Eurozone: A genuine pick-up in growth
Real GDP growth was confirmed at +0.5% q/q in Q1, up from +0.4% in Q4. We believe the recovery will be sustained going forward, especially because (i) ECB monetary policy will stay supportive until mid-2018 at least as inflation will reach +1.7% on average this year and next, (ii) fiscal policy in the Eurozone has shifted away from its restrictive course, and (iii) the EUR remains relatively stable which together with the global economic uptick should support the Eurozone’s exports. In addition, the marked improvement of the labor market should support a gradual increase in wages. Overall we expect export growth to accelerate in 2017. Stronger investment growth and stable consumption growth should also boost import growth. Looking at countries, key southern European countries surprised on the upside: Real GDP increased by +0.4% q/q in Italy, +0.8% q/q in Spain and +1% q/q in Portugal. In Italy, domestic demand was the main growth driver in Q1, with private consumption up by +0.5% q/q, investment in construction up by +0.6% q/q, and stocks contributing +0.4pp. In contrast, investment in machinery and equipment (-2% q/q) as well as exports (+0.7% q/q) disappointed. If the political environment remains stable, GDP growth should come in slightly above +1% in 2017, the highest rate since 2010. In Spain and Portugal, economic growth was driven up by strong investment, notably in machinery and equipment, and a rebound in exports that beat expectations. The latter expanded by +4% q/q in Spain and by +3.1% q/q in Portugal, the fastest paces since 2007 for both countries. However, as we expected, private consumption began to decelerate on the back of higher inflation and base effects after two years of high growth.
Qatar: Under pressure from neighbors
On 5 June, Saudi Arabia, the UAE, Bahrain and Egypt cut their diplomatic relations with Qatar, accus-ing Doha of supporting Islamist groups and terrorism. In addition, the states announced the suspension of air, sea and land transport and travel with Qatar. And, with the exception of Egypt, Qatari citizens are required to return home within two weeks. These restrictions, especially the fact that Qatar's land border with Saudi Arabia – its only land crossing – will be suspended, are more severe than those during a previous eight-month dispute in 2014, when Saudi Arabia, the UAE and Bahrain withdrew their ambassadors from Doha over similar accusations. At that time, trade and travel links were maintained.
In the near term, a military conflict appears unlikely, but a further escalation of economic measures, in particular against Qatari banks, is possible. With an estimated USD335bn of assets in its sovereign wealth fund, Qatar looks able to avoid an immediate economic crisis, but parts of the economy could suffer severely if the dispute drags on for months. Exports of natural gas and oil, accounting for almost 85% of Qatar’s exports, should broadly continue though the UAE’s ban of Qatari-linked vessels from its waters are complicating shipments somewhat. But the suspension of Qatar's land border with Saudi Arabia will affect the imports of food (of which an estimated 40% come via this route) and construction materials (needed especially for the projects related to the FIFA World Cup 2022). Air transport will face higher costs as Qatari airlines are forced to make long detours. And companies servicing Gulf states from Qatar are likely to find it increasingly difficult to operate. Overall, we expect inflation to rise in the next months, and we have revised down our 2017 GDP growth forecast by -1pp to +1.8%.
India: Q1 GDP hit by demonetization – what’s next?
Economic growth decelerated markedly to +6.1% in Q1, from +7% in Q4 2016, hit by “demonetization”. Private consumption growth slowed to +7.3% (+11.1% in Q4) and investment contracted by -2.1% y/y. But soaring government expenditures (+31.9% y/y) supported Q1 growth. External trade activity was mixed as a good export performance was offset by higher import growth. On the production side, construction was hit severely (-3.7% y/y) and manufacturing growth slowed down to +5.3% y/y (+8.2% in Q4). Looking forward, there are signs that the negative effects of demonetization are abating and the economy will gather momentum in the upcoming quarters. On the activity front, domestic passenger car sales rose by +17.4% y/y in April, after +10% y/y in Q1. Business surveys point to improved activity, with both the Manufacturing (51.6 in May) and Services PMIs (52.2) signaling expansion. On financing, a strong rise in deposits gives banks more leeway to cut lending rates. Against this background, we expect real GDP growth to rise gradually to +7.2% in FY2017-18 (after +7.1% in FY2016-17).