India: “Relative calm in an ocean of turmoil” R. Rajan
GDP growth picked up to +7.9% y/y in Q1 2016, from +7.2% in Q4 2015, with private and public consumption the main drivers. However, exports contracted further and investment growth deteriorated. On the production front, activity was supported by strong growth in the wholesale and retail, manufacturing and financial sectors. Additional positive news came from growth in the mining sector, which accelerated, and agriculture, which recovered from contraction. Overall, full-year growth in FY2015/2016 was +7.6%. Looking ahead, private consumption will remain a strong driver, reflecting low inflation and a positive wage boost (7th Pay Commission hike) and government expenditure will remain broadly supportive. Cause for concern is the sluggish investment growth. The latter weakened despite strong monetary easing and the measures of the government to accelerate public investment. One key reason is that credit growth did not pick up strongly as banks were still reluctant to provide new credit, preferring to make provisions for bad loans. As long as this situation persists, economic activity will remain fragile. We expect GDP growth will stabilise at +7.6% in FY2016/2017.
Italy: Domestic demand drives growth
The second estimate of Q1 GDP confirmed growth of +0.3% q/q. Excluding stocks, GDP growth was a meagre +0.1%. Looking at the breakdown, private consumption increased by +0.3% q/q, the same pace as in Q4 2015. Total investment increased by +0.2% q/q, the lowest growth since Q2 2015, as investment in construction continued to contract (-0.5% q/q). However, fixed investment (machinery and transport) increased by +1% q/q, the highest growth since end-2010. Net trade contributed negatively to growth (-0.2pps) as exports fell more strongly (-1.5% q/q) than imports (-0.9% q/q). In terms of sectors, value added increased by +1.2% q/q in industry, by +0.2% in services but contracted by -2.4% in the agricultural sector. Nominal GDP in Q1 increased by +0.7% q/q and by +1.8% y/y (compared with +1.4% in Q4 2015) and the highest level since 2011. Going forward, we expect an average quarterly pace of real GDP growth of +0.3% that will bring overall 2016 growth to +1%. For 2017, we expect GDP growth will reach +1.2%.
U.S. & Canada: A tale of two countries
In the U.S., Q1 GDP growth was revised upwards to +0.8% q/q annualised, from +0.5%. A sharp fall in business investment shaved -0.5pps off the headline rate and net exports and inventories cut an additional -0.2pps each. Q1 consumption was +1.9% q/q annualised, but April consumption increased by a rapid +0.6% m/m and +3% y/y, suggesting strong Q2 GDP growth. As a result, we expect the Fed will now hike interest rates either in June or July. Although consumers spent more in April, confidence contracted in May (92.6 from 94.7). Expectations fell to 79.0 from 79.7, the lowest in 28 months. The Fed’s favoured inflation gauge, the PCE core rate, gained 0.2% m/m and 1.6% y/y. Corporate profits rebounded after two consecutive quarters of reduction, gaining +1.9% q/q, but still in contraction y/y (-3.6%). Meanwhile, after a promising start, the Canadian economy took a sharp downturn. Q1 GDP increased by +2.4% q/q annualised (expectations of +2.8%) but January was the only month to show growth. Furthermore the Alberta wildfires are likely to send Q2 GDP into negative territory.
UK: Subdued growth momentum
The second estimate of Q1 GDP confirmed growth of +0.4% q/q, a slowdown from +0.6% in Q4 2015. Services increased by +0.6% (+0.8% in Q4) and were the main contributor to growth. Output in the manufacturing and the construction sectors contracted, by -0.4% q/q and -1%, respectively. On the demand side, consumers remained the main growth driver (+0.4pps) which they have been consistently since end-2013. Total investment increased by +0.5% q/q, largely reflecting strong growth in transport equipment. However, business investment fell (-0.4% q/q) for the second consecutive quarter, reaching the lowest level since Q4 2014, as lending conditions tightened, Brexit uncertainty continued (see our Economic Insight) and global demand remained soft (notably in the U.S. and China). Overall, we expect the soft momentum will prevail and GDP growth will slow to +0.3% in Q2 and reach +1.9%, at best, in 2016 (+2.3% in 2015). In this context, the BoE is likely to remain dovish, at least until the end of the year, as inflation is expected to remain below 1% in 2016.