The Ides of March continue....Brexit delayed; final outcome remains unclear On 21 March the EU agreed to delay Brexit until 12 April to give the UK parliament more time to coalesce around a way forward. While this move shifts the date of a possible no-deal Brexit back by two weeks, it does nothing to reduce political uncertainty, which will continue to hinder business investment and the economy until clarity emerges regarding the final outcome of the Brexit process. A further vote on the prime minister’s deal is possible in the coming days. If the deal is approved, Brexit will be further delayed until 22 May to allow the passage of necessary legislation. If the deal is rejected, the UK will have until 12 April to decide how to proceed. According to James Smith, an economist at ING: “Those Brexiteers that calculate a long delay is inevitable may… still decide to back it [Theresa May’s deal], while those more moderate MPs that fear ‘no deal’ may also decide to get behind it – although we suspect there will be nowhere near the numbers needed for May to get her deal passed.” Assuming the deal is rejected—or Theresa May declines to present her deal to parliament altogether—all options remain on the table. Parliament could agree on a softer Brexit stance—in favor of a permanent customs union or continued membership of the Single Market for instance—and subsequently request a further Brexit delay in order to make the corresponding changes to the political declaration with the EU.

The UK could also request a further Brexit delay to hold a second referendum or a general election, or could even decide to unilaterally revoke its decision to leave the EU. This last option, however, appears improbable. On 25 March, MPs voted to take charge of the parliamentary timetable, shifting control of the Brexit process away from the prime minister. This move sets up a series of “indicative votes” on Wednesday 27 March to assess which Brexit options could command a majority in parliament, although Theresa May has not yet promised to abide by the outcome of the votes. MPs’ decision to take control could even boost the chance of Theresa May’s deal being approved, by encouraging pro-Brexit Conservatives to back it for fear of an even softer Brexit, or no Brexit at all. It is still perfectly possible that parliament fails to agree a course of action by 12 April. If this is the case, the government could ask for a further delay regardless, although the EU may be reluctant to agree. As Kallum Pickering, an economist at Berenberg, says: “the EU would most likely not grant a longer delay for the UK to just continue voting on May’s deal again.” If the EU refuses a request for a second extension, or the UK decides not to ask for one, the UK would leave the EU with no deal on 12 April, likely severely denting economic activity in the near-term.

\The economy remains stuck in low gear in the three months to January According to monthly GDP data released by the Office for National Statistics (ONS), economic activity rose 0.5% in January over the prior month in seasonally-adjusted terms, contrasting December’s 0.4% fall. Despite the strong January showing, the quarter-on-quarter expansion for the November- January period was a mere 0.2%, matching the reading for October-December, and comes amid sluggish momentum in the rest of the EU and elevated Brexit uncertainty. Looking at a sector-by-sector picture, the November-January reading was underpinned by a solid showing from the service sector, which was partially offset by contractions in the industry and construction sectors. FocusEconomics panelists expect GDP growth of 1.3% in 2019, down

The political standoff between President Nicolás Maduro and Juan Guaidó, who declared himself interim president on 23 January and has been recognized as such by more than 50 countries, is far from over. Following the unsuccessful attempt by Guaidó and his allies to deliver aid into the country on 23 February, the opposition leader embarked on a support-seeking tour across the region before returning to Venezuela without incident on 4 March, despite breaking a court-imposed travel ban, to continue pressing on President Maduro to step down. Meanwhile, the diplomatic and economic pressure continues to mount as the U.S. announced new sanctions targeting high-profile figures in the Venezuelan government and military. This follows the painful sanctions imposed on the all-important oil industry in late-January, which have led government officials to scramble in seeking alternative markets to sell crude and securing access to its gold reserves as well as much-needed foreign currency. The latest power outages, which have been running for nearly a week, complicate matters further as they are set to impact oil operations and disrupt day-to-day economic activity.

The outlook is grim. On the one hand, the political situation remains in limbo, with the Maduro government likely opting to wait out the crisis while Guaidó strives to keep up the momentum. On the other hand, financial sanctions aimed at choking off the government’s access to external financing and its oil revenues inflict more damage to an already crippled economy besieged by run-away inflation and goods shortages. The possibility of political change has increased amid the latest events, a scenario which some of our panelists have factored into their forecasts. FocusEconomics panelists see the economy contracting 12.4% in 2019, which is down 2.1 percentage points from last month’s forecast. In 2020, the panel sees GDP falling 2.5%.

Panelists estimate inflation to have ended 2018 at nearly 1,300,000%. Last year’s monetary reconversion has been unable to tame hyperinflation while sanctions are set to worsen goods scarcities going forward, further fueling inflationary pressures. Our panel sees inflation surging to over 70,000,000% by the end of 2019, before falling to around 1,500,000% by the end of 2020. Despite the sharp devaluation of the currency in late-January which brought the official rate roughly up to par to the black market’s, the differential between the two has started to widen yet again. The official DICOM exchange rate came in at 3,300 VES per USD in the 8 March auction, while the parallel market rate fell to 3,603 VES per USD that same day. Our panelists expect the official rate to end 2019 at 243 million VES per USD, before rising to 1.1 billion VES per USD by the end of 2020.

Flash estimates revealed that the Eurozone economy remained stuck in a low gear in the fourth quarter. Growth was unchanged from Q3’s pace, which had marked the slowest expansion in over four years. While a detailed breakdown of the drivers is not yet available, soft domestic dynamics likely hobbled the economy amid a downturn in the industrial sector and deteriorating confidence. Available data for this year tells a similar story. Economic sentiment dropped to an over two-year low in January, and the manufacturing PMI fell into contractionary territory in February for the first time since June 2013. A high degree of uncertainty also continues to plague the growth environment. A confidential report by the U.S. Commerce Department released in February is expected to have cleared the way for President Donald Trump to levy tariffs on EU automobiles if a favorable trade agreement is not struck. Meanwhile, the Brexit deadline inches ever closer without a clear plan for the UK’s exit. • A soft end to 2018, weaker economic sentiment and ongoing problems in the manufacturing sector are dampening the outlook for the Eurozone this year. Sluggish global trade and geopolitical uncertainty are also seen dragging on growth in 2019, although a tight labor market and accommodative monetary policy should provide some relief. FocusEconomics analysts expect growth of 1.4% in 2019, which is down 0.1 percentage points from last month’s forecast. In 2020, growth is seen stable at 1.4%. • Harmonized inflation eased to 1.4% in January, down from December’s 1.5% and below the ECB’s target of under, but close to, 2.0%. Fading effects from higher oil prices are putting downward pressure on inflation. Our analysts see inflation averaging 1.4% in 2019 and 1.6% in 2020. • The ECB stuck to its plan at the latest monetary policy meeting on 24 January, despite the weak incoming economic data. The ECB held interest rates unchanged and reiterated guidance that it will keep rates at current levels until at least the end of summer. That said, the ECB’s assessment of the Eurozone economy was more downbeat. The next meeting is on 7 March. Our panel sees rates remaining low amid contained inflation and moderate economic activity. The refinancing rate is seen ending the year at 0.04% and 2020 at 0.32%. • The euro was broadly stable in recent weeks but is still hovering among the lowest levels seen in the past year and a half. On 22 February, the currency traded at 1.13 USD per EUR, down 0.2% from the same day last month. Our panel sees the euro ending 2019 at 1.18 USD per EUR and 2020 at 1.22 USD per EUR. Outlook moderates LONG-TERM TRENDS | 3-year averages Angela Bouzanis Senior Economist Euro area 2015-17 2018-20 2021-23 Population (million): 335 337 338 GDP (EUR bn): 10,856 11,946 13,054 GDP per capita (EUR): 32,409 35,452 38,609 GDP growth (%): 2.1 1.6 1.4 Fiscal Balance (% of GDP): -1.5 -0.9 -1.1 Public Debt (% of GDP): 88.6 84.2 80.0 Inflation (%): 0.7 1.6 1.7 Current Account (% of GDP): 3.1 3.0 2.6 1.0 1.4 1.8 2.2 2.6 3.0 Q1 16 Q1 17 Q1 18 Q1 19 Q1 20 1.3 1.6 1.9 2.2 Oct Jan Apr Jul Oct Jan 2019 2020 Change in GDP forecasts GDP, evolution of 2019 and 2020 forecasts during the last 18 months. Economic Growth GDP, real annual variation in %, Q1 2016 - Q4 2020. -1 0 1 2 3 Q1 16 Q1 17 Q1 18 Q1 19 Q1 20 Euro area G7 1.4 1.5 1.6 1.7 1.8 Oct Jan Apr Jul Oct Jan 2019 2020 Change in inflation forecasts Inflation, evolution of 2019 and 2020 forecasts during the last 18 months. Inflation Harmonized Consumer Price Index (HCPI), annual variation in %, Q1 2016 - Q4 2020. FOCUSECONOMICS Euro area FocusEconomics Consensus Forecast | 18 March 2019 REAL SECTOR | Second estimate confirms stalled economy in Q4 A second flash estimate confirmed weak growth dynamics in the Eurozone economy at the end of 2018. According to preliminary figures released by Eurostat, GDP increased a seasonally-adjusted 0.2% in Q4 from the previous quarter, matching Q3’s result which had marked the slowest growth rate since Q2 2014. The reading also matched the first preliminary estimate. Compared with the same quarter of 2017, seasonally-adjusted GDP expanded 1.2% in Q4, down from Q3’s 1.6%. Accordingly, growth slowed to 1.8% in 2018, from 2017’s robust 2.4%. While a breakdown by components is not yet available, soft domestic dynamics likely weighed on growth in the fourth quarter. The Eurozone’s industrial sector floundered, with industrial production recording the largest contraction since Q1 2013 in Q4. A feeble recovery in automobile production following the implementation of new emissions tests in Q3 hampered the result, while a slowdown in emerging markets, geopolitical concerns and other temporary shocks further hobbled the recovery. In addition, economic sentiment deteriorated notably in Q4, despite a tightening labor market. Additional data released by national statistical institutes across the Eurozone painted a weak picture of growth. Germany’s economy narrowly avoided a technical recession in the fourth quarter, eking out zero growth. Italy’s economy, however, did slip into technical recession in Q4, while growth held up in France despite the onset of the ‘gilets jaunes’ protests. The ECB sees the Eurozone economy growing 1.7% in both 2019 and 2020. FocusEconomics Consensus Forecast panelists expect the Euro area economy to expand 1.4% in 2019, which is down 0.1 percentage points from last month’s forecast. For 2020, panelists expect the economy to also expand 1.4%. 

