Eurozone: Q2 GDP growth moderated, as expected
The first official estimate for GDP growth in Q2 is in line with our expectations; +0.3% q/q following an exceptionally strong Q1 (+0.6%) due to the mild weather that generated accelerating activity in the construction sector. Q2 growth is expected to have been driven largely by domestic demand, even if growth is expected to have slowed compared with Q1. The monthly data suggest that there will be a positive contribution to overall growth from external trade. For Q3, business confidence for July (Composite PMIs) suggests growth at +0.3% q/q, with no material negative impact from the Brexit. With this quarterly pace in Q3 and Q4, the +1.6% expected growth in 2016 seems realistic. The next data release is on 12 August and this will provide details for most of the individual countries, notably Germany and Italy for which we expect GDP growth of +0.4% q/q and +0.3%, respectively. The French and Spanish GDP data, already published, point to divergent trends; weaker-than-expected growth in France (0% q/q) but expansion above expectations for Spain (+0.7%).
Brazil: A false start?
As with the FIFA World Cup in 2014, this year’s Olympic Games will only have a marginal impact on the economy. We estimate that additional investment and consumption linked to the Olympics will generate only +0.05pps of GDP growth. Moreover, the recession will continue, with GDP contracting by -3.5% in 2016 after -3.8% in 2015. While additional jobs will be few and short-lived, inflationary pressures will be visible and long-lasting. Annual inflation in 2016 is projected at 8.6%, of which +1pps relates directly to the sporting mega-events and +0.4pps specifically to the Olympics. Public finances will also deteriorate, with the debt-to-GDP ratio rising to 89% in 2016 (+0.4pps resulting from the Olympics). After the Olympics, weaker economic activity will inflate corporate insolvencies by +5% in the Rio de Janeiro State in 2016 and for SMEs it could be as high as +12%. For the country as a whole, we expect insolvencies will increase by +22% in 2016, after +25% in 2015. [For further details see our Economic Insight The Olympics: A false start for Brazil.]
France: A soft patch will not disrupt the trend
GDP growth in Q2 was a disappointing +0% q/q, mainly reflecting a decline in inventories. Industrial production was depressed by many shocks, particularly in June (including strikes and floods). The oil market provides another explanation. As in 2015, oil prices hit a trough during the first quarter, with a rebound in the second and the relatively lower prices in Q1 2016 fuelled an impressive private consumption surge (+1.1% q/q). In contrast, private consumption in Q2 was almost stable, as it had been in 2015. However, consumer confidence hit a peak (98 in May) and decreased only marginally thereafter because structural growth drivers are strong (increasing purchasing power, stabilising unemployment and low interest rates). As a result, we consider that zero economic growth during Q2 was a cyclical issue and that trend growth is still around +1.5% a year.
South Africa: Policy and political perturbations
SARB kept the policy interest rate (repo) unchanged at 7%. This was expected, given the dynamics of weak growth (contraction in Q1 GDP of an annualised -1.2% q/q) and relatively high inflation (above the target range of 3-6% and unlikely to fall within target any time soon). SARB has a tightening bias, given its primary role of controlling inflation, and a further increase in the policy rate (+25bps) is likely this year. Against this background, and with political/policy uncertainties, there remains a possibility of a further downgrade by the rating agencies (junk status is still possible later this year). The IMF now forecasts GDP growth of only +0.1% in 2016 and SARB suggests that annual growth could remain below +2% through to end-2018. We forecast GDP growth of +0.5% in 2016 and +1.5% in 2017.