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Group Economics

Macro Weekly Divergence everywhere

Han de Jong +31 20 628 4201

18 September 2015 The global economy is currently characterised by a significant divergence: advanced economies are doing quite well, but emerging economies are struggling. In an integrated world economy such divergence cannot last for a very long period. An amazing divergence also appears to develop (or perhaps it has existed for some time already) within the policy committee of the US Federal Reserve. This all creates uncertainty. We have lowered our growth forecasts for a number of important emerging economies. Struggling EMs

improving public finances. The basis for growth in these

Emerging economies are having an increasingly difficult time

economies has broadened in recent quarters.

this year. There are several reasons for this. First and foremost is the cooling in China, or more specifically, the cooling of the

Divergence cannot last very long

industrial sector in China. Many other EMs are highly

The chart on this page shows the PMIs for industrialised

dependent on industrial activity in China and, as a result, they

countries and for emerging economies. In an integrated world

are all feeling the effects. A second, but related factor, is the

economy one would expect the correlation between the two to

weakness of commodity prices, which is causing a serious

be high. And it is. A couple of important points need to be

deterioration in the terms of trade for many EMs, which is a

made here. First, PMIs for emerging economies do not have a

significant headwind. Furthermore, political fragility is affecting

particularly long record. And one should probably be careful

a number of EMs as is poor macroeconomic management.

interpreting this series, in particular as regards the level.

Brazil in particular features high on all such lists. Its economy

However, it is clear that the PMI for emerging economies has

has fallen into recession and it is hard to see what

fallen consistently this year (and has fallen below 50 recently).

policymakers can do to turn things around. Inflation has risen

On the other hand, the PMI for advanced economies has

and the central bank has raised interest rates in response. This

stabilised this year at a level well in excess of 50.

is understandable, but not good for short-term growth prospects. In addition, economic weakness has affected public

PMI Manufacturing

finances and the response here is that action has to be taken

Index, <50 = negative, >50 = positive

to prevent too severe a deterioration. This also is bad for

60

growth. And if this was not bad enough, the political situation complicates matters even more, with the various corruption

55

scandals and the record low popularity of President Dilma Rousseff, who was only elected to her second term last year.

50

On top of all these factors, EMs are under pressure from a tightening of financial conditions as capital is flowing out of these economies. There is a lot of talk about this tightening of

45 10

11

12

Developed economies

13

14

15

Emerging markets

financial conditions, sometimes dubbed quantitative tightening. It is, however, extremely difficult to gauge the magnitude and

Source: Thomson Reuters Datastream

to assess the effects. I would suggest that such a divergence cannot last very long. Advanced economies doing well

Either the advanced economies will pull up the EMs or the

At the other end of the spectrum, advanced economies are

EMs will drag down the advanced economies. Most likely, it

doing well. Growth in the US and in the eurozone in particular,

will be somewhere in between. The key questions here appear

while unspectacular, is above the long-term trend in these

to be whether or not China will experience a hard landing, how

economies, resulting in falling unemployment rates and


2

Macro Weekly - Divergence everywhere â&#x20AC;&#x201C; 18 September 2015

vulnerable advanced economies are to the weakness in EMs

meetings left before the end of the year, that FOMC member

and how financial conditions will develop.

will either have to get his way (which does not seem very likely), change his mind (which he will be reluctant to do as it

On China, we are not too pessimistic. Weakness is

would imply him saying that he made an error and has realised

concentrated in the industrial sector, which can be volatile. In

this within a few weeks) or dissent at at least one of the last

addition, we continue to think that Chinese policymakers have

two meetings this year. One would love to be a fly on the wall

a strong motive to prevent a hard landing, they also have the

in those FOMC meetings.

means in our view and the past shows they also have the ability. We take comfort from that as well as from the fact that

The Fed seems to be struggling with three key questions.

the housing sector appears to have bottomed and the services

What is the actual state of the economy, what are they actually

sector remains relatively strong.

trying to achieve and what are the feedback loops between US monetary policy, its effects on EMs and by extension on the

On the vulnerability of advanced economies, we are also not

global economy, and then back onto the US.

overly pessimistic. The fact that growth in advanced economies has broadened significantly suggests that the

While the member projecting lower rates is obviously a dove

vulnerability is not particularly large in the short term.

on the FOMC, the same way Lacker is a hawk, experience of recent years suggests that the way things evolve tend to make

Finally, on financial conditions, I have already said that they

the dovish view more relevant than the hawkish view. This may

are hard to gauge. Of particular interest here is the path of

change, of course, but it is probably fair to say that the Fed will

monetary policy in the US.

proceed cautiously. We have, for a while, argued that they Fed will hike in December. This has now become a lot less certain,

Divided FOMC

but it still seems reasonable to consider this as the base case.

At their September meeting the FOMC decided to leave interest rates unchanged. Weakness in emerging economies,

Our overall assessment

volatility on financial markets and in particular the effects that

We see all the risks referred to above. Yet, we think China will

all these factors may have on the US prevented the Fed from

not experience a hard landing. In addition, we think that

hiking rates. They left open the possibility of a rate hike any

advanced economies will not be overly vulnerable, at least in

time and one of the FOMC members, Richmond Fed President

the short term, to weakness in EMs. Finally, we think that the

Jeffrey Lacker wanted to raise rates. Lacker is a well-known

Fed will proceed cautiously. Assuming things will settle down

hawk. The differences of view within the FOMC are clearly

in the global economy over the next couple of months, a Fed

very significant. While Lacker wanted to tighten monetary

rate hike in December is still a good possibility, but chances of

policy one of the others is now expecting the correct Fed funds

a further delay have increased materially.

rate to lower by the end of the year than it is now. That would bring the key rate in negative territory. As there are only two

Find out more about Group Economics at: http://insights.abnamro.nl/en/ This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product â&#x20AC;&#x201C;considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. Š Copyright 2015 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").