REAL SECTOR | Composite PMI recovers somewhat on services activity in February Leading data suggests that the Euro area’s economy remained soft in February. The Eurozone Composite Purchasing Managers’ Index (PMI), produced by IHS Markit, edged up to 51.4 from January’s 50.7—which had marked the worst result since July 2013. Despite the rise, the PMI still recorded one of the worst readings seen in the past five years. The composite PMI lies just above the 50-threshold that separates expanding business activity from contracting in the Eurozone. The services PMI rose in February, driving the composite PMI’s marginal gain. However, the manufacturing PMI plunged into contractionary territory, recording the worst reading in over five years. New orders fell at the sharpest pace in nearly six years in the manufacturing sector, and output also recorded a steep decline. Employment, however, was a bright spot in the survey, increasing in the services sector and remaining steady in the manufacturing sector, while business sentiment was mixed across sectors. Regarding the two largest Eurozone economies, Germany’s composite PMI revealed diverging dynamics in the region’s largest economy as the service sector recorded a marked acceleration in activity, while the manufacturing sector nosedived into contractionary territory. In contrast, France’s composite PMI was broadly stable. Elsewhere in the region, output growth dropped to the lowest level seen since November 2013. Purchasing Managers’ Index Note: Markit Purchasing Managers’ Index (PMI) Composite Output. A reading above 50 indicates an expansion in business activity while a value below 50 points to a contraction. Source: IHS Markit. 50 52 54 56 58 60 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Gross Domestic Product | variation in % Note: Quarter-on-quarter changes of seasonally-adjusted GDP and year-on-year variarion in %. Source: Eurostat and FocusEconomics Consensus Forecast. 1.1 1.7 2.3 2.9 -0.5 0.0 0.5 1.0 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Quarter-on-quarter s.a. (left scale) Year-on-year (right scale) % % FOCUSECONOMICS Euro area FocusEconomics Consensus Forecast | 19 March 2019 FocusEconomics Consensus Forecast panelists expect fixed investment to grow 2.5% in 2019, which is down 0.1 percentage points from last month’s forecast. For 2020, panelists see fixed investment increasing 2.3%. 

REAL SECTOR | Industrial output contracts for second consecutive month in December Industrial output fell again in December, contracting a seasonally-adjusted 0.9% over the previous month. The result followed November’s stark 1.7% decrease and undershot market expectations of a softer 0.4% drop. Industrial production figures have been notably weak since Q3 2018, fueling a broader downturn in the Eurozone economy. The contraction was driven by shrinking production of capital good and non-durable consumer goods. In addition, energy output all fell mildly, while production of intermediate goods was flat in December. Looking at the individual economies for which data is available, 9 economies saw industrial production drop in December, including Italy and Spain. However, industrial production rebounded in France and Germany. On an annual basis, industrial production contracted 4.2%--the worst reading since November 2012. In 2018, industrial production grew 1.0%, a stark deceleration from 2017’s 3.0%. FocusEconomics Consensus Forecast panelists see industrial production expanding 0.4% in 2019, which is down 0.9 percentage points from last month’s forecast. For 2020, panelists see industrial production growing 1.1%. 

REAL SECTOR | Unemployment rate stable in December According to data released by Eurostat, labor market conditions in the common currency bloc were broadly stable in December. The number of unemployed people decreased by 75,000, and the unemployment rate was unchanged at November’s 7.9% in December. The result remains the lowest unemployment rate since October 2008. Looking at the countries with data available, seven economies saw their unemployment rates drop in December, including Italy and Spain. In contrast, Latvia, Lithuania and the Netherlands saw their unemployment rates edge up. Despite a large overall improvement in the Eurozone over recent years, disparities in the labor market among core and periphery countries persist. Greece is the economy in the Eurozone with by far the highest unemployment rate (18.6%, data refers to October), followed by Spain (14.3%) and Italy (10.3%). At the other end of the spectrum, Germany (3.3%) and the Netherlands (3.6%) have the lowest unemployment rates. FocusEconomics Consensus Forecast panelists expect the unemployment rate to average 7.8% in 2019, which is unchanged from last month’s forecast. For 2020, the panel expects the unemployment rate to average 7.6%. 

OUTLOOK | Economic sentiment falls to over two-year low in January Economic sentiment in the Eurozone continued to drop in January, starting 2019 on a poor note. According to the European Commission (EC), the economic sentiment index (ESI) came in at 106.2 points, down from the revised 107.4 points in December (previously reported: 107.3 points) and the worst result since November 2016. January’s reading undershot market Unemployment | December 2018 Note: Unemployment, % of active population. Data for Estonia and Greece refer to November. Source: Eurostat. Germany Netherlands Malta Estonia Austria Luxembourg Slovenia Ireland Belgium Slovakia Lithuania Portugal Finland Latvia Euro Cyprus France Italy Spain Greece 0 5 10 15 20 Industrial Production | variation in % Note: Month-on-month var. of seasonally-adjusted industrial production and annual average growth rate in %. Source: Eurostat. 0.8 1.4 2.0 2.6 3.2 3.8 -2.0 -1.0 0.0 1.0 2.0 3.0 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Month-on-month s.a. (left scale) Annual average (right scale) % % 

FOCUSECONOMICS Euro area FocusEconomics Consensus Forecast | 20 March 2019 expectations of a softer fall to 106.8. Nonetheless, sentiment in the Eurozone remains elevated above the long-term average. January’s downturn was driven by lower confidence in the industrial, services and retail trade sectors. In contrast, consumers became more upbeat at the start of the year along with the construction sector. Employment plans were mixed across sectors: worsening in the industrial and services sectors but improving elsewhere. Economic sentiment decreased in most member countries, including majorplayers Germany and Italy. Notably, data for Ireland was included for the first time in the European aggregates by the European Commission in January 2019, leading to revised historical data. FocusEconomics Consensus Forecast panelists expect private consumption to grow 1.4% in 2019, which is unchanged from last month’s forecast. For 2020, the panel expects private consumption to rise 1.4% again. 

