WERO n°32: Turkey, Eurozone, US, Emerging Markets

9/13/2018 - Report
ic_blogtagChinaIranTurkeyCanadaUnited StatesGermanyDemandEmerging MarketsEurozoneGross Domestic Product (GDP)GrowthLabor market


Turkey:  Q2 growth still strong, but sharp slowdown ahead

Q2 real GDP grew by +5.2% y/y and +0.9% q/q. While the headline figures still look robust, they are down from +7.3% y/y and +1.5% q/q in Q1. The demand-side details show, that expansion in consumer spending (+6.3% y/y) and fixed investment (+3.9%) slowed down markedly in Q2. And inventories shifted to a negative contribution of -1.8pp to growth in Q2 from +3pp in Q1. All this was in part offset by increased public spending (+7.2% y/y) and a positive contribution of net exports to Q2 growth (+1pp, after -4.3pp in Q1). As a result of lower domestic demand, import growth fell to just +0.3% y/y (+15.4% in Q1) while the weaker TRY helped export growth to pick up to +4.5% y/y (+0.7% in Q1).
However, as of today this is quite old data already, regarding the currency crisis that became full-blown in Q3. Monthly indicators for Q2 and advance indicators for Q3 suggest that a recession is loom¬ing. Industrial production fell -1.6% m/m in May and -2% June. Real retail sales shrank -1% m/m in May and -0.3% June. These trends should have continued in Q3 due to falling domestic demand as firms are facing financing problems and consumers' purchasing power is curbed by rising inflation and the TRY depreciation. The Manufacturing PMI has been below 50 since April and came in at a 46.4 in August. We have reduced our forecasts for full-year growth to +3.3% in 2018 and +0.4% in 2019.

Eurozone:  Home-grown drivers

The Eurozone should remain in the stable vortex of the global economy as we believe the region has enough margins to absorb the negative external shocks of liquidity and the trade uncertainty. However, after +2.6% in 2017, the highest in 10 years, GDP growth should slow down to +2.1% and +1.8% in 2018 and 2019, respectively. We expect growth to reach +0.4% to +0.5% q/q in Q3 and to remain stable for the next two quarters. Going forward, a lower net external trade contribution is expected to be partly offset by stronger domestic demand. Lower inflation (1.7% at end-2018) coupled with the rise in disposable incomes will support households’ purchasing power (+1.4% in 2018). Companies are expected to invest as they still enjoy high margins and low financing costs. The ECB will continue to play the safeguard role: (i) first interest rate hike in fall 2019 with the refi rate expected to reach 0.75% at end-2020; (ii) reinvestment of bonds maturing until 2021 after the end of QE in December 2018.

U.S.:  Strength in jobs and ISMs

The robust economy created +201,000 jobs in August although the prior two months were revised down a total of -50,000. Gains were widespread across industries, including +23,000 in construction, the most in three months, and +17,000 in leisure and hospitality, again indicative of consumers’ willingness to spend on discretionary items. The unemployment rate remained unchanged at 3.9%, and the broader measure of unemployment, the U-6, ticked down to 7.4%, the lowest since records have been kept starting in 1994, over 24 years ago. But wages were the big story, rising from +2.7% to +2.9% y/y, the fastest in over nine years since the recession. The report strengthens the case for two more rate hikes from the Fed this year. Two other reports also demonstrated a vigorous economy – the ISM manufacturing index rose to a 14-year high of 61.3 points, led by a sharp +4.9 point increase to 65.1 in the new orders index, and the non-manufacturing index gained +2.8 points to 58.5. Survey respondents reported strong demand but concerns over tariffs.

Emerging Markets:  Back in 2014?

