Global Risk Management
The Rise of Political Risk
The bad news: the world is becoming a riskier place for business. The good news: political risk can be managed.
| CFO Magazine
A mess with many repercussions for companies doing business overseas. From Ukraine to Iraq, Russia to Argentina, China to Venezuela, political risk is on the rise. Companies like Exxon Mobil, Schlumberger, McDonald’s, Visa, and Condé Nast have been caught in the cross-fire of sanctions between the United States and the European Union on one hand and Russia on the other. In a recent article in Fortune, consultant Ian Bremmer accused Russia and China of driving “an emerging Cold War on business.”
Five years ago, the issue of political risk was “buried,” says Stephen Kay, U.S. political risk practice leader at Marsh. Companies “were herding toward emerging markets, without thinking very hard about the risks involved.” Today, political risk has snapped back with a vengeance. “We’re kind of going through the BRICs; they were supposed to be the bedrock of emerging markets,” Kay says, referring to Brazil, Russia, India, and China. In India, there’s a broad-based insurgency with political violence between terrorist groups; in China, “the growth story is being questioned from all sides today.” The “fairy tale story” of Russian growth “has proven to be closer to a nightmare,” says Kay, “and even Brazil’s growth story looks at risk of backsliding into populism.”
Small wonder that the 1,200 executives who responded to a September survey by McKinsey cited geopolitical instability as the top risk to global growth. Still, despite all the bad news, the good news is that companies can mitigate the political risk associated with emerging markets. One way to do so is to buy political risk insurance; another is to deploy a forward-looking risk management strategy that emphasizes engagement with local governments, businesses, and communities.
From Exploration to Frustration
“Political risk insurance is designed to protect companies that are working primarily in emerging markets against the sort of unforeseeable, unpredictable exposures that constitute a political risk,” says Roger Schwartz, senior vice president of Aon Risk Solutions’ political risk practice. “It’s what people in the business say is a low frequency, high severity risk. When it hits, it generally hits pretty hard or totally.”
Political risk insurance (PRI) can be classified into two broad categories: coverage for corporate assets and investments, and coverage for trade risks, according to Laura Burns, senior vice president for political risk in the financial solutions division of Willis. The first category is typically structured to protect companies from three risks: expropriation, political violence, and currency convertibility.
Regarding the first risk, “the quintessential Hugo Chávez expropriation had been the poster child of that product line,” says Burns, referring to the former Venezuelan president who nationalized foreign firms in sectors from energy to food operations. But acts of expropriation are increasingly occurring in other emerging markets where nationalism is on the rise, she notes. Expropriation coverage also protects firms against “creeping expropriation,” defined as a series of discriminatory actions targeted at foreign firms, such as onerous regulation or taxation, says Burns.
Like property insurance, political violence insurance covers physical damage, but here resulting from war, revolution, insurrection, terrorism, strikes, riots, and so on. Currency convertibility insurance covers situations when a country’s currency controls prevent firms from converting local currency into hard currency or transferring hard currency out of the country.
The second category of PRI addresses trade risks—in particular, “contract frustration,” when, for example, a sovereign government refuses to pay a defense contractor for equipment delivered under a long-term contract, says Burns.
Providing PRI
Demand for PRI is “quite strong” at the moment, says Aon’s Schwartz. “Understandably, it tends to be higher when the news cycles are not so good.”
Who underwrites PRI? The private market for this insurance is “very robust,” says Burns, with more than 40 carriers, led by companies such as ACE, AIG, XL, Zurich, and the Lloyd’s syndicates. Burns says it’s a buyer’s market for PRI: “The market seems to be growing every day—there’s more capacity, more competition,” she says.
PRI is also underwritten by public entities, such as the Multilateral Investment Guarantee Agency (MIGA), an arm of the World Bank, and the U.S. government’s Overseas Private Investment Corp. (OPIC). These entities may offer alternative benefits to an organization. “When they write political risk insurance, they are essentially bringing along the World Bank or U.S. government into the transaction as a business partner,” explains Burns. “If you were to run into adverse events—discriminatory regulatory changes, or the beginnings of what appears to be an expropriatory event—these institutions could potentially use their sway and leverage to advocate for you to deter the situation.”
A drawback of the public market is the amount of time needed for the application process—typically close to a year or more, compared with 45 to 60 days for a private insurer, says Burns.
If PRI is not purchased in advance of risk events, companies risk being locked out of the market. “‘Just-in-time’ political risk management just doesn’t work,” said Angela Duca, vice president for political risk at Marsh, in an October webcast. Marsh advises companies to buy PRI broadly on a multicountry basis, when the market is soft, said Duca.
Local Knowledge
Not every company will choose to buy political risk insurance, while others with large balance sheets may self-insure political risk. But every company entering an emerging market should have a risk management strategy.
“The first thing is to identify the risk and be aware of it,” says Stephen Kay of Marsh. “Many companies that enter into developing countries have a very crude understanding of the new environment. It’s important to have an ear to the ground.”
Hiring a specialist firm in political risk analysis is one way to accomplish that. Such firms can help managers develop scenarios and outcomes that will be considered in any decision to enter (or stay in) a given country, says Kay. Companies can also team up with a local joint-venture partner who can navigate the local landscape. However, “that can also backfire,” says Kay, “if there is a revolution and the joint-venture partner happens to be on the wrong side of the new government.”
A company may also engage with local governmental institutions, including taking out loans from government-owned banking institutions, says Kay. Having local creditors to the venture “may offer a certain protection against government interference,” he says.
Kay adds that it’s practically mandatory for foreign companies to become model citizens of the countries they go into—contributing to the local community, creating employment, keeping in touch with local groups and nongovernmental organizations, being sensitive to environmental concerns. “It makes good business sense to pay attention to these kinds of things,” he says.
Still another way to shield against political risk is to do business in countries that have a bilateral investment treaty (BIT) with the United States. “The proliferation of BITs has been a big trend in international law over the last decade,” says Kay. Under a BIT, each country promises to treat investors from the other country fairly and equitably. These long-term treaties provide an arbitration forum for the resolution of disputes between private investors and states by a panel of experts.
“The existence of a BIT sends a signal that the host country has a certain mind-set of being open to, say, American investors,” says Kay. But BITs have become so popular that developing countries have begun to push back, says Kay, contending that the treaties favor international investors and result in a surrendering of sovereignty by the host country. Some countries have completely withdrawn from BITs, and even prominent countries like Brazil have refused to sign them. Argentina, for one, has repeatedly refused to make payments in disputes it has lost, says Kay.
Jim DeLoach, a managing partner at Protiviti, says one of the hardest things for a company to do is to translate risk assessments into actionable steps. “When you see risk increasing, you need to monitor the level of investment in the country,” he says. DeLoach recalls a mining company in an African country that was facing “significant exchange controls.” “When they realized they couldn’t get their money out, they decided not to put more money into the country,” he says. “They stressed borrowing in the local currency, spending in the local currency, purchasing equipment and inventory in the local currency, trying to keep it all local.”
Even the best companies can suffer asset losses because of political risk, says DeLoach. In such cases, he recommends conducting a post-mortem: “What went wrong? When did we have the signs that the situation was deteriorating? Did we have reliable people on the ground?”
Edward Teach is editor-in-chief of CFO.
Euler Hermes Weekly Risk Outlook
In the headlines January 15, 2014
Germany: Moderate growth and near-balanced budget in 2013
First official estimates indicate that real GDP increased by +0.4% in price-adjusted terms in 2013, following +0.7% in 2012 and +3.3% in 2011. Domestic demand was the growth driver in 2013, contributing +0.7pps, in contrast to 2012 (-0.3pps). Private consumption expanded by +0.9% and government consumption by +1.1%. Fixed investment continued to contract, by -0.8%, with machinery and equipment down by -2.2% and construction by -0.3%. External demand provided a negative contribution of -0.3pps to 2013 growth (+0.9pps in 2012) as export expansion slowed to +0.6% as a result of the difficult global environment and continued weakness in some European markets, while import expansion remained stable at +1.3%. In price- and calendar-adjusted terms, growth in 2013 was slightly higher at +0.5%, as there were fewer working days than in 2012. Preliminary estimates of public finances show a small fiscal deficit of -0.1% of GDP in 2013, following a small surplus of +0.1% in 2012. EH forecasts GDP growth will accelerate to +1.6% in 2014 as the global economy will gain momentum and government investment will pick up. The national budget is likely to remain close to balance in 2014.
U.S.: Weak labour market may weigh on Fed policy
The December 2013 employment report was a disappointment, showing only 74,000 jobs created, compared with expectations of around 200,000 and November gains of 241,000. It was the smallest monthly job growth in three years. Average weekly earnings fell 0.2% m/m, putting the y/y rate at a mere 0.1% over inflation. Unemployment fell from 7% to 6.7%, but once again not for a positive reason as 347,000 people left the labour force, sending the participation rate down to 62.8%, the same as in November (a level not seen since 1978). Weather may have been a factor as it was the coldest December in four years, with nationwide snowfall 21% above normal (much higher in some populous areas), which may have prevented people getting to work. The employment report makes the Fed’s decision on tapering more difficult at Chairman Ben Bernanke’s last meeting at the end of January. Meanwhile, December retail sales increased by 0.2% m/m, held back by a 1.9% fall in auto sales, also attributed to bad weather. Excluding-autos, the real growth rate in retail sales was a modest 2.3% y/y.
France: Further measures to restore company competitiveness
President François Hollande yesterday announced a ‘Responsibility Pact’ of further fiscal measures aimed at reducing the tax burden on corporates through the removal by 2017 of the employer family welfare payroll contributions (5.4% of total labour costs). The Pact is estimated to cost around EUR10-15 billion and Hollande announced that it will be financed entirely from (and depending on) the realised spending cuts (estimated at EUR15 billion this year and EUR50 billion over the next three years). More details will follow but, as it was presented, the Pact will add to the EUR20 billion CICE tax break (through lower employers’ social contributions) announced in November 2012. Half of the CICE is financed through increased VAT and environmental taxes and the remainder will be financed through spending cuts. While the CICE is estimated to have a bigger impact on the services sector than on industry, given that it applies only to salaries up to 2.5 times the minimum salary, the ‘Responsibility Pact’ will encompass all sectors. The gap between average labour costs in France and Germany was 12% at end-2012 but these measures, if implemented, will decrease it by two-thirds by 2017. Indeed, the key issue outstanding is finding funding resources without compromising fiscal targets.
Egypt: Transition edges forward
This week’s referendum on a new constitution is one step forward in the political transition, which remains fragile. Nevertheless, it is important as a guide to presidential and parliamentary elections that are scheduled to follow later this year. Official results are not yet available but EH expects the constitution will be approved, particularly as the Moslem Brotherhood is now officially designated a terrorist group, some opposition groups boycotted the election and the virtues of a “yes” vote were extolled widely in the mass media. Subject to a resounding “yes” vote, General Abdel Fattah al-Sisi, army leader and defence minister, is likely to run for the presidency. Among other things, the new constitution seeks to safeguard the military’s privileges and its independence from political control, partly through its veto powers over who will head the defence ministry. EH expects the transition to remain difficult, but economic activity is improving slowly.
FIGURE OF THE WEEK
+0.4%
Germany’s 2013 GDP growth (first estimate)
|
Americas Countries in Focus Brazil & Mexico: Weak industrial output In Mexico, industrial production increased by +0.1% m/m in November 2013, following +0.4% in October. Output in November was driven by a strong improvement in construction (+1.8% m/m, after -0.6% in October) and moderate increases in mining (+0.1%, after +0.8%) and in utilities (+0.1%, after 0%). However, manufacturing output fell by -1%, after increasing by +0.8% in October. These data are consistent with a slow recovery in the economy and EH expects GDP growth, which was subdued at around +1.5% in 2013, will gain momentum and register +3.3% in 2014. In Brazil, industrial production recorded a slight decrease in November 2013, -0.2% m/m, after three consecutive monthly increases. The main driver of the overall contraction was a -3.2% fall in vehicle production. EH expects GDP growth to reach +2.4% in 2013 and to grow at an almost similar rate in 2014 (+2.5%). Romania: Monetary policy remains accommodating Last week, the National Bank of Romania (NBR, the central bank) lowered its key policy interest rate by 25bps to 3.75%, the fifth rate cut since July 2013, and also lowered minimum reserve requirements of banks. Headline inflation continued to fall, from 1.9% y/y in October 2013 to 1.8% in November and 1.6% in December, and is now close to the lower end of the NBR’s 1.5-3.5% target range. The NBR expects further disinflation in H1 2014, while some high frequency indicators point to a moderation in the economic recovery. The annual rate of change in credit to the private sector has been in negative territory since March 2013 and accelerated to -4.1% y/y in November 2013, holding back investment. The NBR’s business survey of December 2013 indicates a slowdown in activity in manufacturing and construction. EH expects continued accommodating monetary policy and real GDP growth of around +2.5% in 2014, similar to the estimated outcome in 2013. Madagascar: Election result The logistics of holding an election in this island country that is larger than France in area are challenging, particularly given infrastructural impediments and a chequered recent political history. However, the election commission announced that the second round of presidential voting in December 2013 resulted in victory for Hery Rajaonarimampianina (53.5% of the vote) even though his challenger, Jean Louis Robinson (46.5%), won the first round. This is potentially a key step in restoring political legitimacy (a transitional body, HTA, has been in power since a military-backed coup in March 2009) and regaining full access to assistance from the international community, including preferential trade benefits under the US AGOA. EH expects Andry Rajoelina, leader of the HTA, to retain significant political influence, directly or indirectly, and that suggests that interventionist economic policies may persist, perhaps with contract renegotiations in the mining and energy sectors. India: Still below potential Industrial production fell for the second consecutive month in November 2013 (-2.1% y/y after -1.6% in October). The decline was mainly driven by a fall in manufacturing output (-3.5% y/y). However, a more positive outlook is provided in terms of external trade. The value of exports continued to increase in December, but at a lower rate (+3.5% y/y compared with +5.9% in November) while imports remained on a downward trend (-15.2% y/y). Overall, however, advanced indicators continue to point to a fragile outlook. The December 2013 HSBC/Markit Manufacturing PMI, at 50.7, signalled only a slow industrial recovery in the short term, while the HSBC/Markit Service PMI indicated a contraction (46.7, a three-month low) reflecting a weak new order book. As a result, EH expects GDP growth in 2014, at +5.3%, will remain below potential as measured by the long-term growth average of +7.5%. Europe Africa & Middle East Asia Pacific
|
|
|
What to watch January 16 January 16 January 17 January 17 January 17 – U.S. December 2013 CPI CPI confidence January 17 January 21 January 21 January 21 January 21 January 22 January 22 – U.S. December 2013 industrial production – Eurozone Jan. ZEW investor sentiment – Hungary monetary policy decision – South Africa December 2013 CPI – Ghana Q3 2013 GDP |
|
|
DISCLAIMER |
|
January 8, 2014 In the headlines
U.S.: Outlook for 2014 is relatively positive
Prospects for the economy in 2014 appear somewhat brighter than 2013. The government now has a budget for the first time in four years, averting another shutdown and perhaps signalling an easing in partisan non- productivity. However, the budget failed to address long-term entitlement reform and leaves the debt ceiling and jobless benefit issues unresolved. Both the manufacturing and non-manufacturing ISM surveys remain solidly above the 50-mark suggesting expansion, with critical new orders showing particular strength in manufacturing. Consumer confidence rebounded 6.1 points in December 2013, although still weak at 78.1. Consumer spending increased by a solid 0.4% and 0.5% m/m in October and November 2013, respectively, concentrated in durables, and the autos sector is expected to be relatively strong again in 2014. The merchandise trade deficit improved by an unexpected USD6.3 billion in November 2013, to USD34.3 billion, the lowest since October 2009, largely on lower oil imports. Meanwhile, rising mortgage rates and low supply are causing erratic housing data, with prices rising by some measures and falling by others, and housing starts soaring but sales and permits falling.
Eurozone: Low inflation, is it the ECB’s conundrum?
Inflationary pressures moderated in December 2013, to 0.8% y/y (from 0.9% in November). Core inflation edged down to 0.7% y/y, a record low since 2000. A breakdown by country will be released on 16 January. However, preliminary national data show that inflation increased slightly in Germany, to 1.4% y/y (from 1.3%) while it remained unchanged in Italy (0.7%) and Spain (0.2%). With low inflation and the trend on the downside, concerns remain evident, although fears of deflation remain contained, to date. EH sees the need for the ECB to act as soon as H1 2014 through a new refi (refinancing) rate cut, negative deposit rate or new ECB VLTRO similar to the BoE’s Funding for Lending Scheme, particularly if inflation persists at current levels for another few months. Indeed, this would endanger the recovery and debt sustainability, notably in countries with large primary deficits, such as Spain (as higher real interest rates will make deleveraging more painful). Further, downside pressures on prices could endanger corporate profitability, which is already weak in France and Italy. The ECB forecasts that inflation will remain low in the next two years, at 1.1% in 2014 and 1.3% in 2015.
Turkey: Political turmoil weighs on financial markets
The TRY reached a historic low at the start of this week, trading at 2.19 per USD and 2.98 per EUR, down around 6.5% since 18 December 2013. Government bond yields have also risen sharply, by more than 100bps. Both result from a combination of the announcement of the start of the US Fed’s tapering and increased domestic political uncertainty. The latter reflects a large-scale corruption investigation involving high profile politicians and businessmen that appears to have caused unprecedented disarray within the ruling AK Party. Three cabinet members resigned and six other ministers were replaced by PM Erdogan in late December. The political turmoil appears to be a more dominant factor than the Fed’s tapering as the latter has had a much less impact on financial markets of other emerging markets categorised as fragile, such as Brazil, South Africa, India and Indonesia. The Central Bank of Turkey (CBT) has so far tried to stem depreciation pressures mainly through foreign exchange market intervention. However, if the political uncertainty persists and exerts continued downward pressure on the TRY, the CBT may no longer be able to refrain from interest rate hikes. Economic output could also be affected and this could lead EH to reduce its current GDP growth forecast of +4% for 2014.
Singapore: GDP growth eased in Q4 2013, but remains solid
Advance estimates (based on data for two months) indicate that Q4 2013 real GDP increased by +4.4% y/y (down from a strong +5.9% in Q3) and contracted by -2.7% on a q/q seasonally-adjusted annualised basis (+2.2% in Q3). This took full year 2013 growth to +3.7%, up from +1.3% in 2012. Services continued to expand, by a robust +5.5% y/y but declined by -1.7% on a q/q saa basis in Q4, reflecting moderation in domestic trade and financial services. Construction increased by +4.7% y/y but contracted by -6.9% q/q saa, largely a result of a slowdown in private sector construction. Growth in manufacturing weakened to +3.5% y/y and shifted to a decline of -4% q/q saa in Q4, as output of the biomedical sub-sector contracted markedly. The manufacturing PMI fell by 1.1 points to 49.7 in December 2013, the first score below the 50-point benchmark in 10 months, indicating further slowdown in early 2014. For 2014 as a whole, EH expects GDP growth of around +4%.
FIGURE OF THE WEEK
18
Number of eurozone countries, with Latvia’s accession
Americas Countries in Focus Venezuela: Price pressures continue to undermine social cohesion On 6 January, President Nicolás Maduro ordered a 10% increase in the minimum wage, with a further increase to come later in the year. The government appears to be seeking to increase popular support at a time when deteriorating economic conditions, including an inflation rate that reached 56% y/y at end-2013, are eroding living conditions. A devaluation in 2014 appears likely (in Q1 last year, the official exchange rate for the VEB was devalued by 32%, partly to fund a fiscal deficit – 10% of GDP in 2013) and this will put further upward pressure on prices. Other challenges include a shortage of some foodstuffs, restrictions on availability of foreign exchange and periodic power failures. Deteriorating living conditions have also resulted in increases in social, as well as organised, crimes. EH expects GDP growth of only around +2% in 2014 as further street protests and industrial action, reflecting discontent with living conditions and with political leadership, disrupt activity. Latvia: Euro adoption underpins favourable outlook On 1 January, Latvia became the 18th member country of the eurozone, reaping the fruits of an impressive economic policy track record after the severe and protracted recession and financial crisis in 2008-10. While the existing currency peg was maintained, ensuring low inflation, the fiscal deficit was reduced rapidly, from 10% of GDP in 2009 to less than 1.5% in both 2012 and 2013. Public debt increased from 9% of GDP in 2007 to 44% in 2010, but has fallen slightly since then and is now stabilised. Moreover, real GDP growth recovered to +5% in 2012 and +4.2% y/y in Q1-Q3 2013, making Latvia the fastest growing economy in the EU over the past two years. EUR adoption will reduce transfer and convertibility risk to negligible as long as the economy remains well-balanced. This should encourage cross-border trade and FDI inflows and underpin growth. EH expects annual GDP to increase by more than +4% in 2014. South Sudan: Internal conflict, regional impact Following a seemingly intractable split between President Salva Kiir and his former vice-president, Riek Machar, the country has descended into armed conflict, with a risk of all-out civil war. Ostensibly a political fracture within the ruling SPLM, the division has widened into a tribal/ethnic conflict between the two leading communities, the Dinka (Kiir) and Nuer (Machar). Regional mediators (Kenya, Ethiopia and, to an extent, Uganda) brought the two sides together for peace talks but reconciliation will be challenging. Meanwhile, oil output is limited by the dispute, thereby significantly reducing revenues for both South Sudan and Sudan (through which pipelines transport crude oil for export) as well as exerting upward pressure on international oil prices. China is the largest buyer of oil from South Sudan. The wider region is already beset by conflict, including a border with the Central African Republic, and EH expects commercial prospects will remain limited. Bangladesh: Election result unlikely to enhance stability As expected, given a boycott by opposition parties, PM Sheikh Hasina’s ruling Awami League (AL) and its allies won parliamentary elections held on 5 January. The pre-election period was marred by violence and disruption to business activity. The new government will face serious challenges: clashes between supporters of the AL and opposition BNP; reputational risk associated with safety concerns about the country’s key clothing industry (accounting for approximately 80% of exports), following recent factory fires and collapses; and the possibility that the EU may suspend trade privileges under the GSP as a result of perceived lack of progress in terms of factory safety and overall protection of human rights. Meanwhile, the economy appears partly resilient to social and political clashes (average annual GDP growth of +6.2% in 2003-12). EH expects growth of +6% in 2014 but also further violent street protests and some commercial disruption. Europe Africa & Middle East Asia Pacific |
|
|
What to watch January 9 January 9 January 9 January 9 January 9 January 9 January 10 – China December 2013 CPI unemployment January 10 January 10 January 10 January 13 January 14 January 15 January 15 – France November 2013 industrial production – India December 2013 trade balance – Egypt referendum on new constitution |
|
|
DISCLAIMER |
|
For Investors, U.K. Political Risk Comes Early
Coalition’s Weak Support is Fueling Increasingly Volatile Political Climate
Now might seem an odd moment for investors to start worrying about U.K. political risk. By some estimates, the country is enjoying faster growth than any other major economy; in the third quarter of this year, the economy expanded by 0.8% from a year earlier. Later this week, the Office for Budget Responsibility is expected to substantially raise its estimate of 2014 growth to about 2.3%, compared with its March estimate of 1.8%. Unemployment has fallen to 7.6%, its lowest rate in more than three years.
Nigel Roddis/Getty Images
At the same time, the coalition has expended political capital to bolster its business-friendly credentials. It cut the top rate of tax from 50% to 45% in the middle of a recession at a time when living standards for most people were falling. It also used scarce fiscal space to cut the corporate tax rate from 28% to 23% and has said it aims to cut it to 20% by the time of the next election. Meanwhile Prime Minister David Cameron and his finance minister George Osborne have worked energetically to boost U.K. exports, leading endless trade missions to China, India and other developing Asian markets.
But despite the economic recovery, neither the Conservative Party nor its Liberal Democrat coalition partners appear to be getting any gratitude from voters. Polls suggest the opposition Labour Party will win an outright majority at the next election—or at least be able to form a coalition with the Liberal Democrats. Because of the vagaries of the U.K. electoral system, the Conservatives need to be roughly seven percentage points ahead of Labour in the polls to win a majority; currently they are eight points behind. That is fueling an increasingly volatile political climate, with the 2015 election campaign already effectively under way.
For investors, this volatility comes with risks. The first is fiscal. The government may have introduced the toughest spending cuts since World War II. But the overall fiscal adjustment in the U.K. since 2010—at just around 4% of gross domestic product—still falls short of that in the U.S. or several euro-zone crisis countries, and the U.K. still has a fiscal mountain to climb. This year’s deficit-to-GDP ratio is likely to be 7%, among the highest in Europe, while debt-to-GDP is close to 90% and rising. To meet his own target of eliminating the structural deficit over the next five years and run a surplus by 2020, Mr. Osborne will need to make further substantial cuts to public spending or raise taxes, says the Institute for Fiscal Studies, an independent think tank.
On Thursday, Finance Minister George Osborne will update Parliament on his fiscal strategy. He will promise to bank any revenue windfall from faster growth to pay down debt, according to someone familiar with his thinking.
Yet investors can be forgiven for being skeptical: Mr. Osborne has already abandoned one of his previous fiscal targets—a commitment that debt would be lower at the end of the current Parliament than at the start—and the two coalition parties have between them already racked up £2 billion ($3.28 billion) of spending increases in the past two months, which Mr. Osborne will explain this week how he will fund. As the election looms, maintaining fiscal discipline will only get harder.
A second risk relates to the business climate. Some investors worry that the political climate is becoming more hostile. Last week, the government announced a cap on the interest rates that lenders can charge for short-term loans. It also sanctioned a report by a part-time official consisting of unsubstantiated allegations that Royal Bank of ScotlandRBS.LN +1.39% had systematically forced healthy businesses into bankruptcy. In the past, this might have been considered an egregious abuse of process, yet the government’s actions have been barely questioned. To some business leaders, this shows politicians are increasingly willing to interfere in commercial decision-making.
Meanwhile, the Labour Party’s recent promise to cap energy prices if it wins the election has prompted the government to seek a deal with energy companies to cap prices before the election. One casualty of all this political interference is likely to be the U.K.’s liberalized energy market—based on private operators and an independent regulator—raising questions about how the U.K. will secure the future energy investment it needs to replace its aging nuclear fleet.
Another risk relates to the nature of the recovery. Awkwardly, the U.K. economy isn’t rebalancing as ministers once hoped: Third-quarter growth was driven by consumer spending, up 2.3% from a year earlier, while business investment slumped 6.3% and exports were a 0.9-percentage-point drag on growth. What’s more, this consumer spending is being driven by ultralow borrowing costs encouraged by an elaborate array of government subsidies and guarantees designed to deliver cheap credit to politically sensitive parts of the economy, including home buyers and small and midsize businesses.
Mr. Osborne boasts he is a “monetary activist” and says his subsidies are designed to correct “market failures.” But many investors wonder where the enthusiasm for subsidized credit is leading. Will the short-term sugar rush broaden into a sustainable recovery? Or will the U.K. will be faced with an even more unbalanced economy, with new asset bubbles and misallocations of capital? The reality is no one knows, but one thing is certain: Mr. Osborne isn’t going to change course this side of the election.
Write to Simon Nixon at simon.nixon@wsj.com
Weekly Export Risk Outlook by Euler Hermes
August 28th, 2013 In the headlines
Eurozone: Cautious recovery
Q2 GDP growth (+0.3% q/q) surprised on the upside, with better-than-expected outcomes in Germany (+0.7% q/q), France (+0.5%), Austria (+0.2%), Finland (+0.7%) and some southern countries, including Spain (-0.1% q/q), Portugal (+1.1%) and Greece (-4.6%). Positive overall GDP growth follows six consecutive quarterly declines but partly reflects a rebound from weak weather-related GDP data in Q4 2012 and in Q1, with construction increasing by +2.8% q/q in June and energy consumption unusually strong (+2.4% q/q in France, for example). Accordingly, a negative carry-over into Q3 is not excluded. EH continues to expect a gradual and moderate recovery in GDP growth, mainly driven by strong export performances by Germany and parts of the south. This trend is confirmed by business surveys, with the Composite PMI up to 51.7 in August (+1.2pts from July, the largest monthly increase for over two years) while order books (notably for exports) show signs of improvement. Nevertheless, a more sustained recovery remains unlikely in the short term because of prevailing structural weaknesses, including private deleveraging, tight credit conditions and ongoing fiscal consolidation.
US: Housingcracks?
Some cracks may be appearing in the housing market recovery. New home sales fell sharply in July, by -13.4% m/m annualised, with downward revisions to data for the preceding two months, while median prices fell for the third consecutive month. Applications for purchase mortgages have fallen -13% since the first hint of Quantitative Easing (QE) tapering in May (-59% for re-financings). The percentage of consumers planning to buy a home in the next six months fell sharply in August to 5.1% from 6.9%. While existing home sales increased, the National Association of Realtors attributed this partly to buyers who “panicked” at the +100bps rise in mortgage rates since May. Meanwhile, minutes from the Fed’s June meeting indicated broad consensus that QE tapering is likely to happen this year, but the Fed conference in Jackson Hole, Wyoming, gave little hint as to exactly when the tapering will begin, and exposed a divergence of opinion among Fed members.
EmergingMarkets: Currencypressures
Pressures on Emerging Market (EM) currencies―which started in May as concerns about the impact of Fed tapering triggered capital outflows―increased further in August. Countries that have benefited markedly from the Fed’s earlier QE and built up current account deficits have been hit hard, with the Indian INR losing 11% against the USD in August to date (25% since end-April), the Indonesian IDR 10% (16%), the Turkish TRY 5% (13%), the South African ZAR 6% (15%) and the Brazilian BRL 6% (20%). Emerging Europe, which has not attracted substantial net capital inflows in recent years, has avoided the worst of the recent currency sell-off. It is too early to talk about an EM currency crisis and it appears more of a cyclical currency decline for those countries affected. Foreign currency debt burdens are much lower than in previous crises and most EMs have built up substantial FX reserve buffers that can be used to avert excessive currency movements. However, corporate non-payment risk has increased for buyers that have not sufficiently hedged against exchange rate risk.
SouthAfrica: HigherQ2GDPgrowth
GDP growth in Q2 accelerated to +3% q/q seasonally-adjusted and annualised (+0.9% in Q1), spurred by a recovery in manufacturing output (+11.5%) after a sharp fall in output in that sector in Q1. Encouragingly, both wholesale and retail trade and financial services also registered sound growth (+3.2% and +3.5%, respectively). The overall picture suggests that consumer demand is holding up reasonably well, despite market volatility (see above). However, mining output contracted by -5.8% in Q2, following a sharp rebound in the previous quarter, and further industrial disputes during the wage- bargaining season are likely to restrict production in H2. Overall, EH expects GDP growth of around +2.5% in 2013, with acceleration to +3.5% in 2014, subject to an expected global economic recovery and accompanying growth in demand for commodity-based imports.
FIGURE OF THE WEEK
Eurozone’s q/q GDP growth in Q2Americas
Countries in focus
Latin America: FTA
On 26 August, Mexico, Colombia, Peru and Chile concluded a free-trade agreement (FTA), aiming to remove all customs duties within the grouping. In April, these four countries, representing approximately one-third of the overall Latin American economy, came together to form the “Pacific Alliance” in a bid to strengthen their business relations and compete with the Asian market. According to the FTA, 92% of customs duties on goods and services will immediately disappear and the remaining part will be removed over the course of the next few years. Only agricultural products, which are equivalent to around 1.4% of commercial trade of the group, are excluded from the initial terms of the FTA, with customs duties on these products remaining in place until at least 2030.
Eurozone: Creditchannelsinneedofrefreshing
In July, total loans to the private sector continued to deteriorate, reflecting more rapid deterioration in loans to non- financial corporations (NFC, -0.6% m/m, the 12th consecutive monthly contraction) while loans to households were close to stable (-0.1% m/m). The sharpest falls in loans to NFC in July were registered in Spain (-1.3% m/m), Portugal (-0.9%), Greece (-0.9%), Netherlands (-0.8%), Ireland (-0.7%) and France (-0.6%), whereas the decrease remained contained in Germany (-0.3%), Austria (-0.1%) and Belgium (-0.1%). Italy surprised on the upside with credit to NFC up by +0.3% m/m. Credit conditions are likely to remain tight in coming months for several reasons: (i) anaemic supply resulting from the rise in non-performing loans and banks’ conservative strategies; (ii) flagging demand and (iii) cost of credit, reflecting dysfunctional monetary policy transmissions. The risk of a credit crunch is particularly high for SMEs as bank credit is a key source of funding for their investment spending. Restoring credit channels would bring the recovery forward by several quarters.
Israel,Morocco&Tunisia: Growthcaveats
Europe
Africa & Middle East
Asia Pacific
Despite global and, particularly, regional negative pressures, GDP growth in all three countries was higher in Q2
Venezuela than Q1. Israel surWporirslded on the upside, with +5.1% q/q seasonally-adjusted and annualised expansion (+2.7% in
25% Q210)%. The impetus to Q2 growth came from private consumption (+6.7%) but some of this is likely to be
Latin Am erica
expenditures brought forward before austerity measures (tax increases and price rises) come into force. Notably,
15%
investment in Q2 contracted by -6.3%. EH expects +2.7% GDP growth in full-year 2013. In Morocco, Q2 GDP
g1r0o%wth, at +4.3% y/y (+3.8% in Q1), continued to reflect a bounce back from drought-affected weakness in 2012
but non-agricultural sectors were lacklustre and business investment remains weak. EH expects +4.5% GDP
5%
growth in 2013. Meanwhile, in Tunisia, Q2 GDP growth was +3.5% y/y (+2.6% in Q1) but recent political turmoil an0d%unrest suggests a higher growth path remains illusory. EH expects +3% GDP growth in 2013.
-5%
Thailand: Q2GDPgrowthslowsmarkedlyy/y
-10%
Real GDP contracted by -0.3% q/q in Q2 following a decline of -1.7% in Q1, putting the economy into a technical
-15%
recession. In y/y terms, GDP growth decelerated to +2.8% in Q2 from +5.4% in Q1, largely as a result of
-20%
weakening consumer spending and exports. Private consumption expanded by +2.4% y/y in Q2 (+4.4% in Q1),
00 01 02 03 04 05 06 07 08 09 10 11
public consumption accelerated to +5.8% (+2.9%) and fixed investment increased by +4.5% (+5.8%). Export growth slowed sharply, to +2.8% y/y (+8.3% in Q1), while the moderation in imports was less pronounced, to +4.1% (+8.1%), so that net exports subtracted -0.4pps from overall Q2 growth (+1.4pps in Q1). EH expects +3.5% GDP growth in full-year 2013.
What to watch
August 29 – Philippines Q2 GDP August 29 – US Q2 GDP annualised (second estimate) August 29 – French investment survey (industry) August 30 – Poland Q2 GDP details August 30 – India Q2 GDP August 30 – Croatia Q2 GDP August 30 – Brazil Q2 GDP
August 30 August 30 August 30 September 2 – Brazil August external trade data September 2 – EU-27 August PMI data
September 3 – Australia Q2 GDP September 4 – Eurozone Q2 GDP (second estimate) September 5 – ECB meeting
© Copyright 2013 Euler Hermes. All rights reserved.
View all Euler Hermes
Economic Research online
http://www.eulerhermes.com/economic-research
Contact Euler Hermes Economic Research Team research@eulerhermes.com
Publication Director 2 Ludovic Subran, Chief Economist ludovic.subran@eulerhermes.com
– Canada Q2 and June GDP – Eurozone business and consumer survey – Jamaica Q2 GDP
In the headlines Week of August 7th, 2013
Italy: ContractionslowedinQ2
GDP continued to contract in Q2, by -0.2% q/q, and this was the eighth consecutive quarterly contraction. The GDP outcome is in line with EH forecasts but above the consensus of -0.4%. Investment growth is likely to have remained negative in Q2 as industrial production decreased by -0.9% q/q. However, business confidence improved recently, with the PMI service index gaining 2.9 points in July (to 48.7) and the PMI manufacturing index reaching 50.4, which puts it in expansionary territory for the first time since July 2011. On the demand side, prospects remain weak, with retail sales down -1.1% m/m in May, after -2.9% in April, and the rate of unemployment was 12.1% in June. Overall, EH expects economic growth to stabilise in late-2013 and return to a positive (if moderate) trend in 2014 (+0.3%), mainly export driven. The GDP breakdown for Q2 is scheduled to be released on 9 September.
Australia: Monetarypolicyeased
The Reserve Bank of Australia (RBA, central bank) cut its key policy interest rate to a new record low of 2.5% (previously 2.75%). This 25bps cut follows some signs of weak activity overall. GDP increased by +0.6% q/q in Q1, slightly below consensus and the government recently revised down its growth forecast for 2013 from 2.75% y/y to 2.5% y/y. The latest accommodative change in monetary policy, which came just after the PM called for a general election on 7 September, is expected to rebalance economic growth by encouraging borrowing and by strengthening the rate of currency depreciation. Meanwhile, inflationary pressures remain under control at 2.7% y/y in July (within the RBA target range of 2-3%) and provide scope for further monetary easing in the coming months.
UK: Adventofexplicitguidance
The BoE left its key policy interest rate unchanged, at 0.5%, and broke with tradition by announcing that it will maintain its accommodative monetary policy as long as economic activity remains weak and unemployment remains above 7%. This form of communication is consistent with the arrival of a new governor, Mark Carney (previously governor of the Bank of Canada), who is a strong advocate of forward guidance, which is a more explicit direction regarding the future conduct of monetary policy. The Monetary Policy Committee gave more details, including that asset purchases will not be reduced until unemployment reaches the threshold and that the guidance linking Bank Rate and asset sales to the unemployment threshold will continue as long as (i) inflation remains under control (specifically, below the 2% target) and (ii) the financial policy committee judges that the monetary stance is not dangerous for the economy. Official GDP growth forecasts were raised to +1.5% in 2013 (previously +1.2%) and +2.7% in 2014 (previously +1.9%), compared with EH expectations of +1.1% and +1.6%, respectively.
Germany: Insolvenciesfalling
Despite relatively weak overall levels of economic activity in Q1, with GDP growth close to stagnation (+0.1% q/q), the number of corporate insolvencies continued to decline. According to the latest provisional figures from the Federal Statistical Office, Destatis, 6,608 business failures were recorded in Q1, representing a decline of -11.7% y/y (compared with Q1 2012) and of -8.8% as a 12-month floating rate (April 2012 to March 2013, compared with April 2011 to March 2012). On a q/q basis, the number of insolvencies in Q1 increased slightly, by +1.8%. Insolvency figures in Q1 on a monthly basis were subject to volatility, with 2,313 insolvencies registered in March, which was down by -17.7% y/y but up by +11.7% m/m.
FIGURE OF THE WEEK
Italy’s q/q GDP contraction in Q2
NOTE: WERO is taking a break. The next issue will be 28 August 2013.Americas
Countries in focus
US: Mixeddata
Q2 real GDP increased by +1.7% q/q annualised and, after stripping out inventories, real final sales grew by only +1.3%. The long term average for both is +3.3%. Also, Q1 GDP growth was revised down sharply to +1.1% q/q. Moreover, the July employment report was a disappointment, with job growth of 162,000 below expectations and markedly short of a level signifying robust recovery. Hourly wages and weekly hours both fell, pushing earnings below inflation over the past year. Additionally, unemployment fell to 7.4% but this reflected the fact that discouraged people left the workforce, driving down the participation rate. Nevertheless, the week’s data were not all bad as indices from the Institute for Supply Management improved in July, continuing to suggest expansion, with the manufacturing index at 55.4 from 50.9 in June and the non-manufacturing index was 56.0 from 52.2.
Ukraine: Recession and financial difficulties
Q2 real GDP contracted by -1.1% y/y, marking the fourth consecutive quarter of decline. Demand-side details have yet to be revealed, but supply-side data suggest that decreasing investment and faltering external demand were the major causes for the contraction, while private consumption continued to grow, albeit at a slower pace. Industrial and construction output declined by -5.7% y/y and -24.6% in Q2, respectively. Nominal goods exports fell by -5.5% y/y in April-May, although imports also contracted, by -6%. Retail trade expanded by +9% y/y in Q2, down from +13.4% y/y in Q1. Meanwhile, the IMF announced last week that Ukraine is expected to participate in post-programme monitoring, indicating concerns over its ability to meet debt repayments. The country’s outstanding debt to the IMF is around USD8 billion, of which USD3 billion is due by end-2013.
