Spain: Still solid GDP growth despite political uncertainty
The first quarter of 2016, a year that started without a government formation following the inconclusive elections in December 2015, still produced good economic results, with GDP expanding by +0.8% q/q, the same pace as in the previous quarter, and slightly above expectations. Retail sales expanded by +4.3% y/y in March, indicating that domestic demand continued to drive growth. Industrial production increased by +2.2% y/y in February. Bank interest rates for SME continued to fall (2.75% on average for loans between 1- 5 years, below current rates in Germany) while deflationary issues are progressively easing. Even though political uncertainty has not yet translated into economic disturbances, it has started to weigh on domestic business and consumer confidence which have deteriorated strongly in Q1. Foreign investor confidence has also been affected. Portfolio investment inflows fell sharply to EUR14bn in the 12 months ending in February 2016, down from a peak of EUR114bn in October 2015. After a last round of government formation talks failed again, the King of Spain dissolved Congress yesterday, calling new elections to be held on 26 June.
U.S.: Weak consumer hurts Q1 GDP, Fed on hold
Q1 GDP growth was only +0.5% q/q annualized, hurt by business investment which shaved -0.6pps from the headline while inventories and net exports both detracted -0.3pps. Consumption grew only +1.9% q/q annualized, and in March it was virtually unchanged at +0.05% m/m, despite a decent gain in real disposable income of +0.3% m/m to +3.1% y/y. The Fed’s preferred inflation measure, the PCE core rate slipped from +1.7% to +1.6% y/y in March. As expected the Fed left interest rates unchanged but issued a dovish statement which virtually mirrored the GDP report, saying “economic activity appears to have slowed” and “household spending has moderated.” The trade deficit in goods shrank from USD62.9bn in February to USD56.9bn in March, driven by a -1.7% m/m drop in exports while imports fell -4.4%. The April ISM manufacturing index fell from 51.8 to 50.8, barely above the 50 level signalling expansion, while the “new orders” component remained solid at 55.8 despite falling from 58.3. We believe the Fed will hike one time at most this year, probably in H2.
France: These boosts are made for working!
In France, growth surprised on the upside during the first quarter (+0.5% q/q). This growth acceleration was partly explained by cyclical factors. Private consumption was very weak during the fourth quarter of 2015 (-0.1% q/q) but recovered very quickly in the first quarter (+1.2% q/q) of 2016. This bumpy growth profile is related to shocks such as the terrorist attacks in November. The oil price evolution also helps explain the growth figures (the cycle and the trend). A weak oil price is favorable for household and corporate purchasing power, but when oil prices recover (such as in Q2 2015 and currently) economic growth often fades. However, at the end of the day, the trend in oil prices (low for longer) is growth-friendly. Corporate profit margins are rapidly recovering. At 31.4% at the end of 2015, margins were 2 points higher than at their 2014 lows and are expected to return rapidly to their long-term average (32.5%). Last but not least, business insolvencies decreased visibly during the first quarter (-4.5% y/y).
Emerging Markets: Unpleasant growth arithmetic
Some emerging markets are experiencing a new cyclical deterioration. An aggregate manufacturing PMI computed by Euler Hermes decreased to 49.3 in April (from 49.9 in March), but with strong regional divergences. Resilient growth engines, such as Asia or Central Europe remain stable. The weakness is mainly related to vulnerable economies (with fiscal and/or current account deficits). The so-called fragile five (Brazil, Turkey, Russia, South Africa, Indonesia) aggregate manufacturing PMI exhibited a record low of 46.9 in April. This weakness is driven by domestic factors, particularly in Latin America, where the negative shock led by “low for longer” commodity prices still has detrimental effects on confidence, which in addition has also been hit by social tensions (unemployment is increasing very fast) and rising political risks (situations in Brazil, Venezuela or Chile). The last update of global housing prices revealed a very strong deterioration in this set of fragile economies. Against the backdrop of such an unfavorable cyclical outlook, Euler Hermes forecasts global business insolvencies to increase by +2% in 2016, driven by emerging markets.