Germany: Robust Q2 GDP growth, driven by net exports
Q2 real GDP growth was confirmed at +0.4% q/q, down from the very strong +0.7% in Q1. The GDP breakdown reveals that external demand replaced domestic demand as the key growth driver, even though export expansion slowed to +1.2% q/q (+1.6% in Q1). But since imports declined by -0.1% q/q (+1.3% in Q1) net exports contributed +0.6pps to Q2 growth (+0.3pps in Q1). Private consumption was a little disappointing, up by just +0.2% q/q (+0.3% in Q1), while government consumption slowed to a still solid +0.6% q/q (+1.3% in Q1). Capital spending dragged down Q2 growth, with fixed investment declining by -1.5% q/q (after a strong +1.7% in Q1), pulled down by both construction investment (-1.6% q/q) and investment in equipment (-2.4% q/q). Inventories subtracted -0.1pps from Q2 growth (-0.3pps in Q1). However, the annual comparison shows a more benign picture for fixed investment which rose by +4.4% y/y, driven by strong increases in both construction investment (+5.1% y/y) and investment in equipment (+4.4%). Euler Hermes forecasts full-year GDP growth of around +1.8% in 2016 and +1.7% in 2017, up from +1.5% in 2015 (revised upwards from +1.4% previously).
Nigeria: Fear of floating of the naira erases credibility
The economy is in stagflation. GDP growth was negative in Q1 (-0.4% y/y) and inflation is soaring (+16.5% y/y in June). The monetary authorities kept a fixed exchange rate for too long. Last year, a black market premium appeared and a late exchange rate reform on 20 June 2016 – replacing the peg with a managed float – did not solve the problem despite a one-day depreciation of the naira by -30% (and a cumulative -40% to date). The black market premium is approaching 20%. Nigeria does neither have a public debt (15% of GDP) nor an external debt problem (6% of GDP). However, as fear of floating is weakening the naira, foreign exchange (FX) reserves have fallen to about USD25bn (about four months of import cover) from USD28bn at end-2015. The Nigerian authorities have announced a set of emergency measures, including some banks being banned from doing FX transactions. More measures are likely, including additional capital controls, however, the appropriate one would perhaps be a free floating of the naira, despite a possible knee-jerk reaction in the short term.
Philippines: Strong growth performance in Q2
Real GDP growth accelerated to +7% y/y in Q2 (+6.8% in Q1) supported by strong domestic demand. Public spending rose rapidly with public expenditures in construction increasing by +27.9% y/y and government consumption by +13.5%. Private consumption remained solid (+7.3% y/y) supported by election-related spending and increased remittances from overseas Filipinos. Net external trade was the main drag on Q2 growth. Export growth decelerated to +6.6% y/y (+7.3% in Q1) while imports continued to surge (+20.9% y/y). On the production side, growth was driven by services (+8.4% y/y) and industry (+6.9%). Agriculture continued to struggle (-2.1% y/y) hampered by disturbed weather conditions (El Niño). On the price front, inflation remained relatively low (1.9% y/y in July) compared to the Central Bank’s target range of 3% ± 1pp. Going forward, a growth slowdown is expected in H2 due to (i) the withdrawal of election-related spending, (ii) modest global demand and (iii) continued weather-related weakness in agriculture, but full-year growth should still post a robust +6.5% in 2016.
Mexico: GDP contraction in Q2
Seasonally adjusted real GDP fell by -0.5% q/q in Q2, after expanding by +0.8% in Q1. The primary sector contracted by -0.3% q/q, while the services sector stagnated. The industrial sector shrank by -1.5% q/q, dragged down by still mild industrial activity in the U.S. (-0.5% y/y in July, the 11th consecutive month of contraction) which absorbs 80% of Mexican industrial exports. The economy is also being affected by tight fiscal and monetary policies. Despite moderate inflation (+2.7% y/y in July), the Central Bank has raised its key policy interest rate by +125bps to 4.25% since December 2015 in order to smoothen the impact of external shocks on the currency (notably Fed rate hike risk). Alongside, the government has announced several cuts in the budget due to still low oil revenues and investors’ concerns about public finances. Overall, 1pp of GDP of spending cuts have been decided since the start of the year. Against this gloomy background, Euler Hermes has revised downwards its forecast of economic growth to +2% in 2016, at best.