MONETARY SECTOR | Inflation eases to nine-month low in January According to complete data released by Eurostat on 22 February, harmonized inflation came in at 1.4% in January, below December’s 1.5% and matching the preliminary estimate. January’s result marked a nine-month low. Inflation sits below the European Central Bank’s target rate of near, but under, 2.0%. Lower price pressures for energy as the impact from higher oil prices faded drove January’s fall. Annual average harmonized inflation was unchanged at December’s 1.8% in January. Core inflation, meanwhile, crept up to 1.2% from 1.1% in December. On a monthly basis, harmonized consumer prices plunged 1.1%, which followed the 0.1% decrease seen in December. Among the countries in the common-currency bloc, Greece (0.5%) and Portugal (0.6%) recorded the lowest inflation in January. On the flipside, Estonia (2.8%) and Latvia (2.9%) experienced the highest price pressures. Regarding the largest economies in the Eurozone, inflation fell in France (1.4%), Italy (0.9%) and Spain (1.0%) in January, but was stable in Germany (1.6%). The ECB sees harmonized inflation averaging 1.6% in 2019 and 1.7% in 2020. FocusEconomics Consensus Forecast participants expect harmonized inflation to average 1.4% in 2019, which is down 0.1 percentage points from last month’s forecast. For 2020, panelists expect harmonized inflation to average 1.6%.

REAL SECTOR | Global economic growth moderates in Q4 as uncertainty heightens Global economic growth continued to cool in the fourth quarter of 2018, with aggregated growth hitting the lowest mark in two years. The global economy expanded 3.0% in the fourth quarter over the same period in the previous year according to an estimate produced by FocusEconomics. The print was a notch below the 3.1% expansion forecast in the previous month and Q3’s 3.1% increase. Looking at the economic performance of G7 economies, Q4’s slowdown was mostly led by a sharp deceleration in the Euroarea, which expanded at the weakest pace in over four years in annual terms. Although a detailed GDP breakdown is still missing for the common-bloc, available data suggests that a downturn in the industrial sector and deteriorating economic confidence likely hit domestic demand, while a cooling global economy could have led to a deterioration in the external sector. In Japan, economic growth rebounded in seasonally-adjusted annualized terms (SAAR) in Q4 as the impact of a series of natural disasters in Q3 dissipated. Low business confidence and Brexit uncertainty kept growth subdued in the United Kingdom. Regarding the United States, GDP figures for Q4 have not yet been disclosed due to the government shutdown in December 2018 and January 2019. However, available data for the quarter suggests that growth moderated in SAAR terms in Q4 on the back of less robust private consumption. Data for the first quarter paints a rather gloomy picture for the global economy, with moderating demand impacting industrial activities. Labor markets, however, seem relatively robust worldwide, which should buffer domestic demand. On the political front, President Donald Trump stated on 24 February that the U.S. will extend the 1 March tariff hike deadline on USD 200 billion of Chinese imports, while officials from both countries cited substantial progress in bilateral talks. That said, President Trump did not propose a new deadline and there is widespread skepticism about the depth and scope of the progress, particularly how to ensure compliance with the deal. In the eyes of U.S. government officials, China’s industrial subsidies and alleged espionage, the large trade surplus that the Asian giant holds against the U.S. and intellectual property rights violations in China are the key sticking points. Global outlook stable 2.4 2.8 3.2 3.6 Q1 16 Q1 17 Q1 18 Q1 19 Q1 20 2.8 3.0 3.2 3.4 Oct Jan Apr Jul Oct Jan 2019 2020 World Economic Growth Change in GDP forecasts Note: GDP, real annual variation in %, Q1 2016 - Q4 2020. Note: GDP, evolution of 2019 and 2020 forecasts during the last 18 months. FOCUSECONOMICS Summary FocusEconomics Consensus Forecast | 3 March 2019 While the China-U.S. trade spat appears to be on track for a successful resolution in the near future, the winds of protectionism are gathering strength. On 17 February, U.S. Commerce Secretary Wilbur Ross recommended imposing tariffs on global imports of cars and auto parts; President Trump now has 90 days to decide whether to do so, which could amount to tariffs of 25%. Meanwhile, on 26 February, Theresa May pledged in parliament to allow MPs to vote on whether to delay departure if no deal has been reached by mid-March. MPs will debate the next steps on 27 February; crucially, one amendment likely to be debated could also force the government to request an extension of Article 50.


OUTLOOK | Global economic outlook takes a respite this month The economic outlook was stable this month following last month’s downgrade. While the global economy has entered a soft patch this year, robust labor markets worldwide and supportive fiscal policies are expected to shore up economic growth. Moreover, the U.S. Federal Reserve’s decision to pause its tightening cycle will allow central banks to adopt more accommodative monetary policies. Nevertheless, risks to the global economic outlook are clearly skewed to the downside. Despite President Trump’s plan to delay additional tariffs on Chinese goods, trade tensions between China and the United States remain elevated. Furthermore, the U.S. administration has already threatened its trade partners that new tariffs, this time on cars, are on the table. Meanwhile, China’s economy continues to slow, adding downward pressure on global demand, while uncertainty surrounding Brexit shows no sign of abating. FocusEconomics Consensus Forecast panelists expect the global economy to expand 3.0% in 2019, which is unchanged from last month’s estimate and below the 3.2% increase projected for 2018. The panel sees global economic growth inching down to 2.9% in 2020. This month’s stable growth prospects for the global economy reflects unchanged growth prospects for the United Kingdom and the United States. Conversely, our analysts downgraded their view for Canada, the Eurozone and Japan. Among developing economies, growth prospects in Asia ex-Japan remained stable on hopes that China and the U.S. will be able to clinch a trade deal in the coming months and that policy stimulus will avoid an economic downturn in China. In Latin America, while economic dynamics are expected to improve in 2019, the slow pace of economic reforms in Brazil and widespread political risks are dragging on overall regional growth. Economic growth in Eastern Europe will slow due to headwinds in Turkey, subdued economic activity in Russia and moderating dynamics in the European Union—the region’s main trading partner. Despite bolder fiscal support in the Middle East and North Africa, economic growth will moderate in the region owing to OPEC+ oil production cuts. The economic recovery in Sub-Saharan Africa will continue Change in GDP Growth Forecasts 2019 2020 -0.15 -0.10 -0.05 0.00 0.05 Euro area Japan G7 United Kingdom World United States BRIC China Brazil India -0.04 -0.02 0.00 0.02 Euro area BRIC Brazil G7 United States China Japan World United Kingdom India Note: Change between February 2019 and March 2019 in percentage points. . . Source: FocusEconomics

Growth projected to regain some steam in Q4; crisis-stricken Venezuela groans under oil sanctions Latin America’s bumpy economic recovery is expected to have had a better quarter at the end of 2018, after growth slumped in the third quarter. FocusEconomics estimates that GDP increased 1.7% year-on-year in Q4, above Q3’s 1.5%. Despite the modest uptick, growth remains weak in the Latin American economy, which had a disappointing 2018 overall. Weaker global trade, a noisy election cycle, shifting sentiment for emerging-market assets and one-off shocks in major players caused the recovery to flounder last year. Preliminary data for Mexico revealed that growth lost steam in the fourth quarter. Plunging industrial activity on the back of contractions in the construction and mining sectors dented economic activity, while retail trade figures were more positive. Official GDP figures for the rest of the region’s economies are still outstanding, although FocusEconomics analysts estimate that Ecuador and Uruguay both also lost steam in Q4. Moreover, Argentina’s recession is expected to have deepened as sky- high inflation, falling employment and decimated confidence undermined economic activity. Elsewhere in the region, dynamics are expected to have held up better. A pick-up in Brazil’s economy likely fueled the overall regional acceleration, on the back of a recovering labor market and returning confidence. Peru’s economy is also projected to have bounced back from a poor Q3, thanks in part to soaring infrastructure spending, while growth in Chile is also seen having accelerated in Q4. Growth is seen receding slightly at the start of 2019 and the Latin American economy is seen expanding 1.5% annually in Q1. Signs of a looser monetary policy stance in the United States are supporting sentiment for emerging-market currencies and should help give most central banks more room to encourage economic activity. In addition, the end of the crowded election cycle should allow governments to shift focus to implementing much-needed reforms, although a degree of uncertainty will likely linger until new policies are pushed through. Slower global growth, however, could take some wind out of the region’s external sector this year. On the political front, Venezuela has been in the spotlight in recent weeks after the leader of the opposition-controlled National Assembly, Juan Guaidó, declared himself interim president on 23 January. Several countries, including the United States, have since recognized his presidency, ramping up international pressure on President Nicolas Maduro to resign or hold new elections. Moreover, the United States is using its economic might to squeeze the crisis-stricken country, imposing new sanctions on state-owned oil firm PDVSA. These measures will likely dent oil revenues and further exacerbate the country’s already dire economic condition. The situation is fast-evolving and there is considerable uncertainty regarding the future of the country and whether Maduro will be able to cling onto power. Some of our panelists have begun forecasting a political transition, while there is also the risk that the recent actions by the United States could boost Maduro’s standing in the country.

