According to today’s reports, UK GDP grew by 0.4% in the third quarter of the year, relatively better than expected, and up from 0.3% growth from the second quarter. The UK’s manufacturing sector also returned to positive growth, with output rising by 1% during the quarter. Below are some comments Finance Monthly had heard on the matter.
Rebecca O’Keeffe, Interactive Investor’s Head of Investment, had this to say: “With expectations still rife that the Bank of England will raise interest rates next month, today’s GDP figures will be closely scrutinised to see whether they give any excuse for policymakers to hold fire or if they support their hawkish intent. Uncertainty about Brexit, the relatively fragile state of the British economy and fears over personal debt and household incomes could all be making Mr Carney think twice about whether now is the right time to start the process of raising rates. However, the prospect of delaying could lead to accusations of the MPC crying wolf again and severely dent sterling. Rocks and hard places abound, and the Governor will be keeping his fingers crossed that today’s figure gives him a valid excuse either way.
“Lloyds bank, which has more private shareholders than any other UK company, has become a stalwart income play for investors, with a dividend yield of close to 5% and optimism that this yield could increase. Although there was no new comment on dividends, Lloyds confirmation today that they expect to ‘deliver a progressive and sustainable ordinary dividend for the full year and the Board will give due consideration at the year end to the distribution of surplus capital through the use of special dividends or share buy backs’ is music to the ears of income investors.”
Emmanuel Lumineau, CEO at BrickVest, said: “Today’s announcement is good news for the economy and will bolster the case for higher interest rates for the first time in more than a decade. For the commercial real estate industry, higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. There has certainly been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.
“We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.”
Mihir Kapadia, CEO and Founder of Sun Global Investments, has said: “While the 0.4% is still below the UK’s long term growth rate, it certainly contributes to a positive momentum, and means that the economy has not yet rolled into a recession that was largely predicted over Britain’s decision to leave the EU. The UK’s annualised growth is now sitting at 1.5%, a subpar score against a formidable looking EU economy.
“Sterling has risen on the back of today’s growth report, up 0.25% against the US dollar to $1.317. The City is getting into a more hawkish tone, expecting that the pick-up in growth raises the chances of a UK interest rate rise next month. The third quarter has been particularly difficult for the UK economy, with inflation ringing 3% while wage growth has been subdued. Consumers are facing an increased squeeze in living standards while the city has been brought to its knees by the increased uncertainty over Brexit proceedings.”
According to a report co-authored by Yandong Jia, a researcher at the Research Bureau of the People's Bank of China, alongside Jun Nie, a senior economist at the Kansas City Fed, “analysis indicates that the momentum of Chinese growth is likely to slow in the near term."
As the world’s second largest economy, China’s GDP has seen a 6.9 YoY increase, according to China’s National Bureau of Statistics (NBS). However, the above report suggests further growth to be considered bleak. "An analysis of its underlying forces suggests this momentum may not be sustainable," it reads. "In addition, strength in policy-related variables has been waning, creating additional downside risks to near-term growth."
Finance Monthly, this week spoke to several expert sources on China’s economy and prospected continued growth. Here are Your Thoughts.
Josh Seager, Investment Analyst, EQ Investors:
Every so often, investor concern about a Chinese hard landing rises. There have been numbers of catalysts for this over the past three years, from Chinese equity market sell offs to expectation of capital outflow induced currency depreciation. Most have passed without issue and are now barely remembered
The biggest cause of concern, however, has been debt. This has led many commentators to predict a large credit crisis. We believe that such concerns are overemphasised and stem from a key misunderstanding: the Chinese economy is ultimately guided by the Communist party not market dynamics. Credit crises generally happen because heavily indebted borrowers lose access to financing. In China’s case, the communist party control both the lenders (the banks) and the problem borrowers (the heavily indebted State-Owned Enterprises (SOES). Consequently, they are in a perfect position to manage the riskier debts and avoid defaults.
The real risk to China is much less exciting. Without ‘creative destruction’ where unprofitable companies are allowed to default, resources become misallocated. This means that unprofitable and unproductive companies, many of whom should be bankrupt, hoover up capital, employees and materials that could be better used by more productive firms.
This is happening in China, SOEs are hoarding resources in spite of the fact that they have get 1/3 (capital economics) of the return on them that private companies do. The route out is through supply-side reform but is difficult. It requires bankruptcy, bank recapitalisation and would probably lead to higher unemployment and increased uncertainty.
