Economic growth in the Eurozone, which should achieve 1.4% in 2015 and further to 1.8% in 2016, leading to another good year for Central and Eastern Europe (CEE) in 2015, according to the latest CEE Quarterly report by UniCredit Economics & FI/FX Research.
Exports from the region stand to benefit in particular from the economic recovery in the Eurozone, while the ECB's quantitative easing should stimulate capital flows and keep financing costs low at the same time.
According to UniCredit, the favourable external environment also offers local central banks the opportunity to keep interest rates at record lows for an extended period of time, prolonging the accommodative monetary stances in place. Low financing costs could provide some scope for fiscal support, especially in countries where government deficits and debt are at moderate levels. However, not all countries in Central and Eastern Europe will be able to benefit to the same extent from the favourable conditions.
"Countries with solid fundamentals and advanced reforms will draw the lion's share of the benefits from the current situation," said Lubomir Mitov, CEE Chief Economist at UniCredit.
These countries (EU-CEE) include the Baltic States, Poland, Slovakia, Slovenia, the Czech Republic and Hungary, which joined the European Union in 2004, as well as Bulgaria and Romania, which became EU members in 2007.
These export-focused EU-CEE countries should be able to utilise their competitive advantages and close economic ties with Germany to the fullest extent. Real GDP growth should accelerate to 2-3% this year as a result, except for Poland, where growth will exceed 3%.
UniCredit did extend a caveat to its positive forecasts, citing that the interest rate hikes expected later this year from the US Federal Reserve could exert an adverse impact on global risk appetite and result in stagnation or a reversal in capital flows to the CEE countries.
Hartwig Kos
The European Central Bank’s (ECB) recent programme of quantitative easing, purchasing bonds in the open market, has had a profound impact on markets in Europe, even before the purchases began, believes international investment firm, Baring Asset Management.
Over the past few months, European equity markets have rallied, while both bond yields and the euro have fallen to historic lows. The euro weakness has had a significant positive impact on European exporters in particular. However, these market movements are not only down to quantitative easing. Economic data in Europe has been improving recently, and sentiment around European assets has improved considerably.
“Over the past six months we have undertaken a significant shift in the [Baring Euro Dynamic Asset Allocation Fund]. In August last year, we had 25% of the fund in US equities, with very little in Europe; we now have no US equities and nearly 30% in European equities. Our European position also includes a 10% allocation to European small caps which we believe will benefit from the more positive economic environment indicated in the recent economic data,” said Hartwig Kos, Investment Manager, Baring Euro Dynamic Asset Allocation Fund.
Having celebrated its second anniversary in March, the Baring Euro Dynamic Asset Allocation Fund has returned 10% since inception on an annualised basis, and 21.55% on a cumulative basis, outperforming the three-month EURIBOR +3%p.a. which has delivered a return of 3.2% and 6.65% respectively. The Baring Euro Dynamic Asset Allocation Fund follows the same strategy as other Barings’ multi asset funds, taking a global perspective but ensures that at least 50% of the fund’s exposure is in Euros.
Hartwig Kos added: “On the fixed income side, we are also invested in European high yield debt, which we believe will be positively impacted by the general search for yield in the market. We have also found the risk premia in Russia and Brazil to be particularly attractive.
“Another theme in the portfolio is our allocation to European property. While we do not yet see any overall inflation in Europe, we do see asset price inflation due to a mismatch of interest rates – the ECB benchmark rate is too low for the economic conditions in Germany and other northern European countries, so property prices and credit are booming in those regions. To capture this opportunity, we have taken positions in a number of real estate investment trusts across northern Europe.”
The milestone launching of the ASEAN Economic Community (AEC) gives South-East Asian nations the opportunity to take the region to the next level of development, though there are significant challenges ahead, according to the Co-Chairs of the 24th World Economic Forum on East Asia, held in Jakarta, Indonesia, April 19-21, 2015.
The AEC creates a single regional common market of Asean countries with a free flow of goods, services, investment capital and skilled labour.
“There is an eagerness to make this work and put all the elements in action to move forward, have a level playing field, a much bigger market and grow the pie significantly in the next few years,” said Hans-Paul Bürkner, Chairman of The Boston Consulting Group.
The theme of the World Economic Forum on East Asia 2015 was “Anchoring Trust in East Asia’s New Realism”. Building trust among all stakeholders and in institutions will be crucial if ASEAN is to succeed in reaping the full benefits of regional integration.
