Russia: Recession continues to ease only gradually
A flash estimate by RosStat indicates that Q2 real GDP contracted by -0.6% y/y, following a -1.2% y/y decline in Q1. The further easing of the recession was expected but whether the economy has hit bottom and begun a recovery in Q3 is not clear. July activity data are not encouraging. Industrial production declined by -0.3% y/y in July after it had edged up in each of the three preceding months (and thus by an average +1% y/y in Q2). It was dragged down by a -1.5% y/y fall in manufacturing output which is consistent with the decline in the manufacturing PMI to 49.5 in July (from 51.5 in June) back again below the 50.0 mark which indicates activity in the sector is contracting. Negative trends in the sector include reduced inflows of new total and export orders. Moreover, retail trade turnover continued to contract markedly by -5% y/y in July, after an average -5.6% in Q2 and -5.8% in Q1, indicating that private consumption remains weak. For now, Euler Hermes continues to forecast full-year 2016 GDP to contract by -0.9%, followed by a modest recovery of +1% in 2017.
Central & Eastern Europe: Regional growth remains robust
First estimates indicate that real GDP growth in the group of 11 EU members in the CEE region regained momentum in Q2, picking up to around +3.2% y/y (from a five-quarter low of +2.9% in Q1). The key driver of this rebound was Romania which surprised once again on the upside with growth surging to +6% y/y in Q2, thanks to continued strong domestic demand that has been supported by fiscal stimulus measures. Growth in Slovakia accelerated as well, to +3.7% y/y, driven by rising net exports and household demand, especially domestic automotive sales were up by +23% y/y. In both Poland and Bulgaria growth remained nearly unchanged at around +3% y/y in Q2. In the Czech Republic, growth eased to +2.5% y/y as construction activity fell sharply, indicating a probable drop in investment. Hungary saw a rebound of growth to +2.6% y/y (from 0.9% in Q1). The decline in demand for Baltic exports in Russia continues to retard growth in Latvia (+2.1% y/y in Q2), Lithuania (+1.8) and Estonia (+0.6%). Euler Hermes expects regional full-year growth of the 11 EU members in the CEE will ease to around +3% in both 2016 and 2017 (+3.4% in 2015).
Japan: Strong yen affects GDP growth
Real GDP growth was flat in Q2, down from +0.5% q/q in Q1, according to preliminary estimates. Real exports declined (-1.5% q/q) as a result of the strong yen and subdued external demand. Net exports subtracted -0.3pps from growth. Domestic demand made a positive contribution, supported by modest growth in private consumption (+0.2% q/q) and public expenditures while private investment recovered from contraction as residential investment picked up. However, non-residential investment continued to contract. June activity indicators pointed to a small uptick, with industrial production (+2.3% m/m) and retail sales (+0.3% m/m) recovering from contraction while capacity utilization improved (+1.5% m/m). In July, consumer and business confidence recovered from the trough seen in Q2 (e.g. the manufacturing PMI was 49.3 compared to 47.7 in May). Looking ahead, uncertainties continue to weigh on the outlook. Rising wages and further fiscal support will support domestic demand in the short run. However, addressing the yen strength will be critical to boost exports and private investment.
Spain: The beat goes on
First official estimates by the National Statistics Institute from end-July have put Q2 real GDP growth at +0.7% q/q, slightly down from +0.8% q/q in Q1 but above market expectations. For now, Euler Hermes maintains its GDP growth forecast of +2.6% for 2016 (after +3.2% in 2015). Despite a loss of confidence, private consumption remains strong, supported by a decreasing unemployment rate (19.9% in June after 22.3% a year ago) and an acceleration of retail sales growth (+4.9% y/y in June after +3.2% in May). However, industrial production has slowed down from +2.5% in April to +0.8% in May and +0.9% in June and this trend is likely to continue as total order books keep decreasing. Ongoing political turmoil has led to a drop in portfolio inflows – net inflows of EUR122.4bn in October 2015 have shifted to net outflows of -EUR9.8bn in May 2016. As bond yields reached a new historic low, going below 1% in August, net portfolio inflows are unlikely to return to positive grounds any time soon.