1. society
2. work
3. unemployment

Macroeconomic
and Country Risk Outlook
Economic
Outlook
no. 1214
January 2015
www.eulerhermes.com
Overview 2015
Not such a Grimm tale
but no fabled happy ending
Economic Research
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Euler Hermes
Contents
3
edIToRIal
18
Tale # 5 - The Fox and the Cat
4
oveRvIew
18
◼ Russia: The Fox has many tricks
8
CounTRY RISk ouTlook
19
◼ Poland: The Cat scaled the tree
10
Tale #1 - killing the goose that
laid the Golden egg?
20
Tale # 6 - The Tortoise and the Hare
20
10
◼ united States: The Fed will raise rates
in 2015
◼ ethiopia: First a Tortoise, now a Hare.
Next?
21
11
◼ united kingdom: BoE tightening; gently
does it...
◼ South africa: Forever the Tortoise and
never crossing the finishing line?
22
12
Tale # 2 - The boy who cried
wolf/Growth
Tale # 7 - The ant and the
Grasshopper
22
◼ China: Kick the saving habit
23
◼ India: Restructuring the economy and
achieving potential - Modi-nomics
economic Research
euler Hermes Group
economic
Outlook
no. 1214
macroeconomic
and Country Risk outlook
The economic outlook is a monthly
publication released by the Economic
Research Department of Euler Hermes
Group. This publication is for the clients
of Euler Hermes Group and available on
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Risk: David Semmens (Head), Frédéric
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RCS Paris B 388 236 853
Photoengraving: Imprimerie Adelinet –
Permit January 2015; issn 1 162–2 881
◾ January 20, 2015
2
12
◼ brazil: Yelling “Growth”
13
◼ mexico: Running for Growth
14
Tale # 3 - The Sleeping beauty and
the Prince
24
eConomIC ouTlook SeRIeS and
oTHeR PublICaTIonS
14
◼ France: Can investment jolt Sleeping
Beauty back to life?
26
SubSIdIaRIeS
15
◼ Germany : A prince with blind spots?
16
Tale # 4 - Hansel and Gretel lost in
the woods
16
◼ Spain: Leading the search for Growth
17
◼ Italy: Trailing behind in the hunt
Euler Hermes
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
edIToRIal
Once upon a time…
ludovIC SubRan
As the nights become increasingly dark, at least in the northern hemisphere, those of us with children may pass the
time telling fables and short-stories by the fireplace – heaters
work too. Euler Hermes’ seven fairy tales on the 2015 economic outlook is a Tiger Mom’s best companion to start (albeit very early) the development of her child’s economic
skills. It all starts with: Once upon a time in a global economic
mess, and ends with and the Central Banker lived happily ever
after.
More seriously though, 2014 ended in horror story mode.
The end of the balance sheet magic conducted by the Federal
Reserve, the twists of political hotspots and the enchanted
lower oil prices changed the plot for many companies around
the globe. As we turn the page to 2015, hopefully we foresee
a happier ending.
In high school, I had to read The Uses of Enchantment by
Bruno Bettelheim – I had a weird teacher that year: I know.
The book unveils the impact of dark fairy tales such as the
ones by the Brothers Grimm for children. The darkness of
abandonment, death, wicked witches, and injuries are supposed to allow children to grapple with their fears and toughen up all the way to adulthood. Let us hope that our macroeconomic fairy tales will help countries grow.
[Our] NeverEnding Story starts in the US and the UK which
find it hard to eventually kill the goose that laid the Golden
Egg: their aggressive monetary policy. In the Americas, Brazil
is much like the boy who cried Wolf: it has been shouting
growth for quite some time without much happening, while
Mexico has been acting on it. In Europe, Spain and Italy are
our Hansel and Gretel, lost in the forest, in spite of some
light at the end of the tunnel: the long-awaited Quantitative
Easing. In the merry go round of money printing, it is indeed
the ECB’s turn! One question remains though: Will the German Prince awake the French Sleeping Beauty? Flying east,
Russia’s many tricks have not prevented it being hunted by
the market hounds, while Poland scaled the tree like a cat. In
Africa, the South African hare may never cross the finishing
line while the (many) unconventional tortoises such as Ethiopia are doing wonders. Our volume 1 of economic fairy tales
ends in Asia where the fable of the Ant and the Grasshopper
depicts China’s old habits of savings (which die hard) while
Modi-nomics may be India’s spring.
Again, looking at 2015, story-telling (and hope) will be key
as growth continues to be fragile without the assistance of a
Fairy God Mother.
3
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Euler Hermes
oveRvIew
overview 2015
Not such a Grimm tale but no fabled happy ending
DAvID SEMMENS
2015 global growth should show a marginal
improvement to 2.8%, before finally expanding by
3.1% in 2016. While the world started 2014 with
much optimism it was ultimately a year of
persistent economic disappointment and
frustration across the globe.
This year we anticipate that policy action from both the European and Japanese central banks will boost growth, inflation
and inflation expectations but all of these are part of a multi-
+0.2%
year recovery scenario. We believe cautious optimism remains vital, as in 2014, only Spain, the UK, Ireland and India
Forecast
GDP growth
in Russia
in 2014
truly outperformed our broadly below consensus expectations and even then these outperformances were modest.
In 2015 advanced economies can be expected to grow at
2.1%, the fastest pace since 2010. We look for the US (3.1%
in 2015) to expand over 2.5 times as fast as the Eurozone
which we anticipate will finally rise above the 1.0% mark at
1.1%, the highest in four years. We expect more supportive
Pre versus Post crisis consumption growth
and importantly decisive policy to come from both the BoJ
and Japanese government, which will boost GDP from an
10%
9%
China
Average private consumption growth, 2009-2014
7%
to expand 3.9% in 2015. Emerging markets will show two
6%
crucial, albeit very different, slowdowns. Firstly China’s policy
5%
driven and well managed slowdown to 7.3% in 2015 vs. 7.4%
4%
Brazil
in 2014 will continue the focus on more domestic driven
3%
2%
growth and crucially lessening over investment and excess
U.S.
capacity. This contrasts strongly with the collapse in Russian
Germany
1%
Japan
0%
0%
1%
France
2%
3%
UK
4%
GDP, with economic sanctions, capital flight and the near
5%
Average private consumption growth, 2000-2007
Sources: IHS, Euler Hermes
4
anemic 2014 at 0.1% to 1.0% in 2015. Emerging Economies
will barely recover from a sub-par 3.8% performance in 2014
8%
6%
7%
8%
halving of the value of both the RUB and oil saw a paltry 0.2%
Euler Hermes
Economic Outlook no. 1214-1215 | December 2015-January 2015 | Macroeconomic and Country Risk Outlook
into a dire drop of -5.5% in 2015, followed by -4.0% in 2016.
+7.3%
Developed market demand: Time is the greatest healer
China’s growth 2015 forecast to be the
slowest in 25 years
in 2014, however these problems will only be compounded
Despite recovering since the recession, across the board
consumer demand is still weaker than previous experience
would have expected at this point in the cycle. US, UK and
German consumers are slowly returning towards trend levels
but their caution following the depth of the recession is un-
boost inflation expectations, increase liquidity in the market
likely to wane in the near term. This pick up in brightest in
and create appetite for portfolio diversification, lower the
the US, where the pass through of lower oil prices has a more
spread between peripheral yields, increase credit to non-fi-
direct impact on consumer spending and sentiment, howe-
nancial sector and investment appetite. These moves should
ver there is still significant underemployment and wage
also see further Euro weakness (1.12 at year end 2015) and
growth broadly remains unthreatening.
help Eurozone exports through competitiveness gains.