Emerging Markets (EM) showed a deterioration of their growth prospects during the last months, but with growing divergence. Our overall aggregate EM Manufacturing PMI decreased to 50.7 points in August (still in growth territory) from a 52.0 peak in December 2017. However, our sub-component on unbalanced economies (Brazil, Turkey, South Africa, Mexico) deteriorated more deeply, from a 53.0 peak in February to 49.6 in August. A recession was officially confirmed in South Africa last week and is looming in Turkey. This free fall reminds of 2014, when a tightening of Fed policy, a deceleration in China and policy mistakes nurtured recessions in key EM (Brazil, Russia). Such a bad cocktail is now again somewhat materializing. But, as in 2014, the growth disruption is stronger in key unbalanced EM economies and remains quite muted in other ones (EM Asia and EM Europe). The next things to monitor will be the potential for new policy shocks in vulnerable economies (monetary/fiscal policy in Argentina and Turkey, elections in October in Brazil).

Canada:  Slowing labor market

The Labor Force Survey (LFS) demonstrated more than its usual volatility, reporting that the economy lost -51,600 jobs in August after having gained +54,100 jobs in July, with Ontario losing -80,100 jobs after having gained +60,600 jobs in July. The y/y rate of job growth is more stable but fell to only +0.9%, the slowest in two years. Losses were widespread with only six of 16 industries growing. Construction lost -16,400 jobs, the fourth loss in five months, perhaps reflecting the stumbling housing market, while manufacturing lost -9,200 jobs, which was a disturbing seventh consecutive month of decline, likely caused by tariffs and soft auto sales. Wage growth fell to +2.9% y/y; it had been +3.9% just three months earlier. Given that the LFS has been so volatile recently, it’s unlikely that the Bank of Canada will be dissuaded by this report from hiking in October.

Germany:  Domestic demand ok, but export engine stutters

The German industry has got off to a poor start in the third quarter. Seasonally adjusted industrial production fell by -1.1% in July compared with the previous month. The contraction in July took place on a broad basis. The strongest decline was in investment goods, which fell by -2.5% m/m. July´s order data in manufacturing disappointed, too. New orders fell by -0.9% seasonally adjusted compared to the previous month. The discrepancy between domestic and foreign orders is remarkable here. While domestic orders rose by +2.4% m/m, orders from abroad fell by -3.4%. The latest foreign trade data also fits into this picture. Exports in July fell by just under -1% compared with the previous month, while imports rose sharply by almost +3%. Obviously the German domestic demand is still going well, while the export engine has stuttered. A major reason for this is certainly the ongoing trade conflict with the U.S.

Iran:  Feeling the pain of sanctions

Real GDP grew by +3.8% in fiscal year (FY; usually ending on 20 March) 2017/18, a normalization after the +12.5% recorded in FY 2016/17 on the back of the partial relief of sanctions in early 2016. However, the outlook for the next years has significantly darkened after the U.S. in May announced the re-imposition of its pre-2016 sanctions on Iran, including the secondary sanctions affecting non-U.S. companies. The re-imposition will be completed in November. The impact on the Iranian economy has been harder than initially expected. The official exchange rate of the rial (IRR) has been kept stable by the Central Bank to date, but the currency has lost two thirds of its value against the USD on the black market since May, which has widened the gap between the two rates to over 200%. The rapid depreciation contributed to a surge in inflation to 24.2% y/y in August. We expect oil exports to roughly halve from 2.3mn bbl/day in FY2017/18 by mid-2019. As a result, real GDP growth is forecast to decelerate to +1.2% in FY 2018/2019 and -1% in FX 2019/20.

China:  Rising fears, switching policy gears

Latest activity indicators suggest slower economic growth in August. USD-denominated export growth decelerated to +9.8% y/y (from +12.2% in July). Imports followed the same path (+20% y/y in August after +27.3% in July). Vehicles sales decreased by -3.8% y/y (after -4% in July) on the back of (i) higher uncertainties for consumers as fears of a trade war intensify and (ii) difficult access to credit for non-urban agents due to the government’s crackdown on peer to peer lending. Looking ahead, signals of a looser economic policy stance are building up. It is clear on the fiscal side with the government announcing measures ranging from tax cuts, support to SMEs and infrastructure spending. On the monetary side, signs of a gradual easing are appearing. Outstanding loans rose by +13.2% y/y in both July and August (up from +12.7% in June). Euler Hermes forecasts China’s GDP to grow by +6.6% this year (down from +6.9 in 2017).