U.S. sanctions set to exacerbate economic crisis On 28 January, the Trump administration significantly increased the economic pressure on President Nicolás Maduro’s government by announcing sweeping sanctions against PDVSA, the state-owned oil firm. The new measures freeze around USD 7 billion of PDVSA’s assets in the U.S. and would effectively halt Venezuela’s oil exports to the U.S., amounting to USD 11 billion in lost export revenues over the next year. In addition, proceeds from oil sales by PDVSA would flow into designated accounts outside the control of the Maduro government. Considering that the country depends almost entirely on oil exports for its hard currency income, the sanctions deal a serious blow to the government’s cash flow and to the already crippled economy. The U.S. is the main buyer of Venezuelan crude, currently importing around 500,000 barrels per day (bpd). It also exports about 100,000 bpd of diluents to Venezuela, which are needed to mix with its heavy type of oil before it is exported. Under the sanctions, PDVSA would have to seek alternative buyers for its crude, such as in India, and would have to sell at a sharp discount to secure those markets. Furthermore, the cost of importing diluents from elsewhere would rise as Venezuela would lose the price advantage from its proximity to the United States. Consequently, lower revenues stemming from the loss of its main export market, coupled with the higher costs of importing diluents, will severely curtail Venezuela’s capacity to produce, process and export oil going forward. This will have a significant impact on public finances and on the economy more broadly. While previous U.S. sanctions implemented in August 2017 already made it hard for the government to access international financing, the new ones will constrain even further its ability to acquire much-needed hard currency. A major implication is that the Maduro government and PDVSA could struggle to service their hefty foreign debt obligations, which could push them closer into default and in turn put Citgo—PDVSA’s U.S.-based subsidiary and most valuable foreign asset—and other assets at risk of action by creditors. On the domestic front, lower inflows of dollars will further distort the foreign exchange system, as noted by Milton Guzman, analyst at Andes Investments: “Despite the recent effort from the government to apply a more flexible FX scheme, at least, in the next three or four months, the net amount of external resources will be significantly low as to feed up the market in a satisfactory way.” This in turn increases the risk of the exchange rate weakening considerably, which would further fuel hyperinflation. In addition, given the economy is highly import dependent, lower foreign currency revenues means the country will be able to import significantly less, leading to deeper shortages and increased hardship on the Venezuelan population. This was highlighted by Efrain Velazquez, director at AGPV, who commented: “[The sanctions] imply that public imports will have to be reduced. Economic and social impacts will be huge. Food shortages will increase and hyperinflation may accelerate even more.” As such, the sanctions would inflict a heavy toll on the average Venezuelan and could potentially intensify outward migration. Going forward, analysts see the economic outlook deteriorating further, a view that is shared by Velasquez: “Our next macroeconomic projections may show lower GDP growth and higher inflation.” That said, in light of the highly uncertain political environment, others are contemplating various scenarios to play out, like the one illustrated by Guzman: “Since our most recent macro FOCUSECONOMICS Venezuela LatinFocus Consensus Forecast | 113 February 2019 forecast is assuming that a political change would take place between May and June, the sanctions could be lifted, while additional efforts from a transition government to prevent the rapid oil output decline reported since 2017 could also contribute to mitigating the impact of the new sanctions.” Although the sanctions are designed to spark a political transition, which is a scenario that some of our panelists have factored into their forecasts, it is far from certain whether this will be accomplished. By further deteriorating domestic conditions, the measures could even backfire by helping Maduro shore up his support on the ground. All in all, panelists participating in the LatinFocus Consensus Forecast project that GDP will contract 10.3% this year, which is down 0.6 percentage points from last month’s forecast. For 2020, panelists expect GDP to fall 2.8%.

While the economy appears to have ended 2018 on a solid footing, prospects for this year are quickly deteriorating. This is predominantly the consequence of oil production cuts agreed in December among OPEC+ countries, which will drag on GDP growth this year. That said, the oil production caps have started to boost oil prices, which should shore up government revenues somewhat. Moreover, the economy remains constrained by the government’s Saudization policy, which intends to boost the number of jobs for Saudis in the private sector by imposing labor restrictions on foreigners. According to analysts, the amount of expat jobs in the country—especially in the retail sector—declined by around 1.5 million people in the 2017–2018 period; the unemployment rate among Saudis in the same period has nevertheless remained virtually unchanged, hovering around 13%.

Despite greater fiscal support, the economic recovery is likely to lose some steam this year as an uncertain global oil outlook, oil production cuts in compliance with the OPEC+ deal and negative spillovers from the Saudization policy are expected to hit economic activity. Moreover, key economic reforms appear to have stalled, which threatens long-term economic growth in the country. Our panel expects growth of 1.9% in 2019, which is down 0.3 percentage points from last month’s projection, and 2.2% in 2020. Inflation plunged from November’s 2.8% to 2.2% in December, mainly reflecting weaker price increases for restaurants as well as a sharp drop in housing rentals. Inflation should moderate further down the road as the effect of the introduction of a VAT on 1 January 2018 completely fades. FocusEconomics panelists project that inflation will average 2.0% in 2019, which is unchanged from last month’s estimate. Next year, the panel sees inflation at 2.2%. Monetary policy is tied to exchange rate policy and the Saudi Arabian Monetary Authority’s (SAMA) priority is to keep the riyal’s peg against the USD. The country thus follows U.S. monetary policy and, to defend the currency peg, the SAMA hiked its main rates on 19 December after a similar move by the Fed. Saudi Arabia maintains an exchange rate system with full convertibility and no restriction on capital flows. The riyal has been officially pegged to the U.S. dollar at a rate of 3.75 SAR per USD since January 2003 and has had a de-facto peg to the greenback since 1986. Our panelists do not foresee a change in the current exchange rate system during the entire forecast horizon, which ends in 2023.

REAL SECTOR 

PMI moderates in December

The Purchasing Managers’ Index (PMI), sponsored by Emirates NBD and produced by IHS Markit, fell from 55.2 in November to 54.5 in December. Nevertheless, the index remained well above the 50-threshold that indicates expansion in business activity in the non-oil producing private sector. The softer improvement in business conditions reflected weaker growth in output, albeit it remained comfortably above the 2018 average. Growth in new orders softened in December, mostly due to subdued external demand. As a result, employment growth remained weak as it did purchasing activity. Strong competitive pressures continued to squeeze margins, while input prices increased due to higher equipment and raw materials prices. Looking forward, Khatija Haque, head of MENA research at Emirates NBD, commented that: “Business optimism remains strong in Saudi Arabia, and the future output index climbed to the highest reading in five years. 53.8% of respondents expect that output will be higher in 12 months’ time, with no firms expecting a deterioration in conditions.”

FocusEconomics Consensus Forecast panelists see fixed investment rising 5.0% in 2019, which is up 0.5 percentage points from last month’s estimate. For 2020, the panel expects fixed investment to increase 5.4%. The government projects growth of 2.6% in 2019. FocusEconomics panelists project GDP to expand 1.9% in 2019, which is down 0.3 percentage points from last month’s estimate. For 2020, panelists expect the economy to expand 2.2%.

