Korea: The Reluctant Rate Cut
Slow growth, low inflation and weak external demand finally prompted the central bank to cut the policy rate after a seven-month hiatus. The latest monetary action is likely to be too little and too late to revive the economy.
Brazil: Waiting for the Animal Spirits
A low ratio of investment to GDP is weighing on trend growth. Despite lower interest rates, investors remain in a cautious, wait-and-see mode amid heightened policy uncertainty. Above-productivity wage growth has further dampened investor sentiment. While critical to shaking investors out of their current cautious mindset, successful implementation of infrastructure concessions is a necessary but not sufficient condition for a lasting lift in investment.
May 2013 Global Economic Monitor
The recent data flow has been marked by two notable contrasts. First, GDP growth has disappointed in emerging markets, but not in mature economies. Second, the global outlook has deteriorated as measured by business sentiment surveys, but has brightened according to financial markets. What do we make of these conflicting signals? On balance, we believe the moderate global economic expansion remains on track even as the outlook for emerging markets has deteriorated somewhat. Emerging market policy easing and more supportive financial conditions in mature economies provide welcome support.
Kuwait: Improved Political Climate Could Spur Growth
A new parliament that is less antagonistic toward the government has raised hopes for progress on the development plan. This will boost the nonhydrocarbon sector, which takes over as the main driver for overall real GDP growth in 2013. Several other indicators point to some recovery in the nonhydrocarbon sector, including a rebound in equity prices and stronger bank lending to the private sector.
Algeria: Modest Fiscal Consolidation to Start in 2013
The fiscal breakeven oil price increased further to $130/b in 2012, driven by a decline in hydrocarbon output and a large increase in public spending. Fiscal consolidation is expected to start with the 2013 budget. Reforms are needed to reduce the reliance on hydrocarbon revenues and to limit fiscal policy’s distortionary effects. The current account surplus remained large at 7.6% of GDP in 2012, leading to a further large increase in official reserves to $191 billion (equivalent to 93% of GDP).
China: Modernizing the Railways
The reinstatement of the ambitious railway investment program in mid-2012 after the crash of a high-speed passenger train and the resolution of public governance issues helped bolster growth in the economy and advance modernization of the transportation infrastructure.
IIF Weekly Wrap - May 17, 2013
Felix Huefner, Deputy Director of the IIF Global Macro team, discusses this week’s Euro Area and Japan GDP releases and the outlook for Germany. Felix compares the global outlook’s conflicting signals of weak April sentiment indicators and booming financial markets, and looks forward to next week’s Euro Area PMI and U.S. durable goods releases.
Oman: Fiscal Restraint Needed Going Forward
High oil prices and an increase in production pushed the budget surplus up to an estimated 4.2% of GDP in 2012. Expenditure has risen sharply over the past two years, due to both an increase in social spending and investment in infrastructure. Greater restraint will be needed going forward as the oil price that balances the budget has now risen to around $100 per barrel.
The GCC: Sustaining Robust Growth, Maintaining Stability
The GCC registered an average growth of 5.8% in 2012. Growth is projected to moderate to 3.8% in 2013, due to flattening crude oil production. Growth of nonhydrocarbon sector, however, is forecast to stay robust at around 5% this year. The banking system is sound and has fully recovered from the spillovers of the global financial crisis. The external current account and fiscal balances are projected to remain in large surpluses this year, leading to a further increase in net foreign assets to $2.1 trillion, equivalent to 132% of the aggregated GDP, by end-2013. The report signals that the main downside risk to the GCC outlook stems from the possibility of much lower oil prices for a sustained period of time.
IIF Weekly Wrap - May 10, 2013
Sonja Gibbs, Director of the IIF’s Capital Markets and Emerging Markets Policy Department, discusses this week’s currency movements and central bank liquidity and reviews the May Capital Markets Monitor, which contrasts these broad financial market rallies with the questionable prospects for the global economy.
Oman: Using Oil and Gas to Diversify the Economy
An increase in oil and gas production and robust activity in the nonhydrocarbon sector pushed growth to an estimated 7.1% in 2012. The biggest challenge going forward will be meeting citizens’ aspirations for more inclusive growth and creating private sector jobs for young people coming into the workforce. The biggest risk over the medium term is the availability of gas, a shortage of which could derail plans to diversify the economy and develop the industrial base. However, recent discoveries bode well for substantially higher output by the end of the decade.
Malaysia: Looking Beyond the National Elections
Although tarnished by opposition allegations of electoral irregularities, as well as the failure to secure a majority of the popular vote, the recent election win is good enough for Prime Minister Najib to consolidate his position in the upcoming ruling party leadership contest and advance his program emphasizing national unity, improved governance, gradual structural reforms and greater investment.
