Outlook for the economy
- Global economic upturn
- Eurozone business cycle strengthening
- Buoyant growth in CEE
- Patience is needed with respect to monetary policy normalization
Since our team started to follow the United States, the Euro Area and Central and Eastern European economies and financial markets in 2011, the global macroeconomic framework has never been as constructive as this year. Financial market pundits might tend to add, that this statement inherently implies, that the probability for a change to worse is also increasing. However, we do not see it in our judgment which is purely informed by available data and ‘knowns’ as compared to the ‘unknown knowns’.
During the last months, the global recovery continued increasingly synchronized between developed economies and emerging countries (Figure 1). World output growth is estimated around 3.5 to 3.7 % for the total of 2017. Lately, Japan’s economy has joined the club of countries with a strengthening cyclical upturn (Q2 GDP 1.4 %).
The United States’ economy is on a solid growth path (2017 GDP: 2.2 %). Storm related disruptions (the hurricanes Harvey, Irma and Maria) and rebuilding might have affected economic activity in Q3 (1st GDP release is due this Friday), but past experience suggest that the storms are unlikely to materially alter the course of the economy over the medium term. The US central bank Fed initiates a slow process of balance sheet reduction in October reversing ‘QE’ over the next several years. In the meanwhile, the prospects for tax reform and fiscal stimulus remain uncertain with respect to timing and magnitude.
Economic growth in the UK has been slowing steadily. Since last year the country went from growth leader to growth laggard (Q2 GDP 1.5 %). In September, the Bank of England surprised investors by anticipating an early begin of an interest rate hiking cycle amid a tight labor market and rising inflation but despite otherwise weakening fundamentals.
Hence, the number of central banks in monetary policy normalization mode is slowly climbing up (US Fed, ECB, BoE). The speed of this process is set to remain very gradual amid a broadly weak inflation environment. It will not change the low interest rate environment in the short-term and fundamental drivers of low interest rates in developed economies – demographics and low productivity growth – remain in place in the medium-term.
In Q2, Eurozone real GDP increased by 0.6 % quarterly and by 2.3 % in annual terms (Figure 2). Quarterly GDP rose by at least 0.5 % for the last four consecutive quarters and well above the potential growth rate of the Euro Area. In the total of the year, we expect GDP to expand by 2.2 % in 2017 resembling the highest annual growth since 2007. The expansion is driven by domestic demand with private consumption (0.5 % q/q and 1.8 % y/y) and fixed investment (0.6 % q/q and 3.3 % y/y) rising solidly. In addition, net export contributed to GDP growth in Q2 with rising exports as well as imports (4.4 % and 4.3 % y/y).
Cross-country survey data (PMI, EC sentiment, ifo-business climate) point to sustained positive economic sentiment among firms and households. During the three months until August, retail sales growth averaged 2.3 % (y/y). The manufacturing activity rebounded in 2017. Euro Area industrial production and construction were up 3.4 % and 2.9 % over the three months until August. Industrial orders rose by 7.9 % (y/y, 3 months average) in Germany. Our Eurozone now-cast model currently suggests 0.5 % GDP growth (q/q) during Q3 2017.
Credit to Euro Area households has been accelerating. Household mortgages and consumer loans rose by 3.1 % and 6.7 % (y/y) in August. In addition, total loans to corporates are recovering (1.4 % in August) though below the expansion rate in H1 (1.6 % y/y).
In August, the Eurozone unemployment rate was 9.1 % and well below the average during 2016 (10.0 %). Total employment has been recovering (+1.6 % y/y in Q2). Labor compensation (Figure 3) rose by 1.6 % (y/y) in Q2 albeit heterogeneously across countries (Germany 2.5 %, France 1.9 %, Austria 1.3 %, Italy -0.2 %, Spain -0.1 %).
For the total of the Central and Eastern European region, our real GDP growth projection (see table) increased to 2.9 % in 2017 and 2.4 % in 2018 (compared to 2.3 % and 2.3 % a quarter ago). At the same time, the inflation environment remains favourably low and stable and unemployment rates keep declining in virtually all countries where UNIQA is operating insurance business.
The National Bank of Romania (NBR) is the second central bank after the Czech National Bank (CNB) that took a first step towards monetary policy normalization. In contrast, the National Bank of Hungary, decided recently to further loosen monetary policy, in spite of rising inflation and supposedly due to weak credit growth.
Central European economies face tightening labor markets with historically low unemployment rates, expanding employment and rising wages. Consumer expenditure is currently the main driver of economic growth in the region. As a result, domestic inflationary pressure is emerging, though, being dampened by spill-overs from moderate inflation in the Euro Area.
Russia’s economy delivers a higher growth contribution to the region as quarterly GDP increased recently more than expected. Our GDP growth forecast was updated to 2.0 % from 1.2 % in the previous quarter. The Central Bank of Russia (CBR) brought inflation to heel. Also in Ukraine, domestic demand has been recovering.
In South Eastern Europe, the macroeconomic environment should continue fostering insurance catch-up. The beneficial pictures is obfuscated by a sudden growth slowdown in Macedonia during H1. In spite of that, the Western Balkan economies are performing well. We expect average economic growth in the region to be at 3 % in 2017 and 3.1 % in 2018.
Major central banks demand patience with respect to the normalization of monetary conditions. The ECB will likely decide this week (Thursday) on the calibration of the policy instruments beyond the end of the year. Most likely, the ECB is going to announce a reduction in monthly asset purchases (e. g. to 40 bn EUR) and a time period (e. g. running until mid-2018). Alternatively, asset purchases could be announced for a longer period (nine months) with a lower monthly purchase amount (e. g. 30 bn EUR). A ‘tapering’ (stepwise reduction) to zero is unlikely, hence, EZB QE remains open-ended with the option to prolong it.
In its September macroeconomic projections, the ECB foresees Euro Area real GDP increasing by 2.2 %, 1.8 % and 1.7 % in 2017-2019. Annual inflation is forecast at 1.5 %, 1.2 % and 1.5 % for 2017-19. Compared to the previous release (June), the inflation rate is projected 0.1 percentage points lower for 2018 and 2019, respectively. The downward revision mainly reflects the recent appreciation of the Euro nominal exchange rate by around 4 % since May/June.
The Fed initiates the balance sheet normalization program in October. The Federal Reserve will gradually reduce the securities holdings by decreasing its reinvestment of principal payments it receives from securities held in the System Open Market Account (SOMA). The FOMC anticipates reducing the quantity of reserve balance over time, to a level appreciably below that seen in recent years but larger than before the financial crisis. The level will reflect the banking system’s demand for reserve balances and the FOMC’s decisions about how to implement monetary policy most efficiently in the future. According to the normalization process, the balance sheet will have shrunk by 1,500 bn USD to around 3,000 bn in September 2020.
Disclaimer
This publication is neither a marketing document nor a financial analysis. It merely contains information on general economic data. Despite thorough research and the use of reliable data sources, we cannot be held responsible for the completeness, correctness, currentness or accuracy of the data provided in this publication.
Our analyses are based on public Information, which we consider to be reliable. However, we cannot provide a guarantee that the information is complete or accurate. We reserve the right to change our stated opinion at any time and without prior notice. The provided information in the present publication is not to be understood or used as a recommendation to purchase or sell a financial instrument or alternatively as an invitation to propose an offer. This publication should only be used for information purposes. It cannot replace a bespoke advisory service to an investor based on his / her individual circumstances such as risk appetite, knowledge and experience with financial instruments, investment targets and financial status. The present publication contains short-term market forecasts. Past performance is not a reliable indication for future performance.