Economic forecasts. Summary. July 2014

Transcription

1 Economic forecasts July 2014 Summary Aside from some not-immaterial exceptions, economic news since our last update has for the most part been in-line with our view of steadily improving growth in developed economies. As we head into the second half of the year, the key unknown in those economies where the recovery is more mature will be how much spare capacity remains unused. The Bank of England appears to have become the first to re-assess its view that rates can stay at emergency levels without eventually boosting inflation, and the market now expects an increase in the base rate for the first time since 2007 later this year. We also expect the US Federal Reserve to face a similar crossroads in the coming months, as continued falls in the unemployment rate raise the prospect that spare capacity is not as abundant as previously supposed. The ECB, by contrast, appears to be as close as ever to implementing quantitative easing in order to combat disappointingly low inflation, a sign that if anything the euro area economy has too much spare capacity. As always, the picture is not all rosy. The curious disaster of the US Q1 GDP outturn is a case in point, but also the emerging market (EM) economies continue to face a challenging environment. Forecasts are revised lower once again in many EM economies, and we will be watching very closely for any knock-on impact via the financial markets following an end to the Fed s quantitative easing programme. Indeed, this is an uncertain risk for all economies as we graduate from the extraordinary monetary conditions of recent years. GDP (year/year) End 2014 End 2015 Threadneedle Consensus Threadneedle Consensus US Euro Area Japan UK Brazil Russia India China Updated June 2014 T17048 Issued July 2014 Valid to end October

2 US GDP (year/year) Headline Inflation (year end) Core Inflation: PCE (year end) Official Rates¹ (year end) ¹ ¹ 10-year bond yield EUR/USD (year end) USD/JPY (year end) Updated 28 June 2014 Notes: (T) = Threadneedle forecast, (Cons) = consensus forecast, ¹consensus = derived from market expectations Changes to Threadneedle forecasts: US GDP from 2.7. Source: Threadneedle, Consensus Economics, Bloomberg, June 2014 Trend intact despite appalling first quarter Following a fresh bout of optimism in late 2013 that the US economic growth trend was finally gravitating from 2% to 3%, Q1 delivered the worst quarterly outcome outside of a recession in the post-war period. Certain factors within this number can comfortably be dismissed as one-offs, such as the large inventory drag and weather-impacted fall in investment spending. However, the irony-riddled implication for our 2014 forecast is a shift back to 2%, even accounting for a healthy rebound through the middle of the year. The risk to that forecast remains to the downside. Aside from the GDP data, general trends remain favourable, in particular with respect to small businesses that are at their most optimistic since the financial crisis, which should bode well for further employment gains. Following the sharp move higher in US Treasury yields in 2013, the Federal Reserve has more recently attempted to talk down expectations of interest rate hikes following the likely end of quantitative easing in October. How long Janet Yellen can continue to justify zero rates will depend chiefly on the amount of spare capacity that remains to be utilised in the economy. A key metric in assessing this will be wage growth which has remained relatively muted since the recovery began in 2009, due to the high prevailing level of unemployment. We believe that wage growth may begin to edge higher in the coming months, signalling that there is less spare capacity in the labour market than the Fed previously believed, and re-enforcing expectations that rate hikes will be required earlier. However, the US economy has previously not fared well following the end of QE programmes, so we are wary that the removal of the markets regular liquidity fix could have some negative side effects, leading to a wobble around the year-end. T17048 Issued July 2014 Valid to end October

3 Euro Area GDP (year/year) Headline Inflation (year end) Official Rates (year end) year bond yield EUR/USD (year end) EUR/JPY (year end) Updated 26 June 2014 Notes: (T) = Threadneedle forecast, (Cons) = consensus forecast Changes to Threadneedle forecasts: Official rates end 2014 and from 0.25; 10-year bond yield from 2.0, from 2.5. Source: Threadneedle, Consensus Economics, Bloomberg, June 2014 ECB brought back into play by worrying inflation trends The euro area economy maintained a pace of subdued growth at the beginning of 2014, as domestic demand contributed positively for the third consecutive quarter. On a country-by-country basis, the laggards of the past 12 months continued to struggle, namely Italy and France where GDP growth flat-lined. The structural problems holding back those nations are well-known but we remain optimistic that they can return to an albeit slow pace of growth in the coming quarters. Germany remains the standout performer, and we expect the strong labour market and favourable monetary conditions to contribute towards 2.5% GDP growth in The focus of investors and policymakers has squarely moved towards inflation in recent months, following repeated disappointments from monthly CPI data. The ECB has shown significant concern regarding the chronic nature of the disinflationary trend and reacted accordingly, announcing a host of measures in June to boost inflation expectations. Negative deposit rates charged to banks and the announcement of fresh liquidity injections are the most important of these measures, which have two key aims. Firstly, to cement the ECB s commitment to extremely low rates for the foreseeable future, and secondly to bridge the gap between improving private sector loan demand and scarcity of bank credit. The economic impact of these targeted measures remains to be seen, but the scale of balance sheet expansion is unlikely to rival the aggressive policies of other central banks seen over recent years. The last tool in the ECB s box is quantitative easing, but the ECB would like to see the impact of June s measures first. However, if the euro maintains its stubborn strength and inflation continues to dwindle, it may be forced into action sooner rather than later. T17048 Issued July 2014 Valid to end October