In Europe the continued slowness of the recovery and the
lack of impetus means consumers are caught in a cycle of
Emerging market demand: Companies and
ded by anemic inflation and a lack of wage pressure. This consumers need more encouragement to take
maintains a lack of impetus in demand, stunting investment their hands out of their pockets
righteous caution with their spending intentions, compoun-
growth. It is this vicious cycle that the ECB intends to break.
First for the good news, 2015 is likely to see Chinese consu-
We look for the ECB to provide additional monetary support
mer spending rise strongly, Euler Hermes anticipates 8.0%
by purchasing sovereign debt in Q1-2015, possibly followed
y/y. This is supported by strong wage growth but the rate of
by non-financial corporate purchases later in the year, to
further increases in consumer spending will remain muted
5
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Euler Hermes
RUB and Oil, hand in hand
Real GDP growth, annual change, %
Weekly
2016f
RUB/USD
1.4
1.7
2.1
2.2
emerging economies
38
4.2
3.8
3.9
4.5
north america
25
2.2
2.4
3.1
2.9
United States
23
2.2
2.4
3.1
3.0
Canada
3
2.0
2.3
2.4
2.3
latin america
8
2.7
0.9
1.3
2.3
Brazil
3
2.5
0.0
0.5
1.3
Mexico
2
1.1
2.3
3.2
3.7
western europe
23
0.0
1.2
1.3
1.6
United Kingdom
3
1.7
2.6
2.5
2.2
Sweden
1
1.3
1.8
1.5
2.1
17
-0.4
0.8
1.1
1.4
Germany
5
0.2
1.5
1.3
1.6
France
4
0.4
0.4
0.9
1.2
Italy
3
-1.9
-0.4
0.3
0.8
Spain
2
-1.2
1.4
1.9
1.9
Netherlands
1
-0.7
0.7
1.0
1.4
Central and eastern europe
6
1.9
1.3
-1.1
-0.1
Russia
3
1.3
0.2
-5.5
-4.0
Turkey
1
4.1
2.8
4.3
4.0
eurozone members
Poland
1
1.7
3.2
3.0
3.2
asia
29
4.9
4.3
4.7
5.2
China
11
7.7
7.4
7.3
7.3
Japan
8
1.6
0.1
1.0
1.5
India
3
5.0
5.8
6.4
6.8
oceania
2
2.1
2.7
2.7
2.9
Australia
2
2.1
2.7
2.6
2.9
middle east
4
2.7
3.2
3.6
3.6
Saudi Arabia
1
4.0
4.5
4.0
4.5
africa
2
4.1
4.0
4.5
5.4
South Africa
1
1.9
1.5
2.5
3.0
Morocco
0
4.4
3.0
4.2
4.5
* Weights in global GDP at market prices, 2013
Sources: IMF, IHS Global Insight, Euler Hermes forecasts
Regional growth rates
%
Eurozone
U.S.
BRIC
Africa
Asia ex-Japan
forecasts
12
10
8
6
4
2
0
-2
-4
-6
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Sources: IHS, Euler Hermes
6
while there is little downward momentum in
the savings rate. This increase will be enough in
our opinion to offset the much slower growth
in government spending (3.2% vs. 7.1%). We are
not concerned by the managed slowdown, but
remain watchful for any signs of weakness, in
particular insolvencies. India’s continued Modification should see growth accelerate further,
rising 6.4% in 2015 and 5.8% in 2014. Continued
improvement in policy credibility, both on the
monetary (inflation targeting) and fiscal (greater
openness to FDI and infrastructure investment)
fronts, has boosted investment and consumption. By contrast, Brazil is likely to see growth of
0.5% in 2015 and 1.3% in 2016, below our expectations for the Eurozone. Unfortunately
much of Brazil’s economic boom was driven by
consumer spending rather than industrial di-
110
25
30
100
35
90
40
80
45
70
50
60
55
50
60
40
65
Dec-14
62
Oct-14
advanced economies
20
Nov-14
3.1
Apr-14
2.8
May-14
2.5
Mar-14
2.4
Jan-14
100
Feb-14
woRld GdP GRowTH
WTI
120
Sep-14
2015f
Jul-14
2014e
Aug-14
2013
Jun-14
weights*
Sources: Bloomberg, Euler Hermes
versification. The new government will need to
address the structural issues that are indicative
of stagflation, make it difficult to tackle the chronic under investment and ultimately are crippling consumer sentiment.
Global liquidity: The flood will continue but from different clouds
Global liquidity has been an ever-rising tide since
the Federal Reserve first began to cut interest
rates in September 2007. Late 2014 saw an end
to ultra-easy monetary policy in the US and 2015
is likely to see the US central bank hike interest
rates for the first time since 2006. At the same
time the BoJ has just increased its annual rate
of QE purchases to JPY80trn from JPY60-70trn,
and we anticipate that weak growth and deflationary concerns in the Eurozone will force the
ECB to act and trigger purchases of sovereign
debt. This will be supportive for financing in JPY
and EUR but will also see USD strength as a firmer medium term trend. A stronger USD brings
its own problems as seen in taper tantrum in
the summer of 2013, however Emerging Markets’ import coverage is firmer, Russia and venezuela are notable exceptions. We cannot
stress the importance of vigilance enough during these changing times as the inter-linkages
of financial markets frequently give rise to very
real corporate impacts. The ending of the
EURCHF FX floor, earlier this year, is one such
event. The appreciation of the CHF will benefit
those earning it and holidaying abroad, but on
the flip side Hungarian corporates have around
Euler Hermes
Economic Outlook no. 1214-1215 | December 2015-January 2015 | Macroeconomic and Country Risk Outlookisk Outlook
Oil price
USD/barrel
130
year average
spot
end of year
120
112
110
100
100
100
109
90
80
73
70
60
57
60
50
40
13
14
15
16
Euler Hermes forecasts
Sources: IHS, Euler Hermes forecasts
EUR4bn or 18% of total loans denominated in
CHF, unhedged companies are likely to see a
negative impact on profitability and their investment capabilities.
Oil: Black gold or lead weight?
The recent drop in oil prices, circa USD50 at
time of writing, reflects the purest economic
problem. The combination of weaker than anticipated economic demand, coupled with greater than expected supply was always going to
drive prices lower, but this much lower was a
true shock. So where does this leave us? While
lower prices will provide some boost to growth,
optimism needs to be tempered by the fact that
it was also weaker demand that drove prices lower. More importantly, there are those that will
benefit, the US, Western Europe (ex-Norway),
China and Japan, those who will lose revenue
but can afford to, Saudi Arabia and Qatar, those
who it will be inconvenient for, Mexico and Brazil, and those who cannot afford to, namely Iran,
venezuela and Russia. Going forward we look
for Brent prices to average USD60 in 2016 and
to end the year at USD73, before edging back
to USD100 by the end of 2016. While Russia has
the funds to cover the shortfall in the short to
medium term, Iran’s budget needs oil at around
USD135 and venezuela’s circa USD120 to break
even. Both Iran and venezuela are likely to face
heightened unrest at home, but their fiscal genetics are only going to add to companys’ reluctance to provide the investment both countries so desperately need to diversify their
economies.