Morocco: Takingprecautions
The IMF reaffirmed its support through continuation of a two-year USD6.2 billion Precautionary Liquidity Line
(PLL) facility. At this stage, the PLL is unlikely to be used but it acts as insurance against external shocks on the
balance of payments and as a form of approval of the government’s general policy stance. It is therefore a useful
signal to markets, investors and donors that recent economic performance has been relatively sound. However,
the Fund again stressed the need for structural reforms, including improvements in tax collection and reductions in
subsidy expenditures. These reforms are likely to be introduced slowly and progressively, given the sensitive
nature of the impact on incomes at a time when unemployment is high (8.8% at a national level in Q2 but 20.2%
Europe
Africa & Middle East
Asia Pacific
Venezuela for those aged W25o r-l3d4 years living in urban areas) and regional uncertainties heighten political and social risks.
25%
20%
Latin Am erica
Indonesia: GrowtheasedinQ2
15%
10%
5%
Real GDP growth moderated to +5.8% y/y in Q2 from +6% in Q1, but remained robust overall as a result of an improved net trade balance. Growth in private consumption remained relatively stable at +5.1%, public
consumption accelerated to +2.1% (+0.4% in Q1) while fixed investment slowed to +4.7% (+5.8% in Q1). Both
0%
-5%
exports and imports picked up in Q2, to +4.8% and +0.6% (+3.6% and -0.1% in Q1), respectively, so net exports contributed +2pps to overall Q2 growth. Headline inflation increased sharply in July, to 8.6% y/y (5.9% in June),
as a result of the reduction in fuel subsidies in late June. Higher inflation will weigh on households’ purchasing
-10%
-20%
power, but still buoyant consumer confidence and strong wage growth suggest that private consumption may hold -15%up relatively well. EH expects +6% GDP growth in full-year 2012.
00 01 02 03 04 05 06 07 08 09 10 11
What to watch
August 9 – China July CPI, PPI, IP, retail sales August 9 – Latvia Q2 GDP August 9 – France June IP, manufacturing output August 10 – SADC heads of state summit
August 11 – Mali presidential election run-off
In the headlines
UK: Positive surprise on growth
Growth accelerated in Q2, to +0.6% q/q, slightly above EH forecasts, after +0.3% in Q1. All the main industry sectors improved for the first time since Q2 2010, indicating that the UK’s recovery is strengthening. The main contribution to the increase in GDP came from the services sector (+0.5pps), accounting for around 80% of the economy. Industrial production contributed +0.1pps to the increase, while the construction and agriculture sectors contributed +0.05pps and +0.01pps, respectively. The resilience of the labour market (stable unemployment at 7.8%) and strong retail sales (+0.9% q/q in Q2 after +0.5% in Q1) will have supported private sector consumption. Private investment growth is likely to have remained in positive territory, supported by recovering business confidence and improving credit conditions for the corporate sector. The GDP demand breakdown will be released on 23 August.
Spain: Slow progress?
The Bank of Spain yesterday released preliminary Q2 GDP growth estimates showing a contraction of -0.1% q/q, compared with -0.5% in Q1 and slightly above the forecast of EH. According to the National Statistical Institute, Q2 GDP data reflect a more negative contribution in domestic demand that was partially compensated by a positive contribution in net exports. Meanwhile, unemployment reached a record high of 26.9% in May, double the rate at end-2008 and retail sales decreased by -5% y/y in June, compared with -4.4% in May. Also, credit to NFC further deteriorated in June, declining by -20% y/y, the sharpest fall since November 2007. Against this background, EH expects a progressive stabilisation in growth in Q3/Q4, mainly triggered by further positive contributions from net exports and by improvements in business confidence. In June, for the first time since April 2011, the manufacturing PMI reached 50, indicating balance between expectations of growth and contraction. Overall, EH expects GDP to contract by -1.6% in 2013 and to recover only moderately in 2014, to +0.3%.
Eurozone: Weak corporate investment rate
In Q1, the business profit share (gross operating surplus divided by gross value added) remained stable at 37.7% on the back of a stabilisation in both gross value added and compensation to employees. The gross investment rate fell to 18.8%, reaching the lowest level in the past decade, reflecting contraction in investment (-3.4% q/q), while gross value added remained stable. Latest data for credit to NFC suggest that this trend is likely to continue in coming months as the amount of loans was down by -5% in June to the lowest level since early 2008. Further, investment surveys in Germany suggest that investment in France and Germany is more oriented towards equipment replacement and modernisation, rather than new production. Moreover, prevailing tight credit conditions and weak private demand remain a drag on investment. EH expects stabilisation in eurozone investment in Q3/Q4 if the trend in business confidence continues to improve. In this respect, the composite PMI, at 50.4 in July, was above the no-growth threshold for the first time since January 2012.
North Africa: Regional tremors
The political transitions in North Africa were always going to be difficult, given the revolutionary nature of the regime changes and expectations of the populations. In Egypt, the fall of the elected government in early July, detention of the president and ensuing demonstrations and violence delay the prospect of political and economic stability and therefore limit consumer and investor confidence. Without an elected government, IMF support is also on hold and the economy remains dependent on bilateral aid and grants, particularly from the GCC. In Tunisia, the political assassination of an opposition leader reflects deep divides between secular and Islamist groups and a similar killing earlier in the year brought down the government of the time. Consolidation of earlier political gains is proving difficult. Meanwhile, in Libya, tribal and regional divisions and heavily-armed militia are preventing the establishment of a centralised authority and improvements in security. Trading conditions are challenging throughout the region.
FIGURE OF THE WEEK
Spain’s June y/y contraction in credit to non- financial corporatesAmerica
Countries in focus
US: Real data
Among generally weak recent data releases, the National Association of Realtors’ Pending Home Sales Index, a gauge of future existing home sales, slipped -0.4% m/m in June on higher home prices and rising mortgage rates. The Case-Shiller Home Price Index increased by +1% m/m in May, but it was the smallest gain in four months and was below expectations. However, in y/y terms, growth is now +12.1% and prices in several cities are rising at over +20%. Meanwhile, the Dallas Fed’s monthly regional manufacturing survey slipped from 6.5 to 4.4 in July as production and new orders fell. In addition, an index on consumer confidence fell from 82.1 to 80.3 in July as expectations for the next six months weakened, particularly regarding employment. An index reading in excess of 100 is normally associated with a strong economy.
Hungary: Monetary policy easing and fiscal concerns
The Monetary Council (MC) last week lowered the key policy interest rate by 25bps to a record low 4%. This was the 12th consecutive rate cut since August 2012, resulting in a cumulative reduction of 300bps. Inflation ticked up slightly from an all-time low of 1.7% y/y in April to 1.9% in June, but remained below the lower end of the 3%±1pps target range. The MC expects inflationary pressures to remain muted as a result of continued weak domestic demand and it intends to support the still faltering economy. Hungary did better than most of its peers during the recent market turmoil―the HUF/EUR exchange rate has remained broadly stable since end-April. However, concerns have returned on the fiscal front as the budget deficit reached -3.8% of GDP in Q1, putting Hungary at risk of being placed back under the EU’s Excessive Deficit Procedure, which it exited in June.
Mali: Elections and outlook
The first round of presidential elections was held on 28 July. An interim government has been in place following
the outcome of a military coup in March 2012 and an insurgency in the north that led to the takeover of around
60% of the country by Islamic militants. In January 2013, French and AU troops intervened to protect the capital,
Bamako, and disperse the militants. A successful poll will be followed by parliamentary elections later in the year
and an elected government will allow the US to restore aid. However, underlying tensions have not been allayed,
relations with Tuareg tribes in the north remain fragile, porous borders allow militants easy entry and exit routes
and the economy contracted last year. As a result, after elections that were an effective two-person race between
Europe
Africa & Middle East
Asia Pacific
Venezuela Ibrahim BoubacWaorrlKd eïta and Soumaïla Cissé, expect the new president to have a challenging term in office.
25%
20%
Latin Am erica
SouthKorea: GDPgrowthacceleratedinQ2
15%
10%
5%
Q2 real GDP growth picked up to +1.1% q/q (advance estimate) from +0.8% in Q1, largely reflecting acceleration in consumption. Government spending expanded by +2.4% q/q in Q2 (+1.2% in Q1) and household spending
shifted to an increase of +0.6% after falling by -0.4% in Q1. Fixed investment growth moderated to +1.9% q/q in
0%
-5%
Q2 (+3.8% in Q1). External trade activity also eased in Q2, with exports expanding by +1.5% q/q (+3% in Q1) and imports by +1% (+2.5% in Q1), but net exports still made a significant contribution to Q2 growth. In y/y terms, Q2
GDP growth picked up to +2.3% from +1.5% in Q1, with all major demand-side components showing an
-10%
-20%
acceleration, notably fixed investment that, after four quarters of contraction, increased by +2.7% y/y, reflecting -15%rapid expansion in construction investment (+7.1%). EH expects full year 2013 growth of around +2.5%.
00 01 02 03 04 05 06 07 08 09 10 11
What to watch
August 1 – EU-27 July manufacturing PMI August 1 – Russia July manufacturing PMI August 1 – UK August BoE base rate decision August 2 – US July unemployment August 5 – Nigeria Q2 GDP
Week of July 24th, 2013
In the headlines
Japan: And the winner is…Abe
The Liberal Democratic Party and its ruling coalition partner, New Komeito, won 76 seats in elections on 21 July. They now have 135 seats out of a total of 242 in the upper chamber of parliament, which should give PM Shinzo Abe’s government a stable majority in both Houses of the Diet for the next three years. This result confirmed the popularity of Abenomics, suggesting a further deepening in monetary policy loosening, fiscal stimulus and pro-growth reforms in the coming years, especially on the structural side. There is also the prospect of more flexibility in labour markets and the creation of deregulated economic areas to attract foreign investments. EH expects the economy to grow by +1.6% in 2013, boosted by both public and private consumption.
Eurozone: Continuing tight credit conditions for corporates
The Q2 ECB Bank Lending Survey suggests that credit standards on loans to non-financial corporations (NFC) continue to remain tight, notably for SME. However, banks expect credit conditions associated with loans to NFC to be less tight in Q3. Lending polices remain affected by macro- economic uncertainty and by borrowers’ risk (industry and company specific). Loan demand from the NFC continued to decline in Q2, but at a slower pace, and banks expect this trend to continue. Several initiatives to support lending to corporates were taken at the recent EU summit, including an increase in EIB capital (allowing EUR180 billion of additional investment, equivalent to 1.4% of eurozone GDP), an easing in ABS collateral requirements by the ECB and the EIB-European Commission proposals on loan securitisation for SME. Within the latter, the most interesting option (securitisation of new and old SME loans and risk mutualisation) would allow additional bank loans of around EUR100 billion for one million SME.
US: House arrest?
The housing market appears to have hit a bump in the road in its substantial recovery phase. Since May, when talk of the Fed’s tapering of asset purchases first arose, the interest rate on a 30-year mortgage has increased from approximately 3.5% to 4.5%. Perhaps as a result, sales of existing single family homes fell -1.1% m/m in June, the first decline in four months. Prices increased by 5.5% m/m (13.2% y/y), also hurting sales. In addition, June starts and permits fell -9.9% m/m and -7.5% m/m, respectively, although they may have been affected by wet weather and volatility in the multi-family components. Meanwhile, manufacturing showed another sign of a rebound as the Philadelphia Fed’s July survey improved sharply to 19.8, the highest since March 2011, and the Fed’s “Beige Book” reported economic activity rising at a “modest to moderate pace” including expansion in manufacturing.
Eurozone: Early signs of improvement in Q3
Business confidence surprised on the upside in July, suggesting that recession could be avoided in Q3. The PMI composite index increased by 1.7 points to 50.4 (consensus at 49.1), above the no-growth threshold for the first time since January 2012, with the manufacturing output PMI at 52.3 and services at 49.6. Prospects have improved in the manufacturing sector with output at its highest level since mid- 2011 and new orders on the rise for the first time since May 2011. The current level suggests a slight improvement in economic activity in the coming months but this trend is not yet firmly established. While business confidence improved substantially in Germany (+1.7 points to 50.3 in manufacturing and +2.1 points to 52.5 in services) it continues to suggest contraction in France (+1.4 points to 49.8 in manufacturing and +1.1 points to 48.3 in services). For the peripheral countries, output persists in contractionary territory, but the rates of decline have slowed.
FIGURE OF THE WEEK
Vietnam’s y/y Q2 GDP growthAmerica
Countries in focus
CostaRica: Leader of the PAC
The opposition Partido Acción Ciudadana (PAC) provisionally elected Luis Guillermo Solís as its candidate to contest presidential elections in February 2014. In a primary election on 21 July, Solís won 35.53% of the votes cast, compared with 35.22% for Juan Carlos Mendoza. The narrow margin of victory led to a manual recount, with the final result likely by the end of the week, but it suggests that the PAC is divided and that Solís, if confirmed as the party’s candidate, will need to campaign effectively to make headway against the ruling PLN. Currently, the PLN candidate Johnny Araya, who is mayor of the capital San José, is the favoured candidate of those responding to recent opinion polls. However, Araya’s popularity may be affected adversely by scandals besetting the current government of President Laura Chinchilla, so expect an active election campaign.
Turkey: TRY and help
The central bank yesterday raised its overnight lending rate by 75bps to 7.25% while keeping its key policy one- week repo rate and the overnight borrowing rate unchanged at 4.5% and 3.5%, respectively. The widening in the interest rate corridor is aimed at supporting exchange rate and price stability. Inflation picked up to 8.3% y/y in June from a two-year low of 6.1% in April. The TRY has depreciated by around 7% against a 0.5USD+0.5EUR basket since end-April, despite liquidity controls and significant direct interventions by the central bank. As a result of the latter, official foreign exchange reserves dropped by USD10.4 billion up to mid-July, although they are still comfortable at just over USD100 billion. The central bank also doubled its credit offered to exporters through Turkish Eximbank aiming to support exports as well as foreign exchange reserves.
United Arab Emirates: Oil platform
GDP increased to AED1,409.5 billion (USD384 billion) in 2012, recording real growth of +4.4%. Official data also
show that growth in 2011 was +3.9%, compared with an earlier projection of +4.2%. In 2012, crude oil production
averaged 2.65 million barrels per day (mbpd, up +5.9% on 2011), the oil and gas sector accounted for 40% of
GDP and hydrocarbons contributed +6.3% to overall growth. However, robust domestic demand also enabled the
non-oil sector to boost growth, increasing by +3.5% (+2.6% in 2011). The outlook this year is for output of crude to
moderate and oil prices to ease, but the non-oil sector is likely to drive overall growth, partly benefiting from
Europe
Africa & Middle East
Asia Pacific
Venezuela
perceptions that the country is stable in a region with significant uncertainties. EH expects GDP growth to ease to
25%
20% 15%
World +3.5% in 2013LbaetifnoAremrercicoavering to around +4% in 2014, subject to the anticipated pick up in the global economy.
Vietnam: Growth below government expectations
10%
Real GDP growth in Q2 picked up slightly, to +5% y/y from +4.8% in Q1. As a result, growth in H1 2013, at +4.9%
5%
y/y, was close to the full year 2012 outcome of +5%, although it remained well below the annual average +6.9% in
0%
-5%
2002-2011 as well as the government’s 2013 growth target of +5.5%. Demand-side data have not been published but the General Statistics Office indicated that domestic demand remained weak, partly due to banking sector
problems. On the supply side, growth in H1 was led by services, which expanded by +5.9% y/y. Industry
-10%
(including construction) increased by +5.2% y/y, while agriculture remained weak at +2.1% y/y. The government -15%announced some policy changes to promote growth and started with a 1% devaluation of the official VND/USD
exchange rate to 21.036 at end-June. Also, corporate taxes will be lowered, but not before 2014.
-20%
00 01 02 03 04 05 06 07 08 09 10 11
What to watch
July 25 – Brazil June unemployment July 25 – UK Q2 GDP (preliminary) July 25 – South Korea Q2 GDP July 25 – Philippines Monetary Board meeting July 25 – Togo parliamentary elections
July 26 – Singapore June industrial production
July 30 – Lithuania Q2 GDP July 30 – Spain Q2 GDP (preliminary) July 31 – Zimbabwe elections July 31 – FOMC meeting August 1 – ECB meeting August 1 – US July Manufacturing ISM Index
Week of July 18th, 2013
In the headlines
China: Secondquarterofdeceleration
In Q2, GDP growth slowed for a second consecutive quarter, to +7.5% y/y from +7.7% y/y in Q1 but it accelerated on a q/q basis, to +1.7% from +1.6% in Q1. Several output indicators suggest economic resilience, with industrial production increasing by +0.7% m/m in June, investment increasing by +1.5% and retail sales of consumer goods increasing by +1.3%. Less encouraging signs, however, came from external trade data as the total values of both exports and imports were down, by -5% m/m in June (-2% in May) and by -9% m/m (-4% in May), respectively. Meanwhile, Finance Minister Lou Jiwei announced that China can withstand a growth slowdown to around +6.5% as part of its new overall strategy that is rebalancing growth towards private consumption, fostering sustainable growth in the long term.
Eurozone: Industrial output contracted in May
In May, industrial production (excluding construction) declined by -0.3% m/m (in line with consensus expectations) after increasing by +0.4% in April. Industrial production contracted in France and Germany (-0.5% m/m and -0.8%, respectively) while increases were registered in southern European countries, including Italy (+0.1% m/m), Spain (+0.3%) and Portugal (+6.1%). Base effects linked to bad weather conditions in May could trigger a rebound in the June data, with industrial production growth increasing by around +1% q/q in Q2. If confirmed, this would be the highest increase since the start of 2011. In this context, EH does not exclude a positive surprise in eurozone Q2 GDP growth, statistics for which will be released on 14 August. Even so, weak business confidence (Eurozone Manufacturing PMI at 48.8 in June) and contraction in credit to non-financial corporations (-5% y/y in May) continue to suggest negative GDP growth in Q2, before a return to positive, but moderate, growth in H2 2013.
Germany: Exportsstilldisappoint
The first provisional data for May released by Destatis, the federal statistical office, suggest that foreign trade continues to be affected by weak external demand. Exports of goods in that month totalled EUR88.2 billion, a decline of -2.4% m/m and -4.8% y/y, while imports of goods amounted to EUR75.2 billion, up +1.7% m/m (-2.6% y/y). In May, there was a particularly steep slump in exports to other eurozone members, down by -9.6% y/y, while deliveries to other EU countries (-2.4%) and to countries outside the EU (-1.6%) declined at a slower rate. In the period January-May, exports totalled EUR454.3 billion, down slightly on a y/y basis, by -0.3%, with exports to eurozone members down markedly, by -3.6% y/y, while shipments to other EU countries (+0.9%) and to non-EU countries (+2.2%) recorded increases over the period.
US: Mostlypositiveindicators
Recent economic data releases have been generally positive. Manufacturing industrial production increased for the second consecutive month in June, after falling in three of the previous four months. The New York Fed’s regional (Empire State) manufacturing survey also increased, for the second consecutive month, and June auto sales were strong for the third month in a row, rising by a sharp +1.8% m/m. However, retail sales excluding autos and gasoline fell -0.1% m/m. Increased gasoline sales were a result of a rapid price spike, which is expected to continue for several weeks, driven by unrest in the Middle East and by inventory drawdowns. The jump in energy prices pushed consumer and producer prices higher, yet their core rates remain at a relatively subdued rate of +1.6% y/y. Finally among the latest data, the housing market index continued on its steep recovery, improving from 41 in April to 57 in July, which is the highest since January 2006.
FIGURE OF THE WEEK
China’s y/y Q2 GDP growthAmerica
Countries in Focus
EmergingAmericas: Differingstancesonmonetarypolicy
Last week, the central bank in Brazil increased the benchmark policy interest rate for a third time since April, by 50 bps to 8.5%, and indicated that increases may be extended through to the end of the year as it battles inflation. Consumer prices increased by 6.7% y/y in June, which is the largest monthly rise since October 2011 and is above the upper range of the central bank’s inflation target. Also of concern, the economic activity index declined by -1.4% m/m in May (+1.2% in April), to the weakest level since end-2008. Meanwhile, Mexico’s central bank left its key policy interest rate at 4% for July, even though inflation in June was 4.09% y/y and therefore slightly above ceiling (target of 3%, +/- 1%). Inflationary pressures have eased after a surge in fresh food prices earlier in the year. Chile also maintained its policy rate, at 5%, despite some signs of weakening economic activity.
Malta: Weakeconomicoutlook
Real GDP increased by +1.6% y/y in Q1, slightly down from an upwardly revised +1.7% in Q4 2012. Notably, all demand-side components of GDP posted declines in Q1, except for imports, which increased by just +0.2% y/y, and gross capital formation, which surged by +75% y/y. Private consumption contracted by -2.1% y/y, government consumption by -3%, fixed investment by -5.6% and exports by -3.4%. This indicates that inventory restocking was the sole growth driver in Q1. This is unlikely to continue during the remainder of the year. High frequency indicators suggest that both domestic and external demand remained weak in Q2. EH expects full year GDP growth of just +0.5% in 2013. The slowdown in economic activity led to reduced tax income and an increase in the fiscal deficit to -6.2% of GDP in Q1 2013, up from -5% in Q1 2012 and -3.3% in full year 2012.
Kenya: Monetarypolicyonhold
Last week, the Monetary Policy Committee of the central bank left the key policy interest rate unchanged at 8.5%,
citing currently moderate price pressures as inflation is comfortably within the 2.5% band around the 5% medium-
term official target. Headline inflation was 4.9% y/y in June and core inflation remains steady. In addition, the KES
is stable and Q1 GDP growth was a robust +5.2% y/y. However, the monetary authorities remain wary of potential
external risks stemming from, among other things, political uncertainties in Egypt and therefore on key export
sectors, particularly tea. EH expects monetary policy to be on hold through the course of H2 2013, but much
Europe
Africa & Middle East
Asia Pacific
depends, as the central bank identifies, on the impact on the economy of previous interest rate changes and on
Venezuela those external Wunocrledrtainties.
25% 20%
Latin Am erica
Singapore: GDPgrowthpickedupinQ2
15%
Advance estimates (based on data for two months) indicate that Q2 real GDP growth accelerated to +3.7% y/y
10%
(+0.2% in Q1) and +15.2% on a q/q seasonally-adjusted annualised (saa) basis (+1.8% in Q1), largely reflecting a
5%
recovery in manufacturing, which increased by +1.1% y/y (-6.9% in Q1) and +37.6% q/q saa (-12.7% in Q1). 0%However, this strong rebound is unlikely to continue as it mainly reflects a surge in the output of the biomedical
and electronics sub-sectors, which are known as major sources of growth volatility. Construction growth
-5%
moderated somewhat in Q2 but remained robust at +5.6% y/y and +9% q/q saa. Growth in services picked up to
-10%
-15% -20%
+5% y/y and +9% q/q saa, indicating continued resilience in domestic demand and financial services. EH expects full year 2013 growth of just above +2%.
00 01 02 03 04 05 06 07 08 09 10
12 June 2013
In the Headlines
FIGURE OF THE WEEK: +1%>JAPAN’S REVISED Q/Q Q1 GDP GROWTH Japan: BoJ policy statement and GDP revision
In its latest monthly statement, the Bank of Japan (BoJ, central bank) pledged to pursue both quantitative and qualitative monetary easing until its inflation target of 2% is achieved. According to the BoJ, the monetary base will increase at an annual pace of JPY60-70 trillion and the target for asset purchases remains unchanged. Also included in the statement is the latest economic outlook, with the BoJ now more confident about growth in the short term. Q1 GDP data have been revised upwards, with growth now put at +1% q/q from an earlier projection of +0.9%. EH expects GDP growth to accelerate to +1.6% in 2013 (and to remain relatively stable at +1.4% in 2014), driven by stronger domestic demand, especially public expenditure. However, excessive public debt is likely to remain a drag on growth.
US: Policy signals
May’s employment report was lacklustre. Although job growth of 175,000 slightly exceeded expectations, data for the previous two months were revised down 12,000, unemployment ticked back up 0.1pps to 7.6% and both hourly earnings and weekly hours worked were unchanged. The Fed needs to see the labour market “improved substantially” before it starts to taper its programme of quantitative easing (QE) and there is widespread speculation that this could occur at the September meeting. However, there are only three more employment reports before then and it is unlikely that these will all be very strong, so it appears more likely that the tapering will not begin until later in the year, at the earliest. Moreover, the ISM non-manufacturing report, although mostly positive, showed employment falling from 52 to 50.1—barely in expansionary territory.
China: Still moderate growth
A raft of economic data for May released last weekend continued to point to at best moderate growth, with risks tilted to the downside. Industrial production was up +9.2% y/y, slightly down on April’s +9.3%, led by light industry. Fixed asset investment in January-May increased +20.4% y/y, slightly down on January-April and slightly below 2012. Retail sales growth continued to improve slightly, however, up +12.9% y/y. Both exports (+1% y/y) and imports (-0.3%) weakened markedly, but monthly data has been erratic, clouded by possible over-invoicing and, in May, base effects. The trade balance remained in surplus. Credit expansion also slowed, although it has been strong so far in 2013. Inflation (CPI) eased to 2.1% (2.4% in April)—against expectations. Overall, growth expectations are being revised downwards. EH now forecasts +7.7% in 2013 with the risks to the downside.
Austria: Stagnation
GDP stagnated in Q1, following a contraction of -0.1% q/q in Q4 2012. Positive contributions were provided exclusively by public spending, growing by +0.5% after +0.2% in the previous quarter. Despite a moderate increase in foreign trade, with exports and imports both rising by +0.3%, the net export balance did not provide support for growth (contributing 0.0pps). While consumer spending remained flat (0%) for the fifth consecutive quarter, investment spending continued to fall, with investment in machinery and equipment contracting by -1% and construction spending down by -0.1%.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Senegal: Update
Following a decisive electoral victory in 2012, Macky Sall took over the presidency from long- serving Abdoulaye Wade. Sall has a clear popular mandate to govern but his presidential term will be challenging, given macro-economic imbalances, structural deficiencies and need to improve perceptions of a generally weak business environment. Large fiscal and current account deficits (-6.8% and -8.5% of GDP in 2012, respectively) are unsustainable in the long term and currently managed through inflows of financial aid. Membership of the CFA franc zone offers some limitation on exchange rate and transfer risk. Despite inefficient and erratic energy and power supplies, EH expects GDP growth of +4% in 2013 and +4.5% in 2014, compared with a long-term annual average of +4%.
Americas – Venezuela: Growth slows sharply
The economy slowed sharply in Q1 as GDP increased by just +0.7% y/y after an annual increase of +5.5% in 2012. Petroleum sector output increased (+0.9% y/y) but construction (-1%), manufacturing (-3.7%) and mining (-25.5%) all contracted. Inflation in May accelerated sharply, to 35.1% y/y. The Q1 current account surplus was USD1.7 billion (USD7.5 billion in Q1 2012). Lower oil prices impacted export earnings but non-oil exports also fell as companies struggle to source raw material inputs. Exchange controls and other government intervention limit inputs to production and create consumer shortages, so inflation is likely to stay high and growth low. Oil prices remain crucial. Meanwhile, the audit by the National Electoral Commission confirmed President Maduro’s election win.
Asia-Pacific – Philippines: Highest regional GDP growth
Q1 GDP growth accelerated to +2.2% q/q (+1.9% in Q4 2012) and +7.8% y/y (+7.1% in Q4), making the Philippines the fastest growing economy in the region, as surging domestic demand offset weakening exports. Robust private consumption expanded by +5.1% y/y in Q1 (+6.2% in Q4), infrastructure projects boosted government consumption growth to +13.2% (+9.5% in Q4) and strong construction activity propelled fixed investment growth of +16.8% (+19.7% in Q4). However, exports collapsed, falling by -7% y/y in Q1 (+8.6% in Q4), while imports retained modest growth of +1.6% (+8% in Q4). EH expects domestic demand to retain momentum amid an ongoing weak global environment in 2013, resulting in full year GDP growth of around +6%.
Europe – Latvia: Good news (at last)
Last week, the European Commission and the ECB recommended that Latvia should be allowed to adopt the EUR at the start of 2014. The final decision will be made by the European Council of Ministers, scheduled for 9 July. As a consequence, S&P this week raised its rating of Latvia by one notch to BBB+, with a stable outlook. Meanwhile, according to the Central Statistical Bureau, Q1 GDP growth was revised upwards to +3.6% y/y (from a +3.1% flash estimate) and +1.4% q/q (from +1.2%), making Latvia the fastest growing economy in Europe in Q1. Strong private consumption contributed +3.4pps to Q1 y/y growth and government consumption added +0.2pps, while fixed investment subtracted -2.5pps. Net exports added +1.1pps, with expansion of exports clearly outpacing imports.
Worth Knowing
Iran
The winner of the presidential elections on 14 June is now difficult to predict, given that some leading candidates were barred from standing, others withdrew themselves and pre-poll alliances are moving support towards particular individuals in both the hardline and reformist camps. It remains likely that the successor to President Mahamoud Ahmadi-Nejad (who will step down under a constitutional ruling) will be closer to Supreme leader Ayatollah Ali Khamenei than the incumbent, so do not expect the elections to presage significant policy changes.
North and South Korea
Tensions on the Korean peninsula appear to be easing―after rising sharply in early 2013―as North and South Korea agreed to hold high-level inter-governmental talks this week. A key point on the agenda is expected to be restoration of suspended commercial links. The North also intends to reconnect a Red Cross hotline that was cut in March, which will reduce the risk of an accidental military escalation.
15 May 2013
In the Headlines
FIGURE OF THE WEEK: +9.3%>CHINA’S Y/Y APRIL GROWTH IN INDUSTRIAL OUTPUT Eurozone: Q1 GDP and outlook
GDP contracted by -0.2% q/q in Q1—slightly below consensus expectations (-0.1%) and the sixth consecutive quarterly contraction—and it was broad based, with Spain (-0.5%), Italy (-0.5%) and France (-0.2%) contracting and only Germany (+0.1%) of the larger economies recording expansion. Weakness was also reflected in retail sales, which contracted by -0.1% mo/mo in March, suggesting depressed private consumption. EH does not expect a strong improvement in demand as labour markets remain weak (March unemployment 12.1%) and business confidence remains at a low level, with the composite PMI continuing to signal contraction. A (slight) positive sign came from industrial production, which increased by +1% mo/mo in March, suggesting that business activity may gradually improve over the course of 2013. EH forecasts a slight recovery in H2, with growth stabilising at a low level because of weak fundamentals, but expects GDP to contract by -0.3% for full-year 2013.
China: Moderate growth
Growth in industrial output in April picked up to +9.3% y/y (+8.9% in March) but was below consensus forecasts and fixed asset investment growth in January-April slipped to +20.6% y/y, still driven mainly by residential property and infrastructure, with manufacturing lagging. Retail sales growth held up at +12.8% y/y (+12.6% in March) and credit growth accelerated, with net new lending at its highest April level, which should be supportive of future economic growth. Total social financing also accelerated, to +21.8% y/y (+21.1% in March), the highest since June 2011. Growth of exports and imports improved in April, to +14.7% y/y and +16.8%, respectively. April Inflation picked up to +2.4% y/y (+2.1% in March) but was driven by food prices (vegetables) with non-food inflation at +1.8%. Overall, April indicators point to continued—if relatively more moderate—growth (EH forecasts +8% in 2013) and probably will not prompt further policy easing, at this stage.
US and Canada: Recent data and outlook
In the US, April retail sales increased by +0.1% mo/mo, helped by a +1% increase in auto sales, but there was a -4.7% fall in gasoline sales due to a sharp price decline. Stripping out autos and gasoline, sales increased by a healthy +0.6%. On a y/y basis, auto sales were up a steep +7.7%, masking weakness in all other retail sales, which were up only +2.8%. Notions that the Fed might taper its bond purchases later this year have driven up the 10-year Treasury yield 30bps to 1.95% in just 10 trading days. Although the federal debt ceiling may be hit technically by 19 May, recently-increased tax revenues and temporary measures will now help the Treasury avoid that ceiling, in practice, until at least September. In Canada, April employment increased by a modest 12,500 (+0.9% y/y), while unemployment fell to a still high 7.2%. Continued weakness in employment and exports may pressure the BOC to lower rates and weaken the overvalued CAD.
Germany: Strong March indicators
New orders received by the industrial sector continued to increase in March, up by a surprisingly robust +2.2% mo/mo, following a similar rate of expansion in February and a fall of -1.6% in January. In March, external demand (+2.7%) increased at a more rapid rate than domestic demand (+1.8%), providing some evidence of a cautious recovery in the eurozone (+4.2% after +1.2% in February). Moreover, industrial production increased by +1.4% in March after +0.8% in February, including higher output in the car industry (+7%), computers and electronics (+6.3%) and the ship and aircraft industry (+4.4%), while printing (-1.7%) and machinery (-0.6%) recorded lower figures. Construction output continued to contract, falling by -3.1% (-1.6% in February). Also disappointing in April was the Ifo Business Climate Index, which was down by -2.2% mo/mo after -0.7% in March.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Israel: Policy changes
This week, the central bank announced a cut in the key policy interest rate, by 25bps to 1.5% percent (effective 17 May), and a new policy directive as it intends to purchase FX to offset potential undue effects on the ILS of output and sales of natural gas from the Tamar offshore field. These measures reflect reduced inflationary pressures—growth in prices is below the middle of the official target range—and ILS effective appreciation, which amounts to 5.4% over the last three months as other countries cut rates and implemented quantitative easing. Meanwhile, the new finance minister tabled a draft austerity budget (including cuts in defence spending) that projects a fiscal deficit of -4.65% of GDP this year falling to -3% in 2014. Expect further anti-austerity protests but these are unlikely to deter policymakers.
Americas – Panama: Country update
Growth is likely to moderate in 2013 and 2014, to +7.5% and +6.8%, respectively, which may remove residual concerns of overheating (annual growth in the previous five years averaged +8.6%). Growth has been supported by expansion of the Panama Canal and other large infrastructure projects and is underpinned by generally sound policies, anchored by use of the USD. There is no independent monetary policy. Strong credit expansion is slowing, the fiscal deficit is moderate and the public debt/GDP ratio is on a declining trend, although still on the high side. The current account deficit is wide, but largely covered by FDI flows and the external balance is manageable. Presidential elections will be held in 2014, with leading candidates to succeed incumbent President Ricardo Martinelli already chosen.
Asia-Pacific – Indonesia: Q1 GDP growth and inflation
Q1 GDP growth eased slightly to +6% y/y from +6.1% in Q4 2012, but remained strong overall, reflecting an improved net export balance. Private consumption expanded by +5.2%, public consumption +0.4% and fixed investment +5.9%. Exports increased by +3.4% (+0.5% in Q4 2012) while imports contracted by -0.4% (+6.8%), so net exports contributed +1.5pps to Q1 growth. EH expects +6% growth in full-year 2012 (+6.2% in 2011). Headline inflation eased from 5.9% y/y in March to 5.6% in April, but remained above the authorities’ 3.5-5.5% target range for 2013. Inflation may increase further in the near term if the government finally pushes through a long-planned reduction in fuel subsidies. Accordingly, the central bank kept its key policy interest rate on hold at 5.75% this week.
Europe – Bulgaria: Election result
Sunday’s parliamentary elections left Bulgaria with the prospect of a hung parliament. The former ruling centre-right GERB party of ex-PM Borisov, which resigned in February amid protests over poor living standards, took 30.5% of the vote, followed by the centre-left BSP (26.6%), the ethnic-Turkish MRF (11.3%) and the far-right Ataka (7.3%). No other party passed the 4% threshold required to gain parliamentary seats. Given deep animosities between the GERB and the BSP and MRF there is no obvious coalition option with a clear majority in parliament. The next government is likely to be unstable and will probably not last a full term. It will also have difficulties in solving social problems that led to the resignation of the previous government. Even so, do not expect major policy shifts in the near future.
Worth knowing
Pakistan
Despite pre-election intimidation, violence and political assassinations, the 11 May polls received a high turnout and former PM Nawaz Sharif of the PML-N party will form the new government, representing the first handover between civilian administrations.
Other GDP
Hong Kong: growth in Q1 remained subdued, increasing by +2.8% y/y (virtually the same as Q4 2012) and +0.2% q/q. EH expects overall growth in 2013 to be a moderate 3-3.5% before picking up to +3.8% in 2014. Estonia: +1% y/y in Q1 (+3.7% in Q4 2012) and -1% q/q in Q1 (+0.9% in Q4). Latvia: +3.1% y/y in Q1 (+5.1% in Q4) and +1.2% q/q in Q1 (+1.3% in Q4).
Interest rates
Poland: key policy rate cut by 25bps to 3% last week. Serbia: key policy rate cut by 50bps to 11.25% this week. South Korea: key policy rate cut by 25bps to 2.5% last week. Vietnam: key policy rate cut by 100bps to 7% last week.
8 May 2013
In the Headlines
FIGURE OF THE WEEK: 7.5%>US APRIL UNEMPLOYMENT France: Economy on probation
One year after his electoral success, President François Hollande faces a major credibility challenge. In a recent poll, only 31% indicated confidence in his economic policies—an endorsement that has halved since the beginning of his mandate—and his rating is likely to deteriorate further following more weak data, including consumer confidence, industrial output and trade. Moreover, record high unemployment (12% in February), weakening corporate competitiveness (strong EUR and fiscal adjustments) and high public debt (95% of GDP in 2014) are making the deficit adjustments even more painful. As a result, European Commissioner Olli Rehn suggested that France may need an additional two years to reach its fiscal deficit target of -3% of GDP (by 2015), subject to further action in relation to structural reforms, including labour markets and social security provision. While the impact on growth of austerity measures should soften in the ST, the need for fiscal revenue generation and budget cuts remains significant, amounting to around EUR20-30 billion.
US: Labour market
Non-farm payrolls increased by 165,000 in April, markedly above expectations, data for the previous two months were revised sharply upward and unemployment fell to 7.5%. However, the Fed unexpectedly announced that it might increase its future asset purchases. This may reflect other labour market conditions. Indeed, a broader measure of unemployment (including marginally- attached workers) deteriorated to 13.9%, the workweek fell -0.6%, temporary employment increased, the participation rate remained at the lowest since 1979 and the median duration of unemployment was 17.5 weeks, well above the peak (12.3 weeks) of any previous recession. Meanwhile, the April ISM manufacturing index barely remained in expansionary territory, falling from 51.3 to 50.7, while non-manufacturing slipped from 54.4 to 53.1. March construction spending fell -1.7% mo/mo.
India: Interest rate cut
Last week, the Reserve Bank of India (RBI, central bank) again cut the key policy interest rate (repo) by 25bps. This was the third cut of 25bps so far this year. The RBI’s action reflects an easing in headline and core inflationary pressures against a background of weaker economic growth in 2012 and indications of that trend continuing into H1 2013. Wholesale price inflation fell to 5.96% y/y in March (6.84% in February) and is now within the RBI’s target 5-6% range for the first time in over three years. However, the RBI is likely to remain cautious in its monetary stance, particularly as the current account deficit remains large. Expect GDP growth to regain some momentum but not to return to annual rates of +9% before 2015 (around +7% in 2014).
Eurozone: New high debt/GDP ratio in 2012
In 2012, government deficit ratios in many countries decreased moderately but in some countries, including Greece and Spain, they increased, despite attempts to address the shortfalls. The overall government deficit/GDP ratio in the eurozone declined from -4.2% in 2011 to -3.7% in 2012. The highest deficits last year were recorded in Spain (-10.6%), Greece (-10%), Ireland (-7.6%), Portugal (-6.4%) and Cyprus (-6.3%), while France recorded -4.8%. Germany was the only country with a surplus (+0.2%). The consolidated gross debt/GDP ratio for the eurozone increased from 87.3% in 2011 to a new high of 90.6% at end- 2012, reflecting increasing debt levels—EUR 8,225.8 billion in 2011 to EUR 8,601 billion in 2012—and weak economic growth. At a disaggregated level, the highest debt ratios in 2012 were registered in Greece (156.9%), Italy (127%), Portugal (123.6%) and Ireland (117.6%), while France recorded 90.2% and Germany 81.9%.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Namibia: Update
In government, the previously Marxist independence movement SWAPO has promoted national reconciliation, democracy, good governance and a mixed economy. However, poverty remains pervasive (despite middle-income status), unemployment is high and economic diversification away from diamond mining is limited. Twin deficits are now recorded in the fiscal and current accounts but some relief is gained through a close association with South Africa and the regional customs and monetary unions. However, the NAD is pegged to the ZAR and inflationary pressures (consumer prices were up 6.2% y/y at end-2012) are likely to continue to be imported from that source. EH expects GDP growth of just over +4% in 2013 and 2014, compared with an annual average +4.5% in 2000-12.
Americas – Chile: Growth slowing
The March monthly economic activity indicator (GDP proxy) was up +3.1% y/y—lower than expected—and unchanged mo/mo. Nonetheless, in Q1 the index increased by a still relatively robust +4.4% y/y. With growth easing from the fast pace of 2012, April inflation is likely to be still below the bottom end of the 2-4% target and, with a Q1 fiscal surplus, the central bank is likely to leave interest rates unchanged as overheating concerns recede. EH expects GDP growth of 4-4.5% in 2013. Meanwhile, Laurence Goldborne, seen as the strongest potential candidate for the ruling centre-right coalition, withdrew from November’s presidential elections. The coalition faces an uphill struggle against former president Michelle Bachelet, the most likely candidate of the centre-left Concertacion.
