Economic Research The Week Ahead: Key US data releases and 2Q India GDP in focus US: Labour, personal spending and PCE data releases The US will see a number of important releases at the end of this week. Core PCE inflation (due 31 August) is forecast to remain subdued, rising by just 0.1% m-o-m in July, in line with the previous two months. As a result, the yearly growth rate should moderate to 1.4% y-o-y, from 1.% in June. Consensus expects that personal spending growth rebounded to 0.4% m-o-m in July, reflecting the solid retail spending data for the month. On the labour front, consensus predicts a healthy jobs growth number for August, with 180K jobs created (due 1 September). However, we see some potential for a smaller print, with August data historically falling short of market expectations. Nevertheless, the labour market remains healthy, with non-farm payrolls averaging 184K in 7M2017. The unemployment rate is forecast to remain at 4.3% in August, despite the weaker expected job gains. Wage growth is estimated to remain steady at 0.2% m-o-m, albeit sufficient to push the yearly rate up to 2.6% y-o-y (July: 2.%). Meanwhile, 2Q GDP growth will likely to see a small upward revision to 2.7% q-o-q in the second estimate (due 30 August), up from 2.6% in the initial release. This is on the back of stronger private consumption activity and a greater inventory build. Economics Team Monica Malik, Ph.D. Chief Economist +971 (0)2 696 848 Monica.Malik@ Contents I. Recent Events and Data Releases 2 II. Economic Calendar Eurozone: Strong EUR a headwind to the inflation outlook The flash estimate of Eurozone inflation is due on 31 August, with consensus estimating a moderate rise to 1.4% y-o-y in August, from 1.3% in July. Core inflation likely remain steady at 1.2%. The expected rise in headline inflation will be partly due to the energy base effect, though this support will fade in the upcoming months. The EUR strengthening will also place downward pressure on inflation in the coming months. We believe that the ECB will likely revise down its inflation forecasts at its September meeting. The EUR strengthened to above 1.19 against the USD at the end of last week, after ECB President Mario Draghi did not talk down the EUR in his speech at Jackson Hole, as some market participants had expected. However, we highlight that it was well communicated ahead of the meeting that Draghi would not discuss monetary policy. Fed Chair Janet Yellen also refrained from discussing policy in her Jackson Hole speech on financial stability. Yellen highlighted that regulatory reforms enacted after the financial crisis have strengthened the banking system without impeding economic growth. India: GDP and GVA to accelerate in 2Q India releases 2Q2017 GDP and gross value added (GVA) data for 2Q on 31 August, with both indicators forecast to see a pickup in the pace of expansion. GVA, a better indicator of economic activity in India, is likely to accelerate to above 6% in 2Q, from.6% in the previous quarter. Higher public expenditure is likely to be a key support factor, alongside stronger private consumption growth, supported by the disinflation trend seen in 2Q. However, private investment is expected to have remained weak on GST-related uncertainties. 1
Jan-14 Apr-14 Oct-14 Apr-1 Oct-1 Apr-16 Oct-16 Apr-17 Sep-14 Nov-14 Mar-1 May-1 Sep-1 Nov-1 Mar-16 May-16 Sep-16 Nov-16 Mar-17 May-17 I. Recent Events and Data Releases A. MENA Economies Saudi Arabia: Government issues second domestic sukuk The Saudi government issued its second domestic SAR sukuk last week after launching the first in July. Please see our Economic Research Weekly - Global Data Watch 31 July - 4 August 2017 for more details on the initial domestic sukuk. The government raised SAR13 billon (USD3. billion) this time, less than the SAR17 billion raised in July. Demand for the paper remained strong, highlighting the still-ample liquidity in the banking system. The sukuk received bids of over SAR38 billion, according to the Ministry of Finance, down somewhat on July s SAR1 billion. The strong demand allowed the government to reduce yields for the August issue. The profit rates were not made public, but Reuters indicated that the August auction saw the five-year priced at 2.7% (down from 2.9% in July), the seven-year at 3.2% (down from 3.2%), and the 10-year at 3.