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Global Outlook

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Emerging Markets Outlook − The tail wagging the dog

Fri, Sep 25 2009, 07:19 GMT
by Flemming J. Nielsen

Danske Bank A/S


  • Emerging markets have started recovering despite continued weakness in the more developed markets. Emerging markets in Asia (EM Asia) are leading the recovery, while signs of stabilisation so far have been only tentative for most countries in central and eastern Europe (CEE). The recovery has been driven by easier international financial conditions, strong policy response particularly in Asia, and a sharp decline in inflation.
  • Growth in Asia is expected to slow but overall remain healthy as policy focus shifts from maximising growth to securing sustainability. China, India and South Korea are expected to start tightening monetary policy in Q1 10. CEE is likely to lag global recovery and monetary policy overall remains on hold until H2 10. Fiscal deficits remain a concern for CEE.
  • Comparatively small output gaps, robust domestic demand, inflation picking up and EM Asia leading the monetary tightening cycle, make a strong case for the appreciation of Asian currencies. China is expected to resume its gradual appreciation policy at some stage next year.

Outlook for emerging markets has improved

Emerging markets were hit particularly hard by the global financial crisis in Q4 08 and Q1 09. However, despite continued weakness in most developed markets, some emerging markets started recovering substantially in Q2 09. This has particularly been the case in Asia, where growth surged across the region, albeit from depressed levels. China has developed largely in line with our expectations in Global Scenarios (June 2009), while recovery in Asia outside China has come faster and stronger than expected. The recovery in Asia has been an important boost to global industrial activity and a driver behind the recent increase in commodity prices.

So far there are only tentative signs of stabilisation in CEE and CIS with Poland as the main exception. Although the CEE and CIS economies are expected to improve in the coming months, we continue to believe the recoveries will be mainly export driven and lag global recovery. However, we now see less downside risk on CEE and CIS economies, as the global economy appears to be recovering and external financial conditions have eased significantly.

Commodity producing countries in Latin America and the Middle East will be unable to be an independent driver for a global recovery, but are currently benefitting from higher commodity prices on the back of the global manufacturing recovery.

Published on  Fri, Sep 25 2009, 07:19 GMT

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Japan Outlook − A little help from my friends

Thu, Sep 24 2009, 07:07 GMT
by Flemming J. Nielsen

Danske Bank A/S


  • Japan started to recover in Q2 09 driven by a strong rebound in exports to the rest of Asia, inventory cuts gradually easing and fiscal stimuli. The recovery appears to be on a solid footing for the rest of the year, as these recovery drivers will largely remain in place.
  • In 2010 the recovery will lose some steam, as the positive impact from fiscal stimuli and the inventory cycle starts to wane. The current strong pull from Asia will be hard to sustain in 2010, although Japan’s dependence on the rest of Asia remains a structural advantage.
  • Deflationary pressure has increased and inflation is likely to remain negative until late 2010. For that reason, the Bank of Japan (BoJ) is unlikely to start tightening until late in 2010. We think the BoJ will lag in the global monetary tightening cycle likely to start next year.
  • We have only made minor changes to our forecasts. GDP growth for 2009 has been adjusted upwards and 2010 marginally downwards, largely reflecting our expectation that the recovery has been pushed slightly forward in addition to upward revisions of Q1 09 GDP.

Recovery on a solid footing for the rest of the year

Just as the contraction in the Japanese economy was unusually sharp in the wake of the global financial crisis, the recovery has so far been strong. In Q2 09 GDP growth rebounded 3.9% q/q AR and is on track to exceed 4% q/q AR in Q3 09. Hence the development in Japan has so far been broadly in line with our forecast in Global Scenarios, June 2009, where we argued for very strong GDP growth in the early recovery phase. The main drivers in the Japanese recovery have been:

  • Strong export recovery, driven mainly by exports to the rest of Asia.
  • Easing pace of inventory cuts.
  • Fiscal easing with a particularly strong impact on private consumption.
  • Improved financial conditions.

So far it has been a typical Japanese export-led recovery with the main beneficiary being the manufacturing sector. In Q2, net exports alone added more than 1.3pp q/q to GDP growth. The sharp rebound in exports has mostly been driven by exports to the rest of Asia, not least China. Manufacturing exports to the rest of Asia – accounting for about 50% of Japan’s total exports – soared 15% q/q in Q2. Net exports to Asia alone probably added around to 1pp q/q to Japan’s GDP growth in Q2. Japan is currently without doubt benefiting substantially from its dependence on Asian export markets.