Asia-Pacific – Malaysia: Election result
In the general elections on 5 May, the ruling Barisan Nasional (BN, National Front) coalition led by PM Najib Razak won, but with a reduced majority. The BN won 133 out of 222 seats in the House of Representatives (down from 140 in 2008), with the Pakatan Rakyat (PR, People’s Alliance) 89 (82). Moreover, for the first time, the BN lost the popular vote (5.22 million to the PR’s 5.49 million). The election campaign featured widespread dissatisfaction over the country’s power-sharing model, with indications that voting patterns are now more ethnically based. Market reaction to the election result was generally positive on the assumption that continuity of policies will prevail but, with Najib’s position now weaker, some uncertainties in relation to the reform agenda may resurface.
Europe – Czech Republic: Outlook
Revised data show that seasonally-adjusted real GDP declined by -0.2% q/q and -1.7% y/y in Q4 2012, marking the fourth consecutive quarter of contraction and taking full-year GDP down by -1.2%. The main reason for the unfavourable performance in 2012 was decreasing domestic demand, especially private consumption (-3.5%) and fixed investment (-1.6%). External trade, although moderating, was the only positive influence on growth as exports increased by +4.1% in 2012, outpacing import expansion of +2.1%. Early indicators suggest that the weakness in the economy will continue in H1 2013 but EH expects growth to pick up gradually in H2 as the global economy gathers some momentum. Full-year real GDP is forecast to grow marginally, at +0.2% in 2013, before picking up to around +2% in 2014.
Worth knowing
China
Export growth was stronger than expected in April (+14.7% y/y). Imports also increased strongly (+16.8%) but the trade balance returned to surplus after a deficit in March.
Pakistan
General elections (11 May) have been preceded by some violence and political assassinations, perhaps orchestrated by militant Islamists and the Taliban. Expect former PM Nawaz Sharif and his PML-N party to do well but stability and security will remain fragile whatever the electoral outcome.
Libya
The General National Congress (parliamentary body) voted in favour of the Political Isolation Law, which will bar from office any individual with connections to the former regime. Strict adherence to the law will result in the removal from office of many civil servants and other officials at a time when experience is required to negotiate a difficult political transition.
2 May 2013
In the Headlines
FIGURE OF THE WEEK: +2.5%>US Q/Q ANNUALISED Q1 GDP GROWTH World Economy: Still a bumpy road
World trade decreased further in February (-0.7% mo/mo). Total exports decreased for most regions except the US (+0.3% mo/mo) and Africa and the Middle East (+1.2% mo/mo). A significant drop was posted by Japan (-2.4% mo/mo) and Central and Eastern Europe (-1.8% mo/mo). If global trade remains at the same level in March, growth in world trade in Q1 2013 will reach +0.5% q/q (+0.5% for advanced economies and +0.4% for emerging economies). EH expects global trade to post moderate growth in 2013 (+3.6% after +2.1% in 2012). Global industrial momentum recovered slightly in February (+0.5% mo/mo) from flat in January, led by the US (+1.1% mo/mo) in the advanced economies and by Asia and Africa/Middle East in the emerging economies. If world industrial production remains at the same level in March, Q1 2013 production will increase by +0.8% q/q (+0.7% q/q in advanced economies and +1.1% q/q in emerging economies).
US: Latest economic indicators
Real GDP growth in Q1 was weaker than expected at +2.5% q/q annualised. Consumption was positive but growth in final sales (after change in inventories) was weak at +1.5%. Investment contributed positively but net exports and government spending both acted as a drag on growth. Real disposable personal income fell -5.3% q/q, largely reflecting a correction from the rapid increase in Q4 2012 (+6.2%) to avoid tax measures. Spending cuts, taxes, budget uncertainty and anaemic employment reports suggest the weakness will continue. April consumer confidence recovered from a disappointing March but remains markedly below average. Housing data continue to be positive, with prices in the Case-Shiller Index increasing for the 13th consecutive month in February, at +9.4% y/y. However, half of the 20 cities in the sample show double digit annual growth, a rate which may not be sustainable.
Spain: Reduction in the pace of austerity
The European Commission endorsed—a formal approval is expected by end-May—the plan of the Spanish cabinet to delay the reduction in the country’s fiscal deficit to -3% of GDP (from the current -10.6%) by two years, to 2016, given the weak economic environment. This is a positive development as it shows that the European fiscal framework is becoming more flexible (also in Portugal and France) to limit the potential adverse consequences of corrective policies. Indeed, the severe recession registered in 2012 (-1.4%), together with the increase in interest expenditures, triggered a significant slippage in the 2012 fiscal target of -6.3%, which is now this year’s target. Even so, this is likely to prove challenging, given the second consecutive year of recession expected in 2013 (EH forecasts GDP will contract by -1.5%) and the banking sector bailout (EUR40 billion, equivalent to 4% of GDP) that weighs on interest expenditures.
Taiwan: Lower than expected Q1 growth
Q1 growth slowed by more than expected, according to the official advance estimate. Real GDP increased by +1.5% y/y, after +3.7% in Q4 2012, although this was still above the full year 2012 pace of +1.2%, and contracted by -0.8% q/q (+1.8% in Q4 2012). The main factor in the slowdown was a negative net export contribution. Export growth held up (+4.8% y/y) but there was a very strong surge in imports (+6.9%), partly the result of increasing imports of capital goods. Personal consumption growth was also markedly lower but a positive feature was fixed investment, which continued the upturn from Q4 2012 (+10.6% y/y). The economy is still likely to strengthen through the year, but full year growth of GDP may now be closer to +3% than +3.5%.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Rwanda: Eurobond
Last week’s issue of a 10-year USD400 million debut sovereign Eurobond followed international bonds from Zambia, Nigeria, Tanzania and Angola. Orders received are put at around USD3 billion—7.5 times oversubscribed—suggesting continued appetite for African debt at a time when high-yield investment opportunities are limited elsewhere. For Rwanda, the financial injection will be used partly to retire ST financing for ongoing projects, including a hydropower plant. Despite Rwanda’s recent record in terms of stability, GDP growth (annual average +7.8% in 2000-12) and improved business-friendly environment, the country remains aid-dependent and there are regional uncertainties. Even so, EH expects GDP growth of +6% in 2013 and +7% in 2014, with associated business/trading prospects.
Americas – Colombia: Unchanged interest rates
The central bank left the policy interest rate unchanged at 3.25% at its policy meeting last week. Previously, the rate had been lowered steadily from a recent cycle peak of 5.25% in February 2012 and was cut by 50bps in March. Inflation edged up slightly in March but, at 1.9% y/y, was comfortably within target. Expectations suggest that it will remain within bounds and so is not posing a significant threat. Expected Q1 growth of +2.8% is also not strong but the central bank believes that previous rate cuts have now passed through into the economy and, along with fiscal measures, these should encourage stronger growth through the year, justifying a pause. EH expects GDP to increase by +3.6% in 2013 with a stronger H2 than H1.
Asia-Pacific – South Korea: Solid Q1 GDP growth
According to advance estimates, Q1 real GDP growth accelerated to +0.9% q/q from +0.3% in Q4 2012. The rebound was largely driven by external demand, although this appears to be partly a correction to the decline in the previous quarter. Exports expanded by +3.2% q/q in Q1 (-1.1% in Q4), outpacing import growth of +2.5% (-0.8% in Q4), so that net exports made a large contribution to Q1 growth. Government spending (+1.3% q/q in Q1 after -0.6% in Q4) and fixed investment (+2.9% in Q1 after -1.6% in Q4) also made a turnaround in q/q terms, while private consumption disappointed, falling by -0.3% q/q after +0.8% in Q4. In y/y terms, Q1 GDP growth was stable at +1.5%. All components grew solidly except for investment, which declined by -4.5%. EH expects full year 2013 growth of around +2.5%.
Europe – Hungary: Monetary & fiscal policy
The Monetary Council (MC) last week lowered the key policy interest rate by 25bps to 4.75%. This was the ninth consecutive rate cut since August 2012, resulting in a cumulative reduction of 225bps. Inflation eased recently, from 6.6% y/y in September 2012 to 2.2% in March 2013, to be at the lower end of the 3%±1pps target range. The MC expects the disinflationary impact of ongoing weak domestic demand to continue and may consider further interest rate cuts to support the still declining economy. However, exchange rate volatility―as observed in March when the HUF/EUR rate fell by 5% in a few weeks―poses upside risks to inflation. On the fiscal front, concerns were raised by the budget deficit in Q1 as it amounted to 56% of the full-year 2013 target.
Worth knowing
Other GDP
UK: Q1 GDP increased by +0.3% q/q and +0.6% y/y, led by the services sector. Lithuania: Q1 real GDP growth decelerated to +3.4% y/y from +4.1% in Q4 2012, although it picked up to +1.3% q/q from +0.7% in Q4. All major sectors contributed to growth in Q1, except construction. Ghana: Latest revisions upgrade GDP growth in 2011, to +15% (previously +14.4%), and 2012, to +7.9% (+7.1%). Mauritius: Q4 2012 +0.2% q/q and +3.1% y/y (+1.2% and +3.6% in Q3, respectively). Overall, GDP increased by +3.3% in 2012 (+3.5% in 2011).
European Central Bank
The ECB lowered its key benchmark rate by 25bps to 0.5% and the rate on the marginal lending facility by 50bps to 1%, while keeping the rate on the deposit facility unchanged at 0%.
24 April 2013
In the Headlines
FIGURE OF THE WEEK: USD100.3>BARREL PRICE OF BRENT OIL (-15.5% Y/Y) Eurozone: Surprising fall in German business confidence
Business confidence remained stable in April, with the PMI Composite Index at 46.5, a level still suggesting contraction in the manufacturing and services sectors, evident since August 2011 and February 2012, respectively. The German manufacturing PMI came in below expectations at 49.7, ending a four-month period of expansion, and confidence in the services sector also disappointed, falling below 50 for the first time in five months (49.2, against consensus expectations of 51). In contrast, in France, the rates of decline in both the services and manufacturing sectors continued to ease. Indeed, both the manufacturing and the services PMIs came in above expectations, at 44.4 and 44.1, respectively, although they remain at very weak levels. Overall, the surveys continue to suggest falling output across the zone (albeit at a slower pace), partly reflecting weak domestic and export orders. EH revised downwards its eurozone GDP growth forecast for 2013, by -0.2pps to -0.3%, as the current expectation is that stabilisation in economic activity will not be apparent until towards the end of the year.
US: Strong housing market
The housing market remained the brightest spot in the economy in March, with starts increasing by +46.7% y/y and permits by +17.3%. Sales of existing single-family homes were up +9.1% y/y and new home sales were up a strong +18.5%. Prices for existing homes were up by a robust +12.1% y/y, while growth in prices in the much smaller new-home market slipped to +3% from +18.2% in December 2012. Supply for both existing and new houses is very tight, at 4.7 and 4.4 months, respectively. Such a strong performance in the housing sector is a current positive, although it raises concerns that the market may be artificially inflated by professional investment groups and others that are taking advantage of the Fed’s easy money policy.
Brazil: Interest rates increased
With March y/y inflation moving beyond the upper bound of the target range (6.6% against 4.5% +/-2%) and expectations for the end of 2013 still at the upper end, the central bank last week raised the policy interest rate by 25bps, to 7.25%. This shifts the focus firmly away from growth, although GDP is unlikely to increase by more than +3% this year and indicators in the early months have not been strong. A short tightening cycle now seems likely, although rates should remain historically low. Meanwhile, the government is seeking to create more fiscal leeway by committing itself to the same overall primary fiscal surplus target this year (+3.1% of GDP) but without obligation of the central government (target +2.2%) to offset any shortfall in the non- central government surplus.
Tunisia: IMF support
On 19 April, the Fund reached a staff-level agreement with the country for a Stand-By Agreement (SBA) of USD1.75 billion. If approved by the IMF board, which seems likely, the facility will be in place for a period of 24 months, with disbursements made over the same period. An IMF facility will provide timely support during this stage of the political transition and it acts as a bellwether for the donor and investor communities at large. Even so, the challenges remain significant, with stability and security still not assured. As recently as February, a political assassination introduced further uncertainty and led to a reconstituted moderate Islamist-led government. Moreover, political and social uncertainties—the constitution is being redrafted and elections are expected in October-November—come at a time when the economy remains affected by weak external markets (Europe accounts for over 70% of exports and over 50% of imports and is a major source of tourism). EH forecasts GDP growth of +3% in 2013 and +4% in 2014, still below the recent long-term annual average of +4.4% (2000-10).
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Nigeria: Security
Intense fighting in the north between the armed forces and militant Islamists—including use of rocket-propelled grenades—with associated heavy loss of civilian life suggest an escalation in the conflict with rebel groups, including Boko Haram, which seeks an Islamic state in northern Nigeria. The timing of this event, immediately prior to the inauguration of a committee to discuss an amnesty deal for Boko Haram, raises questions over the federal government’s ability to control the northern part of the country and, perhaps, parts of the military. In addition, tensions persist in the oil-rich Niger delta region where substantial crude oil output continues to be lost to criminal activity. Even so, annual GDP growth has not fallen below +6% since 2005 and EH forecasts +7% in 2013 and +6.5% in 2014.
Americas – Paraguay: Election result
Colorado Party (CP) candidate Horacio Cartes comfortably won the presidential elections held last Sunday, with 45.8% of the vote against 36.9% for his nearest rival, Efrain Alegre of the ruling Authentic Liberal Party (PLRA). Cartes’ election is likely to herald Paraguay’s return to Mercosur and other regional and international bodies from which it was suspended following the ousting of former president Fernando Lugo. Cartes, a political newcomer, is likely to be pro-business and relatively orthodox in terms of economic policies, but how reformist remains to be seen. Preliminary results suggest that the CP (19 of 45 seats) will not have a majority in the Senate, although it will in the lower house. The president-elect should benefit from a strong economic rebound this year, after GDP contracted in 2012.
Asia-Pacific – Thailand: Monetary policy & update
The Monetary Policy Committee (MPC) left the key policy interest rate unchanged at 2.75% in April. Headline inflation fell to 2.7% y/y in March from 3.3% in February and core inflation eased to 1.2% in March from 1.6% a month earlier, comfortably within the monetary policy target range of 0.5-3.0%. The MPC expects inflation to remain contained in the near future and the economy to moderate to a normal trend, following the post-flood recovery that boosted real GDP growth to +6.4% in 2012. However, the weak state of the global economy poses some downside risk to growth. In February, manufacturing output fell by -1.2% y/y (+10.1% in January) and nominal exports declined by -4.6% y/y (+15.6% in January). Expect some monetary easing if growth decelerates more than projected.
Europe – Slovak Republic: Outlook
Real GDP increased by +2% in 2012, making the Slovak Republic the second-fastest growth economy in the eurozone (after Estonia). Domestic demand was weak, however, and net exports were the sole growth driver as exports were up +8.6% while imports increased by just +2.8%. The current account posted the first annual surplus (2.3% of GDP) since 1995. New capacity in the automotive sector supported industrial production and exports in 2012, mitigating the impact of weakening eurozone demand, although this effect will wane because of the growth slowdown (+0.7% y/y in Q4 2012). Moreover, in January-February 2013, turnover contracted in major sectors, including industry (-2% y/y), construction (-5.1%) and retail trade (-1.6%). Expect GDP growth to ease to around +1.2% in 2013.
Worth knowing
China
The April flash manufacturing PMI (HSBC/Markit) was 50.5, still in positive territory, but down from 51.6 in March.
European Central Bank
The Q1 2013 Lending Survey suggests that credit standards for NFC loans improved slightly (and are expected to remain stable in Q2) because of improving financing conditions for eurozone banks and lower risk perceptions related to economic activity and industry specific risks. Banks reported unchanged net declines in the demand for loans to NFC reflecting the negative impact of fixed investment on firms’ financing needs, but expectations point to a less negative decline in demand for loans to NFC.
Kuwait
The surplus in the external merchandise trade account increased by +20.7% in 2012, to a record USD92.6 billion, equivalent to around 54% of GDP, another record. Exports of goods totalled USD118.5 billion in 2012 (oil accounted for 95% of the total).
17 April 2013
In the Headlines
FIGURE OF THE WEEK: +7.7%>CHINA’S Y/Y GDP GROWTH IN Q1 World Economy: IMF’s latest forecasts
In its latest World Economic Outlook, the IMF revised downward its forecast of 2013 global growth, to +3.3% (-0.2pps from January 2013) reflecting weaker expected performance by both advanced economies (-0.1pps to +1.2%) and emerging economies (-0.2pps to +5.3%). While global economic conditions are still improving, the lower 2013 projections reflect persistent divergence within the advanced economies, particularly the slow, if steady, recovery in the US (+1.9%) and the prolonged recession in the eurozone (-0.3%) set against the resilience of emerging economies, with emerging Asia +7.1% again leading the way. The IMF expects global growth to recover progressively in 2014 (+4%) helped by stronger US growth (+3%) and modest recovery in the eurozone (+1.1%). The IMF scenario remains slightly more optimistic than that of EH on a stronger expected recovery in the US, Japan and emerging economies.
China: GDP growth below expectations
Q1 GDP growth was +7.7% y/y according to official data released last week. This was slightly below expectations and less than in Q4 2012 (+7.9%). Other data released for March were not encouraging as industrial output (+8.9% y/y) was slower than in January-February, as was fixed asset investment and the increase in electricity production was also down on that period. Retail sales, however, were slightly stronger at 12.6% (12.3% in January-February) and the manufacturing PMI was also up on the previous month and in positive territory. Real estate investment growth in March was down on January-February, but still stronger than in 2012. Credit expansion was very strong in Q1 but did not appear to pass through to GDP growth, which raises the question of whether such stimulus is as effective as in the past. The data are unlikely to prompt a big policy response and emphasise the shift to more-moderate growth in China. EH retains a GDP forecast of +8% in 2013, although downside risks have increased.
US: Relatively weak data, uncertain policy response
Economic data turned moderately softer in the last week, with retail sales falling -0.4% mo/mo in March, although after stripping out autos and gasoline from the data, sales fell by only -0.1% mo/mo. The four-week moving average of weekly jobless claims increased to its highest level in almost two months, confirming the weakness evident in the March employment report. Consumer sentiment in the first half of April plunged to a nine-month low driven by expectations of higher unemployment and lower after-tax income. Perhaps it is data like this that led Fed Chairman Ben Bernanke to repeat his view that monetary conditions will remain accommodative for some time. However, the official minutes released from the Fed’s March meeting show that some members think that quantitative easing should stop by the end of this year, if not sooner.
European Union: Latest trade data
The merchandise trade balance for the eurozone as a whole continued to improve in February, registering a surplus of EUR10.4 billion, markedly above expectations of EUR5bn. For the EU27, the trade surplus was EUR1.8 billion. However, the improvement in the eurozone resulted mainly from a generalised fall in imports from the rest of the world (-7% to EUR138.3 billion) as exports remained broadly stable (-1% to EUR148.6 billion). EH expects this trend to continue through 2013 as the prolonged recession in the eurozone is likely to weigh on the strength of private consumption and therefore lead to further downward adjustments in imports, although improving cost competitiveness (notably in the Southern European countries) may allow some increase in exports intra- and extra-zone. Nevertheless, the strength of the EUR is likely to remain a headwind.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Jordan: GDP growth
Official data show that GDP growth was +2.2% y/y in Q4 2012 and +2.7% for full year 2012, compared with an annual average +5.8% in 2000-11. Nominal GDP was JOR22 billion (USD30.9 billion) in 2012, up +7.2% y/y. The rate of quarterly growth eased through the course of 2012 (+3.1% in Q1), reflecting global (weak external markets) and regional (trade disruptions and refugee inflows, both Syria-related) factors. Indeed, in Q4, GDP contracted by -4.4% q/q, so activity is also likely to be lacklustre in H1 2013. Meanwhile, the IMF remains supportive, last week releasing a USD384 million tranche from its SBA. EH expects GDP growth to remain below the long-run average, at +2.5% and +3.5% in 2013 and 2014, respectively, with a large degree of uncertainty reflecting vulnerability to external influences.
Americas – Venezuela: Election result
Hugo Chavez’ chosen successor, former vice-president Nicolas Maduro, duly won the presidential election last weekend, but by a much slimmer margin than expected—50.8% of the vote against 49% for his rival, opposition leader Henrique Capriles. The close outcome means that Capriles is refusing to accept Maduro’s win, calling for a recount, although the National Electoral Council has confirmed the result. It also makes Maduro’s position more difficult, as Chavez had beaten the same challenger last October by a 10pps margin. With a much weaker popular mandate, it remains to be seen if Maduro will move towards a more pragmatic stance to try and begin to address economic imbalances or continue in the same vein as his predecessor. Either way the political balance looks more fragile.
Asia-Pacific – Singapore: Q1 GDP & monetary policy
Advance estimates (based on data for two months) indicate that Q1 real GDP contracted by -0.6% y/y (+0.4% in Q4 2012) and -1.4% on a q/q annualised basis (+3.3% in Q4), reflecting the economy’s openness and associated vulnerability to external factors. The manufacturing sector contracted by -6.5% y/y and -11.3% q/q, mainly as a result of a sharp fall in output of biomedical products, a cluster known as a major source of growth volatility. Construction grew strongly at +7% y/y and +15.1% q/q, while expansion in services was modest, at +1.2% y/y and +1.8% q/q. EH expects full year 2013 GDP growth of +2%. Inflation picked up to 4.9% y/y in February from 3.6% in January but the Monetary Authority last week kept monetary policy unchanged, weighing between inflationary pressures and risks to growth.
Europe – Germany: Stronger indicators in February
Industrial new orders were up significantly in February, by 2.3% mo/mo, after falling by -1.6% in January. Both domestic (2.2%) and foreign orders (2.3%) were up, with the latter including higher demand from the eurozone (1.6%) as well as non-zone countries (2.7%). However, orders in the January-February period as a whole were -0.9% down over the corresponding period of 2012. Industrial production increased by 0.4% in February (-1.1% in the previous month), with a variable performance at sector level, with increases in machinery (4%) and the car industry (2.3%) but falls in chemicals (-2.1%), pharmacy (-2.1%) and clothing (-7.6%). Construction declined by -2.7% (from 3.1%). The Ifo Business Climate Index was down slightly in March, by -0.7%, after a strong increase in February (3%).
Worth knowing
Commodity prices
Gold: latest USD1,380/ounce, down -18.5% over the course of 2013, to date, and the lowest since January 2011. Oil: latest USD99.9/barrel, below USD100/b for the first time since July 2012 and down -11.2% over the course of 2013, to date. Commodities Overall: most recent all-commodity index is down -5.2% mo/mo and -8% y/y, to its lowest since June 2012.
Turkey
The central bank cut its key policy one-week repo rate by 50bps, to 5%, as well as both ends of its overnight interest rates, to 4% and 7%, respectively, in an apparent move to curb short-term capital inflows, which have picked up again recently.
Somalia and Zimbabwe
Somalia: The IMF resumed formal recognition of the country after 22 years of suspended relations (12 April). Zimbabwe: Following a referendum on a new constitution, the EU lifted many sanctions, although some remain on particular individuals.
10 April 2013
In the Headlines
FIGURE OF THE WEEK: 2.1%>CHINA’S MARCH CONSUMER PRICE INFLATION Portugal: Fiscal ruling
On 5 April, the Supreme Court rejected a series of austerity measures amounting to EUR1.35 billion, equivalent to 0.8% of GDP. The ruling comes as Portugal looks to receive the next EUR2 billion tranche of its EUR78 billion bail-out package and negotiate an extension of its loan maturity. The European Commission reaffirmed Lisbon’s commitment to the adjustment programme, yet the ruling makes full implementation even more challenging. The issue is likely to be discussed during the EcoFin meeting to be held this weekend and the Troika mission scheduled in April-May 2013 will be crucial as it assesses the evolution of the adjustment programme. The next steps must also be placed in the context of the return to the bond markets in mid-2013 envisaged in the programme, which will depend on market confidence, and without which there will be a financing shortfall. Portugal has around EUR15 billion in total refinancing needs by end-2013 of which only EUR6 billion is covered in the existing bailout programme. A key date is 23 September, when around EUR5.8 billion of Portuguese bonds will mature.
US & Canada: Labour markets and growth
The US employment report for March was a disappointment, as it shows that only 88,000 jobs were created, markedly below expectations of around 190,000. Average hourly earnings were flat for the third consecutive month in March and inflation- adjusted wages contracted by -0.5% over a twelve month period. Although unemployment continues to edge down, the fall is driven largely by people leaving the workforce, rather than job gains, and the result is the lowest labour force participation rate since 1979, a significant impediment to recovery. Nevertheless, a shrinking trade deficit and resilient consumption, perhaps boosted by the wealth effect from the rising stock market, could push Q1 GDP growth above +3% q/q annualised. Meanwhile, the Canadian labour market is even weaker, shedding 54,500 jobs in March and suggesting that Q1 GDP growth in that country will be less than +2% q/q annualised.
China: Inflation and foreign trade
Consumer price inflation eased to 2.1% y/y in March from 3.2% in February. However, the fall was largely the result of movements in food prices after the New Year and the non-food index was up 1.8% y/y (1.9% February). Although the low inflation rate does not pressure the authorities to tighten monetary policy it is also unlikely to encourage further monetary loosening at this point. March trade data showed a record monthly deficit, with imports up +14.1% y/y and exports up +10.0%. Export growth returned to pre-New Year levels, although it was led by emerging economies as exports to the EU and US both fell, while stronger domestic demand appears to have boosted import growth above expectations. Meanwhile, Fitch lowered its local currency debt rating, reflecting concerns over the growth of domestic credit, including the rise of shadow banking, although the rating is still A+.
Germany: Labour costs above the EU average
Employers in the private sector paid an average EUR31 per working hour in 2012, which was up +2.8% y/y. German labour costs in the private sector, as a result, ranked eighth in an international comparison among EU countries and exceeded the EU- average of EUR23.5 by 32%. France ranked fourth with EUR34.9 (49% higher than the EU-average), while the UK ranked twelfth with EUR21.9 (7% below average). Within the EU, Sweden recorded the highest level with EUR41.9 and Bulgaria the lowest (EUR3.7). Relative positions in the manufacturing sector were Sweden still at the top (EUR43.8 per working hour), followed by France (fourth, EUR36.3), Germany (fifth, EUR35.2) and UK (twelfth, EUR22.7), while the EU-average was EUR24.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Burkina Faso: Update
The landlocked economy is vulnerable to exogenous factors, including climate, commodity prices (particularly gold) and uncertain regional stability. However, a relatively effective electoral system and generally sound economic policies provide an enabling environment that resulted in annual average GDP growth of +4.4% in 2000-08. Foreign debt obligations are low but fiscal and current account deficits are large and require careful management. However, membership of a regional economic union (UEMOA), with a joint central Bank (BCEAO) and common currency (CFA franc), mitigates against transfer and convertibility risks. EH expects GDP growth of +5.5% and +6% in 2013 and 2014, respectively, subject to improved security to the north (particularly in Mali) and recovery in external markets.
Americas – Venezuela & Paraguay: Election update
Ahead of Sunday’s presidential election (14 April) in Venezuela, opinion polls give vice- president and Hugo Chavez’ chosen successor Nicolas Maduro a large lead over opposition candidate Henrique Capriles. Maduro looks set to win, but following Chavez will not be an easy task. Maduro lacks Chavez’ charisma and is unlikely to have the same control of the ruling party. He also seems intent on continuing unbalanced policies, but will find it hard to sustain recent spending increases and control inflation. Paraguay will hold presidential and legislative elections on 21 April. Political newcomer, but candidate of the former long-time ruling Colorado party, Horacio Cortes leads in opinion polls, followed by Efrain Alegre (Liberal Party). Both are to the right of ousted former president Fernando Lugo.
Asia-Pacific – Vietnam: Q1 real GDP growth
Q1 real GDP growth decelerated to +4.9% y/y from +5.4% in Q4 2012. Agriculture, forestry and fishing expanded by just +2.2% in Q1, while industry and construction matched the overall growth rate (+4.9%) as manufacturing has gained momentum (+5.4%). Services grew by a robust +5.7% y/y in Q1, with wholesale and retail trade increasing by +5%, transport and storage by +5.6% and financial services by +6.3%. Growth deceleration in Q1 is not unusual in Vietnam, so expect an improving performance over the course of 2013, resulting in full year growth of around +5.3%, compared with a government target of +5.5%. The trade balance posted a surplus for the third consecutive quarter in Q1, at USD481 million, as nominal export growth of +25.1% outpaced import growth of +20.4%.
Europe – Hungary: Recession likely to continue
Revised estimates from the Statistical Office confirm that real GDP decreased by -2.7% y/y and -0.9% q/q in Q4, marking the fourth consecutive quarter of decline. Full year GDP contracted by -1.7% in 2012. Domestic demand was particularly weak last year, with private consumption down by -2%, government consumption up by +0.5% and fixed investment down by -3.8%. Exports managed to grow by +2% while imports were flat (+0.1%), so that external demand limited the overall fall in GDP. Early indicators for 2013 suggest that the recession will continue for some time. In January-February, industrial production declined by -3.4%, retail sales by -2%, nominal exports in HUF by -1.1% and imports by -0.4%. Expect little growth of real GDP, if any, in full year 2013.
Worth knowing
Other GDP
Albania: +1.7% y/y in Q4 (+2.9% in Q3) and +0.1% q/q, +1.6% in full year 2012 (+2.8% in 2011). Jamaica: -0.9% y/y in Q4 2012 (-0.3% in Q3) and by -0.3% for full year 2012. Botswana: + 3.2% y/y in Q4 2012 and by +3.7% for full year 2012 (agriculture +6.4% and construction +14.4% but mining—including diamonds—contracted by -8.1%).
Lithuania
Last week, Fitch upgraded its LT sovereign rating by one notch to BBB+ (stable outlook), citing the continuing economic recovery and robust growth prospects, as well as progress on fiscal consolidation.
Kenya
Uhuru Kenyatta, who won presidential elections in March, was sworn into office this week. While the elections and immediate post-poll period were relatively peaceful (compared with 2007-08), there are uncertainties relating to Kenyatta’s indictment by the ICC in The Hague for crimes against humanity and how the international community deals with this fact.
3 April 2013
In the Headlines
FIGURE OF THE WEEK: 12%> EUROZONE UNEMPLOYMENT IN FEBRUARY France: Confirmation of fiscal slippage
Contrary to government expectations, the fiscal deficit and public debt were both above target at end-2012. The fiscal deficit is estimated at -4.8% of GDP (compared with -4.4% in the Stability Programme) reflecting higher public expenditure (56.6% of GDP, 55.8% projected) as a result of Dexia’s recapitalisation in December 2012 and lower public receipts (51.7% of GDP, 52.1% projected) because of weak economic activity. Consequently, public debt increased more than expected (+4.4pps of GDP to 90.2%, compared with an expected 89%). France now has to submit a new Stability Programme by mid-April against a background of European Commission forecasts of fiscal deficits of -3.7% and -3.9% of GDP in 2013 and 2014, respectively, but government forecasts of -3% and -2%, respectively. EH expects economic stagnation to prevail in 2013 (GDP +0.1%) with a moderate rebound in activity in 2014 (+0.9%). In this environment, EH expects the fiscal deficit to decrease to -3.6% of GDP in 2013 and -3.1% of GDP in 2014, while public debt is likely to increase to 95% of GDP in 2014.
US: Non-housing data are lacklustre
Recent economic data were welcomed by local financial markets but the impact may be temporary. Housing remains a bright spot in the economy as prices increased for the 12th consecutive month in January, by +8.1% y/y. Overall Q4 2012 GDP growth was revised upwards, but only to a weak +0.4% annualised as a sharp fall in government spending and an increase in inventories were barely outweighed by very weak consumption growth of +1.8% annualised. Disposable personal income and expenditures both recovered in February, yet their real y/y rates of +0.9% and +2% are still markedly below average. The March ISM index showed manufacturing activity still expanding (51.3) but it registered a sharp drop from the previous month (54.2).
Eurozone: Demand capped by record unemployment
Unemployment increased further in February, to a record high 12%, which is +1.1pps above the rate in the corresponding period in 2012. Significant divergence within the Eurozone group of countries continues to be evident, with rates of unemployment in Spain and France continuing to increase, to 26.3% (from 26.2%) and 10.8% (from 10.7%), respectively. In contrast, Italian data show a decrease for the first time in seven months, by -0.1pps to 11.6%, while German unemployment continues to reach new record low levels (5.4%). EH expects this divergence to continue for several months against a background of generally weak economic activity in the Eurozone in H1 2013, with private consumption remaining the main drag on overall growth (-0.1% q/q on average). However, a gradual stabilisation in economic activity is likely in H2, mainly driven by the export sector.
Turkey: Slowdown in 2012, improving outlook
According to data from the Turkish Statistical Institute, Q4 2012 real GDP growth decelerated further, to +1.4% y/y (+1.6% in Q3) and 0% q/q (+0.1% in Q3). Full-year 2012 growth was +2.2%, sharply down from an upwardly revised +8.8% in 2011. Tight monetary policy, aimed at facilitating a soft landing for the economy (after overheating in 2010-11) curtailed private consumption (-0.7%) and private investment (-4.5%) in 2012. Countervailing fiscal policy―reflected in robust growth in public consumption (+5.7%) and public investment (+8.9%)―and a surge in gold exports to Iran kept the economy growing in 2012. Exports increased by +17.2% in 2012 while imports were flat because of weak domestic demand. Early indicators and sentiment indices suggest an improving outlook for 2013. Expect full year growth to pick up to around +4%.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Algeria: Strong base
Hydrocarbons account for around 45% of GDP directly and 98% of export earnings, and state-owned enterprises dominate the energy sector. FX reserves have been built up and at USD180 billion provide import cover of over 35 months. Algeria also manages a Sovereign Wealth Fund. This strong base is enabling the government to increase expenditure on social development (increased subsidies, new job schemes and improved infrastructure), thereby appeasing some popular expectations, as well as boosting growth. Expect government spending (including large infrastructure projects) to continue to underpin growth. Long-term annual average growth is +3.9% and GDP is estimated to have expanded by +4% in 2012 and is forecast to decelerate to +3.5% in 2013, before recovering to +4.5% in 2014.
Americas – Argentina: Update
As required by the US appeals court, Argentina filed a payment plan for debt holders that did not participate in earlier debt exchanges. The plan offers the same terms as accepted by other holders in earlier exchanges. The appeals court ordered the so-called “hold-outs” to respond to the proposed plan by 22 April but, as it does not offer improved terms, it seems unlikely to be accepted by them. It remains to be seen how the US appeals court will rule finally but, in the meantime, uncertainty over whether Argentina will fall into technical default and how it might circumscribe a ruling against it, if at all, is set to persist. Elsewhere, the January monthly activity indicator showed a mild pick up, increasing +3.2% y/y (+1.1% in December 2012).
Asia-Pacific – India: Current account deficit
PMI data for March show that manufacturing output expanded at its weakest rate for 16 months, with the headline index declining to 52 from 54.2 in February, the new orders index weakening to 52.8 from 56.3 and new export orders declining to 50.4 from 53.2. Such data still suggests expansion, but at a much reduced rate. Meanwhile, the current-account deficit hit record highs in October-December 2012 (Q3 of FY2012/13) at -6.7% of GDP (-5.4% in the previous quarter), reflecting an increasing trade deficit (energy accounts for one-third of the import bill and the cost of imported oil is equivalent to 5.9% of GDP, 3.7% average in 1990-2010) and weak FDI inflows. Overall, the balance of payments improved in Q3 FY2012/13 but this was because of volatile equity and bond flows rather than FDI.
Europe – Serbia: Mired in recession
Revised estimates from the Statistical Office show that real GDP contracted by -2% y/y in Q4 2012, marking the fourth consecutive quarter of decline. Full year GDP contracted by -1.7% in 2012 (+1.6% in 2011). Domestic demand was particularly weak in 2012 as government consumption growth of +1.8% was insufficient to offset the declines in private consumption (-2%) and fixed investment (-3.4%). Exports increased by +4.5%, narrowly outpacing import growth of +4.2%. Even so, net exports contributed negatively to 2012 growth, given an unfavourable export/import ratio. In 2013, domestic demand is likely to remain subdued as a result of fiscal consolidation, while exports should be boosted as a Fiat car plant began output in mid-2012. Expect full year growth of around +1% in 2013.
Worth knowing
North and South Korea
Tensions have risen sharply on the Korean peninsula against a backdrop of a relatively new regime in the North and annual military exercises with the US in the south. It seems unlikely that either side wants a military clash, although the full motives of the North remain obscure, but in a fragile atmosphere all sides will need to tread very carefully.
Commodities
This year, benchmark all-commodity indices show prices falling consistently on a y/y basis, currently by -3.6%. Crude oil prices (Brent basis) are now around USD110.7/barrel (-11.8% y/y) and average USD112.6/b in the year to date (average for all 2012, USD111.7/b). Natural gas prices are +84% y/y and gold prices -5.6% y/y.
South Africa
The manufacturing PMI fell below 50 in March (49.3 from 53.6 in February) signalling contraction in activity.
28 March 2013
In the Headlines
FIGURE OF THE WEEK: EUR10BN>FINANCING PACKAGE FOR CYPRUS Eurozone Debt Crisis: Cyprus bail-out
After an extremely tense period, during which banks in Cyprus were closed, a bail-out package with the Troika was agreed last weekend. Crucially, Laiki Bank (the country’s second largest bank) will be split into a ‘bad’ and a ‘good’ bank. In the former, 40% of deposits above EUR100,000 will be converted to equity. The latter will be absorbed by Bank of Cyprus (BoC, the largest bank) in which deposits above EUR100,000 will also be subject to a debt swap (sufficient to reach a capital ratio of 9%, but probably at least 30%). The ECB will continue to provide liquidity support. Temporary controls will be placed on bank withdrawals. Another requirement is a reduction in the size of the banking sector to the EU average. Fiscal measures include a higher corporate tax rate and a privatisation programme. The Eurozone and IMF will provide up to EUR10 billion to cover the government’s financing needs while maintaining debt sustainability. Following the agreement, the recession is likely to be deeper than expected and there is considerable uncertainty over its duration, particularly in the context of the wide modification of the economic structure as the banking sector contracts and public debt increases. Full implementation of the adjustment programme will also be challenging and will test government resolve, with debt sustainability finely balanced for some time. Banks re-open today, providing the first major test as the authorities try to shore up depositor confidence.
Eurozone: Difficult H1 2013
In March, business confidence (composite PMI) reached a four-month low (-1.7pps to 46.5, compared with a consensus expectation of 48.2) reflecting deteriorating prospects in both the manufacturing and services sectors. In Germany, the fall was more pronounced in services (-3.1pps to 51.6), while the manufacturing index fell below the ‘no growth’ threshold (-0.9pps to 49.8). The outlook is more worrying in France, with confidence in the services sector reaching a four-year low (41.9) and the index for manufacturing output remaining flat at a very low level (42.8). Overall, despite some recent improvement, current levels of business confidence suggest economic activity will remain weak in the coming months. Against this background and continuing political risk, EH expects a difficult H1 but with gradual signs of stabilisation emerging from early H2 2013.
Germany: Fewer start-ups
In 2012, the number of larger business start-ups—classified by the Federal Statistical Office as having a marked significance for the overall economy—totalled 134,200, down by -7% y/y. The number of new small business start-ups was also down in 2012, by a sharp -17% y/y, at 243,400. In the same period, the rate of establishment of new part-time businesses was stable, with around 241,000 start-ups. In terms of business de-registration, there were mixed results in 2012, with larger business closures up +2.4% y/y at 122,100, while closures of small businesses declined by -3.3% y/y, at 292,100. The number of de-registrations of part-time farms increased by +3.5% y/y at 157,600 in 2012.
BRICS: Summit
This week, leaders from Brazil, Russia, India, China and South Africa met in Durban and a key topic for debate at the BRICS summit was the establishment of a development bank, principally as a conduit for financing infrastructure projects. Details have still to be worked out, not least where the bank will be located, its structure and how (and to what extent) it will be capitalised. The countries also agreed to establish a pool of foreign exchange reserves (potentially USD100bn) to be used in support of a member in financial difficulties. Again, details are limited. Overall, the rather loose grouping is now showing some signs of deepening through mutual support and formal organisation. Expect further progress, but at a measured pace.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Oman: Update
The country is strategically important as it is at the entrance to the Gulf and the international oil and gas waterborne trade routes (hydrocarbons provide 80% of Oman’s export revenues). Despite some succession uncertainties, policy continuity has resulted from Sultan Qaboos’ lengthy leadership. The business environment is generally sound and above average for the region. Fiscal and current accounts register strong surpluses, 11.4% and 7.7% of GDP in 2012, respectively, and FX reserves provide over five months of import cover. Foreign debt ratios are very low and repayment obligations are comfortable. Government spending, partly to limit potential contagion from the Arab Spring, is a key driver and overall GDP growth is forecast at +5% for 2013 and +4% in 2014.
