Turkey: Q1 GDP growth boosted by consumption
Q1 real GDP increased by +4.8% y/y, down from the dynamic +5.7% y/y in Q4 2015, but still strong compared with +4% in full-year 2015. The breakdown of GDP shows that Q1 growth was entirely driven by vigorous consumer spending (+6.9% y/y) and soaring public spending (+10.9%). Investment came to a standstill (-0.1% y/y). Real export growth recovered somewhat (+2.4% y/y) but was outpaced by strengthening real import growth (+7.5%), so that net exports subtracted -1.6pps from Q1 growth. As base effects supported the strong Q1 performance (GDP was up by just +2.5% y/y in Q1 2015), EH expects the momentum will fade gradually in the coming quarters. Nonetheless, our growth forecast for full-year 2016 was revised to +3.6% (from +3.3% previously). In January-April and in nominal USD terms, imports (-10% y/y) declined more than exports (-8%), so the current account deficit narrowed by -25% y/y to -USD10.8bn. A deteriorating services surplus (down -USD1.6bn) reflecting a sharp drop in tourism was more than offset by an improving trade deficit (up +USD3.6bn) as a result of lower commodity prices. EH expects an annual current account shortfall of -4.5% of GDP in 2016.
China: Encouraging signs but…
The latest indicators point to growth stabilisation in May. Real industrial production increased by +6% y/y (as in April) with an improvement in manufacturing output (+7.2 y/y from +6.9% in April). Nominal retail sales increased by +10% (+10.1% in April) and, in real terms, showed an acceleration (+9.7% y/y from +9.3%). The government reported that +5.77mn urban jobs were created in January-May, indicating that 57% of the annual target has already been reached. However, growth in private investment was lower. Looking ahead, a ‘soft landing’ (gradual growth deceleration) remains on track. Domestic demand is resilient, with robust private consumption and a supportive fiscal policy, and revival in industrial output is further boosted by easing deflationary pressures. Even so, volatility risk remains elevated as the external environment (weak demand) is not supportive and the rebalancing drivers are not yet secure. Economic growth is still heavily reliant on macro-policies, with limited increase in private spending. In that context, GDP growth is set to decelerate to +6.5% in 2016.
U.S.: Consumers on track, but labour market is not
Retail sales increased by a further +0.5% m/m in May (above expectations of +0.3%) after a strong +1.3% gain in April. This boosts the outlook for consumption and for overall GDP growth in Q2. Gains in sales were widespread except for building materials, which fell for the third consecutive period (-1.8% m/m). In a continuing trend, department store sales fell -0.9% m/m and -5.8% y/y, while non-store retail sales gained +1.3% m/m and a very strong +12.2% y/y. Gasoline sales were up +2.1% m/m on higher prices and autos increased by +0.5% m/m but, even without these items, sales were up by +0.3% m/m and +4.1% y/y. Meanwhile, the Labor Department’s April JOLTS survey continued to show that the job openings rate, which improved by +0.1pps to +3.9%, exceeded the hiring rate, which fell -0.2pps to +3.5%, a situation that had never appeared until a few months ago. The 0.4pps gap is the largest ever, suggesting that employers have job openings but cannot find workers with the right skills to fill them – a headwind for growth.
Greece: Time for some fresh money
The Euro Working Group validated the pending measures the Greek government had to adopt to obtain disbursement of a new tranche of the bailout (EUR7.5bn) that is expected to be officially signed-off by Eurozone Finance Ministers on 16 June. These funds will allow Greece to repay maturing bonds of EUR4.3bn in July (including EUR2.3bn to the ECB on 20 July), reimburse the IMF (EUR0.75bn in July) and pay interest charges (EUR0.7bn). Moreover, the government is likely to start to clear its arrears (EUR5.5bn at end-April). A second tranche of EUR2.8bn is expected to be disbursed in September but this is conditional on implementation of new reforms. We also expect on 21 July at the next ECB meeting that the ECB Emergency Liquidity Assistance to Greek banks will be suspended in favour of the normal repo operations with Greek bonds used by banks as guarantee. This will allow a reduction in the funding costs of banks. Capital controls remain an outstanding issue as they do not allow optimal financing in the economy. However, if all remains on track, we expect some relief in early Q4.