanwhile, unemployment decreased to 7%, gradually easing back to pre-crisis levels. Going forward, we expect growth will slow to +3% in 2016 (below the long-term average of +3.3%) and to +2.5% in 2017, with consumer spending the main contributor to expansion. Inflation returned to positive territory in September and the Central Bank reinforced its very dovish stance by further lowering its deposit rate in February (-15bps to -0.5%).
Recent data are mostly positive. Real personal income and expenditure both beat expectations in January, gaining +0.4% m/m to +2.8% y/y and +2.9% y/y, respectively. The core PCE deflator moved up to +1.7% y/y, the highest since July 2014. Durable goods orders increased by a sharp +4.9% m/m as core orders gained +3.9%. The ISM manufacturing index improved for the second consecutive month, to 49.5 and close to signalling expansion. Five of the ten components improved, new orders remained unchanged at 51.8 and employment increased for the first time in three months. Construction spending increased by +1.5% m/m (expectations of +0.5%) and the previous month was revised up to +0.6% m/m from +0.1%. Other data were more negative. Q4 2015 GDP was revised up to +1% q/q annualised (from +0.7%) but a large inventory build was responsible and this will weigh on Q1 GDP, as will the trade deficit, which widened to -USD62.2bn from -USD61.5bn. Meanwhile, new home sales in January were much weaker than expected, falling to an annual rate of 494,000 (-9.2% m/m).
France: Waiting for Godot (Mario?)
Q4 2015 GDP growth was revised upwards +0.1pps to +0.3% q/q (full-year remaining +1.1%) but the economy failed to gather speed. The Composite Markit PMI fell to 49.8 from 50.2 and the INSEE business climate fell -1.5pts, almost back to its long-run average (100.5). A breakdown reveals that manufacturing confidence was unchanged at 103, while services fell -1pts to 99. The global environment is taking its toll on retail trade, with confidence declining another -2pts to 103 in February (110 in October 2015). Meanwhile, the consumer confidence index shed -2pts to 95. Even so, consumption is holding up, particularly in durable goods (still rising +4.5% y/y). We continue to believe that consumption and company investment will prove resilient but our GDP growth forecast of +1.4% for 2016 is now at risk. Inventories contributed strongly to growth in the last two quarters (+0.7pps each) suggesting a negative contribution in 2016. Additionally, manufacturing turnover also failed to reach “escape velocity”, growing only +0.2% in 2015; we expect a moderate +2% increase in 2016.