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Societe Generale - ScenarioEco Sept 2014 - En

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  N°16 SEPTEMBER 2014 SCENARIOECO  Societe Generale Economic and sectoral studies department Ended the 30th of September 2014 Next issue: December 2014 W  AITING FOR 2015… The global economy disappointed in the first-half of 2014. Instead of gathering momentum as initially expected, GDP growth stalled in most countries and even recorded one or two quarters of decline in some of them (such as the US, Japan and Germany, but also Brazil, Russia and Romania). Nevertheless, the trend is still leaning toward a slow pick-up in global growth. On the whole, major central banks remain inclined to maintain highly accommodative monetary policies, especially since inflation remains low. However, in 2015, their policies would take different paths, with the ECB easing further while the Fed and the BoE are set to begin very gradually raising their key interest rates. Rising geopolitical tensions add to uncertainty.  A   SERIES OF DISAPPOINTMENTS IN H1…. On the growth front, H1-14 was disappointing. These disappointments impacted advanced and large emerging economies alike. For example, the US economy stumbled in Q1. As a result, despite a strong bounce back in Q2, the prospect of US annual growth returning to 3% was pushed back to 2015, though srcinally it was hoped to happen in 2014. As expected, the Japanese economy buckled under the weight of the consumption tax hike, but investment spending also weakened. And while growth was initially expected to gradually improve in the euro area, instead it only slightly picked up in Q1 before stagnating in Q2. Namely, real GDP contracted in Q2 in Germany, beyond the fallback expected after the boost to construction activity in Q1 which had resulted from unusually favourable weather conditions; meanwhile, France has stagnated during the entire H1 and Italy failed to exit recession. Spain and the UK were the only economies where the recovery momentum was confirmed. Emerging market economies also brought their share of disappointments: Romania fell into recession, Brazil saw a contraction in activity and Russia's economy ground to a halt. On a more positive note, the slowdown in China proved moderate and India confirmed its pickup following a phase of very weak growth. T HE SPECTRE OF DEFLATION CASTS ITS SHADOW ON THE EURO AREA    In the euro area, disappointing H1 GDP data reports are accompanied by a deterioration in forward-looking indicators from business surveys. For example, Germany's IFO business climate index has been falling since May. Similarly, France's INSEE index has been sliding since April, which does not foresee any improvement in economic activity in the H2. What's more, euro area inflation is drawing dangerously close to 0%. However, this threshold should not necessarily be seen as the frontier with deflation. Indeed, the euro area experienced negative inflation data from June to October 2009, without falling into a deflationary spiral. -2-1012345Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 Q1-14YoY, as % REAL GDP GROWTH US Euro area UK Japan Brazil Russia Source: datastream 707580859095100105110115120 2007 2008 2009 2010 2011 2012 2013 2014 BUSINESS CLIMATE INDICATORS Germany (IFO) France (INSEE) Source datastream  SCENARIOECO  | N°16 – SEPTEMBER 2014  2   Deflation is, in fact, more than just a decrease in the general price level of goods and services. It is also characterised by expectations of a long-term decline in prices and income, causing investment and consumption spending decisions to be postponed. This, in turn, weighs on production and drags prices down further. By this definition, the euro area is not currently subject to deflation: CPI inflation is still positive (+0.3% in August); investment spending is up slightly year-on-year, though it did dip in Q2; and last but not least wages are still moderately rising. Having said that, deflation risk has increased in the euro area. In order to prevent the risk of inflation staying too low for too long, the ECB announced new measures in September, less than