Macro weekly china will do what it takes 13 august 2015

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.

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 and any 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").