Political risk: What we know worries
us and what we don’t worries us
more
Geopolitical uncertainty was an ever present
theme in 2014; with our outlook for 2015
equally as spikey. We remain cautious about the
rate of improvement in the situation in Russia
and the Ukraine, with current sanctions unlikely
to be removed or even reduced anytime soon.
Interestingly as part of its three-year monetary
policy strategy, the Central Bank of Russia is
already anticipating the sanctions to continue
until the end of 2017. Russia’s FX reserves
remain ample, but capital flight remains a greater issue with investors unlikely to feel brave
anytime soon. Furthermore trade relations between Russia and the US/EU are likely to take
significant time to repair.
Continued conflict in the Middle East and political uncertainty in the region saw 2014’s
growth continue to perform below long term
potential, with only modest improvement anticipated in 2015. Islamic State (IS) represents an
existential threat in the region and is a source of
potential imported terrorist activity worldwide.
EH does not expect a quick resolution to problems in the area. Even if IS is defeated, or at
least contained, infrastructure and lives still
need to be rebuilt.
It is important to highlight the potential for
future escalation of currently simmering events
for a low probability but high severity event. In
particular, any escalation of tensions in the
South China Seas, the evolution of the Ebola
virus (into an airborne mutation) and the
potential for venezuelan political tensions spurring greater civil unrest. There is also the
potential for the elections in Sri Lanka, Turkey,
Burma, Argentina and Thailand to throw up
some surprises. Similarly the UK could elect a
government more favorable towards an exit
from the EU, creating more issues for Europe.
The continent sees elections in Greece, Spain
and Portugal, all of which are unlikely to be
without their own surprises and are likely to see
increased market focus and volatility.
Be careful out there, you never hear the shot
that kills you. ◽
7
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Euler Hermes
Country
Risk
Outlook
4th Quarter 2014
k11
15 changes
in country risk ratings
4th Quarter 2014
countries with
improved
ratings
maCRoeConomIC ReSeaRCH and CounTRY RISk Team
medium term
risk:
the scale comprises 6 levels :
aa represents the lowest risk,
d the highest.
l4
el Salvador
Short term
risk :
the scale comprises 4 levels :
1 represents the lowest risk,
4 the highest.
b1
b2
countries with
deteriorated
ratings
Growth is subdued and public accounts are
deteriorating. The current account deficit is
expected to widen to -5.4% of GDP in 2015
while reserves only cover 3 months of imports
and capital inflows are decelerating. As the
economy is dollarized, liquidity shortages are
a major risk.
→ oTHeR CHanGeS
bahamas
belize
Gambia
macedonia
malawi
Seychelles
Togo
8
bb1
bb2
d4
d3
d4
d3
d4
d3
d4
d3
d4
d3
d4
d3
uruguay
bb1
Rwanda
bb2
Economic slowdown is expected with +2.7%
GDP growth in 2014 and +2.9% in 2015.
Private consumption is hindered by elevated
inflation, while exports are suffering from
downside pressures on commodity prices and
weak performance of major trading partners
(Brazil, Argentina).
d4
C3
Poverty and reliance on commodities remain
an issue but political stability has helped raise
economic growth by +6.8% on average over
the last 5 years. The risks of non-payment are
lower while the ease of doing business is
comparatively high.
Euler Hermes
Economic Outlook no. 1214-1215 | December 2015-January 2015 | Macroeconomic and Country Risk Outlookisk Outlook
R
lithuania
b2
U
S
S
I
A
Russia
bb2
The recovery following the 2009 recession has
been strong and resilient to the Eurozone
crisis. Despite the Russian crisis, Lithuania is
forecast to reach +3% growth in 2014 and
+2.8% in 2015. Accession to the Eurozone in
January 2015 will reduce external liquidity
risk.
C3
C4
The RUB slide in H2 2014 escalated into a
currency crisis in December and severe
liquidity shortages among domestic banks. A
deep recession of -4.5% is forecast in 2015.
Capital and foreign exchange controls are
possible in 2015.
Source: Euler Hermes, as of December 17, 2014
ethiopia
d4
bangladesh
d3
Despite high poverty and periodic famines,
GDP growth has been very strong and Ethiopia
remains a favoured destination of global FDI
flows, particularly from Asia. The government
recently issued a (oversubscribed) sovereign
bond.
d4
Cambodia
d3
Economic growth reached +6.1% in the
FY2014 despite political tensions. The
economy is expected to pick up in 2015,
supported by rising public infrastructure
investment and gradual improvement in
global demand. The external position remains
solid thanks to remittances while reserves
cover 6 months of imports.
d4
d3
Strong economic growth projected (+7.3% in
2015) with external trade the key driver.
Domestic demand should pick up due to
credit growth, long term investment inflows
and low energy prices. The current account
deficit (-11% of GDP), although large, is not a
concern in the short-term.
9
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Euler Hermes
Tale # 1
killing the goose that
laid the Golden egg?
United States: The Fed will raise rates
in 2015
10
dan noRTH
Golden monetary stimulus
In the midst of the Great Recession,
the Federal Reserve embarked on
an aggressive course of monetary
policy easing by using Quantitative
Easing (QE), and by setting the Fed
Funds interest rate to zero percent.
These efforts provided unprecedented liquidity to the financial system and kept interest rates near record lows, stimulating the
economy and supporting asset
prices. Monetary policy had become the goose that laid the gol-
Low U.S. inflation allows Fed to move slowly
%
Core PCE y/y
Federal funds rate
10
8
6
4
2
0
84
89
94
99
Sources: IHS, Euler Hermes
10
04
09
14
den egg. Now the time has come
to consider beginning to raise the
Fed Funds rate for the first time in
ten years, and the Fed will have to
do so without causing that goose
any harm, much less killing it. Raising the Fed Funds rate too soon
could choke off economic growth,
but raising it too late could create
inflationary pressures.
but the golden effect won’t fade
too quickly
EH expects that the Fed is more likely to avoid raising rates too soon
since that has been the Fed’s historical pattern, this recovery has
been particularly fragile, and inflation remains subdued. Expectations are that the Fed will start raising the Fed Funds rate at the end
of Q2-2015, and continue to raise
it at a slow, measured pace thereafter. An earlier tightening could result from rapidly rising inflation or
faster than expected growth. A later
tightening could result from a relapse in the labor market or extended global weakness. But whatever
the Fed decides about the Fed
Funds rate, the stimulative effects
of QE won’t fade for some time
The number of years
since the Fed started to
tighten
since the liquidity it created, which
took six years to build, won’t disappear rapidly. The goose will keep
laying golden eggs.
The outlook for 2015
EH expects U.S. GDP growth of
3.1% in 2015, buoyed by higher
employment with a resulting
increase in income and consumption, higher consumer confidence,
and continuing low energy prices.
Furthermore, inflation is likely to
remain close to the 2% target since
slack will remain in the labor market (the U.S. should have 5-10
million more jobs at this stage of
the recovery despite rising employment,) keeping wage pressures at
bay. A weak global economy, a firm
U.S. dollar, and the fall in energy
prices will also put downward pressure on inflation.