The Chinese government is financially strong and can afford to do this now. However, reform will get more difficult and expensive as the stock of debt builds. If President Xi chooses to pursue reforms we are likely to see short term pain for long term stability. If not, we will see a continuation of the status quo for the next few years but future GDP will be lower as a result.
Jonathan Watson, Chief Market Analyst, Foreign Currency Direct:
The Chinese economy has been wobbling with concerns over the pace of economic growth, which peaked at nearly 15% in 2007 but has been languishing around 6.9% lately.
Both business and consumer debt is high, and there are wider concerns that the largely export driven growth the economy has seen in the last few decades is coming to a halt.
Previously voiced concerns over the legitimacy of Chinese economic data raises questions about the extent of the trouble the economy could be in. Overlooking those fears, what appears clear is that the Chinese economy is still improving. With the global economy predicted to grow by 3.6% this year and 3.7% next year, according to the IMF, China should have little to worry about.
As a net exporter, the global economy will continue to have an effect on China’s economic growth. Any readjustments could cause turbulence but I see the trajectory as positive. Rather than hitting a wall as many have been predicting for years, I expect the Chinese economy will be building over or through one…
Erik Lueth, Global Emerging Market Economist, LGIM:
The Chinese economy is indeed likely to slow from here, but it is unlikely to hit a wall. Growth has been above the official target of 6.5% so far this year, powered by exports and a buoyant property sector. But, both of these drivers are fading.
In response to runaway house inflation in prime cities, the government tightened prudential measures over the past year or so. This has led to weaker housing demand and prices with the latter now falling in tier-1 cities. Similarly, exports seem to have peaked with PMIs in advanced economies looking stretched and the Chinese currency no longer falling in real terms. In our base case the economy would slow from around 7% this year to 6.5% in 2018 and 6.2% in 2019.
We are concerned about high debt levels, but the Chinese economy hitting a wall is a mere tail event in our forecast. To begin with, a financial crisis doesn’t look likely (as I have argued here on our investment blog, Macro Matters). China’s debts to foreigners are negligible and the capital account remains tightly managed. Key debtors and creditors are state-owned—state-owned enterprises and banks, respectively—greatly reducing roll-over risks. And, shadow banking while risky is still too small to overwhelm the state banks.
Second, China still has ample fiscal space. If it were to increase its fiscal deficit – estimated at around 12.5% of GDP – by 2 percentage points over each of the next 5 years, government debt would rise from around 70% of GDP today to 105% of GDP in 2021. This is not negligible, but certainly manageable given high savings rates and potential growth.
If something has the potential to drive China against the wall, it would be the deflation of a property bubble. As always spotting a bubble is challenging, but on balance we discount it. According to BIS data real house prices have been flat since the global financial crisis on a nationwide basis. Moves in prime cities have been anything but sideways, but at 90% over 3 years, increases remain well below the 300% witnessed in Tokyo before its bubble burst in 1990.
Dr Ying Zhang, RSM Rotterdam School of Management, Erasmus University:
China’s economic growth from the factor-driven to an efficiency-driven in the past 3 decades has not only brought China to be the world manufacturing center in the past, but also leveraged China as one of the important “spinal joints” of the world-body for the future. The reason of its importance is consistent with the global phenomena and world economy integration, as well as the interdependence between China and the rest of the world.
China’s supply-driven and quantity-based catch-up model is very effective, particularly to bring China to the category of middle-income countries; however, once stepping into such a territory, the historical evidence already shows that the chance to be trapped in there is be very high, if without proper in-time transformation.
Due to the high-interdependence, China’s reduced economic growth rate, though not pulling China’s economy moving down, has pulled exponential impact on some countries in terms of their employment rate and economic performance. Such symptom calls for worries and blaming to China, with two different messages: one, China hits the wall; second, China is transforming and preparing for the innovation-driven economic growth model.
China’s current transformation, in terms of being inclusive and quality-based and dramatic rising evidence in domestic consumption and prosperous service sector, implies that China will not be falling into the first proposition. It is also supported by the vision and the joint effort of Chinese citizens, global participants, and Chinese government to build China as an inclusive society and sustainable economy for the sake of world integration and global sustainability. In principle, this direction is presented as a paradox where China’s transformation is empowered by massive entrepreneurship and innovation in the current technology-driven and digitalization era ,while presented with a reduced GDP growth rate. The underlying matter is our perception and the angle to view it.