“People have lost trust in the ability of markets and business to create wealth and to fairly allocate opportunities,” observed John Riady, Executive Director of the Lippo Group in Indonesia. “So it is important for business to reflect on its role and the role that it can play in society. But this is important not only for business. No matter who we are – whether in government, education, media or NGO – this is an important time to reflect on stewardship, how we can be better stewards of what we have been given, and how we can rethink what we are doing and better structure our institutions to reflect the realities of our world.”
Teresita Sy-Coson, Vice-Chairperson of SM Investments Corporation in the Philippines, said that the discussions at WEF East Asia had highlighted the major challenges ahead for labour mobility. “There is now an understanding of the importance of the freer movement of human capital,” she said.
William Lacy Swing, Director-General of the International Organisation for Migration (IOM) in Geneva, agreed: “It is quite clear that, with the very exciting regional integration going on here, human mobility will be increased and expedited as a result. We have to look at it as both a challenge and opportunity. Migration is not a problem to solve; it is a reality to be managed.”
Germany’s Chancellor, Angela Merkel, talking at the 2015 World Economic Forum Annual Meeting.
Germany’s Chancellor, Angela Merkel, called for urgent fiscal reform in Europe at a special session at yesterday’s World Economic Forum Annual Meeting. Whatever the decision of the European Central Bank (ECB) on quantitative easing, she said that European leaders must not be diverted from continuing with meaningful structural reforms.
“Time is of the essence,” she said. “Every day we delay is a lost day. We need to promote growth and create long-term jobs.”
Europe has an opportunity to emerge stronger out of the crisis, the Chancellor said. While acknowledging progress by countries such as Italy, Spain and France, she stressed that Europe is not out of the woods yet. “The European single market needs to become less regulated and more open.”
The growth-austerity argument is a false dichotomy, she added. “Germany has shown that growth-oriented fiscal policy is possible,” she said. Pointing to internal demographic challenges, Merkel emphasized the need to manage debt levels to ensure that onerous burdens are not passed on to the next generation as six million German workers enter retirement age.
Merkel called on other European leaders to begin fiscal consolidation. She pointed to historic low interest rates and questioned how countries with large fiscal deficits will fare if rates rise. “Now is the time to get our houses in order,” she said.
The Chancellor added that Europe needs to grasp several immediate opportunities. The first is for more open trade via the Transatlantic Free Trade Agreements. The second is for Europe to become a standard-setter globally in digitization
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On Greece, she emphasized that Germany’s actions have always been oriented towards keeping Greece in the Eurozone. “We have to both show solidarity with Greece just as they show readiness to shoulder their responsibilities.”
Merkel concluded by affirming Germany’s position in Europe. “Germany will remain a stable anchor in Europe,” she said.
The BRICS Agenda: Boccanera, Lin, Jaitley, Neri, Kudrin, Ghosn
Ministers, industrialists and academics from the BRICS countries delivered a strong message of long-term potential economic growth for their countries at a panel session at yesterday’s World Economic Forum, in Davos, Switzerland. The message was clear – BRICS nations are ripe for investment, and will continue to be provided their governments successfully implement planned structural reforms.
“We continue to invest in all these countries, because we invest not for the next two or three years, but for the next 10 or 15 years,” said Carlos Ghosn, Chairman and Chief Executive Officer, Renault-Nissan Alliance, France. Ghosn emphasized that despite the adjustments currently taking place in the BRICS countries, they are all capable of strong growth.
Justin Lin, Professor, National School of Development, Peking University, People's Republic of China, said that China would have to depend less on exports and more on domestic consumption and investment, but the government’s strong balance sheet and high private savings will facilitate this transition. “I am confident that China will be able to maintain a 7% growth rate over the next five or even 10 years. China will continue to be an engine of world growth,” Lin said.
Arun Jaitley, Minister of Finance, Corporate Affairs and Information and Broadcasting of India, said India intended to return to an 8%-9% growth rate. Jaitley said the recent change in government has led to clarity about the path forward and a changed mindset, inside and outside the country. “The world is looking at India again,” he said. Lower oil prices are helping India’s current account balance and bringing down inflation, he added at exploresurvey.com/beverage.
“Russia will have to learn how to live with more moderate oil prices,” Alexei Kudrin, Professor and Dean, School of Liberal Arts and Sciences, Saint Petersburg State University, Russian Federation, told participants. Kudrin said lower prices were obliging Russia to make structural reforms and diversify its economy in a way that would benefit the country in the long term.