4 Japan GDP (year/year) Headline Inflation (year end) Official Rates (year end) year bond yield USD/JPY (year end) EUR/JPY (year end) Updated 16 June 2014 Notes: (T) = Threadneedle forecast (Cons) = consensus forecast Changes to Threadneedle forecasts: None. Source: Threadneedle, Consensus Economics, Bloomberg, June 2014 Land of the rising wages? The increase in the rate of consumption tax in April makes it especially difficult to assess the current underlying trends within the Japanese economy, where considerable change has been afoot over the past year. We remain of the belief that Prime Minister Abe and Bank of Japan Governor Kuroda s joint policies of aggressive monetary easing, fiscal adjustment and structural reform have put in motion a tectonic shift in the foundations that underpin the Japanese economy. Aside from the short-term noise, we continue to watch the key variables closely for confirmation that this shift is in train. These include wage growth, which appears on a gentle upward trajectory due to tightening labour conditions, and investment, which grew strongly during the first quarter and looks set to strengthen further. The ultimate aim of sustainable inflation remains to be confirmed, but the commitment to this aim appears unwavering. The so-called third arrow, structural reforms aimed at boosting long-run growth potential, is another important and arguably more challenging part of the policy mix. After some consternation regarding the slow delivery of such measures previously, the recent announcement of 230 new focused measures serves as proof that the process remains on track. T17048 Issued July 2014 Valid to end October

5 UK GDP (year/year) Headline Inflation (year end) Official Rates (year end) year bond yield USD/GBP (year end) EUR/GBP (year end) Updated 28 June 2014 Notes: (T) = Threadneedle forecast, (Cons) = consensus forecast Changes to Threadneedle forecasts: Official rates from 1.0. Source: Threadneedle, Consensus Economics, Bloomberg, June Rate sensitivity The apparent normalisation of the recovery has reached the stage where the central bank is feeling pressure to commence a tightening cycle, leading Governor Carney to change the tone of his communications. It is evident that Carney is focusing on addressing his message to the real economy and not solely to financial markets. Although the market has fully priced in the first hike by November, this is not a done deal and remains data dependent. A particular focus of the Monetary Policy Committee (MPC) in the coming months will be the growth in average earnings, which to date has been anaemic in the face of strong headline employment growth. Recent economic indicators remain consistent with an economy expanding at a 3-4% pace and the MPC has suggested that it sees upside risks to its already strong forecast for the second half of However, the tightening we have seen in financial conditions, together with the extreme interest rate sensitivity of the economy and the stuttering global economic upswing, suggest that now is not the right time to become more optimistic on the UK recovery. Consequently, look for some cooling in the pace of activity into 2015, with the trend in labour income being the key determinant to the longevity of the recovery and the response of the MPC. T17048 Issued July 2014 Valid to end October

6 Emerging Markets GDP GDP CPI CPI Official Rates Official Rates m 12m T Cons T Cons T Cons T Cons T Cons T Cons Brazil Mexico China India South Korea Russia Turkey Updated 28 June 2014 Notes: (T) = Threadneedle forecast, (Cons) = consensus forecast Changes to Threadneedle forecasts: GDP 2014 Brazil 1.5 from 2.0, Mexico 2.8 from 3.0, Russia 0.8 from 0.2, Turkey 3.8 from 2.0; GDP 2015 Brazil 1.8 from 2.1, Mexico 3.5 from 4.0, Russia 1.7 from 2.0. Source: Threadneedle, Consensus Economics, June 2014 Outlook still somewhat gloomy but some sources of optimism Expectations for growth in emerging economies continue to be revised lower. This is fairly broad-based, although Brazil, South Africa and Russia are particularly notable. Sharp revisions lower in Russia may partly be attributable to the Ukraine crisis, but also reflect underlying structural issues. Aside from the doom and gloom there are some bright spots. One country where growth sentiment has become more optimistic is India, where the election of Narendra Modi with an absolute majority presents the greatest likelihood of effective structural change in some time. Such reforms will attempt to improve the efficiency of the Indian economy in various sectors, including agriculture and energy, with the key aim of boosting investment and kick-starting some much-needed infrastructure projects. We are optimistic regarding these developments but note that the fiscal position is already stretched, and consequently much of this investment will need to be provided by the private sector. In China, monetary fine-tuning has for now allayed fears that growth will slip too far below the government s 7.5% target. Weakness in the real estate sector continues to weigh on growth, but is attempting to pick up the slack with increased infrastructure spending. While this increases the likelihood that the target is met, it emphasises the difficulty of rebalancing the economy away from unproductive investment towards more sustainable sources of growth, whilst maintaining the necessary overall growth rate to ensure adequate employment and social stability. Ironically, at a time when policymakers are attempting to liberalise the financial system, they are in some ways working harder than ever to maintain control over it easing liquidity in the banking sector whilst imposing a strict rationing of credit to certain sectors. This is a microcosm of the great challenges facing the Chinese authorities over the coming years. T17048 Issued July 2014 Valid to end October

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