China’s economy does not hit the wall. Instead, it is on drive with much more power. With corrected understanding on the relationship between what China is working on and what the statistics simply presented, there would be more space for the world to grow together, for the world economy to be more stabilizing, sustainable and integrative.
Franklin Allen, Executive Director, Brevan Howard Centre for Financial Analysis:
Academics and journalists often predict that the Chinese economy’s growth will “hit a wall” and slow down dramatically. So far this has not happened. The Chinese economy has slowed down from about 10% annual real GDP growth several years ago to the current 6.5-7.0%. My own view is that this kind of growth rate is likely to continue for the next few years at least. The Chinese government still has a large degree of control over many aspects of the economy and if growth appears to be missing this target, they can ensure enough extra activity is undertaken that it hits it. There is a significant amount of debt in the Chinese economy but much of this is local government debt. The problem is that the funding of local governments is not well structured currently. They do not have taxing powers and do not receive large block grants from the central government. At some point the Chinese government will need to solve this problem. However, in the short run debt figures in China should be interpreted in a different way than equivalent numbers in Europe or the US.
In the long run, I think the Chinese economy has the capability to grow more quickly than current rates. The problem is that the financial system does not provide productive small and medium sized enterprises with the financing they need. They are the growth engines the economy requires and has used in the past during the fast growth period. If you look at the interest rates these firms are prepared to pay in the shadow banking sector, it seems likely they can grow quickly if they could obtain finance through the formal financial system. At the moment this is geared up to provide large state-owned enterprises with finance but they do not require very much. They do not have many prospects for growth. Hopefully, reforms to the financial system that have long been discussed and that will allow flows to the firms that need then will be implemented before too long.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
Recent banking research from Accuity has revealed that between 2009 and 2016, correspondent banking relationships, where one financial institution provides services on behalf of another in a different location to facilitate cross-border payments, have reduced globally by 25%. This comes despite the fact that global GDP per capita grew during the same period, following the 2008 financial crisis.
Commenting on the findings, Henry Balani, Global Head of Strategic Affairs at Accuity, said: "Correspondent banking represents the cornerstone of the global payment system designed to serve the settlement of financial transactions across country borders. Our Research highlights some important trends in de-risking and its impact on international trade and global banking.
"The irony is that regulation designed to protect the global financial system is, in a sense, having an opposite effect and forcing whole regions outside the regulated financial system. This matters because allowing de-risking to continue unfettered is like living in a world where some airports don't have the same levels of security screening - before long, the consequences will be disastrous for everyone."
Measuring the cost of global de-risking
Since the global financial crisis of 2008, regulators have imposed requirements for greater transparency, established higher liquidity thresholds for banks as well as stepping up enforcement actions on institutions that violate anti-money laundering (AML) regulations.
In 2014, AML penalties peaked at $10 billion compounding the challenges banks face in high-risk geographies (Figure1). In this climate, the threat to banks of doing business in these geographies potentially outweighs the benefits of services to their clients, even if there may be good business opportunities to pursue.
The challenges of increased operational costs, competitive and regulatory pressures have driven banks to withdraw from correspondent banking relationships. Historically, these relationships were provided as services to international customers, but this is no longer viable, as banks cannot justify the increased compliance cost associated with offering correspondent banking services to their local customers. As a result, businesses in the regions most affected are struggling to access the global financial systems to finance their operations. Without this access, local banks are forced to use non-regulated, higher cost sources of finance and expose themselves to nefarious actors and shadow banking.
Henry Balani added: "A number of factors have contributed to derisking, the most important being that the risk / reward balance has become unfavourable for large clearing banks and in response they have taken a country / region risk view in deciding who they can do business with. If we want to reverse this trend and begin to 're-risk', then the 'antidote' will require more granular level due diligence and proper risk assessments to provide large clearers with the confidence that they can deal with low risk businesses in high risk jurisdictions."
Decline in USD relationships is either indicative of a concentration in relationships or a reduction in USD dominance
- The number of USD correspondent relationships declined by 15% with Euro relationships showing a steeper decline of 23%
- The number of Chinese Renminbi (RMB) correspondent relationships increased by 8%
- Global bank locations in developing economies increased by 31% since 2014
Findings from this research reflect the number of correspondent banking relationships transacting in particular currencies rather than the volume of currency transactions. Research shows a steady decline in the number of USD correspondent banking relationships globally since 2014. The USD was the currency of choice as the global economy recovered from the global financial crisis in 2008. While USD continues to be the currency of choice, the rate of decline in the number of USD relationships further accelerated with a drop of 13% between 2015 and 2016 from a decline of 2% between 2014 and 2015.
