Daily Insight
Group Economics Macro & Financial Markets Research
14 September 2016
China’s economy gaining momentum Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
China Macro: August data show improvement - Recent macro data confirm the resilience of the Chinese economy, helping to further ease fears of a hard landing. August data generally improved compared to July and were also beat market expectations. Industrial production accelerated to 6.3% yoy (July: 6.0%). Retail sales rose to 10.6% yoy (July: 10.2%). Meanwhile, fixed investment growth was stable at 8.1% yoy, after having fallen steadily in preceding months. At 2.1% yoy, private investment was still weak, but its growth pace did not fall further either. Previously, imports had also surprised on the upside. Producer price deflation continues to ease, supporting a recovery in industrial profits. Bloomberg’s monthly GDP estimate for August rose to a 20-month high of 7.2%, easing fears that official GDP numbers are too optimistic. In our view, the improving macro picture widens the room for Beijing to address China’s main financial stability risks, such as high and rising debt levels and overcapacity issues. Beijing’s tight rope walk will continue, as the authorities needs to steer credit growth down in a pace that is not too slow (otherwise debt ratios will never stop rising) nor too fast (as that would risk a hard landing). Please also refer to our China Watch – Macro data show improvement (Arjen van Dijkhuizen) Euro Macro: German ZEW stabilises at lows despite improved outlook for the UK economy - Germany’s ZEW economic sentiment stabilised at 0.5 in September. At this level the indicator is well below its long-term average value of 24 and consistent with very modest growth of Germany’s economy during the next six months. Although we do expect the German economy to be a bit weaker in the second half of this year than in the first half, we think the participants of the ZEW survey may have become a bit too gloomy. We expect GDP growth to be around 0.3 qoq in Q3 and Q4 of this year, following 0.7% and 0.4% in Q1 and Q2, respectively. The details of the ZEW report show that expectations about the UK economy improved a lot, in line with the recent rebound in the UK’s PMIs for the industrial and the services sector. Still, the expectation for the US economy deteriorated markedly. This is probably due to the recent publication of some disappointing economic data for the US (nonfarm payrolls and the ISM indexes) in combination with rising expectations of the Fed rate hike. Indeed, the participants to the ZEW survey raised their expectations for shortand long-term interest rates in the US sharply and also lifted their forecasts for the US dollar. (Aline Schuiling) Euro banks: Harmonising how banks classify bad debts - The ECB announced earlier this week a public consultation in regard to a draft guidance paper on non-performing loans (NPLs). The aim of the exercise is to work towards a common approach for “bad debts”, that can be applied consistently across Europe. European supervisors generally consider a loan to be non-performing when more than 90 days have passed without the borrower paying the agreed instalments. However, countries have significantly different approaches for their classifications. With a harmonised approach, the ECB could then have a stronger focus on making banks increase their provisions and write-offs in a timelier manner. Crucially, the guidelines will be non-binding, although further supervisory action can still occur by the ECB on European banks. It is hoped that by addressing NPLs that banks will be better positioned to lend, which could then support the sluggish eurozone economy to gain some pace. Unfortunately, this guidance will not help the Italian banking situation. As in the short term,
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Bloomberg: ABNM
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Daily Insight - China’s economy gaining momentum - 14 September 2016
the changing on what constitutes a NPL does not assist in fundamentally addressing the problem. At present, the Italian banks hold over a third of all the non-performing loans in the EU. Meanwhile, the Italian banks are chronically unprovisioned and, in our view, will not be able to increase provisioning via the normal course of business to meet their NPL dilemma. The Italian referendum slated for November, the low Italian GDP outlook and the huge NPL stockpiles are all good reasons to remain underweight on Italian bank debt for the rest of the year. (Tomas Kinmonth)
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Daily Insight - China’s economy gaining momentum - 14 September 2016