ANZ RESEARCH QUARTERLY 2017
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
ANZ R E S E ARCH I S S U E 27 2017 Q2 ANZ RESEARCH QUARTERLY ECONOMIC S , COMMODITIES & MARKETS
CONTENTS
AT A GLANCE 3
BRINGING IT ALL TOGETHER | Recovery but no reflation 4
G3 | Animal spirits stirring in the US
6
CHINA | Investment-led recovery highlights policy dilemmas 10
AUSTRALIA | RBA dilemma - weak wages, strong house prices 12
NEW ZEALAND | As good as it gets? 14
SOUTH AND SOUTHEAST ASIA | The long and winding road to full recovery 16
FOREIGN EXCHANGE | Reality check 20
GLOBAL BONDS | Still muddling through 24
COMMODITY MARKETS | Fundamentals support prices, but not without some risks 27
FORECASTS 31
Publication date: 29 March 2017
Please email research@anz.com with feedback and enquiries3 AT A GLANCE Source: ANZ Research
4
BRINGING IT ALL TOGETHER
THINGS TO WATCH
RECOVERY BUT NO REFLATION
Current accounts in the US, Australia and New Zealand
Richard Yetsenga
have become important.
The market upswing has stalled, but the economic upswing
hasn’t. Certainly the global data pulse, as well as in Asia China is likely to slow in 2017, and this needs to only
Pacific, is supportive of a continued manufacturing and trade be modest to validate our economic and market views.
upswing. The trend in positive data surprises is proving
enduring, Fed tightening expectations have been revised The Fed is likely to lead a small group of tightening
up (including by ourselves), commodity prices for the most countries.
part have held gains, and labour markets have generally
persisted with modest improvement. Wage growth ultimately needs to broaden to validate
reflationary expectations.
The response of markets, however, is very real, and looks
to be somewhat at odds. Global bond yields in particular
have been largely range-trading since December, even The US trade deficit is finally showing signs of a more
with higher Fed funds expectations. As well, the US equity sustained deterioration. The broader environment tends
market traded lower over March. In our view, however, to be reflationary and positive for risk assets when this
these two apparently contradictory world views aren’t in fact is the case (Figure 1), and is likely to reflect US demand
contradictory. spilling over into the global trade cycle. President Trump
may be trying to make the US more self-sufficient, but he
We believe growth is in decent shape. The data are is pushing against an economy with strong momentum,
relatively clear on that point. And, perhaps more operating at the limits of full employment.
importantly, many issues which were often cited as likely
downside gap risks have improved over the past year. The Despite the cyclical recovery, we still cannot argue
improved growth trajectories of both Europe and China, and that the global recovery has matured enough to be
particularly their apparent financial stability, are significant labelled an expansion. There are structural weaknesses
in this regard. The improved tone in markets in early 2017 which remain, or, at the very least, structural questions
had as much to do with a reduction in downside risks, as it which remain unresolved. This includes a quite patchy
did with a view that growth was actually accelerating. business investment environment. Only in the US, China,
the Philippines, New Zealand and (parts of) Australia
Our growth forecasts expect the pick-up from 2016 to be is investment likely to be a meaningful contributor to
sustained into 2018. China, as an exception, is expected growth.
to continue its slow and secular growth moderation, but
much of the rest of Asia are likely to show some growth In addition, wage growth across all advanced economies
acceleration. Australia and New Zealand show an apparent remains sub-par. The only real exception is Germany,
pick-up and slowdown (respectively), but this more reflects where wage growth is higher but stable. Even in the
technicalities in what have been lumpy growth numbers US where the recovery is most advanced, wage growth
rather than being genuinely representative of the underlying remains modest and continues to undershoot many
growth pulse. standard indicators. As a consequence, only in the US are
rates of core inflation close to the central bank’s target.
One important driver of the environment, namely trade, has
actually surprised us on the upside. The US trade deficit,
in particular, is a key metric to monitor going forward.
FIGURE 1. BETTER GLOBAL NEWS FROM US TRADE FIGURE 2. HEADLINE INFLATION IS PEAKING
0 5 110
forecasts
-10 4 80
-20 3 50
-30
y/y % change
y/y % change
USDbn
2 20
-40
1 -10
-50
0 -40
-60
-1 -70
-70
Jan 92 Jan 95 Jan 98 Jan 01 Jan 04 Jan 07 Jan 10 Jan 13 Jan 16 -2 -100
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
US trade balance
G7 CPI inflation (LHS) Growth in Brent USD oil prices (RHS)
Source: Bloomberg, ANZ Research Source: Bloomberg, ANZ ResearchBRINGING IT ALL TOGETHER | 5
This dynamic around underlying inflation is a way which is uniformly negative. The improved growth
becoming much more pressing because the peak profile is also a key reason that elevated policy uncertainty
period of commodity price inflation is passing (Figure has not driven either a fall in asset prices or a rise in
2). Over the next few months we should see peaks in volatility (Figure 4).
headline inflation across most countries, in the China PPI
and in the prices indices in the PMIs. We suspect that The net result of this mix of forces, which might best be
this is a key reason that bond yields have been characterised as ‘ok but not great’, is that while easing
unable to rise further despite the growth profile cycles have ended in virtually all of our key markets of
looking healthy and the Fed hiking. Only in the UK interest, interest rate hiking cycles remain rare. The
do we forecast a meaningful pick-up in inflation over the Fed is on a sustained tightening track, and China and
coming year, and that principally reflects the influence of Taiwan are likely to follow in ‘mini-me’ fashion, with China
currency depreciation. Reflation remains absent, at least moving at least partly to protect its currency. Beyond that,
thus far, from this recovery. the Philippines is likely to begin a tightening cycle in the
second half of 2017 and New Zealand may well come back
While we remain relatively constructive on growth, to the tightening table in 2018. Elsewhere, central banks
there are a couple of pockets of concern even in that generally remain in stasis as modest cyclical recoveries
sphere. Australia has yet to clearly make the transition tussle with structural headwinds.
from a housing led cycle to a
business led cycle, although The result of our ‘recovery
we remain hopeful that a Surprise people often enough and the but not yet expansion’
pick-up in wage growth will surprises cease surprising. characterisation is that
see this occur. And China much of the steepening
will need to adjust to tighter liquidity this year. China’s in yield curves has already been seen. We expect US
upside growth surprise last year was foreshadowed by bond yields to continue rising, but certainly no faster than
the easing in liquidity and decline in bond yields through the rise in the fed funds rate. We also forecast higher
2014 and 2015. China began tightening liquidity for bond yields elsewhere, albeit with spreads against the US
the housing sector in Q3 last year and for the broader narrowing for China, Australia and New Zealand.
economy in Q4. China’s industrial cycle will likely
slow over 2017 and into 2018 (Figure 3). Commodity prices, conversely, are likely to trade the
third trend as supply tightness remains a broad theme. We
While politics remains a global issue, we have become see some price gains, in oil, copper and gold particularly.
somewhat more comfortable with the dynamic. Surprise But also see some prices moderating from recent high
people often enough and the surprises cease surprising. levels, including iron ore and coking and thermal coal.