Facing fierce criticism at home and abroad, President Nicolás Maduro was sworn in to serve a new six-year term on 10 January after being reelected in the May 2018 presidential election that was widely condemned as illegitimate. This comes against a dire economic backdrop as the economy remains in crisis with no end in sight. Oil prices slumped after hitting four-year highs in October, which, coupled with faltering oil production—down nearly a third from January 2018 to 1.1 million bpd in November 2018 according to secondary sources—have undoubtedly put a strain on crucial export earnings and government revenues. On a brighter note, in a bid to revamp output, two major oil deals between the state-run oil firm, PDVSA, and U.S.-based Erepla and France’s Maurel & Prom were announced in early-January. Erepla is set to invest up to USD 500 million in three oilfields, while Maurel & Prom would invest USD 400 million for a 40% stake in the Petroregional del Lago joint venture.

The near-term outlook remains bleak, with GDP seen contracting for the sixth consecutive year in 2019. The economy is expected to continue to be crippled by runaway inflation, dwindling oil output and a dysfunctional exchange rate regime. Financial sanctions which hinder the country’s ability to access foreign credit and restructure debt only exacerbate the dire situation. Given the severity of the crisis, conditions may emerge for a political transition, a scenario that some of our panelists have been factoring into their forecasts. FocusEconomics panelists see the economy contracting 9.7% in 2019, which is down 1.3 percentage points from last month’s forecast. In 2020, the panel sees GDP falling 1.4%. • Panelists estimate inflation ended 2018 at over 1,500,000%. Despite the recent currency overhaul and authorities’ pledges to scale back monetary financing, analysts contend the measures are unlikely to tame hyperinflation. Our panel sees inflation surging to over 100,000,000% by the end of 2019, before falling to around 1,500,000% by the end of 2020. • Despite the flexibilization of exchange rate controls under the recent Economic Recovery Plan, the gap between the official and non-official rate continues to widen. The official DICOM exchange rate came in at 862 VES per USD in the 11 January auction, while the parallel market rate fell to 1,890 VES per USD on the same day. Our panelists expect the official rate to end 2019 at 1.8 billion VES per USD before rising to 9.9 billion VES per USD by the end of 2020.

Insight from Focus Economics

Gasoline

Gasoline prices regained some ground at the start of the year and, on 11 January, reformulated blendstock for oxygenate blending (RBOB) gasoline traded at USD 1.55 per gallon. This was up 4.5% from the same day last month, was 0.8% lower on a year-to-date basis, and was down 17.2% from the same day last year. Gasoline prices fell further in late December in line with the fall in global crude oil prices and on weaker-than-normal holiday demand. A report by the EIA showed gasoline demand for the week ending 28 December was the lowest in nearly two years. Moreover, gasoline stocks rose higher in the period, signaling ample supply. Prices, however, have bounced back in anticipation of tighter supply. Prices are expected to pick up later this year as OPEC and its allies trim output in order to boost crude oil prices. FocusEconomics panelists expect gasoline to trade at an average of USD 1.81 per gallon in Q4 2019 and USD 1.71 per gallon in Q4 2020.

Dry Gas

Natural gas prices have retreated over the last month after November’s multi-year high spike. On 11 January, the Henry Hub Natural Gas price was USD 3.10 per one million British thermal units (MMBtu). The price was 29.7% lower than on the same day in the previous month but was up 5.4% on a year-to-date basis. In addition, the price was 0.5% higher than on the corresponding date in 2018. The fall in prices was chiefly due to mild weather in the U.S. over the past month, which dampened heating demand and which is expected to persist in the coming months. Moreover, the previous month’s significant jump in natural gas prices caused utility firms to shift to alternative energy sources such as coal, which further weighed on demand. Some kind of pullback was always to be expected following such a dramatic price increase in November, which likely saw prices run ahead of fundamentals amid speculative demand. Looking ahead, prices are expected to tick up slightly from their current level going forward, supported by a global shift away from coal towards gas, a cleaner non-renewable energy. However, high U.S. supply should contain any price increase. FocusEconomics panelists see the spot price averaging USD 3.14 per MMBtu in Q4 2019, before climbing to USD 3.17 per MMBtu in Q4 2020.

Brent Crude

In January, Brent crude oil prices appear to be recovering following the freefall which began in October and led Brent crude oil prices to hit a one-and-a-half year low by the end of December. On 11 January, oil prices traded at USD 59.1 per barrel, which was 1.1% lower than on the same day last month. Although the benchmark price for global crude oil markets was 16.0% lower than on the same day last year, it was up 16.9% on a year-to-date basis. Thawing relations between China and the United States has fueled hopes that a full-blown trade war between the two superpowers will be avoided, boding well for the global economy. This situation, coupled with the oil production cut announced by OPEC and Russia in early December and effective in January 2019, has supported oil prices so far this year. However, Brent crude oil remains still at low levels due to the collapse in oil prices observed in the October– December period due to widespread concerns of a new global oil glut. The U.S decision to grant waivers to Iranian oil buyers, coupled with a somber global economic outlook and strong oil production by Russia, the OPEC and the United States, negatively impacted oil prices. Looking forward, analysts surveyed by FocusEconomics expect, on average, that the recovery in oil prices will strengthen in the coming months as the oil production cut agreed by OPEC+ will keep the global oil market adequately supplied. However, a potential global economic slowdown and strong oil production will limit the rebound. FocusEconomics panelists see prices averaging USD 69.2 per barrel in Q4 2019 and USD 68.3 per barrel in Q4 2020.

West Texas Intermediate (WTI) 

WTI crude oil prices declined sharply in recent weeks and hit an over one-year low of USD 44.5 per barrel on 27 December. Afterwards, however, prices for the black gold started to recover. WTI crude oil prices traded at USD 51.4 per barrel on 11 January, which was down 0.4% from the same day last month. Although the price was down 19.4% from the same day last year, it was 13.9% higher on a year-to-date basis. The price for WTI crude prices plummeted since U.S. President Donald Trump announced waivers for eight countries to continue purchasing Iranian oil in early November. Moreover, the United States continued to pump oil at record levels in recent months, reaching an average of 11.7 million barrels per day in the week ending 4 January. However, recent news that China–U.S. trade talks were progressing, coupled with reduced supply by OPEC+ members, boosted prices since the start of the year. In a sign that the U.S. economy could be cooling, U.S. crude oil stockpiles decreased less than expected in the week to 4 January, while inventories of refined products surged in the same period. Looking forward, WTI oil prices are likely to rise from current levels as the oil cut production by OPEC+ will reduce global oil supply. Robust U.S. shale production, however, will limit any sharp upward movement. For Q4 2019, analysts expect prices to average USD 62.2 per barrel, before increasing slightly in Q4 2020 to USD 60.9 per barrel.

Is Turkey in complete shambles?
The economy likely recorded a dismal fourth quarter, as the impact of the August 2018 currency crisis continued to reverberate. The manufacturing PMI was firmly in contractionary territory throughout the period on shrinking output and new orders, while business sentiment was decidedly pessimistic. Moreover, consumer spending was hit by higher interest rates, still-elevated inflation and depressed household sentiment, with retail sales declining sharply in October and vehicle sales plummeting throughout Q4. This comes after comprehensive data showed that GDP growth slowed sharply in Q3 on soft private consumption and fixed investment. More positively, the lira has recovered substantial ground since September, while external rebalancing continues apace, with a third consecutive monthly current account surplus in October. On the political front, President Erdogan announced a second 100-day plan in December. According to the president, it contains projects worth TRY 24 billion, which could provide a mild boost to demand going forward. Moreover, the government recently extended temporary tax cuts until the end of March, in a bid to fight inflation and support consumer spending. • The economy is set to perform poorly this year, depressed by restrictive financial conditions constraining private consumption and fixed investment. However, the external sector should provide some support. Currency volatility and the possibility of renewed geopolitical tensions pose significant downside risks. FocusEconomics panelists expect the economy to flatline in 2019, down 0.2 percentage points from last month’s forecast, and 3.1% in 2020. • Inflation fell from 21.6% in November to 20.3% in December. Price pressures should ebb in 2019 on a tighter monetary stance and tepid domestic demand, although the recent minimum wage hike will slow the decline. Our panel sees inflation ending 2019 at 15.1% and 2020 at 11.1%. The possibility of a further sharp currency depreciation, premature monetary loosening and a spending splurge in the build-up to local elections in March 2019 pose upside risks to the outlook. • At its 13 December meeting, the Central Bank left the one-week repo rate at 24.00%, to tame inflation and support the lira. The Bank is likely to maintain its tight stance in the short-term, before beginning an easing cycle later in 2019 as inflation ebbs. Our panelists see the one-week repo rate ending 2019 at 19.49% and 2020 at 15.22%. • On 4 January, the lira traded at TRY 5.33 per USD, strengthening 1.0% from the same day of the previous month. The lira is likely to depreciate going forward, with the currency set to remain vulnerable to a resurgence of friction with the U.S. and market skepticism over monetary policy independence and the government’s commitment to fiscal prudence. Our panelists see the exchange rate ending 2019 at TRY 6.29 per USD and 2020 at TRY 6.57 per USD

