Macro Weekly
Group Economics
1 July 2016
One week after the Brexit vote • Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
• • • • • •
One week after we woke up to the UK’s decision to leave the EU what have we learnt? What is still uncertain? It seems financial conditions may not tighten very aggressively… …while another round of global monetary easing looks likely In addition, the UK government will almost certainly go ahead and take the country out of the EU, though the process may not start until 2017… …in addition it will most likely be a tough and long negotiation Although we have downgraded our economic forecasts, we do not yet have evidence of the size of the uncertainty shock… …or the extent to which euro contagion will build in the coming period
Evaluating the situation one week later One week ago the world was waking up to the UK’s decision to leave the EU. This opened up a world of uncertainty, with many questions about what would happen next. One week on, we take stock and try to evaluate what issues we have a better view on now, and what areas remain highly uncertain. Financial conditions may not tighten very aggressively So what have we learnt? First, of all the market reaction of the first few days could be seen to be rather encouraging. Although there was an aggressive sell-off in equity markets in the immediate aftermath of the vote, major market indexes have recovered to varying degrees since then. This raises the hope that financial conditions will not tighten very aggressively, which would have been a major headwind for the global economy. Of course, it is perhaps too early to say that markets will not experience a further leg down going forward. However, it does seem reasonable to assume that the Brexit impact is not too far from being discounted, assuming a relatively benign scenario for the rest of Europe. Of course in an adverse scenario, where Brexit morphs into a full-scale euro crisis and investors fear euro/EU break-up, markets would have much further to correct. However, our base case – and that of the consensus it seems - is that contagion will be limited. Another round of global easing Something else which has become a little clearer is that central banks are set for a new round of easing, which is one of the factors that has supported investor confidence. Further UK easing over the summer has been explicitly signalled by BoE Governor Carney. There have also been reports that the ECB is considering changing the rules of its QE programme to give it room to make additional
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Macro Week kly – One week k after the Brex xit vote – 1 July y 2016
purcha ases. Indeed, President Dra aghi and Exec cutive Board m members Coeu ure and Praet have indicated d they expect Brexit to be negative n for euurozone econo omic growth h. We expect ffurther easing g from the BoE E, ECB and BooJ, while we continue c to expec ct the Fed to ke eep interest ra ates on hold th his year. Brexitt is Brexit, bu ut it may take e a while and will be tough h Since the referendu um, the UK political scene has been a circcus, with the Labour L and Conse ervative partie s looking to be e in chaos and d the Scottish national party y looking to make moves to trigg ger a new inde ependence referendum. Hoowever, we are e seeing some clarity about w who the next Conservative C Prime P Ministe r might be. Affter Boris Johnson decided no ot to put his na ame forward, current Homee Secretary Th heresa May has em merged as the e front runner in the race. Mrs. May M has set ou ut a number of o key positions s, which providde some early y indications of the UK K’s approach. First of all, sh he said there sshould be no second s referendum, the pub blic had given its verdict. Se econd, Article 50 should nott be invoked before e the end of th his year. Third,, there should be no new Geeneral Election before 2020. Finally, the go overnment had no mandate e to reach a deeal that would maintain the fre ee movement of people. Thiis is crucial, as s it will therefoore make it diffficult for the UK to have full acce ess to the sing gle market, giv ven the EU's ccurrent stance. Indeed, French h President H ollande has sa aid that there will be no acccess to the single market withou ut free movem ment. All this su uggests that th he negotiationns will likely be e long and difficult and that the e period of unc certainty will be prolonged. Uncerrtainty about the uncertain nty So the ere are a numb ber of areas where w there is a little more cclarity a week on from the referendum. What iss still uncertain? Well a major issue is whhat will the Bre exit mean for the e economic ou utlook. Earlier this week, we lowered our fforecasts for economic e n and UK gov growth h, US, German vernment bond d yields, sterlinng and the euro (see Global Macro View – Downgradin ng our forecas sts on Brexit). One of the ma ain features of the scenario is th hat the prolong ged period of uncertainty u willl lead to corpo orate caution and hence a scaling back k of hiring and investment, eespecially of course c for the UK K. How big or small this effe ect will be is ob bviously intanggible and high hly uncerttain. We will n need to wait an nd see how bu usiness confiddence indicators develop. Althou ugh we have sseen some bus siness surveys this week, thhey relate to June, J so we have to t wait for the data for July to t get the first indications. The otther big issue is the extent of o ‘exit contagion’ to other E EU countries. In our base case, we assumed ccontagion will remain limited. However, ppolitical risk is elevated and th here is clearly an anti-establlishment and Eurosceptic E tidde sweeping through t many countries. The e Italian politic cal reform refe erendum later this year and elections in Germa any, France a and the Netherrlands next year are key eveents to watch in this respec ct. Certainly so ome of the po olls make worrying reading. For instance, a poll this week showed that Ittaly’s anti-EU,, anti-establish hment 5 Star P Party would win w a Generral Election if h held today. Th he risk of Euro opean contagioon looks significant.