Americas – Colombia: Monetary policy and growth
The central bank lowered the policy interest rate by 50bps last week, to 3.25% from 3.75%. The move reflects the slower pace of economic growth in recent quarters combined with inflation (1.8% y/y in February) below the mid-point of the 2-4% target range and below potential growth concerns, replacing fears of overheating. Although GDP growth has slowed, Q4 2012 data released last week showed a stronger performance than expected, as GDP increased by +3.1% y/y (+2.7% y/y in Q3) and +1.8% q/q (contraction in Q3). Q4 data took full year 2012 GDP growth to +4% (+6.6% in 2011). Expect growth of +3.8% in 2013 and +4% in 2014. If growth slackens there is scope to cut rates further, although credit expansion remains relatively strong, if more subdued than from mid-2011 to mid-2012.
Asia-Pacific – Vietnam: Monetary policy
Headline inflation fell by 0.2% mo/mo in March and eased to 6.6% y/y from an average 7% in January-February and an average 9.1% in 2012. The improvement in March―which was mainly driven by declining food prices and transport costs―gave the central bank confidence to lower its key policy interest rate (the refinancing rate) by 100bps, to 8% on 26 March. This was the first rate cut in 2013 following a cumulative 600bps reduction in 2012. Policymakers are eager to support the economy, which grew by +5% in 2012 (which was a 13-year low), but the scope for further interest rate cuts in 2013 is probably limited, perhaps to another 100bps, as inflationary pressures remain evident. Shocks to food prices and exchange rate volatility are key upside risks to inflation.
Europe – Croatia: 2012 fourth year without growth
Revised estimates from the Bureau of Statistics confirm that real GDP contracted by -2.3% y/y in Q4, marking the fifth consecutive quarter of decline. Full year 2012 GDP contracted by -2% and, after also declining in 2009-10 and stagnating in 2011, is now -11% down from the peak in 2008. Domestic demand was particularly weak in 2012, with private consumption decreasing by -3%, government consumption by -1.2% and fixed investment by -4.6%. Weak domestic demand also affected imports, which declined by -2.1% in 2012. Exports managed to grow, but only marginally at +0.4%, so that external demand mitigated the overall fall in GDP. EU economic weakness, tight monetary policy and fiscal austerity will continue to dent growth prospects. Expect 2013 to be another year without growth (stagnation at best).
Worth knowing
Other GDP
UK: -0.3% q/q and +0.2% y/y in Q4 2012 (third estimate) and +0.3% in 2012 overall. France: -0.3% q/q in Q4 2012 (second estimate). Mozambique: +8.3% y/y in Q4 2012 and +7.4% in 2012 overall.
Central African Republic
Rebels from the Séléka coalition (three distinct groups that unified in opposition to the regime) mounted a coup against the government of François Bozizé and took control of the capital, Bangui, on 24 March. Bozizé fled the country and a rebel leader, Michel Djotodia, declared himself president and suspended parliament and the constitution. While elections have been promised, the stability of the Séléka coalition is yet to be tested and national security remains tenuous.
Lebanon
The government of PM Najib Mikati resigned (22 March) but Mikati is willing to head a new government of national salvation.
20 March 2013
In the Headlines
FIGURE OF THE WEEK: EUR10bn>EUROZONE FINANCIAL AID FOR CYPRUS Eurozone Debt Crisis: Cyprus bail-out
Negotiations with the Troika on a bail-out package—underway since mid-2012—resulted in an agreement on 16 March that unexpectedly included the approval of only EUR10 billion of financial aid from the Eurozone (instead of the requested EUR17 billion) plus a one-off levy on bank deposits, hitting small savers as well as those above the EUR100,000 insured maximum, including large foreign depositors who had taken advantage of Cyprus’ position as an offshore banking centre. The levy was required to raise EUR5.8 billion from this source as part of the total financing package. However, Cyprus’ parliament overwhelmingly rejected the whole bailout package yesterday (with not a vote in favour). Political leaders are trying to find an alternative plan and the government is also seeking help from Russia. The situation is fluid and the outcome highly uncertain, but the room for sustainable adjustment has dwindled and risks have increased. Even if the worst case is avoided—collapse of the two largest banks, bank runs, sovereign default and possible EZ exit—the Cypriot economy will be affected adversely, including contraction in the banking sector (partly as a result of withdrawal of some overseas deposits) and an increase in public debt, along with increased risk of an eventual debt write-down. Also, the economic adjustment programme will be painful, deepening the recession that brought GDP contraction of -2.4% in 2012, with at least another -3% likely in 2013. Moreover, the characteristics of the Cyprus bail-out, however small in terms of Eurozone GDP (less than 0.2%), have set an unfortunate precedent in relation to how to provide necessary financing needs, spurring concerns throughout the monetary union.
Eurozone: Towards a banking union
Provisional agreement was reached on laws allowing the ECB to create a single supervisory body (effective in mid-2014) for European banks with total assets above EUR30 billion (or 20% of GDP). This represents a significant step forward towards a banking union. The new institution is expected to aid stability across the zone banking system and protect the area from external shocks. In particular, it is hoped to break the vicious circle between sovereigns and banks (through a direct recapitalisation of banks by the ESM, rather than through the government) and to improve confidence in European banks. Next steps consist of finding an agreement on a common deposit insurance scheme (expected by June 2013) and on a common resolution scheme (through a Fund able to save banks from bankruptcies).
Germany: Mixed data
Latest indicators continue to provide a mixed overall picture. On the positive side, the Ifo Business Climate Index continued its improvement, for the fourth consecutive month, increasing by +3% mo/mo in February. Further, the Consumer Climate Index improved slightly in February, still driven by the robust labour market and a brightened economic outlook. Also positively, exports of goods were up by +3.1% y/y in January, mainly a result of higher demand from countries outside the EZ. On a disappointing note, industrial orders declined surprisingly in January, by -1.9% mo/mo, after improving by +1.1% in December 2012 and industrial production fell slightly, by -0.2%, following +1% in the previous month.
India: Interest rate cut
On 19 March, the central bank cut its key policy interest rate by 25bps, to 7.5%, the second cut this year (25bps in January) as officials try to manage a delicate balance between growth (weakening GDP expansion in 2012) and inflation (wholesale prices up 6.84% y/y in February). With inflation remaining above the target range of 4-6% and concerns relating to large current account deficits, the scope for further monetary policy loosening is limited, although signs of moderation in the wholesale price index may allow another small cut in interest rates in H2. Expect GDP growth of +6.5% in 2013 and +7% in 2014.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Israel: Coalition
A six-week post-election deadline was close to expiry when Binyamin Netanyahu (Likud) managed to complete a coalition of parties and form a new government. Likud is joined by Yesh Atid (secular nationalist), Jewish Home (right of centre nationalist) and Hatnua (centrist) and together they hold 68 of 120 parliamentary seats. The political system usually operates with a coalition government and alliances tend to be fluid, so expect a workable government. In terms of policies, a pro-market agenda will continue and there will now be pressure to pass legislation to require most ultra-orthodox citizens to perform military service and, significantly, to seek renewed negotiations with the Palestinians. However, despite this week’s visit by US President Obama, do not expect a peace deal to be agreed in the ST.
Americas – Paraguay: Presidential elections
The latest opinion polls give Horacio Cartes just over 37% support in the presidential elections to be held on 21 April. Cartes, a businessman, is the candidate of the conservative opposition Colorado Party. Efrain Alegre of the centre-left ruling Authentic Radical Liberal Party (PLRA) is in second place, with just over 30%. No other candidate has more than 10% and 13% of voters are undecided, so Cartes is favourite, although his lead is by no means overwhelming. These elections are important as they will choose the successor to former- president Fernando Lugo (who was removed from office early and controversially after impeachment) and should help normalise international relations. If Cartes wins, it will restore the Colorado Party to office, which it held for an unbroken 61 years prior to 2008.
Asia-Pacific – Pakistan: A political first
On 16 March, the government resigned and parliament was dissolved ahead of elections. This marked the first time that a civilian government managed to complete a full five-year term and it provides scope for a peaceful handover of power. Despite periodic calls, including from opposition politicians, the military has kept in the background. However, all this does not necessarily indicate a deepening in democracy. The ruling PPP, led by President Asif Ali Zadari, is not assured of being re-elected, particularly against a background of power shortages, inadequate infrastructure and economic imbalances, as well as periodic bombings and generally weak security. Indeed, to date, a caretaker government to oversee the period to elections has yet to be formed, so expect heightened tensions.
Europe – Ukraine: Back in recession
Revised estimates from the State Statistics Service confirm that the economy returned to recession in Q4, with real GDP contracting by -2.5% y/y, after -1.3% in Q3. Full year 2012 growth was only +0.2%, driven by an increase in private consumption of +11.7%. Government consumption increased by +2.2%. Fixed investment expanded by just +0.9% and a sharp decline in gross capital formation, by -12.9%, indicates a large drop in inventories. Exports fell sharply in 2012, by -7.7%, while imports maintained modest growth of +1.9%. Early indicators for 2013 show a continued decline in industrial production in January-February, by -4.8% y/y. Expect real GDP to continue to contract in H1 2013, before recovering gradually in H2 and registering around +1.5% for the year as a whole.
Worth knowing
Other GDP
Sri Lanka: +6.3% y/y in Q4 2012 and +6.3% for the year as a whole (+8.3% in 2011). Oman: +4.5% in 2011 (provisional), with government expenditure a key driver (+7.4%). Namibia: +4.3% y/y in Q4 2012 (+0.7% in Q3) and +5.5% for 2012 as a whole.
Egypt
Official data show a further fall in net international reserves (to USD13.5 billion at end-February), representing import cover of below three months. Meanwhile, the prospect of an IMF USD4.8 billion lending facility remains uncertain, although a Fund technical team may be in Cairo soon. Formal approval of a facility may yet have to await Egyptian elections (now unscheduled).
Nigeria
All key interest rates and liquidity ratios were left unchanged at this week’s MPC meeting. This was largely anticipated, partly because of recent upward pressure on the NGN (weak capital flows). Indeed, monetary policy may be tightened later in the year.
13 March 2013
In the Headlines
FIGURE OF THE WEEK: USD109.7>BARREL PRICE OF BRENT OIL (-2.5% YEAR TO DATE) Eurozone: ECB to retain accommodative stance
The president of the ECB, Mario Draghi, announced that the institution’s impact on monetary policy will remain accommodative as long as needed. This reflects a significant lowering in inflationary expectations and the fact that economic activity remained weak in early 2013. Projected GDP growth in 2013 was revised downwards moderately (by -0.2pps to -0.5%) and inflation is expected to remain low (at 1.6%). While market confidence has improved recently, financial conditions remain a drag on economic activity. Indeed, market fragmentation within the eurozone is still high, weighing on funding conditions for the corporate sector (-4% y/y for credit to non-financial corporates in January 2013). In this respect, we would expect the ECB to lower its key interest rate (currently at 0.75%) over the coming months and to announce further long-term refinancing operations (LTRO).
China: Latest data
Exports increased strongly in February (+21.8% y/y), but import growth was relatively low. Fixed asset investment growth in Jan- Feb accelerated to +21.2% y/y (+20.6% for the whole of 2012), but industrial output was up +9.9%, after +10.3% in December 2012, although it was still above the April-October 2012. Retail sales eased to +12.3% in Jan-Feb from +15.3% in December and below the rate evident in 2012. Inflation accelerated to 3.2% y/y in February and, although this was probably affected by the New Year, the trend appears upwards. These mixed data are in keeping with a moderate growth recovery this year (+8% from +7.8% in 2012). Inflation and property sector concerns are likely to limit monetary policy options if growth begins to fade, although there are fiscal options and the authorities are unlikely to be too concerned if growth is above, or in line with, the +7.5% target.
US: Recent indicators
Recent data suggest the economy is improving somewhat, despite higher taxes and gasoline prices. In addition to the sharp rebound in housing, a leading indicator of business spending increased +7.2% mo/mo in January, putting its annualised growth rate at a very strong +30% over a three-month period, and the four-week average of jobless claims fell 349,000. However, analysts were overly enthusiastic about the February employment report. Although the rate of unemployment fell from 7.9% to 7.7%, almost half of the improvement was because people left the workforce. Non-farm payroll jobs increased by 236,000, which was more than expected but still less than the 250,000+ needed each month to signal full employment. Moreover, data for the previous two months were revised down 15,000.
Kenya: Election update and prospects
Deputy PM Uhuru Kenyatta was declared president-elect after winning 50.07% of votes cast (50%+ required to avoid a second round of voting). His nearest rival, PM Raila Odinga, received 43.31% in a turnout of 86% of registered voters. The narrow margin by which a second round was avoided encouraged Odinga to challenge the result and seek redress for perceived electoral shortcomings–including the breakdown of a new electronic vote counting system–through the courts. Odinga called for his supporters to respect the law (the Supreme Court will give a ruling) and remain peaceful, although it was post-poll violence after end-2007 elections (not the vote itself) that resulted in around 1,300 deaths and significant economic disruption (GDP growth was +1.5% in 2008, after an average +6% 2004-07). This time, prospects look better for a peaceful transition. Expect GDP growth of +5% this year, but much depends on domestic stability and the international reaction to a president-elect who goes before an ICC tribunal in July for alleged crimes against humanity from the 2008 violence.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Malta: Update
Real GDP increased by +1.1% y/y in Q4 2012 (+1.7% in Q3), taking full-year growth to +0.8%. Over the year, growth was driven by external demand and by public consumption. The latter increased by +5.5%, while private consumption contracted by -0.5%. Gross capital formation fell by -7.3%, reflecting a sharp fall in inventories as fixed investment declined by -2.5%. Exports increased by +5.2% y/y and more rapidly than imports (+4.4%) so net exports made a positive contribution to full-year 2012 growth. Expect growth to remain subdued in 2013. On the political front, the centre-left Labour Party, led by PM-designate Joseph Muscat, won a landslide victory (55% of the vote) in the parliamentary election held on 9 March that will return it to power for the first time since 1998.
Americas – Venezuela: Presidential elections called
The electoral authorities set 14 April as the date for the presidential election, which had to be called within 30 days of President Hugo Chavez’ death last week, reducing some near-term uncertainty surrounding the succession. Interim President Nicolas Maduro will be the ruling PSUV’s candidate and Henrique Capriles, beaten by Chavez in the October 2012 election, will again represent the opposition coalition, MUD. Capriles took 44.9% of the vote last October and is likely to mount a serious challenge, although Maduro, who commands large state resources, looks to be the favourite, helped by the short run-in period to the election. If elected, Maduro can be expected to continue the broad thrust of his predecessor’s policies, but he (or anyone) will find it hard to replicate Chavez’ charismatic leadership.
Asia-Pacific – North and South Korea: Rising tensions again
Tensions are high again following North Korea’s long-range missile test in December 2012 and its third nuclear test, on 12 February 2013 (previous tests were in 2006 and 2009). The UN tightened sanctions in January, and again last week, with even China criticising the nuclear test. In response to the latest sanctions, as well as to joint military exercises between South Korea and the US, the North threatened to end all non-aggression pacts with the South, including the 60-year-old armistice, as well as a pre-emptive nuclear strike against attackers. While this sounds like previous rhetoric, it also suggests that Kim Jong-un, the North’s young leader, wants to maintain his father’s foreign policy stance. Outright military conflict is unlikely, although risks remain of an unanticipated incident leading to escalation.
Europe – Romania: Weak 2012 GDP growth
Revised official estimates confirm that Q4 2012 GDP returned to modest growth of +0.1% q/q sa (-0.3% Q3) and +0.3% y/y (-0.3% Q3). This took full-year 2012 growth to a modest +0.3%, led by domestic demand. Private consumption grew by +0.8% in 2012 and government consumption by +2.8%. Fixed investment expanded by +4% but gross capital formation increased by just +1.1%, suggesting inventories had a negative impact on annual GDP, as did net exports because import contraction (-1.3%) was less than that for exports (-3.2%). Quarterly data reveal that investment and government consumption lost momentum in Q4, probably reflecting the need to bring the fiscal deficit in line with IMF conditions for a precautionary credit facility. Expect growth to pick up slightly, to +0.8% in 2013.
Worth knowing
Other GDP
Armenia: +7.2% in 2012 (+4.7% in 2011). Iceland: +1.4% y/y in Q4 (+2.2% in Q3) and +0.5% q/q sa in Q4 (+4.8% in Q3), +1.6% in 2012 as a whole (+2.9% in 2011).
Poland
The central bank lowered the key policy interest rate by 50bps to 3.25% last week, the fifth cut since monetary easing started in November 2012. Inflation fell to 1.7% y/y in January, just above the lower end of the central bank’s target range of 1.5–3.5%.
Sudan and South Sudan
Agreement was reached on the resumption of oil exports from South Sudan (as of 24 March) through pipelines across its northern neighbour. Full output could involve around 350,000 bpd of additional crude coming to global markets but relations between the two countries are fragile, with unresolved border and economic issues, so oil prices may not respond significantly.
6 March 2013
In the Headlines
FIGURE OF THE WEEK: -0.6%>EUROZONE Q/Q Q4 2012 GDP CONTRACTION Eurozone: Weak data but signs of stabilisation
The second estimate of EZ Q4 2012 GDP confirms the economic contraction of -0.6% q/q in the flash estimates. Investment was the main driver (-1.1% q/q) and private consumption also continued to contract (-0.4%). On the supply side, the main drag was manufacturing (-1.7% q/q), followed by construction (-0.8%). All of the four largest economies contracted, with -0.9% q/q in Italy, -0.8% in Spain, -0.6% in Germany and -0.3% in France. The latest data suggest a subdued Q1 2013, with unemployment still on an upward trend (a new record high 11.9% in January from 11.8% in the previous month). However, business confidence surveys signal some stabilisation in the coming months. Meanwhile, this week’s Eurogroup decisions include a likely adjustment in the maturities of the EFSF and EFSM loans to Portugal and Ireland to facilitate their return to the markets this year, disbursement of the next tranche of Greek aid (EUR2.8 billion) reflecting progress with reform implementation, further discussion on the recapitalisation of banks by the ESM, which should allow a final decision next June, and discussions with the new Cypriot government regarding financial assistance.
US: Spending cuts and other uncertainties
Automatic spending cuts of USD85 billion (<3% of the federal budget) came into effect on 1 March, but expect negotiations to reverse them to continue. Upcoming dates contribute even more uncertainty, including 27 March when Congress must decide to keep funding government operations or not and mid-May when the debt ceiling may need to be raised again. Meanwhile, Q4 2012 GDP was revised up to +0.1% q/q annualised, with only the consumer contributing significantly at +2.2%, still markedly below average. Personal income increased significantly in December 2012, by +2.6% mo/mo, partly to avoid new taxes, and then fell back by even more in January, -3.6%, to a weak annual real rate of 1.8%. Industry is doing better than the consumer as both the manufacturing and non-manufacturing ISM indices increased, to 54.2 and 56.0, respectively, and indicate expansion.
Switzerland: Robust 2012 GDP growth
In the final quarter of last year, the economy proved to be resilient and, indeed, developed slightly better than expected during that period. GDP increased by +0.2% q/q and this followed a similarly strong performance in Q3 (+0.6%). In full year 2012, GDP increased by +1%. Growth in Q4 was driven by ongoing strength in both private consumption (+1.1%) and public consumption (+1.1%), which was accompanied by a more moderate contribution from investment (+0.5%), although the latter followed two consecutive quarters of contraction. Net exports continued to provide a negative contribution to overall growth, of -0.3pps, reflecting difficult global conditions. There was also a reduction in inventories, which had a marked impact equivalent to -1.1pps on overall growth.
Venezuela: President’s death
President Hugo Chavez died yesterday. He had been seriously ill with cancer for some time, although he had won another term in office by a comfortable margin in elections held last October. Vice-president Nicolas Maduro, Chavez’ chosen successor, will assume temporary office until fresh elections are called, according to initial statements. There are likely to be manoeuvrings within the ruling party but, at this point, Maduro appears favourite to win an election and then try to continue the broad thrust of Chavez’ policies. Nonetheless, there are considerable challenges. It will be difficult for Maduro (or anyone) to replace the charismatic leadership of Chavez, which may reduce his popular appeal. It also remains to be seen if Maduro can maintain control of the forces that backed Chavez (including the military) and whether the opposition can mount a united campaign. The coming months will be highly uncertain and the transition could unfold in unpredictable ways.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Kenya: Elections
Final results from Monday’s elections are not yet available but in the presidential polls Deputy PM Uhuru Kenyatta has edged ahead of PM Raila Odinga. The elections at end- 2007 led to inter-tribal fighting, political inertia and severe business/economic disruption in 2008. To date, the most recent polls were relatively well organised and violence limited. Kenya is strategically important as east Africa’s largest economy and as a gateway to that region and trade hub. A peaceful political transition will therefore boost a wider area. However, it remains to be seen whether the election results will be widely accepted and there is a further complication in that Kenyatta was indicted by the ICC for alleged crimes during the 2007 polls and, if he is elected president, Kenya may incur international sanctions.
Americas – Brazil: Modest Q4 2012 upturn
GDP data for Q4 2012 shows that the economy continued to pick up at a moderate pace, with q/q growth of +0.6% (+0.4% in Q3) the fastest pace since Q1 2011. Importantly, fixed investment, which has been a major constraint on growth, turned positive after four successive quarters of contraction (+0.5% q/q) and private consumption remained robust. Q4 increased +1.4% y/y (+0.9% in Q3) and full year 2012 growth was +0.9%. With external demand growth muted, domestic demand is likely to be the main driver in 2013, supported by the reduction in interest rates in 2012 and a better outlook for fixed investment, helped by infrastructure development. EH expects growth to pick up to +3% in 2013, followed by +3.8% in 2014. February manufacturing PMIs remained in positive territory.
Asia-Pacific – India: Budget and outlook
The federal budget attempts to chart a path between fiscal consolidation and pre-election spending (parliamentary polls by May 2014). By containing increases in subsidy provision and planned revenue increases, the budget targets a deficit of -5.2% of GDP in FY2012/13 (achievable) and -4.8% in FY2013/14 (challenging, given the electoral timetable and current weaker growth path). Longer-term plans are for deficit reduction to -3% in FY2016/17 (ambitious, given the need for poverty alleviation) and for overall debt/GDP ratios to continue to decline (down to 67% in FY 2012/13 from 75% in FY2006/07). Meanwhile, GDP increased by +4.5% in October-December 2012 (Q3 FY 2012/13). Expect monetary policy to be eased in H1 2013 and the growth momentum to rebuild gradually (GDP +6.5% FY2013/14).
Europe – Slovenia: Political & economic crisis
After two months of government infighting over corruption allegations against PM Janša and mounting public protest, the premier’s minority government fell in a no-confidence vote last week. Opposition leader Bratušek was asked to form a new government, but early elections are likely. On the economic front, the country’s downturn continued in Q4 2012, with real GDP contracting by -3% y/y and -1% q/q, taking the full year decline to -2.3%. Domestic demand was particularly weak in 2012, with private consumption falling by -2.9%, public consumption -1.6% and fixed investment -9.3%. Moreover, inventories subtracted -1.9pps from overall growth. Imports also contributed negatively (-4.3%) while exports increased only by +0.3%, so net exports (+3.3pps) prevented an even deeper contraction.
Worth knowing
South Africa
Q4 2012 GDP increased by +2.1% q/q (+1.2% in Q3) and +2.3% y/y (+2.5% in Q3), with the key drivers manufacturing, financial services and government sectors, which outweighed a contraction in mining. For calendar year 2012, growth was +2.5%, compared with +3.5% in 2011. Relatively weak growth limited fiscal manoeuvrability in last week’s budget, which projects a deficit of -4.6% of GDP in FY2013/14 (overall debt equivalent to 38.6% of GDP), declining to -3.1% of GDP by FY2015/16. South Africa hosts a BRICS summit meeting this month, reflecting changing trade and investment patterns of the country.
Other GDP
Azerbaijan: +2.2% in 2012. Belarus: +1.5% in 2012. Croatia: -2.3% y/y in Q4 2012, -2% in 2012 as a whole. Cameroon: +5% in 2012 (+4% 2011). Côte d’Ivoire: +8.5% in 2012 (initial estimate, -4.7% 2011).
27 February 2013
In the Headlines
FIGURE OF THE WEEK: -0.6%>GERMANY’S Q/Q Q4 2012 GDP Eurozone: Renewed uncertainty
Fiscal consolidation is far from over. This was re-affirmed recently by the European Commission economic forecasts, as the worse-than-expected GDP contraction will continue to weigh on public debt/GDP ratios, still expected to be on the rise in 2013, and structural fiscal deficits will adjust at a slower pace than in 2012. Spain and France were noted as countries that will not be able to reach the 3% of GDP threshold in the next two years with current budget plans and they will have to present their adjustment plans to the Commission by April. More generally, political uncertainty that could affect decision making in the eurozone has increased, notably with last weekend’s Italian legislative election results, but also fragile political and social stability in Spain and upcoming German legislative elections in September. Although this is likely to put downward pressure on economic activity in the coming months, we do not expect sovereign tensions to return to 2012 summer levels (with the potential backstop of the ECB/ESM in the wings) and we continue to forecast a gradual stabilisation in activity in the eurozone towards the end of the year.
Germany: Q4 2012 GDP contraction
Weakness in the export sector (-2.0% q/q), mainly caused by the eurozone recession, had a considerable impact on overall growth at the end of 2012, with quarterly GDP contracting for the second time since 2009, at -0.6% q/q in Q4 (-0.1% in Q4 2011). Official data show that net exports had a negative effect on growth equivalent to -0.8pps in Q4. In contrast, there was a positive contribution from domestic demand, which contributed +0.2pps to overall GDP growth. However, there were marked differences within the demand components, with household consumption slightly up (+0.1% q/q), investment in construction slightly down (-0.1%) and investment in equipment recording a further marked decline, of -2% (having contracted for five consecutive months). There was a positive contribution of +0.2pps to overall growth resulting from a rise in inventories.
US: Buoyant housing market
The housing market continues to demonstrate strength. January data include increases in housing permits (+35% y/y), starts (+24%), sales of existing homes (+8.5%) and sales of new homes (+16% mo/mo and +29% y/y). Prices of existing homes were up +11% y/y and of new homes +14%. Housing supply is very tight, with availability of existing homes down to 4.5 months at current rate of sales and new homes down to 4.8 months, both the lowest since 2008. Indeed, housing is currently the brightest spot in the economy. Meanwhile, Fed Chairman Bernanke defended the stance on monetary policy to the Senate Banking Committee, which suggests that there will not be a change in the near-term. With automatic budget cuts due in two days, politics remains divisive, although the cuts amount only to 2.5% of overall spending.
Eurozone: Positive signals, weak prospects
The Economic Sentiment Indicator (ESI) for February was positive overall, indicating increasing confidence for a fourth consecutive month (91.1 from 89.5 in January), contrary to the Composite Output Markit PMI (47.3 in February, down from 48.6). All the components of the ESI, except construction and retail trade, improved, including the industrial sector (by +1.2 to -10.8) and services (by +0.9 to -6.0) and all the big four economies (Germany, France, Italy and Spain) registered a rise in sentiment, particularly Germany (+2.5 to 102). The ESI suggests that activity is likely to stabilise in the eurozone in the ST, although still at weak levels. However, the immediate outlook is clouded by potential political stresses, including in post-election Italy, where recent polls did not deliver a clear verdict.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Cyprus: Update
The centre-right DISY candidate, Anastasiades, won the second round run-off in presidential elections last Sunday, securing 57.5% of the vote, against the left-of-centre AKEL candidate, Malas. With Anastasiades as president, the likelihood of a near-term conclusion of the bailout negotiations with the IMF/EU—which were delayed by the outgoing AKEL president, Christofias—has increased. However, the Anastasiades DISY-DIKO alliance in parliament has only a one-seat majority. On the economic front, the country’s downturn continued in Q4 2012, with real GDP contracting by -3.1% y/y and -1% q/q. Details have yet to be published, but the statistical office noted that declines were recorded in major sectors such as construction, manufacturing, trade and transport.
Americas – Peru: Strong growth
GDP growth slowed in Q4 2012, to a still robust +5.9% y/y (+6.8% Q3), taking full year growth to +6.3% (+6.9% 2011). Growth in 2012 was led by domestic demand, as investment (particularly public sector) and public consumption accelerated, partially offsetting a moderate slowdown in private consumption. Export growth slowed while that of imports accelerated. With headline inflation within target range and core inflation slightly above in January 2013 interest rates are likely to remain unchanged in the near-term. The fiscal surplus increased in 2012 and the external balance is not under pressure. The current account deficit widened to -3.6% of GDP in 2012 but net FDI flows more than covered the deficit and FX reserves increased. Expect GDP growth of around +6% in 2013 and 2014.
Asia-Pacific – Malaysia: Robust 2012 growth
Real GDP growth accelerated to +6.4% y/y in Q4 2012 (+5.3% in Q3), taking full-year growth to +5.6%, up from +5.1% in 2011. The robust performance in 2012 was entirely led by domestic demand, particularly fixed investment (+19.9%). Private consumption expanded by +7.7% and government consumption by +5%. Net exports made a negative contribution to 2012 growth as annual exports were almost flat (+0.1%) after contracting in H2, while imports maintained modest growth of +4.5%. The annual current account surplus narrowed to 6.4% of GDP in 2012 from 11% in the two previous years. Average annual inflation fell to just 1.6% in 2012 from 3.2% in 2011. In 2013, expect GDP growth to ease to +4.5% as investment is likely to moderate and the global economy remains weak.
Europe – Bulgaria: Modest 2012 growth
Flash estimates put Q4 2012 real GDP growth at +0.1% q/q and +0.5% y/y, both unchanged from Q3. As external demand weakened sharply in 2012, domestic demand took the lead. In Q4, growth of both private consumption and fixed investment picked up, to +3.5% and +2.7% y/y (from +3% and +1% in Q3), respectively. Public consumption contracted by -1.4% y/y (-0.2% in Q3) because of continued fiscal constraint. Imports declined by -0.8% y/y in Q4 (+4% in Q3) while exports retained modest growth of +1.8% (+3.3% in Q3). Full year growth is estimated at +0.8% in 2012, down from +1.7% in 2011, and should maintain that pace in 2013. On the political front, the government’s surprising resignation last week is likely to lead to an early election within two months.
Worth knowing
Argentina
The closely watched US appeals court hearing on payments to the “debt holdouts” is scheduled for 27 February. The court will then decide on whether to uphold an earlier ruling that Argentina should make payments to the “holdouts” whenever it makes payments to other bondholders.
Tunisia
A former minister of the interior, Ali Laarayedh, was appointed prime minister on 22 February and now has 15 days to form a government, probably a coalition involving the moderate Islamist party al-Nahda, opposition politicians and technocrats.
Kenya
Presidential and parliamentary elections are scheduled for 4 March. President Mwai Kibaki will step down and opinion polls show a tight contest for the leadership between PM Raila Odinga and Deputy PM Uhuru Kenyatta, which may lead to a second round of voting. Following the last elections (December 2007) there was widespread violence and protracted economic disruption.
20 February 2013
In the Headlines
FIGURE OF THE WEEK: -0.5%>EUROZONE 2012 GDP CONTRACTION Eurozone: Q4 2012 GDP contracted
GDP decreased by -0.6% q/q in Q4 2012, slightly more than expectations of -0.4%, confirming the expected contraction in activity over the whole year (-0.5%, in line with EH forecasts). In Q4 2012, q/q contractions were widespread, including Germany (-0.6%), France (-0.3%), Netherlands (-0.2%), Belgium (-0.1%), Austria (-0.2%), Finland (-0.5%), Italy (-0.9%), Spain (-0.7%) and Portugal (-1.8%). In full year 2013, EH forecasts GDP to contract by -0.1% (compared with a consensus -0.2%) reflecting ongoing fiscal consolidation and a weak global economy. Business surveys in January continued to point to contraction in the coming months, although stabilising. EH expects this trend to continue, but with a gradual improvement in H2. Meanwhile, in Italy legislative elections are scheduled for 24-25 February. The latest polls show that the centre-left PD Bersani was leading with around 35.2% support, followed by centre-right PdL Berlusconi (28%), 5 Star Movement Beppe Grillo (15.9%) and the centre coalition lead by Monti (14.8%). However, uncertainty regarding the election’s outcome is high given the Italian electoral system and a high number of undecided /abstentions (30% of voters).
US: Lacklustre data
The most recent four-week moving average of weekly jobless claims, at 353,000, is still not indicating a robust labour market. In addition, retail sales (ex-auto) were weak in January and over the year have grown only +1.7%, but auto sales expanded by a strong +7.6%. Industrial production slipped in January putting the y/y increase at only +2.1%. Meanwhile, automatic budget cuts of USD85 billion are due to start in 10 days, with accompanying concerns relating to the ability of the government to manage its finances. The cuts, representing less than 3% of the total budget, were delayed in August of 2011 until January 2013, and were then delayed again until 1 March.
Germany: Record foreign trade levels in 2012
Despite challenging global economic conditions and a marked contraction in economic activity in Q4 2012, the external sector performed strongly last year. First (and provisional) official statistics show that merchandise exports were valued at a record EUR1,097 billion in full year 2012, representing an increase of +3.4% compared 2011, which had also been a record. Imports of goods increased moderately in 2012, by +0.7%, and also reached a new high, of EUR909 billion. The trade balance in 2012 registered a surplus of EUR188 billion, which was the second largest annual surplus since the introduction of foreign trade statistics in 1958. In 2012, exports of goods to the rest of the Eurozone declined by -2.1% but shipments to other EU countries increased by +3.3% and exports to countries outside the EU increased by +8.8%.
North Africa: Transition update
Until recently, it was perceived that the transition in Tunisia had been relatively smooth compared with neighbouring Libya and with Egypt. Recent events, specifically the street response following the assassination of a leading political opposition figure, have brought that assessment into question. Tunisia’s PM—head of a tri-partite coalition of Islamist and secular parties— resigned this week after failing to forge a new government of technocrats, largely because his al-Nahda party did not support this move. The president will now seek a new premier and a new government but the political environment has deteriorated, reflecting tensions within and between formal parties and social and religious groups. A regional theme is how to establish a new political environment, with stability and security, while a deteriorating economy fails to meet popular expectations of jobs and improved living standards. Expect the transitions to remain fragile across the region and to require international support.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – South Africa: Politics
A new political movement, Agang (“to build”) is in the process of being registered as a party that may contest next year’s elections. The prime mover behind Agang is Mamphela Ramphele, with strong anti-apartheid, academic and international agency credentials. This is a positive move as a more competitive political environment would balance the ANC’s dominance. Although there appears to be growing disillusionment with the ANC’s ability to deliver a more equitable society and to increase jobs, it remains to be seen if Agang can garner sufficient grass-root support to make a challenge. Other opposition parties, including the DA and Cope, have yet to make an impact at a national level. Expect the ANC, although losing support, to remain the dominant political force for now.
Americas – Ecuador: Presidential elections
Rafael Correa (first elected in 2006) was re-elected by a wide margin for another four-year term in the first round of the presidential polls held last Sunday. Preliminary indications from the National Electoral Council give Correa 57% of the vote, comfortably above the 50% or 40% with a 10pp margin over the next candidate needed for a first round win. With the opposition fractured, his nearest rival, Guillermo Lasso, who has conceded defeat, took 23% and third placed former president, Lucio Guttierez, 7%. In legislative elections held at the same time, Correa’s Alianza PAIS movement so far has 51% of the vote for the 137-seat National Assembly, which points to the president having a working majority. Expect the president to continue and intensify his populist/interventionist “citizens’ revolution”.
Asia-Pacific – Thailand: Post-flood recovery
Base effects boosted Q4 2012 real GDP growth to +18.9% y/y (+3.1% in Q3), taking full-year growth to +6.4% (+0.1% in 2011). Severe floods adversely affected the economy in Q4 2011, resulting in a GDP contraction of -8.9% y/y. Annual growth in 2012 was entirely driven by domestic demand, partly as a result of reconstruction spending. Private consumption expanded by +6.6%, government consumption by +7.4% and fixed investment by +13.3%. Inventories added +0.8pps to full-year growth. External trade activity moderated as a result of ongoing global weakness, with exports increasing by just +2.9% and imports by +6.2%, with net exports subtracting -1.5pps from overall growth. As base effects fade and external demand remains weak, expect GDP growth to ease to around +4% in 2013.
Europe – Central Europe: Weak 2012 GDP
Hungary fell further into recession in Q4 2012, with real GDP contracting by -0.9% q/q and -2.7% y/y, with the full-year decline at -1.7%. The Czech Republic also remained in recession as GDP contracted by -0.2% q/q and -1.7% y/y in Q4 and by -1.1% in 2012 as a whole. Romania slipped back into contraction in Q3 but returned to growth of +0.2% q/q and +0.3% y/y in Q4, taking full-year growth to a meagre +0.2%. Bulgaria retained positive, although modest, growth throughout the year, with Q4 GDP expanding by +0.1% q/q and +0.5% y/y. The Slovak Republic lost momentum in Q4, with growth slowing to +0.2% q/q and +0.7% y/y, but full-year growth was comparatively solid at around +2%. Expect regional weakness to continue as a result of austerity and low external demand.
Worth knowing
Cyprus
The centre-right DISY candidate Anastasiades won the first round presidential election last Sunday (45% of the vote) ahead of the AKEL candidate, Malas (26%). They face each other in the second round runoff on 24 February. Anastasiades has campaigned on concluding a bailout deal with the IMF/EU, which the incumbent AKEL president, Christofias, has continuously delayed since mid-2012.
Sovereign Ratings
Iceland: upgraded to BBB by Fitch (stable outlook). Slovenia: downgraded to A- by S&P (stable outlook). Tunisia: S&P downgraded to BB- from BB.
Bulgaria
The government surprisingly announced its resignation today, following days of mass protests against high energy prices.
13 February 2013
In the Headlines
FIGURE OF THE WEEK: -2.4%>FALL IN EUROZONE 2012 INDUSTRIAL PRODUCTION US: Positive data
The ISM survey of non-manufacturing business came out above 50, indicating expansion for the second consecutive month. The employment component of the survey rose 2.2 points after leaping 5 points in December, and now stands at 57.5, the highest since February 2006. Weekly jobless claims improved and the four week moving average fell to 351,000, down a very sharp 57,000 in just nine weeks and approaching levels which could bring unemployment down more rapidly. Both the ISM and jobless claims reports seem to conflict with January’s employment report, perhaps indicating improvements there in February. The December trade deficit narrowed from USD -48.6bn to USD -38.5bn, possibly enough to push the next revision of Q4 GDP into growth territory from its current -0.1%.
Eurozone: Industrial production
Eurozone industrial production increased by +0.7% m/m in December, slightly above expectations. However, the downward revision in November (to -0.7% m/m vs. -0.3% previously) results in a -0.9% q/q contraction in Q4 2012. Thus, in 2012 eurozone industrial production fell -2.4%, the second consecutive year of contraction. It is now 13% below the pre-crisis peak. The 2012 annual contraction was widespread with -1.1% in Germany, -2.1% in France, -6.9% in Spain, -6.6% in Italy, -4.0% in Portugal and -0.5% in Greece. However, industrial production grew in Ireland and Netherlands, up +1.9% and +2.0% respectively. These data confirm that 2012 ended on a negative tone and suggest a negative GDP growth number in Q4 2012 (EH expects -0.4% q/q). This trend is likely to persist, at least in H1 2013, although business confidence indicators suggest some stabilization at weak levels.
China: Latest data
Inflation in January fell to 2.0% y/y (2.5% December). This was largely the result of food price rises which usually peak at the time of the Lunar New Year and which fell in January last year. Importantly, non-food price increases were hardly changed and remained low at 1.6% y/y. January trade data were also distorted by the Chinese New Year, as factories work overtime and shipments are brought forward. Exports surged by 25.0% y/y and import growth also accelerated, though both were above expectations which tends to suggest that demand continues to pick up. Bank lending also surged in January and overall credit, as measured by the broader “total social financing” increased strongly. This is likely to be positive for near-term growth of output, but may cause some concern among policymakers, especially if it continues to expand at a similar pace.