While the 25% drop in global correspondent relationships is greater than the USD correspondents decline, the trend for USD is particularly significant when compared to the contrarian increase in the number of Chinese RMB correspondent banking relationships. Since 2014, research shows an 8% increase and since 2012, the number of the RMB relationships showed a dramatic increase from 3,600 to 8,800 relationships in 2016 (albeit from a low base). The research further reveals a peak in the number of RMB correspondent banking relationships in 2015 as the USD continued to decline.
There are two explanations for this decline in USD relationships when compared to the RMB. Either there is a concentration in USD relationships, with more transactions settled through fewer relationships, or there is a decline in the dominance of USD.
Global bank locations in developing economies have also increased by 31% since 2014, largely due to growth in China and APAC. This is significant as the number of banks in established global financial centers are in decline.
China prevails as region with highest growth in correspondent banking relationships
Actions from US and European regulators have resulted in banks shunning higher risk economies while missing out on the potentially profitable use of their currencies for correspondent banking, in the process.
Our Research reveals that the areas benefiting from the changes are largely in the East. For instance, China has experienced a 133% increase in the number of banks since 2009 and an astounding 3,355% growth in correspondent banking relationships during the same period.
Balani added: "The decline in USD relationships has several explanations: either we are seeing a concentration in USD relationships among fewer correspondent banks, or we are seeing a decline in USD dominance. The shift can also be attributed to the potential AML penalties associated with using these currencies. Since the financial crash of 2008, we have also seen significant commitment from financial institutions in emerging economies to demonstrate they are not high risk. We see this playing out in the East and the increased number of relationships reflects their commitment."
Balani concluded: "As we see more regulation come into place, global banks can support growth in local businesses by investing in technology that can securely and quickly determine the risk of a transaction in a high-risk geography."
(Source: Accuity)
Albania's official Institute of Statistics (INSTAT) has released figures showing GDP growth for 2016 of 3.46%, fuelled in part by a fourth-quarter export surge of 16%. Growth exceeded forecasts by both the International Monetary Fund and the World Bank.
INSTAT reported that the growth was led by commercial trade, tourism, construction and energy production, all of which generated robust figures. Overall, the year's performance was the best since 2010 when growth was 3.7%.
In welcoming the encouraging data, Prime Minister Edi Rama said: "This is good news, but it's only the start of what we hope to achieve on the economy. My government's first term has focused primarily on institutional reform and improved governance. Now we are starting see the results -- in investment, business expansion and in job creation. Now we must pour all our efforts into economic expansion and generating rewarding jobs for our fellow citizens."
The Prime Minister highlighted major reforms to the power generation system which, in 2013, needed an infusion of US$ 135 million from the state budget merely to remain operational. The revamped grid, now almost fully replaced with new technologies, has reduced power losses to 28% from 45%. As a consequence of the reforms, electrical energy sector production rose 62% in the final quarter of 2016 alone, and 30% for the full year, Mr Rama said.
Restored confidence in the Albanian economy meant that foreign direct investment for 2016 reached a record EUR 983 million, a 10.5% rise over the previous year, according to the Bank of Albania. In the last quarter, FDI reached EUR 276 million, a full 70% rise year-on-year.
Commenting on the INSTAT announcement, Finance Minister Arben Ahmetaj said it confirmed an overall improvement in the Albanian fiscal situation. "Stable government debt, as one of the most vital indicators of the macroeconomic health in the country, is now in a much more favorable position than it was a few years ago," Mr. Ahmetaj said.
"After more than two decades during which, with a brief exception in 2010, the State Budget was operating at a deficit, now in 2016 the budget has been able to record a surplus. In the 2017 budget as well as in the medium term framework for the years to follow, a primary positive balance has been established as a target and will be adhered to, meaning another surplus, and a growing one. As a consequence, fiscal policy followed in the last few years has made it possible to halt and reverse the unhealthy trend of government debt since 2008."
A new fiscal rule, backed by legislation, mandates the government to decrease government debt every year until it reaches a stable maximum of 45% of GDP.
(Source: Belgrave Strategic)
GDP growth in Canada's banking industry will be limited to 2.4% this year amid a slowdown in consumer and business credit growth, according to The Conference Board of Canada's first outlook for the Canadian banking services industry. Still, the industry is expected to perform better than the overall Canadian economy and profit margins will remain healthy over the forecast period.
