Brazil: The end of the drama?
After more than 6 months of political turmoil, the Brazilian Senate voted last week to remove president Dilma Rousseff, who had been re-elected in late 2014. We do not expect new elections to take place. Interim President Michel Temer should remain in office until the end of the term in 2018, despite approval ratings below 15%. This might mark the end of the political drama.
Yet Brazil’s economic woes are far from over. Real GDP was down -0.6% q/q in Q2, a deeper contraction than in Q1 (-0.4%). Private (-0.7%) and public (-0.5%) consumption continued to fall. Infrastructure projects related to the Olympics led to modest growth in investment (+0.4% after 10 consecutive quarters of contraction) and to a rebound in imports (+4.5%). Exports grew by a modest +0.4%, thus net exports shaved growth by -0.5pp. We expect the recession to moderate in the coming quarters while GDP should return to growth by Q1 2017. The Brazilian economy could contract by -3.5% in 2016, and grow moderately in 2017 (by +0.2%).
Italy: Ma il cielo è sempre più grigio*
Q2 data shows GDP at 0% q/q, below expectations (+0.3%). Domestic demand contributed -0.2pp to growth this quarter: (i) consumer spending growth slowed to +0.1% q/q, the lowest level since mid-2014; (ii) public spending fell by -0.3% q/q; (iii) investment in machinery and equipment fell by -0.6% q/q; (iv) investment in construction stalled; (v) stocks contributed -0.1pp to growth. Good news comes from exports, which rebounded by +1.9% q/q, the highest quarterly growth since 2011.
The manufacturing Price Managers Index (PMI) continued to drop in August and reached 49.8, the first time below the 50 threshold since Jan. 2015. Services PMI remained stable at 52.3. Consumer confidence deteriorated further.
We expect +0.8% growth in 2016 (previous forecast was +1.0%) and +0.9% in 2017. Risks could arise after the constitutional referendum in November. Banks remain in focus with the ongoing restructuring of Monte dei Paschi di Siena and merger of the two biggest regional banks - Banco Popolare and Banca Popolare di Milano.
* But the sky is increasingly gray
South Africa: A sigh of relief, but will it last?
South Africa avoided recession, as GDP rose by an annualized +3.3% q/q in Q2, up from a -1.2% contraction in Q1. This growth was particularly driven by the mining sector which rebounded with +8.1%, up from - 18.1% in Q1, and manufacturing, which increased by +8.1% in Q2. Household and government consumption increased by +1% and +1.3% respectively, while investment dropped -4.6%. Despite positive signals, South Africa’s twin deficits (current account deficit at -4.1% of GDP, fiscal deficit at -3.5% of GDP), rand volatility caused by political uncertainty, and the associated risk of a rating downgrade (see also WERO 24 August 2016), could pose serious future challenges.
South Africa’s current account financing heavily relies on investment from abroad. Despite resilient FDI inflows - Beijing Automotive International just announced an $819 million automobiles investment - South Africa’s external financing relies more on short-term portfolio inflows. These are sensitive to political risk, credit rating changes, and rand volatility.
Emerging Markets: Stuck in the middle with you
Our aggregate manufacturing Emerging Markets’ PMI edged up to 49.8 in August (from 49.5 in July). This improvement sent the index almost to its April high. It is the best performance since February 2015, the last time the Index stood above 50. Conclusion: the trend decline is over, but there’s no clear acceleration in manufacturing sectors. The growth cycle is somewhere in the middle.
This holds also for the Fragile-5 economies: Indonesia, Turkey, Brazil, Russia, and South Africa. Recession in the latter three is not over. Yet the private sector has made big efforts and the rebalancing has progressed. Major improvements in the level of private savings and private sector confidence have their effect. While this cannot yet be described as a growth cycle, green shoots are evident. Should the dovish Fed and China hold the line for a while more, no big hurdles await down the road.