Group Economics
Macro Weekly Divergence everywhere
Han de Jong +31 20 628 4201
18 September 2015 The global economy is currently characterised by a significant divergence: advanced economies are doing quite well, but emerging economies are struggling. In an integrated world economy such divergence cannot last for a very long period. An amazing divergence also appears to develop (or perhaps it has existed for some time already) within the policy committee of the US Federal Reserve. This all creates uncertainty. We have lowered our growth forecasts for a number of important emerging economies. Struggling EMs
improving public finances. The basis for growth in these
Emerging economies are having an increasingly difficult time
economies has broadened in recent quarters.
this year. There are several reasons for this. First and foremost is the cooling in China, or more specifically, the cooling of the
Divergence cannot last very long
industrial sector in China. Many other EMs are highly
The chart on this page shows the PMIs for industrialised
dependent on industrial activity in China and, as a result, they
countries and for emerging economies. In an integrated world
are all feeling the effects. A second, but related factor, is the
economy one would expect the correlation between the two to
weakness of commodity prices, which is causing a serious
be high. And it is. A couple of important points need to be
deterioration in the terms of trade for many EMs, which is a
made here. First, PMIs for emerging economies do not have a
significant headwind. Furthermore, political fragility is affecting
particularly long record. And one should probably be careful
a number of EMs as is poor macroeconomic management.
interpreting this series, in particular as regards the level.
Brazil in particular features high on all such lists. Its economy
However, it is clear that the PMI for emerging economies has
has fallen into recession and it is hard to see what
fallen consistently this year (and has fallen below 50 recently).
policymakers can do to turn things around. Inflation has risen
On the other hand, the PMI for advanced economies has
and the central bank has raised interest rates in response. This
stabilised this year at a level well in excess of 50.
is understandable, but not good for short-term growth prospects. In addition, economic weakness has affected public
PMI Manufacturing
finances and the response here is that action has to be taken
Index, <50 = negative, >50 = positive
to prevent too severe a deterioration. This also is bad for
60
growth. And if this was not bad enough, the political situation complicates matters even more, with the various corruption
55
scandals and the record low popularity of President Dilma Rousseff, who was only elected to her second term last year.
50
On top of all these factors, EMs are under pressure from a tightening of financial conditions as capital is flowing out of these economies. There is a lot of talk about this tightening of
45 10
11
12
Developed economies
13
14
15
Emerging markets
financial conditions, sometimes dubbed quantitative tightening. It is, however, extremely difficult to gauge the magnitude and
Source: Thomson Reuters Datastream
to assess the effects. I would suggest that such a divergence cannot last very long. Advanced economies doing well
Either the advanced economies will pull up the EMs or the
At the other end of the spectrum, advanced economies are
EMs will drag down the advanced economies. Most likely, it
doing well. Growth in the US and in the eurozone in particular,
will be somewhere in between. The key questions here appear
while unspectacular, is above the long-term trend in these
to be whether or not China will experience a hard landing, how
economies, resulting in falling unemployment rates and
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Macro Weekly - Divergence everywhere â&#x20AC;&#x201C; 18 September 2015
vulnerable advanced economies are to the weakness in EMs
meetings left before the end of the year, that FOMC member
and how financial conditions will develop.
will either have to get his way (which does not seem very likely), change his mind (which he will be reluctant to do as it
On China, we are not too pessimistic. Weakness is
would imply him saying that he made an error and has realised
concentrated in the industrial sector, which can be volatile. In
this within a few weeks) or dissent at at least one of the last
addition, we continue to think that Chinese policymakers have
two meetings this year. One would love to be a fly on the wall
a strong motive to prevent a hard landing, they also have the
in those FOMC meetings.
means in our view and the past shows they also have the ability. We take comfort from that as well as from the fact that
The Fed seems to be struggling with three key questions.
the housing sector appears to have bottomed and the services
What is the actual state of the economy, what are they actually
sector remains relatively strong.
trying to achieve and what are the feedback loops between US monetary policy, its effects on EMs and by extension on the
On the vulnerability of advanced economies, we are also not
global economy, and then back onto the US.
overly pessimistic. The fact that growth in advanced economies has broadened significantly suggests that the
While the member projecting lower rates is obviously a dove
vulnerability is not particularly large in the short term.
on the FOMC, the same way Lacker is a hawk, experience of recent years suggests that the way things evolve tend to make
Finally, on financial conditions, I have already said that they
the dovish view more relevant than the hawkish view. This may
are hard to gauge. Of particular interest here is the path of
change, of course, but it is probably fair to say that the Fed will
monetary policy in the US.
proceed cautiously. We have, for a while, argued that they Fed will hike in December. This has now become a lot less certain,
Divided FOMC
but it still seems reasonable to consider this as the base case.
