Russia Economic Outlook July 2019

A second GDP estimate confirmed that the economy ran out of steam in the first quarter, amid a broad-based deceleration. Wholesale and retail trade contracted in Q1 as January’s VAT hike dented consumer demand, while a lackluster outturn in the manufacturing and constructions sectors further derailed growth. Moreover, constrained oil output and weak energy demand from Europe curbed mining activity, bringing merchandise exports to a near halt in Q1. Turning to Q2, soft momentum appears to have persisted. After rebounding in April, economic activity growth tumbled again in May, owing to a deterioration in the manufacturing sector. In addition, weaker household consumption likely played a role, as retail sales growth slid in the month. Going into Q3, the focus is on 1–2 July OPEC+ meeting, where oil output cuts are likely to be extended.

Sliding private consumption and a downbeat external sector will restraint growth this year, although an uptick in public spending should provide some relief. Meanwhile, growth in the short-term should pick up slightly thanks to monetary policy easing, while a stronger boost over the medium-term is expected as the “national projects” plan gains traction. FocusEconomics panelists see growth at 1.4% in 2019, which is unchanged from last month’s forecast. In 2020, GDP is seen increasing 1.8%.

Inflation ticked down to 5.1% in May (April: 5.2%), inching slightly closer to the Central Bank’s 4.0% target. Nevertheless, price pressures remained elevated following from January’s VAT hike and due to rapidly rising food prices. Inflation should ease going forward, supported by a stable ruble and soft consumer demand. Inflation is seen ending 2019 at 4.4% and 2020 at 3.9%.

On 14 June, the Central Bank trimmed its key interest rate by 25 basis points to 7.50%. The decision marked the first rate cut since March 2018 and came against the backdrop of gradually moderating inflation and slower-than-expected economic growth. The Bank’s relatively dovish tone signals that further policy easing is likely in the second half of the year. Accordingly, the majority of our panelists see the Bank cutting the rate by another 25 basis points by the end of the year. Consensus projects it to end 2019 at 7.13%. In 2020, the key rate is expected to end the year at 6.69%.

The ruble gained ground in recent weeks, strengthening to a 10-month high in mid-June, partly thanks to a strong demand for treasury bonds. Nevertheless, reduced hopes of a Fed rate cut curbed the currency’s gains. On 28 June, the RUB traded at 63.0 per USD, appreciating 2.2% month-on-month. Our analysts expect the ruble to largely stand its ground in the coming quarters. Our panel sees the ruble ending 2019 at 65.6 per USD and 2020 at 66.6 per USD.

REAL SECTOR -> Growth plummets in Q1 on broad-based frailties...
GDP growth plunged to 0.5% year-on-year in the first quarter of 2019, according to a second estimate released by Rosstat. This was notably below Q4’s 2.7% outturn and matched the preliminary figure. A breakdown by sectors revealed broad-based weakness across the economy. Notably, the wholesale and retail trade sector contracted 3.0% in annual terms, weighed on by the hike in the VAT that was introduced in January. In addition, the agricultural sector swung to contraction, declining 1.2% annually in Q1 (Q4: +2.3% year-on-year), while growth in the manufacturing sector picked up pace but remained muted (Q1: +0.6% yoy; Q4: +0.2% yoy). The construction sector also ground to a halt, recording zero growth after several major infrastructure projects were completed in 2018, while the government’s ‘National Projects’ program is off to a slow start. Meanwhile, growth in the mining sector was relatively robust, clocking in at 4.6% in Q1, but was well below Q4’s multi-year high of 7.7% nonetheless.

