UK: Against headwinds
Prime Minister May’s announcement on Tuesday at the Conservative convention that Art. 50 would be triggered by March 2017 and the fact that she seemed to aim for a “hard Brexit” caused the GBP to fall by -2% to a 31-year low against the USD. Meanwhile, the real economy has shown positive signs of continued growth despite uncertainty. The manufacturing PMI posted a strong 55.4 in September, up from 53.4 in August, with both output and new orders strengthening, thanks to better price competitive¬ness of UK goods due to GBP depreciation. The construction sector showed positive signs too as its output expanded for the first time since May, with the PMI up to 52.3 in September from 49.2 in August. Residential building was the main contributor to this expansion while commercial construction declined, still affected by Brexit uncertainty. Activity in the services sector, accounting for about 80% of British GDP, rose also but at a slower pace (PMI at 52.6 in September, down from 52.9). Measures worth GBP5bn were already announced by the government to support the economy. More is expected on 23 November when the Autumn Statement is presented by the Chancellor of the Exchequer.
U.S.: Continued weakness
Real personal consumption expenditures fell -0.1% m/m in August, the first loss since January. The decline drops the y/y rate to +2.6% from +2.9% in July. The data further suggest consumption will rise only around +2.5% annualized q/q in Q3, down sharply from +4.3% in Q2. In addition disposable income rose only +0.1% m/m in August, driving the y/y rate down to +2.4% from +2.6%. The final revision to Q2 GDP growth showed an annualized growth rate of only +1.4%, dragged down by a -7.9% drop in investment, the worst of the recovery. Similarly, construction spending fell in August by -0.7% m/m to a -0.3% y/y rate, the first negative in 62 months. Residential construction was up only +1.3% y/y now vs. +22.8% one year ago, and non-residential construction is down -1.3% vs. +9.6% last year. The ISM manufacturing index gained +2.1 points in September to 51.5, as the new orders component gained +6.0 to a robust 55.0. But manufacturing is still weak as shipments of core capital goods fell by
-0.4% m/m in August, the fourth consecutive decline, while new orders are still falling -3.1% y/y.
China: Improving slowly
Industrial profits increased by +8.4% y/y in January-August, supported by both decreasing costs and a “positive” price effect. On the one hand, Chinese producers benefited from low commodity prices and accommodative monetary policy ensuring access to cheap credit. On the other hand, they have profited from declining deflationary pressures (producer prices fell by -0.8% y/y in August, the least negative rate since April 2012). Meanwhile, latest official PMIs continue to send a mixed message, as the dichotomy between manufacturing and non-manufacturing activity persists. Growth continues to be driven by services as indicated by the non-manufacturing PMI of 53.7 in September (53.5 in August). The manufacturing PMI remained in the expansion territory but at a low level (50.4 in both August and September) suggesting a modest momentum in the short run. Regarding the sub-components, output increased while new orders weakened slightly. In that context, policymakers are expected to maintain their accommodative stance, with fiscal support being the main tool while the monetary authorities will focus on reducing financial risks. Euler Hermes forecasts GDP to grow by a resilient +6.5% in 2016.
Emerging Markets: Back to school
Growth is accelerating in Emerging Markets’ (EM) manufacturing sectors. The Euler Hermes proprie-tary aggregate EM manufacturing PMI increased from 49.8 in August to 50.1 in September, thus rising above the 50.0 threshold indicating growth for the first time since end-2014 and signaling that EM GDP growth may perhaps accelerate for the first time in two years. The growth drivers include (i) improving “credit” conditions from stabilizing exchange rates to a recovery in capital inflows (driven by a dovish Fed and a dovish China); (ii) reinvigorated commodity prices; (iii) a recovery of producer prices (defla¬tion¬ary pressures are receding, particularly in China); (iv) fading Brexit fears (more generally, fading EU political risk) fueling Eastern European optimism. Overall, the Euler Hermes forecast of EM growth accelerating from +3.8% in 2016 to +4.5% in 2017 is in line with that positive news. Supportive for the forecast is that some large economies in recession will eventually grow again in 2017, albeit at a moderate pace (+1% in Russia and +0.6% in Brazil).