LAST WEEK

  • China cut the required reserve ratio (RRR) for all banks by 50bp, starting from 24 February. This is the second reduction in the last three months. The main reason is to bolster banking sector liquidity and support lending. Further declines in the RRR are expected in the coming months and a cut in policy interest rates later this year cannot be excluded.

  • The Thai economy contracted by a sharper-than-expected 10.7% qoq in Q4 2011. Annual GDP growth slumped to just 0.1% in 2011, from 7.8% in 2010. However, a strong recovery is underway, led by rebounding manufacturing production.

  • As expected, the central bank of Turkey left the policy rate at 5.75%, however it narrowed the O/N corridor by 100bp.

  • South African CPI inflation edged further above the official 6% target ceiling, rising to 6.3% in January from 6.1% in Dec.


THE WEEK AHEAD

  • Recent Chinese trade and lending data have reignited some fears of a possible ‘hard’ landing. In particular, the sharp fall in January imports suggested investment growth has slowed sharply. Next week’s PMI data should give a stronger indication of underlying trends, as the impact of the Chinese New Year fades. We forecast the manufacturing PMI index to increase to 51.3 in February, from 50.5 in the previous month. The output index should again be the key driver behind the rise but we will also be paying close attention to the trade and inventories sub-components. The import index fell sharply to 46.9 in January, from 49.1 in December. However, inventory levels of raw materials appear very low and, with the temporary impact of the Chinese New Year fading, we believe that import demand should strengthen in the coming months.

  • The pace of Indian economic growth has slowed significantly as higher inflation and aggressive monetary policy tightening weighed on investment and household spending. Monthly data suggest annual GDP growth slowed further in Q4 2011, with industrial production up just 0.9% y/y in Q4 and trade data indicating that net exports subtracted from growth. We forecast annual GDP growth slowed to 6% in Q4 2011, from 6.9% in the previous quarter. Looking ahead, we forecast growth to slow further before interest rate cuts and slower inflation support stronger economic activity in the second half of 2012.

  • Global risk sentiment and financial conditions have improved significantly since last month’s Hungarian monetary policy meeting. In fact, the HUF has been the best performing currency over the past month as concerns over the euro area have receded. However, the economy still faces a number of strong headwinds including weak external demand and the threat of liquidity constraints. And while inflation is trending higher (even excluding the impact of the recent hike in VAT) – it was 5.5% y/y in January, up from 4.1% in December – we look for interest rates to be left unchanged at 7% this week. However, if external conditions permit we expect a series of rate cuts in H2 2012, albeit inflation could remain a concern. Significantly, this is dependent on the completion of successful negotiations with the IMF over a new line of credit. The February deadline for the Hungarian government to address some concerns is a key test but we still think an agreement is unlikely until Q2.

  • The South African economy is forecast to have grown by 1.6% saar in Q4 2011, up from 1.4% in Q3. The main driver is expected to be manufacturing, having grown by 4.4% saar in the quarter, following a contraction of 0.8% in Q3. Buoyant retail sales during the quarter also suggest household spending rose strongly. However, while domestic demand has rebounded, export growth slowed markedly in the quarter. In part this reflects reduced demand from euro area partners but also a sharp contraction in mining production. Looking at the year ahead, despite a number of headwinds facing the economy, we expect GDP growth of 3.2% this year, up from an estimated 3.1% in 2011 but still respectable given the uncertain global backdrop.

  • Meanwhile, central bank interest rate meetings in Russia and Israel this week are not expected to lead to any change in policy rates, largely reflecting the improved global background. However, subdued inflationary pressures in both economies suggest the authorities have significant room to lower policy rates should financial tensions intensify once again.