OUTLOOK -> Economic conditions deteriorate in May
The manufacturing Purchasing Managers’ Index (PMI) produced by IHS Markit
dropped from 51.8 in April to 49.8 in May, marking a nine-month low. As a
result, the index lies below the critical 50-point mark and points to contracting
activity in the manufacturing sector. May’s result reflected a notable drop in
employment, with firms shedding jobs at the fastest pace since March 2016.
In addition, new orders and output also lost steam.
The services sector also lost momentum in May, with the IHS Markit Russia
Services Business Activity index falling to 52.0 from April’s 52.6. Firms
reported a modest rise in new business and services providers shed jobs for
the first time since September. FocusEconomics Consensus Forecast panelists project fixed investment will expand 1.9% in 2019, which is down 0.1 percentage points from last month’s forecast. In 2020, the panel expects fixed investment to grow 2.3%.

Euro area Manufacturing PMI (Final, June): 47.6, Flash: 47.8, Previous: 47.7

Germany Manufacturing PMI (Final, June): 45.0, Flash: 45.4, Previous: 44.3

France Manufacturing PMI (Final, June): 51.9, Flash: 52.0, Previous: 50.6

Italy Manufacturing PMI (June): 48.4, GS: 49.1, Consensus: 48.7, Previous: 49.7

Spain Manufacturing PMI (June): 47.9, GS: 49.8, Consensus: 49.5, Previous: 50.1

Italian manufacturing PMI fell by 1.3pt to 48.4 in June, below market expectations. 

SPAIN
Spanish manufacturing PMI also fell considerably, slipping by 2.7pt to 47.9, well below expectations. This reflected notable weakness in new orders, output, and employment. The drag on the industrial sector was largely attributed to global trade tensions and political uncertainties.

Incoming data points to slightly weaker growth in the second quarter, on the heels of a strong Q1 upturn that was buoyed by a robust rebound in fixed investment. Although industrial production bounced back solidly in April, the composite PMI fell to a five-and-half-year low in May, weighed on by broadly stagnant manufacturing activity. Moreover, while retail sales remained firm in April, employment growth slowed in April and May, which, coupled with consumers turning more pessimistic over the same period, suggests that private consumption has lost some stride. In the political arena, after scoring important wins in the recent national, regional and local elections, acting Prime Minister Pedro Sánchez is set to be sworn in the investiture vote to take place next month. Falling short of a parliamentary majority, however, his Socialist Party (PSOE) is likely to rely on left-wing Unidas Podemos and smaller regional parties to govern.

INDUSTRIAL PRODUCTION

Industrial production rose 1.7% year-on-year in seasonally- and calendar adjusted terms in April, rebounding from March’s revised 3.0% contraction

(previously reported: -3.1% year-on-year). Despite the upturn, the annual

average variation in industrial output remained at minus 0.3% in April, which

had turned negative for the first time in five years in March.

April’s increase reflected improved dynamics in most major sectors. The

production of consumer goods rebounded strongly, while capital and

intermediate goods production picked up compared to March. Meanwhile,

energy output contracted for the third month running in April.

On a month-on-month basis, adjusted for seasonal and calendar effects,

factory output climbed 1.8% in April, rebounding from the 1.2% slip logged

in March.

REAL SECTOR
The Spanish Board of Architects approved 9,405 new construction permits in March, according to data published by the Ministry of Public Works. The figure was above both the 8,461 permits granted in March 2018 and the 9,175 permits granted in February. On an annual basis, permits rose 11.2% in March, slightly above February’s 10.5% upturn. The moving three-month sum of permits totaled 27,886 in March, which represented an 18.9% increase from the same period last year and followed the 23.6% expansion recorded in February. That said, the current number of permits represents a mere fraction of the 268,266 permits that were granted during the July–September 2006 peak.

RETAIL SALES
Retail sales rose 2.0% in year-on-year terms in April, marking a six-month high and following the soft 0.2% upturn logged in March. The print largely reflected a strong increase in food sales more than offsetting lower sales of personal equipment goods. On a distribution-based system, sales at small and large chain stores picked up notably compared to March while they rebounded at department stores. Meanwhile, purchases at single retail sales contracted for the second consecutive month in April.