Venezuela: Tough Fiscal Choices Ahead
President Nicolás Maduro faces the daunting task of addressing rapidly growing fiscal challenges while avoiding political upheaval stemming from the required adjustment. While he may try to “muddle through” at least for the short term, a more forceful policy response is likely to be needed to stabilize public sector finances.
IIF Weekly Wrap - May 3, 2013
Felix Huefner, Deputy Director of the IIF Global Macro team, discusses the latest developments in the global outlook, including this week’s U.S. unemployment figures and ECB rate cut, and shares his observations on the weak long-term outlook for the German economy, recommending the presentations from the IIF’s recent Economic Advisory Committee Meeting in Luxembourg.
Algeria: Reforms Needed to Boost Nonhydrocarbon Growth
Nonhydrocarbon growth remained strong, supported by government spending. Hydrocarbon output is expected to continue declining at least until 2015. Structural reforms are needed to diversify the economy and sustain rapid nonhydrocarbon growth. However, we do not expect major changes in policy making before the April 2014 presidential elections.
Malaysia: Facing an Electoral Hurdle
The return to trend growth and supportive policies leave the Barisan Nasional (BN) government of Prime Minister Najib Razak well placed to win the closely-contested national elections on May 5. While a BN victory has been largely priced in by financial markets, there is the possibility of a post-election sell-off in the event of a hung parliament or a narrow opposition win, which would mean the first non-BN government since independence.
Mexico: Delivering on the Structural Front
Broad political consensus has enabled President Enrique Peña Nieto to make substantial and rapid progress on reform implementation, auguring higher trend growth. Politics, however, could become an issue for approval of high-profile fiscal and energy reforms scheduled to be addressed in the coming months.
April 2013 Global Economic Chartbook Update
The April edition of our Global Economic Chartbook updates our views on the global outlook, providing charts on the global business cycle, global inflation, world trade and external imbalances, and emerging economies as well as economic policy and financial conditions. Special features include the Euro Area crisis, U.S. fiscal events, Japanese monetary policy, labor market divergences, and our top ten global risks. This Chartbook is also available in PowerPoint format—please double-click on each chart to access the underlying spreadsheets. We encourage you to use the charts and data in your own work.
India: Inflation is Moderating
Subdued domestic demand, falling commodity prices and improving agricultural supply are contributing to a decline in the high inflation rate. The central bank is likely to take the opportunity of lower inflation, fiscal restraint and the efforts to alleviate supply constraints to persevere with gradual monetary easing.
IIF Weekly Wrap - April 26, 2013
Kevin Nixon, IIF Managing Director for Regulatory Affairs, discusses the increasing trend towards fragmentation—a concern raised in the IIF’s recent policy letter to the G-20 on “The Risk of Fragmentation in a Global Economy”—and the costs of layering of redundant regulations, recommending the IIF co-signed letter on “Margin Requirements for Non-Centrally Cleared Derivatives.” Kevin also previews the IIF’s upcoming report on “Promoting Greater International Regulatory Consistency,” to be released in the coming weeks, and invites members to participate in the work of the IIF’s regulatory committees and working groups.
Emerging Markets Bank Lending Conditions Survey - 2013Q1
The latest survey, conducted by the IIF between March 12 and April 16, 2013, pointed to continued overall improvement in bank lending conditions in 2013Q1. Funding conditions—especially in domestic markets—continued to ease in emerging markets, partly reflecting the monetary policy easing in key emerging market economies. However, the pass-through of this improvement to credit standards in some EM banks has been weak.
Euro Area Bank Lending: Lost In Transmission
Easier bank lending conditions in the periphery are a key factor for any recovery of Euro Area growth. While bank funding conditions in peripheral countries have improved, bank lending rates to firms remain high and credit standards have not eased. The evidence of an increasing divide between large and small peripheral banks calls for another non-standard ECB measure to help lending by smaller banks.
Chile: Close Eye on the Currency
The policy response to quantitative easing in mature economies has, thus far, relied heavily on the floating exchange regime and heightened fiscal restraint in order to safeguard competitiveness. Nonetheless, intensification of appreciation pressures is likely to trigger sterilized dollar purchases by the central bank and/or the tightening of macroprudential regulation.