Euler Hermes
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
5.8%
Unemployment
rate in 2015,
a level not seen
since 2008
United Kingdom: BoE tightening gently
does it…
ana boaTa
Still one of the fastest growing
western european economies
in 2015-16
GDP growth is expected to remain
strong, at +2.5% in 2015 and to
slow further to 2.2% in 2016. Private
consumption will remain the major
growth driver, supported by the adjustment in savings and the continued labor market strength
(unemployment rate expected at
5.8% in 2015). However, wages
growth remains subdued on the
back of continued weak productivity growth but lower inflation rate
BoE Interest rates
8
Rates on credit to firms
Rates on credit to households
8
BoE key interest rate
7
7
6
6
5
5
4
3
4
The BoE announced
the QE program and
cut interest rates at 0.5%
3
2
2
1
0
04
Record low interest rates
at least until Q3/Q4 2015
05
06
07 08
09
Sources: IHS, Euler Hermes
10
11
12
13
14
1
0
boosts household real purchasing
power. Looking at gross value added by sector, increasing activity in
the services sector represent more
than 50% of the overall economic
recovery since 2013.
The boe would rather tighten
later and earlier
Momentum in the construction
and manufacturing sectors has
shown signs of weakness recently.
For the former, building engineering has been hit the most with production on the downside but the
trend should be only short-lived
thanks to the additional support
from the National Infrastructure
Plan for 2015-16 (GBP55bn, i.e.
2.9% of GDP). Further, homebuilder’s activity has also lost ground,
but should see support from strong
demand thanks to the extended
Help to Buy mortgage guarantee
scheme, renewed willingness by
banks to lend to home owners and
stamp duty reform. For the manufacturing sector, one of the main
drags remains the strong GBP/EUR
on exchange rate when it comes
to trade with the eurozone (~40%
of total exports), but slower growth
in the emerging markets (25% of
exports) has also been a significant
constraint for order books. The capacity utilization rates in industry
fell at 81.7% at end-2014 (from
84.2 in Q3) and productivity gains
have persistently remained very
weak. However, a positive trend is
notably within the automotive sector with GBP4.2bn of new investments since 2012 on the back of
expanding activity of local, but
mainly foreign brands, attracted by
the flexibility of the labor market
and the supportive fiscal regime.
Production in the sector is on a positive trend and it will be essential
for the policy mix to remain positive. The extension of the Funding
for Lending Scheme that focuses
incentives towards supporting SME
lending until 2016 is very welcomed. Further, the BoE is likely to
maintain the status quo at least until Q3 2015 (with a risk of delay into
Q4) given that inflation is expected
to average 1.0% in 2015 on the back
of low oil prices.
11
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Euler Hermes
Tale # 2
The boy who cried
wolf/Growth
Brazil: Yelling “Growth”
danIela oRdóñez
a reality slap
Brazilian economy largely benefited from raw material revenues
and large capital inflows over 20032008, and scored an average annual growth of +5%. These resources were however very
demand-oriented as consumption
(public+private) accounted for
over 70% of real growth, while investment remained relatively weak.
Less favorable external conditions
(slowdown of China, fall in commodity prices, normalization of
Fed’s policy, BRL depreciation)
highlighted the weaknesses inherent to the Brazilian economic model. Local production could not
keep up the momentum of domes-
Flatlining Brazilian Exports
Exports, USD bn, over 12 months
Brazil
Mexico
400
350
300
250
200
150
100
06
07
08
09
10
11
Sourcs: INEGI, Central Bank of Brazil
12
12
13
14
tic demand, generating internal (inflation) and external (current account deficit) imbalances, and finally weighing on growth.
The main problem is lack of
investment
Euler Hermes estimates that the investment deficit cumulated by the
Brazilian economy over the 10 past
years reaches USD1100 bn. A resources reallocation from consumption and imports to investment
would have allowed Brazil to increase its investment rate to almost
35% since the early 2000s. However, the latter has remained low and
stands currently at 17%, the lowest
among the BRICs and well below
the Latin American average of 23%.
The lack of investment in infrastructure combined with the persistent problems of protectionism,
excessive bureaucracy, high labor
costs, and a complex and punitive
tax system greatly hinders the national business environment and
cripples competitiveness.
Trying to go back on track?
The newly re-elected President
Dilma Rousseff pledged to combat
inflation (+6.3% y/y in 2014) in her
second term. Consequently, the
monetary policy tightening cycle
begun by the Central Bank in 2014
(the SELIC has been raised by
+75bps to 11.75%) is expected to
be pursued in 2015. Alongside, the
new Finance Minister, Joaquim
Levy, committed to address fiscal
accounts. The target is to reach a
primary surplus of +1.3% of GDP in
2015 and +2% in 2016-2017. Along
with huge ongoing investment programs, these policies are a welcomed first step to address macroeconomic imbalances. However,
they will also weigh on overall activity levels, at least in the short term.
Euler Hermes expects real GDP to
grow by only +0.5% in 2015, after
stagnating in 2014.
USD
1,100bn
Estimated investment
deficit cumulated over
the 10 past years
Euler Hermes
Economic Outlook no. 1214-1215 | December 2015-January 2015 | Macroeconomic and Country Risk Outlook
Mexico: Running for Growth
1.3%
danIela oRdóñez
of GDP
Run, mexico, run!
During 2003-2008 Mexico (real
growth of +3% per year) was well
behind in the Latin American race
for growth (+4.5% per year), but
the wind seems to be changing. Euler Hermes expects Mexican activity to expand by +2.3% in 2014
and by +3.2% in 2015, largely outperforming the regional average
(+0.9% and +1.5%). In 2015 the
main driver will be the recovery of
the U.S., but the activity is expected
to strengthen thereafter thanks to
two main structural changes:
Mexico marches on
(i) Mexican industry competitiveness is back in the game. Significant
wage moderation has allowed the
hourly cost in the local manufacturing sector (USD6.4/hour in 2012,
according to the U.S. BLS) to go below those of several Eastern European countries (Poland: USD8.3,
Hungary: USD8.9, Czech Republic:
USD11.9), and to become much
more competitive than other Latin
American peers (Brazil: USD11.2,
Argentina: USD18.9). Although it
remains still far above Philippines’,
India’s or China’s (below USD3.0),
the cost gap has significantly decreased since the early-2000s.
Industrial Production, 100=2006, over 12 months
Mexico
Brazil
120
115
110
105
100
95
90
06
07
08
09
Sources: INEGI, IBGE
10
11
12
13
14
(ii) Mexico engaged in 2012 a very
ambitious structural reform
agenda that includes opening the
energy and telecommunication
sectors to foreign capital, increasing labor market flexibility and
strengthening public finances.
These reforms have driven foreign
investment inflows (FDI and portfolio) that have averaged 7% of GDP
per year since 2012, against 5.5%
over 2010-2012, and below 4% during 2005-2008.
Additional fiscal
constraint if oil prices
remain low
(at 60USD/barrel
over 2015)
Going for the regional lead?
Although Brazil remains by far the
largest Latin American economy
(7th in the world), the positive developments in Mexico (15th in the
world) raises the question of the
leadership in the region. Notably,
the divergence in industrial production trend between Brazil (dropping) and Mexico (accelerating) is
striking, while the share of Mexico
on regional exports and FDI inflows
is increasing since 2012, at the expense of Brazil’s.