EXTERNAL SECTOR
Spain’s current account balance recorded a tiny surplus of EUR 26 million
in March, smaller than the EUR 389 million surplus recorded in March 2018
but much greater than the EUR 2.8 billion deficit logged in February. In the
12 months up to March 2019, the current account balance reached a surplus
of EUR 9.0 billion, the smallest since October 2014 and below the EUR 9.4
billion recorded in the 12 months up to February.
According to the Bank of Spain, the lower current account surplus compared
to the previous year reflected the smaller trade surplus recorded in March
2019 of EUR 1.2 billion—mainly the result of imports growing more than
exports—below the EUR 1.8 billion logged in March 2018.

Thank you Goldman Sachs and Focus Economics

Comprehensive GDP data for the first quarter confirmed that the relatively robust expansion was mostly propelled by a sharp decline in imports of goods and services. Underlying domestic demand, meanwhile, appeared weak as reflected by lackluster private consumption in Q1, raising concerns over Prime Minister Shinzo Abe’s plans for household demand to drive economic growth. Turning to the second quarter, consumer confidence tumbled to an over three-year low in May, which does not bode well for a recovery in consumer spending and leaves Abe at a crossroad whether to move ahead with a controversial sales tax in October. Japan’s economic prospects are quickly worsening as escalating trade tensions, especially between China and the United States, could further erode global demand and, in turn, Japan’s all-important external sector.

Faltering global demand is expected to weigh on growth this year. Conversely, the economy should benefit from frantic front-loading of consumer purchases ahead of October’s sales tax. The key downside risks are further trade restrictions, which would reduce demand for Japanese goods, as well as weaker global growth, which could strengthen the yen. FocusEconomics panelists see the economy growing 0.8% in 2019, which is unchanged from last month’s forecast, and 0.5% in 2020.

Inflation jumped to 0.9% in April from 0.5% in March. Price pressures nevertheless remain relatively muted, mostly reflecting Japan’s firmly entrenched deflationary mindset, strong productivity gains and increased competition largely thanks to technological progress. Looking forward, the sales tax hike scheduled for October should boost inflation significantly. FocusEconomics panelists expect inflation to average 0.8% in 2019, which is unchanged from last month’s estimate, before reaching 1.1% in 2020. 

The Bank of Japan (BoJ) kept its monetary policy on hold and forward guidance was unchanged at the 19–20 June meeting. The Bank supported its decision on the back of subdued inflationary pressures and an uncertain global economic outlook. That said, the BoJ could expand its monetary stimulus as soon as in Q3 in the event of a rate cut by the Fed. A majority of FocusEconomics panelists expect the BoJ’s short-term policy rate to remain unchanged at minus 0.10% until at least the end of 2020.

Rising global trade tensions continued to fuel demand for safe-haven assets in recent weeks, leading the yen to strengthen against the U.S. dollar. On 20 June, the yen traded at JPY 107.3 per USD, appreciating 2.6% month-on-month. Looking forward, the evolution of the yen will be mostly determined by external events such as the trade war and global growth prospects. Panelists see the yen trading at JPY 108.1 per USD at the end of 2019 and at JPY 106.7 per USD by the end of 2020.

Summer is in full swing and so is the geopolitical storm - Chad


Euro Area: ECB pushes back possible rate hike at June meeting The European Central Bank (ECB) turned more dovish at its June monetary policy, responding to the bloc’s softer growth momentum. The ECB pushed back the timing of a rate hike and left interest rates at record-low levels.


Germany: Industrial sector not out of the woods yet Industrial production fell 1.9% month-in-month in April in seasonally- and calendar-adjusted terms, swinging from March’s 0.5% increase. Production in the energy sector was down noticeably; the construction sector, however, provided a small silver lining as production increased marginally.