As well, the reality of the extreme electoral outcomes
has actually ended up being more moderate in terms The reality of Fed tightening in a more balanced
of the policy outcomes being delivered, at least so far. global recovery suggests the USD will benefit only
In the UK Brexit hasn’t resulted in a sudden break with episodically from higher US interest rates. The USD’s
Europe, even if the exact nature of the break remains gains are likely to be concentrated in Asia to the end of
somewhat unclear. 2017, while we expect European currencies to be weaker
this year before some recovery in 2018. The AUD and
And in the US some of President Trump’s more extreme NZD remain caught in a tussle between somewhat better
views are being blunted by legislative realities. domestic and commodity market dynamics on the one
The President’s failure to deliver his desired travel hand, but the pull of narrower rate spreads against the US,
restrictions or his commitments on health care reform on the other. Current account developments are likely to be
(at least so far), suggests that political risk is now in key drivers of how this wrestle eventually resolves itself.
play in the US as well as Europe, but not necessarily in
FIGURE 3. CHINA’S INDUSTRIAL CYCLE SET TO SLOW FIGURE 4. UNCERTAINTY IS NOT ALWAYS UNCERTAINTY
30 1.5 350 90
80
300
25 2.0
70
250
20 2.5 60
200 50
15 3.0
150 40
10 3.5
30
100
5 4.0 20
50
10
0 4.5
Jun 06 Jun 08 Jun 10 Jun 12 Jun 14 Jun 16 0 0
Li Keqiang Index (%y/y) 5yr bond yield (RHS, inverted) Jan 08 Jan 11 Jan 14 Jan 17
The bond yield has been led by 12 months. The Li Keqiang Index is bank lending, Policy Uncertainty Index (LHS) VIX (RHS)
rail freight and electricity consumption.
Source: Bloomberg, ANZ Research Source: Bloomberg, ANZ Research6
G3
THINGS TO WATCH
ANIMAL SPIRITS STIRRING
IN THE US Although US household and business confidence are
elevated, they haven’t yet translated to increased
Tom Kenny | Brian Martin
spending. It will be worth watching this space.
The current US recovery entered its 93rd month in March
2017, making it the third longest expansion on record. Japan’s inflation continues to disappoint amid tepid
The underlying fundamentals are in good shape and there wage growth. Early signs from the 2017 spring wage
is nothing to suggest that this expansion can’t continue offensive suggest this trend is continuing.
for at least another year. Our Recession Index – which
is compiled using a latent economic activity trend and The UK triggers the formal process for leaving the
financial conditions - puts the probability of a recession European Union. This will take up to two years and will
occurring over the next year at around 5%. If a recession herald a period of heightened uncertainty, particularly
is avoided over the next year, this expansion could move for the UK.
into second place overall. The longevity of the cycle has
been helped by extremely accommodative policy.
We are reasonably comfortable with our view that the US
If one uses US business and consumer sentiment surveys economy can grow slightly above 2% over the next couple
as a barometer of activity, then one might conclude that of years. This modestly above trend growth should result
activity is growing at a well above-trend pace. The NFIB in a gradual reduction in the unemployment rate and see
small business survey is at levels not seen since 2004, inflation rise modestly. Policy measures from the Trump
which is hardly surprising given President Trump’s agenda administration and Congress point to upside risks to this
of tax cuts, repealing the Affordable Care Act and reducing scenario.
red tape. Meanwhile consumer sentiment is near 15-year
highs. Respondents to the February ISM manufacturing On 16 March 2017 President Trump released his America
and non-manufacturing surveys suggest that GDP is First Budget - a Budget Blueprint for 2018. The document
growing north of 3% y/y. Finally, many business surveys largely focused on changes to discretionary spending with
are pointing to a swift pick-up in capex spending. limited impact for the Budget’s bottom line. In particular,
a significant boost to annual military spending, to be
However, the hard data suggest the growth picture in Q1 funded by cutbacks to other areas like science and the
2017 is somewhat more subdued. For example, the Atlanta environment was recommended. Trump is said to be
Fed GDPNow is pointing to around 1% annualised growth releasing a more detailed Budget document in May. It is
in Q1 amid modest household spending and a sizeable unclear whether much detail will be provided.
net export drag. That said, we are cognisant that Q1 GDP
has been soft relative to other quarters in recent years. On revenue, Trump wants to cut both personal and
Notably, personal consumption growth averages around corporate taxes. The personal tax cuts favour upper income
1 percentage point (annualised) lower in Q1 compared households and thus the boost to household spending may
to the other quarters. In the past four years, personal be limited. A proposal to reform business taxes doesn’t
consumption expenditure growth averaged slightly appear to be bedded down yet and the details remain
under 2% annualised in Q1 compared to just above 3% highly controversial.
annualised in the other quarters.
FIGURE 1. ISM SURVEYS AND US GDP GROWTH FIGURE 2. PHILLY FED CAPEX OUTLOOK AND NRI
65 6 15 30
5 25
60 10
4
20
55 3 5
15
y/y % change
2
50 0 10
Index
1
% y/y
Index
0 5
45 -5
-1
0
40 -2 -10
-5
-3
35 -15
-4 -10
Recession
30 -5 -20 -15
90 95 00 05 10 15 00 02 04 06 08 10 12 14 16
Non-residential investment, lhs
ISM composite + 1 qtr, lhs GDP, rhs
Philly expected capex + 6 months, rhs
Source: Bloomberg, ANZ Research Source: Bloomberg, ANZ ResearchG3 | 7
Key Republicans are keen to repeal corporate tax and at the March meeting was under serious consideration.
replace it with a border adjustable tax (BAT). This reform The key macro forecasts by the FOMC were left more or
will prove politically unpalatable for some politicians given less unchanged from those made in December. These
that there are clear winners and losers from this strategy. forecasts include two more hikes in 2017 and three
Already a number of Republican Senators have expressed in 2018. In sum, the Fed’s forward guidance suggests
reservations. Given that Republicans hold just a small it remains on a gradual path to withdraw monetary
majority in the Senate the BAT may struggle for support. accommodation and that this should be consistent
Moreover, the adoption of such a tax regime could trigger with further strength in the labour market and inflation
significant retaliatory responses from foreign countries returning to target.
if the WTO were to deem the BAT as non-compliant with
existing laws. We are now anticipating a further two hikes in 2017;
previously we had expected only two hikes in 2017 in
In sum, fiscal policy is set to be mildly stimulatory in the total. Our forecasts for 2017 and 2018 are now in line
short term, potentially from 2018 onwards. However, it is with the Fed’s median projection (three hikes per year).
difficult to foresee Congressional Republicans supporting That said, it is clear that the risks lay to the Fed moving
a significant fiscal stimulus. Indeed, the starting point more quickly for a couple of reasons:
for public debt is already high (net debt is over 80% of
GDP) and the Congressional Budget Office is forecasting • First, the US economy is more or less at an ‘escape
a widening in the Budget deficit under current law. The velocity’ and the Fed is almost at its dual mandate.
key for fiscal policy will be reform that engenders strong This means that the central bank is likely to be
incentives to work and invest. less circumspect about the downside risks from a
tightening. Potentially a major break from how it has
President Trump’s policies in other areas will have mixed behaved in recent years.
implications for growth over the medium term. Possibly
supporting growth is the President’s desire to cut back on • Second, fiscal policy is set to become expansionary
red tape and regulations. although the exact extent is not known. Regardless,
this dynamic is a strong contrast to recent years
On the negative side of the ledger are cuts mooted to when the weakened US economy endured fiscal
legal immigration numbers (which are currently adding tightening.
