U.S.: Surprisingly dovish Fed
The Fed left interest rates unchanged last week and gave a dovish outlook. At last December’s meeting, the Fed suggested it would increase rates four times in 2016 and by a total of +100bps, but now it projects only two increases and a total of +50bps. Euler Hermes expects only one hike, at most, in 2016. The Fed also lowered its 2016 GDP forecast to +2.2% from +2.4% and lowered its inflation forecast to 1.2% from 1.6%. The Fed cited soft investment and net exports, as well as cautioning that “global economic and financial developments continue to pose risks”. Energy prices fell a steep -6% m/m in February, dragging consumer prices down -0.2% m/m to a +1% y/y rate. However, after stripping out the volatile energy and food components, core prices actually increased by 0.3% m/m and 2.3% y/y, matching a recovery high, but still not enough to worry the Fed. Meanwhile, the manufacturing sector is showing signs of life as industrial output gained +0.2% m/m in February to a +1.8% y/y rate, compared with only +0.4% y/y just three months ago. Moreover, the Fed’s Empire State (NY) manufacturing survey turned positive for the first time in seven months.
Eurozone: Robust growth in the services sector
PMI flash estimates suggest that economic activity is picking up speed, particularly in the services sector. The Composite PMI rebounded +0.7 points to 53.7 after two consecutive falls, with Services up to 54.0, while Manufacturing remained relatively stable at 52.7. The German Composite PMI remained stable at a high level (54.1) with Services slightly up to 55.5 but Manufacturing registering a moderate decline to 51.3, a 16-month low. The latter, while remaining in expansionary territory, reflects slowing in a sector that is affected by less buoyant demand from emerging markets. In France, both Services (+1.9 points to 51.2) and Manufacturing (+1.3 points to 50.8) drove the Composite PMI up to 51.1 in March from 49.3 in February. For the Eurozone overall, the start of the year indicates that services remain a bright spot, while the manufacturing sector is making slow progress. Downside price pressures remain as indicated by corporate average selling prices. The Q1 PMI suggest that growth will not accelerate beyond the +0.3% q/q on average registered since Q1 2014.
Indonesia: Red, orange or green light?
Economic activity gathered pace in Q4 2015, supported by increased public expenditure and firm private consumption. There are signs of further improvement in 2016, but the trend is fragile. Exports continue to be a drag on growth, with another decline in February (-7.2% y/y) but domestic consumption is driving expansion (retail sales +11.9% y/y) supported by a positive mix of low inflation, firm labour markets and improving consumer confidence. Investment remains the key challenge as business confidence, although improving in Q1, remains volatile. Credit growth is struggling to pick up speed (+9.6% loans growth in January). The Central Bank cut its policy interest rate for the third time this year, to 6.75% from 7%. Going forward, there is room for further easing: (i) inflation is still in the target range of 3-5% and (ii) downward pressures on the IDR have receded. However, expect easing to be gradual to avoid creating financial distortions. Progressive increases in credit growth to a 12-14% y/y range will support domestic investment and push GDP growth above +5%.
Israel: Despite regional concerns, the outlook remains good
GDP growth in 2015 was officially revised downwards, but only to +2.5% y/y from the earlier estimate of +2.6%. Consumption growth was revised upwards, private to +4.9% (from +4.7%) and government to +3.1% (+3%). However, the contribution of net exports was revised downwards, with exports -3.1% (from -2.5%) and imports +0.6% (+0.1%). This supports our earlier analysis (see WERO 17 February 2016) that consumption will drive growth this year and that GDP expansion will be around +3% in 2016, one of the highest in the OECD grouping. The BoI’s Composite State of the Economy Index for February 2016 (+0.25% m/m) supports that outlook. Meanwhile, the current account surplus in 2015 improved to +4.7% of GDP, the highest since 2004, partly reflecting lower energy import costs (oil and petroleum products account for 20% of the import bill). EH expects a current account surplus of around +5% of GDP in 2016 and +4.5% in 2017. Also in 2015, FX reserves increased by USD4.5bn and amounted to USD90.6bn by the end of the year and this provided an import cover of around 13 months.