% (down from 3.%). Moreover, the government was able to raise more in the longer maturities compared to last month. It issued SAR2.1 billion of the five-year note, SAR7.7billion of the seven-year and SAR3.2 billion of the 10-year. Demand for debt remained strong at SAR38 billion Fig. 1. % change 20 1 10 0 - Saudi Arabia: Private sector credit demand remains weak in 2017, down 1.1% y-o-y in July Y-o-Y (LHA) M-o-M (RHA) 4 3 2 1 0-1 -2-3 Fig. 2. % 2.6 2.1 1.6 1.1 0.6 Saudi Arabia: Interbank rates continue to reflect the comfortable banking sector liquidity conditions 3 Month 6 Month Source: SAMA, ADCB calculations Source: Bloomberg We believe that demand for the sukuks is supported by weak private sector credit demand and by a large pool of shariah-compliant liquidity. The issuance of government sukuks will help develop a domestic debt market. This could result in further government sukuk issuance in 2017 to help cover the fiscal deficit. However, we believe that the government will closely monitor banking sector liquidity conditions so as not to tighten them to the extent of restricting already lackluster private demand. Saudi Arabia may also issue another international bond in 4Q2017. Funds raised from sukuk will help cover fiscal deficit Saudi Arabia: SAMA s net foreign assets fall in July, after a June rise SAMA s net foreign assets (NFAs) resumed their falling trend in July, after seeing a surprise rise of USD1.6 billion in June. For more detail on SAMA s June data, please see our Economic Research Weekly - Global Data Watch 31 July - 4 August 2017. We had expected a return to further drawdowns of NFAs, reflecting the ongoing fiscal deficit. SAMA s NFAs fell by USD6.3 billion in July, despite the government issuing USD4.3 worth of SAR sukuks 2
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Oct-14 Apr-1 Oct-1 Apr-16 Oct-16 Apr-17 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Oct-14 Apr-1 Oct-1 Apr-16 Oct-16 Apr-17 However, as we have highlighted in our research, capital flows and possible movement in assets between Saudi Arabia s different investment vehicles could increasingly impact the data, thereby making it less reflective on fiscal and BoP developments. SAMA s NFAs fell by USD6.3 billion in July, to USD487 billion in July. This was their lowest level since June 2011 and down 12.8% y-o-y. Notably, the drop was despite the government issuing its first SAR sukuk in July. Government deposits with commercial banks also fell by USD4.8 billion in July, highlighting the fiscal shortfall. We believe that the higher implied spending in July was linked to the back payment and reinstatement of public sector and military allowances and bonuses, announced in June. Government spending growth should moderate in August with no signs of a broad-based pickup in public sector activity. We still expect further drops in SAMA s NFAs in 2H2017, though the pace could moderate the potential for further domestic and international debt issuances. Fig. 3. Saudi Arabia: SAMA s NFAs fell by USD6.3 billion in July, broadly in line with the 7M2017 average USD billion, change in SAMA s NFAs 20 1 10 0 - -10-1 -20-2 Source: SAMA, ADCB calculations Fig. 4. Saudi Arabia: Seasonal factors and the expatriate tax likely impacted private consumption in July % change y-o-y, 3M moving average 3 2 1 - -1 Value of PoST PoST and ATM Combined Source: SAMA, ADCB Calculations ATM Withdrawals Meanwhile, proxy data continues to point to non-oil activity remaining lacklustre, especially going into the quieter summer period. Private sector credit growth remain flat m-o-m and contracted by 1.3% y-o-y in July. Meanwhile, indications of private consumption (ATM withdrawals and value of point of sales transactions) showed a further monthly fall in July, despite the likely back payment and reinstatement of public sector allowances and bonuses. We believe that this likely reflects a combination of the summer period, when many nationals travel outside, alongside the impact of the introduction of a fees on expatriate dependents from July. Indicators of economic activity remain weak UAE: Excise tax to be introduced on some unhealthy goods from October The UAE government has announced that it will implement an excise tax on unhealthy products on 1 October. The tax will have the double benefit of raising government revenue and reducing consumption of these products. The tax rate will be 100% for tobacco products and energy drinks and 0% for carbonated drinks, excluding sparkling water. However, the boost to government revenue is expected to be small at around AED7 billion per annum, c.0.