China: Glass half-full or half empty?
While the Chinese National People’s Congress met to approve a new five-year plan, latest figures show a mixed trend. Nominal retail sales growth slowed to +10.2% Jan-Feb y/y (from +11.1% y/y Dec 2015). Real industrial production growth decelerated to +5.4% (from +5.9%). Financial volatility in January eroded household’s confidence, while lower external demand and the seasonal effect of the Chinese New Year also weighed down on growth.
On the upside, nominal urban fixed-asset investment grew by +10.2% in February (y/y). Fiscal figures signal a rise in government expenditures in January (+24 % y/y).
Looking ahead, we expect economic activity to weaken in Q1, before stabilizing from Q2 onwards as macro-policies get further traction. Eased monetary policy will keep credit at a comfortable range, and fiscal stimulus should boost activity. Domestic demand will remain firm thanks to higher government spending and resilient private consumption. External demand will remain the main drag in the short run, weighing on industrial production. EH forecasts that GDP growth will slow down to +6.5% in 2016.
Ireland: Fastest growing eurozone economy
As Irish communities celebrate St Patrick’s Day around the world, the home country has one more reason to rejoice: Ireland’s GDP grew by +2.7% q/q in Q4 2015. The Irish economy is now the fastest growing member of the Eurozone.
Growth was mainly driven by net trade (+1.5pp) followed by investment (+0.6pp) and consumption (+0.5pp). Overall growth stands at an impressive +7.8% in 2015, thanks to an unprecedented peak in investment (+28.2%) and a rise in consumption back to pre-crisis levels. However, over the whole year, imports continued to outpace exports (+16.4% against +13.8%).
Investments are stimulated by an advantageous tax regime. With corporate tax at 12.5%, the lowest in the EU, many companies choose to relocate to Dublin. However, the European Commission has recently sped up its investigation of state aid provided to some multinationals. Our forecast for the country’s GDP in 2016 is +4.5%, with a slowdown in both consumption and investment.
Meanwhile, no government has been formed since the February elections which resulted in a hung parliament. Still, a grand coalition may emerge before April 6, when another vote for PM is expected.
US: Intermediate-term outlook remains stable
February retail sales fell -0.1% m/m. Much of the decline was due to a sharp drop in gasoline sales, the eighth consecutive monthly decline. Autos were also a drag, declining -0.1% m/m. Discounting gasoline and autos, retail sales were better, rising a firm +0.3% m/m. On a y/y basis, retail sales increased by +3.1%, only half the long-term average, but ex-autos and gasoline sales were up +4.3%, the same as the long-term average. Overall, while the intermediate-term outlook remains steady, there was another setback to even stronger growth: January sales were revised down to -0.4% m/m from +0.2%.
Meanwhile, the manufacturing sector displayed another sign of potential recovery as the Empire State (NY) Fed survey went positive for the first time in seven months. It was driven in part by new orders, which increased for the first time in nine months. Moreover, inflation remains dormant, with producer prices falling in February by -0.2% m/m, as expected, to a 0% y/y rate.
Ex-food and energy, prices were flat, bringing the y/y inflation rate to a weak +1.2%.
Egypt: Pound for pound?
In a further twist to the country’s unfolding policymaking the Central Bank this week devalued the EGP by around 13% to 8.85 against the US dollar. The bank announced a "more flexible exchange rate" to resolve market imbalances and bolster foreign reserves. These stood at USD16.5bn in February - providing import cover of three months - compared with USD36bn pre-2011. The EGP was overvalued but the authorities had preferred to use, to date, a patchwork of policy measures, including import restrictions (see also WERO 10 March 2016). More clarity and transparency of policy are welcome but the new flexibility suggests further depreciation may be implemented later this year. Moreover, devaluation will increase inflationary pressures (headline CPI at 9.1% in February) at a time when the government is seeking to limit fuel and food subsidy provision. Social tensions may increase if countervailing social safety nets are not also increased and these will worsen the fiscal accounts.
Market reaction was initially positive.