1 million per annum to population growth) and an
increase in the deportation rate of undocumented workers It would seem that the size of the Fed’s USD4.6trn
(which account for about 5% of the current workforce). balance sheet will be a focus of debate with FOMC
On trade, there is set to be greater scrutiny on those officials in the year ahead. At the press conference post
countries that run large trade surpluses with the US the March 2017 meeting Fed Chair Yellen said that an
like China, Japan, Germany, Taiwan and South Korea. unwinding of the balance sheet was discussed. She
Specifically, the US administration may try and ‘remedy’ indicated that balance sheet normalisation would be
these deficits by taking out punitive actions. If such action gradual and predictable, with more details provided as
from the US eventuates, retaliation can be expected. It is they become available. Any decision to start unwinding
hard to see how such behaviour will be an overall positive seems some way off, with Yellen stressing that it is easier
for US or global growth over the longer-run. and preferable to use the fed funds rate as the key active
tool for monetary policy.
At its 14-15 March 2017 policy meeting the FOMC raised
its target fed funds range by 25bps to 0.75-1.00%. The
move was well telegraphed to the markets a couple weeks
prior when a succession of Fed speakers hinted that a hike
FIGURE 3. CBO BUDGET PROJECTIONS UNDER FIGURE 4. FOMC OBJECTIVE FUNCTION – DEVIATION
CURRENT LAW– BUDGET BALANCE AS % OF GDP FROM THE DUAL MANDATE
4 10
2
8
0
-2 6
% of GDP
-4
4
-6
CBO forecast
-8 2
-10
0
60 65 70 75 80 85 90 95 00 05 10 15
-12
66 71 76 81 86 91 96 01 06 11 16 21 26 FOMC objective function Long-term average
Source: Bloomberg, CBO, ANZ Research Source: FOMC, Bullard, ANZ ResearchG3 | 8
JAPAN – INFLATION SHORTFALL PERSISTS On the international front, the Trump administration could
Japan’s economy grew by 1.0% in real terms in 2016, prove challenging for the outlook. Although a meeting
which is above its longer-run potential of 0.5%. between PM Abe and President Trump in February surprised
Nominal GDP grew by 1.3%, which marked the third with the degree of congeniality, comments from key US
straight year that nominal growth exceeded real Trade officials suggest that the trade relationship could come
growth. This suggests that Abenomics – which kicked under strain given that Japan runs a large trade surplus with
off late 2012 – has had some success in reflating the the US.
Japanese economy out of its long-term deflation funk.
That said, Abenomics is falling well short of its key In January, the core CPI, which excludes fresh food, turned
objectives of 2% inflation and 3% nominal growth. positive for the first time since late 2015. This is expected
Pricing pressures remained tepid in 2016 with the to pick up more sharply in coming months largely owing
headline CPI falling (by 0.1% y/y) for the first time to a rebound in energy prices. However, an alternative
since 2014. The weakness in consumer prices was measure of underlying inflation that excludes fresh food
driven by energy price weakness, JPY strength over and energy is unlikely to increase much in the short term.
the first nine months of 2016, and ongoing subdued This is based on our view that inflation expectations should
wage pressures. remain subdued and ongoing tepid wage pressures. On the
latter, it is notable that the first round of negotiations in the
Japan’s economy continues to grow above trend 2017 Shunto wage offensive has recently concluded. This
in early 2017 supported by an improved external saw companies offer a 0.4% base pay increase. Although
environment, which is boosting local production and the final figure for the current Shunto round may be a little
exports, and fiscal stimulus. This pace is unlikely to be higher than this, the pay increase will fall well short of what
sustained in H2 2017 as fiscal stimulus is set to fade is needed to achieve 2% inflation on a sustainable basis.
and the outlook for consumer spending is uncertain.
On the latter, real wage growth is set to fall into The BoJ adopted its QE with Yield Curve Control monetary
negative territory in the next few months as nominal framework in September 2016. It is targeting the short-
wage growth falls short of CPI inflation. In addition, term policy rate at -0.1% and the 10-year rate at about
labour market reforms currently underway have mixed zero. The BoJ has had some difficulty this year keeping the
implications for consumer spending. For example, the 10-year yield at zero amid rising global inflation and global
push to shorten the working week by limiting overtime bond yields. This sparked speculation that the BoJ may
hours and encouraging leisure activities. This may raise the target rate for the 10-year yield soon. However,
increase spending on leisure activities, but at the the BoJ has pushed back on this speculation and said that
same time it may also limit firms’ willingness to lift it will intervene in the bond market to achieve its objective.
rates of pay. Furthermore, the BoJ has signalled that this commitment is
strong given inflation is very low and there is no evidence of
The geopolitical environment in 2017 could have a firm uptrend in underlying inflation.
meaningful implications for Japan’s medium-term
growth prospects. On the domestic front, recent We don’t anticipate any change in the BoJ’s target for short-
changes to internal-based LDP rules – extending the or long-term rates this year on the assumption that inflation
tenure of the LDP President to three terms or up to pressures in Japan should remain modest. However, should
nine years – have opened the door for PM Shinzo Abe US ten-year yields push up toward (or above) 3% then the
to extend his term until September 2021. BoJ will find it difficult to keep the 10-year JGB yield at zero.
This may turn out positively for Japan, as a stable That said, some spread widening may still be possible even
political environment should allow the government if JGB yields rise. This should support JPY weakness and
to focus on structural reform rather than quick thus promote domestic inflation pressure. We also expect to
macroeconomic fixes. see the BoJ ease its rate of JGB purchases in 2017 owing to
supply limitations.