"Despite a sluggish Canadian economy, the banking industry managed a strong performance in 2016 largely due to the robust growth in the housing sector and equity markets," said Kristelle Audet, Senior Economist, The Conference Board of Canada. "However, with growth in consumer and business credit expected to weaken going forward, the industry will expand at a slower rate than what we have seen in recent years, although it will still outperform the overall Canadian economy".
Highlights
- Canada's banking services industry's growth will be limited to 2.4% in 2017 due to weaker growth in both consumer and business credit.
- With high household indebtedness and low interest rates limiting growth in the consumer credit segment, banks have been keen to tap into business lending in recent years. However, this segment is now also running out of steam.
- Despite slower growth, the industry will keep its costs under control, allowing pre-tax profits to surpass $80 billion in 2017.
The robust performance of the industry in recent years was largely driven by non-interest income sources due to historically low interest rates. Interest income, which accounts for over 40% of the industry's revenues, has remained essentially flat in recent years. In order to generate revenue growth, the industry had to look for other sources, including insurance and investment management services, as well as banking fees.
The banking industry has also been keen to tap into the business loan segment in recent years. Chartered bank loans issued to the private sector have posted their longest expansion on record—24 consecutive quarters of growth since the 2009 recession. However, the double-digit increases seen through 2016 will not be sustained moving forward, with a slowdown in private sector lending growth expected this year.
Also, with the housing market forecast to cool as a result of new taxes and tightened mortgage-lending rules combined with interest rates likely to rise at modest pace starting in 2018, growth in mortgage and non-mortgage debt will continue to ease. In fact, this year, for the first time in 25 years, growth in disposable income should outpace growth in consumer debt.
Growth in the industry will thus be limited by more moderate growth in both consumer and business credit. Given the more challenging business environment, the industry is undertaking significant efforts to keep costs growth under control, which will allow it to maintain a healthy profit margin throughout the forecast. However, there are still risks to this outlook. A correction in either the housing or equity markets would have a significant impact on the industry's performance.
Despite historically low interest rates, the industry's profit margin has improved significantly in recent years and is expected to average around 31% over the next five years. Meanwhile, pre-tax profits will continue to climb, reaching over $80 billion this year.
(Source: Conference Board of Canada)
by Ben Brettell, Senior Economist, Hargreaves Lansdown
The UK economy shook off Brexit-related uncertainty to post 0.5% growth in the third quarter. This is down from 0.7% in Q2, but far better than the 0.3% economists had feared.
The ONS said there was little evidence thus far of an output shock in the immediate aftermath of the vote.
Initial GDP estimates should always be taken with a pinch of salt, as they are based on less than half of the data which will ultimately be available, and are therefore subject to revision in the coming months. Nevertheless it’s difficult to interpret today’s figures as anything other than very good news for the UK economy.
Some will be concerned about the absence of any rebalancing of the economy away from the ever-dominant services sector, which grew 0.8% while everything else contracted. However, I don’t see this as a problem. In an increasingly global economy, individual countries need to specialise in industries where they have a comparative advantage. It’s clear to even the most casual onlooker that the UK has a comparative advantage in services, and therefore it shouldn’t come as a surprise that ever more resources are allocated to that sector of the economy.
The Bank of England may deserve some credit for acting swiftly to bolster the economy in the months after the referendum, though of course it’s impossible to predict what would have happened in the absence of any action. What today’s release does do is pour cold water on the chances of a further rate cut next month. In August the Bank said the majority of MPC members expected a further rate cut later this year, but at the time it was forecasting zero GDP growth. A stronger-than-expected Q3 performance is likely to mean the Bank leaves policy unchanged when it meets in November.
France cut its budget deficit target for 2015 and announced that this year’s economic growth could beat the government’s 1% forecast, as the country posted a smaller than expected fiscal gap for 2014.
Statistics office INSEE announced that the budget gap dropped to 4% of economic output in 2014 from 4.1% in 2013, signalling economic recovery is underway.
The data "paves the way for a revision of the 2015 public deficit to about 3.8% of GDP," Finance Minister Michel Sapin said in a statement.
The euro zone's second biggest economy, France’s economy grew by 0.4% in 2014, the same rate of growth as see in 2013. Sapin is predicting a 1% growth for 2014.
However, France needs to take further steps to bring its economy in line, with European Union finance ministers stating this month that they had given France two more years to cut the deficit to the 3% limit.