While exports should remain a big positive for Japan, the extraordinarily strong growth in exports to Asia in Q2 and Q3 can probably not be sustained, see Emerging Markets. Exports to Asia are likely to start slowing in Q4 09, but this should be at least partly offset by stronger exports to Europe and the US in the short run as these economies start to recover. Hence, the important export driver appears to be solidly in place until early 2010. However, we have some doubt about its strength later in 2010.

Published on  Thu, Sep 24 2009, 07:07 GMT

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Euroland Outlook − Ascending to the surface

Wed, Sep 23 2009, 07:42 GMT
by Frank Øland Hansen

Danske Bank A/S


  • Over the past couple of months the economic recovery has played out pretty much as we anticipated with a strong rebound in confidence indicators and a pick-up in orders and exports.
  • We now anticipate above-trend growth in the rest of 2009 followed by lower but also more broad-based growth in 2010. The recovery will be sustainable if domestic demand begins to pick up in early 2010.
  • Unemployment could peak earlier and at a lower level than previously anticipated. We expect unemployment to peak in early 2010 at around 10.2%.
  • Next summer the euro area will have recovered so much that the ECB will consider interest rates at historical lows as being inappropriate and will start hiking.

Overview

The European economy was descending towards the ocean floor at a dangerous pace in Q1 but managed to get almost neutral buoyancy in Q2. Euroland GDP only declined a modest 0.1 % q/q in Q2 and both France and Germany were already ascending towards the surface with GDP growth in positive territory. Inventories dragged growth down towards the bottom, but net trade gave an equally large push upwards as exports declined by less than imports. Both private and public consumption contributed positively too. The positive contribution from private consumption is good news, but it is important to keep in mind that consumption has been boosted temporarily by the ‘cash for clunkers’ programmes and other stimulus measures. Investment dragged growth down for the fifth consecutive quarter, although at a slowing pace.

Over the past couple of months the economic recovery has played out pretty much as we anticipated with a strong rebound in confidence indicators and a pick-up in orders and exports to Asia. Unemployment has increased sharply, but there are signs of an earlier stabilisation and at a lower level than we previously feared.

We continue to expect above-trend growth in the second half of this year as the inventory reductions are brought to an end and exports make a partial rebound pulled up in particular by Asian demand (see: Research Euroland: In Asia we Trust). We currently project GDP growth of 0.5% q/q in Q3 and 0.8% q/q in Q4. Despite this promising outlook for the rest of the year, overall growth in 2009 is set to be an historical low of about -3.7%.

After a couple of quarters with a strong rebound from very low levels, we expect lower but also more broad-based growth. The recovery will only be sustainable if domestic demand (beyond the inventory cycle) begins to pick up in early 2010. We expect that it will, but are on the watch for signs that it won’t. If domestic demand fails, we could get a nasty double-dip.

Published on  Wed, Sep 23 2009, 07:42 GMT

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US Outlook − Out of the woods

Wed, Sep 23 2009, 07:36 GMT
by Peter Possing Andersen, Signe Roed-Frederiksen

Danske Bank A/S


  • A significant boost from the inventory cycle, fiscal stimulus, a turn in housing and a fast improvement in financial conditions will lift growth above trend in the current quarter and the following two.
  • Positive job growth is key for underlying demand and the longerterm outlook. We expect employment to be back in black by yearend, but a moderate slowdown in growth in mid-2010 remains a risk.
  • Headline inflation has troughed and will pick up to 2.5-3% by year end. Core will continue its gradual slowing, with a risk of dipping below 1% next year.
  • The Federal Reserve will not accommodate further, but is set to remain on hold for a considerable while. Rate hikes will not be on the agenda before late next year at the earliest.

Recovery on track for the coming quarters

It is clear by now that the US economy is recovering from the recession at a speed that is even faster than we anticipated three months ago. From being mostly confined to the manufacturing sector, the evidence of improvement has grown stronger in other areas as well, most notably in the housing market and business investments outside structures.

Consequently, we have revised our forecast for the final quarters of 2009 and the first quarter of 2010 up to 4.6% q/q AR, 4.1% q/q AR and 4.0% q/q AR respectively, but continue to see risk of a moderate slowdown in mid-2010. This leaves annual GDP growth in 2009 at -2.3% and at 3.2% in 2010.

More upside from the manufacturing sector

The recovery in the manufacturing sector that we have argued for since early this year is well underway. The large gap between demand growth and production growth is still far from closed and the process has further to run. We believe that the manufacturing recovery will prove stronger than the current consensus view. We look for the ISM index to reach 55-60 over the coming three months and to stay in this interval at least until year-end.