FIGURE 5. JAPAN GDP GROWTH FIGURE 6. 10-YEAR SOVEREIGN BOND YIELDS
6 2.7 0.5
4 2.5 BoJ introduces "yield curve
control" 10-year @ 0%
2 0.3
2.3
0 2.1
%
0.1
%
%
-2
1.9
-4 nominal > real
1.7
-0.1
-6
1.5
-8
96 98 00 02 04 06 08 10 12 14 16 1.3 -0.3
Jul 16 Sep 16 Nov 16 Jan 17 Mar 17
Real Nominal
US Spread Japan, rhs
Source: Bloomberg, ANZ Research Source: BoJ, ANZ ResearchG3 | 9
ECB CONSTRAINED BY WEAK CORE INFLATION The continued modest growth in wage costs is a concern
The early 2017 indications from data and leading in this regard. In Q4, wages and salaries rose by
indicators are that the euro area economy is continuing 1.6% y/y. That is not inflationary especially when set
to recover, with growth also showing signs of broadening. against a backdrop of expected zero real wage growth
Unemployment is continuing to fall gradually and in this year (headline inflation is now expected to average
January it was 9.6% vs 10.4% a year earlier. Last year, 1.7% this year).
employment growth averaged 1.3% vs 1.0% in 2015
and those firmer employment conditions are helping to We are therefore of the view that for the foreseeable
support improved stability in consumer confidence at high future, the ECB is likely to maintain its planned asset
levels. The early firmness seen in PMI and other survey purchase programme (EUR60bn per month April-
data was reflected in a 0.9% m/m increase in January December) and that a sustained rise in core inflation
industrial production and Q4 GDP rose by 0.4% q/q to will be required for them to alter that. The latest
leave 2016 growth up 1.7%. In Q4 investment rose 0.6% macroeconomic projections from the ECB forecast that
q/q following Q3’s 0.7% drop and grew at an average core inflation will average 1.1% this year. That rises to
quarterly rate of 2.5% y/y last year. 1.5% next year which would be consistent with tapering.
So far, ECB officials advise against an abrupt halt to QE,
It came as no surprise, therefore, that at the latest not least because of the adverse impact it could have on
ECB meeting President Draghi noted the improved and credit spreads and financial conditions.
broadening evolution of the euro area recovery.
UK INFORMS EU OF INTENT TO LEAVE
That assessment prompted the ECB to acknowledge that
the potentially very severe adverse risks that the euro The UK’s decision to formally trigger Article 50 before the
area economy has faced in recent years have receded. end of March has set in train the formal process of the UK
The ECB dropped its usual reference that it will avail of leaving the EU. Article 50 sets out that the UK has two
all instruments at its disposal to ease policy further if years to negotiate and complete its exit. Uncertainty over
needed. The market responded positively to that, but future UK trade arrangements remains rife and is a major
the reality is that the ECB indicated in March 2016 that it concern for policymakers.
didn’t expect to have to cut interest rates further and it
hasn’t as growth and employment have been recovering In that regard, we expect the BoE to remain on hold for
for some time. much of the forecast horizon. Whilst growth is performing
well (forecast at 1.9% this year) and inflation looks
We do not subscribe to the view that the ECB may poised to overshoot the BoE’s central 2% target, we
suddenly shift its monetary settings and guidance and see the risks to activity to the downside. The recovery
the above highlights just how gradual and cautious any in retail sales has petered out, rising inflation will eat
change of policy might be. In fact, the ECB left its main into real income growth and uncertainty may weigh on
guidance unchanged in March. That may well be tweaked investment. There is no evidence yet that wage growth
in the months ahead, but the ECB will not be in a rush is accelerating in response to GBP weakness so on that
to do so. The ECB’s mandate is inflation and despite basis, cost push inflation is not accelerating. If demand
the better growth climate, there is no evidence yet of weakens, then it won’t pull inflation higher either and the
a sustainable recovery in HICP. Headline inflation has spike in prices as a result of exchange rate depreciation
spiked higher due to base effects (February 2.0% y/y), can be expected to pass through. Stability is paramount
but core inflation is stable at 0.9% y/y and has been and raising interest rates would only add to uncertainty
below 1.0% in 11 out of the past 12 months. Evidence of at a time when certainty is required.
a sustainable recovery over time is needed if the ECB is
to step back from its unconventional monetary policies.
FIGURE 7. EURO AREA PMI AND GERMAN IFO FIGURE 8. EURO AREA INFLATION
60 120
3.5 1.8
3.0 1.6
55
110 2.5 1.4
2.0 1.2
50
Index
Index
1.5 1.0
% y/y
% y/y
100
45 1.0 0.8
0.5 0.6
90
40
0.0 0.4
-0.5 0.2
35 80
06 08 10 12 14 16 -1.0 0.0
10 11 12 13 14 15 16 17
Euro area composite PMI, lhs IFO Index, rhs
HICP Core HICP, rhs
Source: Bloomberg, Markit, ANZ Research Source: Bloomberg, ANZ Research10
CHINA
THINGS TO WATCH
INVESTMENT-LED RECOVERY
HIGHLIGHTS POLICY DILEMMAS A strong investment pipeline bodes well for China’s
headline growth.
Raymond Yeung
ECONOMIC OPTIMISM BOOSTED BY STRONG Credit expansion may prompt the authorities to rein in
INVESTMENT soon, repeating their policy reaction in Q2 2016.
China’s economic sentiment has been upbeat recently,
thanks to a noticeably strong investment in Q1. Fixed asset The PBoC will likely adjust interest rates more
investment (FAI) rose 8.9% y/y in the first two months, frequently as a part of its structural reforms.
compared with 8.1% in December 2016. Infrastructure
construction jumped 27.3%, almost doubling the pace We forecast that China will register average growth of
seen during the same period last year. The number of 1.4-1.5% q/q sa over the first half of the year. This will
infrastructure investment projects in the pipeline approved translate into a headline growth rate of 6.6-6.7% y/y.
by the National Reform and Development Committee since However, in order to achieve the official annual target of 6.5%
Q4 2016 has surged significantly in the past few months. in 2017, the country will need to grow steadily at a pace of
This bodes well for actual FAI flows in 2017, especially over 1.6% q/q sa or 6.4% y/y in H2, indicating that more fiscal
the first half of the year. and administrative support is required to maintain a strong
investment pipeline.
Property investment has also recovered rapidly in the
… BUT THAT WILL HINDER THE PROGRESS OF
first two months and registered growth of 8.9% y/y,
CAPACITY REDUCTION …
2.0ppt higher than the 2016 average. This suggests that
developers remain confident about China’s real estate Indeed, the recent recovery highlights a number of policy
prospects despite the government’s efforts to cool the dilemmas facing China despite its promise to shift from an
market. Property investments in the central provinces investment-led growth model to one favouring consumption
have increased noticeably while those in the eastern and services. Even though economic momentum looks to
provinces are lagging behind. This is not surprising as have stabilised on the surface, the authorities still face a
many tier-1 cities (Beijing, Shanghai, Guangzhou, and very delicate balancing act.