Germany: Labour market resilience
Although latest official quarterly GDP data have yet to be published, the economic contraction in Q4 2012 is expected to have been deeper than initially estimated. However, recently released results from the Ifo Business Climate Index show a strong improvement in January for the third consecutive month, which suggests positive momentum this year. Against a difficult economic background in 2012, the labour market was relatively resilient, with data from the the Federal Statistical Office showing a total of 41.8 million people in employment in December 2012, representing an increase of +0.7% y/y. Moreover, a recent labour force survey shows that the number of people registered as unemployed declined -3.4% y/y, to reach 2.25 million by the end of 2012.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Tunisia: Politics
Last week’s assassination of an important opposition political leader led to street protests, strikes and security forces on alert. In response the PM proposed an interim cabinet of technocrats to replace the Islamist-led coalition and oversee elections. This move has been rejected by the key coalition parties and discussions continue to try to find a way forward, with the outcome uncertain. This is a set-back in the political transition with downside risks, reflecting underlying tensions within and between Islamist and secularist groups. Meanwhile, a deterioration in the economy reflecting the uncertain transition and weakness in key trading partners have led to an approach for IMF assistance, reportedly a precautionary facility. As elsewhere in the region, political transition is proving challenging.
Americas – Venezuela: Devaluation
An exchange rate devaluation from 4.30 strong bolivars per USD to 6.30 USD (46.9% change, effective from 13 February) was announced by the central bank last week. The exchange rate was also unified as the bond-exchange rate (SITME) was eliminated. Cadivi (responsible for the availability of foreign exchange) will set import priorities. The devaluation was widely expected, as the government needs to alleviate import scarcities and boost government revenues (oil revenues in local currency terms) pressures from both of which have been mounting. The devaluation, however, will boost already high inflation. It may also indicate growing confidence of the government in their position in the continued absence of President Chavez, who remains in Cuba undergoing treatment for cancer.
Asia-Pacific – Indonesia: Robust 2012 GDP growth
Real GDP grew by +6.1% y/y in Q4 2012, maintaining the momentum of the previous three quarters and taking full-year 2012 growth to +6.2%, slightly down from +6.5% in 2011. In contrast to 2011, however, growth in 2012 was entirely driven by domestic demand. Private consumption expanded by +5.3% in 2012, public consumption +1.3% and investment +9.8%. Export growth slowed to +2% (+13.6% in 2011), affected by weakness in global demand, lower commodity prices and the imposition of export restrictions on non-processed minerals in May 2012. Import growth slowed also, but by less, to +6.7% (+13.3% in 2011), such that net trade subtracted -1.5pps from 2012 growth (+1.5pps in 2011). Expect this growth pattern to continue over the coming quarters, resulting in full-year 2013 growth of about +6%.
Europe – Baltic states: 2012 growth reflects resilience
Latvia was the fastest growing economy in CEE in 2012, with Q4 real GDP growth of +5.1% y/y and +1.3% q/q, taking full-year growth to an estimated +5.5%, the same as in 2011. In Estonia, Q4 GDP expanded by +3.7% y/y and +0.9% q/q, resulting in full-year growth of +3.2% (+8.3% in 2011). Lithuania‘s Q4 GDP increased by +4.0% y/y and +1.0% q/q, taking full-year growth to +3.6% (+5.9% in 2011). Domestic demand was the key growth driver in all three countries, but external demand also contributed, showing remarkable resilience against Europe’s general weakness in 2012. As a result, the Baltic region grew stronger than any other CEE economy and ST country risk has improved. Nonetheless, expect growth to ease to about +2-3% in 2013 as base effects from the earlier deep recession will wane.
Worth knowing
Jamaica
The government has announced plans for another (domestic) debt-exchange with private sector holders in order to reduce debt servicing further, though the positive news is that this is part of negotiations for an IMF financial support programme. A similar debt-swap was undertaken in 2010.
Slovenia
The political crisis deepened last week after a second junior coalition partner, DeSUS, decided to leave the government, shrink- ing the coalition’s minority in parliament even further to 36 seats (out of 90). Early elections are increasingly likely.
Interest rates
Poland: key policy rate cut by 25bps to 3.75% last week. Serbia: key policy rate raised by 25bps to 11.75% last week.
30 January 2013
In the Headlines
FIGURE OF THE WEEK: +1.8%>SINGAPORE’S Q/Q ANNUALISED Q4 GDP GROWTH Eurozone: Leading indicators
Economic sentiment within the EZ improved for the third consecutive month in January (ESI up +1.4 points to 89.2) while the Composite PMI reached a 10-month high at 48.2. Confidence picked up in most sectors but remained broadly unchanged in industry and retail. Although still below the long-term average, this improvement bodes well for EZ activity, which could show some signs of stabilization in the coming months. Similar to the January Composite PMIs, confidence improved in Germany (ESI +2.5pts to 99.1), Netherlands (+1.0pt to 86.3), Spain (+0.5pt to 88.2) though it deteriorated in France (-0.3pt to 88.2). At its current level, the Economic Sentiment Index (ESI) continues to point to negative GDP growth in Q1 2013. On the monetary front the ECB announced that EUR137.2bn of liquidity will be repaid by 278 EZ banks on January 30 representing 26% the total amount tendered within LTRO 1 operation in Dec 2011. The amount exceeded analysts’ expectations and suggests that banks managed to rebuild balance sheets.
US: Mixed data
Consumer confidence plunged from 66.7 to 58.6, reaching the lowest level since November 2011. The drop was probably caused by the 2% increase in the payroll tax and yet another delay in addressing the “fiscal cliff.” The Case-Shiller home price index for 20 cities rose for the 10th consecutive month, putting the y/y rate at 5.6%, the highest since before the bubble burst in 2006. The latest rounds of Quantitative Easing (QE) have had little effect. Since QE3 was implemented in September to lower mortgage yields, these have fallen just 12 bps. In December QE4 was announced to drive down Treasury yields, yet the yield on the 10 year issue has risen by 32 bps. Nonetheless, it is unlikely that the Fed will change its policy stance for some time yet.
India: Interest rates
After nine months on hold the central bank (RBI) moved to resume rate cutting this week, lowering the key policy rate by 25bps to 7.75%. It also reduced the cash reserve ratio for banks to 4% from 4.25% to ease liquidity and strengthen credit flows. Despite recent less than dovish statements, the influence of three consecutive months in which the pace of inflation, as measured by the Wholesale Price Index, policymakers preferred measure in India, has eased (to 7.18%) has prompted the move, when set against the background of still soft economic activity. Though inflation is still relatively high the RBI notes that it has probably peaked and the economic outlook remains “lacklustre”. As the RBI also acknowledges, there is scope, if limited, to reduce rates further, so expect more cuts, probably small and growth to pick up moderately in FY 2013/14.
UK: Q4 GDP reversal
Real GDP contracted again in Q4 by -0.3% q/q (for the fourth time in the past five quarters, but after an increase of +0.9% in Q3) leaving 2012 growth for the year as a whole flat. The downturn in Q4 was largely driven by the production sector (services were flat, while construction grew by +0.3%, the first quarterly increase since Q4 2011. Once again, one-off factors were important, as the extended and later than usual maintenance of the largest North Sea oil field led to a large fall in oil & gas extraction, which contribute -0.2pp of the overall -0.3% fall in output in Q4. A weaker Q4 was expected after the temporary lift to Q3 growth provided by the Olympic Games. Latest data, despite quarterly volatility, confirm that the underlying trend of the economy is broadly flat. Recent bad weather may weaken Q1, but the economy is still likely to resume modest growth in 2013 (EH forecast +0.8%).
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Jordan: Elections
Electoral officials announced a relatively high turnout (57%) in parliamentary polls on 23 January, despite a boycott by the main opposition Islamic Action Front and some smaller parties. International observers declared that the polls were without systemic violations. Pro- regime tribal loyalists and independents will dominate the new parliament and, following a revised electoral law of mid-2012, King Abdullah II now has to select the PM from the legislative body. Political reforms have done little to stem protests (generally peaceful) relating to perceptions of corruption and to subsidy cuts. In addition, they have yet to address societal divides between Transjordanians and those of Palestinian descent. Expect a period of post-election adjustment and assessment but also further social discord.
Americas – Colombia: Interest rate cut
The central bank lowered the policy interest rate by another 25bps to 4% at its latest meeting this week. This followed cuts in November and December. With December inflation at 2.4% y/y (against a target of 2-4%) growth having slowed sharply (Q3 GDP was up only 2% y/y and November industrial production fell -4.1% y/y) and the exchange rate strong (capital inflows) the move was not a surprise. The central bank also confirmed that it will continue to intervene in the exchange rate and accumulate FX reserves, though it did not impose controls on inflows. Meanwhile, on the political front the third round of government peace talks with the FARC guerrilla movement, which focused on rural development, as scheduled, concluded in Havana last week, but without significant progress.
Asia-Pacific – Singapore: Q4 GDP
Advance estimates (based on data for two months) indicate that Q4 real GDP growth picked up to +1.1% y/y (flat in Q3) and +1.8% on a q/q annualised basis (-6.3% in Q3), taking full year 2012 growth to a modest +1.2%. Manufacturing remained weak, declining by -1.5% y/y and -10.8% q/q in Q4, reflecting sluggish external demand from advanced economies, especially for electronics products. Construction continued to grow by +5.9% y/y but contracted for the second consecutive quarter on a q/q basis (-8.9%), suggesting the sector may lose steam in 2013. Services led the rebound in Q4, expanding by +1.5% y/y and +7% q/q, indicating a measure of resilience in domestic demand and financial services. Expect full year 2013 GDP growth of around 2%.
Europe – Slovenia: Government crisis
Civic List, a junior partner has left the ruling five-party coalition after PM Janša refused to resign over a corruption scandal, depriving the government of its parliamentary majority. Other small coalition partners are also considering leaving if Janša does not step down. Public protest against the PM is also mounting, as a general strike and protest over austerity measures turned into anti-Janša rallies. The political crisis comes at an unfortunate moment for the country’s difficult economic situation. The economy remains mired in protracted recession and is likely to contract again in 2013, while the government has been pushing for austerity and reforms in order to retain fiscal sustainability while recapitalising the ailing banking sector. Political standstill could increase the likelihood of an international bailout.
Worth knowing
Other interest rates
South Africa: The central bank held its key policy interest rate at 5%, citing a deteriorating inflationary outlook (ZAR weakness, as well as wage pressures). Inflation increased to 5.7% y/y in December 2012, at the high end of the central bank’s target range of 3-6%.Hungary: The key policy rate was cut by 25bps to 5.5% (effective today). Turkey: Last week both ends of the overnight interest rates were cut by 25bps, to 4.75% (borrowing) and 8.75% (lending), while the key policy one-week repo rate was kept at 5.5%.
Cyprus
Last week, Fitch lowered its LT sovereign rating by two notches to B from BB-, and retained a negative outlook, citing revised, higher estimates of banking sector recapitalisation costs that will cause a heavy public debt burden.
24 January 2013
In the Headlines
FIGURE OF THE WEEK: +7.9%>CHINA’S Y/Y Q4 2012 GDP GROWTH China: Stronger Q4 GDP
Latest official data show Q4 2012 GDP growth picked up to +7.9% y/y (+7.4% in Q3) taking full year 2012 growth to +7.8% and ending seven consecutive quarters of decelerating y/y growth. Official data put q/q expansion at +2% in Q4 (+2.1% in Q3). While investment accounted for more of the 2012 slowdown than consumption, investment is also leading the upturn (infrastructure and real estate in Q4). While the latest data indicate that China has avoided a “hard landing” the pace of the pick up in 2013 is still set to be quite moderate rather than the strong rebound of 2010-11, as expansionary policies will remain cautious. For the time being, EH retains a growth forecast of +8% in 2013, as there are still several headwinds, although the risk to the forecast may be shifting towards the upside.
US: Housing and budgetary issues
Housing market data continue to show strength, with December 2012 starts increasing by +12.1% mo/mo (+37% y/y) and permits—up by only +0.3% mo/mo—by +29% y/y. Supply of existing homes is down to 4.4 months, the lowest since 2005 and this weak supply is likely to be mainly responsible for the fall in existing home sales by -1% mo/mo in December (+13% y/y) and for the rapid 11.5% y/y increase in prices. Meanwhile, House Republicans proposed raising the debt ceiling through to May in order to get more time to negotiate a budget. Nonetheless, automatic budget cuts are still scheduled for 1 March. President Obama’s inauguration speech laid out a long “to-do” list and was thought by many to be a warning to Republicans that entitlement reform on Medicare and Social Security is not on that agenda.
World Economy: IMF forecasts
The IMF’s update to its World Economic Outlook (released 23 January) revises global growth forecasts moderately downward for both 2013 and 2014 (by -0.1pp, to +3.5% and +4.1%, respectively) reflecting weaker than expected performance by the advanced economies (-0.2pp to +1.4% in 2013 and -0.1pp to +2.2% in 2014). In turn, this results from recession in the eurozone in 2013 (-0.2% from +0.1% previously forecast) before a moderate pick-up in 2014 (+1%). Forecasts for the emerging economies remain broadly unchanged at +5.5% in 2013 (-0.1pp compared with October 2012 forecasts) and +5.9% in 2014. The IMF is slightly more optimistic than EH, notably in relation to the advanced economies and partly because it takes account of Japan’s recent stimulus plan. However, the IMF cites elevated downside risks because of the EZ crisis and US fiscal tightening in the ST.
Algeria: Security risk
Domestic security forces adopted a hardline approach in ending the In Amenas gasfield occupation by jihadist rebel extremists with links to al-Qaida and reportedly to criminal activities. In Amenas produces around 6bn cubic metres of gas each year, which equates to 15% of the country’s output and to 2% of Europe’s annual gas imports. Recent events do not help the government of President Abdelaziz Bouteflika’s attempts to improve relations with oil and gas majors through easing business restrictions or in winning foreign support to implement a USD260 billion investment plan to upgrade infrastructure, education, healthcare and water supply. Nevertheless, Algeria is not a weak economy as it registers strong current account surpluses, its foreign debt obligations are low and FX reserves of around USD190 billion provide import cover of over 36 months. Expect heightened security at hydrocarbon installations, output to return to normal quickly and international oil and gas companies to maintain a presence. However, further sporadic rebel incidents are expected against a background of heightened regional security tensions.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Israel: Elections
Preliminary results from 22 January general elections suggest, as signposted by polls, that PM Binyamin Netanyahu will remain premier and head a new coalition government. Netanyahu’s Likud-Beiteinu bloc needs to forge an alliance with smaller parties, likely to be centre and right-of-centre to reflect a marked shift in political attitudes and voting patterns. Significantly, two issues high on the international agenda—relations with Palestinian agencies and with Iran—did not register decidedly during electoral campaigning, although they are likely to be key challenges for the new administration. Despite recent US-Israeli differences expect bilateral relations to remain strong, even though a two-state solution involving Palestine appears unlikely under the revised domestic political balance.
Americas – Brazil, Mexico & Chile: Interest rates
The central banks of Brazil, Mexico and Chile left their policy interest rates unchanged—at 7.25%, 4.5% and 5%, respectively—at regular meetings last week. In Brazil, with inflation a constraint at 5.8% y/y at end-2012 (4% +/-2% target range) and growth expected to pick up to +3-3.5% in 2013, the decision was not a surprise. Nonetheless, growth concerns are likely to remain in sharp policy focus. In Mexico, inflation has declined to below 4%, providing scope for a rate cut if growth moderates more than expected but, for the time being, with growth still relatively resilient, rates remain on hold. Chile’s growth is also still resilient and inflation low, so the decision was also no surprise, but again there is scope to cut if necessary.
Asia-Pacific – Japan: Monetary policy changes
A weakening in central bank independence was signalled this week, as monetary policy will now be reviewed by the Council on Economic and Fiscal Policy, a government body in charge of overall economic policy. Aggressive easing in monetary policy is set to continue to overcome deflation and sustain economic growth. The annual inflation target was increased from 1% to 2% and the asset purchase programme will continue without a specific termination date (“open ended asset purchasing”). Expect these changes to reinforce the fiscal stimulus and contribute to a growth boost in the ST. However, the impact is uncertain as the fiscal component of the policy mix is weighted towards public works and the private sector is expected to remain cautious because of medium- and long-term risks.
Europe – Eurozone: Public debt
EZ public debt remained broadly stable in Q3 2012, at 90% of GDP compared with 89% in Q2. At a country level, there are diverging trends among the four largest economies. Germany and France registered a decline in their public debt ratios, by -0.8pp and -1.1pp, respectively, driven by “safe haven” status of their bond markets. In contrast, Italy and Spain recorded increases in their public debt, by +1.4pp and +1.3pp, respectively, again reflecting recent developments in bond markets. For Spain, there is the additional burden on debt derived from the financial aid for the banking system. In this context, expect public debt to GDP ratios to continue increasing, given a poor economic outlook and still-high interest rates, although the pace of the increase is likely to slow.
Worth knowing
Switzerland
The country will be represented in this year’s four G20 meetings of finance ministers and central bank governors, reflecting an invitation from the Russian presidency of that grouping and the important role of Switzerland in the international financial system.
Jordan
Parliamentary elections (23 January) were boycotted by several parties, including the main Islamist opposition group, the Islamic Action Front (IAF). Voting was supervised by an independent electoral commission and monitored by international agencies.
Eritrea
Reports of an attempted coup now appear overblown. Public protests and calls for political reforms and release of political prisoners led to a group of soldiers storming a government building but a settlement was negotiated and normality resumed.
16 January 2013
In the Headlines
FIGURE OF THE WEEK: +4%>EH FORECAST FOR 2013 GLOBAL INSOLVENCIES World Economy: Upturn, but only gradual
World GDP growth is expected to increase by +2.5% in 2013 (after +2.4% in 2012) before accelerating to +3.2% in 2014, led by an improvement in the eurozone, according to EH’s latest forecasts. The eurozone will experience another year of contraction (-0.1%) in 2013 but from H2 this year should gain momentum into 2014 (+1.4%). The US will record a slight slowdown (+1.9%) in 2013 before advancing (+2.5%) in 2014. Much of global growth will continue to be attributable to emerging economies, which will contribute nearly 1.9pps in 2013 (75% of the total) and 2.1pps in 2014 (60% of the total). The EH Global insolvency index is projected to rise by +4% in 2013 (after +1% in 2012) with another strong increase in southern Europe (+19%) led by Spain and Greece.
Germany: Full-year GDP data suggest Q4 contraction
First official estimates indicate that GDP increased by +0.7% in 2012, following +3% in 2011. Significantly, the full-year rate of growth in 2012 suggests that the economy contracted in Q4, the first quarterly fall since the 2009 crisis, as the rate of expansion in Q1-Q3 had been more positive. Exports (+4.1%) were the main growth driver in 2012, despite the difficult international environment, and imports increased by only +2.3%, so net exports contributed 1.1pps to overall growth. Consumption was up +0.8% in 2012 but capital investment contracted, with machinery and equipment down by -4.4% and construction by -1.1%. The initial estimates of 2012 GDP are in price-adjusted terms. In calendar-adjusted terms, GDP growth in 2012 was slightly higher at +0.9%, as there were three working days less in 2012, compared to 2011.
China: Latest data releases
December trade data showed export growth of +14.1% y/y (+2.9% y/y November), higher than expected. Importantly, export growth to developed markets strengthened, particularly to the EU. Import growth also accelerated, to +6% y/y (0% November), mainly reflecting imports for domestic use. December consumer price inflation accelerated to 2.5% y/y (2% November) but this was driven by food prices, particularly vegetable prices following cold weather. Non-food prices increased only 1.7% y/y (1.6% y/y in November). December credit growth showed weaker loan demand, but the broader “total social financing” measure— increasingly the focus of policymakers—increased, although its growth is levelling off. Overall, data continue to point to a modest pick-up in activity and EH expects growth in 2013 of +8% (Q4 GDP data will be released later this week).
US: End-year data
Recent data offer little definitive guidance to the state of the economy. Despite the holiday period, which fell short of expectations, retail sales grew +0.5% mo/mo in December 2012 (+0.4% mo/mo in November), finishing the year up +5% y/y, compared with a long-term average of +6.4%. By contrast, the trade deficit was up sharply in November, to USD48.7 billion from USD42.1 billion the previous month, suggesting a weak contribution by net exports to Q4 GDP. Consumer credit increased markedly in November 2012, partly reflecting student debt. Meanwhile, it is likely that many Americans were surprised to see how much their first paychecks of the year had been reduced by the 2% increase in Social Security taxes resulting from the partial fiscal cliff deal. Political positions are hardening over the impending debt ceiling and spending cut debate. Expect this to come to a head towards the middle of February.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Mali: Stability threat
French military jets launched airstrikes against militant Islamist rebels in central and northern areas to prevent anti-government forces advancing on the capital, Bamako. France will also deploy a landforce to protect its locally-based citizens but also to provide support before the home army and ECOWAS troops attempt to recapture the large area of the country outside the government’s control since early 2012. French airstrikes appear to have been successful in halting the rebel advance but a decisive defeat of al-Qaida and other Islamic forces that are heavily armed, relatively well trained and who can retreat into large desert areas and then regroup is likely to be hard to achieve. Largely porous borders make this a regional issue, with international ramifications for anti-terrorist campaigns.
Americas – Peru & Mexico: Output and inflation
Peru’s economy grew +6.8% y/y in November 2012, according to data released last week, maintaining the strong performance evident earlier. Construction led the way—up +16.8% y/y—with services and utilities also expanding strongly. The central bank last week, unsurprisingly given the growth momentum and inflation within target (2.65% y/y in December) left the policy interest rate at 4.25%. Expect growth of +6% in 2013. In Mexico, the October monthly activity indicator (GDP proxy) released last week recovered from September’s dip, increasing +4.3% y/y and +0.2% q/q, supported by a strong pace in the services sector, and November industrial production was up +0.9% mo/mo, which suggests that Q4 y/y growth picked up. Expect full year 2012 GDP growth of +4% and +3.5% in 2013.
Asia-Pacific – India: Monetary policy
At a time of weakening growth, economic policy-making has been hampered by inflationary pressures that have limited remedial action through interest rates. Relief may now be in prospect as wholesale prices—still the official inflation gauge—increased by 7.18% y/y in December 2012, down from 7.24% in November. However, consumer price inflation increased to 10.6% y/y in December (9.9% in November) so the central bank may remain conservative in relation to monetary easing in the ST, even though it would help the government, which has limited scope to use fiscal policy because of budgetary pressures. Expect policy interest rates to be cut in 2013—but not yet and to be subject to further easing in inflationary pressures. Also, expect GDP growth of around +6.5% in FY2013/14.
Europe – France: Labour market reform
After protracted negotiations, the government and the unions appear to have forged a consensus regarding labour market reforms. The planned measures involve more flexibility for company employment procedures in exchange for additional rights for workers. Companies will be encouraged to avoid layoffs by being able to negotiate temporary cuts in pay and working hours during periods of slow activity. Companies employing young workers (less than 26 years of age) will receive temporary tax cuts, while higher taxes on short-term contracts will be imposed. These reforms will be put before parliament fairly soon but, if implemented, their effectiveness will depend on how the existing rigid labour market can adapt and also on the system of negotiations between companies and unions.
Worth knowing
Eurozone
The first Eurogroup/Ecofin meeting under the EU presidency of Ireland will take place on 21-22 January. The key topics for discussion will be the banking system bailout for Cyprus (EUR17 billion, equivalent to 100% of GDP), the disbursement of the next tranche of financial aid for Greece (EUR7 billion for the remaining bank recapitalisation funds) and discussions on the operational framework of the future single banking supervisory mechanism (SSM).
Jordan
Q3 2012 GDP growth was +2.6% y/y, down from +2.9% y/y in Q2, and nominal GDP was USD8.4 billion.
South Africa
Fitch Ratings agency downgraded its long-term, foreign-currency rating to BBB from BBB+, with a stable outlook.
9 January 2013
In the Headlines
FIGURE OF THE WEEK: 11.1%>EZ UNEMPLOYMENT IN NOVEMBER 2012 Eurozone: Mixed signals
The latest EZ indicators give mixed signals, with a deteriorating labour market but improving retail sales and confidence. The rate of unemployment increased by 0.1pps between October and November 2012 and reached a new record high of 11.1%. With the exception of Germany, where unemployment stabilised at 5.4%, all the leading economies registered an increase, most notably Spain (from 26.2% to 26.6%). However, retail sales in the EZ increased by +0.1% mo/mo in November after three consecutive months of decline. Moreover, the Economic Sentiment Index (ESI) in December increased for the second successive month, by +1.3pps after +1.4pps in November, in line with the trend signalled by the PMI. The ESI improved for all the leading economies, particularly Italy (+2.0pps) and Germany (+1.0pps). In terms of sectors, all except retail recorded improved confidence, which was especially marked in industry and in services. The decline in the retail sector was moderate (-0.9pps) and followed a large increase in November (+7.2pps).
US: Fiscal cliff
Resolution of the “fiscal cliff” came at the last minute and did not address spending. In effect, the negotiations focused on less than 1% of the population, those earning over USD400,000, for whom taxes will rise on both income and investments. To fund “Obamacare”, an additional 3.8% tax on investment income was implemented for those earning over USD200,000. However, 77% of Americans will be affected by an increase in the payroll tax from 4.2% to 6.2%, removing significant income and consumption from the economy. Expect negotiations on spending cuts to continue into March, when the debt ceiling will be reached. Since Republicans were defeated on taxes, it is expected that they will demand significant spending cuts, perhaps through scheduled automatic cuts, by holding the debt ceiling hostage.
Switzerland: Uncertain outlook
Following surprisingly robust GDP growth of +0.6% q/q in Q3 2012, the outlook has deteriorated markedly against a background of global economic uncertainties, which are likely to limit capital spending and exports, in particular. EH forecasts capital spending will grow by +0.6% in 2013, after +0.4% and +4% in 2012 and 2011 respectively. Exports are forecast to rebound only moderately in 2013 (+1.7%) after contracting by -0.2% in 2012. Meanwhile, the leading indicators are not providing a clear outlook, with the PMI index continuing to increase in December (the third consecutive month) but the downtrend in the KOF sentiment index accelerating in December. However, it should be noted that the two indicators are not fully comparable, with the PMI focus on medium- and large-sized enterprises and the KOF on small- and medium-sized companies.
Venezuela: Inauguration postponed
With President Chavez unable to attend his inauguration scheduled for 10 January, as he remains under treatment in Cuba after surgery for cancer, the National Assembly voted to postpone the inauguration and allow him to be sworn in by the Supreme Court at a later date (unspecified). While the opposition maintains that failure to attend the scheduled inauguration is unconstitutional, the government argues that as Chavez is a re-elected, not new, president the postponement does meet constitutional requirements. The Supreme Court has not ruled on the constitutional position, but, as it is strongly pro-Chavez, could be expected to be supportive. The opposition does not seem to have the ability to change the situation but, while the question of President Chavez’ recovery remains open, considerable uncertainty over the future will persist.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Central African Republic
A loose alliance of rebels, Seleka, has overrun a large part of the country and its forces are within close proximity of the capital, Bangui. The rebels claim that the government under President François Bozizé has not kept to the terms of peace deals signed in 2007 and 2008, including power sharing and integration of rebel factions into the national army. Some regional countries are offering limited military support but France, already with concerns relating to security in Mali, will not use troops. The landlocked country has a history of coups and rebellions and its economic development—natural resources include timber, gold, uranium and diamonds—has yet to meet potential. Expect economic growth to be limited by the current instability, with GDP expansion of around 3%, subject to crisis resolution.
Americas – Ecuador: Presidential elections
Presidential (and legislative) elections will be held on 17 February, in which the incumbent Rafael Correa will be standing for another term (first elected November 2006). At the start of the formal campaign, President Correa is well ahead of the other seven declared candidates, with 60.6% of the vote compared with just 11.2% for his nearest rival, Guillermo Lasso, according to the most recent opinion poll (Perfiles). This is comfortably above the 50% or 40% with a 10pps margin over the nearest rival required for a first round win (if necessary there will be a second-round run-off in April). With the opposition divided and President Correa’s core support seemingly solid, another term seems likely, in which he can be expected to continue his populist “citizens’ revolution”.
Asia-Pacific – Vietnam: Slow 2012 growth
Q4 GDP growth picked up slightly to +5.4% y/y, but left full-year 2012 growth at just +5.03%, the slowest since 1999. Manufacturing increased by just +4.03% and construction growth was particularly weak at +2.09%. There are some positive indicators—inflation ended 2012 at 6.8% y/y and credit growth was moderate, which allowed the central bank to cut interest rates, the trade balance was probably in small surplus (based on customs data) and FX reserves increased, to USD20.4 billion in July 2012 (latest available data). However, problems remain in the banking sector and the improved trade balance results partly from the weakness of imports, limiting the scope for expansionary government policies. There is little to suggest a strong recovery in 2013 (EH expects +5.3% GDP growth).
Europe – Poland: Monetary policy
The central bank cut the key policy interest rate by 25bps today, to 4% (in line with expectations) and the lowest level since May 2011.The economic slowdown (from +4.3% GDP growth in 2011 to +2% in 2012) and lower inflationary pressures (consumer prices at 2.7% y/y in November 2012, 1.5pps below a June peak) allowed the central bank to pursue its easing cycle started in November, which followed a rate increase in April and then six months of no change. Inflation is likely to decrease further in H1 and to fall below the central bank’s 2.5% target. This will allow further monetary policy easing, with the aim of supporting economic expansion. However, EH expects GDP growth to remain at around +2% in 2013 before recovering to +2.7% in 2014.
Worth knowing
Q3 GDP growth
Colombia: -0.7% q/q (+1.3% Q2) and +2.1% y/y (+4.9% Q2). Mauritius: +1.3% q/q (+1.1% Q2) and +3.7% y/y (+2.9% Q2). Morocco: +2.9% y/y (+2.3% Q2). Tanzania: +6.5% y/y (+6.9% Q2).
Czech Republic
Presidential elections will be held on 11-12 January. This will be the first direct vote for the position as, under the old system, parliaments used to elect the head of state. If an absolute majority is not reached, a run-off will be held on 25-26 January.
Italy
Legislative elections were brought forward from mid-April, to 24-25 February, following the decision in December 2012 of PM Mario Monti to step down. Monti will now campaign for a centrist alliance, while Pier Luigi Bersani will lead a centre-left coalition group (current poll favourite) and Silvio Berlusconi will be part of the leadership of a centre-right coalition.
20 December 2012
In the Headlines
FIGURE OF THE WEEK: USD110>BARREL PRICE OF BRENT OIL (+6.8% Y/Y) Japan: Election result
The Liberal Democratic Party (LDP), led by Shinzo Abe, won an absolute majority (60.4%) in general elections for the lower house in parliament. This should allow the government to pass legislation in the lower house and the right-of-centre coalition LDP-Komeito holds more than two-thirds of seats in the upper chamber. The outgoing ruling party, the Democratic Party of Japan (DPJ), won only 57 seats out of 480. The next stage in the electoral timetable is elections for the six-year term upper house, which are scheduled for July 2013. The LDP can be expected to push for the adoption of further expansionary fiscal and monetary policies to combat deflation and to support growth. However, the government will have limited leeway on the fiscal side, given the high public debt-GDP ratio (in excess of 200%). Meanwhile, the BoJ announced more quantitative easing. Expect GDP growth of +0.8% in 2013.
US: Further QE
The Fed announced unprecedented actions to stimulate the economy whereby, in addition to the USD40 billion in mortgage- backed securities it is buying each month (Quantitative Easing, QE3), it will now start buying USD45 billion in Treasuries each month (QE4). As each round of QE becomes less effective, the latest measures are unlikely to help boost the economy markedly, but they do raise significant inflation risks. The Fed also changed its guidance as to when it may increase interest rates from “at least mid-2015” to hard targets, such as when unemployment falls below 6.5% and the rate of inflation moves above 2.5%. In the meantime, November retail sales and industrial production rebounded after being adversely affected by Hurricane Sandy in October. Core CPI inflation was 1.9% y/y in November.
Eurozone: Manufacturing PMI
The flash EZ composite PMI increased moderately in December to 47.3, up for the second consecutive month and signalling a slowdown in the contraction of output. The PMI for both manufacturing and services improved—although very slightly for the industrial sector—by 0.1pp to 46.3 and 1.1pp to 47.8, respectively. Regionally, for the first time in the last eight months, the German composite PMI increased above the 50 threshold, suggesting that activity returned to expansion territory. However, the French index continues to point to sluggish growth in Q4, although at a lower rate of contraction (45 against 44.3 in November). The outlook remains weak as surveys continue to reveal contraction in new orders and deterioration in employment intentions.
Germany: Fewer start-ups
The number of start-ups of larger businesses that provide a marked contribution to the overall economy totalled 103,000 from January to September 2012. According to data from the Federal Statistical Office, that number was down -6.3% y/y. In addition, newly-formed smaller businesses recorded an even sharper contraction, to 190,700 or -15.3% y/y. In the same period, start-ups of part-time businesses were stable at around 183,000. Business de-registrations in the first three quarters of this year show that closures of large businesses were +3.9% y/y, totalling 91,900, and that for part-time farms they were +2.7% y/y (111,500), although closures of small businesses were -1.9% y/y (215,700).
Please note that this is the last WERO of 2012. The next issue will be on 9 January 2013.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – South Africa: ANC
At its five-year leadership and policy conference, the ANC re-elected Jacob Zuma as its head, making him the strong front-runner for the state presidency (elections in 2014). Given that deputy state president Kgalema Motlanthe lost out in the ANC leadership polls, it is likely that Cyril Ramaphosa will run as Zuma’s deputy in 2014. Ramaphosa’s recent background is in business—after trade union leadership and key interlocution in the country’s political transition—but nationalisation (including mines) remains a popular policy option within the ANC. Accordingly, despite the continuity resulting from Zuma’s re-election at party level, business and investor confidence is unlikely to improve in the ST. Expect economic, as well as social, challenges and annual GDP growth capped at +3% in 2013.
Americas – Costa Rica: Country risk update
GDP growth will slow in 2013, to 3.5%, from a strong pace in 2012, which was boosted by a very strong Q1 performance, but should remain in line with the longer-term trends. Inflation is expected to remain within target. Although there are some weaknesses, such as large fiscal and current account deficits, the overall external balance is satisfactory, helped by substantial net FDI flows. Also, public debt levels are moderate in relation to GDP and external debt ratios are low. Costa Rica has a long record of political stability, with well established representative government and, overall, systemic political risk is low. However, the current government, like its predecessor, has struggled to maintain a working majority in congress that would be able to approve much-needed comprehensive tax reforms.
Asia-Pacific – South Korea: Election result
Park Geun-hye, daughter of former president Park Chung-hee (president 1961-79), narrowly won yesterday’s presidential election, with 51.6% of the vote compared with the 48% of Moon Jae-in of the centre-left Democratic United party. Turnout was 76%, the highest for 15 years. Park will become the first female president in February, replacing Lee Myung-bak who will step down after his five-year term, as required by the constitution. Park already led her conservative Saenuri Party (formerly known as the Grand National Party) to win parliamentary elections in April 2012, providing her with a strong mandate to follow up on campaign promises. These include expansion of the welfare system, reduction in the influence of the chaebol and improved ties with North Korea.
Europe – Ukraine: Risk update
Last week, the new parliament that resulted from October elections confirmed PM Azarov from the ruling Party of Regions for a second term, even though policies under his govern- ment strained Ukraine’s relations with the IMF, the EU and Russia and also contributed to an adverse economic outlook. Real GDP shifted to contraction in Q3, falling by -1.3% y/y (+3% in Q2) and -1.2% q/q sa (+1.9% in Q2). In November 2012, the central bank, authorised by parliament, introduced capital controls to protect the UAH/USD peg and FX reserves, which had fallen by -24% y/y. Country risk remains high. In December, Ukraine’s LT sovereign ratings were further downgraded by one notch by both S&P and Moody’s and a negative outlook was retained by both.
Worth knowing
Turkey
The central bank lowered its key policy interest rate by 25bps to 5.5% (18 December).
Egypt
Unofficial reports suggest that 56.5% voted in favour of a new constitution put to a national referendum (first stage only).
Ireland
Q3 GDP +0.2% q/q (+0.4% Q2) and +0.8% y/y. Household consumption showed positive growth for the first time since Q2 2010.
Croatia
Last week, S&P downgraded its LT and ST sovereign ratings to BB+ (stable outlook) from BBB-, becoming the first major rating agency to move Croatia into speculative grade, citing a lack of structural and fiscal reforms and poor MT growth prospects.
12 December 2012
In the Headlines
FIGURE OF THE WEEK: +10.1%>Y/Y, CHINA’S NOVEMBER INDUSTRIAL OUTPUT Eurozone: Industrial production falls further
Industrial production data continue to suggest deeper contraction in Q4, with a further decline in October (-1.4% mo/mo after -2.4% in September) driven mainly by a sharp decrease in the production of capital goods (-3% mo/mo) and durable consumer goods (-3.8% mo/mo). Except in Spain, where production grew by +1.2% mo/mo, all the main economies registered a decrease, including Germany (-2.4%). Meanwhile, with more summit meetings this week, political uncertainty in Italy resumed as PM Mario Monti announced that he will resign once the budget law is passed, increasing the likelihood that elections will be brought forward to February. The summit meeting will also consider Greece’s debt buy-back, which was completed, although at a slightly higher price than originally expected.
US: Lacklustre jobs market
The November employment report depicted an economy lacking positive momentum, reflecting fiscal cliff uncertainties and weak consumption. Only 146,000 jobs were created in November, which again is well below the 250,000+ required to signify a sound recovery, and October and September payrolls were revised down by a total of 49,000 jobs. The rate of unemployment fell to 7.7% in November but this partly reflects a negative cause as some people became discouraged about finding a job and left the work force. Surprisingly, the Labor Department stated that Hurricane Sandy “did not substantively impact” the employment report, despite the fact that its survey was performed the week following the hurricane when many could not get to work. Fiscal cliff negotiations are ongoing, but pressure is rising as President Obama starts a 20-day vacation on 17 December.
Switzerland: Robust Q3 growth
Real GDP increased by a surprisingly robust +0.6% q/q in Q3, despite the relative weakness in the global economic environment. Indeed, Q3 GDP growth was the strongest recorded since the end of 2010 and it again exceeded the average expansion of EU countries. Growth was driven by consumption, reflecting continuation of a relatively healthy labour market and, more markedly, by public spending, but investment had a negative impact. Export growth of +0.5% q/q after +0.4% in Q2 suggests that a strong CHF did not curtail outward shipments in that period, although strong import growth resulted in net exports exerting a drag on overall expansion of 0.8pp.
Turkey: Growth slowdown in Q3
Q3 real GDP growth decelerated to +1.6% y/y (+3% in Q2) and just +0.2% q/q sa (+1.7% in Q2). Credit tightening by the central bank continued to hold back private consumption, which slipped by -0.2% y/y in Q3 (-0.1% in Q2), and to curtail investment by -7.6% (-7.2% in Q2). Public consumption growth was again solid at +4.4%, unchanged from Q2. Net exports remained the growth driver in Q3 as strengthening demand from MENA countries, especially Iranian purchases of Turkish gold, kept export expansion at a healthy +11.9% y/y, albeit down from +20.9% in Q2, while imports continued to decline, by -2.4% (-3.7% in Q2) as a result of weakness in domestic demand. Expect full-year growth of slightly below +3% in 2012, picking up to around +4% in 2013. The current account deficit narrowed to -6.7% of GDP in Q1-Q3 2012 from -10% in 2011 as a whole.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Ghana: Elections
John Dramani Mahama of the NDC, who took over the presidency on the death of John Atta Mills in July, was declared winner of elections on 7 December (50.7% of the vote), receiving his own mandate to govern. Despite international observers declaring the polls relatively free and fair, the result is being contested by the leader of the main opposition party, Nana Akufo-Addo (47.7%) of the NPP. Democracy is more developed than elsewhere in West Africa and this latest electoral process, if results are finally accepted, will boost the country’s image and improve inward investment potential. Indeed, the new oil sector—commercial output from 2011—enabled Ghana to become one of the fastest growing economies. GDP growth registered +12% y/y in 2011 and should be in excess of +7% in 2012-14.
Americas – Venezuela: Presidential uncertainty
President Chavez is back in Cuba for further surgery for cancer. Unlike previous occasions when he had treatment, he appointed a successor in case he becomes incapacitated—his vice-president and minister for foreign affairs, Nicolas Maduro. A successor would be interim as the constitution requires elections to be called within 30 days if the president leaves office within the first four years of a term. (President Chavez starts his next 6-year term on 10 January 2013, after extending his 14-year rule in the October elections.) Although the operation itself was successful, according to Maduro, the return of presidential health risks increases uncertainty, particularly as it is unclear whether even a chosen successor would be able to retain the president’s personal popularity.