Part of the pick-up in production seen lately can be attributed to the auto sector as the “cash-for-clunkers” incentive scheme has unleashed a chunk of pent-up demand for autos (see Research US: Auto sector to boost H2 growth). However, evidence of improvement is by no means confined to the auto industry. In the latest ISM report 13 sectors reported growth in new orders and production while only three reported contraction.

Published on  Wed, Sep 23 2009, 07:36 GMT

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Outlook for Russian and Baltic economies

Mon, Apr 27 2009, 12:34 GMT
by Lars Rasmussen, Violeta Klyviene

Danske Bank A/S


Heading for deep recessions

Agenda

  • Russia: Labour market conditions worsen, which jeopardises recovery
  • Very weak economic performance in Q1 09 dampens outlook for rest of the year
  • The slowdown is broad based with serious implications for the labour market
  • Corporate sector debt roll-over is a concern for financial stability

Baltics: Painful adjustment under way

  • The downturn steepened, and the 2009 outlook is pessimistic
  • Unemployment has risen and the employment situation is likely to deteriorate further due to weakening output
  • On a positive note, price pressure is abating and external imbalances are shrinking

Published on  Mon, Apr 27 2009, 12:34 GMT

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Economic and Financial Outlook, 2009 Q2

Mon, Mar 23 2009, 10:53 GMT
by Allan von Mehren

Danske Bank A/S


Macro and central bank outlook

• Global: The global economy is in its worse crisis since the 1930s and GDP is falling rapidly. However, we expect massive stimulus packages to lead to a gradual improvement, starting in the US and Asia in H2 2009 and spreading to Europe during 2010 (see Global Scenarios, March 2009). We expect global leading indicators to rise during the spring and summer.

• US: The economy is likely to remain in recession for a while yet, as the effects of continued deleveraging, wealth destruction, credit tightening and negative recession dynamics (skyrocketing unemployment and business destocking) should keep growth rates negative during Q2. However, in the middle of the year we expect a range of stabilising factors to kick in. The pace of credit tightening should slow, which, combined with a significant boost to real incomes from lower commodity prices, fiscal policy easing, lower mortgage rates and slower business destocking, should help a recovery get under way. We project GDP growth at -2.7% in 2009 and 2.5% in 2010. We do not expect unemployment to stabilise before early 2010, topping out at 9.4%. Risks of deflation are rising but remain limited due to a forceful policy response. We thing the Fed is likely to keep policy rates unchanged at a close-to-zero level for a prolonged period and continue the expansion of its balance sheet as long as the credit markets remain dysfunctional.

• Euroland: Euroland is almost in free-fall at the moment. Exports are falling dramatically as a result of the slump in global demand, credit tightening and falling capacity utilisation is putting a brake on investments, and a mixture of collapsing housing bubbles and decreasing job security is dampening private consumption. The speed of contraction should soon begin to taper off - partly driven by a rebound in exports and non-residential investments. However, we still expect Euroland GDP to shrink for most of 2009 and do not project positive growth before Q4 09, when we are likely to face a gradual recovery with growth reaching trend about a year later. We believe that the ECB is likely to deliver a final 50bp rate cut in April, which would bring the refi rate to 1.0%, after which it is likely that the ECB will engage in credit easing. We expect the Euroland economy to contract by 2.7% this year and grow 0.8% in 2010.

• Japan: In 2009 we expect GDP to contract by an astonishing 5%. The main reasons for this extraordinary weakness is Japan's high dependence on exports of highly cyclical manufacturing goods and the comparatively weak fiscal and monetary response to the crisis. We expect the Japanese economy to bottom out at very depressed levels in Q2 09 and recover slightly in H2 2009 when the impact from fiscal easing should start to kick in and global trade should rebound slightly. A sustainable recovery in Japan in 2010 would depend on a rebound in global growth next year. With Japan entering dangerous deflationary territory and fiscal policy constrained by political uncertainty, there is likely to be increasing pressure on the Bank of Japan (BoJ) to step up quantitative easing, including increasing the purchase of government and corporate bonds. We thing the BoJ is unlikely to hike its leading interest rate before H2 2010.

