5/1/20: BRIC Manufacturing PMIs 4Q 2019

As global manufacturing sector activity barely stayed above the recession line in 4Q 2019, BRICs manufacturing PMIs indicated a cautious upswing in activity, with exception for Russia and India. Here are the core details:

• Brazil's 4Q 2019 Manufacturing PMIs averaged 51.8, statistically unchanged on 3Q 2019 figure of 51.9. Both 3Q and 4Q readings were statistically above 50.0, indicating modest growth, and above historical average of 50.3. Nonetheless, 4Q 2019 reading was the second lowest in six consecutive quarters.
• Russia posted its second consecutive quarter of recessionary growth readings for manufacturing sector, with quarterly average PMI slipping to 46.8 in 4Q 2019, down from 48.2 in 3Q 2019, making 4Q contraction the sharpest since 2Q 2009. All in, the last time Russian manufacturing sector posted statistically above 50.0 reading was in 1Q 2019. The signal here is severely negative to overall growth prospects for the Russian economy for the entire 2019 and a major concern for the 1H 2020 dynamics. 
• China manufacturing PMI surprised to the upside in the last quarter of 2019, rising from 50.6 in 3Q 2019 (a reading statistically indistinguishable from zero growth 50.0 mark) to 51.7 in 4Q 2019 (a reading indicating moderate expansion, compared to the historical average of 50.8). Statistically, Chinese manufacturing has not been in an expansion mode over 3Q 2018 - 3Q 2019 period, which makes 4Q 2019 reading an important signal of a potential turnaround.
• India manufacturing PMI averaged 51.5 in 4Q 2019, slightly down on 51.8 in 3Q 2019. This is the weakest level since 3Q 2017, but statistically it is still indicative of expansion in the sector.

Overall, BRIC Manufacturing PMI (based on each country share in global GDP) has improved from 50.7 in 3Q 2019 to 51.2 in 4Q 2019, marking the fastest rate of the group's manufacturing sector expansion 1Q 2018 and the second consecutive quarter of the index being statistically above the 50.0 zero growth line.

Globally, manufacturing sector growth conditions improved from 49.5 in 3Q 2019 to 50.1 in 4Q 2019, although statistically, no reading from 2Q 2019 onwards was significantly above or below the zero growth 50.0 line.

As the chart above clearly shows, Global Manufacturing sector activity remains extremely weak. On-trend, more recent BRICs Manufacturing sector growth is above that of the Global PMI signal, but both show weaknesses. 

13/7/19: BRICS Current Account Surpluses: Its Russia and China Story

China and Russia dominate BRICS' current account dynamics and this is not about to change.

Both China and Russia have been posting strong current account figures in recent years, and this is not changing with the onset of the Russia sanctions in 2014 and the Trump Trade Wars in 2018. The two economies clearly dominate the emerging markets' current account dynamics in terms of both the sign of the balances (surpluses) and their magnitudes.

The caveat for Russia is that its current account gains are coming in at the time of relative weakness in its exports and net capital outflows:

Meanwhile, per latest data, U.S. trade deficit with China has widened once again as Chinese exports to the U.S. contracted by ca 7.8 percent y/y, while U.S. exports to China fell 31.4 percent. Which means the U.S. trade deficit with china is up 3 percent compared to June 2018.

It is a classic textbook example on how to lose 'bigly' from a trade war.

6/4/19: BRIC Services Lead, Manufacturing Lag Global Growth Momentum

I have blogged recently on BRIC and global PMIs for manufacturing and services, covering the data for 1Q 2019, as well as monthly PMIs for BRIC economies. Here are the 1Q 2019 PMIs for composite economic activity across the same:

In 1Q 2019, only Brazil posted improving Composite PMI reading, with the rest of BRIC economies showing deteriorating growth conditions, in line with continued drop in Global Composite PMI. Over the last 5 quarters, Global Composite PMI has dropped from its peak of 54.23 in 1Q 2018 to 52.5 in 1Q 2019, with current reading at its lowest in 10 quarters.