Shenzhen) are located in eastern provinces. Nonetheless,
the quicker growth of property investments in some Capacity reduction in the steel industry is a case in point.
provinces underlies the fact that the impact of property Last year, Chinese officials announced that they had
tightening measures is regionalised in nature and so these successfully shed 65 million tonnes (mt) of crude steel
measures are unlikely to turn the entire sector upside down. capacity, well surpassing the 45mt target set for 2016.
However, our detailed analysis (see China Insight, 28 February
The idea of price-driven recovery works well in an 2017), suggests that the reported figures had also included
investment environment. An increase in price expectations idle and unproductive capacities. Thus the actual reduction was
urges businesses to stock up. The recent sharp rise in likely about half of what was reported (about 30mt vs 65mt).
China’s producer price index (PPI) resembles what happened The risk is that latent plant capacities are reversible. While the
between July 2009 and May 2010 when the PPI jumped from rapid price rebound on the back of an investment-led recovery
-8.2% to 7.1% on the back of the Chinese government’s has helped to maintain overall stability in the sector, it also
massive stimulus. Meanwhile, riding the current wave are offers a huge economic incentive for Chinese operators to
new orders placed by Chinese manufacturers, with the keep their furnaces burning. This would ultimately delay the
new orders index staying above 52.0 in five of the last six progress of capacity reduction, a core component of President
months, giving business momentum a jump start. Xi Jinping’s supply-side structural reforms.
FIGURE 1. FIXED ASSET INVESTMENT PROJECTS FIGURE 2. PROPERTY INVESTMENT BY REGION
APPROVED BY CHINA’S NDRC
350 50
300 40
250
30
% y/y ytd
200
CNY bn
20
150
10
100
50 0
0
-10
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
Feb 11 Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17
16 16 16 16 16 16 16 16 16 16 16 16 17
Eastern Central Western
Approved FAI projects, CNY bn
Source: CEIC, ANZ Research Source: CEIC, ANZ ResearchCHINA | 11
… AND TURN CORPORATE DELEVERAGING INTO NOT COMPLACENT ABOUT STRONG ECONOMIC
A LONG MARCH HEADLINE
Furthermore, an investment-led growth model conflicts All said, lying beneath the decent data recently is a slew
with the goals of taming credit growth and reducing of structural issues that Chinese policymakers still need
corporate leverage. Running parallel to the strong to address. Admittedly, the risk of a China ‘hard landing’
investment seen in recent months is a rapid expansion has waned substantially so far in 2017 compared with the
of credit. New yuan loans pledged by Chinese banks same period a year ago. The current economic conditions
increased by CNY3.2trn in January and February, an should provide a window for policymakers to push
amount comparable to the same period last year, forward boldly with structural reforms.
suggesting that the first half of 2017 will likely see a
repeat of the same property-driven recovery in H1 2016. One critical element of the reform is to discover a market
mechanism for the allocation of financial capital. We do
However, the consequences of China’s credit-fuelled see the authorities making progress on this front. Over
growth were forewarned in a famous article allegedly the past few months, the PBoC has deployed a variety
written by an ‘authoritative person’ and published on of monetary instruments to manage market liquidity.
the front page of the People’s Daily last year. In the Notably, the central bank has increasingly relied on
article, the anonymous writer interest rate tools such
warned that “...economic as the reverse repo rates
stabilisation relies on the old An investment-driven recovery hinders and medium-term lending
method, which is investment-
the progress of capacity reduction and facilities (MLF) rates
driven, and fiscal pressure to signal its monetary
in some areas has added up
spurs credit growth. policy stance. This is a
to possibilities of economic welcome move. We have
risks.” In addition, they said “high leverage inevitably been arguing that China needs to develop a policy rate
leads to high risks, which, without proper management, to improve its monetary policy effectiveness (see China
can trigger a systemic financial crisis, cause negative Insight, 24 August 2016). We believe the PBoC will
economic growth and even eat up people’s savings, and continue to test the market’s reaction by changing these
that’s fatal” (see China Insight, 12 May 2016). In the potential policy rates more frequently.
wake of the article, the PBoC put its monetary easing
cycle on hold. To combat the resurrection of the investment-led growth
model, Chinese policymakers are expected to mop up
The reality is that the impact of additional credit on excessive liquidity in the economic system. Cheap credit
economic growth is shrinking and policymakers have is not welcome. We believe the central bank will continue
yet to discover a solution to contain credit growth. At to maintain a tightening bias for the rest of the year
the recent National People’s Congress in early March, and the PBoC is expected to adjust the money market
the State Council said it would continue to target an rates upward by another 20bps by the end of 2017.
increase of total social financing by 12%, higher than In addition, the government has embarked on another
the growth of nominal GDP by 2.5ppt. Unless China can round of property tightening measures after the NPC. If
suppress interest rates at low levels for an extended these measures fail to tame the market, we may see the
period (without worrying about capital outflows), a high ‘authoritative person’ emerge again.
level of debt servicing will eventually weigh on disposable
income and hence consumption, posing a major obstacle
to economic rebalancing in the long term.
FIGURE 3. M2 GROWTH VS NOMINAL GDP GROWTH FIGURE 4. MONEY MARKET 7-DAY REPO RATE VS PBOC
REVERSE REPO RATES
18% 6
16%
5
14%
12% 4
10%
3
%
8%
6% 2
The PBOC guides
4% interest rate
1 upward
2%
0% 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mar 15 Jul 15 Nov 15 Mar 16 Jul 16 Nov 16 Mar 17
GDP+Inflation target M2 growth target CFETS 7-day Repo Fixing PBOC Reverse Repo
Source: CEIC, ANZ Research Source: Bloomberg, ANZ Research12
AUSTRALIA
THINGS TO WATCH
RBA DILEMMA – WEAK WAGES,
STRONG HOUSE PRICES Given the recent deterioration, some improvement in
Felicity Emmett the labour market will be crucial if wage growth is to
improve.
CHANGING DRIVERS
Australia’s growth outlook remains positive, but the drivers The Q1 inflation outcome will be keenly awaited given
are changing. Housing will provide less support, as will net the disappointment in wages growth in Q4.
exports. But private investment and public spending are
stepping up to fill the gaps, leaving growth likely to remain Macro prudential measures are likely to be announced
around 3% over the next two years. Inflation remains shortly. How effective will they be in taking the heat
missing in action, however, with wages growth plumbing out of the housing market?
new lows. While a number of indicators point to a pick-up
in wages in the period ahead, we expect any acceleration to In addition, the weakness in non-mining investment in
be modest leaving the RBA on hold for a prolonged period. the mining states looks to be abating (Figure 2). This
weakness has been a substantial weight on non-mining
HOUSING CONSTRUCTION SUPPORT TO FADE
investment at the national level until recently and these
Housing construction looks to be close to a peak. With early signs of recovery are encouraging. Overall, non-
more than two years’ worth of projects in the pipeline, mining investment is now growing at a solid 11% rate,
however, activity is likely to remain at an elevated level the highest since 2007.