% of our estimate for 2017 GDP. The upward pressure on headline inflation is also forecast to be limited to c. 0.3 pts in the first 12 months in our view, given the small contribution of the products in question to the CPI basket. Excise tax expected to raise c.aed7 billion per annum 0.% of our 2017 GDP forecast The introduction of the excise tax is part of a GCC-wide push to raise non-oil revenue; Saudi Arabia has already implemented the tax in June 2017 (same as proposed by the 3
1Q2014 2Q2014 3Q2014 4Q2014 1Q201 2Q201 3Q201 4Q201 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 UAE). More significant will be the introduction of VAT across the region, with the UAE and Saudi Arabia expected to implement the indirect tax on 1 January 2018. Please see our note GCC Economic Update - Assessing the economic impact of VAT, published on 14 June 2017 for more details. B. G4 Economies UK: Sharp slowdown in private consumption growth in 2Q The second print of headline GDP growth for 2Q2017 was unrevised from the first estimate. The economy expanded by 0.3% q-o-q and 1.7% y-o-y. However, the second print provided the initial estimates of 2Q GDP on an expenditure basis. Notably, there was a sharp slowdown in private consumption to 0.1% q-o-q, weaker than the consensus expectation of 0.3% and down from 0.4% in 1Q. This was due to the pick-up in 2Q consumer inflation on the back of the weaker GBP. Moreover, personal spending growth was impacted by a drop in car purchases following tax changes. Other key areas of the economy were also soft, with business investment seeing zero growth on a q-o-q and y- o-y basis. Total gross fixed capital formation did grow by 0.7% q-o-q, albeit down from 1% in 1Q, though this was supported by government and public-sector investment. Overall government spending was the main support to growth in 2Q, which does not bode well for the growth outlook. Net exports did not contribute positively to real q-o-q GDP growth. The data indicates that the corporate and external sectors did not pick up the slack from consumers. Real GDP growth moderated sharply in 1H217, and we believe that the weak underlying growth drivers will keep the BoE on hold for the rest of this year and in 2018. We also see a gradual moderation in inflation in 2H2017, which is factored in our interest rate outlook. Weak underlying growth drivers public spending the main support Fig.. UK: Higher government spending and public investment supported 2Q2017 real GDP growth, as personal spending slowed further % change q-o-q 1.0 0.8 0.6 0.4 0.2 GDP Private Consumption Investment Government Spending 0.0-0.2-0.4 Source: UK Office for National Statistics US: Durable goods orders and shipments surprise to the upside The durable goods orders and shipment data for July point to a robust start for capital expenditure into 3Q. Durable goods orders (ex-transport) rose by a solid 0.% m-o-m, up from 0.1% in June and exceeded consensus expectations of 0.4%. Moreover, core capital goods shipments surged by 1% m-o-m, and the June shipment growth was also revised up to 0.6% (from 0.1% initially). Core capital goods shipments data feed in to GDP data to reflect equipment spending by businesses. Data points to strong equipment spending by businesses 4