Of all BRIC economies, India and Russia are outperforming the Global Composite PMI, with Russia posting the fastest growth at 54.1 of all BRIC economies in 1Q 2019. Brazil is statistically in line with Global Composite PMI, while China is a clear under-performer.

Sectorally, the main weakness amongst the BRICs is in Manufacturing, with Services outperforming Global Composite index:

4/4/19: BRIC Services PMIs for 1Q 2019: Converging to Global Growth Momentum

Q1 2019 Services PMIs for BRIC economies came in signaling no change on 4Q 2018 and converging to the Global Services PMI reading.

Brazil Services PMI averaged 52.3 in 1Q 2019, a gain on 51.2 in 4Q 2018, and the highest quarterly reading since 1Q 2013 when it stood at exactly the same reading. 

Russia Services PMI average for 1Q 2019 was at 54.9, down from 55.6 in 4Q 2018, singling moderating, but still fast pace of growth in the Services sectors of the economy. 

China Services PMI was at 53.0 in 1Q 2019, a marginal improvement on 52.8 reading in 4Q 2018, but still substantially down on 53.7 reading in 1Q 2018.

India Services PMI was at 52.2- a slip on 53.0 recorded in 4Q 2018. Given past weakness in Services sector in the Indian economy, 52.2 reading is still respectably tied to the second fastest growth for any quarter since 4Q 2016.

GDP-weighted BRIC Services PMI averaged 53.0 in 1Q 2019, the same reading as in 4Q 2018 and singling marginally faster growth than 52.7 reading for 1Q 2018.

Meanwhile, Global Services PMI averaged 53.2 in 1Q 2019, down marginally on 53.4 in 4Q 2018 and marking the third consecutive quarter of declining growth in global services economy. 

CHART

5/12/18: BRIC PMIs for November: A Moderate Pick Up in Growth

BRIC PMIs are in, although I am still waiting for Global Composite PMI report to update quarterly series - so stay tuned for more later), and the first thing that is worth noting is that, based on monthly data:

1. Brazil growth momentum has accelerated somewhat, in November (103.2) compared to October (101.0), although both readings are consistent with weak growth (zero growth in my series is set at 100). November reading is the highest in 9 months, although statistically, it is comparable to growth recorded in March, April and October this year).
2. Russia growth momentum de-accelerated from 111.6 in October to 110 in November, although, again, statistically, the two numbers are not significantly different from each other. November was the second highest reading in nine months, and the third highest reading in 2018.
3. China growth has improved from 101.0 in October to 103.8 in November. Despite this, last two months remain the lowest since April this year. From statistical significance point of view, October reading was distinctly below November reading, but November reading was consistent with August-September.
4. India posted substantial rise in growth conditions, from already robust 106.0 in October to a 24-months high of 109.2. This reading is statistically above all other period readings, with exception of being tied with July 2018 level of 108.2.

Thus, overall, BRIC Composite growth indicator rose from 102.8 in October to 105.3 in November, the highest in 10 months. BRIC ex-Russia reading was at 105.4 in November, compared to 102.7 in October. November reading for ex-Russia BRIC growth indicator was also the highest since February 2013.

Couple of charts to illustrate monthly data trends:

While the chart above clearly shows that Russia supports BRIC block growth momentum to the upside, this effect is somewhat moderating due to both ex-Russia BRIC growth momentum rising and Russia growth momentum slowing slightly.

The chart below highlights BRIC estimated growth contribution to global growth momentum:

Overall, as the chart above shows, BRIC economies contribution to global growth momentum has accelerated in November, but remains bound-range within the longer-term trend of weaker BRIC growth for the last five and a half years.

As noted above, I will be posting more on BRIC growth dynamics signalled by the PMIs once we have Global Composite PMIs published by Markit. Stay tuned.