Emerging Europe: Growing Monetary Policy Challenges
Inflation has slowed and external deficits narrowed, but growth prospects have deteriorated in Emerging Europe. With fiscal space constrained, central banks have responded with sizable interest rate cuts. These, however, have done little thus far to boost bank lending. With scope for further cuts limited by financial stability concerns, central banks have increasingly turned to macroprudential tools. Uncertainty remains high, nonetheless, because of the weak outlook and ongoing financial fragmentation in Europe.
IIF Weekly Wrap - April 19, 2013
Felix Huefner, Deputy Director of the IIF Global Macro team, shares monetary policy takeaways from this week’s IMF meetings, covers this week’s negative data flow, and discusses the continued theme of divergence as outlined in the IIF’s latest Global Economic Monitor.
2013 April U.S. Economic Forecast
Signs of slowing are increasingly evident in the U.S. economy, but it is too early to say with confidence how deep and protracted this slowing will be. Our call is for growth to decelerate from a surprisingly robust 2.7% q/q, saar, in 2013Q1 to around 1.5% in 2013Q2. Real GDP growth for the year as a whole now looks likely to register around 1.9% y/y, which is a tick higher than we had projected last month.
2013 April Euro Area Economic Forecast
While sovereign debt tensions in the Euro Area have eased markedly since last summer, weakness in economic activity persists. Our outlook for a gradual recovery in growth assumes further action by the ECB, targeted to ease bank lending conditions in the periphery. We kept our estimate for 2013Q1 unchanged at -0.5% q/q, saar, lowering down 2013Q2 from flat to -0.1%q/q, saar. This reflects a slight downward revision to growth in Germany, which is expected to partly offset contraction in the rest of the region.
2013 April Japan Economic Forecast
Q1 set the path for economic expansion as consumption rose markedly and capex and industrial production recovered. We expect growth to accelerate to 3.5% q/q, saar, in 2013Q2 from 2.0% q/q, saar, in 2013Q1 as the supplementary budget boosts public investment and improved global demand supports exports. Monetary stimulus will support growth in the near-term via sentiment channels but for it to have a sustained impact on the real economy, stronger exports and corporate profits would need to translate into sustained increases in capex and wages.
April 2013 Global Economic Monitor
The good news first: the global expansion remains on track. Confidence in the global manufacturing sector remains at a level consistent with modest growth. Among mature economies, a huge monetary stimulus is underway in Japan that even surpasses corresponding efforts by other major central banks. The Fed is still in easing mode, and it is only a matter of time in our view that the ECB will join with a new set of nonstandard measures. While Chinese GDP growth in Q1 has disappointed, credit growth remains strong and the government is prepared to again turn to supporting fiscal measures if needed.
The bad news:
Egypt: IMF Agreement Could Arrest Economic Deterioration
Egypt urgently needs to rectify serious macroeconomic imbalances as a prelude to tackling deep embedded structural distortions in the economy. Growth has stalled, unemployment continues to rise, and the fiscal deficit is expected to widen further to at least 12% of GDP in FY2012/13. Agreement with the IMF could help arrest the deterioration.
Portugal: Early Agreement On Precautionary ESM Would Help
The deteriorated growth outlook prompted the Troika to relax deficit targets twice, but even these will be difficult to attain. The EU and the IMF are likely to accept larger deficits as long as the program remains on track, but financing needs will exceed earlier projections. Well contained in the short run, financing pressures look set to intensify after 2014. Early agreement that Portugal is eligible for precautionary access to ESM bond buying would help assure a smooth return to full bond market access and provide needed backing to the government.
IIF Weekly Wrap - April 12, 2013
Felix Huefner, Deputy Director of the IIF Global Macro team, discusses Euro Area Q1 weakness and expected ECB easing, the effect of U.S. fiscal tightening on consumers, and Japan’s new economic policies, recommending the IIF’s latest research note on Abenomics. Felix looks forward to next week’s IMF Spring Meetings and U.S. industrial and housing data releases.
Japan: Abenomics- High Hopes
Hopes are high that the new Japanese economic policy will finally end deflation. In the short-term, forceful monetary and fiscal stimulus will support growth. Wages will need to start rising for deflation to end durably. In the medium to long-term, however, expansionary measures need to be accompanied by appropriate structural reforms to lift trend growth. Higher potential growth would help to deal with the fiscal burden.
Tunisia: Widening Twin Deficits are a Source of Concern
External and fiscal deficits widen, driven by higher imports and large increases in current government spending, respectively. We expect both deficits to remain large in 2013. Reform of subsidies is a priority for fiscal consolidation over the medium term. FDI rebounded, and external financing remains available at reasonable costs. Adequate external financing in 2013 is partly linked to progress in political transition.