Marcelo Côrtes Neri, Minister of Strategic Affairs of Brazil, said Brazil is returning to the “middle path” it had originally begun in 2003: a combination of redistributive social programmes and market-friendly economic policy. He added that the country’s recent slow growth has not prevented impressive social achievements. “In Brazil inequality has fallen, and fallen sharply, since 2001,” he said.
South Africa too is taking concrete steps to rebalance its economy while maintaining strong social programmes, Nhlanhla Musa Nene, Minister of Finance of South Africa, said. Nene said the government is working to improve the environment for the private sector, to make the public sector more efficient, and to make the government more accountable to its citizens. Fiscal restraint is needed at present, but “we will continue to develop infrastructure and to protect the poor”.
President Barack Obama
President Obama delivered a defiant and upbeat State of the Union Address earlier this week, claiming that 2014 had been a ‘breakthrough year for America’.
“Our economy is growing and creating jobs at the fastest pace since 1999. Our unemployment rate is now lower than it was before the financial crisis. More of our kids are graduating than ever before. More of our people are insured than ever before. And we are as free from the grip of foreign oil as we’ve been in almost 30 years,” President Obama said.
“At this moment - with a growing economy, shrinking deficits, bustling industry, booming energy production - we have risen from recession freer to write our own future than any other nation on Earth. It’s now up to us to choose who we want to be over the next 15 years and for decades to come,” he said.
“Will we accept an economy where only a few of us do spectacularly well? Or will we commit ourselves to an economy that generates rising incomes and chances for everyone who makes the effort?”
Talking at Capitol Hill, President Obama stressed the importance of what he called ‘middle class economics’, calling on Americans to embrace equality
“Middle-class economics is… when everyone gets their fair shot, everyone does their fair share, everyone plays by the same set of rules. We don’t just want everyone to share in America’s success, we want everyone to contribute to our success,” he stated.
According to the President, middle-class economics means helping working families feel more secure in a world of constant change. Top of the list is helping people to afford childcare, college, health care, a home and retirement.
“Middle-class economics works. Expanding opportunity works. And these policies will continue to work as long as politics don’t get in the way. We can’t slow down businesses or put our economy at risk with government shutdowns or fiscal showdowns. We can’t put the security of families at risk by taking away their health insurance, or unravelling the new rules on Wall Street, or refighting past battles on immigration when we’ve got to fix a broken system,” President Obama said.
According to President Obama, since 2010, America has put more people back to work than Europe, Japan, and all advanced economies combined. The country’s manufacturing sector has added almost 800,000 new jobs. He also added that there are millions of Americans who work in jobs that didn’t even exist 10 or 20 years ago - jobs at companies like Google, eBay and Tesla.
“No one knows for certain which industries will generate the jobs of the future. But we do know we want them here in America. We know that. Middle-class economics is all about building the most competitive economy anywhere, the place where businesses want to locate and hire.
President Obama also put a call out to further develop America’s infrastructure, calling on a bipartisan infrastructure plan that could create more than 30 times as many jobs per year, and make this country stronger for decades to come. “Twenty-first century businesses need twenty-first century infrastructure - modern ports, and stronger bridges, faster trains and the fastest Internet,” he remarked.
International trade and export were also on the agenda.
“Twenty-first century businesses, including small businesses, need to sell more American products overseas. Today, our businesses export more than ever, and exporters tend to pay their workers higher wages. But as we speak, China wants to write the rules for the world’s fastest-growing region. That would put our workers and our businesses at a disadvantage. Why would we let that happen? We should write those rules. We should level the playing field. That’s why I’m asking both parties to give me trade promotion authority to protect American workers, with strong new trade deals from Asia to Europe that aren’t just free, but are also fair,” said President Obama.
“95% of the world’s customers live outside our borders. We can’t close ourselves off from those opportunities. More than half of manufacturing executives have said they’re actively looking to bring jobs back from China. So let’s give them one more reason to get it done.”
China's economy expanded 7.3% in the final quarter of last year, beating expectations and recording a 7.4% expansion for the year as a whole, but failing to meet the government's 7.5% target.
Growth slowed from 1.9% to 1.5% quarter-on-quarter. Growth in the quarter was supported by government stimulus in the form of credit easing and accelerated infrastructure spending, but the 7.5% target was missed despite this.
