The main news this month has come from the area of economic policy with the Federal Reserve's decision to maintain monetary expansion unchanged for the time being. This decision should help to consolidate the economic recovery, both in the USA and also in the emerging economies, especially those under greater financial pressure (see the Focus «Emerging countries in trouble: who is who?»).
The Federal Reserve has surprised by not starting its tapering although this decision is supported by the latest macroeconomic indicators. On 18 September, when most people were expecting the Federal Reserve to announce a reduction in its bond purchase programme (tapering), its President, Ben Bernanke, made the startling announcement that this measure will be postponed. Beyond the markets' favourable reaction, applauding the maintenance of liquidity with gains in risk assets, it is important to note that the Fed's decision has been based on three arguments. The first and surely most essential one is how the US central bank has interpreted the latest indicators, particularly the insufficient revival in the labour market. A second aspect underlined by the Fed has been monetary conditions tightening up too quickly. Lastly, it explicitly mentions as a short-term risk the uncertainty surrounding the imminent fiscal debates held in October, the month when the public debt ceiling will be reached and which has started with the temporary shutdown of one sixth of federal services, which might once again lead to a possible suspension of federal payments. Together with this appraisal, the Fed has also updated its economic projections, of particular note being its downward revision of 2014 growth forecast.
Certainly, taken as a whole, the latest figures present a mixed economic panorama that allows for different interpretations, including those of the Fed itself. The most positive figures are related to business activity. The ISM business confidence figures for August, especially for services, point to the expansion continuing in 3Q. Consumption is not excessively exuberant but neither is it negative, as attested by August's rise in consumer confidence to 81.0 points. Nonetheless, we must remember that the current levels are still far from the long-term trend.
Neither has the battery of indicators been negative from the real estate sector, with satisfactory figures both in sales and prices. In September, the housing sales index of the National Association of Home Builders maintained a similar growth rate to those of July and August, while the Case-Shiller indicator for prices posted its seventeenth consecutive month of rises in July. However, what is causing concern in the real estate sector is the fast rise in mortgage rates, up by 1.1 percentage points since April to 4.5%. It should also be noted that the trend for inflation is still contained, rising by 1.5% year-on-year in August.
Given this situation of figures that are moderately positive and in line with expectations, the labour market figures came as a disappointment. Although labour's recovery has not stopped, it is progressing at a slower rate than expected with just 169,000 net jobs created in August (the forecast was 180,000, approximately) and with a downward revisions of the figures for June and July. Moreover, the meagre fall in the unemployment rate of 0.1 percentage points to 7.3% has mainly been due to a reduction in the labour force. To complete a picture that, although not pessimistic is somewhat frustrating, August also saw drops in both the participation rate and the activity rate.
Given all the above, we have not changed our growth forecasts for 2013 and 2014 but the risks have increased slightly. We believe that the figures support both our forecast for 2013 (1.6% growth) and for 2014 (2.8% growth). Nonetheless, it must be admitted that there is now a slightly greater risk of growth actually being lower than forecast.
In the short term, our scenario sees inventories adjustments slowing up growth, as inventories accumulation was high in 2Q. We should also note the risk of budget negotiations delaying investment and consumption decisions in the final part of 2013. Regarding the coming year, and beyond, we are particularly concerned about the ultimate determining factor of consumption (namely employment) growing too slowly. Until the average household income substantially increases, sustainable growth rates in excess of 3% are unlikely.
The upward revision of GDP in 2Q implies greater growth in 2013 but also confirmation of the hike in consumption tax. While the initial publication of the 2Q GDP figure came as an unpleasant surprise, its revision has been the opposite. The component revised upwards has been investment so that GDP growth now stands at 0.9% quarter-on-quarter compared with 0.6% initially estimated. This improved tone for activity will probably moderate in 3Q but, even if this happens, we expect growth in 2013 to reach 2.0% year-on-year.
After this figure was published, the government confirmed the hike in consumption tax in April 2014 and will place this rate at 8%, compared with the current rate of 5%. A further hike is expected for 2015. With public debt at 238%
of GDP in 2012 and one of the lowest rates of VAT among industrialised countries, this measure may be seen as reasonable. However, given that this increase will have a recessionary effect on consumption, the government will probably take palliative measures in the form of greater public spending. The ultimate effect of both decisions should lead, according to our forecasts, to slightly lower growth in 2014 than expected: 1.8% compared with the previous forecast of 2.0%.
China seems to be gradually getting back on the path of activity, as shown by August's acceleration in industrial production, retail sales and fixed asset investment. For its part, the foreign sector continues to sort out its situation
(in August, the cumulative external surplus over 12 months was 45% higher than the figure one year earlier), while inflation remains stable with a 2.6% rise year-on-year in August. The rise in the PMI business activity indicator, reaching a six-month peak in September, suggests this recovery will continue.
Brazil, however, has lost steam throughout 3Q. After providing good news in 2Q, the latest indicators suggest that the GDP flash estimate for 3Q might have weakened. In July and August, the PMI indicator was below the threshold of 50 points, which would indicate that business activity is shrinking, at the same time as consumer confidence also fell in July. The negative figures for exports complete a panorama in which no powerful levers for growth can be seen in the short term, although certainly this could change if China's stance turns openly expansionary. In contrast, Mexico's overall tone has improved. After an unexpected slowdown in activity in 2Q, indicators (in particular, the PMI indicator and the flash estimate for activity) point to growth speeding up in the second half of 2013.
Turkey's situation is showing signs of overheating. Although 2Q growth came as a pleasant surprise, with GDP rising by 4.4% year-on-year, more than expected, the dynamics supporting this are unlikely to be sustainable in the medium term. Taking into account the fact that inflation is gaining ground (with rises in excess of 8% year-on-year in August), private credit accelerated towards the zone of 30% year-on-year in 2Q and the current deficit approached the range of 7% of GDP in the same period, in the near future the government is likely to implement a combination of restrictive measures (another hike in interest rates like the one in August; setting limits to bank credit, etc.) in an attempt to reduce external net borrowing.