Macro Weekly China will do what it takes…
Group Economics
Nick Kounis +31 20 343 5616
14 August 2015 We draw five conclusions from this week’s big macro events. First, China will do what it takes to support the economy, with the yuan devaluation the latest in a line of measures to support growth. Second, the eurozone economy lost some of its upward momentum in Q2, but there are plenty of positives signalling better growth going forward. Meanwhile, the Dutch and Spanish economies are back in the top league in terms of eurozone economic performance. Fourth, the US economy is back on track helped by consumers. Finally, Greece is set for an ESM programme, but likely also new elections.
China’s FX regime shift
perspective and would need to go further to be a significant
The big event of the week was China’s shift in currency
stimulus for the tradable goods sector.
regime, which we see as a sign that the authorities will do what it takes to support growth. The PBoC allowed the currency –
Reactions from other countries do not suggest any strong
which is pegged to the dollar - to better reflect market forces. It
resistance at this stage. An EU spokesperson described the
fell by around 3%, to take it to the lowest level since 2011. On
move as a ‘positive development’ to the extent that it better
Friday, the central bank ended a 3-day slide, by setting the
reflects market forces. South Korea’s Deputy PM for Finance
reference rate slightly higher. The move partly reflects a desire
said that greater Chinese export competitiveness will also
to show commitment to currency liberalisation ahead of the
benefit Korea. Even the normally hawkish US Treasury
IMF’s decision on whether to include the Chinese currency in
adopted a restrained tone, saying it was too early to judge the
the SDR basket. This is seen as an important milestone in
full implications of the move.
China’s long-road to achieving major reserve currency status.
China’s yuan had strengthened before this week Supporting economic growth However, that is certainly not the end of the story. We think the
Real effective exchange rate index
135
yuan devaluation should be seen as the latest in a line of measures to support economic growth. Data over the last few
130
days showed a slowdown in industrial production and
125
investment in July after signs of a stabilisation in June, while exports have been persistently weak over recent months.
120
Although the official GDP numbers are bang on the
115
government’s 7% target, the Bloomberg GDP indicator – for instance – was running at 6.6% in July. We see further
110 Jan-14
May-14
Sep-14
Jan-15
May-15
moderate yuan devaluation ahead and additional monetary stimulus in coming months, which added to other measures,
Source: Thomson Reuters Datastream
should help the economy to regain some traction. Currency war talk looks overblown
No Fed delay
We do not think that the devaluation of the yuan will now
Speculation that the Fed will now delay raising interest rates,
trigger a currency war given that it is not too aggressive, while
which has weighed on the dollar, also look off the mark at this
other countries also recognise that China’s economy faces
stage. The yuan devaluation will not have a big impact on the
challenges. It is good for the overall global economy if
US economic outlook. Recent good economic data (see also
countries that are losing momentum also have weakening
below) and FOMC member commentary point to a September
currencies. The yuan real effective exchange rate has risen by
increase in the Fed’s target range for the fed funds rate.
almost 10% since the start of last year and by around 4% this year, so the move in the fixing is still quite modest from that
2
Macro Weekly - China will do what it takes… – 14 August 2015
Eurozone has lost momentum
Netherlands and Spain are back in the premier league
Meanwhile, GDP data confirmed that the eurozone economic
The country breakdown showed that the Dutch and Spanish
recovery has lost some pace. Eurozone GDP rose by 0.3%
economies are once again structurally outperforming. The
qoq in Q2, which was below the consensus forecast of 0.4%
Dutch economy slowed to 0.1% in Q2 from 0.6% in Q1.
and also down slightly from 0.4% in Q1. Business surveys
However, GDP was heavily weighted down by the temporary
have suggested that the eurozone economy lost momentum
effects of lower gas output. Stripping this effect out the Dutch
over recent months, which could reflect some fall-out from the
economy maintained the strong pace seen at the start of the
Greek crisis and potentially weakness in the Chinese
year. Meanwhile, already released data showed the Spanish
economy.
growth surging by 1% in Q2 following 0.9% in Q1. Unfortunately, data for Ireland are not yet available for Q2, but
Reasons to expect better growth ahead
it has also been booming in the last few quarters.