Greece: New Democracy expected to win general election but slow economic recovery set to continue Polls show that conservative opposition New Democracy (ND), led by Kyriakos Mitsotakis, maintains a sizeable lead over Syriza, signaling that not only will it win the national vote on 7 July but could even secure an absolute majority in the 300-seat Parliament as well. Although Mitsotakis’ victory would imply a shift to a more market-friendly policy mix that may provide a boost to business confidence, the economy’s slow pace of recovery is set to persist in the near-term owing to structural fragilities and authorities’ adherence to strict fiscal targets agreed with Eurozone lenders.


France: Domestic demand propels growth in Q1 France’s economy grew a seasonally-adjusted 0.3% quarteron-quarter in the first quarter. Although first-quarter growth was unaltered from the preliminary estimate, revisions to last year’s fourth quarter—which was revised up to 0.4% from 0.3%— suggest that growth tapered somewhat at the outset of the year.


Italy: Risk of unprecedented fine and resurging financial turmoil elevated The European Commission could launch an excessive deficit procedure against Italy in the next few months for breaking spending and borrowing rules, unless convincing measures are swiftly adopted. The EC tabled a disciplinary procedure against Italy over its failure to comply with the debt reduction benchmark in 2018 and on expectations that the country will not comply with the debt reduction benchmark either in 2019 or in 2020. Second estimate trims Q1’s rebound GDP ticked up 0.1% in the first quarter over the previous period in seasonally- and working-day adjusted terms. The Italian economy returned to growth in Q1, after languishing in technical recession in the last two quarters of 2018, supported by the external sector and by a slight increase in domestic demand net of inventories.


Spain: Composite PMI falls to five-and-a-half-year low in May Largely reflecting slower activity growth in the manufacturing sector, the IHS Markit composite Purchasing Managers’ Index (PMI) declined to a five-and-a-half-year low of 52.1 in May from 52.9 in April.


Italy In Depth:
A second estimate of GDP trimmed down the first quarter’s meager rebound, and revealed a somber picture of the economy. Plunging imports explained the improved performance of the external sector, which boosted the economy out of technical recession, while destocking weighed heavily on GDP growth, as dismal demand prospects prompted firms to lighten inventories. Data for Q2 still points to a limping economy: In April, industrial production contracted again, and the manufacturing PMI remained stuck in contractionary terrain in May. Meanwhile, clouds are forming on the political horizon: On 5 June, the European Commission stated that the opening of an excessive deficit procedure against Italy was “warranted”, due to the country’s high debt load and lack of a credible plan to address it. Although the government stated it will stick to EU rules, and despite some recent budget reprieve hopes which supported Italy’s bond market, the possibility that the Commission could take further disciplinary steps in the months to come remains on the table. The economy is poised to stagnate this year, weighed down by languishing domestic demand and slower growth in the EU. Political and fiscal uncertainty and feeble credit extension will likely depress investment, while consumer spending will be constrained by muted productivity growth and weak job creation. The risk of turbulence in the financial markets clouds the outlook. FocusEconomics panelists project growth of 0.1% in 2019, which is unchanged from last month’s projection, and 0.6% in 2020.  Harmonized inflation dropped to 0.9% in May from 1.1% in April. The slowdown came mainly on the back of slower increases in prices for services related to transport, and energy products. Inflation should remain subdued this year, kept in check by anemic domestic demand and stagnant wages. FocusEconomics panelists expect inflation of 0.9% in 2019 and of 1.1% in 2020.