REAL SECTOR
Growth slows massively in Q3 According to data released by Turkstat on 10 December, the Turkish economy lost further steam in Q3, amid significant financial market and exchangerate turbulence, soaring inflation and higher interest rates. Economic growth dimmed to a mere 1.6% in Q3, below market expectations and down from Q2’s revised 5.3% (previously reported: +5.2% year-on-year). Domestic demand weakened considerably in the third quarter. The expansion in private consumption slowed to 1.1% (Q2: +6.4% yoy), depressed by intensifying price pressures and weaker consumer sentiment. Meanwhile, fixed investment declined sharply (Q3: -3.8% yoy; Q2: +4.2% yoy) on lower investment in construction, and machinery and equipment. In contrast, government spending growth maintained the robust momentum observed in the build-up to the June elections (Q3: +7.5% yoy; Q2: +7.8% yoy). The external sector strengthened notably in the third quarter, due to the weaker lira and soft domestic demand. Exports of goods and services increased 13.6% (Q2: +4.2% yoy), while imports contracted 16.7% (Q2: +0.2% yoy). As a result, the external sector contributed 6.7 percentage points to growth, up from Q2’s contribution of 0.9 percentage points. Looking ahead, the economy is likely to contract over the next few quarters, as still-elevated price pressures, tight financial conditions and weak sentiment depress domestic demand. However, the external sector should continue to provide support thanks to increased price competitiveness. The economy should return to growth in the second half of this year as the impact of the currency crisis subsides. FocusEconomics Consensus Forecast panelists see GDP flatlining in 2019, which is down 0.2 percentage points from last month’s forecast, before expanding 3.1% in 2020.

Industrial production falls in October Industrial production declined 5.7% in October in calendar-adjusted year-on-year terms, a deterioration from September’s revised 2.4% decrease (previously reported: -2.7% year-on-year). October’s reading was driven by contractions in the manufacturing, and electricity, gas, steam and air conditioning supply sectors, while the mining and quarrying sector grew solidly. On a seasonally- and calendar-adjusted month-on-month basis, industrial output fell 1.9%, up from September’s 2.6% drop. Annual average growth in industrial output fell from 6.9% in September to 5.7% in October. Industrial production is likely to continue to perform poorly in the months ahead, dampened by high domestic interest rates and weak domestic demand. FocusEconomics Consensus Forecast panelists expect industrial production to rise 0.7% in 2019, which is down 1.0 percentage points from last month’s estimate. The panel sees industrial output increasing 3.3% in 2020.

Consumers grow gloomierin December The consumer confidence index, published by the Statistical Institute in cooperation with the Central Bank, worsened from 59.6 in November to 58.2 in December. As a result, the index moved further below the 100-point threshold that separates pessimism from optimism among Turkish households. Weak consumer confidence readings throughout Q4 bode poorly for private consumption in the period. December’s dip was driven by consumers’ less optimistic views regarding the labor market, general economic conditions and their personal financial conditions. Nevertheless, consumers grew slightly more upbeat about their ability to save. FocusEconomics Consensus Forecast panelists see private consumption declining 1.5% in 2019, which is down 0.4 percentage points from last month’s forecast, before expanding 3.1% in 2020...

Inflation dips in December Consumer prices fell 0.40% from the previous month in December, up from November’s 1.44% decrease, according to data released by the Turkish Statistical Institute (Turkstat). December’s drop was chiefly driven by lower prices for clothing and footwear; and transport. Inflation fell from 21.6% in November to 20.3% in December, the second consecutive monthly slowdown, while core inflation went down from 20.7% to 19.5%. The lessening of price pressures was likely driven by numerous factors, chiefly government tax cuts on some goods, temporary price discounts, lower oil prices and the recovery in the lira. Looking to Q1, a less supportive base effect will keep inflation elevated, although this could be partly offset by the recent announcement that tax cuts will be extended till end-March. Over the rest of the year, inflation should gradually ease on weak domestic demand, although a 26% minimum wage hike will likely slow the decline. The evolution of the volatile lira and monetary and fiscal policy will be key factors to watch. FocusEconomics panelists see inflation closing 2019 at 15.1%, which is up 0.5 percentage points from last month’s forecast, and 2020 at 11.1%.

Central Bank keeps rates unchanged in December 

At its monetary policy meeting on 13 December, the Central Bank of the Republic of Turkey (CBRT) left the one-week repo rate unchanged at 24.00% for the second consecutive month. The Bank’s decision to keep rates at their current high level was motivated by a desire to consolidate the strengthening of the lira observed in recent months, as well as to temper inflation, which is still extremely elevated despite dipping in November. Any rate loosening would have risked damaging the Bank’s credibility—already shaken following a period of policy inaction earlier this year—and putting downward pressure on the currency. On the other hand, with price pressures dipping and domestic demand depressed, the CBRT saw no need for further tightening. In its communiqué, the Bank’s language was slightly less hawkish than at the previous meeting. However, the CBRT reiterated its commitment to a tight monetary stance “until [the] inflation outlook displays a significant improvement”—taking into account fiscal policy, inflation expectations and the lagged impact of previous rate hikes—and left the door open to future rate hikes if required. According to analysts at Unicredit: “Considering the inflation outlook, we do not think that the CBRT will have room to cut before late 2Q19. Having said that, we cannot rule out the possibility that political calls for lower interest rates will resume in the run up to the local elections, which are expected on 31 March 2019.” Our panellists expect the one-week repo rate to end 2019 at 19.49% and 2020 at 15.22%

Read more at Focus Economics

The economy benefited from increased crude oil production and higher prices for the black gold in the third quarter, prompting GDP to expand at the fastest pace in two-and-a-half years. Although growth in non-oil private activity accelerated slightly, it remained low compared to historical figures. Subdued dynamics in the private sector, a rising unemployment rate and low levels of foreign investment are casting doubts over the much-trumpeted Saudi Vision 2030. In order to shore up economic growth, on 18 December, the government announced an expansionary budget for 2019, which focuses on boosting capital expenditure. Analysts, however, warn that the projected revenues could be on the optimistic side. While the implied price is about USD 70 per barrel, oil prices have fallen in recent weeks and hit an over one-year low of USD 50.1 per barrel on 26 December.

The economic recovery should broaden this year due to renewed fiscal stimulus, which should support domestic demand. Although the Saudi government sees the recent drop in oil prices as temporary, it is still unclear whether the recently-approved oil production cut will be enough to push up oil prices. Our panel expects growth of 2.2% in 2019, which is down 0.2 percentage points from last month’s projection. In 2020, growth is also seen at 2.2%.

Inflation rose from October’s 2.4% to 2.8% in November, the highest reading in eight months. Inflation should moderate this year on the back of subdued domestic demand and as the impact of the VAT fades. Panelists project that inflation will average 2.0% in 2019, which is down 0.1 percentage points from last month’s estimate. Next year, the panel sees inflation at 2.2% in 2020.

The riyal has been officially pegged to the U.S. dollar at a rate of 3.75 SAR per USD since January 2003 and has had a de-facto peg to the greenback since 1986. To defend the currency peg against the USD, the Saudi Arabian Monetary Authority hiked its repo and reverse repo rates by 25 basis points on 19 December following a similar decision by the U.S. Federal Reserve on the same day. Our panelists do not foresee a change in the current exchange rate system during the entire forecast horizon, which ends in 2023.

