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​In the headlines:
  • Eurozone: Surprising fall in German business confidence
  • US: Strong housing market
  • Brazil: Interest rates increased
  • Tunisia: IMF support


​Figure of the week:


Barrel price of Brent oil

Eurozone: Surprising fall in German business confidence

Business confidence remained stable in April, with the PMI Composite Index at 46.5, a level still suggesting contraction in the manufacturing and services sectors, evident since August 2011 and February 2012, respectively. The German manufacturing PMI came in below expectations at 49.7, ending a four-month period of expansion, and confidence in the services sector also disappointed, falling below 50 for the first time in five months (49.2, against consensus expectations of 51). In contrast, in France, the rates of decline in both the services and manufacturing sectors continued to ease. Indeed, both the manufacturing
and the services PMIs came in above expectations, at 44.4 and 44.1, respectively, although they remain at very weak levels. Overall, the surveys continue to suggest falling output across the zone (albeit at a slower pace), partly reflecting weak domestic and export orders. EH revised downwards its eurozone GDP growth forecast for 2013, by -0.2pps to -0.3%, as the current expectation is that stabilisation in economic activity will not be apparent until towards the end of the year.

US: Strong housing market

The housing market remained the brightest spot in the economy in March, with starts increasing by +46.7% y/y and permits by +17.3%. Sales of existing single-family homes were up +9.1% y/y and new home sales were up a strong +18.5%. Prices for existing homes were up by a robust +12.1% y/y, while growth in prices in the much smaller new home market slipped to +3% from +18.2% in December 2012. Supply for both existing and new houses is very tight, at 4.7 and 4.4 months, respectively. Such a strong performance in the housing sector is a current positive, although it raises concerns that the market may be artificially inflated by professional investment groups and others that are taking advantage  f the Fed’s easy money policy.

Brazil: Interest rates increased

With March y/y inflation moving beyond the upper bound of the target range (6.6% against 4.5% +/-2%) and expectations for the end of 2013 still at the upper end, the central bank last week raised the policy interest rate by 25bps, to 7.25%. This shifts the focus firmly away from growth, although GDP is unlikely to increase by more than +3% this year and indicators in the early months have not been strong. A short tightening cycle now seems likely, although rates should remain historically low. Meanwhile, the government is seeking to create more fiscal leeway by committing itself to the same overall primary fiscal surplus target this year (+3.1% of GDP) but without obligation of the central government (target +2.2%) to offset any shortfall in the noncentral government surplus.

Tunisia: IMF support

On 19 April, the Fund reached a staff-level agreement with the country for a Stand-By Agreement (SBA) of USD1.75 billion. If approved by the IMF board, which seems likely, the facility will be in place for a period of 24 months, with disbursements made over the same period. An IMF facility will provide timely support during this stage of the political transition and it acts as a bellwether for the donor and investor communities at large. Even so, the challenges remain significant, with stability and security still not assured. As recently as February, a political assassination introduced further uncertainty and led to a reconstituted
moderate Islamist-led government. Moreover, political and social uncertainties—the constitution is being redrafted and elections are expected in October-November—come at a time when the economy remains affected by weak external markets (Europe accounts for over 70% of exports and over 50% of imports and is a major source of tourism). EH forecasts GDP growth of +3% in 2013 and +4% in 2014, still below the recent long-term annual average of +4.4% (2000-10).