UK In Depth:
The economy has likely lost momentum in the second quarter, after Brexit stockpiling flattered the first-quarter GDP reading. Economic activity contracted sharply in April, albeit in part due to a temporary shutdown at car manufacturing plants. Moreover, the manufacturing PMI dived into contractionary territory in May for the first time in several years on lower export orders. On the flipside, the unemployment rate is at a multidecade low, while wage growth is comfortably outpacing inflation, which is feeding through to solid retail sales. On the political front, the race to choose a new Conservative Party leader—and by extension the next prime minister—continues. Boris Johnson, who has advocated leaving the EU on 31 October with or without a deal, remains the clear favorite. However, all options remain on the table, including a general election, second referendum, leaving the EU with a deal and not leaving at all. This year, muted business investment, coupled with ebbing momentum in key trading partners such as the EU and U.S., will restrain the economy. However, the robust labor market should support private consumption, while a more expansionary fiscal stance should also buttress the economy. The highly uncertain outcome of Brexit remains the key risk to the outlook. FocusEconomics panelists expect GDP growth of 1.3% in 2019, which is unchanged from last month’s forecast. For 2020, panelists see the economy expanding 1.4%. • Inflation decreased to 2.0% in May (April: 2.1%) on softer transport inflation, hitting the Bank of England’s target. Going forward, inflation is likely to dip slightly in H2 amid lower energy prices and mild economic momentum, but stay fairly close to target. FocusEconomics panelists expect inflation to average 1.9% in 2019, which is unchanged from last month’s forecast, and 2.0% in 2020.

A sharp drop in oil prices and its derivatives, especially WTI and gasoline, led the overall decline in energy prices. The drop reflected escalating trade tensions globally, which could exert additional downward pressure on an already weakening global economy. Moreover, natural gas prices hit a nearly three -year low on high inventories and strong production. Although thermal coal prices posted the first monthly gain in 10 months in May, prices plummeted in the first days of June, suggesting that downward pressures on thermal coal prices are far from over.

Brent crude oil prices tumbled in recent weeks following the rally observed since the start of the year. On 5 June, oil prices hit a nearly four-month low and fluctuated at similar levels in the following days. On 7 June, oil prices traded at USD 64.1 per barrel, which was 9.7% lower than on the same day last month. Moreover, the benchmark price for global crude oil was 14.8% lower than on the same day last year, although it was up 26.8% on a year-to-date basis. The decline in oil prices mostly reflects slowing economic activity in key economies such as China and Korea. Escalating trade tensions between China and the United States, as well as the prospect of new trade wars between the U.S. and other players including Australia, India and Mexico, have reinforced this trend. On the supply side, record oil production in the United States is also exerting downward pressure on oil prices. The recent fall in oil prices comes despite the reimplementation of sanctions against Iran and OPEC’s strict oil production cuts, amounting to more than two million barrels since the start of the year according to the cartel’s latest report. Against this backdrop, Saudi Oil Minister Khalid al-Falih stated on 3 June that there is growing consensus among producers to extend the current oil cap deal beyond the end-of-June deadline.

West Texas Intermediate (WTI) crude oil prices plummeted in recent weeks and, on 5 June, hit a five-month low. WTI crude oil prices traded at USD 54.0 per barrel on 7 June, which was down 12.1% from the same day last month and was down 18.2% from the same day last year. Nevertheless, the price was 19.5% higher on a year-to-date basis. The sharp drop in WTI crude oil prices reflects concerns about the health of global growth and surging production in the United States. In recent weeks, the U.S. increased tariffs on Chinese goods and removed India from its Generalized System of Preferences program, which gives developing economies preferential access to the U.S. market. Moreover, Trump threatened to impose tariffs on Australian and Mexican imports as well as levy all remaining Chinese imports. A sustained increase in trade protectionism could hit global growth and reduce demand for the black gold. On the supply side, the United States continued to pump oil at record levels, pushing down oil prices, and will likely continue to do so in the coming months given that the number of oil rigs rose in the week ending 31 May. In a sign that the oil market is well supplied, the EIA’s latest report showed that oil inventories climbed by 6.8 million barrels for the week ended 31 May.

Thank you FocusEconomics

On a call this morning the Mexico tariffs were discussed.
A few takeaways:

The tariffs proposed last night were metered and tiered with planned dates with amounts between 5% - 25%.  It is worth noting that Mexico is working with the US to stop any development on the threatened tariffs. However, also noted: Mexico is puzzled at "the best way to show immediate progress to combat the tariffs."