Nevertheless, there are plenty of positives coming through and we think the eurozone economy will regain momentum in the
A heart-warming tale of successful adjustment
coming quarters. Domestic fundamentals are improving. We
These are three very different economies but all have at
have seen a drop in interest rates, while banks are easing their
various stages over the last few years dropped down to the low
lending standards. The windfall gains from lower oil prices
growth league, underperforming the eurozone average. All
should support consumer demand. In addition, there are signs
three had to various extents had to deal with sharp housing
that companies will step up investment in the coming months.
market corrections and fiscal consolidations. In the case of
Banks are reporting increased demand for loans from
Ireland and Spain, we also saw sharp labour cost declines as
companies, while orders for German machinery and equipment
well as structural reforms. They have come through a period of
from other eurozone countries has started to grow strongly.
pain and are now out the other side and are doing well. In a
Increased hiring should follow.
world often dominated by doom and gloom, it is nice to take a short intermezzo for a good news story.
The outlook for exports should also brighten. We think global growth will pick-up. The US economy has firmed after a bad
The US is back on track
start to the year, while the impact of the various stimulus
US economic reports were generally encouraging, and add to
measures should allow the Chinese economy to regain some
evidence that the recovery is back on track after a terrible start
traction. Meanwhile, most of the effects of the euro
to the year. Consumers look to be leading the way. Retail
depreciation are still to feed through to eurozone exports.
sales were up by 0.6% in July after a revised flat reading in June (from -0.3%). This left sales up by 7.9% annualised in the
Eurozone GDP in the year to Q2
3-months to July. This compared to 6.9% in June and -4% in
% yoy, selected member states
March. GDP in Q2 could be revised up to an annualised 3% or above.
4 3
Households are benefiting from ongoing strong job growth as
2
well as healthy balance sheets. A separate report published
1
this week also showed mortgage foreclosures falling to the
0
lowest level in the survey’s 16-year history.
-1
Greece set for programme and new elections -2 SP
NL
GE
PT
GR
BE
EZ
FR
AU
IT
FI
Meanwhile, Greece continued to make strong progress towards a new ESM programme. It has agreed the terms with
Source: Eurostat, Bloomberg
the quartet of institutions while the programme has also received the backing of parliament. At time of writing the Eurogroup needed to rubber stamp the deal on Friday. The German government seemed to have some concerns, but European officials seemed quietly confident there would be
3
Macro Weekly - China will do what it takes… – 14 August 2015
approval. The final step is the approval of national parliaments in the coming week. We have set out some potential pitfalls that could knock the agreement off track in coming months (see our Global Daily Insight, 10 August). The vote in the Greek parliament on the programme once again underlined that Prime Minister Tsipras’ government no longer has a majority in parliament. New elections therefore seem likely before year end. With further economic hardship on the cards, Mr Tsipras may want to get elections out the way as soon as possible. The far left of his party will probably splinter, but we think that Syriza could still win a majority in new elections.
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
1.8
2.3
Eurozone
Japan
1.6
-0.1
1.1
1.2
United Kingdom
1.7
3.0
2.8
2.6
China
7.7
7.4
7.0
7.0
World Inflation (%)
3.2 2013
3.3 2014
3.2 2015e
3.8 2016e
United States
1.5
1.6
0.4
2.4
US Treasury
2.23
2.19
Eurozone
1.3
0.4
0.4
1.7
German Bund
0.71
Japan
0.3
2.8
0.8
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 13/08/2015
3.9 +3M
3.9 2015e
3.9 2016e
Federal Reserve
0.25
0.50
0.75
1.75
EUR/USD
1.09
1.11
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
124.7
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
0.31
0.32
0.6
1.5
0.7
1.7
-0.02
-0.02
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
1.5
1.0
2.0
06/08/2015 13/08/2015
+3M
+12M
2015e
2016e
2.7
3.0
2.8
3.0
0.63
0.8
1.6
0.9
1.8
1.04
0.98
1.1
1.9
1.2
2.0
Japanese gov. bonds
0.42
0.38
0.6
1.0
0.7
1.0
UK gilts
1.92
1.84
1.7
2.5
2.0
2.7
06/08/2015 13/08/2015
+3M
+12M
2015e
2016e
1.00
1.05
1.00
1.15
124.4
125
135
128
135
1.55
1.56
1.47
1.50
1.49
1.51
EUR/GBP
0.70
0.71
0.68
0.70
0.67
0.76
USD/CNY
6.21
6.40
6.50
6.65
6.55
6.75
10Y interest rate
Currencies
06/08/2015 13/08/2015
2016e
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
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