9/10/18: BRIC Composite PMIs 3Q 2018: A Tale of Growth Slowdown

Previous posts on 3Q 2018 PMIs have covered:

1. BRIC Manufacturing PMIs: http://trueeconomics.blogspot.com/2018/10/31018-global-pmis-tanked-in-3q-2018.html;
2. BRIC Services PMIs: http://trueeconomics.blogspot.com/2018/10/91018-bric-services-pmis-3q-2018-slower.html; and
3. Global Composite PMIs: http://trueeconomics.blogspot.com/2018/10/31018-global-pmis-tanked-in-3q-2018.html.

Now, let’s take a look at the BRIC Composite PMIs that combine Services and Manufacturing sectors growth signals. As Global Composite PMI signalled slowing growth momentum in the global economy, BRIC Composite PMIs all trailed global growth indicator.

Brazil Composite PMI fell deeper into contraction territory in 3Q 2018 (48.5) compared to 2Q 2018 (49.1), marking the fourth consecutive quarter of contraction in the economy, as signalled by the combination of PMI indices in Services and Manufacturing sectors. 3Q 2018 was the lowest Composite PMI reading for the South America’s largest economy in 6 consecutive quarters.

Russia Composite PMI slipped from 53.4 in 2Q 2018 to 52.4 in 3Q 2018, marking slowdown in the rate of economic expansion. This was the lowest reading in Russia Composite PMIs since 2Q 2016. Despite this, Russia Composite PMI was the second largest in the BRIC group (marginally below India’s 52.5 reading).

China Composite PMI posted a modest decline in the growth rate falling from 52.5 in 2Q 2018 to 52.1 in 3Q 2018, the latter reading marking the lowest rate of expansion in 3 quarters. In fact, China Composite PMIs have been singling weak growth dynamics in every quarter since 4Q 2016 - something that is yet to be reflected in the official growth figures for the country.

India Composite PMI bucked the BRIC trend and rose from 51.9 in 2Q 2018 to 52.5 in 3Q 2018, for the first statistically significant growth signal in 5 quarters. Despite this, growth momentum in India remains below global PMI levels.

Global Composite PMI declined from 54.0 in 2Q 2018 to 53.3 in 3Q 2018.

Overall, slowing global growth momentum is being matched by a slowdown in the BRIC economies. Both Manufacturing and Services sectors of the BRIC economies are underperforming their Global counterparts and the overall trend is toward declining global and BRIC growth.

9/10/18: BRIC Services PMIs 3Q 2018: Slower Growth Ahead

Having covered Global Composite PMIs for 3Q 2018 here: http://trueeconomics.blogspot.com/2018/10/31018-global-pmis-tanked-in-3q-2018.html as well as BRIC Manufacturing PMIs here: http://trueeconomics.blogspot.com/2018/10/11018-bric-manufacturing-pmi-dips-down.html, here is an update on BRIC Services PMIs for 3Q 2018.

In summary: things are getting less promising for 2H 2018 growth in world's largest emerging and middle-income economies.

Brazil Services PMI posted second consecutive quarter of contraction in 3Q 2018, falling from 48.8 in 2Q 2018 to 47.9 in 3Q 2018. Since 3Q 2014, Brazil's Services PMIs posted readings below 50.0 mark (zero growth mark) in all, but one quarter (1Q 2018 when the PMI was at 51.0). Importantly, 3Q reading was statistically significantly below 50.0 mark.

Russia Services PMI fell marginally from 54.0 in 2Q 2018 to 53.6 in 3Q 2018, signalling weaker, but statistically-speaking, still positive growth. PMIs fell in all three last quarters from the 4-quarters peak of 56.0 in 4Q 2017. Q3 2018 was the lowest growth reading in 9 consecutive quarters. Despite this, Russia Service sector growth signalled by the PMIs is the fastest of all BRIC economies.

China Services PMI also fell to 52.6 in 3Q 2018 compared to 53.2 in 1Q 2018, marking the third consecutive decline in PMIs. China posted the second highest rate of growth in Services sectors amongst the BRIC economies.