3

Macro Weekly - Divergence everywhere â&#x20AC;&#x201C; 18 September 2015

Main economic/financial forecasts GDP grow th (%)

2013

2014

2015e

2016e

1.5

2.4

2.7

2.9

United States

-0.2

0.9

1.6

2.0

Eurozone

Japan

1.6

-0.1

1.0

1.2

United Kingdom

1.7

3.0

2.8

2.6

China

United States Eurozone

3M interbank rate

10/09/2015 17/09/2015

+3M

+12M

2015e

0.34

0.35

0.6

1.3

0.6

2016e 1.6

-0.04

-0.04

0.00

0.00

0.00

0.00

Japan

0.17

0.17

0.2

0.2

0.2

0.2

United Kingdom

0.59

0.59

0.7

1.5

0.7

1.7

10/09/2015 17/09/2015

2016e

7.7

7.3

7.0

6.5

World Inflation (%)

3.1 2013

3.2 2014

3.1 2015e

3.5 2016e

+3M

+12M

2015e

United States

1.5

1.6

0.2

2.1

US Treasury

2.23

2.19

2.3

2.7

2.3

2.7

Eurozone

1.3

0.4

0.2

1.5

German Bund

0.70

0.79

0.5

1.3

0.5

1.4

Japan

0.3

2.8

0.7

1.4

Euro sw ap rate

1.02

1.04

0.8

1.6

0.8

1.6

United Kingdom

2.6

1.5

1.1

1.9

Japanese gov. bonds

0.33

0.34

0.7

1.0

0.7

1.0

China

2.6

2.0

1.5

2.0

UK gilts

1.86

1.96

2.0

2.6

2.0

2.7

World Key policy rate

4.3 17/09/2015

3.9 +3M

3.8 2015e

3.8 2016e

10/09/2015 17/09/2015

+3M

+12M

2015e

2016e

Federal Reserve

0.25

0.50

0.50

1.50

EUR/USD

1.12

1.13

1.00

1.05

1.00

1.10

European Central Bank

0.05

0.05

0.05

0.05

USD/JPY

120.6

120.0

128

135

128

135

Bank of Japan

0.10

0.10

0.10

0.10

GBP/USD

1.54

1.55

1.49

1.50

1.49

1.49

Bank of England

0.50

0.50

0.50

1.50

EUR/GBP

0.73

0.73

0.67

0.70

0.67

0.74

People's Bank of China

4.60

4.35

4.35

4.35

USD/CNY

6.38

6.37

6.55

6.70

6.55

6.75

10Y interest rate

Currencies

Source: Thomson Reuters Datastream, ABN AMRO Group Economics.

Key Economic Indicators and Events Day

Date

Time

Country

Key Economic Indicators and Events

Period

Latest outcome

Consensus

ABN AMRO

Monday Monday Monday Monday

21/09/2015 21/09/2015 21/09/2015 21/09/2015

09:00:00 15:45:00 16:00:00 20:00:00

CH EC US MX

Foreign currency reserves - CHF mln ECB announces weekly QE details Existing home sales - % mom Policy rate - %

Aug

531820

Aug Sep 21

2.0 3.0

-1.2 3.1

-0.8

Tuesday Tuesday Tuesday

22/09/2015 22/09/2015 22/09/2015

13:00:00 14:00:00 15:00:00

TR HU US

Repo rate - % Base rate -% FHFA house price index - % mom

Sep 22 Sep 22 Jul

7.5 1.4 0.2

1.4 0.5

0.4

Wednesday Wednesday Wednesday Wednesday Wednesday

23/09/2015 23/09/2015 23/09/2015 23/09/2015 23/09/2015

03:45:00 10:00:00 10:00:00 10:00:00 15:45:00

CN EC EC EC US

PMI manufacturing - index (Caixin) - flash PMI services - index Composite PMI output PMI manufacturing - index Markit - Flash PMI

Sep P Sep P Sep P Sep P Sep P

47.3 54.4 54.3 52.3 53.0

47.8 54.2 54.1 52.2

54.5 54.2 51.8

Thursday Thursday Thursday Thursday Thursday Thursday Thursday

24/09/2015 24/09/2015 24/09/2015 24/09/2015 24/09/2015 24/09/2015 24/09/2015

06:30:00 10:00:00 10:00:00 11:10:00 13:00:00 14:30:00 16:00:00

NL DE NO EZ CZ US US

Producer confidence manufacturing - index Ifo - business climate - index Policy rate - % ECB allotment TLTRO-5 - EUR bn Repo rate - % New durable goods orders - % mom New homes sold - % mom

Sep Sep Sep 24

107.9

3.0 108.1

Sep 24 Aug Aug

3.5 108.3 1.0 73.8 0.1 2.2 5.4

0.1 -2.2 1.5

-2.0 1.4

Friday Friday Friday Friday

25/09/2015 25/09/2015 25/09/2015 25/09/2015

01:30:00 10:00:00 14:30:00 16:00:00

JP EC US US

CPI - % yoy M3 growth - % yoy GDP - % qoq annualised Univ. of Michigan cons. confidence - index

Aug Aug 2Q T Sep F

0.2 5.3 3.7 85.7

0.1 5.4 3.7 87.6

5.5 3.7 85.0

Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)


Macro weekly divergence everywhere 18 september 2015  
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