Eurozone: Consumption drives half of Q1 GDP growth
Q1 real GDP growth was revised upwards by +0.1pps to +0.6% q/q. Moreover, Q4 2015 growth was revised up to +0.4% q/q, from +0.3%. Exports had been the main growth driver through 2015, but consumption and corporate investment are now on a positive trend. Indeed, approximately half of the growth in Q1 GDP was driven by consumer spending, while company investment also increased at quite a strong pace for the second consecutive quarter (+0.9% q/q after +1.5% in Q4 2015). However, net exports acted as a drag on growth for the third consecutive quarter, as imports (+0.8% q/q) increased more rapidly than exports (+0.4% q/q). For the latter, growth was the weakest since Q1 2013, reflecting recent EUR appreciation and also weakness in external demand, notably in the emerging markets. In Q2, we expect a slightly softer growth momentum, with GDP likely to increase by +0.3% to +0.4% q/q as advanced indictors point to growth moderation. Overall, we expect GDP growth will fail to accelerate in 2016 and will increase at the same pace as in 2015 (+1.6%).
U.S.: Widespread weakness, Fed on hold again
The May employment report was very disappointing, with only +38,000 jobs created, compared with expectations of around +160,000. May’s job creation was the lowest since September 2010 and, in addition, the previous two months were revised down a total of -59,000. Job levels have contracted for three consecutive months, while the labour force has fallen by -820,000 in the past two months. Partially as a result, Fed Chair Janet Yellen gave a very dovish speech, suggesting there will not be a June interest rate hike and sharply lowering the odds on a July increase. Other negative news included: (i) manufacturing ISM increased in May but is still weak at 51.3 and the services ISM fell -2.8 to 52.9; (ii) the trade deficit widened in April, to -USD37.4bn, from -USD35.5bn; (iii) core factory orders fell -0.6% m/m and -4.4% y/y in April; (iv) construction spending, which had previously been strong, fell -1.8% m/m in April, the most since January 2011; and (v) productivity was down an annualised -0.6% q/q in Q1, the second consecutive fall, and +0.7% y/y, compared with a long-term average of +2.3%.
South Africa: Status quo
The country retained its investment grade when S&P ratings agency this week did not move it to “junk” status, as had been widely reported as probable. The immediate market reaction to the “reprieve” was positive (but of uncertain duration); the ZAR strengthened by more than +3% and yields on government long bonds fell -14bps to 9.17%. However, attention now turns to Fitch, which may put South Africa on negative outlook (currently stable) after downgrading it in December 2015. In May, Moody’s kept South Africa two levels above “junk” status, but with review for a downgrade. Moreover, S&P will review South Africa again in December, so the current reprieve from “junk” status and all that it entails (including negative investor outlook and higher borrowing costs) may not last long. It is difficult to see how the poor economic performance can be turned around in that time, although there is a window of opportunity for policymakers to make some encouraging moves. However, political tensions ahead of, and during, August’s local elections may limit gains from positive policy announcements.
Brazil: Recession eased in Q1
Real GDP contracted by -0.3% q/q in Q1 (-5.1% y/y), after -0.8% q/q in Q4 2015 (-5.9% y/y). Overall, real GDP has fallen -7% since its most recent peak in 2014 and is now back at its 2010 level. Contraction in private consumption deepened in Q1, to -1.7% q/q after -0.9% in Q4 2015. Consumers find themselves in a perfect storm, conditions that will continue in the coming months amid persistent inflationary pressures (9.3% y/y in April), rising unemployment (11.2% in April), slowing wage growth and tight financing conditions (interest rates reached 70% for non-earmarked credit for households). Investment continued to contract in Q1 (-2.7% q/q, after -4.8% in Q4 2015) and was down -25% from its latest peak in January 2014. Net exports contributed positively to overall growth in Q1 (+1.5pps) as exports rebounded strongly (+6.5% q/q) – perhaps driven up by the lifting of capital controls in Argentina in December 2015 – while imports continued to fall (-5.6% q/q). Overall, we expect the economy will contract by -3.5% in 2016.