The way ahead is still long
However, important weaknesses
remain. The Mexican economy is
still very dependent on the U.S. business cycle (>70% of exports),
while public finances rely heavily
on oil revenues (30% of total revenues). Also, security issues related
to drug-trafficking, low rule of law
and high levels of corruption remain major challenges for the business environment.
13
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Euler Hermes
Tale # 3
The Sleeping beauty
and the Prince
France: Can investment jolt Sleeping Beauty
back to life?
FRÉdÉRIC andRÈS
EUR
78bn
Corporate
investment gap
Residential and public investment will continue to stifle the
recovery in 2015...
One explanation behind France’s
sleepy economic performance is an
acute lack of investment. In real
terms, investment is -9.7% below
pre-crisis levels. This deficit is
broad-based, echoing throughout
all components of investment. First,
residential investment by households has declined for 11 consecutive quarters and is now -24% below
the previous peak in December
2007. Following a 150% rise in hou-
French corporate investment gap
EUR bn
Real Investment from NFCs
Quarterly Investment Gap (R)
Real Investment, adjusted-pre-crisis trend
forecasts
0%
340
320
-5%
300
280
-10%
260
-15%
240
220
-20%
200
180
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: INSEE
14
-25%
sing prices between 1999 and 2011,
a correction has barely begun, as
evidenced by the modest -3.7% fall
since 2011. Prices-to-income ratios
remain close to all-time highs and
about 27% above long-term average, pricing most French households out of the market. Second, as
usual in a post-electoral year, public
investment is falling markedly. As
such, orders books in private works
are about 1.5 standard deviations
below their long-run average, the
lowest they have been since 1996.
...but corporate investment
might finally show signs of life
More worrying though is the lack of
corporate investment. According to
our forecasts, the corporate ‘investment-gap’ will continue to widen
in 2015, up to a cumulative EUR 78
billion (or 3.5% of GDP)! The only
two sectors where investment has
recovered from the crisis are Business services and Information &
Communication. Investment remains in the doldrums in the equipment goods (-16% below Q1 2008
levels), construction (-12%) and
‘Other industrial products’ (-9%)
sectors. The explanation behind this
lack of investment is twofold. First,
there is a clear lack of aggregate
demand stemming from a lackluster nominal growth rate (c. 1% in
2014). Second, corporate margins
remain at a very low level. We believe they will recover in 2015, on
the back of a moderation in input
costs. The CICE will lower labor
costs by 2-3% whereas lower oil
prices will be a boon to many sectors. We estimate that a sustainable
fall of 25% in oil prices could lead
to c. 9bn increase in total value-added and an increase of c. 0.35pp in
margins on average. The main beneficiaries would be the Transport
sector (+2.4pp rise in margins),
then the 'Manufacturing of other
industrial products' (+1.2pp). However, we believe that the 'Loi Macron' will benefit neither investment nor growth in 2015. Even
though its aims are noble (e.g., liberalization of regulated professions, reforms of labor tribunals,
opening of bus transport), its scope
is probably too wide and diluted by
political haggling. As such, we expect it to bolster GDP growth by
+0.05pp (at most) per annum for
the next five years.
Euler Hermes
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Germany: A prince with blind spots?
lukaS boeCkelmann
on course for a moderate recovery...
After 2 years of stagnating growth,
Germany looks ahead to a path of
a modest recovery. Consumer
spending has remained a sword
with a sharp blade so far. Wage and
employment growth are expected
to remain solid. On the one hand
the introduction of the new minimum wage at EUR8.50, will help
lift wages 3.3% y/y. On the other
hand we predict 274,000 low-wage
jobs will be eliminated by this
change, but unemployment will
Continued German labor market improvement
to support growth
True participation rate (in %, LHS)
UE rate rate with constant participation rate (in %, RHS)
Participation rate (in %, LHS)
True unemployment rate (in %, RHS)
55.0
13
54.5
12
11
54.0
10
53.5
9
53.0
8
52.5
7
52.0
6
51.5
51.0
5
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bundesbank, Euler Hermes
4
stay low, circa 6.5%. Consumer
spending should gather further
momentum, reaching full-year expansion of +1.3% in 2015 after an
increase of +1.1% in 2014. After a
disappointing performance in
2013, deducting -0.5% from GDP
growth, net exports are about to
regain its role as one of Germany’s
growth engines – or as the Prince’s
horse to stay with the picture. Trade
sanctions in Russia, the slowing
growth in China and Brazil and the
erosion of the competitive position
are certainly negatives. However,
the depreciation of the Euro and
the impact of lower oil price more
than offset those. In 2015 as a
whole, Euler Hermes expects exports to rise by +4.1% and imports
by +3.8%. As a result, net exports
should contribute 0.4-0.5pps to
overall growth in 2015.
...but investments are a blind
spot
On the downside, low private investment activity is holding Germany back from higher GDP
growth. This reflects: i) a weak industry production (down to -0.5%
y/y in November from +4.8% y/y in
January) and a capacity utilization
rate that remains little above its
long term average (83%), suggesting that economic activity is not
buoyant enough to support additional investment into equipment;
ii) insufficient additional demand
on the back of weak GDP growth
in the last three quarters of 2014;
and iii) cautious surrounding the
economic outlook caused by geopolitics. While much needed public
investment continues to be delayed, residential investment increased since 2010 by 5.9% on average each year. Given the resilient
labor market, a supply bottleneck
in urban housing and positive financing conditions we expect a
continuation of residential investment growth in 2015.
+1.3%
Growth of consumer
spending in 2015
15
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Euler Hermes
Tale # 4
Hansel and Gretel
lost in the woods
Spain: Leading the search for growth
SaRaH boSSe-PlaTIÈRe, danIela oRdóñez
The sun is finally rising
After 5 years of recession combined
with difficult adjustments and reforms, the Spanish economy appears to have finally found the way
out of the economic woods. Euler
Hermes expects real GDP to expand by +1.4% in 2014, before
picking up to +1.9% in 2015 and
+1.9% in 2016, outperforming Germany, Italy and France. Investment
and exports - further boosted by
the lower euro - will continue to be
the main drivers of the recovery,
Spanish consumer confidence and retail sales
%
10
Real retails sales growth (y/y, %, left axis)
Consumer confidence (%, balance of opinion, right axis)
0
-5
5
-10
-15
0
-20
-25
-5
-35
-40
-45
06
07 08
09
10
11
Sources: Central Bank of Spain, INE
16
but the way back is very steep...
The recovery begins from very low
levels. The real GDP still stands -6%
below pre-crisis level, while GDP
per capita has fallen to 2003 levels.
More worrying, both industrial production and retail sales stand approximately at -30% below pre-crisis level and the recovery is very
gradual. Public and private debts
remain very elevated, while financing conditions for corporations are
still stretched. Credit to NFC is still
contracting (-13% y/y in November
2014) and interest rates remain
high despite ECB action. Last but
not least, despite on a downward
trend, insolvencies remain more
than five times above 2007.
-30
-10
-15
05
also helped by the fall in oil prices.
Private consumption should also
continue growing, but without accelerating since consumer confidence is on a downward trend
since June 2014.
12
13
14
-50
...and full of risks
Several risks hamper our central
scenario. Lower than expected performance of trade partners (Eurozone, but also Latin America) could
-25%
Gap of the credit
to the private sector
relative to pre-crisis
levels
limit export expansion. If the ECB
actions do not succeed to address
deflationary pressures, the ongoing
deleveraging process could be obstructed. Finally, political issues are
not to be underestimated. Notably,
Catalonia’s (20% of GDP) potential
independence could remain a major issue in the near term, notably
as we get closer to the December
2015 general elections.