and decline only gradually this year. Housing has been a
HIGH RATES OF SPARE CAPACITY IN THE
key support to the non-mining recovery, particularly when
LABOUR MARKET ARE WEIGHING ON WAGES
the linkages with employment and consumer spending are
taken into account. But while the outlook for growth is positive, there
remains considerable spare capacity in the labour
Another key pillar of the recovery has been net exports. market. After trending lower through the second half
With the bulk of the AUD depreciation now behind us, of 2015, unemployment was broadly stable at around
net exports are unlikely to contribute as much to growth. 5.75% through most of 2016, but ticked higher to 5.9%
Growth in imports of both goods and services is already in February.
picking up. That said, we expect export growth to remain
solid. LNG production is still coming on stream and will Moreover, underemployment continues to trend higher.
add around ½ppt to growth over the next couple of years. All the growth in employment over the past year has
Moreover, ongoing improvement in Asia’s (and particularly been in part-time jobs, while the number of full-time
China’s) household income should continue to support jobs has declined. Many of these part-time workers
strong growth in Australia’s exports of tourism and would actually prefer to work full-time, and consequently
education (Figure 1). underemployment continues to rise.
Importantly, this strength in tourism is now spilling over This highlights that there is considerably more slack in
into investment. Non-residential building approvals have the labour market than the unemployment rate suggests.
been heading higher, particularly in areas exposed to The ongoing weakness in wage growth is consistent with
tourism. Since the low in 2013, the value of work in the the persistently high levels of spare capacity in the labour
pipeline for short-term accommodation has nearly tripled. market (Figure 3).
These second round effects from the lower AUD will be
important for growth over the next few years.
FIGURE 1. EXPORTS LIKELY TO REMAIN STRONG, BUT FIGURE 2. NON-MINING INVESTMENT LOOKS TO BE
STRONGER IMPORTS WILL SUBTRACT FROM GROWTH PICKING UP IN THE MINING STATES
1.5 30
Nominal non-mining business investment (AUD bn)
Contribution to annual GDP growth, ppts
25
1.0
20
0.5
15
0.0
10
-0.5
5
-1.0 0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 90 95 00 05 10 15
Services exports Services imports Net exports of services Mining states Non-mining states
Source: ABS, ANZ Research Source: ABS, ANZ ResearchAUSTRALIA | 13
Given this extra slack, and with inflation expectations low in investor lending in an effort to cool the market. This
and job insecurity still quite high, we think that a strong would likely be in the form of tightening some of the
recovery in wages is unlikely, even though there are measures announced in late 2014, which were quite
some signs that wage growth has stabilised. successful but whose effects have waned over time.
INFLATION WEIGHED DOWN BY WEAK WAGES MONETARY POLICY ON HOLD
AND INTENSE RETAIL COMPETITION
With inflation likely to stay below the RBA’s target band
Combined with the weakness in wage growth, strong well into 2018, our view is that the RBA is set to keep
competition at the retail level is weighing on inflation. rates on hold. Persistently weak wages growth counts
The surge in foreign retailers opening brick and mortar towards further rate cuts, but strong house price growth
stores in Australia has intensified pricing pressure in the will prevent the RBA from further monetary policy easing
retail sector. With the expected opening of Amazon this in our view.
year, this is set to continue.
Rate hikes seem a long way off. The RBA is cognisant of
Our work on inflation continues to suggest that the risks the fact that low inflation has to some degree fed through
to inflation remain to the downside. The ANZ Inflation to lower wage outcomes via the decline in household
Risk Index (Figure 4), which is a Fed-style measure of and business inflation expectations. For this reason
future inflation probabilities for Australia, suggests that we believe the RBA will not take the risk of tightening
the chances of inflation being inside policy prematurely. And
the target band have been picking while the international
up recently, although the probability Low wages growth combined environment is looking
remains low compared to history. with surging house prices more positive and global
This analysis supports our view that leaves the RBA in a bind. inflation does look to be
underlying inflation will rise only very heading higher, we think
gradually back to the RBA’s inflation rate hikes remain a very
target. distant prospect. The Bank seems set to leave the cash
rate at 1.5% for some time.
HOUSE PRICES STILL RISING STRONGLY
In contrast to the weakness in inflation, house prices
continue to rise strongly. The strength remains
concentrated in Sydney and Melbourne, where prices
are up a sharp 19% and 14% respectively over the past
year. National prices for all dwellings are up a (slightly)
more moderate 12%. Unit prices are, however, falling
in Brisbane, and a number of other cities. And with a
substantial amount of supply set to come on-stream
in units over the next two years we expect downward
pressure on unit prices to intensify.
The strength in house prices has occurred alongside a
significant increase in investor lending. With household
debt rising across all levels of incomes, concerns
are rising about the sustainability of this debt in an
environment of very low wage growth. We expect that
APRA will shortly announce measures to crimp growth
FIGURE 3. WAGES GROWTH PLUMBING NEW LOWS FIGURE 4. INFLATION MORE LIKELY TO STAY BELOW
THE RBA’S TARGET BAND
10 100%
90%
8
Expected probability - next 12 months
80%
Average non-farm wages, % change
6 70%
60%
4
50%
40%
2
30%
0 20%
10%
-2
0%
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
-4 Prob of inflation averageing less than 2% Prob of inflation averageing between 2-3%
90 95 00 05 10 15 Prob of inflation averageing more than 3%
% change q/q % change y/y
Source: ABS, Ai Group, Bloomberg, Melbourne Institute, NAB,
Source: ABS, ANZ Research Westpac, ANZ Research14
NEW ZEALAND
THINGS TO WATCH
AS GOOD AS IT GETS?
Sharon Zöllner Auckland house prices – they’re down but are they
out?
MATURING CYCLE
The New Zealand economy continues to record The Fed and global yields – where they go, New
reasonable growth. Led particularly by the construction Zealand rates will follow.
and tourism sectors, but largely across the board,
activity and labour demand is solid. Exceptionally strong Dairy prices – will the stall become a rout?
net migration is boosting activity and spending. There
are a few weaker spots: house sales and Auckland
house prices have softened, building consents have The restrictions the RBNZ imposed on riskier housing
weakened markedly, and the recovery in global dairy lending have succeeded in putting the brakes on the
prices is threatening to stall. Growth in per capita terms market to some extent, with Auckland housing activity
has also been a little lacklustre and weather-related sharply lower. Both house sales and consents have
weaker primary production saw softer GDP growth in dropped due not only to lending restrictions, but also
the last three months of 2016. But looking at the bigger stretched affordability, sharply higher construction costs,
picture, it is a reasonably buoyant story, and one where and modestly higher mortgage rates. Indeed, Auckland
the unemployment rate should continue to ease lower, house price inflation is well off its highs, though the
despite strong labour supply growth. extreme volatility of late makes it difficult to discern the
current trend (Figure 1).