This approach is different from the last, and that has caused alarm.

Does this cancel NAFTA?  In the short term, no.

- Chad Hagan

Venezuela is descending into chaos, the crisis has deepend. - Chaganomics

U.S. flights to Venezuela are being suspended due to safety and security concerns, officials with the U.S. Department of Homeland Security said Wednesday. - ABC News

The political and economic crisis deepened over the past month. On 30 April, opposition leader Juan Guaidó called for a military uprising to remove President Nicolás Maduro from office. The attempt, however, failed as it did not attract meaningful military support, raising uncertainty over the opposition’s future going forward. Meanwhile, oil production took another nosedive in March as widespread power outages and crippling U.S. sanctions took their toll. Production fell a staggering 289,000 barrels per day (bdp) from February, which amounts to an over 36% plunge since January, according to OPEC data. Moreover, U.S. and Canadian authorities announced new sanctions against the Venezuelan government in April, most notably targeting the country’s Central Bank and several high-ranking officials, including the foreign minister. In other news, on 7 May, the opposition-controlled National Assembly authorized a USD 71 million interest payment on PDVSA’s 2020 bond. The failure to pay could have prompted creditors to try to seize a sizeable chunk of shares in its U.S. refining unit Citgo, the country’s most valuable overseas asset.

The outlook remains bleak. Uncertainty remains elevated over what happens next in the political standoff between President Maduro and Juan Guaidó, while successive rounds of sanctions aimed at choking off the government’s access to hard currency worsens the already-dire state of the economy, which has been stuck in deep depression for years. The probability of a political transition remains high, a scenario which some of our panelists have factored into their forecasts.  - Focus Economics

Economic Outlook Worsens For Turkey...

The Turkish economy continued to flag at the start of the year. Consumer credit growth eased to a decade low in Q1 2019, while retail sales continued to contract in the first two months of the year. Consumer spending felt the pinch from high unemployment, depressed confidence levels, still-elevated inflation and a weak currency. Moreover, the manufacturing sector remained in a tough spot as reflected by its weak PMI reading throughout Q1 and April. Against this backdrop, the government announced new reforms in early April in an attempt to stimulate the economy. In more positive news, tourism income rose robustly in the first quarter of the year as the number of visitors increased noticeably from a year earlier, likely aided by the starkly cheaper lira. Meanwhile, the trade deficit narrowed as imports continued to fall sharply through March in tandem with the plunging lira.

The economy is expected to shrink this year on the back of falling domestic demand due to high inflation, rising unemployment and a weak currency. Towards the end of the year, the economy should recover and inflationary pressures should ease, which would provide room for monetary policy easing.

Inflation eased to 19.5% in April from 19.7% in March. This year, price pressures should ebb due to tight monetary policy and frail domestic demand, although they will likely remain elevated in the months ahead on an unsupportive base effect.

Turkey’s manufacturing sector opened the second quarter on a sour note: The Purchasing Managers’ Index (PMI) ticked down to 46.8 in April from 47.2 in March, indicating that operating conditions worsened at a stronger pace. The latest print marked the 13th consecutive moderation in business conditions. The latest downturn in the index, produced by the Istanbul Chamber of Industry in cooperation with IHS Markit, came on the back of a further drop in new orders, both domestic and foreign, driving production down and leading to more moderate purchasing activity. The drop in domestic new orders was sharper than new business from abroad. Weak new orders also drove destocking activity, with pre- and post-production inventories shrinking at a quicker pace compared to March. Ongoing currency weakness vis-à-vis the greenback was again a noticeable drag on the sector. The weak lira drove input costs to the highest level since October last year and this consequently pushed output prices up to a six-month high. Furthermore, suppliers’ delivery times lengthened again amid payment difficulties, likely linked to demand weakness. Andrew Harker, associate director at IHS Markit, noted that there was a silver lining in April: “More positive was the labour market situation, with employment broadly stable amid signs that firms are looking to the future and working on new products in anticipation of an improvement in business conditions later in the year.”