two months after its June package and before some components of this package had even been implemented (such as the new TLTROs). The ECB cut its interest rates again, with the deposit facility rate edging a little further into negative territory. It also announced new ABS and covered bond purchase programmes, whose detailed modalities will be released in October. R  ATE HIKES ON THE HORIZON IN THE US  AND UK    Conversely, the Fed and the Bank of England are preparing to start raising their interest rates. In both countries, inflation is higher than in the euro zone (1.5% in the UK and 2.0% in the US), economic activity more solid and the labour market situation has significantly improved. Even so, these interest rate hikes are likely to be very gradual in order to avoid causing long term rates to climb too quickly, which would jeopardise the fledgling recovery. As a result, monetary policy in both countries would remain very accommodative on the forecast horizon. Furthermore, in both cases there is no question for the time being of the central banks starting to sell the securities they have purchased under their quantitative easing policy, thus keeping large balance sheets. O  VERALL ,  THE GLOBAL ECONOMY WOULD GRADUALLY PICK UP …  IN 2015 Outlooks are also expected to be mixed among the world's largest emerging economies. On the one hand, Chinese growth would moderate very gradually, thus keeping some momentum. And India's economic recovery is expected to firm. On the other hand, in Brazil and especially Russia, economic activity would struggle to take off. Overall growth in emerging economies would therefore decline in 2014 compared to 2013, before improving slightly in 2015.  All in all, global growth is not expected to pick up in 2014, and would instead remain on the same subpar trend recorded during the past two years. It is forecast to slightly pick up speed in 2015, thus returning to a rate comparable to that of 2011, the year when - after the initial hopes raised by 2010 - it finally started to appear that the crisis was not over...  A  ND ,  IN THE MEANTIME ,  ON FINANCIAL MARKETS … The persistent weakness of the global economy and the nearer prospect of Fed's interest rate hikes did not alter financial market optimism. Stock market prices have continued to rally, while risk premiums and volatility have fallen to new lows. This apparent disconnection only enhances the risk of market turbulence when the Fed eventually begins raising its key interest rates. The recent increase in geopolitical tensions also adds downward risks to the global outlook in 2015. 0100200300400500600Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14Jan.2007=100 CENTRAL BANKS' TOTAL ASSETS United States Euro area Japan United Kingdom Source : datastream 012345672011 2012 2013 2014 2015In % GROWTH OF GDP Industrial countries Emerging countries World Sources : Datastream, SG forecasts  SCENARIOECO  | N°16 – SEPTEMBER 2014  3 M  ACROECONOMIC F ORECASTS   2011201220132014 (f)2015 (f)GDP - 2012USDbnurcasng powerparities 2 Currentprices ratesCurrentprices ratesIndustrialised countries1.41.21.31.72.148.662.840,957 United States 1.6 2.3 2.2 2.1 3.0 20.3 22.3 15,557Japan -0.4 1.5 1.5 1.1 1.0 5.9 8.2 5,566Euro area 1.6 -0.6 -0.4 0.7 1.0 14.6 18.5 12,529Germany 3.7 0.6 0.2 1.5 1.6 4.0 5.1 3,553France 2.1 0.4 0.4 0.3 0.7 2.9 3.9 2,713Italy 0.6 -2.4 -1.8 -0.2 0.6 2.4 3.1 2,018Spain 0.1 -1.6 -1.2 1.0 1.4 1.8 2.1 1,364United Kingdom 1.1 0.3 1.7 3.0 2.2 3.0 3.4 2,329 Emerging countries6.04.64.54.34.951.437.226,117  Asia 7.3 6.1 6.1 6.0 6.2 28.0 17.0 12,953China 9.3 7.7 7.7 7.3 7.0 13.6 8.9 6,996India 6.6 4.7 5.0 6.0 7.0 5.6 2.3 1,694 Africa 4.3 3.9 3.9 4.0 4.5 2.5 1.9 1,401Latin America 4.3 2.6 2.7 1.2 2.3 8.5 7.2 5,192Brazil 2.7 1.0 2.5 0.5 1.3 2.9 3.2 2,228Eastern Europe (incl. Turkey, ex. Russia) 5.3 1.5 2.6 2.3 3.1 4.7 3.5 2,476Russia 4.3 3.4 1.3 0.0 0.8 3.0 2.3 1,643Middle East 3.7 3.9 2.6 3.0 4.6 4.6 3.4 2,451 World - Purchasing power parities ponderation3.83.03.03.13.6100World - Current prices rates ponderation3.02.42.52.63.110067,074Oil price (Brent USD/Barrel)111112109105100 United States 3.1 2.1 1.5 1.9 2.0Japan (CPI national) -0.3 0.0 0.4 2.8 1.6Euro area 2.7 2.5 1.3 0.4 0.9Germany (HICP) 2.1 2.0 1.5 0.9 1.3France (CPI) 2.1 2.0 0.9 0.7 1.2Italy (HICP) 2.9 3.3 1.3 0.1 0.7Spain (HICP) 3.2 2.4 1.4 -0.1 0.3United Kingdom (HICP) 4.5 2.8 2.6 1.6 1.9 Share of world GDP2012 (As %) Real GDP (growth rate, as %) 1 Consumer prices index (growth rate, as %) 1 The annual numbers are seasonnaly and working-day adjusted and hence may differ from the basis used for official projections.  