Government unveils an expansionary budget for 2019 despite the recent fall in oil prices On 18 December Saudi Arabia presented its budget for 2019, which is the Kingdom’s largest ever in a bid to spur faltering economic growth. Despite the media-grabbing Saudi Vision 2030—intended to diversify the economy away from oil—the Saudi economy is still heavy reliant on state-funded activity, which mostly comes from oil revenue. Moreover, foreign investment remains low and the unemployment rate among Saudis continued to climb in the first half of 2018, despite the implementation of the Saudization scheme, an initiative to force companies to hire Saudis. The government plans to increase total spending by 7.3% to a record high of SAR 1.1 trillion (USD 295 billion) this year, despite the recent decline in oil prices. The increase will be mostly driven by a 20.0% increase in capital expenditure, while current expenditure will rise a modest 4.2%.

Although the 2019 budget does not include a reduction in Saudi Arabia’s lavish subsidy system, it entails a sizeable reduction in military spending despite Saudi Arabia’s significant involvement in the conflict in neighboring Yemen. Finally, unlike in preceding years, authorities did not include details about the planned off-budget spending by the Public Investment Fund, Saudi’s main sovereign wealth fund, suggesting that investment could be even higher. Government revenues are expected to jump 9.0% this year, leaving a fiscal gap of 4.2% of GDP (2018: deficit of 4.6% of GDP). Analysts warn that the increase in oil revenues could be on the optimistic side as the implied oil price assumption for the 2019 budget is around USD 70 (Q4: USD 56.5), threatening to derail the government’s consolidation efforts. The budget also includes an increase in non-oil revenues mainly due to higher expat levies. The public debt is expected to rise from 19.1% of GDP in 2018 to 21.7% of GDP in 2019.

The Saudi government presented a budget intended to shore up growth amid sluggish economic conditions, especially in the private sector. Although projected revenues appear to be optimistic, the government considers that the current drop in oil prices will be temporary and that the planned oil production cut (effective January 2019) will prop up crude oil prices going forward. While the increase in capital expenditure is good news for the economy, there are doubts about the pace of execution of the investment projects. FocusEconomics panelists project the fiscal deficit to reach 4.6% of GDP in 2019. Next year, the fiscal deficit is forecasted to inch up to 4.7% of GDP.

The oil sector propels economic growth in Q3 Saudi Arabia’s economic recovery gathered steam in the third quarter on the back of higher oil prices and increased crude oil production. GDP expanded 2.5% year-on-year in Q3, following the 1.6% rise in Q2 and marking the best result in two-and-a-half years.

The Kingdom ramped up production in the July–September period in order to offset declining output in Iran and keep global oil markets adequately supplied. The United States was piling pressure on Iran’s trade partners to cut down purchases of Iranian oil to “zero” by 4 November, when the bulk of the new sanctions had been planned to be reimposed. As a result, crude oil production in Saudi Arabia jumped from an average of 10.11 million barrels per day (mbpd) in Q2 to 10.42 mbpd in Q3. Fears that increased oil production by key players, mainly Russia and Saudi Arabia, was not enough to compensate Gross Domestic Product | variation in % Note: Year-on-year changes of GDP in %. 

Therefore, the average price of the OPEC oil basket rose from USD 72.0 in Q2 to USD 74.1 in Q3. Against this backdrop, growth in the oil and gas sectors rose from 1.3% in Q2 to 3.7% in Q3, marking the best result in nearly two years. On the downside, economic dynamics in the non-hydrocarbon sector moderated from a 2.4% increase in Q2 to a 2.1% rise in Q3. That said, the deceleration came entirely from the non-oil public sector, suggesting that authorities took their foot off the pedal following several quarters of stimulus, although growth in the non-oil private sector in Q3 still remained sluggish compared to historical figures. Saudization, the government’s initiative to reduce unemployment among native Saudis, is prompting an exodus of foreign workers this year, likely impacting the performance of the private sector, especially that of retailers. 

From the expenditure point of view, economic growth was fueled by an acceleration in gross fixed capital formation (Q2: +5.2% year-on-year; Q3: +8.9% yoy) and robust government spending (Q2: +7.5 yoy; Q3: +7.6% yoy). Conversely, private consumption growth moderated from 2.5% in Q2 to 1.6% in Q3. Exports of goods and services benefited from healthy dynamics in the oil market and expanded 8.0% in Q3 (Q2: +7.0% yoy). Improved domestic activity boosted imports, which rose 7.2% (Q2: -6.5% yoy). In the accompanying release to the 2019 budget unveiled on 18 December, Finance Minister Mohammed al-Jadaan announced that the economy likely expanded 2.3% in the full-year 2018, implying a growth rate of around 4.0% for the final quarter of 2018. Looking ahead, the recent fall in oil prices, the agreement to cut oil output in 2019 and weaker prospects for the global economy all threaten Saudi Arabia’s economic recovery.

Moreover, geopolitical risks remain large, with the country engulfed in a war in Yemen and the killing of journalist Jamal Khashoggi in the Saudi consulate in Istanbul rattling relations with the West. That said, the Saudi government approved an expansionary budget for 2019, which should shore up growth this year. The government projects growth of 2.6% in 2019. FocusEconomics panelists project GDP to expand 2.2% in 2019, which is down 0.1 percentage points from last month’s estimate. For 2020, panelists also expect the economy to expand 2.2%.

MONETARY SECTOR | Inflation hits an eight-month high in November Consumer prices fell 0.2% over the previous month in November, following October’s 0.3% decline. The drop was mainly due to lower prices for housing, water, electricity, gas and other fuels as well as for restaurants and hotels. In November, inflation climbed from 2.4% in October to 2.8%, marking the highest reading in eight months. Meanwhile, the annual average variation in consumer prices increased from 1.8% in October to 2.2% in November, reaching the highest level since March 2015. FocusEconomics Consensus Forecast participants expect inflation to average 2.0% in 2019, which is down 0.1 percentage points from last month’s projection. The panel sees inflation averaging 2.2% in 2020.

EXTERNAL SECTOR | Oil prices drop in December on global oil glut fears On 26 December, OPEC oil prices fell to their lowest since September 2017 (USD 50.1 per barrel) due to concerns over excess supply. In the following days, the price for the OPEC oil basket was broadly stable and, on 4 January, it traded at USD 53.0 per barrel, down 13.3% from the same day in December and 19.9% lower than on the same day in 2018 The slide in oil prices was triggered by President Trump’s decision in early November to grant sanction waivers to eight countries, allowing them to continue buying Iranian crude oil until May. Russia, Saudi Arabia and other producing countries had already started pumping more oil in order to keep global oil markets adequately supplied in the event of a sharp reduction in Iran’s oil exports. The United States also continued to produce oil at all-time highs in recent months due to the country’s flourishing shale oil industry. On the demand side, there had been growing concerns about an economic slowdown in 2019, which would likely trim demand for energy products. Moreover, OPEC and Russia’s decision to cut oil production by 1.2 mbpd as of January in an attempt to support prices had little impact on the global oil markets. The deal was clinched at OPEC’s regular meeting on 7 December. Before the meeting, Qatar unexpectedly announced its withdrawal from the oil cartel, effective January, after nearly 60 years of membership. Although Qatari officials stated that this was driven by the Kingdom’s strategy to focus on its gas industry, analysts point out that the ongoing diplomatic spat between Qatar and Saudi Arabia likely prompted the decision.

Sources: Focus Economics

Brent Crude

The panelist forecast range for Q4 2019 runs from a minimum of USD 56.8 per barrel to a maximum of USD 106.9 per barrel.

