After 28 May, what had been small-scale demonstrations opposing the demolition of a park in Istanbul widened into nationwide anti-government protests, including violent clashes with police. Parallels have been drawn to the 'Arab Spring' protests in North Africa in 2011 but references to a 'Turkish Spring' appear to overstate the risk to government stability. The ruling religiouslyconservative AKP under PM Erdogan was democratically elected three times from 2002, with almost 50% of the vote in 2011. However, the AKP's success cannot hide the deep-rooted division in society between secularists and religious conservatives. The short-term impact of the unrest on the economy was seen in tumbling markets, with the TRY falling by around 2% in the week to 3 June, to a 16-month low, the stock market falling by 10.5% and the spreads on sovereign debt increasing by 100bps. It remains to be seen whether there will be a long-term impact on the economy, but there is a risk that the attractiveness to foreign investors may suffer temporarily and that the upgrade trend―Turkey regained investment grade status just last month for the first time in two decades following an upgrade by Moody's―will be put on hold, for now.
Eurozone: Contraction likely to continue in Q2
In May, business confidence indicators (composite PMI) gained 0.8 points to 47.7, slightly above consensus expectations (47.2). The increase was driven by both manufacturing (+1.6 points to 48.3) and services (+0.5 to 47.5), with the levels suggesting a
slower pace of contraction of activity. The strongest improvement in the data is registered by Spain, with the manufacturing PMI gaining 3.4 points to 48.1, its highest level in two years. The manufacturing PMI for France also increased relatively substantially (+2 points to 46.4), exceeding expectations (consensus at 45.5), although confidence within the services sector remained stable (at 44.3). In Germany, business confidence increased marginally in both manufacturing (+0.4 points to 49.4) and services (+0.2 to 49.8). Overall, currents levels of business confidence suggest that the recession in the eurozone will continue in Q2, although at a slower pace than in Q1. EH expects GDP growth will stabilise towards the end of the year.
US: Latest economic data
Data continue to suggest that a strong revival is not yet evident. Q1 GDP growth was revised down slightly to a relatively weak annualised +2.4% y/y but, if the impact from inventories is excluded, the rate of growth was a very weak +1.8%. The trade deficit
widened in April to USD40 billion from USD37 billion, suggesting downward pressure on Q2 GDP. Moreover, economic growth is also coming under pressure from taxes. In April, and after allowing for inflation, taxes increased by +10.6% y/y, driving personal disposable income growth to a low +1% and resulting in weak personal consumption expenditure growth of only +2.1%.Meanwhile, the ISM manufacturing index fell below 50 in May for only the second time in almost four years, signalling contraction. Perhaps significantly, the new orders component, which is a gauge of future activity, fell sharply from 52.3 to 48.8.
Switzerland: Strong Q1 growth
The economy continued to be robust in Q1 2013, with GDP expanding by a surprisingly strong +0.6% q/q, after increasing by +0.3% in the previous quarter. Growth was mainly driven by private consumption, which registered further expansion of +0.6%
after +1.1% in Q4 2012. A positive contribution to growth was also provided by capital formation in the construction sector (+0.3%). On the downside, public spending declined markedly, by -0.9% after +0.9% in Q4, and investment in equipment fell -0.8% after +0.2% in Q4 2012. Net exports also contributed negatively to the overall GDP figures (-0.6pps), with both exports(-1.2%) and imports (-1.7%) declining, reflecting the weakness in the European economy, in general.