However, we are at the point of the cycle where firms are
increasingly hitting capacity constraints. Accordingly, we The RBNZ is wary of declaring victory over housing
expect that growth will continue to moderate through the risks prematurely. Experience with earlier rounds
course of the year as constraints (particularly for labour of LVR restrictions suggests the impact could prove
and credit, and most evidently in the construction sector) short-lived as investors find their way around them.
become more binding. Many fundamentals for the Auckland housing market
remain strong: rapid population growth, historically low
HOUSING AND STRUCTURAL RISKS
mortgage rates (albeit creeping upwards), and housing
Capacity issues are a nice problem to have for firms, shortages, corroborated by rising rents – and falling
compared with lacklustre demand. However, at this building consents suggest these housing shortages will
‘mature’ stage of the economic cycle, structural economic not be alleviated any time soon from the supply side. And
weaknesses can emerge as late-cycle imbalances it’s no longer only about Auckland, with housing markets
and excesses form. One obvious risk area is housing. around much of the country having had a boom year.
The Reserve Bank has been warning of the financial
stability risks stemming from the strong housing market However, what does look different this time around
(particularly in Auckland) for years, but has stopped versus the last housing cycle is that financial institutions
short of raising the Official Cash Rate in response due to are already curtailing credit (independently of LVR
the fact that CPI inflation remains subdued (and global restrictions) and interest rates are rising. That’s dented
yields so low). Rather, it has relied on macroprudential the demand side.
restrictions such as limits on high loan-to-value ratio
(LVR) lending and requiring larger deposits from property
investors.
FIGURE 1. AUCKLAND HOUSE SALES AND HOUSE FIGURE 2. ANNUAL GDP GROWTH AND THE OFFICIAL
PRICE INFLATION CASH RATE
35 60 8 10
50 9
30
6
40 8
25
30 7
20 4
Annual %
20
Annual %
6
Annual %
15 10
2 5 %
10 0
-10 4
5 0
-20 3
0 -30 2
-2
-5 -40 1
10 11 12 13 14 15 16 17
-4 0
Auckland stratified house price index (LHS)
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Auckland house sales (RHS)
Production-based real GDP (LHS) OCR (RHS)
Source: REINZ, ANZ Research Source: RBNZ, Statistics NZ, ANZ ResearchNEW ZEALAND | 15
With the median house price to income ratio close to return to close to 2% in the Q1 figures. If it reaches
double digits in Auckland, the housing market is clearly 2%, that would be the first time back at the target mid-
a financial stability risk, despite the recent cooling. And point since 2011. Our forecast is for it to stay there or
associated with record-high house prices is record-high thereabouts (Figure 4). However, when we drill deeper
household debt as a proportion of income (168% at the into the data, there is still little evidence of inflation
end of 2016 compared with 159% in 2008). This is a broadening beyond housing and petrol prices. The
predictable response to the fact that the economy has recent sharp decline in global oil prices raises the risk
record-low OCR interest rate settings – lower than at the that inflation pressures could peter out yet again before
trough of the global financial crisis – despite an economy core inflation has risen sustainably. Financial institutions
that has been growing 3½-4% a year (Figure 2, previous are also lifting retail mortgage rates as they manage
page). Higher household indebtedness means that when the aforementioned mismatch between deposits and
retail interest rates do rise – whether it’s because the loans growth, which represents a tightening in financial
RBNZ has embarked on a tightening cycle, or because conditions.
global (read: US) rates rise, or bank funding costs lift
sharply – they will have a more marked negative impact The Reserve Bank will therefore approach the tightening
on sentiment and spending than might have historically cycle cautiously. It has been wrong-footed twice since
been the case. Recent first home buyers are particularly the global financial crisis, kicking off a tightening cycle
exposed. only to have to reverse it (and more) as inflation failed
to materialise (Figure 2).
However, while noting that We expect that OCR hikes
fact, it is important to also The Reserve Bank will approach the are a mid-2018 story,
bear in mind that other tightening cycle cautiously. It has been whereas the Reserve Bank
structural metrics are looking wrong-footed twice. is forecasting the OCR to
remarkably restrained for remain at 1.75% until late
what is typically the ‘silly 2019.
season’ of the economic
cycle. New Zealand’s net foreign debt is far lower than There is a fair amount of water to flow under the bridge
its peak during the last business cycle (55% of GDP before then. While the global economy and inflation
versus 84% in late 2008). The current account deficit are strengthening, that in itself comes with challenges,
is contained at 2.7% of GDP, well below its historical after years of super-stimulatory monetary policy. It
average of 3.7%. Low global interest rates have helped, remains to be seen how equity and credit markets cope
but they also reflect that a consumption boom has with meaningfully higher US and global interest rates in
not followed the housing equivalent. We estimate the what is now a very highly indebted world, where years
household saving rate is currently around zero, compared of yield-chasing have encouraged firms, pension funds
with an average of -4% between 2003 and 2008. Looking and households to take risks they would likely not have
forward, we do see the risks skewed towards modestly considered in more normal times. For now, complacency
larger deficits, due to both rising global interest rates and rules, but that could change fast. New Zealand, as a
the fact that the wide gap between domestic deposit and small, open economy, remains very exposed to the
credit growth is narrowing only slowly, forcing a lift in vagaries of the global economy and financial markets.
offshore bank borrowing (Figure 3).
Inflation across the New Zealand economy remains
below the Reserve Bank’s target mid-point. It is true that
thanks largely to an oil and food price-related rebound
in tradable inflation, headline CPI inflation looks set to
FIGURE 3. NZ BANKING SECTOR: DEPOSITS AND FIGURE 4. CPI INFLATION AND THE TRADABLE/NON-
LENDING TRADABLE SPLIT
20 8
Borrowing ANZ
18 accelerating 6 forecast
16
Annual change ($bn)
14 4
Annual % change
Self-
12 Pre-GFC funding
boom 2
10
8 0
Deposits
6 decelerating
-2
4
2
-4
0 95 97 99 01 03 05 07 09 11 13 15 17 19
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Tradable inflation Non-tradable inflation
Retail deposits Household borrowing Headline CPI inflation
Source: RBNZ, ANZ Research Source: Statistics NZ, ANZ Research16
SOUTH AND SOUTHEAST ASIA
THINGS TO WATCH
THE LONG AND WINDING ROAD
TO FULL RECOVERY Export rebound to remain muted due to structural
Sanjay Mathur | Weiwen Ng | Eugenia Victorino | headwinds.
Shashank Mendiratta
Domestic demand handicapped by poor profitability
ASIAN EXPORTS ARE PICKING UP
and high leverage.
