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Weekly Export Risk Outlook: Eurozone, France, Turkey, U.S.



​Eurozone: Rising selling prices for the first time in a year

The flash estimate of the Eurozone PMI Composite Output Index for September 2016 was down to 52.6 from 52.9 in August, slightly below expectations. This is the lowest level in 20 months, mainly triggered by slowing activity in the services sector (the flash Services PMI Activity Index fell to 52.1, the lowest since January 2015). In contrast, the manufacturing sector surprised positively, with the flash Manufacturing PMI increasing to 52.6 (from 51.7 in August) a 3-month high. Growth has picked up for new orders (3-month high) and new export orders while selling prices have increased for the first time in a year. France surprised positively, notably in the services sector with 54.1, a 15-month high. Germany came out below expectations due to a sharp slowdown in the services sector, to 50.6, while the manufacturing sector increased more than expected, to 54.3. However, this is in part contrasting with the Ifo Business Climate surveys for Germany which show improvements for both services (to 32.2, a 9-month high) and industry (to 109.5, a 28-month high). For Q3, the PMIs suggest that Eurozone GDP will grow at about the same pace as in Q2 (+0.3% q/q).

France: Down the road? No longer

The weakness in the manufacturing sector appears to be over. The Business Confidence survey indicated more resilience in September as it rose to 103 points from 101 in August. The latter was the weakest print since March 2015 which was related to food products, beverages, accommodation (services) and food services activities, as a result of the impact of the Nice terrorist attack on tourism. These sectors are now recovering from very low levels, but activity has remained well below the long-term average. Unemployment figures in August also show an impact (+1.4% m/m) related to these sectors. Moreover, business insolvencies show some sectoral and regional patterns which can be explained, in part, by the impact of the attacks. In June, insolvencies rose by +3.3% in Ile-de-France (Paris region) – with construction up by +3.1%, accommodation & catering +3.7% and transportation +22.5% – while decreasing elsewhere (-3.1% in France overall). The economy as a whole, however, continues to improve. Euler Hermes forecasts annual GDP growth of +1.5% in both 2016 and 2017.

Turkey: Back to speculative grade

Last Friday, Moody's downgraded Turkey’s sovereign rating by one notch from Baa3 to Ba1 (Stable outlook) moving it back into speculative grade, citing large external funding requirements, weakening growth and deteriorating institutional strength. Only one of the three major rating agencies, Fitch, still has Turkey as investment grade, but it revised the outlook to Negative in August. The initial financial market reaction was relatively contained: the ISE-100 index fell by -3.8% on Monday but has since recovered in part while the TRY fell by just over -1% against the USD and the EUR. Looking ahead, it needs to be monitored if this downgrade will undermine capital flows, especially if Fitch follows at some stage, and thus contribute to currency instability and, potentially, monetary tightening. For now, monetary policy has remained in easing mode. Also last week, the Central Bank trimmed its overnight lending rate for a seventh straight month, by 25bps to 8.25%, while the overnight borrowing rate remained fixed the whole time at 7.25%. Hence the interest rate band around the benchmark one-week repo rate (also unchanged at 7.5%) has shrunk from 350bps points in February to just 100bps.

U.S.: Housing disappoints, consumer confidence mixed

The housing market disappointed in August. Unit sales of existing homes fell for the second straight month, dropping by -0.9% m/m to a mere +0.8% y/y. Volatile new home sales also fell by a sharp -7.6% m/m, partially reversing last month’s +13.8% gain, but the y/y rate is still strong at +20.6%. Prices for both existing and new homes fell for the second month in a row, losing -1.3% m/m and -3.1% m/m, respectively. On a y/y basis existing home prices are up by +5.3% but prices for new homes have fallen -5.4%. The combination of low supply and falling prices suggests weak demand in the housing market. Consumer confidence rose by +2.3 points in August to a strong 104.1 level. The increase was driven by the current situation component which gained +3.2 points to 128.5. And while the future expecta-tions component gained +1.7 points, it is still weak at 87.8, and the gap between the two components grew to 40.7 points, the most since the 2009 recession, suggesting consumers are still uneasy about the future and may continue to restrain spending.