In April, lending to the private sector contracted by -0.9% y/y, with lending to households up by +0.4% y/y, while the rate of contraction in credit to non-financial corporations (NFC) accelerated (-3% y/y, the most rapid decline since early 2010). Credit conditions remain tight—although to a lesser extent than in Q4 2012—against weak demand, elevated perceptions of corporate credit risk and regulatory capital requirements for banks. Financial fragmentation prevails, with corporates in some periphery countries experiencing financing costs higher than those prevailing elsewhere in the zone. In this context, the investment cycle is expected to remain depressed, reflecting long term corporate financing issues—in April, medium and long term loans were down -5.4% y/y. Financing, in general, is likely to remain challenging for NFC. In 2013, EH expects a third consecutive year of growth in insolvencies, with an increase of +21%.
US: Fed deliberations
Recent economic data have been broadly positive, led by the housing sector, which registered increases in both new and existing single-family home sales of +29% y/y and +9% y/y, respectively, in April. The Case-Shiller home price index for March was up by +10.9% y/y, the 12th consecutive month of increase, and an index of a leading consumer confidence survey increased by +7.2 points in May, to 76.2, the highest in over five years, driven by perceptions of improvements in the job market, housing and stock markets. Meanwhile, Fed Chairman Ben Bernanke and several Fed presidents last week gave seemingly contradictory signals about when they might taper asset purchases. Bond market participants apparently think it could be by September and have driven the yield on the 10-year Treasury note up over 20bps in five days as a result.
Germany: Weakness in Q1
A detailed data release from the Federal Statistical Office confirmed the weakness in the economy in Q1, with GDP increasing by only +0.1% q/q after contraction of -0.7% in Q4 2012 (revised downwards from -0.6%). The main driver to growth was consumer demand, which expanded by +0.8%, after -0.3% in the previous quarter. Despite difficult global conditions, there was also a small positive contribution (+0.1pps) from net exports, although exports (-1.8%) and imports (-2.1%) both contracted. Investment in equipment registered a further decline, of -0.6%, falling for the sixth consecutive month, while capital formation in the construction sector contracted markedly, by -2.1%, with activity particularly affected by adverse weather conditions. A decline in inventories provided a further negative contribution to overall growth (-0.1pps).
South Africa: Slowdown
GDP growth in Q1, at +0.9% q/q was the weakest since a contraction in Q2 2009 and followed an increase of +2.1% in Q4 2012.It was also markedly below the consensus forecast of +1.6%. The key drivers in the Q1 data were contractions in manufacturing (-7.9% q/q) and the agriculture, forestry and fishing sector (-4.9% q/q, after +7.9% in 2012 as a whole) balanced by strong growth in the mining sector (+14.6%). Given that mine output reflected recovery from strike-related disruptions in 2012, the underlying growth performance is probably even weaker. The latest GDP data provide a policy dilemma as a slowing economy is combining with inflation (5.9% y/y in April) at the upper limits of the official target range (3-6%). In this context, SARB, the central bank, kept monetary policy on hold last week, keeping the key policy interest rate unchanged at 5%. Some of the headwinds (including increased electricity tariffs, weak external demand, output disruptions through strike action and high labour costs) appear set to continue and EH now expects GDP growth in 2013 will be +2.5% (previously +3%)