2  Purchasing Power Parity (PPP) is the monetary exchange rate that equalises the cost of a standardised basket of goods between different countries. The GDP weighting of different countries as a share of world GDP expressed in PPP is based on the latest estimates by the World Bank    26/09/2014Dec 2014Jun 2015Dec 201520132014 (f)2015 (f) Interest rates United States Fed Funds target rate 0.25 0.25 0.50 1.00 0.25 0.25 0.5510 year Gvt Bonds 2.5 2.8 3.3 3.8 2.3 2.7 3.3 Japan Intervention rate 0.07 0.10 0.10 0.10 0.08 0.10 0.1010 year Gvt Bonds 0.5 0.6 0.8 1.0 0.7 0.6 0.8 United Kingdom Bank rate 0.50 0.50 1.00 1.25 0.50 0.50 0.9510 year Gvt Bonds 2.5 2.8 3.3 3.5 2.4 2.7 3.2 Euro area Refinancing rate 0.05 0.05 0.05 0.05 0.55 0.15 0.0510 year Gvt BondsGermany 0.9 1.0 1.3 1.6 1.6 1.3 1.4France 1.3 1.4 1.7 2.0 2.2 1.8 1.7Italy 2.4 2.5 2.8 3.1 4.3 3.0 2.9Spain 2.2 2.3 2.6 2.9 4.6 2.8 2.7 Exchange rates EUR / USD 1.27 1.30 1.25 1.25 1.33 1.34 1.26EUR / GBP 0.78 0.80 0.80 0.80 0.85 0.81 0.80EUR / JPY 139 137 131 131 130 139 132GBP / USD 1.63 1.63 1.56 1.56 1.56 1.66 1.57USD / JPY 109 105 105 105 98 103 105  SCENARIOECO  | N°16 – SEPTEMBER 2014  4 Macroeconomic Forecasts ........................................................................................................................................ 3   Euro area: On the skids… .......................................................................................................................................... 5   Germany: More than a correction? ............................................................................................................................. 6   France: No momentum .............................................................................................................................................. 7   Italy: A third year of recession.................................................................................................................................... 8   Spain: Rising real GDP but declining prices .............................................................................................................. 9   United Kingdom: An unbalanced recovery .............................................................................................................. 10   United States: Towards a shift in monetary policy .................................................................................................. 11   Japan: Growth hard hit by the consumption tax hike .............................................................................................. 12   China: Under control ................................................................................................................................................ 13   India: Consolidating stabilization gains .................................................................................................................... 14   Brazil: Stagflation ..................................................................................................................................................... 15   Russia: Waiting for supportive policies? .................................................................................................................. 16   Euro area forecasts .................................................................................................................................................. 17   Out side euro area forecasts .................................................................................................................................... 20  

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Jul 24, 2017
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