Group Economics
Macro Weekly China easing on the way
Nick Kounis +31 20 343 5616
21 August 2015 We draw five conclusions from this week’s big macro events. First, China’s industrial sector is still slowing, but help is at hand: monetary conditions are easing and further stimulus looks likely sooner rather than later. Second, China and the Fed continue to cast a shadow over emerging markets and commodities. Third, the Fed looks to be still on track to raise interest rates in September, though China worries and market volatility have made investors sceptical. Fourth, the eurozone economy is on the path of steady recovery, with the composite PMI rising in August. Finally, Greece is set for new elections next month, creating uncertainty.
China slowdown ongoing The China Caixin manufacturing PMI fell to 47.1 in August in
China GDP and monetary conditions index
the flash estimate from 47.8 in July. This took the index to the
Index
lowest level since March 2009, which was during the aftermath
160
of the global financial crisis. The PMI is not as reliable an indicator of growth as in the US or eurozone, while it refers only to manufacturing, while services have been much stronger. Having said that, it does fit into a broader picture painted by recent data signalling that the economy is still losing momentum and there are downside risks to the 7% target.
% yoy
12
140
11 Easier monetary conditions
120 100
8
60
7 6 07
Recent data justifiably raise concerns about a hard landing for China’s economy. Investors question whether the authorities are doing enough and whether they can control the economy
9
80
40
Monetary conditions are easing
10
08
09
10
11
12
13
Monetary Conditions Index (lhs)
14
15
GDP (rhs)
Source: Bloomberg; MCI is made up of a combination of loan growth, real interest rates and the real exchange rate
in any case. We continue to think that the authorities can and will do what it takes to turn the economy round. Stimulus often
Emerging market and commodity woes
works with a lag and there are signs that it will start to gain
Concerns about China, the yuan devaluation and the
traction before long. For instance, there are signs that
possibility of a Fed rate increase, have seriously hurt EM
monetary conditions are finally easing. Bloomberg’s monetary
assets and commodities, while also souring investor risk
conditions index jumped higher in July, to point to a significant
sentiment more widely. At the same time, the slump in these
easing. This reversed the tightening seen since the start of the
markets is often taken as a sign that these economies are
year. Money supply and lending growth are firming.
heading for a slump. For instance, China is the world’s biggest commodity consumer, so if oil prices are falling to (or below)
More to come
the levels seen earlier this year, it is perceived as a sure sign
In addition, the depreciation of the yuan suggests that
of a sharper economic slowdown.
monetary conditions have eased further this month. Finally, we expect the authorities to take further steps in terms of policy
Supply glut is a key factor for commodities
rate cuts and reductions in bank reserve requirements. Our
However, weakness in demand is only a part – and not the
China economist Arjen van Dijkhuizen expects the PBoC to
most important part – of the story. Oil prices – and the prices of
reduce its lending rate by 25bp and its required deposit
some other commodities – have been under pressure because
reserve ratio by 100bp, as well as further yuan depreciation
of over-supply. To the extent that lower prices are driven by
and fiscal stimulus. The first steps could well come sooner
supply, this is actually beneficial to many net commodity
rather than later following the weak China manufacturing PMI
consumers, which will see windfall gains.
survey.
2
Macro Weekly - China easing on the way – 21 August 2015
Emerging market currencies heading lower
Eurozone PMI and GDP growth
Concerns about the outlook, lower commodity prices and the
Index
yuan devaluation have put pressure on emerging market currencies. When the Fed actually starts to raise interest rates (see below) this will add to the headwinds emerging market currencies face, and we expect further weakness ahead. EM currency weakness may be part of the solution rather than part of the problem for some countries as it will allow them more freedom to decouple from the Fed’s monetary policy. However, there is an important caveat. Very sharp falls in currencies
% qoq
60
1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0
55 50 45 40 35 30 04 05 06 07 08 09 10 11 12 13 14 15
could prove to be destabilising and be counter-productive,
GDP (rhs)
especially for economies with high levels of foreign currency debt. In addition, financial conditions would tighten on the back
Composite PMI (lhs)
Source: Thomson Reuters Datastream, Markit
of capital outflows. The risks to EM from the Fed
Eurozone recovery still on track
There are clearly risks of a financial shock to emerging market
The eurozone composite PMI rose to 54.1 in August from 53.9
economies from the Federal Reserve raising rates. These
in July. Weakness in France was offset by improving growth
should hopefully be contained by the likely slow pace of Fed
momentum in Germany, Spain and Italy. At current levels, the
rate hikes and better EM fundamentals than in the past.
eurozone index is consistent with economic growth of around
Stabilisation in China’s economic growth and support from
0.4% qoq. The survey therefore suggests that the eurozone
stronger advanced economy demand should also help.
economic recovery remains on track. China is a risk to this outlook but eurozone domestic fundamentals are positive. For
Investors doubt whether the Fed will hike
instance, the PMI survey points to stronger job growth.