• Emerging Markets: Emerging market growth has slowed sharply in all regions. For emerging markets overall we expect stabilisation in Q2 09 albeit at very depressed levels. We expect a slight recovery in H2 2009 but we think we will have to wait until 2010 before the recovery gains a solid footing. We expect China to recover first; in fact it is already showing signs of improvement. We project a sharp turnaround in H2 2009. The recovery in Central & Eastern Europe is likely to be weak compared to other emerging markets. With access to external financing becoming more strained and the political status quo being increasingly questioned, there is likely to be considerable downside event risk for emerging markets in the short run. 2009 could turn out to be a very busy year for the IMF. Monetary conditions have been eased aggressively in recent months as inflation dropped rapidly amid the economic downturn; these monetary easing cycles are generally coming to an end in emerging markets, especially in CEE/CIS. In LATAM and Asia there is more room for easing going forward.

Published on  Mon, Mar 23 2009, 10:53 GMT

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Economic and Financial Outlook, 2009

Fri, Dec 19 2008, 09:39 GMT
by Allan von Mehren

Danske Bank A/S


Macro and central bank outlook:

• Global: The world economy is currently in its worst recession for decades. We expect the weakness to continue over the coming quarters but for a modest recovery to begin in the middle of 2009. The US should be the first to recover followed by Asia, whereas Euroland will be the laggard (see Global Scenarios, Dec 2008)

• US: The economy will remain in recession through Q1 but the contraction will be milder than the exceptionally sharp drop in activity seen in the current quarter. A fiscal boost is on the cards in H1, which combined with a super boost to real incomes from declining energy prices, will help a recovery get under way. The recovery will nevertheless be relatively moderate by historical standards as the deleveraging in the financial sector, declining home prices and unemployment will continue to weigh on growth through 2009. We do not expect unemployment to stabilise before early 2010, topping at 8.6%. Both headline and core inflation are past their cycle peaks and risks of deflation are rising but remain very limited due to an aggressive policy response. We expect the Fed to keep the Fed funds rate at close to zero throughout 2009 and to continue to conduct full-scale quantitative easing. That could include further purchase of mortgage-backed securities, private sector credit instruments and longer-term treasury bonds.

• Euroland: The economy has slipped into a deep recession which will last until at least mid-2009. Tighter financial conditions and greater uncertainty are reducing demand in both the domestic economy and on export markets. By spring/early summer 2009, the worst should be over as demand should be stimulated by a rapid decline in inflation and a pick-up in the US economy. Furthermore, automatic stabilisers and discretionary fiscal policy responses - although many details remain to be revealed - should stimulate demand. The recovery is expected to be slow and gradual and growth will be below potential way into 2010. Much depends on how the financial crisis unfolds and risks to growth are primarily on the downside. We expect pressure to mount on the ECB to cut rates during the first few months of 2009 and even though the ECB believes that going below 2% would be painful, we think the weak economy will force it to cut the refi rate to 1.5%.

• Japan: The economy has contracted sharply in H2 08 on the back of weak exports and corporate investments. We expect fiscal easing and lower inflation to prevent the economy from contracting further in H1 09. However, the economy will barely grow in H1 09 and there is mainly downside risk to our GDP forecast in early 2009. In H2 the economy should start to improve as the global economy gradually starts to recover. Deflation fears could re-emerge as both headline and core inflation will return into negative territory in 2009. We expect the Bank of Japan to effectively return to some form of quantitative easing by cutting its leading interest rate to 0.1% and possibly even to zero and instead use outright purchase of government bonds and corporate debt as the main monetary transmission mechanism.

• Emerging Markets: The growth outlook for Emerging Markets worsened during 2008, and standing on the brink of 2009 most countries in the Emerging Markets face a couple of quarters with negative growth as global deleveraging continues to put a dampener on Emerging Markets. In CEE and CIS we are most downbeat on the growth outlook, as these regions are the ones where imbalances have grown the most and thus the need for increased savings and reduced spending are the highest - overall we expect zero at best in CEE/CIS. Latin American economies suffer from lower commodity prices and slumping US growth, while Asia should get a boost from lower commodity prices and better external balances. However, in H1 09, Asian growth will slow significantly as industrial production suffers from lower exports. During the last part of 2009, there should be a reasonable chance of a rebound. Good news for Emerging Markets is that inflation falls rapidly, which should open the door for more aggressive monetary easing, but also weaker currencies - mostly in CEE/CIS.