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Macro Week kly – One week k after the Brex xit vote – 1 July y 2016
Ma ain economic c/financial forrecasts GDP P grow th (%)
2014
2015
2016e e
2017e
3M interbank rate
Unitted States
2.4
2.4 ↓
1.7 7 ↓
1.8
Unitted States
Eurozone
0.9
1.6
1.3 3 ↓
1.0
Eurrozone
-0.1
0.6
0.6 6
0.6
2.2 ↓ 6.9
1.5 5 ↓ 6.5 5
0.5 6.0
pan Jap Unitted Kingdom Chin na
3.1 7.3
World Infllation (%) Unitted States
3.4
3.1
2.9 9
3.4
2014 1.6
2015 0.1
2016e e 1.4 4
2017e 2.0
Eurozone
0.4
pan Jap
2.8
0.0 ↑ 0.8
Unitted Kingdom
1.5
0.0
Chin na
2.0
World
23/06/2016 30 0/06/2016 0.64
2017e
1.00 ↑
1.5
-0.35
-0.35
-0.35
Jap pan
0.06
0.06
-0.1
-0.10
-0.10
-0.1
Unitted Kingdom
0.59
0.56 ↓
0.3 ↓
0.30 ↓
0.30 ↓
0.3
0/06/2016 23/06/2016 30 1.74 1.49 ↓ 0.10 -0.13 ↓
+3M M 1.4 ↓ -0.2 ↓
2016e 1.40 ↓ -0.20 ↓
+12M 1.60 ↓ -0.10 ↓
2017e 1.8
0.4 ↓ 0.0
0.45 ↓ 0.00
0.55 ↓ 0.20
0.7
-0.14
0.42 ↓ -0.23
1.38
0.87 ↓
0.8 ↓
0.50 ↓
0.30 ↓
0.2
0/06/2016 23/06/2016 30 1.14 1.11 ↓ 103.3 ↓ 106.2
+3M M 1.1 10 ↓ 100.0 ↓
2016e 1.10 ↓ 103.0 ↓
+12M 1.10 ↓ 105.0 ↑
2017e 1.10
1.2 27 ↓ 0.8 87 ↑
1.20 ↓ 0.92 ↑
1.25 ↓ 0.88 ↑
1.35
6.6 60
6.70
6.80
6.80
10Y Y interest rate US Treasury Gerrman Bund
1.8
Eurro sw ap rate
2.3
Jap panese gov. bonds
1.4
0.5 5 ↑ 2.0 0
2.0
UK gilts
3.5
2.9
3.1 1
3.2
30/06/2016 0.50
+3M 0.50
2016e e 0.50 0
2017e 1.25
European Central Bank k
-0.40
-0.40
-0.40 0
-0.40
USD D/JPY
nk of Japan Ban
-0.10
-0.30
-0.30 0
-0.30
GBP/USD
1.48
0.50 ↓ 4.35
+12M
0.70 ↑
35 -0.3
1.5
Peo ople's Bank of China a
2016e
-0.28
0.3 3 ↑
Ban nk of England
0.7 ↑
-0.27
0.3 3
y policy rate Key Fed deral Reserve
+3M M
0.65 ↑
Currencies EUR R/USD
0.55
0.25 ↓
0.25 5 ↓
0.25
EUR R/GBP
0.77
1.34 ↓ 0.83 ↑
4.35
4.10 0
3.85
USD D/CNY
6.58
6.65
0.1 0.2
Sou urce: Thomson Reu uters Datastream, ABN A AMRO Group Economics.
Ke ey Global Macro Events Tuesday T T Tuesday T Tuesday T Tuesday T Tuesday T Tuesday T Tuesday T Tuesday
05/072 2016 05/07/2 2016 05/07/2 2016 05/07/2 2016 05/07/2 2016 05/07/2 2016 05/07/2 2016 05/07/2 2016
03:45:00 03:45:00 10:00:00 10:30:00 11:00:00 16:00:00 20:30:00
CN CN EC EC GB EC US US
PMI servvices - index (Caixin) PMI com posite - index (Caixin) Compossite PMI output PMI servvices - index PMI servvices - index Retail sa ales - % mom New durable goods orders - % mom Fed's Du udley speaks on loca al economy Bingham mton, NY (v)
Jun Jun Jun F Jun F Jun May May F
51.2 2 50.5 5 52.8 8 52.4 4 53.5 5 0.0 0 -2.2 2
We ednesday We ednesday We ednesday We ednesday We ednesday
06/07/2 2016 06/07/2 2016 06/07/2 2016 06/07/2 2016 06/07/2 2016
08:00:00 09:30:00 14:30:00 16:00:00 20:00:00
DE SE US US US
Manufactturing orders - % mo om Policy ratte - % Trade ba alance - USD bn ISM non--manufacturing, inde ex Fed relea ases minutes from June J 14-15 FOMC meeting m
May Jul 6 May Jun Jun
-2.0 0 -0.5 5 -37..4 52.9 90
Thursday T T Thursday T Thursday T Thursday T Thursday
07/07/2 2016 07/07/2 2016 07/07/2 2016 07/07/2 2016 07/07/2 2016
06:30:00 08:00:00 09:00:00
CPI - % yoy y Industria al production - % mom Foreign currency c reserves - CHF C mln ADP nat.. employment report - thousands ECB acccount of the 21 April meeting m
Jun May Jun Jun
0.0 0 0.8 8 60214 47.8 173.2
0.0
0.0 -0.3
152.7
160.0
13:00:00
NL DE CH US EC
Friday Friday Friday Friday Friday
08/07/2 2016 08/07/2 2016 08/07/2 2016 08/07/2 2016 08/07/2 2016
10:30:00 14:30:00 14:30:00 14:30:00 21:00:00
GB US US US US
Trade ba alance - GDP mln Change in employment priva ate employment - tho ousands Change in employment total - thousands Unemplo oyment - % Fed Res erve consumer cred dit - USD bn
May Jun Jun Jun May
-3294 4.0 25.0 0 38.0 0 4.7 7 13.4 4
181.0 179.0 4.8 17.2
150 155 4.8
Sou urce: Bloomberg, Reuters, R ABN AMRO O Group Economiccs (we provide own forecasts f only for selected s k ey variab bles and events)
52.8 52.4
52.9 52.4
0.5
0.3
1.0
1.5
-39.7 53.20
110 0.81
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Macro Week kly – One week k after the Brex xit vote – 1 July y 2016
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