The region’s trade recession is finally behind us. Exports,
on both volume and value measures, have strengthened Overheating in the Philippines.
in all ASEAN economies. The upturn in exports and the
associated shift in the marginal macro momentum have De-synchronised ASEAN and US monetary cycles.
been well rewarded in the financial markets. Going forward
we believe asset price performance will depend on the
GROWTH TO IMPROVE ONLY MODESTLY...
magnitude and durability of the recovery in exports and
whether it can filter into other components of growth, Against this challenging backdrop, we expect growth in
including consumption and investment. ASEAN to remain sub-trend in 2017, rising moderately
to 4.8% from 4.6% in 2016. Only in the Philippines do
A FULL RECOVERY IS STILL ELUSIVE
we continue to expect solid growth of 6.9%. In fact,
We harbour some doubt on these fronts given the various ‘overheating’ and an attendant deterioration in the
cyclical and structural impediments to global trade and current account balance are key risks for the Philippines.
domestic demand. Shifts in household spending towards Outside of ASEAN, we do expect a growth rebound in
services in advanced economies, lacklustre growth in the India as the impact of demonetisation wears off. It is,
broader EM complex, as well as slowing trend growth however, important to bear in mind that our GDP growth
alongside its rebalancing in China, have been impeding forecasts are based off official data which in our view, is
global trade. overstating the strength of economic activity.
... AND MONETARY POLICY TO REMAIN STABLE
At the domestic level, a complicated legacy of slack
capacity, poor profitability and high/concentrated levels of As an outcome of tepid growth, core inflation is likely to
gearing will restrain domestic demand. Persistently sub- remain well behaved, even though headline inflation is
optimal levels of capacity utilisation levels have resulted in set to perk up on the back of higher energy prices and
elevated unit labour costs (ULC). utility costs. The increase is likely to be most pronounced
in Indonesia and Malaysia. In Indonesia, we forecast
Deflating them to more manageable levels will require a headline CPI to rise from 3.5% in 2016 to 4.6% this
combination of higher productivity and wage restraint. year. The comparable readings for Malaysia are 2.1% and
Other measures of profitability such as the return on 3.6%, respectively. The interplay of sub-trend growth
assets (ROA) for the corporate sector have also been and low core inflation implies that in a departure from
weak. And last, but not the least, gearing levels in the past cycles, Asian central banks are unlikely to respond
region are high with non-financial sector debt at over to the on-going tightening by the US Federal Reserve.
100% of GDP in all economies, barring Indonesia and the The only economy where we expect higher policy rates is
Philippines. We believe a resolution of these problems will the Philippines, by 50bps in 2017 and 75bps in 2018.
need to precede a broad-based recovery.
FIGURE 1. TRENDS IN RETURN ON ASSETS (ROA) FIGURE 2. EVOLUTION OF DEBT
8 300
7
250
6
200
5
% GDP
ROA (%)
150
4
3 100
2
50
1
0
0 ID MY PH SG TH
04 05 06 07 08 09 10 11 12 13 14 15 16
ID MY PH SG TH 2005-2008 (Average) 2016
Source: CEIC, Haver, ANZ Research Source: CEIC, Haver, ANZ ResearchSOUTH AND SOUTHEAST ASIA | 17
BANK INDONESIA TO REMAIN NEUTRAL INDIA: MARKING DOWN GROWTH
Indonesia’s growth is gradually strengthening, supported India’s GDP estimate for the December 2016 quarter
by increased contributions from net trade and improving at 7.0% y/y implied only a muted effect on economic
consumption. The improvement in net trade is evident activity from demonetisation. In our assessment, the
from the rising trade surpluses. Meanwhile, consumer fallout from demonetisation was sharper and we estimate
confidence, as measured by Bank Indonesia’s (BI) the true pace of growth at 5.7% y/y.
Consumer Confidence Index, has been improving. The
index reached a two-year high in February. Noteworthy in We are marking down our GDP forecast for FY 2018* to
the survey were respondents’ expectations of improving 7.5% from 8.0 % previously. Our estimate for FY 2017 is
economic and employment conditions over the coming 6.8%. We expect India’s recovery to be more moderate
six months. The investment cycle however, remains owing to the second round effects of demonetisation on
weak, suggesting that there is still excess capacity in the the informal sectors of the economy as well as the real
system and that commodity prices have not recovered estate sector. New investment proposals also dropped to
sufficiently to warrant fresh capital spending. Hence, we INR1.4trn for the quarter ending December 2016 after
expect growth to accelerate mildly to 5.4% in 2017 from averaging INR2.6trn in the previous nine quarters. This
5.0% last year. weakness in investment reflects a combination of excess
capacity, high leverage in the corporate sector, and risk
As such, Indonesia’s growth trajectory does not point aversion among banks to increase lending amid high
to any incipient demand-pull inflationary pressures. levels of non-performing assets (NPAs). While we remain
However, a phased removal of electricity subsidies will sanguine on the reform momentum post the Bharatiya
lead to higher inflation this year but still keep it within Janata Party’s solid victory in the recent state elections,
BI’s target range. the incremental impact on investment will only be visible
in 2018.
We also expect stability in the external position. The
recent widening of the trade surplus, alongside the tax Turning to other components of growth, our view that
amnesty-related repatriation of funds, resulted in a consumption will improve remains intact. As currency in
balance of payments (BoP) surplus of USD9.7bn in 2016, circulation improves, household spending should edge up.
compared to a deficit of USD1.1bn in the preceding year. Further support is likely from the increase in civil servant
Meanwhile, the deficit on the basic BoP also declined to salaries. Early signs of improvement are becoming visible
0.8% of GDP, a five-year low, implying reduced reliance in high frequency indicators such as auto sales and
on volatile portfolio capital flows. The central bank has passenger air travel.
taken advantage of this improvement in the BoP to
rebuild its reserves. On monetary policy, we maintain that the Reserve Bank
of India has firmly shifted to a neutral stance and will not
We expect BI to remain on hold through 2017. Even cut rates in FY 2018. The central bank’s focus on lowering
though the anticipated increase in inflation is almost headline CPI to its target of 4% has raised the bar for
entirely due to cost push pressures, BI is likely to take further easing. Moreover, it has been concerned with
a cautious approach. The central bank has said that the the stickiness of core inflation at around 5%. We believe
current policy stance is already growth supportive and that achieving the 4% target will be difficult. In fact, we
that it is also concerned about possible adverse effects forecast it to rise to 5.4% in FY 2018.
from the US Fed’s tightening. Still, the fact that BI is able
to maintain rates during a rate hike cycle in the US is a
reflection of overall macro stability.
FIGURE 3. INDONESIA BALANCE OF PAYMENTS FIGURE 4. INDIA: INVESTMENT LIKELY TO STAY TEPID
6.0
Dec 16 1.41
5.0
4.0
3.0 Sep 16 2.34
2.0
% GDP
1.0 Jun 16 1.55
0.0
-1.0
Mar 16 3.31
-2.0
-3.0
-4.0 Dec 15 1.18
-5.0
Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
New investment proposals (INRtrn)
Current account BoP balance Basic BoP balance
*FY 2018 implies April 2017-March 2018.
Source: CEIC, Haver, ANZ Research Source: CMIE, ANZ ResearchYou can also read