Euler Hermes
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Italy: Trailing behind in the hunt
ana boaTa
Three straight years of recession to finally end in 2015...
GDP growth is expected to turn positive in 2015 (+0.3% after -0.4% in
2014) thanks to slowly recovering
private consumption and positive
net exports. Although, Italian exports still lag peer group performance on the back of slow competitiveness adjustment, Italy will
be one of the main winners from a
lower euro (expected at 1.12 in Q4
2015) given that 60% of total exports are extra-eurozone and that
the export structure remains highly
Italian investment and capacity utilization
rates in industry
4Q/4Q
Investment Q4/Q4 (lhs)
Capacity utilization rate (rhs)
forecasts
80
4
78
1
76
-2
74
-5
72
70
-8
68
-11
66
-14
64
-17
-20
62
07
08
09
10
11
12
13
14
15
16
Sources: IHS Global Insight, Euler Hermes forecasts
60
sensitive to price variations. Further,
the Italian export culture has strongly developed over the past years
with 212,000 exporting companies
compared to 120,000 in France and
270,000 in Germany.
…but more than 10 years will
be needed to fill in the investment gap
We do not expect investment
growth to turn positive until 2016,
continuing the major drag on
growth after eight consecutive
years of contraction (-28% decline
in real terms since Q1 2007 peak).
In 2015, the total investment gap
compared to 2007 would reach
EUR60bn. Part of the issue seems
to be structural as even prior to the
crisis GDP growth has been very
weak (+1.5% on average on real
terms between 2000 and 2007 and
2% of average inflation). As a consequence, firms’ turnover growth has
been flat and even dropped by -20%
over the past ten years for durable
consumer goods. Indeed, weak
long-term consumer spending
growth (+1.1% pre-crisis average)
has impaired volumes and increasing deflationary pressures since
2016
slightly positive
investment growth for
the first time in eight
years
2013 have amplified downside
pressures on firms’ revenues. Further, over the past years, the environment has increased the
constraints from expenses. First,
firms’ high indebtedness (70% of
GDP) and the weak state of the
banking sector have been a major
drag on financing. Second, still elevated fiscal pressure (total tax rate
stands at 65% of profits vs 44% in
the eurozone) have added to already very high input prices. Profitability stands at record lows and
although we are still far from a
happy ending, a slightly positive
trend is expected in 2015 thanks to
lower oil prices, a slight improvement in financing conditions, stabilizing wages and payment terms
(although at an elevated level of
100 days).
17
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Euler Hermes
Tale # 5
The Fox and the Cat
Russia: The Fox has many tricks
manFRed STameR
-5.5%
GDP contraction
expected in 2015
lack of structural change backfires
Russia has avoided serious economic transformation ever since the
dissolution of the Soviet Union in
1991. Large windfall oil revenues
thanks to the rapid rise of global oil
prices from 2000 to 2008 helped
the “fox” to achieve a lasting boom,
large current account surpluses
and the consolidation of its public
finances after the 1998 sovereign
default, but also aggravated its dependence on hydrocarbon products and its vulnerability to economic and political shocks. The
unwillingness to improve the un-
Russian GDP growth and current account balance
forecasts
20
GDP growth
Current account balance (% of GDP)
15
10
5
0
-5
-10 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Sources: Central Bank of Russia, Euler Hermes
18
favourable economic structure in
good times backfired heavily during the Great Recession when the
global financial crisis combined
with sharply lower oil prices pushed Russia into a severe recession
(-7.8% in 2009).
baseline scenario: Currency crisis will cause a sharp recession
in 2015
In 2014, U.S. and EU sanctions
against Russia combined with sharply falling global oil prices since
mid-year have pushed the Russian
economy again on the brink of a
severe recession. Market confidence has deteriorated with increasing speed, reflected in large net
capital outflows, sharply falling investment, rising borrowing costs
for Russian banks and companies
and the depreciation of the RUB
which turned into a full-fledged exchange rate crisis in late 2014. Real
GDP growth, already on a downtrend in 2013 (+1.3%), will come
in at just +0.2% in 2014 and Euler
Hermes expects a swing to a sharp
contraction of about -5.5% in 2015.
The much weaker RUB in 2015 will
result in marked declines of consumer spending and investment
while lower oil prices will limit potential fiscal stimulus. Both exports
and imports are forecast to decrease but the latter will drop more
sharply owing to the depreciated
currency. The introduction of capital controls on investment flows
and foreign exchange controls (forced RUB buying by companies) is
likely in 2015. However, a sovereign
default in not expected in 2015 as
the government’s reserves are
much higher than in 1998. The recession is forecast to continue in
2016, with GDP declining by about
-4.0%.
downside risks of a black Swan
event
While the probability of a ‘Back to
normal in 2015’ scenario is negligible, there are considerable downside risks to our baseline scenario.
An escalation of Western sanctions
(for example on the SWIFT payment system) or full-fledged capital controls (including current account transactions) would most
likely result in a severe economic
collapse, with real GDP declining
by as much as -15%. A sovereign
default would be possible in 2016
in such a worst case scenario.
Euler Hermes
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Poland: The Cat scaled the tree
+3%
manFRed STameR
Cats tend to land on their feet
In the early 2000s, Poland was often
referred to as the laggard in Central
and Eastern Europe (CEE), trailing
its fellow EU members in the region
in terms of GDP growth and reforms. But thanks to embarking on
sound monetary policy, including
a flexible exchange rate, and adequate fiscal policy, combined with
an enhanced structural reform
agenda, Poland has overtaken its
regional peers since 2007. Supported by solid economic policies and
less dependence on external demand as compared to the peers,
Polish GDP growth
the Polish economy showed marked resilience to the 2009 global
economic crisis, being the only EU
economy that avoided recession in
that year. Notably, Poland got access to a USD20 bn arrangement
under the IMF’s Flexible Credit Line
(FCL) in 2009, a facility which is only
offered to strongly performing economies with a solid record of timely
and effective economic policy adjustments. Meanwhile, the FCL has
been increased to USD34 bn and
extended until January 2015. While
the authorities have never tapped
the FCL, the precautionary arrangement provides important insurance against external risks.
%
Poland
Central Europe EU ex. Poland
forecasts
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Sources: IHS Global Insight, Euler Hermes
Rebound in 2014 despite negative impact from Russia
Following a slowdown to average
annual growth of +1.8% in 20122013, the economy rebounded to
+3.4% y/y growth in the first three
quarters of 2014, driven by robust
private and public consumption
and surging investment. The
contribution of net exports shifted
into negative territory as real import growth accelerated to +8% y/y,
outpacing real exports which in-
GDP growth
in 2015
creased by +5.2% y/y, roughly the
same as in full-year 2013. Russia is
the main reason why export
growth did not pick up. While Polish total nominal exports of goods
rose by +4.7% y/y (those to the EU
by +7.4% y/y) in the first 10 months
of 2014, exports of goods to Russia
contracted by -13% y/y, reducing
the Russian share in Polish exports
to 4.4% from 5.3% in 2013.
