Saudi Arabia: Gulf stream?
Recent announcements outline the policy response to weak oil revenue.
Firstly, the part-privatisation of the state oil company, Saudi Aramco, will move ahead although only around 5% will be sold in an IPO in 2017 (or 2018). Saudi Aramco will become an industrial conglomerate, which could diversify into further downstream activities and non-oil and gas businesses.
Secondly, a mega sovereign wealth fund will be created of around an initial USD2tn. This could encapsulate existing funds including those controlled by SAMA and the Public Investment Fund. It will hold incomes from the privatizations of Saudi Aramco and some other state-controlled entities.
Thirdly, the country will not consider an oil output freeze unless other major producers (including Iran) similarly commit.
The announcements give evidence of a commitment to economic reform, including diversification away from oil. The new mega-fund centralizes the country’s financial resources and is intended to show markets and analysts that those assets provide a cushion against even a protracted downturn.
Germany: Not so bad news
German industrial production fell by a less-than-expected -0.5% m/m in February after it had increased by a 4.5-year record high +2.3% m/m in January (revised down from a preliminary +3.3%). Moreover, in y/y terms, industrial production surged by +4.9% in February after a -1.3% decline in January, so that average industrial production growth picked up from +1.5% y/y in Q4 2015 to +1.8% in January-February. Both turnover and new orders in manufacturing showed a similar pattern at the start of this year – modest declines in m/m but strong rises in y/y terms. Likewise, real retail sales fell by -0.4% m/m in February (-0.1% in January) but rose by +5.4% y/y (-1.2%). Further, economic sentiment indicators such as the IFO, ZEW and GfK indices and PMIs have signaled stabilization or small improvements in March after some moderation in late 2015 or early 2016.
Overall, the latest high-frequency indicators support our expectation of a moderate acceleration of real GDP growth to +1.7% in 2016 (after +1.4% in 2015).
U.S.: Labor market strong, but Q1 GDP weak
Jobs rose by a strong +215,000 in March. Unemployment ticked up +0.1% m/m to 5.0%.
The labor force gained +396,000, the sixth consecutive increase, driving the participation rate up to 63.0% from a low of 62.4% in September. Wages rose +0.3% m/m but the y/y rate remained unchanged at +2.3%. The ISM non-manufacturing index gained +1.1 to 54.5 in March; only one component fell and only one is below 50. The ISM manufacturing index was also strong, rising above 50 for the first time since August, gaining +2.3 to 51.8. New orders rose a sharp +6.8 to 58.3 in February, nine of 10 components increased, and six of them are now above 50.
However, that report was contradicted by a loss of -29,000 manufacturing jobs in March, and by factory orders which fell -1.7% m/m in February to a -3.0% y/y rate. Further, the trade deficit widened from USD45.9bn to USD47.1bn in February, weighing on Q1 GDP.
While the labor market is strong, much recent data, especially personal consumption, suggests a weak Q1 GDP.
Emerging Markets: Spring buds in Asia
Some green shoots are evident throughout the emerging world, even if there are still divergences. An aggregate manufacturing PMI computed by Euler Hermes shows strong improvement in March, growing to 49.9 (best figure since February 2015) and not far from expansion territory.
Fear Factors are now well behind. Commodity prices stabilized, China growth worries are receding, and capital flows to emerging markets recovered. The main contributor: The Chinese industry’s recovery (official PMI 50.2), felt across Asia Pacific where PMIs are also improving. In anticipation, some commodity prices (iron ore, oil) have rebounded, as demand is now expected to remain broadly stable. Emerging market currencies have benefited from this friendlier environment.
However, some commodity exporters (Brazil, Russia) still feel the pain of negative price shocks which have cut national savings and hurt private sector demand. A long-awaited recovery appears to finally come from China and its neighbors but has not spread everywhere.