Asia-Pacific – China: Latest data
Latest data releases indicate a continued pick-up in activity, although the vigour of the rebound remains uncertain. Industrial output was up +10.1% y/y in November (+9.6% in October) but fixed investment activity, a key driver, was steady at +20.7% y/y. Bank lending was up slightly on October, although total social financing, a broader lending measure, levelled off at recently higher levels. In trade data, export growth slowed sharply to +2.9% y/y (+11.6% in October) as demand from the US and Japan fell back, while import growth stalled. Meanwhile, inflation was 2% in November, up slightly from 1.7% in October, although non-food edged down slightly to 1.6% from 1.7%. Overall, the data point to a fairly modest upturn by historic standards. Expect growth in 2013 of +8% after +7.6% in 2012.
Europe – Slovenia: Further sharp GDP contraction
Q3 GDP declined by -3.3% y/y (-3.2% in Q2) and -0.6% q/q sa (-1.1% in Q2) as domestic demand weakened further. There were contractions in private consumption (-3% y/y), public consumption (-3.1%) and fixed investment (-8.8%). Moreover, inventories subtracted -2.5pps from Q3 growth. External trade was also weak, with net exports contributing 3.1pps to Q3 growth as imports contracted more sharply (-5.1%) than exports (-0.7%). Expect full-year GDP to contract by more than -2% in 2012 and by around -0.5% in 2013—making Slovenia the worst performer in central and eastern Europe. Last week, parliament approved austerity budgets for 2013 and 2014 aiming at reducing the fiscal deficit below -3% of GDP (estimated -4.5% in 2012), but expect this to be difficult to achieve because of the protracted recession.
Worth knowing
Other Q3 GDP
Iceland: +2.1% y/y (-0.5% in Q2) and +3.5% q/q sa (-6.1% in Q2). Malta: +1.9% y/y (+1.3% in Q2). Romania
As expected, the centre-left coalition (Social Liberal Union) obtained an absolute majority in both houses of parliament (around 60% of votes). The President’s coalition, Right Romania Alliance, lost popularity (17% of votes) while the new extreme-left People’s Party entered parliament for the first time (14%). The president will appoint a PM after consultations.
Egypt
As a result of ongoing social/political tensions, an agreement for a USD4.8 billion IMF facility was put on hold. It is also possible that recent policy reversals (including on taxation) would have complicated the Fund’s formal approval of the agreement.
5 December 2012
In the Headlines
FIGURE OF THE WEEK: +5.3%>INDIA’S Q3 YR/YR GDP GROWTH US: Mixed data
Recent data have been mixed. October construction spending was stronger than expected, with residential construction posting a robust 3% mo/mo gain. By contrast, the November ISM manufacturing index fell below the 50 level, indicating contraction, and the employment component fell for the first time in three years. Q3 GDP increased by +2.7% yr/yr annualised but its composition was uneven, with inventories contributing significantly and consumption growing by only +1.4%. The effects of Hurricane Sandy are beginning to feed through as expected, with overall economic activity initially slowing and then boosted by recovery operations. Similarly because of the storm, auto sales were markedly down in October and then artificially enhanced to a very strong 15.5mn in November. Personal incomes were flat in October, driving spending down 0.2% mo/mo, but expect an improvement in November.
Eurozone: Slight improvement in business confidence
Manufacturing PMI in the Eurozone increased moderately in November to reach an eight-month high of 46.2, much in line with that month’s industry confidence indicator published by the European Commission, which registered its second and highest increase in the last 10 months. The manufacturing PMI survey reveals that the best performer in the period was Spain, while France, Germany and Greece also posted relatively strong increases. Conversely, Austria and the Netherlands were the worst performers. However, in a majority of countries (Ireland is a notable exception), the PMI remained below the threshold of 50, still suggesting that the outlook for the manufacturing sector is one of contraction, with new domestic and export orders close to mid- 2009 levels on the back of ongoing fiscal adjustments in most of the countries, as well as the global slowdown. In this context, the Eurozone manufacturing PMI continues to suggest that GDP will contract in Q4 2012.
Poland: Q3 GDP
Q3 real GDP growth was slightly up, at +0.4% qtr/qtr sa (+0.2% in Q2), but continued to slow markedly in yr/yr terms, to +1.4% from +2.3% in Q2, as domestic demand shifted to a contraction phase. Private consumption expanded by just +0.1% yr/yr in Q3 (+1.2% in Q2) and public consumption by +0.2% (+0.5% in Q2). Investment contracted by -1.5% yr/yr after +1.3% in Q2. Inven- tories added -0.5pps to Q3 growth (-1.5pps in Q2). Net exports was the sole growth driver in Q3—contributing +2.1pps (+2.7pps in Q2)—as the weakness of domestic demand pulled down imports by -3.7% yr/yr (-3.1% in Q2) while exports maintained mod- est growth of +0.7% (+2.6% in Q2). Expect the downtrend to continue into the first half of 2013, resulting in full-year growth of around +2% in both 2012 and 2013. Today, the central bank lowered its key policy interest rate by 25 bps to 4.25%.
India: Relative weakness
GDP growth in calendar Q3 (Q2 FY2012/13) was +5.3% yr/yr, down from +5.5% in Q2 and +6.7% in Q3 in 2011. The manufacturing sector grew by only +0.8% yr/yr in Q3 and agriculture (reflecting erratic monsoon rains) +1.2% but construction was up +6.7% and services by +7.1%. Overall, the growth momentum remains lacklustre and, with September’s economic reforms yet to feed through, Q4 GDP is unlikely to be much stronger. Growth is likely to pick up in 2013 but its rate of expansion is unlikely to be restored to annual rates of 8-9% for some time, reflecting a relatively weak global environment and a political system that makes policy implementation difficult. However, the independent central bank may begin an easing phase in monetary policy in 2013, which would boost investor and consumer confidence. Much will depend on the course of inflation, which remains high (WPI was up 7.5% yr/yr in October). Expect GDP growth of around +5.5% this FY and +6.5% in FY2013/14.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Egypt: Update
Demonstrations continue, but are largely peaceful. These are in response to President Mohamed Morsi’s decree (22 November) extending presidential powers, including immunity over judicial oversight. Protests are also in response to perceptions that the draft constitution was rushed and does not provide adequately for individual freedoms and is vague on religion as a constitutional basis. Morsi called a national referendum on the constitution for 15 December. Expect some negotiations to be going on to try and resolve the stand-off but the situation contains significant downside risk. For now, the IMF and the donor community remain supportive, but will be so only as long as the transition continues and economic policies are sound. Expect investors and traders to be even more wary.
Americas – Brazil: Moderate growth pick-up
Growth accelerated in Q3 as GDP increased by +0.6% qtr/qtr sa, less than expected but ending four quarters of near stagnation. Yr/yr growth was +0.9% (+0.5% in Q2). Private consumption remained robust, but fixed investment again contracted. Q4 should show further improvement—the latest manufacturing PMI was the highest since March 2011 and industrial production was up +0.9% mo/mo in October. Growth in full year 2012 is now likely to be 1-1.2%, but should still reach 3-3.5% in 2013. With signs of a pick-up in activity and inflation still at 5.5%, the central bank at its latest meeting last week left the policy interest rate unchanged for the first time since starting to ease in August 2011. Since then the rate has been lowered to 7.25% from 12.5%.
Asia-Pacific – Philippines: Growth acceleration
Q3 real GDP growth surged to +7.1% yr/yr (+6% in Q2) as external weakness has been offset by strengthening domestic demand, supported by reasonably expansionary economic policies. Private consumption expanded by +6.2% yr/yr in Q3 (+5.9% in Q2) while govern- ment spending accelerated to +12% (+6.8% in Q2). Fixed investment grew by +8.7% (+11.8% in Q2), supported by strong investment in construction (+24.8% in Q3). Although slowing, exports continued to increase, by +6.9% in Q3 (+8.3% in Q2), while imports grew by +8.3% (+10.3% in Q2). As inflation has remained moderate throughout the year (3.1% yr/yr in October), interest rates have been cut four times. Expect growth to ease somewhat in Q4 and in early 2013, resulting in full-year growth of around +6% in 2012 and +4.5% in 2013.
Europe – Romania: Election preview
This weekend, Romanians will elect members of both chambers of parliament for a new four- year term. The centre-left ruling coalition, the Social Liberal Union, headed by PM Ponta, continues to lead the polls, with around 60% support, while the centre-right opposition coalition, the Right Romania Alliance (ARD), has markedly lost support (to around 15% of voting intentions in some polls). Since end-2011, the political mood in Romania has shifted considerably, with President Basescu’s then ruling Democratic Liberal Party, now part of the ARD, consistently losing popularity because of austerity measures. Moreover, the new radical-left People’s Party is likely to enter parliament with around 15% of the votes. PM Ponta, if re-elected, is likely to ease some of the austerity measures.
Worth knowing
Other Q3 GDP growth
Croatia: -1.9% yr/yr (-2.2% Q2). Slovenia: -3.3% yr/yr (-3.2% Q2) and -0.6% qtr/qtr sa (-1.1% Q2).
Greece
7 December is the deadline for investors to express interest in the Greek bond buyback scheme agreed by the Eurogroup last week that could allow Greece to reduce its overall debt stock by around EUR20bn (10% of GDP).
Cyprus
The government agreed a Memorandum of Understanding with the IMF and the EU on the terms of a preliminary “bailout” deal. The actual size will need to be determined after the conclusion of an ongoing assessment of the troubled banking sector.
Africa: diverging monetary policies
Uganda: the central bank cut its key policy interest rate by 50bps to 12%. Headline inflation remains below the 5% medium-term official target. Malawi: the key policy interest rate was increased by 400bps to 25% (inflation 30.6% yr/yr in October).
28 November 2012
In the Headlines
FIGURE OF THE WEEK: +0.2%>GERMANY’S QTR/QTR GDP GROWTH Greece: Eurozone financing approved
A third meeting of EZ finance ministers this week agreed adjustments to the financial assistance programme, and final approval at national level of the release of EUR43.7bn financing (from the second bail-out) should be concluded by mid-December. Fiscal targets were amended, as the primary surplus target of 4.5% of GDP was postponed from 2014 to 2016, when the debt-GDP ratio is expected to be reduced to 175%, followed by a further reduction to 124% of GDP by 2020 and to below 110% by 2022. Some initiatives have been agreed to help Greece meet these targets including: lowering by 100 bps of the interest rate on the loans provided in the context of the Greek Loan Facility; lowering by 10 bps of the guarantee fee costs paid by Greece on the EFSF loans; an extension of the maturities of the bilateral and EFSF loans by 15 years; a deferral of interest payments on EFSF loans by 10 years; Greece will receive the equivalent of the income earned from the SMP programme; and a debt buy back scheme. Troïka members also indicated their readiness to take additional measures to lower the GDP ratio in 2020 if Greece shows an annual primary surplus. The agreement provides some breathing space, but the relationship between implementation of adjustment measures and financing is likely to remain fragile.
Germany: Q3 GDP growth
Despite the moderate overall recession in the EZ, the German economy continued to grow in Q3, although slowing to +0.2% qtr/qtr, following +0.3% in Q2. According to the Federal Statistical Office, positive contributions were made by foreign demand, with exports rising by +1.4% qtr/qtr in Q3, despite the challenging global environment. As imports increased at a somewhat slower rate, net exports contributed 0.3pps to overall growth. Domestic demand was mixed, with consumer demand increasing by +0.3% qtr/qtr in Q3 and capital formation in construction was also positive, growing by +1.5%. However, investment in machinery and equipment decreased for the fourth consecutive quarter, declining by -2% in Q3. In addition, a fall in inventories resulted in a negative contribution to growth of -0.3pps.
US: Holiday boost
Consumer confidence increased in November, with the index at 73.7 (73.1 in October), the highest since the recovery began, boosted by expectations of further gains in employment and the housing market. Indeed, housing prices firmed for the eighth consecutive month in September, putting the Case-Shiller Home Price index up +3% yr/yr. Moreover, holiday (Thanksgiving) sales had a decent start last weekend, growing +13% yr/yr, although this was less than last year’s growth of +16%. The National Retail Federation expects sales for the entire holiday period to grow +4.1% yr/yr (+5.6% last year). Retailers are now meeting or beating rivals’ prices on their websites or even prices consumers present to them via mobiles in their brick and mortar stores.
Egypt: Further transition concerns
President Mohamed Morsi issued decrees that gave him (temporary) extended powers, particularly over judicial decisions. The reaction to Morsi’s decrees—including demonstrations and strikes—indicate two significant features of the political transition. Firstly, it remains somewhat chaotic, as was to be expected, given the country’s new-found uncharted political territory. Secondly, there remains a strong popular determination not to return to autocratic leadership. The Moslem Brotherhood (and its political wing, the FJP) adopts a relatively pragmatic stance to governance. So expect some concessions to popular demands as Morsi attempts to maintain stability and security, as well as retain international financial support to keep the transition on track.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – South Africa: Update
SARB (central bank) kept the key policy (repo) rate on hold at 5% (22 November) and expressed concerns about the impact of labour disruptions on growth, above-inflation wage increases and inflationary effects resulting from a weakening ZAR. The official inflation forecast is an average 5.5% in 2013 and 5% in 2014, with a peak of 5.7% expected in Q1 2013 (target range 3-6%). Reflecting SARB concerns, GDP growth slowed in Q3, to +1.2% qtr/qtr from an upwardly revised +3.4% in Q2—not surprising, given disruptions to mine output. On a yr/yr basis, GDP growth slowed to +2.3% in Q3 from +3.1% in Q2. A background of weakening growth and continuing inflationary pressures may complicate policy decisions going forward, with SARB unlikely to ease its monetary stance in the ST.
Americas – Peru: Growth still robust
GDP increased by +6.5% yr/yr in Q3 (+6.3% Q2, +6% Q1). Consumer spending, +5.8% yr/yr, continued to underpin strong domestic demand growth, although private and public investment, +15.9% and +22.6%, also grew strongly. On the supply side, construction continued to lead growth—housing, commercial and mining infrastructure—mining and hydrocarbons output remained buoyant and manufacturing output strengthened after two quarters of little yr/yr growth. Weak external demand, however, continued to create headwinds for exports, while imports increased +15%. Domestic demand is likely to remain buoyant, so expect 2012 GDP growth of more than 6% followed by +5.8% in 2013. The fiscal balance remains in surplus, inflation on target and the external balance relatively strong.
Asia-Pacific – Malaysia: Strong Q3 growth
Q3 real GDP growth again surprised on the upside, at +5.2% yr/yr, only slightly down from an upwardly revised +5.6% in Q2. Domestic demand remained the growth driver, offsetting weakness in external demand. Private consumption expanded by +8.5%, government spending by +2.3% and fixed investment continued to soar, by +22.7%. Net exports made a negative contribution to Q3 growth as exports contracted by -3%, while imports increased by +4.4%. However, Q3 also saw a large increase in inventories, the largest in two years. Accordingly, some drawdown in inventories is likely to moderate growth in coming quarters. Expect full-year growth of slightly above 5% in 2012, easing to the low 4-4.5% range in 2013. Inflation remained low at 1.3% yr/yr in October.
Europe – Bulgaria: Modest Q3 growth
According to flash estimates, seasonally and working-day adjusted Q3 real GDP growth slowed to just +0.1% qtr/qtr (+0.3% in Q2) and remained stable at +0.5% yr/yr. Public consumption contracted by -0.5% qtr/qtr in Q3 (+1.2% in Q2) as the government continued fiscal constraint. Growth in private consumption and fixed investment both decelerated to +0.4% qtr/qtr in Q3, from +2.4% and +1.5% in Q2, respectively. The slowdown in private consumption also affected imports, which declined by -3.7% qtr/qtr in Q3 (+7.6% in Q2) while exports retained modest growth of +0.2% (+3.4% in Q2). The shift in the trade pattern in Q3 moved the current account back into surplus, to 0.5% of GDP in the first nine months of 2012. Expect full-year GDP growth of around +0.5% in 2012, rising to +1% in 2013.
Worth knowing
Sovereign ratings
Cyprus: Fitch lowered its LT rating by two notches to BB- from BB+ and retained a negative outlook, citing ongoing delays in negotiating bailout terms with the IMF and EU, as well as deteriorating economic conditions. Hungary: S&P lowered its LT rating by one notch to BB from BB+ (stable outlook), pointing to unorthodox economic policies, which could erode medium-term growth prospects, and a breakdown in IMF talks. India: Moody’s retained a stable outlook on its Baa3 rating.
Canada
The head of the central bank, Mark Carney, was appointed to be the new Governor of the Bank of England. Under Carney’s monetary policy, Canada was able to weather the financial crisis and global recession much better than most.
Sierra Leone
President Ernest Bai Koroma was re-elected for a second term, winning 58.7% of the vote.
21 November 2012
In the Headlines
FIGURE OF THE WEEK: USD109.8> BARREL PRICE OF BRENT OIL (-2.3% mo/mo) Eurozone: Weak data, continued uncertainty
Flash estimates show that EZ GDP contracted by -0.1% qtr/qtr in Q3. Details of the components of GDP are not available yet, but high frequency data provide some guide to the growth profile. In one key sector—construction—EZ output stabilised in Q3 compared to Q2, although monthly data signalled a deterioration at the end of the quarter, as output fell by -1.4% mo/mo in September after +0.3% and +0.6% in July and August, respectively. Except in Germany, where activity registered a small rebound of +2.7% mo/mo (-2.6% in August), all the main economies saw a decrease, especially Italy with a fall of -8% mo/mo. Weak economic data are accompanied by uncertainty over funding for Greece, as finance ministers and the IMF failed to agree on the release of the outstanding tranche at the latest meeting yesterday. More negotiations will be held next week as the EZ and IMF try to agree on ways to achieve an acceptable debt-GDP ratio.
Thailand: Q3 GDP growth
Q3 real GDP growth decelerated to +1.2% qtr/qtr sa (+2.8% in Q2) and +3% yr/yr (+4.4% in Q2), dampened by a sharp drop in inventories, which subtracted -3.8pps from the annual rate (+2.8pps in Q2). Domestic demand picked up further in Q3, with private consumption expanding by +6% yr/yr (+5.3% in Q2), public consumption by +9% (+7.4% in Q2) and fixed investment by +15.5% (+10.2% in Q2). However, weak global demand led to a decline in external trade activity, with exports falling by -2.8% yr/yr (+1.1% in Q2) and imports by -1.8% (+8.6% in Q2), so net exports subtracted -1.1pps from Q3 growth (-4.2pps in Q2). Nevertheless, exports should surge and lead to strong annual growth in Q4 as the severe flood-related downturn a year ago provides a low base. Expect full-year growth of around +5% in 2012 and moderation to +4% in 2013.
US: Housing market
The housing market continues to strengthen. In November, the Housing Market Index increased to its highest level in over six years. Existing home sales increased by +2.2% mo/mo in October, despite a -1.7% fall in sales in the north-east because of Hurricane Sandy. On a yr/yr basis, sales in October were up +10.9% and median prices by +11%. Supply fell to 5.4 months at the end of October, the lowest since February 2006. Housing starts increased by +3.6% mo/mo in October (+15% in September) despite a small dip in the north-east, again as a direct result of Hurricane Sandy. Starts and permits were up +42% and +30% yr/yr, respectively—both very strong numbers—but the increase is from a very weak base and both are more than 60% below the peaks recorded in late 2005 and early 2006.
Israel: Renewed tensions
The cross-border exchange of rocket fire between Israeli forces and Hamas and other groups located in the Gaza Strip has resulted in fatalities and heightened regional tensions. These come at a time when instability in Syria, ongoing concerns relating to Iranian nuclear plans and fragile political transitions across the area already impact negatively on business and trading environments, as opposing forces attempt to influence the significant changes in underlying regional dynamics. Attempts to broker a ceasefire between Israel and Hamas (partly sponsored by Egypt) may yet be successful but, even so, the region will remain tense. Against this background, economic prospects remain uncertain and initial forecasts of Israel’s GDP growth in 2013 of 2.5-3% may need revision either way as events unfold.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Sierra Leone: Election
The third general elections since the end of the protracted civil war in 2002 were conducted peacefully, despite a north-south divide and a strongly contested campaign. Although a run- off election may yet be needed, President Ernest Bai Koroma and his APC party appear likely winners. If opposition parties eventually accept the result—some allegations of electoral malpractice were lodged—a period of investment-led growth may be extended. The APC and main opposition SLPP both promote free market policies and foreign investment as a spur to job creation and improvements in infrastructure, so a significant redirection in the business and trading environment is not expected following the results. However, if violence ensues, GDP growth in 2013 is unlikely to match the annual average 8%+ of 2002-12.
Americas – Mexico: Growth slows
Growth slowed in Q3 as GDP increased by +0.5% qtr/qtr sa (+0.8% Q2) and by +3.3% yr/yr (+4.4% Q2). Manufacturing output eased to +4.1% yr/yr from +5.1% in Q2, as US demand (the major export market) weakened, although some of the overall slowdown could be attributed to weather-related low growth in agricultural output. Expectations surveys suggest that Q4 growth is unlikely to accelerate but, nonetheless, full year 2012 growth should still be +3.9%. Moreover, providing the US economy retains momentum, expect growth in 2013 of around +3.5%. The recent passage by congress of labour reforms is a plus for medium-term growth and may be a positive indication for the future of President-elect Enrique Pena Nieto’s energy reforms, although this remains a difficult area politically.
Asia-Pacific – Hong Kong: Return to weak growth
The economy grew by a modest +1.3% yr/yr in Q3, up slightly on the +1.2% in Q2. On a qtr/qtr basis the economy returned to growth in Q3, as GDP increased by +0.6%, after a contraction of -0.1% in Q2, the sixth consecutive quarter of low growth or contraction. Domestic demand retains momentum, with private consumption up +2.8% yr/yr as employment and income conditions remain supportive. Export momentum improved, with goods exports up +4% yr/yr after falling in Q2. External demand, particularly from mainland China, is crucial for growth (exports of goods and services are around 200% of GDP). With a GDP increase of just +1% in the first nine months of the year, growth in 2012 may not exceed +1.2% but expect +3-3.5% in 2013.
Europe – Central Europe: Q3 GDP growth
Regional Q3 GDP growth weakened further, according to “flash” estimates. The Czech Republic and Hungary remain firmly in recession and will contract in full-year 2012. The former contracted by -0.3% qtr/qtr sa (the fifth consecutive quarter of decline) and by -1.5% yr/yr sa. The latter contracted by -0.2% qtr/qtr sa and -1.5% yr/yr. Romania moved out of recession in Q2 but showed a renewed fall of GDP in Q3, by -0.5% qtr/qtr sa and -0.6% yr/yr. In Bulgaria, Q3 GDP growth slowed to 0.1% qtr/qtr sa but remained stable at +0.5% yr/yr sa. The Slovak Republic remained comparatively robust in Q3, with growth unchanged at +0.6% qtr/qtr sa and slightly down to +2.2% yr/yr (+2.6% Q2). Expect regional weakness to continue as a result of austerity measures and depressed external demand from the EZ.
Worth knowing
Egypt
Agreement was reached (20 November) with the IMF on a 22-month Stand-By Arrangement (SBA) of around USD4.8bn to support the government’s economic programme. Expect the IMF Executive Board to approve the SBA before the end of the year and for this to unlock further multilateral and bilateral financial assistance. The EU pledged USD6.4bn in aid.
Other Q3 GDP growth
Cyprus: -2.2% yr/yr (-2.5% Q2) and -0.5% qtr/qtr sa (-0.9% Q2). Malaysia: +5.2% yr/yr (+5.6% Q2). Singapore: downward revision to +0.3% yr/yr (+1.3% Q3 advance estimate) and -1.5% qtr/qtr sa (-0.4% advance estimate).
Nigeria
At its monetary policy meeting (19-20 November), the central bank left key interest rates unchanged. Expect policy to remain on hold for the rest of the year, with GDP increasing by 6.4% yr/yr in Q1-Q3 2012 and core inflation in steady decline.
14 November 2012
In the Headlines
FIGURE OF THE WEEK: +2.9%> RUSSIA’S YR/YR Q3 GDP GROWTH China: Export growth acceleration
October trade data surprised on the upside as export growth accelerated to +11.6% yr/yr, the largest increase in five months and the third consecutive period in which the pace picked up (+9.9% in September). Exports have been helped by demand from emerging economies and from the US, but Europe and Japan are still weak. Import growth remained relatively weak in October, however, at +2.4%, unchanged on the previous month. As a result, the trade surplus increased. The export data support earlier releases on industrial output, retail sales and fixed investment, all of which showed an acceleration for the second successive month. Bank lending was relatively subdued in October and less than expected, but the broader social financing measure continued to accelerate. These signs of improvement lend support to the authorities in their cautious stance towards policy loosening.
Eurozone: Industrial production declines
EZ industrial production (IP) declined by -2.5% mo/mo in September, the largest monthly fall since November 2008, offsetting a large part of the rebound earlier in the quarter. Nonetheless, overall, IP in Q3 ended up with a +0.3% qtr/qtr increase, better than the -0.5% decline in Q2. This implies a possibly less unfavourable Q3 GDP than had been expected, but also suggests, along with business surveys, that a significant contraction in Q4 will be hard to avoid. Meanwhile, the Greek parliament approved the 2013 budget, with the required cuts, but the EZ and IMF are still considering the outstanding disbursement of financial support, although EZ finance ministers seem to agree on a longer-time horizon in which Greece must make necessary fiscal adjustments. To maintain payments Greece is issuing short-dated debt domestically.
Germany: Mostly weak data
In September, new orders received by industry were down significantly, by -3.3% mo/mo after -0.8% in August, with foreign demand particularly weak at -4.5%. These data provide evidence of very weak demand from within the EZ (-9.6%), while orders from outside the zone were also down, but more moderately, at -1.5%. Additionally, industrial production in September decreased sharply, by -2.3% mo/mo after -0.4% in August, with marked falls in textiles (-6.1%), chemicals (-3.6%), computers and electronics (-7.3%) and the car industry (-10.7%). Construction output remained positive, however, with an increase of +2.7%, following a contraction of -2.6% in the previous month. The latest Ifo Business Climate Index reinforced the generally weak tone of recent data, as it declined again in October—for the sixth consecutive month (-1.4% mo/mo).
Russia: Q3 GDP growth and inflation
As expected, real GDP growth slowed further in Q3, to +2.9% yr/yr (flash estimate) from +4% in Q2 and +4.9% in Q1. Drought and wildfires affected the harvest in Q3, while industrial output growth remained weak at +2.5% (+2.3% in Q2). Nominal merchandise exports continued to contract, by -2.1% yr/yr in Q3 (-1.3% in Q2), reflecting the global slowdown, while imports shifted back to moderate growth of +1.4% (-1.4% in Q2). Domestic demand also weakened in Q3 as private consumption was dampened by a rise in regulated prices for utilities and by sharply higher food prices, the latter a result of the poor harvest. Headline inflation accelerated to 6.6% yr/yr in September from an all-time-low of 3.6% in May. Expect full-year growth of around +3.8% in 2012 and +4% in 2013 and annual inflation to stabilise at around 6% in the next few months.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE‘s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Mali: Security issues
At a summit meeting of ECOWAS, regional leaders agreed to deploy 3,300 soldiers to assist the local army retake the north of the country, which is currently under the control of Islamic extremists, including an al-Qaida offshoot. This follows a UN resolution in October that provided a 45-day window for the regional body to devise such a strategy. The UNSC is now likely to approve the plan but armed forces are unlikely to be deployed—if needed—until December or the new year. The militant forces in the north are well armed and entrenched, so expect significant opposition to attempts to unify the country, particularly as some regional states, including Algeria and Mauritania, appear unsupportive of the UN/ECOWAS initiative. Heightened tensions make the business and trading environment even more challenging.
Americas – Chile: Interest rates and update
At its latest policy meeting, the central bank again left the key interest rate unchanged at 5%. Headline inflation remains just below the 3% mid-point of the bank’s target range (2.9% yr/yr in October). On the real-side of the economy, the monthly indicator of economic activity (a proxy for GDP) was up +1% mo/mo in September, compared with +0.3% in August, the biggest monthly increase this year, which suggests that Q3 real GDP data to be released later this week should show another quarter of solid growth. This inflation/growth nexus points to little immediate pressure to adjust interest rates. Expect growth in 2012 to be around +5%, after a resilient performance in the first nine months, despite lower copper prices, but to slow to +4.3% in 2013.
Asia-Pacific – Sri Lanka: Budget plan
The FY2013 budget focuses on economic and fiscal consolidation, investment in infrastructure, liberalisation of the business environment (tax exemptions and increased thresholds) and promotion of the country as a trans-shipment hub. The deficit is projected to be cut to -5.8% of GDP (estimated -6.2% in FY2012) and around 80% of it will be financed through domestic borrowing. Given global uncertainties, Sri Lanka’s open economy (imports equivalent to 38% of GDP) and a budget that assumes GDP growth of +7.5%, the deficit appears ambitious. EH expects growth of around 5.5% in calendar 2012 and 2013 and that the central bank will keep interest rates on hold this Friday, as they have been since April after a period of tightening in monetary policy in Q1.
Europe – Baltics: Surprisingly strong Q3 GDP growth
In Estonia, Q3 real GDP growth accelerated to +3.4% yr/yr (+2.2% in Q2) and +1.7% qtr/qtr sa (+0.5% Q2), mainly driven by domestic demand. Construction, retail trade and other services contributed notably to growth, while the largely export-dependent manufacturing sector declined by -2.4% yr/yr. Latvia remains one of the fastest growing economies in the region, with Q3 GDP surging by +5.3% yr/yr (+5.0% in Q2) and +1.7% qtr/qtr sa (+1% in Q2). Strong increases in trade (+7% yr/yr), construction (+8%) and industry (+7%) reflect robust domestic and external demand. In Lithuania, strong Q3 GDP growth of +4.4% yr/yr (+2.1% in Q2) and +1.3% qtr/qtr sa (+0.6% in Q2) was also fairly broad-based. Expect full- year 2012 growth of around +3% in Estonia and Lithuania and +5% in Latvia.
Worth knowing
Japan
Q3 GDP contracted by an annualised -3.5% qtr/qtr sa, reflecting a weak domestic economy but also fragile global markets (particularly in Europe and elsewhere in Asia, which are key export destinations) and regional tensions.
Poland
The central bank lowered its key policy interest rate by 25bps to 4.5% last week, as inflation is easing while growth is stuttering. CPI inflation fell to 3.4% yr/yr in October from 3.8% in September and is now within the central bank’s 2.5%±1pp target for 2012.
Saudi Arabia
As from 15 November, companies in the private sector that have a labour force with a foreign (non-GCC) majority may be liable to a fine of SAR2,400 (USD640) each year for every “excess” worker. Last year, a quota system was introduced to try and improve employment prospects for Saudi nationals, with variable impact. The new policy, if applied strictly, could affect many companies in a country where an estimated nine out of 10 private sector employees are foreigners.
7 November 2012
In the Headlines
FIGURE OF THE WEEK: +6.2%> INDONESIA’S Q3 YR/YR REAL GDP GROWTH
US: Re-election, economy fragile
President Obama was re-elected for a second term in elections yesterday. His immediate challenge will be to deal with the “fiscal cliff” issue in order to maintain economic momentum. Latest pre-election data suggest that the economy is still fragile. October’s employment report showed an improvement in the data but they were still anaemic. The economy created 171,000 jobs against expectations of around 130,000 and there was an upward revision to the previous month. Yet, in only five of the last 32 months since job growth became positive did the economy produce more than the 250,000+ jobs needed to provide a solid recovery, and real wages have actually contracted slightly over the year. So, although this was better, it was by no means a “good” report. However, other releases were more positive. Both the manufacturing and non-manufacturing ISM surveys remained positive, consumer confidence reached its highest level of the year, construction spending improved and factory orders were mixed.
Euro zone: PMIs remain weak
The EZ manufacturing PMI for October remained in negative territory for the 15th consecutive month, at 45.7, a level slightly lower than the previous estimate (45.8), pointing to an extension of recession in the early part of Q4. The regional breakdown reveals a weakening in activity in all areas, with all the main economies below the 50 expansion threshold, including Germany (46), Italy (45.5), France (43.7) and Spain (43.5). In October, Ireland was the only country in positive territory, at 52.1. The services PMI for the EZ also edged down in October and remained in negative territory for the ninth consecutive month. In this context, Q4 GDP is likely to remain weak, with conditions as difficult as in Q3. Meanwhile, on the political front, Greece will vote today in parliament, amid a two-day general strike, on the proposed additional fiscal measures, approval of which is necessary for the disbursement of the latest tranche of funding from the EZ and IMF.
Saudi Arabia: Leadership changes
The interior minister, Prince Ahmed bin Abdel-Aziz al-Saud—who was appointed as recently as June—was removed from office in uncertain circumstances. His nephew, Prince Mohammed bin-Nayef al-Saud, replaced him. Prince Ahmed’s departure, officially for personal reasons, was a surprise and again raises speculation relating to succession. King Abdullah is almost 90 years old and Prince Mohammed is 53 and his elevation places him towards the front of a younger (third) generation of princes vying for ultimate power. When it happens, expect the succession to be managed behind the scenes, with little disruption on the surface or to overall policies. However, an injection of “youth” into the ruling elite may help improve communication with a generally young population.
Germany: Slowdown’s employment impact
In October, the Ifo Climate Index deteriorated for the sixth consecutive month, which means that overall GDP growth is likely to virtually stagnate during H2 2012, after +0.8% growth in H1. The slowing economy is having an increasing impact on the labour market by dampening the usually typical autumn revival. According to the latest figures from the Federal Employment Agency, 2.75mn people were registered unemployed in October, 35,000 less than in September and below the ‘normal’ reduction of around 50,000. The number of unemployed in October was 16,000 higher on a yr/yr basis, representing the first such increase since February 2010. Nevertheless, in isolation, these figures do not signal a trend reversal, although it would appear that the pace of reduction in unemployment has lost some momentum.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Uganda: Outlook
The central bank cut its key policy interest rate by a further 50bps to 12.5% at its latest monetary policy committee meeting (1 November) but indicated an end to the recent easing cycle may soon be appropriate—rates have been cut by a cumulative 10pps since February. Core inflation (4% yr/yr in September after 4.8% in August) is now expected to stabilise in the ST around the bank’s medium-term target of 5%. Meanwhile, a recent (relatively favourable) IMF report noted that large current account deficits (over 11% of GDP in FY2011/12) are largely financed by FDI inflows, fiscal policy is tight and quantitative targets in the Fund-supported economic programme were all met comfortably in H1 2012. EH expects GDP growth of around +4% in calendar 2012 and +5% in 2013.
Americas – Brazil: Update
Data released last week show that industrial production fell by -1% mo/mo in September and -3.1% yr/yr. However, this was partly the influence of relatively volatile mining output. Manufacturing fell by only -0.6%, which followed increases in June and July and a 1.6% rise in August alone. Overall, industrial production is still noticeably above the level of a few months ago and the October manufacturing PMI released last week was above 50 and up on September. All this points to continued recovery in output, although 2013 GDP growth will probably fall short of the 4% consensus expectations. On the policy front, without some modification (probably by technical adjustment to public sector investment), the primary fiscal surplus looks set to fall short of this year’s target.
Asia-Pacific – Indonesia: Strong Q3 growth
Real GDP growth continued at a strong pace in Q3, at +6.2% yr/yr, taking the average for the first three quarters of 2012 to +6.3%. Domestic demand was again the key growth driver in Q3, boosted by robust increases in private consumption (+5.7%) and fixed investment (+10%). Government consumption actually declined by -3.2%, but healthy public finances will allow for supportive expansionary public spending, in need. External trade activity slowed markedly, reflecting weakness in the global economy. Net exports subtracted -1.2pps from overall Q3 growth, as exports contracted by -1.4% yr/yr and imports by only -0.2%. Inventories contributed around +2pps to Q3 growth, suggesting that output may fall in coming quarters. Expect full-year growth of around +6% in both 2012 and 2013.
Europe – Czech Republic: Monetary easing, fiscal austerity
Last week, the Czech National Bank (CNB, the central bank) lowered the key policy interest rate by 20bps to 0.05%, following two earlier cuts of a cumulative 50 bps in June and Octo- ber. The CNB is trying to support economic activity, which is markedly curtailed by fiscal austerity. The CNB forecasts GDP in 2012 will decline by -0.9%, similar to EH’s forecast (-1%) and meagre growth of +0.2% in 2013, which is lower than EH’s current forecast of +1%. Inflation will remain under control in the next two years, despite an increase to an average 3.5% in the first nine months of 2012 from 1.9% in 2011, mainly the result of tax increases. Austerity should also contain the annual budget deficit to around 3% of GDP in 2012-13 and total public debt at 45% of GDP, relatively favourable by current EU standards.
Worth knowing
Australia
The central Bank (RBA) left the policy interest rate unchanged at 3.25%. Inflation remains low and, although the economy is slowing, key commodity prices have seen a partial recovery and China’s economy is showing signs of picking up.
Egypt
At USD15.5bn at end-October, net international reserves recorded an increase of +2.9% mo/mo. Bilateral assistance packages supported the reserves but they are still down -29.8% yr/yr. An IMF facility remains crucial to unlock further funding.
Libya
At the end of October, the 200-member General National Congress approved the government list nominated by PM Ali Zidan. However, since then, clashes between rival militia suggest that the new government’s authority will be strongly tested.
Weekly Export Risk Outlook
31 October 2012
In the Headlines
FIGURE OF THE WEEK: +2%>US QTR/QTR ANNUALISED Q3 GDP GROWTH Eurozone: Sentiment index weakens again
The Eurostat Sentiment Index for the euro area declined by -0.7pps in October, the eighth consecutive monthly fall. Confidence in industry and in construction had the main impact on deterioration in sentiment, with a drop of -2.1pps and -2.6pps, respectively. However, some other sector components recorded improvements, notably retail trade (+2.4pps). Moreover, consumer confidence remained broadly stable. Geographically, the two main economies, Germany and France, continued to show signs of weakness, with sentiment down -1.4pps and -1.8pps, respectively, but there was some improvement in other large economies, with confidence in Spain and Italy increasing by +1.8pps and +0.5pps, respectively. Nevertheless, recently-released official flash estimates show that Spain’s GDP contracted by -0.3% qtr/qtr in Q3, the fourth consecutive quarter of contraction. Meanwhile, Spain’s central bank announced steep discounts to be applied to distressed assets transferred to the “bad bank” to be set up as part of the banking sector reform/stabilisation plan.
US: GDP growth, elections and hurricanes
Advance estimates of GDP show relatively anaemic growth of +2% annualised qtr/qtr in Q3 but this was up from +1.3% in Q2, driven by government spending. Other data are mixed. Personal consumption expenditures increased by 0.8% mo/mo in September but at a relatively weak rate of 2.1% yr/yr. New home sales increased by 5.7% mo/mo in September and are now 11.7% higher than a year ago, while prices of existing homes increased by 0.5% mo/mo and 2% yr/yr. The Federal Reserve left interest rate policy and QE3 plans unchanged. Meanwhile, the presidential election campaign is proving a close contest and, with only one week to go, attention is focused on Hurricane Sandy, which hit the east coast, flooding parts of New York City and disrupting economic activity. Insured losses were initially estimated at around USD10bn, but expect this figure to climb higher.
South Korea: Q3 GDP reflects continued slowdown
Advance estimates indicate that Q3 real GDP growth decelerated to +1.6% yr/yr, from +2.3% in Q2, and to +0.2% qtr/qtr sa from +0.3% in Q2. Domestic demand remained weak as investment declined for a second consecutive quarter, by -2% yr/yr, and private consumption expanded by just +1.5%. Public spending continued to mitigate the slowdown, rising by +3.3%. External trade activity moderated further in Q3, reflecting weakness in the global economy, but net exports remained a positive contributor to overall growth, as exports expanded by +2.6% yr/yr while imports increased by only +0.9%. The Economic Sentiment Index declined to 89 in October from an average 92 in Q3, suggesting that the economy may lose further momentum in Q4. Expect full- year GDP growth of around +2% in 2012 before picking up slightly in 2013.
South Africa: Fiscal stance
Economic news has been largely negative of late—labour problems and associated loss of output, particularly in the mining sector (7% of overall GDP), some policy concerns (including uncertainty over potential for forced nationalisation) and impact on the export sector of weak European markets. However, last week’s Medium Term Budget Policy Statement re-affirmed the country’s relatively sound fiscal stance. The budget balance is projected to fall from almost 5% of GDP in 2012/13 to around 3% in 2015/16, without recourse to stringent austerity measures. Nevertheless, expect fiscal targets to be challenging, particularly as there are risks to growth and there are political and policy uncertainties linked to an ANC conference in December (including party leadership elections) and expenditure plans may be subject to amendment ahead of 2014 general elections.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Israel: Politics
Two right-of-centre political parties are merging prior to parliamentary elections in January. Leaders of these parties already serve in government, Likud’s Binyamin Netanyahu as PM and Israeli Beiteinu’s Avigdor Lieberman as foreign minister. The merger strengthens Netanyahu’s prospects of remaining PM but expect the election to be strongly contested, perhaps with the centre and left of the political spectrum (including Kadima and Labour) also forming an electoral coalition—Israeli political alliances tend to be fluid. This is not likely to improve relations with Palestinian authorities—Israeli Beiteinu is anti-peace process—but a renewed mandate for a right-wing government may provide a firmer support base for action against Iran, if progress on limiting Tehran’s nuclear aspirations is not otherwise forthcoming.
