UK: Delays in investment decisions will be a drag on credit
In its Q2 Bank Lending Survey, the BoE revealed that the Brexit vote is expected to have an impact on both credit demand and financing conditions. Regarding the banks’ financing, the long-term wholesale funding spreads increased following the outcome of the EU referendum. Expectations for Q3 indicate a continuation in the rising trend in spreads. Credit availability to households tightened slightly in the three months to mid-June and demand for credit is expected to fall in Q3. The downside adjustment is expected to be more pronounced for the housing market as suggested by the new buyer enquiries balance which was negative in May and recorded the lowest balance since June 2008. For companies, demand for credit is also expected to fall back in the short term from both large corporates and SMEs, partly reflecting some investment decisions being delayed and M&A activity slowing. The commercial real estate sector is impacted by a fall in credit availability for the first time since Q2 2012, a sign that there is a decline in confidence post the Brexit vote and the resilience of this sector appears fragile.
U.S. & Canada: Diverging trends on labour market
In the U.S., the minutes from the Fed’s June meeting had expressed concern over May’s weak jobs report as one reason to keep the Fed Funds rate unchanged. Later in June, however, the labour market rebounded, gaining +287,000 jobs while the labour force rose +414,000. However wage growth remained tepid, rising only +0.1% m/m to a +2.6% y/y rate, and May still looks worrisome as job creation of only +38,000 was revised down to a mere +11,000, while the job openings rate fell from 3.9% to 3.7%. The ISM services index was strong in June, gaining +3.6 to 56.5, the highest since last November. Critical new orders rebounded +5.7 to 59.9, eight of the ten components rose, and nine are above 50. The trade gap widened from –USD37.4bn to –USD41.1bn in May as exports fell -0.2% m/m while imports rose +1.6% m/m. In Canada, job losses of -46,000 in the goods sector were the worst of the recovery, but were offset by a gain of +46,000 in services, putting the y/y job growth rate at a weak +0.6%.
Russia: Current account surplus narrows
Initial estimates indicate that the current account surplus narrowed to just +USD3.4bn in Q2, down from +USD12.6bn in Q1, despite somewhat strengthening oil prices. Indeed, exports of oil and oil products increased by +25% q/q to USD30bn in Q1, however, they were still below the USD33bn shipped in Q4 2015, the weakest quarter last year. The breakdown of the current account balance reveals that the decreased surplus in Q2 is largely due to a widening deficit on the incomes account (from -USD3bn to –USD11bn) while the trade surplus (+USD22bn) and the services deficit (–USD5bn) remained unchanged. For 2016 as a whole, Euler Hermes forecasts the current account surplus to narrow to about +3.4% of GDP from +5.3% in 2015. Meanwhile, net capital outflows by the private sector have normalised since mid-2015, partly because external debt repayments have moderated. In Q2, net capital outflows fell to just –USD2.4bn, taking the cumulative net outflows of the past four quarters to
–USD17bn, well below the average four-quarter rolling cumulus of –USD55bn during 2010-2013 (the four years prior to Russia’s current crisis).
Spain & Portugal: Sanctioned for insufficient fiscal effort
The Eurogroup concluded that neither Spain nor Portugal will be able to reduce their 2016 fiscal deficit to the targets set by European Commission (EC). Thus, they could be sanctioned with fines of up to 0.2% of GDP (EUR2.3bn for Spain and EUR0.4bn for Portugal) at the start of August. Both countries have 10 days to submit reasoned requests for a reduction. The Spanish fiscal deficit stood at -5% of GDP in 2015, above the -4.2% target set by the EC. Fiscal slippage has been driven by pre-elections tax cuts and higher public spending, notably for infrastructure. Spain is expected to fall short of the EC target of -2.8% in 2016 as official estimates point to a fiscal deficit of -3.6% (Euler Hermes forecasts -3.9%). In Portugal, the fiscal deficit was -4.4% of GDP in 2015, well above the -2.7% EC target. Fiscal slippage can be partially explained by Banif’s restructuring, whose fiscal impact amounted to 1.4% of GDP. As for 2016, Portugal is also predicted to miss the -1.8% target set by the EC. Indeed, the Portuguese government forecasts a deficit of -2.2% of GDP (Euler Hermes forecasts -2.9%).