Korea: Foreigners Rush to Bonds
Last year’s ratings upgrades and favorable returns have attracted large foreign investments in domestic bonds. Fiscal sustainability and low public debt have also generated interest, while investors have taken rising tensions on the Korean Peninsula in stride.
Tunisia: At Political Crossroads with a Convalescent Economy
A new coalition government was formed in March. Tunisia’s political transition by end-2013 hinges on agreement on a constitution followed by general elections. Real GDP growth rebounded to 3.7% in 2012 (still below the 2000-2010 annual average of 4.5%), but unemployment remains high. Inflationary pressures emerged, leading to tighter monetary stance.
Uruguay: Brewing Fiscal Imbalances
A rising ratio of current primary spending to GDP, driven by rigid spending items such as salaries and entitlements, has narrowed fiscal policy flexibility. Above-GDP growth of public spending has fueled inflation, overwhelmed monetary policy and eroded competitiveness. Lack of a timely and decisive effort to curtail spending growth will worsen macroeconomic vulnerabilities.
Slovenia: Next in Line?
Banking issues differ greatly from Cyprus, with Slovenian bank assets only one-third the EU average of 3.5 times GDP. The largest banks are state-owned, however, with mounting losses, accelerated increases in NPLs and liquidity pressures driven by steady repayments to foreign lenders since 2008. Falling GDP now presents a main challenge, along with the need to issue bonds soon. Reaffirmed by the new government, policies in place should leave Slovenia well placed to be granted precautionary access to ESM bond buying.
IIF Weekly Wrap - April 5, 2013
This week, IIF Chief Economist and Deputy Managing Director Phil Suttle discusses the Bank of Japan’s radical new strategy to expand the monetary base and the expected effects on Japanese asset markets and the overall economy. Phil also reviews the March data disappointments for the U.S. and Europe and looks ahead to next week’s European industrial production readings, U.S. March retail sales report, and policy and political developments in Portugal and Korea.
Bahrain: Fiscal Pressures Persist
Bahrain is the only country in the GCC that is running a fiscal deficit. A sharply higher level of recurrent expenditure was locked in last year following wage hikes and social measures taken in late 2011 in response to the escalation of social and political unrest earlier in the year. It is thus important that the government consider reforms that would diversify the revenue base and rationalize recurrent spending as soon as politically expedient. The government debt-to-GDP ratio has tripled over the past four years and could reach 41% in 2014 unless corrective measures are taken.
India: Fiscal Deficit Contained
The government’s renewed commitment to containing the large fiscal imbalance is underscored by stepped-up spending restraint since September, although the new budget is cast with a view to the national elections in mid-2014.
IIF Weekly Wrap - March 29, 2013
IIF Chief Economist and Deputy Managing Director Phil Suttle looks at the key takeaways of the latest twist to the Euro Area crisis—the unfolding Cypriot crisis—as covered in this week’s IIF Euro Briefing and research note on Cyprus: Out Of The Fire Into The Frying Pan. Phil also discusses the positive Q1 U.S. data flow and downside risk for March data, and looks forward to next week’s round of March PMI releases and Bank of Japan, ECB, and Bank of England meetings.
Euro Briefing: The Post Solidarity Era
After a week of messy negotiations and flawed proposals, default and devaluation were avoided in Cyprus. Looking ahead, it remains to be seen whether the desire to pass the burden for financial support of the banking sector on to bank creditors is a new approach to be applied generally across the Euro Area, or a one-off solution to be applied just in the very special case of Cyprus.
Cyprus: Out Of The Fire Into The Frying Pan
The March 24 agreement with the Troika put an end to a prolonged period of uncertainty, but is likely to have a lasting adverse effect on the economy. The growth outlook has deteriorated and the heavy losses imposed on uninsured depositors appear to have all but destroyed Cyprus’ existing growth model. The bailing-in of uninsured depositors could have also broader implications by increasing funding pressures for weaker banks in the Euro Area.
March 2013 Global Economic Chartbook Update
The March edition of the Global Economic Chartbook updates our global outlook, provides charts on the global business cycle, global inflation, world trade and external imbalances, economic policy and financial conditions as well as emerging economies. Special features include the Euro Area crisis, U.S. fiscal events, labor market divergences and Japanese monetary policy. This Chartbook is also available in PowerPoint format—please double-click on each chart to access the underlying spreadsheets. As always, we encourage you to use the charts and data in your own work.
Venezuela: No Easy Task Ahead
Campaigning for the presidential election has kicked off. We expect acting President Nicolás Maduro to win the upcoming election. A wide-margin victory will broaden his scope for implementing more pragmatic policies.