Reporting from:

 

The Best Cities in the UK For Startups

Location, location, location. Even in an increasingly digital world, choosing the right city to launch your startup in is an incredibly important decision. Running out of money is often a leading cause of startup death, and different cities around the UK offer wildly varying levels of support and funding for business. For example, whilst London is often see as the go-to location for budding UK businesses, the chances of actual surviving - never mind thriving - are pretty grim. Just 50% of businesses survive beyond three years in the capital city. Factors like high office rents, intense competition, and rising costs of living all play a part of this.

So, when choosing a location for your new venture it’s vital to be strategic and consider all of your options beyond the more obvious choices. With this in mind, Total Processing have put together a map using data from the Office for National Statistics. It contains all the essential information you need about cities all over the UK, from the far reaches of Scotland to the south coast.

The map includes information on how much business activity has grown over the past 5 years in various cities, which gives an indication of how much support is available and whether local authorities are focusing on helping businesses to thrive. For example, Manchester is the home of the Northern Powerhouse, with big pushes to bring businesses to the area and encourage economic growth in the city. This is reflected by its impressive growth in business activity - there’s been a 62% increase in 5 years, with 6,445 enterprises launching there in the past year.

Total Processing have also incorporated information on average survival rates for businesses over 5 years to help you figure out your chances for long term success! Plus, definitely take a look at the final section to see which industries are currently booming, and which are on the decline. Perhaps it’s time for a pivot?

See the full map below and let us know what you think in the comments. Which city do you think is the UK’s most enterprising in 2018?

Despite a confirmed rebound in economic activity in the fourth quarter of last year, available data suggests that growth was weak in the first quarter of 2019. The average manufacturing PMI hit an over two-year low in Q1, as nominal exports contracted for the third consecutive month in February amid an economic slowdown in China. Moreover, consumer confidence deteriorated markedly at the outset of the year, which does not bode well for private consumption this year, while machinery orders—a leading indicator for investment in the coming three to six months—contracted for the third period in a row in January. In light of recent developments, the government downgraded its assessment of the economy for the first time in three years on 20 March. This could prompt Prime Minister Shinzo Abe to take action ahead of the election in the upper house, which is to be held this July.

Front Loaded consumer spending ahead of the planned sales tax hike in October and a recovery in gross fixed investment—partially due to works related to the Tokyo 2020 Olympic Games—will shore up economic growth this year. On the downside, the economy will feel the pinch of weak global demand, especially from China and Europe. FocusEconomics panelists see the economy growing 0.8% in 2019, which is down 0.1 percentage points from last month’s forecast, and 0.6% in 2020. • Inflation stabilized at January’s 0.2% in February, well below the Bank of Japan’s (BoJ) inflation target of 2.0%. Inflation should pick-up further down the road, although it will remain well below the Bank’s target. Against this backdrop, government officials and a banking lobby criticized the target and vowed for a more flexible approach. FocusEconomics panelists expect inflation to average 0.9% in 2019, down 0.1 percentage points from last month’s estimate, before reaching 1.3% in 2020. 

The BoJ left its monetary policy steady at the 14–15 March meeting on subdued price pressures. Governor Haruhiko Kuroda downgraded his view on the Japanese economy on weak global demand impacting the country’s all-important external sector. However, he stated that the domestic economy will remain robust, which should support core inflation. A majority of FocusEconomics panelists expect the BoJ’s short term policy rate to remain unchanged at minus 0.10% until at least the end of 2020. 