II. Economic Calendar Fig. 6. The week ahead Time* Country Event Period Prior Consensus GCC Data Monday, 28 Aug UAE Dubai Airport Cargo Volume, y-o-y Jul -4.6% -- Saudi Arabia 2017 Hajj Statistics Qatar M2 Money Supply, y-o-y Jul 7.7% -- Qatar QCB Net Foreign Assets QAR Jul 8881.3M -- 12:00 Eurozone M3 Money Supply, y-o-y Jul % 4.9% 16:30 US Wholesale Inventories, m-o-m Jul P 0.7% 0.3% Tuesday, 29 Aug 18:00 US Conf. Board Consumer Confidence Aug 121.1 120.4 18:00 US Conf. Board Present Situation Aug 147.8 -- Wednesday, 30 Aug 3:0 Japan Retail Sales, m-o-m Jul 0.2% 0.3% 3:0 Japan Retail Trade, y-o-y Jul 2.2% 1% 12:30 UK Mortgage Approvals Jul 64.7K 6.K 13:00 Eurozone Consumer Confidence Aug F -1. -1. 1:00 US MBA Mortgage Applications 2-Aug -0.% -- 16:1 US ADP Employment Change Aug 178K 188K 16:30 US GDP Annualized, q-o-q 2Q S 2.6% 2.7% 16:30 US Personal Consumption 2Q S 2.8% 3% Thursday, 31 Aug 3:0 Japan Industrial Production, m-o-m Jul P 2.2% -0.3% 3:0 Japan Industrial Production, y-o-y Jul P.%.1% 13:00 Eurozone Unemployment Rate Jul 9.1% 9.1% 13:00 Eurozone CPI Estimate, y-o-y Aug 1.3% 1.4% 13:00 Eurozone CPI Core, y-o-y Aug A 1.2% 1.2% 16:00 India GDP, y-o-y 2Q 6.1% 6.6% 16:30 US Initial Jobless Claims 26-Aug 234K 237K 16:30 US Personal Income Jul 0% 0.3% 16:30 US Personal Spending Jul 0.1% 0.4% 16:30 US PCE Deflator, m-o-m Jul 0.0% 0.1% 16:30 US PCE Deflator, y-o-y Jul 1.4% 1.4% 16:30 US PCE Core, m-o-m Jul 0.1% 0.1% 16:30 US PCE Core, y-o-y Jul 1.% 1.4% 18:00 US Pending Home Sales, m-o-m Jul 1.% 0.% 18:00 US Pending Home Sales NSA, y-o-y Jul 0.7% -- Friday, 1 Sep 4:30 Japan Nikkei Japan PMI Mfg Aug F 2.8 -- :4 China Caixin China PMI Mfg Aug 1.1 1 9:00 India Nikkei India PMI Mfg Aug 47.9 -- 12:00 Eurozone Markit Eurozone Manufacturing PMI Aug F 7.4 7.4 12:30 UK Markit UK PMI Manufacturing SA Aug.1 16:30 US Change in Nonfarm Payrolls Aug 209K 180K 16:30 US Change in Private Payrolls Aug 20K 170K 16:30 US Change in Manufact. Payrolls Aug 16K 10K 16:30 US Unemployment Rate Aug 4.3% 4.3% 16:30 US Average Hourly Earnings, m-o-m Aug 0.2% 0.2% 16:30 US Average Hourly Earnings, y-o-y Aug 2.% 2.6% 16:30 US Labor Force Participation Rate Aug 62.9% -- 17:4 US Markit US Manufacturing PMI Aug F 2. 2.6 18:00 US ISM Manufacturing Aug 6.3 6. * UAE time Source: Bloomberg
Fig. 7. Last week s data Time* Country Event Period Prior Consensus Actual GCC data Monday, 21 Aug UAE Central Bank Foreign Assets Jul 338.3B -- 331.2B UAE M2 Money Supply, m-o-m Jul -0.6% -- -0.2% Saudi Arabia M2 Money Supply, y-o-y Jul 3.% -- % Saudi Arabia SAMA Net Foreign Assets, SAR Jul 1849.7B 1426.2B -- Kuwait M2 Money Supply, y-o-y Jun 0.% -- 0.% Kuwait CPI, y-o-y Jul 1.4% -- 1.3% Kuwait CPI, m-o-m Jul 0.1% -- -0.1% Bahrain CPI,-y-o-y Jul 1% -- 1.4% 3:01 UK Rightmove House Prices, m-o-m Aug 0.1% -- -0.9% 3:01 UK Rightmove House Prices, y-o-y Aug 2.8% -- 3.1% 8:30 Japan All Industry Activity Index, m-o-m Jun -0.8% 0.4% 0.4% Tuesday, 22 Aug 13:00 Germany ZEW Survey Current Situation Aug 86.4 8.2 86.7 13:00 Eurozone ZEW Survey Expectations Aug 3.6 -- 29.3 13:00 Germany ZEW Survey Expectations Aug 17. 1 10 17:00 US FHFA House Price Index, m-o-m Jun 0.3% 0.% 0.1% 17:00 US House Price Purchase Index, q-o-q 2Q 1.6% -- 0.60% 18:00 US Richmond Fed Manufact. Index Aug 14 10 14 Wednesday, 23 Aug 12:00 Eurozone Markit Eurozone Manufacturing PMI Aug P 6.6 6.3 7.4 12:00 Eurozone Markit Eurozone Services PMI Aug P.4.4 4.9 12:00 Eurozone Markit Eurozone Composite PMI Aug P.7..8 1:00 US MBA Mortgage Applications 18-Aug 0.1% -- -0.% 17:4 US Markit US Manufacturing PMI Aug P 3.3 3. 2. 17:4 US Markit US Services PMI Aug P 4.7 6.9 17:4 US Markit US Composite PMI Aug P 4.6 -- 6 18:00 US New Home Sales Jul 630K 610K 71K 18:00 US New Home Sales, m-o-m Jul 1.9% 0% -9.4% 18:00 Eurozone Consumer Confidence Aug A -1.7-1.8 -- Thursday, 24 Aug 12:30 UK GDP, q-o-q 2Q P 0.3% 0.3% 0.3% 12:30 UK GDP, y-o-y 2Q P 1.7% 1.7% 1.7% 12:30 UK Private Consumption, q-o-q 2Q P 0.4% 0.3% 0.1% 12:30 UK Government Spending, q-o-q 2Q P 0.7% 0.3 0.6% 12:30 UK Gross Fixed Capital Formation, q-o-q 2Q P 1% -0.4 0.7 12:30 UK Exports, q-o-q 2Q P -0.7% 1% 0.7 12:30 UK Imports, q-o-q 2Q P 1.7% 0.% 0.7% 16:30 US Initial Jobless Claims 19-Aug 232K 238K 234K 18:00 US Existing Home Sales Jul.1M.M.44M 18:00 US Existing Home Sales, m-o-m Jul -2% 0.% -1.3% 19:00 US Kansas City Fed Manf. Activity Aug 10 11 16 Friday, 2 Aug 3:30 Japan Natl CPI, y-o-y Jul 0.4% 0.4% -- 3:30 Japan Natl CPI, ex-fresh Food, y-o-y Jul 0.4% 0.% -- 3:30 Japan Natl CPI, ex-fresh Food & Energy, y-o-y Jul 0.0% 0.1% -- 16:30 US Durable Goods Orders Jul P 6.4% -6% -6.8% 16:30 US Durables, ex-transportation, m-o-m Jul P 0.1% 0.4% 0.% 16:30 US Cap Goods Orders, Non-def ex-air, m-o-m Jul P 0.0% 0.4% 0.4% 16:30 US Cap Goods Ship, Non-def ex-air, m-o-m Jul P 0.6% 0.2% 1% * UAE time Source: Bloomberg 6
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