Brent crude oil prices continued to freefall over the last month, with the global oil benchmark sinking to more than a one-year low in late November. On 30 November, oil prices traded at USD 57.5 per barrel, which was down 24.0% from the same day last month. The benchmark price for global crude oil markets was down 9.5% from the same day last year and was 13.8% lower on a year-to-date basis. The announcement in early November that the U.S. would provide waivers to eight countries in order to allow them to continue purchasing Iranian oil after the implementation of U.S. sanctions on 4 November triggered the price spiral, as Iranian exports are now unlikely to fall as much as previously predicted. Moreover, Saudi Arabia, Russia and the U.S.—the world’s top three oil producers—are pumping close to all-time highs, adding further downward pressure on prices. On the demand side, signs have recently emerged of flagging activity. The Chinese economy has been decelerating in 2018, Japan recorded a contraction in the third quarter, while Q3 GDP data for the Euro area was the weakest since 2014. This likely added to investors’ concerns over the future appetite for crude oil. Going forward, our panelists see prices recovering from their current low level following such an abrupt decline, with prices likely now trading below fundamentals. However, significant uncertainty still clouds the outlook. One key factor will be whether OPEC agrees to production cuts—potentially as soon as its meeting on 6 December—in order to support prices. In addition, the possibility of an extension to U.S. waivers on Iranian oil exports and the evolution of the U.S.-China trade spat could have an important bearing on prices. FocusEconomics panelists see prices averaging USD 73.2 per barrel in Q4 2019 and USD 73.6 per barrel in Q4 2020. In light of recent developments, 4 panelists upwardly adjusted their Q4 2019 forecasts compared to last month. Meanwhile, 26 panelists kept their projections unchanged and 6 cut their forecasts. 

The panelist forecast range for Q4 2019 runs from a minimum of USD 56.8 per barrel to a maximum of USD 106.9 per barrel.

WTI

For Q4 2019, the maximum price forecast is USD 94.8 per barrel, while the minimum is USD 51.5 per barrel.

West Texas Intermediate (WTI) crude oil prices have hit a 13-month low over the last month on ample supply. WTI crude oil prices traded at USD 50.8 per barrel on 30 November, which was down 23.3% from the same day last month. The price was 16.0% lower on a year-to-date basis and was down 11.5% from the same day last year. On the international scene, the announcement in early November of U.S. waivers for eight countries to allow them to continue importing Iranian oil sent prices crashing in recent weeks. Moreover, Saudi Arabia and Russia continue to pump at near-record highs, adding further downward price pressure. Domestically, comprehensive EIA data for the week ending 23 November showed U.S. crude oil inventories rose by 3.6 million barrels over the previous week, approximately 7% higher than the 5-year average. The 23 November data also marked the 10th consecutive week that inventories have climbed, an indication of elevated supply. On the demand side, despite a strong U.S. economy, global demand for crude oil is likely abating on weaker dynamics in China, the EU and Japan. Prices are likely to rise somewhat going forward following such a sharp decrease in recent weeks which has led to oil looking oversold. Moreover, potential production cuts at the upcoming OPEC meeting in December would support prices. Greater U.S. shale production and softer demand growth, however, will limit any upward movement. For Q4 2019, analysts expect prices to average USD 67.2 per barrel, before increasing slightly in Q4 2020 to USD 68.7 per barrel. In response to recent developments, 18 panelists left their forecasts unchanged for Q4 2019 from last month, 2 of our panelists upgraded their projections, while 8 made a cut to their projections. The spread between the minimum and the maximum oil price forecasts remains relatively wide, with numerous drivers at play in oil markets in recent weeks: 

For Q4 2019, the maximum price forecast is USD 94.8 per barrel, while the minimum is USD 51.5 per barrel.

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Colombia outlook is stable.
Economic growth weakened slightly in Q3 as the government intensified its fiscal consolidation efforts and fixed investment growth slid on weaker business confidence and a wider slowdown in manufacturing activity. Leading indicators point to a moderation going into Q4, with consumer confidence falling further into negative territory in October on downbeat sentiment over general economic conditions. The manufacturing PMI also lost ground in October–November. After failing to gain approval for the first and second draft of the tax bill, the government is set to present a notably watered-down tax reform proposal to Congress, with its original revenue target halved. Fierce opposition forced the government to abandon the planned tax of basic foodstuffs, thereby compelling a freeze on spending in order to meet the fiscal goals and avert a potential credit rating downgrade.

The economy is expected to gain steam next year, powered by higher oil prices, increased investment in the extractives sector and an upturn in domestic demand. A tighter labor market should buoy private consumption, while an acceleration in fixed investment should also fuel growth. However, although the country’s debt dynamics have improved, slashing corporate taxes could present challenges in meeting the fiscal targets, notwithstanding the positive impact on investment. FocusEconomics panelists expect GDP to grow 3.2% in 2019, which is unchanged from last month’s forecast, and 3.2% again in 2020. • Inflation inched up to 3.3% in October from 3.2% in September, as a weak peso and higher commodity prices stoked price pressures. FocusEconomics panelists expect inflation to end 2019 at 3.4% and 2020 at 3.3%. • At its 26 October meeting, Colombia’s Central Bank held the benchmark interest rate at 4.25%, where it has been since the wind-up of the protracted easing cycle at the end of April. Firmer economic activity, thanks to higher oil prices, coupled with muted inflationary pressures, motivated the Bank to stay put and maintain a neutral tone. A riskier external environment will likely lead to a tighter stance, with the Consensus predicting the policy rate to end 2019 at 4.86% and 2020 at 4.95%.

On 30 November, the Colombian peso ended the day at 3,239 per USD, weakening 1.6% over the same day in October. The recent depreciation in the peso came as the government announced its plan to submit the tax reform bill with half of its original revenue target, which would pose challenges to reducing spending or modifying fiscal goals to satisfy credit rating agencies. FocusEconomics analysts see the peso gaining further strength and ending 2019 at 3,106 per USD and 2020 at 3,095 per USD.

According to the latest GDP data released by the National Statistical Institute (DANE) on 22 November, the economy grew at broadly the same pace in the third quarter as it did in the second, dipping just marginally. In annual terms, GDP accelerated 2.7% in Q3, inching down from the previous quarter’s 2.8% which had marked the fastest pace of growth since Q1 2016. On the domestic side of the economy, private consumption growth accelerated from 2.7% in Q2 to 3.2% in Q3 as subdued inflationary pressures shored up households’ purchasing power. On the other hand, fixed investment growth tumbled to 0.7% in Q3, down from 2.3% in Q2, as financing conditions became less favorable. The downturn in this component reflected contractions in the investment of housing, along with machinery and equipment. Moreover, government consumption rose at a slower pace of 4.5% in Q3, down from 5.9% in Q2, as the government continued to strengthen fiscal consolidation measures. Turning to the external sector, export growth fell from 3.0% in the second quarter to 1.2% in the third quarter, as global demand slowed owing to heightened tensions between the U.S. and China, coupled with political uncertainties. Imports also lost some steam, growing 5.1% in Q3 from 5.7% in Q2. Thus, the external sector’s drag on growth was more severe in Q3 compared to the second quarter. In seasonally-adjusted, quarter-on-quarter terms, growth continued to weaken from 0.6% in the second quarter to 0.2% in the third quarter. While economic activity is expected to remain strong, thanks to improving domestic demand and higher projected global oil prices, lingering uncertainties around the new tax reform bill present challenges to achieving the fiscal consolidation goals and continue to pose downside risks to the growth outlook. 

“The Colombian economy is set to continue accelerating along 2019 led by higher investment. That said, the final outcome of the tax bill currently under discussion in Congress will be key to assess any potential, short-term impact on economic growth, particularly on private consumption as individual taxes will be increased. Favorably, the proposal of broadening the VAT to basic goods has been removed from the bill, easing concerns about a strong potential effect on inflation and consumption next year. In any case, seeking resources for the upcoming years remains the main challenge of fiscal policy as the fiscal path is demanding.” Daniel Velandia, chief economist at Credicorp Capital

PMI falls for the fourth consecutive month in November amid wider global slowdown in manufacturing activity Colombia’s manufacturing sector lost pace for the fourth consecutive month in November, reflecting a wider slowdown in manufacturing activity worldwide amid intensifying trade war tensions. The seasonally-adjusted Davivienda manufacturing Purchasing Managers Index (PMI) fell to 51.6 from 52.0 in October. The index thus moved closer to the crucial 50-point threshold that separates improvement from deterioration in the sector, reflecting a weaker rate of expansion in manufacturing activity. 

- From Focus Economics