Ironically, while EM assets are (supposedly) partly in tail-spin because of worries about a Fed rate hike, investors are
Greece set for elections, raising uncertainty
increasingly having doubts about such a move. This reflects
Greek Prime Minister Alexis Tsipras resigned yesterday with
the ongoing worries about China and EM and the slide in
the aim of triggering snap elections, with 20 September the
commodity prices. In addition, the July FOMC minutes,
likely date. Elections are not a done deal because the
published earlier this week, were seen as dovish, while US
opposition parties have up to 3 days to try and form a new
inflation was lower than expected. All this has led to a scaling
coalition government. However, new elections are very likely.
back expectations of a rate hike over the last few days. This
The decision of Greek PM Tsipras to call early elections is no
and lower commodity prices have supported government
real surprise. The Syriza-led government had lost its majority.
bonds and pushed down the dollar versus the euro.
In addition, Mr Tsipras must know that given the bad news on the economy and the tough measures ahead, his government
We stick to September
will only become less popular in the future.
We continue to expect a Fed rate increase in September. We think the FOMC will continue to put more weight on the
Elections should not derail bailout
ongoing improving domestic economy as well as strong job
We do not think the elections will derail the bailout. Polls put
growth. In addition, we think investors may have put too much
Syriza out in front. The second biggest party (New
weight on FOMC discussion of some of the risks. The main
Democracy) and other smaller parties (Potami and Pasok) also
message from the minutes, in our view, was that the conditions
support the bailout. The Left Platform group – which is
for a rate hike are ‘approaching’. Of course if conditions on
splintering from Syriza to form a new party (Popular Unity) –
financial markets were to deteriorate much more sharply, the
will probably not provide real competition. So the most likely
Fed could still delay, but for now we think a September move
outcome at this stage is a new Syriza or Syriza-led
is more likely than not.
government.
3
Macro Weekly - China easing on the way – 21 August 2015
Risk of unclear outcome
Delay of ECB purchases of Greek bonds
Still, there is always uncertainty surrounding opinion polls and
One implication of the elections, is that ECB purchases of
we should be cautious in interpreting them. The UK election
Greek government bonds could be delayed. The ECB has said
earlier this year is a good example. So there could be
that it does not necessarily need to wait until the first
unexpected outcomes. In particular, if Syriza does less well
programme review in October before extending its QE
than expected, it might find it difficult to form a new coalition
programme to Greek government bonds. If the Greek
government. For instance, there might be a situation where it
government implemented significant prior actions before then,
does not have the number of seats to form a coalition with
it could be enough to convince the Governing Council.
Pasok/Potami and the only option is a coalition with ND, which
However, the elections look like slowing the process of
proves difficult to negotiate. In that case there might be a
implementing prior actions in the next few weeks, so we may
minority government of some sort, which could lead to
not see ECB purchases until later in the year.
instability.
Main economic/financial forecasts GDP grow th (%)
2013
2014
2015e
2016e
1.5
2.4
2.7
3.1
United States
-0.3
0.9
1.5
2.2
Eurozone
Japan
1.6
-0.1
1.0
1.2
United Kingdom
1.7
3.0
2.8
2.6
China
7.7
7.4
7.0
7.0
World Inflation (%)
3.1 2013
3.3 2014
3.1 2015e
3.8 2016e
United States
1.5
1.6
0.4
2.4
US Treasury
2.19
2.08
Eurozone
1.3
0.4
0.2
1.5
German Bund
0.63
Japan
0.3
2.8
0.7
1.4
Euro sw ap rate
United Kingdom
2.6
1.5
1.1
1.9
China
2.6
2.0
1.5
2.0
World Key policy rate
4.3 20/08/2015
3.9 +3M
3.8 2015e
3.8 2016e
Federal Reserve
0.25
0.50
0.75
1.75
EUR/USD
1.11
1.12
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
124.4
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
Bank of England
0.50
0.50
0.50
1.50
People's Bank of China
4.85
4.60
4.60
4.60
United States Eurozone
3M interbank rate
+3M
+12M
2015e
0.32
0.33
0.4
1.2
0.7
1.7
-0.02
-0.03
0.00
0.00
0.00
0.10
Japan
0.17
0.17
0.2
0.2
0.2
0.2
United Kingdom
0.59
0.59
0.6
1.2
0.7
1.7
13/08/2015 20/08/2015
+3M
+12M
2015e
2016e
2.7
3.0
2.8
3.0
0.59
0.8
1.6
0.9
1.8
0.98
0.93
1.1
1.9
1.2
2.0
Japanese gov. bonds
0.38
0.36
0.6
1.0
0.7
1.0
UK gilts
1.84
1.76
1.7
2.5
2.0
2.7
13/08/2015 20/08/2015
+3M
+12M
2015e
2016e
1.00
1.05
1.00
1.15
123.4
125
135
128
135
1.56
1.57
1.47
1.50
1.49
1.51
EUR/GBP
0.71
0.71
0.68
0.70
0.67
0.76
USD/CNY
6.40
6.39
6.50
6.65
6.55
6.75
10Y interest rate
Currencies
13/08/2015 20/08/2015
2016e
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
Find out more about Group Economics at: http://insights.abnamro.nl/en/ This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics.The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks andany possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. © Copyright 2015 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").