At their September meeting the FOMC decided to leave interest rates unchanged. Weakness in emerging economies,
Our overall assessment
volatility on financial markets and in particular the effects that
We see all the risks referred to above. Yet, we think China will
all these factors may have on the US prevented the Fed from
not experience a hard landing. In addition, we think that
hiking rates. They left open the possibility of a rate hike any
advanced economies will not be overly vulnerable, at least in
time and one of the FOMC members, Richmond Fed President
the short term, to weakness in EMs. Finally, we think that the
Jeffrey Lacker wanted to raise rates. Lacker is a well-known
Fed will proceed cautiously. Assuming things will settle down
hawk. The differences of view within the FOMC are clearly
in the global economy over the next couple of months, a Fed
very significant. While Lacker wanted to tighten monetary
rate hike in December is still a good possibility, but chances of
policy one of the others is now expecting the correct Fed funds
a further delay have increased materially.
rate to lower by the end of the year than it is now. That would bring the key rate in negative territory. As there are only two
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Macro Weekly - Divergence everywhere â&#x20AC;&#x201C; 18 September 2015
Main economic/financial forecasts GDP grow th (%)
2013
2014
2015e
2016e
1.5
2.4
2.7
2.9
United States
-0.2
0.9
1.6
2.0
Eurozone
Japan
1.6
-0.1
1.0
1.2
United Kingdom
1.7
3.0
2.8
2.6
China
United States Eurozone
3M interbank rate
10/09/2015 17/09/2015
+3M
+12M
2015e
0.34
0.35
0.6
1.3
0.6
2016e 1.6
-0.04
-0.04
0.00
0.00
0.00
0.00
Japan
0.17
0.17
0.2
0.2
0.2
0.2
United Kingdom
0.59
0.59
0.7
1.5
0.7
1.7
10/09/2015 17/09/2015
2016e
7.7
7.3
7.0
6.5
World Inflation (%)
3.1 2013
3.2 2014
3.1 2015e
3.5 2016e
+3M
+12M
2015e
United States
1.5
1.6
0.2
2.1
US Treasury
2.23
2.19
2.3
2.7
2.3
2.7
Eurozone
1.3
0.4
0.2
1.5
German Bund
0.70
0.79
0.5
1.3
0.5
1.4
Japan
0.3
2.8
0.7
1.4
Euro sw ap rate
1.02
1.04
0.8
1.6
0.8
1.6
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.33
0.34
0.7
1.0
0.7
1.0
China
2.6
2.0
1.5
2.0
UK gilts
1.86
1.96
2.0
2.6
2.0
2.7
World Key policy rate
4.3 17/09/2015
3.9 +3M
3.8 2015e
3.8 2016e
10/09/2015 17/09/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.50
0.50
1.50
EUR/USD
1.12
1.13
1.00
1.05
1.00
1.10
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
120.6
120.0
128
135
128
135
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.54
1.55
1.49
1.50
1.49
1.49
Bank of England
0.50
0.50
0.50
1.50
EUR/GBP
0.73
0.73
0.67
0.70
0.67
0.74
People's Bank of China
4.60
4.35
4.35
4.35
USD/CNY
6.38
6.37
6.55
6.70
6.55
6.75
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
Key Economic Indicators and Events Day
Date
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
ABN AMRO
Monday Monday Monday Monday
21/09/2015 21/09/2015 21/09/2015 21/09/2015
09:00:00 15:45:00 16:00:00 20:00:00
CH EC US MX
Foreign currency reserves - CHF mln ECB announces weekly QE details Existing home sales - % mom Policy rate - %
Aug
531820
Aug Sep 21
2.0 3.0
-1.2 3.1
-0.8
Tuesday Tuesday Tuesday
22/09/2015 22/09/2015 22/09/2015
13:00:00 14:00:00 15:00:00
TR HU US
Repo rate - % Base rate -% FHFA house price index - % mom
Sep 22 Sep 22 Jul
7.5 1.4 0.2
1.4 0.5
0.4
Wednesday Wednesday Wednesday Wednesday Wednesday
23/09/2015 23/09/2015 23/09/2015 23/09/2015 23/09/2015
03:45:00 10:00:00 10:00:00 10:00:00 15:45:00
CN EC EC EC US
PMI manufacturing - index (Caixin) - flash PMI services - index Composite PMI output PMI manufacturing - index Markit - Flash PMI
Sep P Sep P Sep P Sep P Sep P
47.3 54.4 54.3 52.3 53.0
47.8 54.2 54.1 52.2
54.5 54.2 51.8
Thursday Thursday Thursday Thursday Thursday Thursday Thursday
24/09/2015 24/09/2015 24/09/2015 24/09/2015 24/09/2015 24/09/2015 24/09/2015
06:30:00 10:00:00 10:00:00 11:10:00 13:00:00 14:30:00 16:00:00
NL DE NO EZ CZ US US
Producer confidence manufacturing - index Ifo - business climate - index Policy rate - % ECB allotment TLTRO-5 - EUR bn Repo rate - % New durable goods orders - % mom New homes sold - % mom
Sep Sep Sep 24
107.9
3.0 108.1
Sep 24 Aug Aug
3.5 108.3 1.0 73.8 0.1 2.2 5.4
0.1 -2.2 1.5
-2.0 1.4
Friday Friday Friday Friday
25/09/2015 25/09/2015 25/09/2015 25/09/2015
01:30:00 10:00:00 14:30:00 16:00:00
JP EC US US
CPI - % yoy M3 growth - % yoy GDP - % qoq annualised Univ. of Michigan cons. confidence - index
Aug Aug 2Q T Sep F
0.2 5.3 3.7 85.7
0.1 5.4 3.7 87.6
5.5 3.7 85.0
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)