The yen was broadly stable against the USD in recent weeks on hopes that China and the United States were close to reaching a trade deal, along with signs that Japan’s ultra-loose monetary policy will remain in place for the foreseeable future. On 22 March, the currency traded at JPY 109.9 per USD, a 0.7% appreciation compared to the same day in February. Panelists see the yen trading at JPY 108.3 per USD at the end of 2019 and at JPY 106.7 per USD by the end of 2020.

Consumer sentiment declined from 41.9 in January to 41.5 in February, marking the lowest reading since December 2016. The print disappointed market expectations of a softer fall to 41.6. The consumer confidence index measures consumers’ expectations for the next six months on a scale of 0–100; a figure of 100 indicates that all respondents see their living standards improving. Consumers were noticeably more pessimistic about their overall livelihood category and their willingness to buy durable goods. Households confidence about their income growth waned somewhat. Conversely, job prospects improved in February. Regarding prices, expectations of higher prices rose slightly in February, with 86.0% of respondents expecting prices to trend higher (up 1.9 percentage points from last month’s survey). FocusEconomics Consensus Forecast panelists expect private consumption to rise 1.0% in 2019, which is unchanged from last month’s forecast. In 2020, the panel sees private consumption growing 0.2%.

The core consumer price index rose 0.2% in month-on-month seasonally adjusted terms in February, matching January’s result. Core inflation inched down from January’s 0.8% to 0.7% in February. The reading was a notch below the 0.8% that market analysts had expected. Nevertheless, inflation remained well below the Bank of Japan’s inflation target of 2.0%. Overall inflation stabilized at January’s 0.2% in February. Core inflation in the Ku-area of Tokyo rose from January’s 1.1% to 1.2% in February. Data for March will be released on 29 March. The median inflation forecast among BoJ members is 1.1% for FY 2019 and 1.5% for FY 2020, including the effects of the consumption tax hike. FocusEconomics Consensus Forecast panelists expect inflation of 0.9% in calendar year 2019, which is down 0.1 percentage points from last month’s estimate. In 2020, the panel sees inflation at 1.3%.

If there is one factor that has kept the global economy in suspense for most of 2018 and thus far this year, it is of course the escalating trade tensions between the world’s two largest economies: China and the United States. In what appears to have been a positive development, the U.S. declared a truce on new trade tariffs for 90 days in early December, paving the way for both countries to start a new round of trade negotiations. Citing substantial progress in bilateral talks, U.S. President Donald Trump announced on 24 February that new tariffs would be postponed indefinitely. Since then, there has been rising optimism that both countries are close to sealing a trade agreement that would put an end to the Sino-American trade war. However, in reality, how close are we to a comprehensive agreement that would remove one of the key downside risks to the global economy? Which of the U.S. demands will be met? How can the deal be enforced? These are the pivotal questions we wish to shed some light on with this Special Survey on the China-U.S. trade war.

Along with the trumpeted reduction of the massive U.S. trade deficit with China (around USD 320 billion in 2018), the U.S. administration is seeking to gain further concessions from the Asian giant via a comprehensive trade deal. A reduction in the trade gap between the two countries, the strengthening of intellectual property rights and greater market access for U.S. companies are seen as the most likely action points to be rubber-stamped in the deal. However, tackling more controversial points such as forced technology transfer and state subsidies is less likely given that they are central to upgrading China’s manufacturing industry and the country’s economic development model more broadly.

“Forced tech transfer and espionage are controversial and China would likely not accept including specific details about these type of activities in a trade deal document. China will likely focus more on the first two items as the key structural offer in any negotiation.” 
- Shaun Roache, Chief Economist APAC at S&P Global Ratings

Despite speculation that both countries are close to striking a trade deal, a majority of the analysts surveyed consider that the upcoming agreement will not be conclusive. Instead, analysts contemplate an interim agreement as the most likely outcome of recent trade talks. Against this backdrop, there is still a significant chance that there is an escalation in trade tariffs before an agreement is reached. On average, there is around a one-third possibility that both countries implement new punitive measures.

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.

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