“Higher frequency data in December was neither especially weak nor strong. Though industrial production beat expectations at 7.9%, accelerating from 7.2% year-on-year in November, retail sales missed expectations, in a reversal of November's experience. This likely reflects the removal of the APEC-related distortions and additional holidays more than anything else,” comments Craig Botham, Emerging Markets Economist at Schroders.
“Investment, meanwhile, was in line with expectations, growing at 15.7% annually, only marginally slower than November's 15.8% reading. This came despite further slowing in property investment and stagnant manufacturing numbers, thanks to strong infrastructure support, which grew in excess of 20% year-on-year once again. Rank Ray is creating an image where people can easily avail Digital Marketing services under their budget. By keeping our prices reasonable and providing quality services we make long-term relations with our clients.
“Property sales contracted again, though at a slightly slower pace. Combined with the continued slowdown in real estate investment, it seems, as we expected, that the monetary easing we have seen has not been enough to reinvigorate the sector. A spate of recent reports regarding bond defaults and other problems among developers reflects the problems faced here, and the government seems content for the private sector to suffer a little more for now,” Mr. Botham said.
“Looking ahead, we expect growth to slow again in the first quarter of 2015 as fiscal reforms and falling land sale revenues hit local governments' budgets. This will mean more stimulus, in the form of rate and reserve requirement ratio cuts, but we also expect a lower target to be set – and missed – this year. The expansion of shadow finance in December, as the monetary easing worked its way through the system, points to one reason for government hesitation in unleashing stimulus, and this will be the case for 2015 as well."
Business leaders gathered in Davos for the 45th World Economic Forum Annual Meeting have called for structural reforms to the global economy to encourage growth.
Participants in this morning’s session on The New Growth Context were told that monetary policy was not enough to encourage growth. “Policy-makers shouldn’t kid themselves,” said Axel A. Weber, Chairman of the Board of Directors, UBS, Switzerland. “They need to deliver policy reforms, not just loose monetary policy.” Weber listed labour market and pension reform as especially important, and cited Germany’s reforms under the Schröder government as an example for the rest of Europe to follow.
“Right now structural reforms are the only game in town. We need politicians to act,” added Min Zhu, Deputy Managing Director, International Monetary Fund (IMF), Washington DC; World Economic Forum Foundation Board Member. Zhu said that “worldwide, the whole banking sector is much stronger than a few years ago” but that “the risks have moved into the shadow banking sector.”
John Rice, Vice-Chairman, GE, Hong Kong SAR, emphasised the importance of infrastructure to global growth. “You don’t have sustainable, inclusive growth unless you have jobs, and you don’t create jobs unless you have good basic infrastructure,” he said.
David M. Rubenstein, Co-Founder and Co-Chief Executive Officer, Carlyle Group, USA, said that since governments and banks are no longer funding infrastructure investments as much as they did in the past, more and more infrastructure projects will be funded by private equity. “Right now the US seems the greatest place in the world in which to invest,” he said. However, he cautioned that economic growth there is leaving many behind, especially in middle- and lower-income groups.
Zhang Xin, Chief Executive Officer and Co-Founder, SOHO China, People's Republic of China; Young Global Leader Alumnus, noted that China, unlike Europe, is suffering from too much investment and not enough consumption. “How do we grow consumption? We need tax reform,” she said. Although pro-consumption reforms in China are proceeding more slowly than she would like, Xin said that “the anticorruption campaign is working very well.”
The IMF has cut its global growth forecast for 2015 to 3.5%, down 0.3% from its October prediction. It expects a lower oil price to be positive for the global economy, but to be offset by negative factors.
The IMF believes a lower oil price will stimulate more growth in advanced economies that import oil rather than in emerging economies, as the benefit feeds more directly through to consumers. In many developing nations, like India, the government subsidises energy consumption, therefore the government tends to benefit from price drops.
However, the IMF believes the US will see strong growth in 2015, helping push the global economy upwards. The US is forecast to see 3.6% growth in 2015, up 0.5% from the IMF’s October forecast.
Meanwhile the IMF sounds notes of concern over Russia, and China. The Russian economy is expected to contract by 3% in 2015, while China is expected to grow by 6.8%, a 0.3% reduction from October's forecast. This follows on official data just released showing Chinese growth slowed to 7.4% in 2014, an enviable level of growth for advanced economies, but its lowest level in 24 years.
European growth has been downgraded and is now expected to come in at 1.2%, down 0.2% from October. However, Spain provides a European bright spot, with 2% growth expected this year, up 0.3% on October's forecast. The UK is expected to grow by 2.7% in 2015, unchanged from October.
