Panorama of contrasts

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April 8th, 2014

The scenario remains of improvement in global economic activity but with some disparities and nuances: the USA seems to be starting to overcome the effects of a tough winter and is consolidating its growth, China is still immersed in a soft landing without any significant inflationary tensions and Japan is awaiting the effects of its VAT hike in April. Among the emerging economies, of note is the situation of Russia whose political conflict with the Ukraine will hit its growth hard in 2014. Brazil is failing to slow up its inflation but India, Indonesia and South Africa are reducing their imbalances.


The slightly upward revision of GDP growth in 2013 Q4 does not alter our scenario of a moderate recovery. The rate of 2.6% annualised quarter-on-quarter (also in year-on-year terms) has not affected overall growth for 2013 of 1.9%. By demand component, of note is the upward revision for private consumption and confirmation of the good tone in capital goods investment, which we expect to continue throughout 2014. The adverse weather at the beginning of 2014 has made us lower slightly our growth forecast for 2014 from 3.0% to 2.8% but at the same time downside risks have fallen given the good tone of the latest private consumption indicators.

The greatest risk for our scenario is the labour market, which is recovering quite sluggishly. Although 175,000 jobs were created in February, the average for the last three months is only 129,000, the lowest figure since July 2012. The unemployment rate picked up slightly to 6.7% but the underlying problem is the persistently low participation rate. This means that the ratio of people in employment to the population aged over 16 is 58.8%, just 0.6 percentage points above the minimum of 2011 but more than 4 points below the level at the end of 2007. The greatest concern for economic policy is to reduce the cyclical part (not due to demographic effects) of this gap (see the article on the participation rate of the US labour market in this Dossier).

The latest business indicators are starting to recover from the effects of the bad weather. In February the business sentiment index for manufacturing (ISM) recovered some of its sharp drop in January and rose from 51.2 to 53.2 points, while the ISM for services fell from 54.0 to 51.6 points, the greatest weakness being in the employment component. These levels are indicative of moderate growth rates in the economy. Concerning demand, March's consumer confidence index produced by the Conference Board reached 82.3 points, still below its historical average close to 100 but at its highest level since January 2008, before the crisis. Elaborating further on this relatively good tone shown by consumption, retail sales, without cars or petrol, rose by 2.3% year-on-year in February, a figure that, although not excessively robust, represents the first month-on-month growth after two consecutive months of decline.

The housing market is toning down its recovery. The Case-Shiller index for existing home prices in 20 metropolitan areas has completed two consecutive years of uninterrupted monthly rises, with a cumulative increase of 22.6%. However, once the effect of inflation is discounted, this index is still 29% below the average for 2006. Continued improvement in the real estate market depends on a more robust recovery in the labour market and household income. In this respect, new homes saw a flat trend in 2013 and early in 2014 and the National Association of Home Builders' sales index for March remained at 47 points, far from the figure of 58 in August 2013.

Consumer prices continue to moderate. February's CPI rose by 1.1% year-on-year (0.1% month-on-month), below the 1.6% of January and the Fed's 2% target. The core CPI (without energy or foods) stood at a 1.6% year-on-year and, without the contribution of rents, would have been 0.8%. The persistence of inflation below 2% gives the Fed room to prolong its low interest rate policy, at the same time as representing an additional problem for households in debt.


Japan grew by 2.5% year-on-year in Q4, awaiting its VAT hike. This figure was something of a disappointment as
private consumption and investment had benefitted from an increase in spending before April's VAT hike (from 5% to 8%). The ultimate effects of this measure will set the pace for the Japanese economy in 2014. To date, it seems that Shimzo Abe's expansionary policies have effectively boosted growth. Industrial production (which, in Japan, is very closely linked to the trend in GDP) and machinery orders (a leading indicator for business investment) saw an upward trend throughout 2013. Similarly, land prices in the Tokyo area posted growth of 0.7% for the whole of 2013 after five years of reductions. These positive figures mean that, in spite of the disappointing GDP figure from Q4, our forecast for the whole of 2014 has only been minimally revised, remaining at 1.3%.

The foreign sector is still in deficit with February's trade deficit being greater than expected. The cheap yen has yet to boost exports and is contributing to a growing energy bill that accounted for 36.4% of all imports in 2013 (23.7% in 2010).

In the area of prices, deflation has yet to be eradicated. CPI stood at 1.5% year-on-year in February but this rate of increase has lost steam over the last few months. Core inflation (without energy or foods) advanced by a timid 0.7% year-on-year in spite of the upward effect of the weak yen. Wages, the touchstone for consolidation in the necessary growth in domestic demand, rose by 0.2% year-on-year in January after 16 months of falls. This is an encouraging figure but it is still not enough. This faltering by inflation, as well as the weakness of exports, mean that the Bank of Japan will probably decide to increase its quantitative easing, more than likely throughout the summer.


China's slowdown seems bearable. Industrial production, retail sales and other leading indicators were below their average for 2013 although they may have been distorted by the break for the Chinese New Year. Such moderate prices give the monetary authority room for policies to boost demand (see the Focus on the slowdown in China).

Imbalances are being corrected in the rest of the emerging countries except for Brazil and Turkey. In February India
once again recorded a drop in inflation thanks to food prices. The same thing happened in Indonesia, although to a lesser degree. Similarly, the current account deficits of India, Indonesia and South Africa, three of the emerging economies considered to be the weakest, have shrunk. The other side of the coin is provided by activity indicators, which are growing at a slower rate than in 2013. Mexico provided the positive note with an economy that is steadily consolidating, at the same time as reducing its inflation. Among the large emerging countries, Brazil is the one with the greatest decline, with persistent inflationary tensions and declining economic growth. For its part, Turkey provided a pleasant surprise by growing 4.4% year-on-year in 2013 Q4 (4.3% in Q3), supported by its domestic demand. This figure was positive but the country's significant imbalances in its current account and prices augment the need for macroeconomic adjustments. In this respect, the recent local elections have strengthened the government and reduced uncertainty regarding the direction of economic policy.

The conflict between Russia and the Ukraine is affecting the economic prospects of both countries. The fall of Ukraine's pro-Russian regime and its replacement by a government closer to the European Union led to a politically complicated process of the Crimea segregating from the Ukraine and its subsequent integration with Russia. At the time of writing
this report, the international community had accepted this step de facto, without the risk of military conflict but with the adoption of (mild) sanctions against Russia. Russia's current situation is dominated by a complicated combination of a
low rate of activity and inflationary tensions (in February inflation stood at 6.2% year-on-year). This political conflict
has intensified financial uncertainty and led to a negative reaction by international investors (capital outflows). Such events have made us revise downwards our forecast for Russia with an expected growth in GDP of 0.8% in 2014 (1.9% previously) and 1.4% in 2015 (2.5% previously). Regarding the Ukraine, the risk of a possible balance of payments crisis has diminished after the recent agreement for financial aid reached with the IMF. The Ukraine will receive a total of 27 billion dollars from international donors, 14-18 billion of which will be provided by the IMF.