Americas – Colombia: Interest rates and update
At its latest policy meeting, the central bank left interest rates unchanged at 4.75%. Support for this decision came from domestic demand, which is holding up (although slowing) as both consumption and investment retain momentum and also from inflation and expectations converging towards the mid-point target of 3%, still high commodity prices and easing credit growth. A further consideration, according to the central bank, was the improvement in global financial conditions brought about by recent actions of central banks. The biggest threat going forward is seen as a strong recession in Europe. That and the future trend of commodity prices will be key factors in maintaining growth prospects and the future course of interest rates into 2013. EH expects GDP growth of +4% in 2012 and +3.8% in 2013.
Asia-Pacific – Taiwan: Q3 GDP, slow improvement
Real GDP returned to yr/yr growth in Q3, increasing by +1.0%, after -0.2% in Q2, although the outturn was below expectations. Qtr/qtr sa the economy continued to make slow progress, as GDP expanded by +0.9%, after +0.6% in Q2 and +0.4% in Q1. Domestic demand returned to yr/yr growth, as fixed investment turned positive, but private consumption growth weakened further. Another positive was that both exports and imports were higher than a year ago. Latest monthly data and surveys also indicate that Q3 ended on a stronger note, pointing to a more robust Q4. Nonetheless, full year 2012 growth is now likely to be only +1%, although a pick-up to around +3% can be expected in 2013 based on EH projections of a moderate improvement in global demand.
Europe – Lithuania: Election result and Q3 GDP growth
The centre-right coalition government was unseated in parliamentary elections held on 14 and 28 October, obtaining just 42 out of 141 seats. However, formation of a new centre-left coalition—comprising the Social Democrats (LSDP, 40 seats), the Labour Party (29 seats) and the Order and Justice Party (11 seats)—is complicated by President Grybauskaite’s unprecedented threat to veto the inclusion of Labour in a new government because of alleged accounting fraud and election violations. LSDP leader Butkevicius is still likely to become the next PM, probably of a minority government. Meanwhile, the statistical office announced surprisingly strong Q3 GDP growth estimates of +4.4% yr/yr (+2.1% in Q2) and +1.3% qtr/qtr sa (+0.6% in Q2).
Worth knowing
UK
Q3 GDP data surprised on the upside with growth of +1% qtr/qtr. However, while positive, this was partly the result of statistical distortions that lowered output in Q2 and Q4 is unlikely to be as strong.
Interest rates
Hungary: key policy rate was cut by 25bps to 6.25%. Philippines: key rates were cut by 25bps, the overnight borrowing rate to 3.5% and the overnight lending rate to 5.5%, based on a continuing benign inflation outlook.
Ukraine
Preliminary results from last Sunday’s parliamentary election suggest a victory for the ruling Party of Regions of President Yanukovich. If that party reaches an outright majority, a coalition government, as now, would not be necessary.
17 October 2012
In the Headlines
FIGURE OF THE WEEK: USD115>BARREL PRICE OF BRENT OIL US: Strong retail sales
Retail sales showed their third consecutive month of strong performance, growing +1.1% mo/mo in September after an upwardly revised +1.2 % in August. High prices drove gasoline sales up +2.5% mo/mo after a sharp +6.1% increase in August. Even without the volatile gasoline and auto components, retail sales increased by +0.9% mo/mo in September. After adjusting for inflation, total retail sales were up a strong +3.4% yr/yr. High gasoline prices were also the driving force behind an increase in the Consumer Price Index (CPI), which was up 0.6% mo/mo in September, after a similar increase in August. However, growth in overall and core CPI remained at a relatively mild 2% yr/yr in September, giving the Fed room to continue its easing stance in monetary policy. Fed Chairman Ben Bernanke defended accommodative monetary policies in the US and even suggested that emerging market countries should allow their currencies to appreciate to offset perceived ill effects.
China: September data
Inflation (CPI) eased further, to 1.9% yr/yr in September (2% in August). While expectations are for some pick-up in Q4, inflation does not look like a major constraint on policy loosening in the near-term. However, with the leadership transition underway (the 18th Party Congress will start on 8 November) there may still be caution over policy. In other releases, monetary data showed M2 and M1 growing a little faster and, although bank lending was unexpectedly weak, the broader “total social financing” took up the slack. Trade data showed that exports—up 9%—were surprisingly strong in September, although import growth was sluggish (+2.4%). Industrial production and investment data to be released later this week will provide more evidence. Q3 GDP data will also be released, most likely pointing to activity stabilising, although the yr/yr figure could be less than in Q2.
India: Inflation limits monetary policy
Consumer price inflation was 9.73% yr/yr in September (10.03% in August) and wholesale price inflation (still the main official gauge of price pressures) was 7.8% yr/yr (7.6% in August). Such data, at a time of relatively weaker overall economic growth— recent reforms are unlikely to spur GDP expansion in the ST—present a policy challenge for the authorities who would otherwise implement a more aggressive loosening in monetary policy. With the full effects of September’s fuel subsidy reduction and delayed monsoon (weaker agricultural output) yet to work through the inflation data, do not expect the monetary policy committee to announce a cut in interest rates later this month. Lower interest rates may yet be tabled before year-end (and are likely in H1 2013) but much depends on official perceptions of the growth-inflation balance.
World Economy: Consensus is subdued growth
Consensus forecasts now project 2012 world GDP growth of +2.5% yr/yr, representing a decrease of -0.1pps compared with the previous forecast released in September (+2.6%). In the latest forecasts, the rate of GDP contraction in Western Europe in 2012 is increased moderately relative to September, by -0.1pps to -0.3%, reflecting a deterioration in prospects for southern European countries, particularly Italy (from -2.2% to -2.4%) and Greece (from -6.3% to -6.7%) but also Belgium (from -0.1% to -0.3%). Expectations of GDP growth also deteriorated for North America (-0.1pps to +2.1%) because of the downgrade in the US forecast (-0.1pps to +2.1%) and for Asia Pacific (-0.1pps to +4.8%). Growth forecasts remain unchanged for Eastern Europe (+2.8%) and also for Latin America (+2.9%). The only region to record an improvement in growth forecasts is the Middle East and Africa, by +0.3pps to 4.4%.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Ghana: GDP & update
Official statistics indicate that GDP growth slowed to +2.5% yr/yr in Q2, after registering +15.7% in Q1 and +20.6% in Q2 2011, and by +2.4% qtr/qtr (+0.1% in Q1 and +16.8% in Q2 2011). Achievement of an official growth target of +9.4% in 2012 now appears unlikely. Economic performance (including distribution of oil wealth) is likely to feature in upcoming presidential election campaigning. Nana Konadu Agyeman-Rawlings (wife of a long-serving former head of state) secured the nomination for these elections as candidate of the newly- formed National Democratic Party (NDP)—a breakaway movement from the ruling NDC. Nevertheless, expect the polls to be a direct contest between the NDC and NPP, with the result too close to call, although significant policy redirection is unlikely, whatever the result.
Americas – Peru: Growth & interest rates
August monthly GDP data show a yr/yr increase of +6.3%, still strong but lower than market expectations and July’s +7.1%. Growth in construction remained particularly strong, up +17.6%. Inflation in September was 3.7% yr/yr (3.5% in August) above the central bank’s target range but, excluding energy and food, the price index increased only 2.1%. Unsurprisingly, against this backdrop and with the exchange rate strengthening, the central bank last week left the policy interest rate unchanged at 4.25% and rates may remain unchanged for some time, although there could be some further adjustment to bank reserve requirements. Expect GDP growth of close to +6% in 2012 and 2013, although the economy remains susceptible to global commodity prices.
Asia-Pacific – Singapore: Q3 GDP & monetary policy
Advance estimates indicate that Q3 real GDP growth eased to +1.3% yr/yr (+2.3% in Q2) and contracted by -1.5% qtr/qtr sa, but the upward revision of Q2 qtr/qtr sa growth to +0.2% (from a preliminary estimate of -0.7%) meant the country avoided recession. The large revision was mainly a result of new data from the construction sector, which is now estimated to have grown by +10.1% yr/yr in Q2 and +8.6% in Q3. The overall economic slowdown in Q3 is a result of weak manufacturing, which grew by just +0.7% yr/yr (+4.6% in Q2), reflecting sluggish external demand from advanced economies. Expect full-year 2012 growth of around +2%. Despite overall economic weakness and easing inflation (3.9% yr/yr in August), the Monetary Authority kept monetary policy unchanged last week.
Europe – Romania: Update
Revised official estimates show that Q2 real GDP growth picked up to +0.5% qtr/qtr sa (+0.1% in Q1) and +1.1% yr/yr (+0.3% in Q1). Fixed investment was the main growth driver in H1, expanding by +14.2% yr/yr. Private consumption grew by a modest +1.1% and government consumption declined by -2.8%. Net exports, however, had a negative impact on H1 GDP as exports contracted by -1.4% yr/yr while imports stagnated. Early indicators for Q3 suggest that the economy continued to grow modestly. Expect real GDP growth of around +1% in full-year 2012, after +2.5% in 2011. Consumer price inflation accelerated to 5.3% yr/yr in September from 3.9% in August and a low of 1.8% in May, mainly driven by rising food costs.
Worth knowing
Canada
The ratio of household debt to disposable personal income increased to a record high 163.4% in Q2, fuelled in part by a rapidly growing housing market, which now appears on the verge of a slowdown.
Interest rates
With inflationary pressures appearing under control, both South Korea and Thailand cut key policy rates by 25bps to 2.75% to support growth via domestic demand as external demand remains weak. Brazil lowered its policy rate by 25bps to 7.25%.
GDP growth
Egypt: +2.2% yr/yr in FY 2011/12 (July-June). Botswana: +8.4% yr/yr in Q2 2012 after an upwardly revised +6.7% in Q1. Namibia: +8.9% yr/yr in Q2 2012 after +3.7% in Q1.
10 October 2012
In the Headlines
FIGURE OF THE WEEK: 7.8%>US UNEMPLOYMENT IN SEPTEMBER US: Labour market
The Establishment employment report met expectations of creation of 114,000 jobs in September. It also showed large upward revisions in July and August indicating growth in government jobs for three consecutive months for the first time since the recession began. However, the economy needs to create 200,000-250,000 jobs per month to generate meaningful overall growth and the number of manufacturing jobs contracted for the second consecutive month. The separate Household survey, which is based on a much smaller and more volatile sample, showed that the rate of unemployment fell an unexpectedly sharp 0.3pps in September, to 7.8%. Unemployment has now fallen 0.5pps in two months, which is very unusual. Meanwhile, factory orders (ex-aircraft) and the ISM services index both showed modest growth in August.
North Africa: Transition update
Libya’s democratically-elected General National Congress (GNC, legislature) dismissed PM Mustafa Abushagur after only four weeks in the job. Abushagur could not forge a government acceptable to the GNC. Libya is still without a constitution and is politically fragile at a time when security issues (some militia have yet to be disarmed) also mark a complex transition. In Tunisia, the government led by the moderate Islamist Nahda party authorised Salafism, although jihadi elements within that movement provide security concerns. Here too, a new constitution has yet to be drafted and democratic institutions are not fully embedded. Meanwhile, Egypt’s President Morsi appears to have consolidated his power base but the economy remains sluggish and the injection of confidence and funding that signing an IMF facility (USD4.8bn) will provide remain critical. Regionally, expect political transitions to remain fragile at a time when key European markets offer only weak trade, investment and employment opportunities and limit domestic growth potential.
Venezuela: Presidential elections
President Hugo Chavez, in office since 1998, won the presidential elections held last weekend. Despite a stronger challenge from the opposition than in previous elections, Chavez, who was elected to serve another six-year term, took 54% of the vote, giving him a comfortable 9pps winning margin over united opposition (MUD) candidate Henrique Capriles. Chavez won 22 of 24 states, including Capriles’ home state. Capriles quickly accepted defeat and the wide margin of victory will give Chavez a strong mandate to continue and extend his “socialist revolution”. Regional elections are due in December and municipal elections in March 2013. A key issue will be whether Capriles will continue to lead a united opposition or, if not, will the MUD again fragment. The health of President Chavez also remains a key uncertainty.
World Economy: Gloomier IMF forecasts
The IMF’s latest (October) World Economic Outlook indicates a gloomier picture, despite recent financial improvements in response to EZ crisis measures and US Fed actions. Projections are revised down both for 2012 (-0.2pps to +3.3% for world output) and for 2013 (-0.3pps to +3.6%), reflecting not only further deterioration in activity but also the high level of uncertainties. Advanced economies will remain on a weaker-than-expected tempo (+1.3% 2012, +1.5% 2013), constrained by fiscal consolidation. The EZ will not recover quickly (-0.4% 2012, +0.2% 2013) and, along with the US “fiscal cliff”, remains among the main risks. Emerging economies will be affected through both trade and financial channels, with growth rates (+5.3% 2012, +5.6% 2013) still not recovering pre-crisis levels despite strong fundamentals and macro-economic room for manoeuvre. Within emerging economies, developing Asia will continue to lead the way (+6.7% 2012, +7.2% 2013). World trade will also register weaker momentum than previously expected (forecasts down by -0.6pps to +3.2% for 2012 and by -0.7pps to +4.5% for 2013).
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Cyprus: Downgrade
Last week, Moody’s lowered its LT sovereign rating by three notches, to B3 from Ba3, and retained a negative outlook. The action—following earlier downgrades by two notches in June and one notch in March this year—mainly reflects the growing difficulties in the banking sector and their adverse effects on the sustainability of public debt and on Cyprus’ growth potential. The large deterioration in asset quality over the last year has led to sharply rising recapitalisation costs of the banking sector—estimated at EUR3-4bn by the EU and Cyprus and EUR8bn by Moody’s. Cyprus applied for a bailout by the EU/IMF in June 2012 and is also seeking new bilateral support from Russia but negotiations are delayed by disagreements over conditionality.
Americas – Brazil: Local elections and update
In the first round of local elections for mayors held last weekend the ruling PT (President Roussef’s party) and its allies performed relatively well. The PMDB won the largest number of municipalities (1,025 of 5,568 contested) including Rio de Janeiro, although this was a lower number than in the previous election in 2008, with the PT and the PSB, also an ally, gaining. Second round run-off votes will be necessary later in October for key cities, including Sao Paulo. On the economic front, with inflation edging up slightly in September (5.58% yr/yr), industrial production data moving ahead (up +1.5% in August mo/mo) but external demand weak, the central bank’s decision on interest rates this week looks finely balanced between no change and a 25bps cut.
Asia-Pacific – Pakistan: Monetary policy and outlook
The central bank this week cut its key policy interest rate by a further 50bps, to 10%, following its 150bps cut in August, reflecting an improved inflationary environment. Consumer price inflation declined to 8.8% yr/yr in September, from 9.1% in August and a recent peak of 12.3% in May. However, inflationary pressures are unlikely to ease substantially as food prices and government domestic borrowing remain high. Even so, official concern over weak growth and, perhaps, some pre-election priming (despite already weak fiscal accounts) are likely to produce a further interest rate cut this year. Its impact may be limited by power shortages, current lack of investment and a weak external outlook, so expect GDP growth in FY2012/13 (July-June) of only +3.5%
Europe – Hungary: Budget revisions
Last week, the government proposed major revisions to the current and the 2013 budgets, including new austerity measures, greater efficiency of tax collection and exemption of the central bank from the already approved introduction of a financial transactions tax. The latter removes one obstacle to a new IMF lending programme. Based on more realistic growth forecasts (-1.2% in 2012 and +1% in 2013) than before, the government now targets fiscal deficits of 2.7% of GDP this year and next which, if realistic, will pave the way for financial support from the EU, which requires deficits to be below 3% of GDP. However, this threshold may still be breached as further austerity and continued weak external demand from the EZ may result in the revised growth forecasts being too optimistic.
Worth knowing
Turkey/Syria
The shelling of a Turkish border village by the Syrian army on 3 October—perhaps as a result of stray gunfire—led to retaliation by Turkish forces and ongoing cross-border artillery exchanges since then. Serious escalation appears unlikely at this stage but it cannot be ruled out entirely in the event of further miscalculation or misadventure.
GDP growth
Kenya: +3.3% yr/yr in Q2, down from a revised +3.4% in Q1 and the slowest quarterly growth rate since Q4 2009. Morocco: +2.3% yr/yr in Q2 after 2.8% in Q1. Mauritius: +1.3% qtr/qtr and +2.5% yr/yr in Q2, after 0% and +2.9% in Q1, respectively. Qatar: +5% yr/yr in Q2 (preliminary estimate) after +7.6% in Q1.
Overseas travel risks becoming more relevant to mid-market employers
Accidents, political unrest could occur while overseas
Joanne Wojcik, Business Insurance (www.businessinsurance.com) October 7, 2012
While large, multinational employers are familiar with the risks inherent in international business travel, midsize employers just beginning to send employees overseas are recognizing the need to manage this exposure.Whether it’s a marketing executive traveling occasionally to arrange for goods to be exported or an operations manager visiting a foreign manufacturing plant that supplies component parts, these international business travelers are exposed to risks ranging from the benign to the extreme.
Though most mid-market companies don’t have on-the-ground operations in foreign countries, they can have travel exposures if their employees travel outside the U.S. for business, said Lyde Esposito, international segments leader at Zurich North America Commercial in Chicago.
“There’s plenty that can go wrong when employees are traveling overseas,” said Dominick Zenzola, Chicago-based vice president and employee benefit manager at Chubb Accident and Health, a unit of Chubb Group of Insurance Cos. “One of the most common is a medical emergency, such as an accident or illness.”
Imagine an employee traveling in the Middle East who requires medical attention after becoming involved in a car accident. The employee is “thousands of miles away and doesn’t speak the language and may not be familiar with the health care system in that country,” Mr. Zenzola said. “There are some hospitals where you have to pay before you get in.”
Bryan Tedford, senior vice president of foreign casualty at Ace USA in Jersey City, N.J., said the insurer once paid a damage claim on behalf of a furniture company employee who was injured while shopping in a farmhouse for antiques to import to the United States.
Weekly Export Risk Outlook by Euler Hermes
12 September 2012
In the Headlines
FIGURE OF THE WEEK: +2.9%>TURKEY’S Q2 YR/YR GDP GROWTH Eurozone: Update
The ECB announced Outright Monetary Transactions last week, under which it will make sterilised purchases of sovereign bonds (1-3 years maturity) in unlimited amounts. Purchases will depend on the country accessing the EFSF/ESM facility on a precautionary basis, which will require an approved economic programme. This is an important and substantive step forward, as the unlimited nature of the programme, for the first time, gives the EZ a credible back stop. Yet it is not a cure-all, as countries will still have to implement economic adjustment and a virtuous circle needs to start that restores economic growth expectations. Also, Germany’s courts ruled favourably on the ESM’s constitutionality, but Greece has still to find agreement with the Troika. Meanwhile, EZ July industrial production rebounded slightly, up +0.6% mo/mo (-0.6% June) with capital goods the main driver (+2.4%), followed by intermediate goods (+0.1%), while the largest decline was energy (-1.2%). At a country level, performance remained mixed, down again in Spain and Italy (both -0.2% mo/mo), but up in France (+0.3%) and Germany (+1.3%).
US: Weak job growth
The employment report provided another statistical disappointment, showing that the economy gained only 96,000 jobs in August—compared with expectations of 125,000—and was again markedly below the 200,000-250,000 needed to provide solid economic growth. There were also downward revisions for the previous two months, amounting to 41,000 jobs, and zero growth in wages. In addition, while the rate of unemployment fell from 8.3% to 8.1% it did so because 368,000 people stopped actively seeking jobs and left the potential workforce, sending the labour participation rate to its lowest since 1981. Given Fed Chairman Ben Bernanke’s recent impassioned speech about the need to improve the weak employment situation, the report may spur policy action, with a third round of quantitative easing, perhaps as early as tomorrow.
China: Data remains weak
August data releases dampened further hopes that Q3 would mark the start of a rebound. Indeed, Q3 yr/yr growth is now more likely to be lower than Q2. Industrial production slipped to 8.9%, export growth remained subdued (+2.7% yr/yr) and imports fell (-2.6% yr/yr). However, January-August fixed investment growth was +20.2% yr/yr (+20.4% in July) and retail sales grew by +13.2% yr/yr in August (+13.1% July). Moreover, bank lending was much stronger than in July, although the main driver of the increase was lending to households. The government also approved a large number of infrastructure investments, although most of these do not appear to be new and are multi-year. More stimulus is still likely, but at a measured pace, with the leadership handover a possible distraction, and full year 2012 growth is now likely to be +7.6%, followed by +8.1% in 2013.
Switzerland: Moderate dip in growth
GDP contracted by -0.1% qtr/qtr in Q2, after somewhat surprisingly strong outcomes in the two preceding quarters (+0.4% in Q4 2011 and +0.5% in Q1 2012), mainly reflecting a marked reduction in inventories, which reduced overall growth by -0.5pps. While capital investment as a whole remained unchanged in Q2, private consumption expanded by +0.3% qtr/qtr (+0.9% Q1) and public consumption by +1%. Net exports made a positive contribution of 0.1pps, despite CHF strength. The Swiss National Accounts were revised in the summer (including data adjustments back to 1990) leading to significant downward revisions. These include Q3 2011, with GDP growth revised from +0.3% qtr/qtr to -0.2%, which contributed to full-year 2011 growth of 1.9% from an original estimate of 2.1%. Expect growth of 1% in 2012 and 1.3% in 2013.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Turkey: Q2 GDP
Real GDP growth eased further in Q2, to +2.9% yr/yr from +3.3% in Q1 and +8.5% in full- year 2011. Credit tightening by the central bank kept private consumption growth low at +0.4% in Q2 and sent investment plunging by -7.4% (+1.5% in Q1). Public consumption growth remained robust at +4.4%. The contribution of net exports to overall growth increased further in Q2 as export expansion accelerated to +19.8%―buoyed by strong gold exports to Iran―while imports continued to decline, by -3.6%, squeezed by the slowdown in domestic demand. Expect full-year 2012 growth of around +3.2% as the data suggest a soft landing for the economy after overheating in 2010-2011. However, continued loose fiscal policy and a still large current account deficit (-8% of GDP in H1) remain concerns.
Americas – Dominican Republic: Risk update
Growth will slow to 3.5% in 2012 and 3.6% in 2013 from 4.5% in 2011. Inflation accelerated to 7.8% yr/yr at end-2011 (food and energy) but fell back to 1.6% yr/yr in July. The fiscal deficit is moderate (around 3% of GDP) and the public debt-GDP ratio low (just over 30%) although revenues as a proportion of GDP are structurally low. The current account deficit is persistently large (8%+ of GDP in 2010-12) and net FDI flows cover only 50% of the deficit. FX reserves cover less than two months of imports (goods and services) and less than 100% of external debt falling due in the next 12 months. External debt ratios are moderate. Overall, growth is relatively strong and debt ratios manageable but the external balance is weak. Systemic political risk is low-to-moderate.
Asia-Pacific – Bangladesh: Update
There is a deep-rooted hostility between the two main political parties, the BNP and the AL, which results in a highly-confrontational political and social environment that is not conducive to effective governance, policy implementation and LT social and economic development. An active military and Islamic fundamentalist militants add to this volatile mix. Nevertheless, annual average economic growth was over +6% in 2008-11, during which period current account surpluses were recorded. However, with the clothing industry accounting for around 80% of export receipts and goods destined mainly for US and European markets (while imports are weighted towards Asian sources), small current account deficits are forecast for 2012 and 2013. Expect GDP growth to slow but still remain over +5% this year and in 2013.
Europe – Slovenia: Q2 GDP growth sharply lower
Real GDP contracted sharply in Q2, by -3.2% yr/yr, following an upward revision to +0.2% growth in Q1. In seasonally- and working-day adjusted qtr/qtr terms, GDP declined by -1% in Q2 after being flat in Q1. In particular, domestic demand weakened in Q2, with private consumption falling by -3% yr/yr, public consumption by -2% and fixed investment by -8.9%. Moreover, inventories subtracted -2.9pps from Q2 growth. External trade activity also fell, but net exports contributed +3.4pps to Q2 growth as imports contracted more sharply (-5.4%) than exports (-0.5%). Domestic demand is unlikely to recover soon because of mounting problems in the banking sector and external demand will remain weak as a result of the EZ crisis. Expect GDP to contract by -1.5% in full-year 2012 and to be flat in 2013, at best.
Worth knowing
Other Q2 GDP growth
Iceland: +0.5% yr/yr (+4.2% in Q1), -6.5% qtr/qtr sa (+0.3% in Q1). Malta: +0.9% yr/yr (-1.2% in Q1). Tunisia: +2.1% yr/yr (+4.6% in Q1 and +3.3% in H1). Israel: +3.2 yr/yr (+2.8% in Q1). Bahrain: -1.3% qtr/qtr (+0.9% Q1), +4.3% yr/yr (+5.9% Q1).
Kenya
On 5 September, the monetary policy committee cut its key policy interest rate by 350bps, down to 13%. This reflects a positive official outlook on inflationary pressures, a relatively stable KES and a stock of FX providing over four months of import cover.
Somalia
On 10 September, parliament elected Hassan Sheikh Mohamud (190 votes) as state president and head of state, ahead of the pre-poll favourite and incumbent leader of the Transitional Federal Government, Sheikh Sharif Sheikh Ahmed (79 votes).
5 September 2012
In the Headlines
FIGURE OF THE WEEK: +5.5%>INDIA’S YR/YR GDP GROWTH IN APRIL-JUNE US: Further QE?
In his much anticipated speech in Jackson Hole, Wyoming, last Friday, Fed Chairman Ben Bernanke made a strong case for more quantitative easing (QE). Bernanke noted that the previous two rounds of QE were effective and, in an unusually impassioned speech, he advocated further easing because unemployment is a “grave concern…” that entails “…enormous suffering and waste of human talent…” and that it could “…wreak structural damage… that could last for many years”. Recent data appear to support this approach, with the ISM manufacturing index below the 50 level for the third consecutive month in August, signalling contraction, and new orders have plummeted since May. Other weak data include construction spending (July), GDP (Q2), consumer confidence (August), personal consumption expenditures and personal income, although auto sales and housing data firmed in August. Friday’s employment report may be critical for policy initiatives.
Eurozone: Update
The EZ composite PMI continues to fall and in August was below the 50 threshold for the seventh consecutive month, signalling further business contraction in Q3. The final index was revised down to 46.3 (flash estimate 46.6, and 46.5 in July). The data are consistent with latest European Commission surveys, in which the economic sentiment indicator fell by 1.8pps, and also with the latest hard data, notably unemployment, which increased to its highest level of 11.3% in July. With the holiday period over, EZ leaders are shuttling between capitals to advance key elements of proposals to deal with the debt crisis, notably the “Draghi plan”, which will involve ECB intervention alongside EZ fund actions. There may be some further announcements at the ECB policy meeting this week, although reports suggest much detail is outstanding, and possibly a policy rate cut. Meanwhile, the ESM awaits Germany’s constitutional court ruling (12 September) and Greece continues to negotiate its Troika programme.
Brazil: Interest rate cut
The central bank’s monetary policy committee cut the policy interest rate (SELIC) by another 50bps to 7.5%, a cumulative reduction of 500bps since the latest easing cycle began in August 2011. The government also announced that it is extending current tax breaks on various consumption items for a further four months. With Q2 GDP figures also released at the end of last week showing growth of just +0.4% qtr/qtr sa and +0.5% yr/yr and inflation within target range and expected to remain there, the latest interest rate move was unsurprising. Yet Q2 qtr/qtr growth had a little more momentum than Q1 and latest retail sales and industrial production data are stronger, so the central bank is likely to be more cautious over future cuts as H2 growth picks up.
India: Weak data influence outlook
Real GDP increased by +5.5% yr/yr in Q1 of FY2012/13 (April-June), compared with +5.3% in the previous quarter. The agricultural sector strengthened moderately but manufacturing remained weak and services remained largely flat. Domestic economic and policy weaknesses, perceptions of corruption and uncertainties relating to political evolution are negative influences on investor sentiment. This is indicated in relatively weak recent data, including overseas trade, with exports of goods declining by -14.8% yr/yr in July and imports down by -7.6%. As a result of weak 2012 monsoon rains, agricultural output is unlikely to generate strong growth in the ST, with negative effects on rural spending patterns. Expect growth of around 6-6.5% in FY2012/13 (recent trend of almost 8%—2002-11), but even this subdued rate depends on a firm policy response in H2.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Angola: Elections
Final results have yet to be released after parliamentary elections on 31 August to renew the National Assembly and indirectly elect the head of state—constitutionally, the victorious party’s leader automatically becomes president. Over 20 political parties participated in the polls, mainly through coalitions but, as expected, preliminary results indicate an emphatic win for the ruling MPLA and that President José Eduardo dos Santos will have a renewed mandate. Expect continuity of policies, particularly as former head of Sonangol (state oil and gas company) Manuel Vicente appears favourite to succeed dos Santos. Hydrocarbons have generated large FX inflows and annual average GDP growth was +12% in 2002-11. Despite a weak global environment, expect growth of around +8% this year and +6% in 2013.
Americas – Costa Rica: Risk update
Growth will slow through 2012 but, after a strong H1, full-year growth will be slightly higher than in 2011 (+4.3% against +4.2%) followed by +3.8% in 2013. Inflation eased to 3.9% yr/yr in July and is on a downtrend, although the rate may edge up again by year-end (but within the 5%+/-1% target range). The fiscal deficit is wide and persistent (above 5% of GDP in 2011). Prospects for durable reforms remain poor, although the public debt-GDP ratio remains moderate. The current account deficit is relatively large (above 5% of GDP) although net FDI flows cover 85% of the shortfall. FX reserves cover around three months of imports of goods and services and 120% of external debt falling due in 2012. External debt ratios are low. Systemic political stability risk is low.
Asia-Pacific – Philippines: Q2 growth retains momentum
Q2 real GDP growth remained strong at +5.7% yr/yr, continuing the rebound in Q1 (+6.3%) from an overall lacklustre 2011. However, the balance of growth in Q2 shifted towards domestic demand. Private consumption increased by +5.7% yr/yr in Q2 (+5.1% in Q1) and government spending by +5.9% (down from a base effects-driven +20.9% in Q1). Investment growth picked up to +8.5% (+3.9% in Q1), driven by accelerated construction activity. Exports increased by +8.3% (+10.9% in Q1) while imports shifted back to growth of +4.4% (-3.2% in Q1). In qtr/qtr sa terms, Q2 GDP growth slowed to +0.2% from +3% in Q1, largely reflecting contraction in industry of -2.4% after +3.8% growth in Q1. Amid ongoing global uncertainties, expect growth to ease in H2, with around +5.2% in full-year 2012.
Europe – Poland: Growth continues to slow
Q2 real GDP growth decelerated further to +0.4% qtr/qtr sa (+0.6% in Q1) and +2.4% yr/yr (+3.5% in Q1), curbed by weakening domestic demand and a sharp drop in inventories. Private consumption expanded by +1.5% yr/yr (+2.1% in Q1) while the decline in public consumption decreased to -0.1% (-1.3% in Q1). Investment growth eased markedly to +1.9% from +6.7% in Q1 as preparations for the European football championship ended. Inventories subtracted -1.5pps from Q2 growth after +0.8pps in Q1. Export expansion moderated slightly to +3.6% in Q2 (+4.8% in Q1) but imports shifted to a -2% decline (+3.2% in Q1), so that the contribution of net exports to Q2 growth jumped to +2.6pps from +0.7pps in Q1. Expect growth to slow further in H2 and come in at +2.5% or less in full-year 2012.
Worth knowing
Canada
Real GDP increased by +1.8% qtr/qtr annualised in Q2, with business investment the key driver, but growth was dragged down significantly by net exports, highlighting Canada’s exposure to the weak US economy (+1.7% qtr/qtr growth). Meanwhile, in June, business bankruptcies hit their lowest level in 30 years.
Other Q2 GDP growth
Australia: +0.6% qtr/qtr sa and +3.8% yr/yr. Croatia: -2.1% yr/yr. Slovenia: -3.2% yr/yr and -1% qtr/qtr sa. Uganda
On 4 September, the central bank lowered its key policy interest rate by 200bps to 15% and the rediscount and bank rates to 19% and 20%, respectively. The key rate has been reduced by a cumulative 800bps since easing began in February.
29 August 2012
In the Headlines
FIGURE OF THE WEEK: +0.3%>GERMAN QTR/QTR Q2 GDP GROWTH Germany: Net exports maintain growth
The rate of GDP growth slowed to +0.3% qtr/qtr in Q2, from expansion of +0.5% in Q1. According to the Federal Statistical Office, exports were the main growth driver in Q2, increasing by +2.5% qtr/qtr, despite the challenging global economic environment. Import growth was subdued and, as a result, net exports contributed 0.3pps to overall growth. While consumer demand was up by +0.4% qtr/qtr, capital investment continued to be a drag on growth in Q2, with machinery and equipment -2.3% qtr/qtr (the third consecutive quarterly decline) and construction was down by -0.3%. Given the current uncertainties and risks arising from the European debt crisis, together with the recent deterioration in some lead indicators, expect 2012 GDP growth of around +1.0%.
US: Housing data against the trend
The minutes from the meeting held by the Federal Reserve on 1 August indicate a somewhat surprising bias towards continued quantitative easing. More policy pointers may be evident at the end of this week when Fed Chairman Ben Bernanke issues his statement from Jackson Hole. Recent data confirm an overall weakness, with the latest weekly jobless claims increasing for the second consecutive period, July business spending falling by -3.4% mo/mo, the fourth decline in five months, and consumer confidence in August dropping to its lowest level in 10 months. However, housing data are improving as prices on existing homes increased for the fifth consecutive month in July, making the yr/yr rate positive for the first time since September 2010. Unit sales of existing and new homes were up +9.9% yr/yr and +25.4% yr/yr, respectively, while starts and permits were up +21.5% and +29.5%, respectively.
Eurozone: Money supply and credit growth
Broad money supply (M3) registered its strongest performance over the last three years, increasing by +3.8% yr/yr in July, after +3.2% in the previous month. Also in a positive vein, credit availability to euro area residents remains on an upward trend, with the stock of credit up by +1.2% yr/yr in July and supported by increased loans to all sectors. The flow of loans to the private sector became positive in July (+EUR37bn compared with -EUR1bn in June), with loans to businesses +EUR45bn from -EUR5bn in June.
Latin America: Politics
In Mexico, the Federal elections Tribunal (TEPJF) said that it will annul only 0.37% of the vote cast in the contested July presidential election, seemingly ending opposition candidate Andres Manuel Lopez Obrador’s challenge over voting irregularities. However, the TEPJF has yet to rule on allegations of vote buying and campaign financing illegalities (due by 6 September). In Paraguay, the electoral court confirmed that presidential elections will be held in April 2013, supporting interim President Franco’s assertions that he will uphold democratic institutions, notwithstanding the ousting of President Lugo (by impeachment). In Colombia, the government announced that it is entering exploratory peace talks with the main rebel group, FARC. These are likely to be protracted and difficult, but are perhaps better placed to succeed than previous attempts.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Jordan: Update
The monarchy is popular but there are increasing social and political frustrations that King Abdullah II’s democratic reforms do not go far enough. However, the key risk currently remains further contagion and/or spill-over effects from Syria and these stem from economic (close trading ties) and security causes. There are also long-standing domestic socio- political tensions, which include competing claims of Trans-Jordanians and Palestinians, with the latter accounting for at least 60% of the overall population. Fiscal and current account deficits remain challenging (-4% and -14% of GDP, respectively). However, the US, the GCC (Jordan is a prospective member) and the IMF (in July, the Fund approved a three-year USD2bn facility) remain supportive. Expect GDP growth of +2.5% in 2012 and +3% in 2013.
Americas – Guatemala: Update
GDP growth is set to slow to +3.2% in 2012 (+3.9% 2011) with a similar pace likely in 2013. Inflation has eased but is susceptible to rising food prices. External liquidity indicators are fairly strong (current account deficit around -3% of GDP and FX reserves provide 4.3 months import cover and are equivalent to 160% of external debt falling due) and the fiscal deficit (-2.8% of GDP in 2011) and debt ratios are moderate. The economy, however, is vulnerable to changes in commodity prices and the US business cycle. On the political front, institutions and the rule of law remain relatively weak and political parties fragmented, although transfers of power have been orderly through elections generally regarded as transparent since the end of the civil war in 1996.
Asia-Pacific – Malaysia: Q2 growth surprisingly strong
Q2 real GDP growth accelerated to +5.4% yr/yr from +4.9% in Q1, driven by strong domestic demand, while the external sector remained weak. Private consumption expanded by +8.8%, government spending by +9.4% and investment soared by +26.1%. Net trade made a negative contribution to growth as exports grew by just +2.1% while imports increased by +8.1%. On the supply side, construction surged by +22.2%, followed by services (+6.3%) and manufacturing (+5.6%) while agriculture contracted by -4.7% in Q2. Expect full-year growth of around +4.6%. The current account surplus narrowed in Q2, but remained sizeable at USD3.1bn, equivalent to +4.1% of GDP (+8% in Q1). Inflation moderated to a 28-month low of 1.4% yr/yr in July, signalling subdued price pressures for now, despite strong growth.
Europe – Serbia: Deteriorating outlook
Q2 real GDP contracted by -0.6% yr/yr, after declining by -1.3% in Q1, with the economy adversely affected by both weak domestic demand and fading external demand amid the ongoing EZ crisis. Moreover, investor confidence deteriorated further, reflecting a change in economic policy direction under a newly-elected coalition government. The more nationalist- populist government advocates fiscal and monetary loosening and a controversial amendment on the governance of the central bank, which threatens to undermine its independence, raises concerns. Year-to-date, the RSD depreciated by around 12% against the EUR and FX reserves fell by 20%. In August, S&P downgraded Serbia’s LT sovereign rating to BB- from BB. Expect recession to continue for the remainder of 2012.
Worth knowing
South Africa
Q2 GDP growth increased by +3.2% qtr/qtr, after +2.7% in Q1, and by +3% yr/yr. However, mining added 1.5pps to overall growth, reflecting a rebound from a strike-effected Q1. Current mining unrest, perhaps spreading from the platinum sector to other metal/mineral industries, suggests weaker growth in H2, with around +2.5% GDP growth overall in 2012.
Hungary
The central bank today lowered its key policy interest rate by 25bps to 6.75%, despite higher-than-expected inflation (5.8% yr/yr in July, well above the 3%±1pps target), in order to support the faltering economy.
Kyrgyzstan
The ruling four-party government, in power since end-2010 following the political unrest earlier that year, collapsed last week, heightening concerns about political stability in the only parliamentary democracy in Central Asia.
22 August 2012
In the Headlines
FIGURE OF THE WEEK: 4%+>Q2 YR/YR GDP GROWTH IN MEXICO AND THAILAND World Economy: Consensus GDP forecasts
Consensus forecasts for 2012 GDP growth improved slightly in August for North America (+0.1pps to 2.1%), remained unchanged for all emerging regions and deteriorated further for the EU, with the latter in recession (-0.1pps to -0.3%). In the EZ, expectations for 2012 improved slightly for Ireland, but again deteriorated for several countries, with recession now forecast in six countries (Ireland, Netherlands, Spain, Italy, Portugal and Greece). Forecasts for the UK also indicate recession (-0.2%). Forecasts for 2013 GDP growth in all emerging regions are little changed from July but show a deterioration for the third consecutive month for North America and Western Europe (both by -0.2pps, to +2.1% and +0.5%, respectively). Forecasts for 2013 for the Eurozone deteriorated, including Germany (-0.1pps) and France (-0.2pps), with Spain (-0.5pps) and Portugal (-0.6pps) registering the two strongest downward revisions and remaining in recession in 2013, along with Greece and Italy.
US: Some (moderately) positive data
The latest employment report (for July) was better than expected, but contained data still far below levels that would indicate a strong recovery. Retail sales were up in July, but it was the first time in four months. Housing permits increased in July, but starts fell for the fourth time in six months. In July, industrial production increased by 0.6% mo/mo but the New York Fed’s manufacturing survey and the Philadelphia Fed’s survey of general business conditions were both in negative territory in August. While consumer sentiment of current conditions increased, expectations for the future fell. Leading indicators fell 0.4% mo/mo in June but increased by 0.4% in July. On balance, the recent positive data are welcome, without suggesting a strong rebound.
