Turkey: Q2 GDP growth slowed more than expected
Real GDP growth decelerated to +0.3% q/q and +3.1% y/y in Q2 2016, from +0.7% q/q and +4.7% y/y in Q1. The breakdown of the y/y figures reveals that Q2 growth was again entirely driven by strong consumer spending (+5.2% y/y in Q2, albeit down from +7.1% in Q1) and very strong public spending (+15.9% y/y, after +10.9% in Q1). Although the election year 2015 is over, the government continues with strong fiscal stimulus. However, annual fixed investment growth weakened further into contraction territory (-0.6% y/y, after 0% in Q1) and inventories subtracted -0.6pps from Q2 growth (-0.3pps in Q1). Moreover, real export expansion came to a near-standstill at +0.2% y/y in Q2 (+2.4% in Q1) while real imports remained strong (+7.7% y/y, up from +7.3% in Q1) so that the negative contribution of net exports to growth rose to -2.3pps in Q2 (-1.6pps in Q1). Early indicators suggest a further deterioration of business confidence (manufacturing PMI) and economic activity (industrial production, and retail sales contracted in July) in Q3. EH expects that the economic slowdown will continue in H2, resulting in full-year real GDP growth of about +3% in 2016 (after +4% in 2015). The forecast for 2017 is +3.2%.
Eurozone: Trying to achieve the initial easing targets
The ECB did not announce any new measures at its meeting last week and kept its economic forecasts broadly unchanged. Eurozone real GDP is expected to grow at a moderate but steady rate (+1.7% in 2016; +1.6% in both 2017 and 2018) and inflation to pick up gradually (+0.2% in 2016; +1.2% in 2017 and +1.6% in 2018). EH does not expect the ECB to increase the pace of its monthly asset purchases but rather to extend it beyond March 2017 and to ensure better implementation. So far, the ECB has reached its target of asset purchases (EUR60bn per month initially and EUR80bn since March 2016) only three times. Indeed, the bond market rally makes the QE conditions hard to achieve as around 60% of the Eurozone bond market is trading at negative yields. Special Committees have been appointed to help redesign the QE program. The main options are: (i) raise the limit per bond issue above 33%; (ii) buy bonds with yields below the -0.4% deposit rate rule; (iii) target bonds with shorter maturities (less than 2 years); and (iv) extend the purchases to other classes of assets.
Venezuela: New elections and default ahead?
Major demonstrations demanding for a recall referendum against President Maduro have mounted since the beginning of September. The referendum needs to be held this year in order to trigger new elections. Popular outrage is growing over food and basic goods shortages, skyrocketing inflation (800% expected in 2016) and the deepening economic recession (forecast at -10% in 2016). Interna-tional support for Maduro has also weakened. Yesterday, the fellow Mercosur member states set Venezuela a time limit until 1 December to align with the membership requirements to avoid being suspended from the trade bloc. Moreover, the lack of financing persists amid long-lasting low oil prices (95% of exports), a rapid depletion of foreign exchange reserves, no access to capital markets and China rethinking its financial support to the country. PDVSA, the national oil company, proposed on Tuesday a bond swap on USD7bn in outstanding debt due in 2016 and 2017 for new bonds maturing in 2020. However, investor appetite is weak. A default on the public debt cannot be ruled out.
China: Growth stabilizes, policy fine tuning to continue
Economic activity showed signs of stabilization in August. Growth of both industrial production (+6.3% y/y, from +6% in July) and retail sales (+10.6% y/y, from +10.2%) strengthened and investment growth stabilized (+8.1% y/y YTD). Exports (in USD) continued to decrease but at a slower pace (-2.8% y/y, after -4.4% in July) and imports recovered (+1.5% y/y) after the drop in July (-12.5%). The business sentiment was broadly positive with both PMIs (official and private-sector) reading above 50 in August. This suggests that Q3 GDP growth should remain in the comfort zone of the authorities (+6.5% to +7%). In that context, policymakers will maintain a “cautious easing stance”. In particular, the Central Bank will keep interest rates at a low level and continue to provide adequate liquidity to the banking sector. However, credit supply will likely be more targeted and authorities will probably tighten regulation to contain financial risks especially from the housing market. On the fiscal side, the support will remain strong to sustain economic growth. Euler Hermes expects real GDP to grow by +6.5% in 2016.