“Economic forecasts of this nature are more like a dowsing rod than a GPS tracking system, but they do confirm what market behaviour suggests- that uncertainty has increased in recent months,” said Laith Khalaf, Senior Analyst for UK-based financial service company Hargreaves Lansdown.
“The falling oil price is of course a major source of instability, though as the IMF notes this should be a boost to global economic activity, albeit with winners and losers.
“The US remains teacher's pet, with the growth forecast for the world's most influential economy revised sharply upwards. At the other end of the spectrum Russia is expected to suffer a 3% contracting in its economy over 2015, as a result of its high exposure to oil and gas production.
“While the IMF strikes a largely negative tone, stock markets have already absorbed much, if not all of the information referred to in these forecasts. For instance Russian and Chinese stocks are already looking relatively inexpensive by historical standards, while US companies are more fully valued, reflecting the respective conditions and confidence in these economies.”
The UK economy edged closer to deflation as annual growth of the consumer price index (CPI) fell from 1% in November to just 0.5% in December, according to data released by the Office for National Statistics yesterday. This is the joint lowest rate of CPI inflation on record, equal with 0.5% seen in May 2000.
“The main contributions to the fall came from the December 2013 gas and electricity price rises falling out of the calculation and the continuing drop in motor fuel prices (reflecting the collapse in global oil prices). Falling food prices – a result of intense competition among UK supermarkets – have also played a major role in the low inflation figures,” the Centre for Economics and Business Research (Cebr) said in a statement.
According to Cebr, disinflationary pressures look set to continue in the first half of 2015. Retailers are still in a phase of intense competition, petrol prices should fall back further in the first half of the year and utility companies are likely to cut prices given developments in wholesale markets. Already, E.ON has announced a 3.5% cut to its standard gas prices, and other utility providers will almost certainly follow suit. Cebr said that, with prices for a number of essentials lower now than a year ago, the prospect of inflation on the CPI measure dipping into negative territory - i.e. deflation - is now very real.
However, Cebr claims that a bout of ‘good deflation’ could be just what is needed by the UK economy. Cebr says that, when the main driver of deflation is falling essentials prices – such as food and petrol - this could result in freeing up household spending power for more discretionary goods.
“While even this kind of deflation may have negative consequences if persistent – falling prices mean that the inflation-adjusted value of household and government debt rises – a brief bout should prove virtuous. With weak economic growth in the Eurozone and no hope of an export-led recovery anytime soon, the boost to household spending power from falling food, transport and utility prices could be the shot in the arm that the UK economy needs to maintain momentum in 2015 – especially when combined with the pick-up in earnings growth which Cebr expects to emerge this year,” Cebr stated.
Nearly half of CFOs expect the US economy to improve during the next six months and only 9% expect it to worsen, according to the Grant Thornton LLP 2014 Fall CFO Survey. The biannual survey reflects the insights of more than 1,000 CFOs and other senior financial executives across the US.
The survey’s findings indicate that economic optimism has remained stable during the past year despite increasing global uncertainty. In spring 2014, 51% of respondents expected the economy to improve during the next six months, compared to 40% in fall 2013 and 45% in the firm’s spring 2013 survey.
The most common growth strategies for businesses in the upcoming year include pursuing organic growth in existing markets (87%) and introducing new products or services (72%). In addition, more than one-third (37%) of companies are considering a merger or acquisition in the next 12 months. For companies with more than $5 billion (€4.2 billion) in annual revenue, that number is even higher at 60%.
“While it’s encouraging that CFOs aren’t expecting contraction, they’re not predicting significant growth either,” said Stephen Chipman, Chief Executive Officer of Grant Thornton. “It’s vital that our country’s political leaders focus now on resolving this uncertainty by advancing comprehensive tax and entitlement reforms to spur economic growth.”
The notion that US economic optimism remains stable amidst increasing global uncertainty correlates with other recent research from Grant Thornton. The Grant Thornton International Business Report found that optimism for the nation’s economic outlook among US business leaders remained strong at a net balance of 69% in third quarter 2014 while Eurozone optimism dropped to a net balance of 5%, down 30 percentage points from the previous quarter. In particular, German optimism plummeted 43 percentage points to 36%.
“The economic environment in Germany has very significant implications for the US economy and businesses,” added Mr. Chipman. “We have yet to realise the domestic repercussions of the weakening Eurozone and will be watching the situation closely in the coming months.”