Growth to remain resilient
Going forward, Euler Hermes expects the servant-turned-princess
Cinderella to remain one of the fastest growing CEE economies in
2014-2016. Real GDP is on track to
expand by about +3.2% in full-year
2014. Robust consumer spending
and investment should continue to
support the economy in the next
two years while a further decline
of exports to Russia will weigh somewhat on external demand, so
that annual growth of about +3%
is forecast in 2015-2016.
19
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Euler Hermes
Tale # 6
The Tortoise and the
Hare
Ethiopia: First a Tortoise, now a hare. Next?
andRew aTkInSon
+10.9%
left behind at the gun? now
hare-like rate of growth
Despite its geographic size and
large population (almost 92 million
in 2012), Ethiopia was seen as a
sleeping giant among regional
economies. Media coverage of
drought and human distress did little to dispel that image. Annual real
GDP growth averaged only +2.9%
in 1991-2000 but +9% since that
latter year. Moreover, annual GDP
growth was in double digits in seven out of the ten years up to end-
Ethiopia inward FDI flows
USD mn
1,000
800
600
400
200
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Sources: UNCTAD, IHS, Euler Hermes
20
2013 and the annual average over
that period was +10.9%, compared
with an average +5.1% for Sub-Saharan Africa as a whole. Such high
growth rates reflect factors that include: (i) the low starting base, (ii)
external debt relief that freed up
resources for more productive use,
(iii) improved economic management and (iv) large inflows of FDI.
Indeed, the Ethiopian tortoise (slow
to get going) is likely to continue
with hare-like economic expansion,
with GDP growth this year of +8.5%
and +8% in 2015.
ethiopia is the africa Rising
story, but for how long ?
In a 2014 assessment, UNCTAD listed Ethiopia as one of the world’s
top destinations for FDI. Total inflows in 2013 were USD953 million,
with a large proportion coming
from Asia to boost the country’s industrial base and improve and extend infrastructure. Moreover, a recent sovereign bond issue of USD1
billion was heavily subscribed, suggesting that investor confidence in
the country’s potential remains
strong. Ethiopia is living the dream,
or fable.
Ethiopia’s annual
avearge GDP growth
2004-13, compared
with…
The longer-term outlook for
growth is generally positive, although much depends on maintenance of domestic and regional
stability and on uncertain availability of water supplies. The World
Bank estimates that Ethiopia has
hydropower generation potential
second only to DR Congo in Africa.
The government has ambitious
plans for the country to become
the “water tower of Africa”. A 25year programme to increase hydroelectric capacity to 37,000 MW by
2037 includes a 6,000 MW Grand
Ethiopian Renaissance Dam on the
Blue Nile (scheduled for completion in 2018). However, there are
environmental concerns relating to
dam building on major rivers and
Egypt, in particular of neighbouring
countries, is concerned about the
control of Nile waters that will be
exerted if these projects are completed.
Euler Hermes
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
•
South Africa: Forever the tortoise
and never crossing the finishing line?
andRew aTkInSon
…South Africa’s
+3.4%
annual average GDP
growth 2004-13
a successful political transition
is not enough
South Africa’s metamorphosis from
an apartheid state to a rainbow nation was almost unilaterally applauded. Indeed, it was a significant political/social transition. However,
long-term (1999-2013) average
annual GDP growth is +3.3%, compared with a generally accepted
minimum of around +5% each year
required to be able to provide a
background to generate jobs and
address well-established social inequalities. We expect GDP growth
of +1.5% in 2014 and +2.5% in
2015, so the outlook remains markedly below potential (tortoise-like)
and also below requirements of an
emerging nation.
GDP growth this year will be the lowest since the recession in 2009
and the outlook does not appear likely to bring about hare-like rates
of expansion. This partly reflects
global developments (weak demand for commodities and weak
prices) but also domestic structural
factors (including large income inequalities, an active labour movement, weak job growth, stubborn
inflationary pressures and power
shortages). Policymakers have to
contend with a deteriorating investor climate and dependence on external capital, with financial markets under pressure, exemplified
by current ZAR weakness. The tortoise looks likely to remain a tortoise.
others in the race
Ethiopia and South Africa are but
two in the race. Ethiopia’s track record (slow to get going but putting
in a current sprint) is not without
some regional competition. Some
who were relatively quick out of the
starting blocks (including Ghana
and Zambia) are having a breather
at the side and taking on IMF water
but others (including Angola, Mozambique, Nigeria, Rwanda and
Tanzania that also recorded annual
average GDP growth of over +7%
in 2004-13) appear likely to carry
on recording hare-like rates of
growth. But who will hit the marathon’s infamous ‘wall’ and stagger
off course and who will get over
the finishing line? In reality, of
course, it is not a race with a winning line and medals, it is a development process. There will always
be hares and tortoises and countries will sometimes be one and sometimes the other. So, the winner
in our fable is…Africa!
South Africa and Ethiopia GDP growth
in %
South Africa GDP growth
South Africa GDP per capita average growth
Ethiopia GDP growth
Ethiopia GDP per capita average growth
14
forecasts
12
10
8
6
4
2
0
-2
-4 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Sources: IHS, Euler Hermes forecasts
21
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Euler Hermes
Tale # 7
The ant and the
Grasshopper
China: Kick the saving habit
maHamoud ISlam
USD 3.6
trillion
Household
consumption
economic growth is supported
by rise in external trade and policy stimulus
Economic growth remained resilient in 2014 (+7.4%) supported by
improving external demand and
accommodative macro-policies.
EH expects the economy to stabilize at 7.3% in both 2014 and 2015.
Investment is set to decelerate further reflecting onging adjustment
in real estate and construction, and
local governement deleveraging.
Exports are set to pick up speed
with the gradual improvement in
China national saving rates
(% GDP)
60
forecasts
50
40
global demand. The policy mix will
likely remain accomodative to keep
growth in an acceptable range (7%
to 7.5%) , maintain absolute employment growth (+10 million jobs
per year) and ease deflationnary
pressures (inflation at +1.5% in December far below 2014 target of
+3.5%). Fiscal stimulus will focus
on supply side measures (tax cuts
for SME) and rising infrastructure
spending to limit distortions. Monetary policy will likely be more accomodative. PBOC move in November (-40 bps policy rate cut)
showed a shift in the authority’s
strategy. Whereas previously its
goal has been to use only targeted
measures, it now aknoweledged
the need to use more conventional
measures to keep growth steady.
With elevated deflationary pressures and surveys pointing to weak
demand growth in the short term,
further support in H1 2015 is likely.
30
20
10
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: National Statistical Office
22
unlock savings will be key to
enhance long term growth
Counter-cyclical macro policies will
be accompanied with structural reforms to generate self-sustaining
growth in private demand. With
national saving averaging 50% GDP,
China has the potential to generate
a firm domestic consumption ledgrowth model with its own resources. However, structural bottleneck including weak social
security system and still highly regulated financial market continue
to fuel precautionary saving (and
thus
limiting
consumption
growth). Going forward, the government is set to accelerate reforms to address these issues. November’s
rate
cut
was
accompanied with two positive developments on the financial liberalization front: the Central Bank raised the maximum deposit rate to
1.2 times the benchmark (from 1.1
times previously); the authorities
issued a draft of plan to insure up
to RMB500,000 per saver at each
bank covered. Removing control on
deposit rates will be pivotal for future consumption with higher returns for savers. While household’s
consumption represented circa
36.4% GDP (USD3.6 trillion ≈ German GDP) in 2014, EH expects a
gradual increase from 2015 onwards (+9% in nominal terms in
2015).
