USA:
• FOMC unimpressed
In the federal open market committee (FOMC) that took place last week, the FOMC left the target range of the federal funds rate unchanged at 0.5 % to 0.75 %, as widely expected. The FOMC statement says that the labor market has continued to strengthen since the last meeting in December and that economic activity continued to expand at a moderate pace. Job gains remained solid and the unemployment rate stayed near its recent low. Household spending continued to rise moderately while business fixed investment has remained soft. The FOMC added the note that “measures of consumer and business sentiment have improved of late”. Inflation increased in recent quarters but is still below the Committee’s 2 % longer-run objective. The FOMC skipped the phrase stating that rising inflation was “partly reflecting earlier declines in energy prices and in prices of non-energy imports”. Otherwise, the statement was mostly unchanged compared to the December meeting. There was some debate among market participants that the Fed would probably turn more hawkish amid rising inflation and higher growth expectations recently. The mostly unchanged tone of the statement does not reflect this.
Eurozone:
• Solid Q4 GDP growth
• Strong inflation upward surprise in January likely to heat ECB ‘tapering’ discussion
Positive flow in fundamental macro data prevailed last week. Eurozone Q4 GDP surprised on the upside by rising 0.5 % (q/q) and 1.8 % annually. Austria’s flash estimate (Wifo) was among the positive surprises as real GDP rose by 0.5 % (q/q). Again, strong household consumption (0.5 % q/q) supported GDP growth, while gross fixed capital formation was weaker than in Q3 (0.1 % q/q). Net export made a negative contribution to GDP growth. In 2016, GDP growth (1.5 %) caught almost up with the total of the Euro Area (1.6 %), while growth in Austria was running behind previously. Furthermore, Belgium (0.4 % q/q), France (0.4 %) and Spain (0.7 % q/q) delivered solid Q4 GDP prints. The economic sentiment indicator published by the European Commission (EC) and released last week (Figure 1), indicated continuing cyclical momentum in line with the latest PMI surveys (see UNIQA Capital Markets Weekly as of 30th January).
The flash release of January Eurozone inflation attracted a lot of attention among investors as rising inflation is fuelling talk about tighter ECB policy ahead including speculations about earlier than previously expected ‘tapering’ (policy of incremental cut-backs of the monthly asset purchases of the central bank). Eurozone inflation surprised on the upside rising to 1.8 % (y/y) from 1.1 % previously (Figure 2). The strong move was undervalued by analysts that expected on average a print at 1.5 % for January (Bloomberg Consensus Forecast). In our internal forecast, this makes us more comfortable to expect that annual inflation in the total of 2017 is going to outpace the current median estimate of analysts (1.4 %) and the latest December ECB staff projection (1.3 %). An inflation estimate that is purely based on average historical monthly consumer price changes during the remaining year would imply that annual 2017 inflation could increase to 1.6 %. An upward revision in the ECB staff inflation projections that will be released in March could indeed fuel investor’s expectations about an earlier timing of the exit from quantitative easing and tapering as previously expected. In turn, these expectations might also put upside pressures on Euro Area yields.
On the other side, the core inflation rate remained unchanged in January (0.9 % y/y). Recently, ECB President Draghi had stressed that for the inflation objective of the ECB to be met, that “there has to be durable convergence towards the inflation goal, so it cannot be transient”. Low core inflation today implies a quick return of headline inflation towards lower levels once base effects from past energy price declines fade. He also noted that inflation has to be self-sustained” and it has to “stay there even when the extraordinary monetary policy support that we are providing today will not be there” (see UCM Weekly as of 23rd January). Low core inflation indicates low underlying price pressures in the economy, as can for example can be observed in the labor market. Between 2001 and 2008, industry & construction labor cost were rising on average by 2.9 % and labor costs in wholesale & retail trade were increasing by 2.6 % (y/y). Whereas, since 2010 annual labor cost growth has fallen to an average 1.7 % and it has only stabilized recently (Figure 3).
This indicates considerable remaining slack in the labor market, although the Eurozone unemployment rate fell to 9.6 % (from 9.7 %) in December. According to that, the core inflation would likely remain low for a longer period and, hence, the headline inflation rate would not be on a self-sustained path.
CEE:
• Russia’s recession was slightly less deep than expected
• Formidable economic growth in Serbia
The recession in Russia was less severe than previously estimated, as annual GDP numbers that were released last week showed. In 2016, real GDP declined by 0.2 %, while the market consensus expectation was -0.5 %. In addition, the decline in 2015 GDP was upwardly revised from -3.7 % to -2.8 %. We had reported last week that monthly supply indicators keep recovering while aggregate demand still paints a bleak picture of the Russian economy.
In Serbia, GDP enhanced by 2.5 % in Q4 2016 after it had increased by 2.6 % in the previous quarter. The Statistical Office of the Republic of Serbia estimates that real GDP grew by 2.7 % in the total of 2016 (comparing to our own previous forecast of 2.5 % GDP growth). Gross fixed investment expanded by 6.1 % in 2016. On the supply side, agriculture supported growth in the economy (8.1 %) as well as industrial production (4.3 %) and construction works (6.0 %). Real retail sales increased by 7.8 % in 2016. Serbia’s economy is expected to remain supported by investment and consumption during 2017 and to generate economic growth comparable to the expansion in the last year.
Author
Martin Ertl
Chief Economist
UNIQA Capital Markets GmbH
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