Published on  Fri, Dec 19 2008, 09:39 GMT

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Economic and Financial Outlook, Q2 08

Fri, Apr 18 2008, 07:09 GMT
by Allan von Mehren

Danske Bank A/S


Macro and central bank outlook:

• Global: The global picture is dominated by the significant slowdown of the US economy and the financial crisis. A continued rise in oil and food prices is adding to the economic woes globally, although commodity exporters are benefitting. The US is set to experience a significant slowdown in the first half of 2008 but is expected to recover slightly in the second half. Euroland will slow down further and the Emerging Markets will also feel the headwinds and experience softer growth ahead.

• US: Economic activity has slowed substantially and a recession may be imminent or already unfolding. In the short term, downside risks remain predominant. If anything, the picture will darken further in the next few months, as consumers struggle with rising energy prices, slowing labour income, tighter credit and declining household wealth. Moreover, industrial and labour market indicators are set for further deterioration. Consequently, the Fed is expected to ease rates to 1.50% by June. As the fiscal stimulus package kicks in by late Q2 and in Q3, consumer spending is set to revive and the Fed will go on hold. Aided by low inventory levels, this is likely to prompt a temporary rebound in US industry during the autumn and a stabilisation in the economy in H2. With the underlying economy remaining fragile, a renewed period of weakness is likely to appear around New Year as the effect from the tax rebates peters out. A sustained recovery will not materialise before somewhere in 2009. Given this picture, the Fed is likely keep rates low for a lengthy period.

• Euroland: The slowdown of the Euroland economy is likely to strengthen over the coming quarters as the economy is faced with significant headwinds. We expect growth to fall to 1.4% this year followed by 1.5% in 2009. The strong slowdown on Euroland’s two biggest export markets, ie the US and the UK, will start to be felt and this will only be worsened by the significant strengthening of the euro versus both the dollar and the pound. Inflation has surprised to the upside and will stay elevated around 3% for some time and continue. The high inflation weakens consumption growth, and housing markets in several countries are at risk of a hard landing due to the credit crisis. Weaker growth and some decline in inflation in the second half of 2008 is expected to pave the way for three rate cuts in September, December and March, taking the ECB rate down to 3.25%. The risk is, though, that inflation stays in a territory where the ECB is boxed in and is unable to move rates.

• Japan: Growth is slowing but in the short run it will not turn out as bad as feared. In the short run, demand in Japan will be supported by recovering housing construction following the near collapse of housing construction in H2 07 after the government tightened building regulation. In addition, private consumption has proven more resilient than expected and the decline in exports to the US has largely been offset by stronger exports to the emerging markets. However, we believe H2 08 will be more challenging for the Japanese economy. The boost from stronger housing construction will disappear in H2 08 and export growth will start to suffer as emerging market growth starts to slow. Growth is expected to pick up in 2009 as the global outlook gradually starts to brighten. The Bank of Japan is expected to keep the leading O/N target rate unchanged at 0.5% until mid-2009.

• Emerging Markets: The Emerging Markets will not be immune from slower growth in the developed markets, although the fundamentals for many of the Emerging Markets remain strong. Emerging Market growth is expected to slow but remain above trend in 2008 and 2009. Slower growth is expected to be most pronounced in Central & Eastern Europe (CEE), where growth has been imbalanced, as indicated by overvalued currencies and unsustainable current account deficits. In the Emerging Markets of Asia, growth is increasingly supported by domestic demand. In addition, direct spill-over from the current financial market turmoil is expected to be limited. In Latin America, the Middle East, CIS and Africa, growth and current accounts will remain supported by higher energy and commodity prices and current account surpluses. Major risks for the Emerging Markets besides general risk aversion, are a major correction in energy and commodity prices and an increasing risk of political tensions on the back of the recent surge in food prices.

Published on  Fri, Apr 18 2008, 07:09 GMT

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More struggle ahead

Thu, Apr 3 2008, 12:27 GMT
by Peter Possing Andersen, Allan von Mehren, Flemming J. Nielsen

Danske Bank A/S


In this issue:

  • Tighter credit everywhere……it’s no longer only about sub-prime

  • An intensifying housing correction

  • Continued substantial drag from housing.

  • Non-residential construction sector-the next accident to happen?

  • Impact from food and energy prices-the worst since Katrina.

  • A recession may be imminent or already unfolding-risk of a renewed dip when tax rebates lapse

  • Monetary policy willeventually work-but it may take a bit longer this time around.

  • Slower demand = slower industry

  • Euroland facing headwinds

  • Rising inflation, slowing growth -A 2001 replay

  • Emerging Markets -From ‘decoupling’to ‘decoupling light

  • ’Global Summary: Less growth, more inflation

  • Conclusions

Published on  Thu, Apr 3 2008, 12:27 GMT


Archive

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