Eurozone: Crisis update
Expectations of ECB intervention (alongside use of the ESM, after it is ratified by Germany in September) allowed yields on Portuguese and Spanish bonds to ease from their recent peaks, but negotiations with Greece on the next tranche of the bail-out programme have returned to the fore. PM Samaras has been holding discussions with EU leaders on the programme set by the “Troika”, particularly over the time frame for the EUR11.5bn additional budget savings that are still required (which, according to some unconfirmed reports, could have increased since the original target was set). With latest estimates of Q2 GDP showing that the economy contracted by 6.2% yr/yr and little prospect of any immediate improvement, political pressures (domestic and international) on the Greek leader are intense.
Brazil: Infrastructure spending
The government announced a Rs133bn (USD65.5bn) infrastructure investment programme last week, focused on highways and railroads. A key feature is that the projects are to be undertaken in a public-private partnership scheme, which it is hoped will invest Rs85bn in the first five years. Actual investment is unlikely to materialise until late 2013 and 2014, although a major improvement in infrastructure is essential for sustainable medium-term growth. Meanwhile, July retail sales increased by 1.5% mo/mo and the central bank’s June monthly activity indicator was up 0.75% mo/mo (0.38% in Q2), signs that fiscal and monetary loosening are having a positive effect and pointing to a stronger H2. Nonetheless, the central bank’s monetary policy committee still seems likely to cut interest rates again when it meets next week, although food prices could pressure inflation.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – South Africa: Update
Recent strikes and violence at platinum mines will disrupt output and profitability for producers at a time when prices are low because of reduced demand, particularly from the European automotive industry. However, the whole mining sector now only accounts for around 7% of GDP, so recent events will not have a significant impact on the overall economy. However, they highlight some structural problems, including lack of jobs, high unemployment, combustible labour relations, income inequalities, poor service delivery and, at a political level, perceived policy paralysis (mining nationalisation is a recurrent debate), reports of corruption and cronyism and a fractious ruling ANC. Against this background, expect GDP growth of around 2.5% this year and around 3% in 2013 (3.1% in 2011).
Americas – Mexico: Q2 GDP growth
Growth slowed in Q2, to 4.1% yr/yr (4.6% Q1) and 0.87% qtr/qtr sa (1.19% Q1). Yr/yr increases were strong in agriculture, manufacturing, construction and services. Demand-side data have not been released yet, but relatively strong investment in April and May, buoyant consumer confidence and government spending ahead of the election all point to still relatively robust domestic demand. Nonetheless, weaker US demand (exports are heavily concentrated on the US) is likely to affect the external sector and government spending is likely to be less strong with elections out of the way, so a further moderation in growth can be expected in H2 (full year 2012 growth 3.5-4%). With food prices pressuring inflation, expect the central bank to continue to keep the policy interest rate on hold for the time being.
Asia-Pacific – Thailand: Domestic demand drives growth
Recovery from the severe flood-related downturn in Q4 2011 continued in Q2, with real GDP increasing by 4.2% yr/yr and 3.3% qtr/qtr sa, driven by strong domestic demand. Private consumption expanded by 5.3% yr/yr, public consumption by 5.6% and fixed investment by 10.2%. There was further post-flood inventory restocking, adding 2.8pps to yr/yr growth. Export growth disappointed at just 0.9%, reflecting, in particular, weakness in European demand. Import growth, at 8.5%, remained robust and, as a result, net exports subtracted 4.4pps from potential Q2 yr/yr growth. The current account recorded a deficit of 2.7% of GDP in Q2, the first quarterly shortfall since end-2008. For 2012 as a whole, expect around 5% GDP growth and a manageable current account deficit of approximately 1.5% of GDP.
Europe – Bulgaria: Q2 GDP growth and current account
According to flash estimates, seasonally- and working-day adjusted real GDP growth increased moderately in Q2, by 0.2% qtr/qtr (0% in Q1) and remained stable at 0.5% yr/yr. Public consumption continued to contract, by 0.6% qtr/qtr in Q2 (-2.1% in Q1) as the government targets a 1.3% of GDP fiscal deficit in 2012. However, growth in private consumption and fixed investment accelerated to 2.1% and 1.5% qtr/qtr in Q2, from 0.5% and 0.4% in Q1, respectively. Both exports and imports shifted to growth in Q2 after declining in Q1, but with imports (+5.9% qtr/qtr) expanding faster than exports (+2.4%), net exports made a negative contribution to Q2 qtr/qtr growth. The current account remained in small deficit in Q2, at 1.2% of GDP. Expect around 0.5% GDP growth in full-year 2012.
Worth knowing
Other Q2 GDP growth
Azerbaijan: 2.5% yr/yr (0.5% Q1). Belarus: 2.8% yr/yr (3% Q1). Kazakhstan: 5.6% yr/yr (5.6% Q1). Malaysia: 5.4% yr/yr (4.9% Q1). Serbia: -0.6% yr/yr (-1.3 Q1). Ukraine: 3% yr/yr (2% Q1) and 1.9% qtr/qtr sa (-0.3% Q1).
Egypt
The IMF’s Managing Director, Christine Lagarde, was in Cairo today, following an invitation by the Egyptian authorities, who are expected to seek (and should get) a financial facility. The Fund is committed to support Egypt during its political transition.
Ethiopia
PM Meles Zenawi died after a lengthy illness and his deputy, Hailemariam Desalegne, assumed leadership as acting premier.
1 August 2012
In the Headlines
FIGURE OF THE WEEK: 1.5%>US Q2 QTR/QTR GDP GROWTH US: Weak Q2 GDP growth
As expected, Q2 real GDP growth was weak at only 1.5% qtr/qtr annualised (2% in Q1)—far below the long-term average of 3.3%. Consumption was equally anaemic at 1.5%. New orders for non-defence capital goods excluding aircraft (a proxy for future business spending) fell for the third time in four months in June, contracting in real terms by 1.6% yr/yr. Meanwhile, new home sales fell a sharp 5.1%, but home prices as measured by the Case-Shiller home price index increased slightly for the fourth consecutive month, although the index was still down -0.7% yr/yr. Personal consumption expenditures fell for the second consecutive month in June. Overall, economic data are continuing to suggest a weakening economy.
Eurozone: Update
June unemployment was unchanged at 11.2%, a record high, but there was an increase in three of the four largest economies, Italy (to 10.8%), France (to 10.1%) and Spain (to 24.8%). Youth unemployment decreased slightly (-0.1pps) but, at 22.4%, remained high and is particularly concerning in countries such as Spain (52.7%), Portugal (36.4%) and Italy (34.3%). Meanwhile, inflationary pressures are slow to ease, with July inflation unchanged at 2.4% yr/yr (Eurostat flash estimate). The July manufacturing PMI also fell again. Positive statements by key EZ leaders ahead of Thursday’s ECB meeting raised expectations of further action to try to lower bond yields in Spain and Italy. Action, if it materialises, is expected to centre on already proposed EFSF bond purchases alongside ECB intervention. Meanwhile, Greece’s coalition government continues to struggle to find the required EUR11.5bn of additional budget savings.
South Korea and Taiwan: Slowdown
Q2 GDP data for South Korea and Taiwan underscore the regional and global slowdown. Advance estimates for Korea show growth decelerated to 2.4% yr/yr (2.8% in Q1) and 0.4% qtr/qtr sa (0.9% in Q1). All GDP components shifted to qtr/qtr contraction—government spending -0.2%, fixed investment -2.3%, exports -0.6% and imports -1.7%—except private consumption, at +0.5%. Only imports contracting faster than exports kept the economy growing qtr/qtr. Expect full-year 2012 growth of 2.5% or less. With June inflation at a 32-month low (2.2% yr/yr), the central bank lowered the policy interest rate by 25bps to 3% in July to support growth. In Taiwan, GDP contracted -0.2% yr/yr (+0.4% Q1), although it increased by 0.8% qtr/qtr sa (0.3% Q1). Private consumption growth slowed further, investment fell 8.4% and both exports and imports decreased. The government lowered its 2012 forecast to 2.1% from 3%, but even this will need a robust H2 performance.
Commodities: Market forces
Although supply disruptions (including drought in the US, Russia and Kazakhstan and weak early monsoon rains in India) and geo-political concerns (including disrupted oil supplies from Iran and Syria) are exerting upward price (and social) pressures a benchmark all-commodity index currently indicates that prices overall, although up 11% mo/mo, are still down over 12% yr/yr.
Please note that the next issue of the WERO will be on 15 August 2012.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Ghana: New president
The transfer of power following the death in office of President John Evans Atta Mills (24 July) was conducted with constitutional transparency and broad-based support within political and social circles, providing further evidence of an entrenched democracy. John Dramani Mahama, the former VP, was sworn into office for the remainder of Mills’ tenure and appears set to contest presidential elections in December as the ruling NDC candidate. Expect those polls to be as close as the preceding ones in 2008, which the current opposition NPP lost by the narrowest of margins. Nana Akufo-Addo will again be the NPP candidate. Although campaigning is likely to be both extensive and forceful, with tensions rising, expect the result to be accepted and the political environment to remain stable overall.
Americas – Colombia: Interest rate cut
At its monetary policy committee meeting last week, the central bank unexpectedly lowered the policy interest rate. The 25bps reduction was the first cut in more than two years, a period in which the rate was raised by 225bps before a pause from March this year. Significantly, the central bank also lowered its GDP growth forecast for 2012 to 3-5% from 4- 6% and also noted that inflation expectations were down to 3.1% at end-2012, almost at the mid-point of the target range. Actual inflation was 3.2% yr/yr in June. With inflation likely to remain close to the mid-point of the target range for the remainder of the year and external demand and global commodity prices weaker, expect further interest rate cuts and 2012 GDP growth of 3-4%.
Asia-Pacific – Vietnam: Q2 GDP growth
Real GDP growth picked up to 4.7% yr/yr in Q2 from 4% in Q1, but remained below the annual average 6.9% in 2006-2010 and 5.9% in 2011. The moderation in early 2012 was largely a lagged response to sharp monetary and fiscal policy tightening in 2011, adopted by the authorities as they were confronted at that time with surging inflation, downward pressure on the exchange rate and rapidly falling FX reserves. Since then, inflation has fallen markedly, to 5.4% yr/yr in July, and the central bank began loosening monetary policy in March, cutting the key interest rate by a cumulative 500bps, to 10% in July. Expect growth to recover further in H2 but to remain just below 5% for 2012 as a whole. The VND/USD exchange rate has been held stable since end-2011 but FX reserves are still low.
Europe – Romania: Impeachment vote
Approximately 87% of the electorate voted to remove President Basescu in an impeachment poll (29 July) but the low turnout, at just 46%, fell short off the constitutionally-required 50%, allowing him to resume office. He was controversially suspended by parliament (early July) for allegedly exceeding his limited constitutional powers. PM Ponta said he would accept the outcome, but the power struggle between his (left of centre) coalition government and the centre-right president is likely to continue. Expect ongoing political and policy uncertainty, with potential adverse economic effects. The move to impeach Basescu was criticised internationally and it resulted in the RON/EUR exchange rate registering a record low last week, although there was some (perhaps temporary) strengthening early this week.
Worth knowing
Israel
Austerity measures—spending cuts and tax increases—were introduced this week as the economy is weakening because of contagion effects from key trading partners (the EZ and US). Expect GDP growth this year of 3% after 4.8% in 2010 and 2011.
South Asia
Significant power failures in Pakistan and India and their underlying causes—largely reflecting a surge in demand because of extreme temperatures and weak monsoon rains, but also underinvestment in the sector—will negatively affect GDP growth. Official forecasts for India’s 2012/13 growth were already revised down to 6.5% from a previous (April) projection of 7.3%.
Lithuania
Q2 real GDP growth decelerated to 2.1% yr/yr from 3.9% in Q1, although it picked up slightly to 0.4% qtr/qtr sa from 0.3% (revised downwards from 0.8%) in Q1. The statistics office noted that all major sectors contributed to growth in H1.
Weekly Export Risk Outlook by Euler Hermes
25 July 2012
In the Headlines
FIGURE OF THE WEEK: -13%>YR/YR DECLINE IN ALL-COMMODITY PRICE INDEX Eurozone: Crisis update
Finance Ministers formally approved the bail-out for Spain’s banks last week, but this did not stop the country’s sovereign 10-yr bond yields rising through 7.5% and increasing across the yield curve this week. The immediate trigger seems to have been the request by Valencia for access to central government funds set aside to help regional governments’ debt redemptions and confirmation that Catalonia will also need support, set against a backdrop of persistent recession, high unemployment, social protests, approval of softer budget targets, mounting bank NPLs and continued capital flight. Spain has a lower interest/government revenue ratio than Portugal or Greece and is better able to withstand high yields, but there also needs to be some positive news, such as progress towards implementation of the decision to allow Spain’s banks to be re-capitalised directly by the EZ fund. Meanwhile, Greece is moving back to the fore, with the “Troika” in Athens to assess progress with the financing programme, and Moody’s assigned a negative sovereign risk outlook to Germany, Netherlands and Luxembourg.
US: Mostly negative
The Index of Leading Indicators, designed to predict economic activity six to nine months ahead, fell in June for the second time in three months. Only one of the ten components, the yield spread between the ten-year Treasury note and the Fed Funds rate, was strongly positive. The Index has been trending downward since the end of Q3 2011 and it is noteworthy because it is one of the most predictive indicators. Meanwhile, housing data remain mostly negative. Although housing starts increased by 6.9% in June (only the second increase in five months), permits fell 3.7%, the second decline in three months, and sales of existing homes fell by 5.1%, although prices firmed. Moreover, unseasonal weather patterns, including drought, may cut agricultural output, contributing further to economic uncertainties.
Eurozone: PMI data signal contraction…
The flash Markit PMI composite output index for July suggests that economic contraction continues. For the 11th consecutive month, the index, at 46.4, was below the 50 mark that signifies expansion. All the sub-components within the index showed weakness, with the manufacturing PMI down 1pps to 44.1 (Germany 43.3 from 45.0 and France 43.6 from 45.2). Although the Services Activity Index increased moderately (47.6 from 47.1) it remained below expansion. The outlook continues to appear unfavourable, with a further decrease—for the 12th consecutive month—in new orders.
China: …but improvement here
The flash Markit/HSBC manufacturing PMI for July released this week indicates that manufacturing is improving, picking up to 49.5, from the final June reading of 48.2, and although still below 50 is the highest level since February. The pick-up was also widely based, with the output component crossing the 50 threshold and the orders component also increasing after two months in which it had fallen. This is hardly the harbinger of strong recovery and by no means the only indicator, but it does tend to suggest that policy loosening may be beginning to have some success, strengthening the prospects of a soft landing.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – South Africa: Repo cut
The key policy interest rate (repo) was cut last week, by 50bps to 5.0%. While reduced inflationary pressures provided some scope for monetary relaxation, concerns relating to growth were also probably to the fore in the decision-making process. The official forecast is that inflation (5.5% yr/yr in June, 5.7% in May) will moderate further, reaching a low of 4.9% yr/yr in Q2 2013 and remaining around the 5% level to the end of 2014. With real rates now in negative territory, however, do not expect further cuts to materialise in the ST. Moreover, a weakening ZAR and potential for increased food/commodity prices may exert upward inflationary pressures, complicating policy formulation. Expect GDP growth to remain lacklustre, given social/development needs, within a range of 2-3% in 2012 and 2013.
Americas – Peru: Cabinet reshuffle
Approaching the end of his first year in office, President Humala re-shuffled his cabinet as he tries to find a more successful way of resolving the wave of social protests over regional mining projects. The new prime minister is Juan Jiminez, formerly minister of justice and a lawyer, replacing retired army officer Oscar Valdes, who had taken a hard-line stance against protesters and declared three states of emergency (regional) during his tenure. Minister of Economy Castilla is retained, a sign of continuity in fiscal and monetary policies associated with sustained growth and resilience to external shocks. The minister of mining and energy is also retained, which suggests continuity in the basic thrust of resource development policy. Meanwhile, monthly data put GDP growth in May at 6.5% yr/yr.
Asia-Pacific – Indonesia: Economy update
Domestic demand continues to boom and drive economic expansion, but also supports robust import growth. As exports have been affected by the global slowdown and lower commodity prices, this has been reflected in a weaker external balance. The current account moved into deficit in Q4 2011 and shortfalls in merchandise trade were recorded in April and May 2012. The weakening in the external accounts caused downward pressure on the IDR which, at end-May, had depreciated against the USD by around 5% since end-2011, and by 11% yr/yr. Since then, the IDR has stabilised as a result of central bank intervention. FX reserves fell by 9% in May-June, although, at USD99bn, they are still ample and should mitigate near-term concerns. Headline inflation remained stable at 4.5% yr/yr in June.
Europe – Ukraine: Risk update
Real GDP growth slowed to 2% yr/yr in Q1 from 5% in Q4 2011. The main driver was private consumption (up 9.8% after 16.8% in Q4). Fixed investment growth moderated to 7.6% (16.8% in Q4), which suggests that there was large inventory destocking in the first quarter. Exports continued to decline, by 6.8% in Q1 (-9.2% in Q4). Imports also fell, by 4.3% (+2.4% in Q4). Early Q2 data for industrial output (weak) and retail sales (robust) indicate a continuation of Q1 trends. External liquidity risk remains high, reflected in a continuing current account deficit (USD2.6bn in January-May), increased investment outflows in Q2 and a 24% yr/yr fall in FX reserves in June. Downward pressure on the quasi-fixed UAH/USD exchange rate has intensified recently.
Worth knowing
UK
Q2 GDP contracted by 0.7% qtr/qtr. The third consecutive quarterly contraction was driven mainly by construction output, but was also affected by poor weather and an extra public holiday, making this preliminary estimate more uncertain than usual.
Nigeria
Yesterday, the central bank increased the cash reserve ratio (CRR) by an unexpected 400bps, to 12%, while keeping the key policy rate (MPR) unchanged at 12%. Adjustment of the CRR rather than the MPR suggests an aggressive tightening stance.
Political leadership
Ghana: President John Evans Atta Mills died on 24 July and VP John Dramani Mahama was sworn into office. Presidential elections are due in December. Egypt: President Mohamed Morsi asked Hisham Kandil, the irrigation minister, to become PM and form a new government. Saudi Arabia: Prince Bandar bin Sultan al-Saud was appointed Director for General Intelligence.
Weekly Export Risk Outlook by Euler Hermes
18 July 2012
In the Headlines
FIGURE OF THE WEEK: 7.6%>CHINA’S Q2 YR/YR GDP GROWTH China: Q2 GDP slows
Q2 GDP growth slowed to 7.6% yr/yr, the slowest pace since Q1 2009 but broadly in line with expectations. On a qtr/qtr basis, however, there was a slight pick-up in activity in Q2, as GDP increased by 1.8% against 1.6% in Q1. In other data, the increases in June retail sales and fixed asset investment were slightly above expectations at 13.7% yr/yr and 20.4% yr/yr, respectively, although industrial production growth at 9.5% yr/yr was down slightly on May. Per capita disposable income growth was also up a solid 13.3% in H1. Importantly, bank lending was stronger in June than in May. With the policy focus clearly switched to expansionary mode, as the recent interest rate cut underscored, full year growth in 2012 should still reach 8%.
Eurozone: A modicum of positivity
Annual inflation was stable at 2.4% yr/yr in June but the mo/mo trend is clearly downward (-0.1% mo/mo in June). May industrial production increased by 0.6% mo/mo, after two months of decrease (-0.1% and -1.1% in March and April, respectively). Meanwhile, the trade balance recorded a surplus of EUR6.9bn in May, compared with a deficit of EUR1.2bn in May 2011, largely as a result of an increase in exports (6% yr/yr) and import stagnation. At a national level, the improvement in the trade figures was particularly marked in Spain and Italy, where the trade balances in the January-April 2012 period (relative to the corresponding period of 2011) improved from –EUR16.9bn to –EUR15.3bn and –EUR15.9bn to –EUR3.6bn, respectively, reflecting stronger export growth relative to imports.
US: Weak sales and other data
Recent data continue to suggest that consumption remains weak. Last week’s statistical release on consumer sentiment showed further deterioration, with the index falling to its lowest level of the year, while retail sales in June fell for the third consecutive month. Moreover, the weakness was widespread, putting the annualised rate of growth in retail sales over Q2 at -0.8%, suggesting negative influences on overall economic performance. Fed Chairman Ben Bernanke added to the pessimism by citing in Congressional testimony increasing risks in Europe and the looming “fiscal cliff,” and saying “reduction in unemployment is likely to be frustratingly slow”. On a more positive note, but not enough to outweigh the negative tone elsewhere, industrial production in June slightly exceeded expectations and showed firmness across most manufacturing and mining sectors.
Israel: Coalition changes
When, in May, the Kadima party joined the Likud-led coalition government it gave PM Binyamin Netanyahu control of 94 out of 120 Knesset seats and with it, the ability to drive a reform agenda, as well as the prospect of remaining securely in office until elections in February 2013. Yesterday, Kadima leader Saul Mofaz withdrew his party from the coalition because Netanyahu would not endorse a significant change in the system of military conscription. Currently, ultra-orthodox Jews (Haredim, approximately 10% of the population), as well as the Arab minority, are excluded from military service. Netanyahu is not in imminent risk of being unseated but expect his powers to instigate economic reforms to be circumscribed by a resulting reliance on his remaining coalition of ultra-orthodox and right wing parties. Moreover, domestic matters may prevent a firm hand when it comes to managing a challenging period of regional geo-political risks.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Mediterranean, Africa & Middle East – Congo, Rep: Elections
The final results of the legislative elections held on 15 July are not yet released but expect the ruling Congolese Workers’ Party (Parti congolais du travail, PCT) to win comfortably, with an absolute majority. As a result, the state president and head of PCT, Denis Sassou- Nguesso, continues to have a firm mandate to govern. Unlike 2007, when there was a general boycott of the polls, the current main opposition groups, UPADS and ARD, fielded candidates but did not anticipate much success, given the ruling party’s access to state funding and the media. Accordingly, the turnout was low. Nevertheless, as confrontations this week between ARD loyalists and the security forces testify, opposition has not acquiesced and further demonstrations can be expected when poll results are announced.
Americas – Mexico: Update
The second placed candidate in the presidential elections, Manuel Lopez Obrador (AMLO), lodged a formal legal challenge against the result—which placed PRI candidate Enrique Pena Nieto as the winner by a comfortable margin (6.62%)—alleging electoral irregularities. The Electoral Tribunal has until 6 September to make a decision, but is unlikely to overturn the result. In the meantime, it remains to be seen whether opposition activist groups, who announced a series of protests and demonstrations in the coming months, can gain critical mass or provide momentum for a sustained campaign by AMLO but, at this point, the opposition looks containable. Inflation accelerated in June, to 4.34% yr/yr, so expect the central bank again to leave interest rates on hold at its policy meeting later this week.
Asia-Pacific – Singapore: Vulnerabilities
Advance estimates (based on data for two months) indicate that Q2 GDP contracted by 1.1% qtr/qtr (+9.4% Q1), reflecting the economy’s openness and associated vulnerability to external factors, including weakness in the EZ, uncertainties in the US and slowdown in China and elsewhere in Asia. Manufacturing was particularly weak in Q2, contracting by 6% (+21% Q1), with a sharp fall in output of biomedical products. However, manufacturing is relatively diverse, with sub-sectors in pharmaceuticals, electronics, aerospace, oil rig construction and petrochemicals and Q2 GDP was still up 1.9% yr/yr (1.4% Q1), suggesting a measure of economic resilience. Nevertheless, given the economy’s export dependency and a weak global environment, expect full year 2012 growth of 2-3%.
Europe – Hungary: IMF negotiations begin
Parliamentary approval earlier this month of amendments to the law governing the central bank paved the way for the start of much-delayed talks with the IMF and the EU on a financing programme. The revised text of the law replaced the original version, which had been heavily criticised by the IMF and EU as infringing central bank independence, causing the negotiations to stall. The initial round of negotiations began this week in Budapest, but agreeing a programme is likely to be a long and arduous process (months rather than weeks). There are still complex economic issues to be resolved, including the 2013 budget framework and the financial transactions tax (which includes the central bank) approved by parliament this week, and domestic politics will also come into play.
Worth knowing
Other GDP growth
Ghana: 8.7% yr/yr (Q1, 3.3% Q1 2011). Morocco: 2.8% yr/yr (Q1, 5.3% Q4 2011). Senegal: 4% yr/yr (Q1). Qatar: 3% qtr/qtr, 6.9% yr/yr (Q1). Israel: 2.7% yr/yr (Q1 third estimate, revised from 3% and then 2.9% in earlier projections).
India
Industrial output increased 2.4% yr/yr in May, with manufacturing (76% of production) up 2.5%. Growth in wholesale prices (the main inflation gauge) moderated to 7.25% yr/yr in June, down from 7.54% in May and the slowest increase since January.
Libya
Although the final results of the first free nationwide elections in five decades will not be released for two weeks, the liberal/secular National Forces Alliance (NFA) won 32 seats in the 200-seat National Assembly, with the Moslem Brotherhood’s Justice and Construction Party 17 and liberal National Front 3 (the balance will go to independent candidates).
Weekly Export Risk Outlook by Euler Hermes
7 June 2012
In the Headlines
FIGURE OF THE WEEK: 5.3%>INDIAN Q1 2012 YR/YR GDP GROWTH Euro-zone: Crisis update
The ECB left interest rates unchanged this week and did not signal its intention to intervene in other ways, perhaps not surprisingly as the bank awaits a political response to the crisis. In its latest economic projections, significantly, inflation is expected to fall below the 2% target in 2013. Meanwhile, market pressures remain intense as Spain seeks to deal with its banking sector problems (a core issue) with most speculation focusing on ways of providing financial support for re- capitalisation, including access to the ESM, although direct bank access is likely to meet resistance and the extent of any required finance will not become clear until the banks’ audit is completed (possibly end-June). In Greece, final opinion polls before the 17 June election (none are allowed in the 14 days before the vote) tended to favour New Democracy (“pro-bail-out”) but are close and the outcome remains uncertain. Ireland’s “fiscal pact” referendum saw a comfortably positive result. The second official EZ GDP estimate confirmed that output stagnated in Q1 (-0.3% qtr/qtr in Q4 2011).
US: Weak labour market
The May employment report was disappointing, with the economy generating only 69,000 jobs, compared with expectations of 150,000, and data for the two previous months were revised down 49,000. Perhaps of more concern is that May was the fourth consecutive month of slower job growth, a significant (and negative) trend in this important indicator. By comparison, the economy needs to create at least 250,000 jobs each month to start significantly lowering the rate of unemployment and increasing aggregate income. Indeed, in the May report, unemployment increased 0.1pps to 8.2%, marking 40 consecutive months of a rate of unemployment in excess of 8%. The employment data were immediately used in political debates, with Republicans accusing President Obama and the Democrats of mismanagement of the economy and the Democrats blaming prior Republican policies—which they liken to Romney’s—of starting the recession.
India: Weak Q1 GDP growth
Economic growth fell to a recent low of 5.3% yr/yr in Q1 2012 (Q4 of FY 2011/12), with most sectors signalling a slowdown, particularly manufacturing (-0.3% yr/yr) and agriculture (+1.7%). In the corresponding quarter of the previous year, GDP increased by 9.2% yr/yr and in Q4 2011 (Q3 FY 2011/12) it was 6.1%. For the full FY, GDP increased by 6.5%, significantly below official targets and consensus expectations. Recent data indicate that industrial output and export trade remain weak, suggesting that overall growth in H1 2012 will also be limited. However, weakening international oil prices will reduce inflationary pressures—as well as reducing the trade deficit as energy products account for around 30% of the import bill—and provide scope for further monetary policy easing in an attempt to foster growth. Even so, expect GDP growth to remain well below the annual average 8.4% of 2003-10, perhaps reaching 7-7.5% in calendar 2012 and 2013.
Egypt: Mubarak trial verdict
Former President Hosni Mubarak was sentenced to life imprisonment after a guilty verdict was announced on charges of complicity in the deaths of demonstrators during last year’s protests. However, the judgement dismissed bribery charges against the Mubarak family and exonerated top security officials of direct responsibility for the deaths during battles with riot police. Do not expect Mubarak to serve a lengthy jail sentence, particularly as his health is reportedly poor, but expect the Moslem Brotherhood’s Freedom and Justice Party candidate, Mohamed Morsi, to have increased his chances of winning the 16-17 June presidential run-off vote as his rival, Ahmed Shafiq, is closely associated with the Mubarak regime.
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz SE’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.Countries in Focus
Worth knowing
China
The benchmark one-year lending expansionary policy focus.
Australia
Mediterranean, Africa & Middle East – Israel: Slowing
With approximately 35% of merchandise trade conducted with EU markets and continuing regional geo-political concerns (including Iran and Egypt, as well as the Palestinian territories), the Israeli economy is expected to slow. Indeed, GDP expanded by 3% yr/yr in Q1 after 3.2% in Q4 2011. Consumption and investment held up well in Q1 but government spending was relatively flat and net exports provided a negative contribution to overall growth. Against this background and with inflationary pressures likely to ease (growth in consumer prices remains within the official 1-3% target range) some loosening in monetary policy is likely as a means of stimulating economic activity. Expect GDP growth of 2.5-3% in 2012 overall, perhaps rising to 4% in 2013, but much depends on the external environment.
Americas – Brazil: Interest rate cut
The key policy interest rate was lowered last week, by 50bps to 8.5%, which follows two successive cuts of 75bps and brings the cumulative fall since last August to 400bps. With inflation within target range (5.1% yr/yr in April)—although still above the 4.5% mid-point— policymakers can afford some relaxation, reinforced by Q1 GDP data at the end of last week. Growth was just 0.8% yr/yr and 0.2% qtr/qtr sa in Q1, not helped by a 7.3% fall in agriculture, but qtr/qtr industry was positive for the first time since Q1 2011. On the demand side, fixed investment fell again and export and import growth slowed but private consumption held up and public consumption accelerated. The economy should gain momentum through 2012, although expect full year growth of only 2.5-3% (2.7% 2011), picking up to 3.5-4% in 2013.
Asia-Pacific – Philippines: Growth rebounds
Q1 real GDP growth accelerated to 2.5% qtr/qtr sa (1.7% in Q4 2011) and to 6.4% yr/yr (4% in Q4). The rebound from an overall lacklustre 2011 was driven by robust domestic demand and a recovery in net exports. Private consumption expanded by 6.6% yr/yr in Q1 (6.4% in Q4) while government spending surged by 24% (7.6% in Q4), although this was partly a result of base effects as there was a 15.8% decline in Q1 2011. Fixed investment grew by 2.8% (-2.4% in Q4). Exports recovered to 7.9% growth in Q1 (-8.2% in Q4) while imports continued to contract, by 2.6% (-6.2% in Q4). Amid an uncertain global environment, expect full-year growth of around 4% in 2012. Inflation edged down slightly to 2.9% yr/yr in May from 3% in April, just below the central bank’s 3-5% target range for 2012.
Europe – Poland: Growth slows
Real GDP increased in Q1, by 0.8% qtr/qtr sa, down from 1% in Q4 2011. Yr/yr Q1 GDP growth slowed to 3.5%, from 4.3% in Q4. Private consumption growth was unchanged at 2.1% yr/yr in Q1 while the decline in public consumption intensified to 1.3% from 0.3% in Q4 as the government accelerated fiscal consolidation. Investment growth eased to a still sound 6.7% from 9.7% in Q4, while inventories added 0.8pps to Q1 growth after -0.6pps in Q4. Both export and import expansion moderated, to 4.8% and 3.2% (from 7.9% and 5%), respectively), resulting in net exports contributing 0.7pps to overall Q1 growth after 1pps in Q4. Expect full-year 2012 growth of just below 3% as inventory restocking and external demand are likely to soften.
and deposit interest rates were cut by 25bps, underscoring the authorities’ switch to an
Q1 GDP increased by 1.3% qtr/qtr (larger than expected) driven by domestic demand. Last week, the RBA lowered its key policy interest rate by a further 25bps, to 3.5%.
Turkey
The central bank left its key policy one-week repo rate unchanged at 5.75% and both ends of its overnight interest rates also unchanged at 5% and 11.5%, respectively, last week. Consumer price inflation fell markedly in May, to 8.3% yr/yr from 11.1% in April, largely due to base effects. Producer price inflation edged up to 8.1% in May from 7.7% in April.
Political Risk Insurance and the future outlook of the Russian market
By: Modern Russia and Daniel Wagner, Country Risk Solutions on April 09, 2012
Daniel Wagner, CEO of cross-border risk consultancy Country Risk Solutions(www.countryrisksolutions.com) and author of the new book Managing Country Risk (www.managingcountryrisk.com), has a quarter century of experience analyzing country risk, including 15 years of underwriting experience with AIG, the Asian Development Bank, GE, and the World Bank Group. He recently spoke to ModernRussia.com about the Russian market, looking at the progress made and future outlook from the perspective of those underwriting political risk insurance for foreign investors.
From the perspective of political risk insurance (PRI), how do you believe the assessment of Russia has changed over recent years?
Russia has been a top destination for PRI for many years and that has not changed over the course of the past decade. The reason does not have to do with any concern about political stability per se, but rather the demonstrated propensity of the Russian government to expropriate foreign assets in the natural resource sector.
That said, it is also fair to say that over the past decade Russia has clearly demonstrated that its government and its economy are stable. However, its over-dependence on oil and gas as a source of state revenue puts it at risk in the event of a sustained drop in the price of global oil and gas. Russia needs the price of oil to stay well above $100 per barrel in order to balance its budget, and for president-elect Putin to be able to deliver on the promises he made during the presidential campaign.
What are the key issues that underwriters in this sector are monitoring when it comes to Russia, and the trends that are being observed?
Underwriters are naturally sensitive to insuring investments in the natural resource, and particularly oil and gas (O&G) sector. That said, a foreign investor’s history in the country, its joint venture partner, and the nature of its operating agreements with the government can provide some comfort to underwriters. They key issues are the length of history operating in the country, nature of operational freedom, quality/track record of the joint venture partners, presence of international arbitration in operating contracts, and bilateral investment agreements between the home and host countries.
How do you believe Russia compares to other key emerging markets in this regard?
It is generally not productive to try to compare one country against another because each transaction has a unique risk profile, which will govern how underwriters perceive it and how insurable it therefore becomes. There are good transactions in otherwise ‘risky’ countries, and vice versa – and there is no country that does not have perceived political risk.
What has been the PRI view toward the recent election period, and the impact on the investment climate?
I have not canvassed other underwriters on this subject per se, but can safely say that Mr. Putin’s re-election is perceived as a stabilizing factor. Underwriters will undoubtedly presume that Mr. Putin has learned some valuable lessons as a result of the investment disputes that arose during his previous tenure, and the realization that Russia must have foreign investment in order to operate and upgrade its infrastructure. On this basis, it can be presumed that underwriters will take a ‘wait and see’ approach to underwriting future transactions in Russia.
On the whole, investors are considered to have reacted positively to Vladimir Putin’s election as president. What do you believe are the reasons for this?
I believe that most people expected Mr. Putin to be re-elected, and that it was a forgone conclusion that this would be the case. In that regard, I think investors have largely reacted positively because they have a good idea of what to expect in the future. And, as stated, above, their presumption will undoubtedly be that Mr. Putin will not make some of the mistakes he made in the past with respect to foreign direct investment in Russia.
From an underwriter’s perspective, what would be your outlook for Russia for the coming twelve months? What would you be advising clients with existing or potential investments in the country?
I expect Russia to continue to benefit from the global economic recovery, and that its middle class will also continue to grow. It has had one of the best performing stock markets in the world and expectations are high that it will continue to live up to its billing as a BRICS country. That said, I would advise clients to adopt a wait and see approach to future investment in the country, and to proceed with caution, particularly in the natural resource sector.
Political Forecasting with Common Sense
By Daniel Wagner
As global politics continue to gyrate, the pace of change poses ever greater challenges to accurately predicting the future. Many forecasters have gotten into the habit of declaring – ex post facto – that they got “it” right, when in fact they failed to accurately predict the course of events. Given the multifaceted nature of the world today, predicting the future is quickly becoming a fool’s game, and calls for a new paradigm.
Today’s oracles confront a dizzying array of information in an attempt to make sense of the future. Looking for precedents in unprecedented times exposes the shortcomings of managing risk by looking in the rear view mirror. It has gotten to the point where there is so much information out there, it is impossible to consume it all. And yet, most of this information is little more than a regurgitation of news, and dated analysis – which is often passé as soon as it is produced. Yet, the average consumer of such information rarely recognizes the difference because they don’t have the luxury of spending enough time consuming the information.
It is increasingly becoming the case, given how complex the world has become, that having real insight into the future calls for little more than an appreciation for history, some ‘street smarts’, and good old fashioned common sense. This seems to have gotten lost in the blizzard of quantitative indicators and seemingly endless stream of pontifications available in the information markets today. Many of these ‘wise men’ wish us to believe that they possess some kind of magical insight into the future, when in fact, many of them don’t know any more than the rest of us.
The truth is, no person or entity can possibly know everything that needs to be known to accurately predict the future. Even the intelligence agencies often get it badly wrong. The tendrils of the global supply chain are now so interconnected, that the Pentagon recently unveiled plans to protect the web of world trade as a top national security priority. So, how can the rest of us hope to get it right?
Part of the answer surely resides in the rise of social media, and the ‘nuggets’ of information that is the result of free flowing thought by ordinary people. A billion imaginations bloom on Facebook, LinkedIn and Twitter, and perceptions can quickly become reality. With mobile density nearing 90% globally, this new paradigm of near perfect interconnectedness is the new form of intelligence that, if properly harnessed, can hold an important key to remaining a step ahead of the competition.
But, equally importantly, we should all be paying even more attention to the lessons of history, which is the best source of information and guide to the future. History teaches us that we will often end up where we started. For example, in Iraq, the mistake of creating artificial country boundaries that tried to forcefully integrate Kurds, Sunnis and Shia was bound to fail eventually. In Malaysia, granting preferential rights to Malays at the expense of the Chinese was a policy that could not possibly exist without a backlash. And in South Africa, white majority rule could never last.
What do all these examples have in common? They are joined by human nature, and the notion that people will eventually rise up when a situation is grossly unfair. We don’t need an expensive information provider to tell us that. In my view, all we really need to know is the difference between right and wrong, and the nature of human nature, to have real insight into what direction events will ultimately take a country.
Traditionally, the interconnection between politics and economics is what has driven markets, but today, the impact of development, environmental issues, and socio-cultural dynamics must be included in the mix. Taking a static view toward forecasting the direction of markets that does not include this range of variables will likely lead to failure. Each transaction is unique and each risk profile is specific, so using a broad brush to ‘paint’ a risk landscape will rarely yield the desired result.
Simple use of intuition and the ‘smell test’ may be more accurate indicators of risk than all the quantitative methods so often used to interpret the world today, which fail to introduce texture and common sense into the equation. My advice is to study history and listen to your gut. Your chances of being right are as good, if not better, than an overemphasis on numbers – and a lot less expensive.
*Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk advisory firm based in Connecticut, Director of Global Strategy with the PRS Group, Adviser at the Princeton Council on World Affairs and author of the new book Managing Country Risk.
Related articles
- Investment Contrarians Expert Reports: Recent GDP Growth Estimates from the European Commission Suggest Eurozone Financial Crisis to Continue Impacting Non-Eurozone Count (prweb.com)
- IMF Downgrades Global Growth for 2013 (247wallst.com)
- Britain heading for triple-dip recession as GDP shrinks 0.3% in fourth quarter (guardian.co.uk)
- China’s growth to hit 8% in 2013 (money.cnn.com)
- Economic outlook for Latin America remains stable. (focuseconomics.wordpress.com)
- The State of Entrepreneurship: Will Entrepreneurs Increase Hiring and Contribute to GDP Growth in 2011? (kauffman.org)
- India’s GDP growth likely stuck near three-year low (thehimalayantimes.com)
- Canada’s economic growth slows to a crawl (metronews.ca)
- Philippines surprises with 7.1% GDP growth in Q3; more jobs, better incomes seen (business.inquirer.net)
- IMF: Global recovery ‘weakening’ (bbc.co.uk)
Alexander Gordin
Valerie Antoinette
Fluent In Foreign Business 
Excellent article. I think that engaging our cultural intelligence, a vetted sense of history and some street-smart form the only way to move forward in the international arena. I believe that it has always been the case, but a need to quantify and manage with spreadsheets have been pervasive in the U.S. Anywhere else, those sensorial guiding elements have been engaged for centuries.