Euler Hermes
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
2.3%
GDP
Cost of subsidies
(FY2013-2014)
India: Restructuring the economy
and achieving potential – Modi-nomics
maHamoud ISlam
Phase 1: lower inflation and
stop capital outflows (2014)
Economic fundamentals are improving with evidence being show
in stronger GDP growth (above 5%
y/y in Q2 and Q3 2014) supported
by services activities and private
consumption. Inflationary pressures have eased significantly (CPI
y/y at 5% in December 2014 compared to 9.9% end 2013) due to
monetary tightening and weak
commodity prices. The current account deficit narrowed (-1.5% GDP
in 2014 from -2.3% in 2013) reflecting a rise in exports and a reduction in commodities imports bill.
India policy rate and domestic bank loans
16
Policy rate (lhs)
Domestic bank loans (y/y; rhs)
40
14
35
12
30
10
25
8
20
6
15
4
10
2
5
0
02 03 04 05 06 07 08 09 10 11 12 13 14
0
Sources: IHS Global Insight, Euler Hermes
The combination of more proactive
central bank policy and the change
of leadership have strengthened
confidence, sustained capital inflows (FDI inflows up to 2% GDP in
2014 from 1.5% in 2013) and helped stabilize the currency. The outlook is broadly positive for 2015 and
2016 with growth to exceed 6%. Rising demand in the US and the Eurozone will support further improvement in the trade balance.
Private consumption is set to recover gradually on the back of lower
inflation. vulnerabilities to external
shocks have eased with import cover exceeding 6 months, twins deficit reducing and increased policy
credibility.
Phase 2: Rebuild buffer to support growth (2015 onwards)
Fostering investment will probably
be the first priority of the authorities
in 2015. Despite a rise in confidence, investment growth did not
really pick up - mainly due constrained by difficult credit conditions
and concerns about the global environment. The government will
need to build a sufficient buffer to
raise public investment without
worsening debt sustainability. It is
also vital to take further steps to
improve the business environment
to make India more attractive for
foreign direct investment. Regarding these two items, the Modi government has made significant
progress ending diesel subsidies
and increasing foreign direct investment limits in key sectors (Defense, insurance, real estate and
railway infrastructure). This progress should accelerate in 2015 as
the Expenditure Management
Commission should deliver recommendations to reduce the deficit in
February and reform subsidies
(which cost 2.3% GDP in FY20132014). Regarding monetary policy,
the Central Bank stance will have
to provide greater support to credit
growth while ensuring macro-financial stability: Bank credit decelerated to 11% y/y in H2 2014 from
14% in H1. Falling commodity
prices will probably keep inflation
below 6% In H1 2015 (RBI target is
6% by January 2016) allowing monetary easing. However, ongoing
fiscal consolidation, divergence in
advanced economies monetary policies and uncertainties about oil
prices suggest a gradual approach
with another rate cut (-25bp) in H1
2015, after a first one (- 25bp) in
January 2015.
23
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
Macroeconomic, Country Risk
and Global Sector Outlook
economic Research
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Business Insolvency Worldwide
Economic
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no.1210
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The global
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A rotten apple
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Half-baked recovery
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global growth?
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Insolvency World Cup 2014: Who will score fewer insolvencies?
no. 1208-1209
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Growth: A giant with feet of clay
no. 1210
◽ Special Report
The global automotive market: Back on four wheels
no. 1211-1212
◽ business Insolvency worldwide
A rotten apple can spoil the barrel
Payment terms, past dues, non-payments and insolvencies:
What to expect in 2015?
no. 1213
◽ Special Report
International debt collection:The Good, the Bad and the Ugly
no. 1214
◽ macroeconomic and Country Risk outlook
Overview 2015: Not such a Grimm tale but no fabled happy
ending
To come:
no. 1215
24
◽ Special Report
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Euler Hermes
Economic Outlook no. 1214 | January 2015 | Macroeconomic and Country Risk Outlook
weekly
export Risk
Outlook
The
Economic
Talk
N
N
https://www.youtube.com/watch?v=xYS8qaNrUaU
http://www.eulerhermes.com/economic-research/economic-publications/Pages/Weekly-Export-Risk-Outlook.aspx
Economic
Insight
Country
Report
◽An aditional USD88bn of U.S. exports in 2015 > 2014-12-02
◽Chinese growth - What could possibly go wrong? > 2014-12-02
◽U.S. businesses’payment behaviors point to slowed GDP and mixed
picture for key industries > 2014-11-18
◽Spain: Cautiously taking the bull by the horns > 2014-10-08
◽Chinese exports 2014-2015: Another US300bn > 2014-10-07
◽Russia and the West: Tough Love? > 2014-09-12
◽Non-payments in Italy: It’s not over… yet! > 2014-09-04
◽Don’t cry too much for Argentina > 2018-08-08
◽ Fertilizer: The seed growing secretly > 2014-08-05
◽ Road transport: Labor costs explain the large gap in profitability in
Europe > 2014-07-08
◽The European electricity market under strong pressure > 2014-07-05
◽Thailand: Another coup challenges the country’s economic
resiliencel > 2014-06-06
◽2014 World Cup : more inflation than growth in Brazil > 2014-06-06
◽Tire industry on a roll >2014-04-17
◽Putinomics: Tightrope walking > 2014-04-10
Industry
Report
◽Azerbaijan > 2014-12-17
◽Bangladesh > 2014-12-17
◽Cambodia > 2014-12-17
◽Denmark > 2014-12-17
◽El Salvador > 2014-12-17
◽Ethiopia > 2014-12-17
◽Gabon > 2014-12-17
◽Germany > 2014-12-17
◽Honduras > 2014-12-17
◽Iceland > 2014-12-17
◽Israel > 2014-12-17
◽Laos >2014-12-17
◽Latvia > 2014-12-17
◽Lithuania > 2014-12-17
◽Mali > 2014-12-17
◽Mozambique > 2014-12-17
◽Myanmar > 2014-12-17
◽Norway > 2014-12-17
◽Norway > 2014-12-17
◽Paraguay > 2014-12-17
◽Rwanda > 2014-12-17
◽Sri Lanka > 2014-12-17
◽Sweden > 2014-12-17
◽Switzerland > 2014-12-17
◽Taiwan > 2014-12-17
◽Trinad & Tobabo > 2014-12-17
◽Turkey > 2014-12-17
◽Uganda > 2014-12-17
◽Uruguay > 2014-12-17
◽The paper industry in Italy: Time to turn the page > 2014-12-16
◽Consumer electronics: Only a timid rebound in 2015 > 2014-12
◽Construction in Italy: Only a timid rebound in 2015 > 2014-12-02
◽Textile & Clothing in Germany: A two-geared reality > 2014-10-31
◽Textile & Clothing in Italy: Bronze medal on the international podium, but facing obstacles
> 2014-10-31
◽Italian car sector: Time to do an oil change > 2014-10-22
◽U.S Automotive > 2014-10-03
◽U.S. Construction > 2014-10-03
◽Italian steel at a crossroads > 2014-09-30
◽Der Automobilweltmarkt: Wieder auf allen vier Rädern > 2014-09-19
◽Agrifood in the Netherlands The bumpy road continues > 2014-09-18
25
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Euler Hermes Economic Outlook
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