India Services PMI rose, breaking the BRIC trend, in 3Q 2018 to 52.2 (weak growth) from 51.2 in 2Q 2018, marking the second consecutive quarter of above-50 readings. This marks the strongest growth signal in 8 quarters, albeit the level of PMI is anaemic.

Overall BRIC Services PMI computed by myself based on Markit data and global economy weights for BRIC countries, has moderated from 52.5 in 2Q 2018 to 52.2 in 3Q 2018, suggesting weakening growth momentum in the Services sector of the BRIC economies. This development was in line with the Global Services PMI movements (down from 54.2 in 2Q 2018 to 53.5 in 3Q 2018). For BRICs, Services PMI is now at the lowest reading in three quarters, and for the Global Services PMI -  in 7 consecutive quarters.

All BRIC economies Services sectors are now trailing (Brazil, India and China) or barely matching (Russia at 0.1 points higher) the Global Services PMI.

3/10/18: Global PMIs tanked in 3Q 2018

While Markit continue to publish Services and Composite PMIs for BRIC economies, here is a quick update on Global PMIs for 3Q 2018 which are now out:

• Global Manufacturing PMI averaged 52.5 in 3Q 2018, down from 53.2 in 2Q 2018. This is the lowest reading for the index in 8 quarters, signalling slowest growth in global manufacturing sector since 3Q 2016. It also marks the second consecutive quarter of declining Global Manufacturing PMI.
• Global Services PMI averaged 53.5 in 3Q 2018, the lowest reading in 7 consecutive quarters, matching the lowest point in 8 consecutive quarters. This marked the first quarter of declines in Services sector activity, and the drop was sharp: down from 54.2 in 2Q 2018.
• Global Composite PMI averaged 53.3 in 3Q 2018, down from 54.0 in 2Q 2018 and 54.2 in 1Q 2018, marking the lowest reading in 8 consecutive quarters. The slowdown in the overall global economic indictor has also been sharp in 3Q 2018 and most of this slowdown took place in August and September.

Overall, these are not great signs for the global economy. 

For BRIC Manufacturing PMIs analysis for 3Q 2018, see here: http://trueeconomics.blogspot.com/2018/10/11018-bric-manufacturing-pmi-dips-down.html. BRIC Services PMIs and BRIC Composite PMIs analysis is to follow, so stay tuned.

1/10/18: BRIC Manufacturing PMI dips down in 3Q 2018

BRIC Manufacturing PMIs turned south in 3Q 2018 in line with Global trend, but leading that trend to the downside. Per latest data through September 2018:

Russia Manufacturing PMI averaged miserly 49.0 in 3Q 2018, down from anaemic 50.2 in 2Q 2018. This was the lowest quarterly reading since 3Q 2015 when the Russian economy was in an official recession. Russia is the only BRIC economy nominally in contraction territory, when it comes to PMIs-signalled manufacturing sector activity, and 49.0 is statistically close to being sub-50 reading as well.

Brazil’s Manufacturing PMI remained broadly unchanged on 2Q 2018 reading of 50.9 at 50.8 in 3Q 2018. Although notionally above 50.0 mark, statistically, the reading was not significantly different from zero growth signal of 50.0. This means that both Russian and Brazilian economies registered deteriorating PMIs over two consecutive quarters in the case of Brazil and 4 quarters in the case of Russia.

China Manufacturing PMI was at disappointing 50.5 in 3Q 2018, down from a weak 51.1 reading in 2Q 2018. This marks the worst reading in China PMI in five quarters. As with Brazil, China’s Manufacturing PMI for 3Q 2018 was not statistically distinct from 50.0.

India Manufacturing PMI was the only one that remained statistically in expansion territory at 52.1 in 3Q 2018, basically unchanged on 52.0 in 2Q 2018 and barely up on 51.8 in 1Q 2018.

Meanwhile, Global Manufacturing PMI averaged 52.5 in 3Q 2018, down from 53.2 in 2Q 2018 and 54.0 in 4Q 2017 and 1Q 2017. All in, Global PMI has finished 3Q 2018 at the lowest level in 8 consecutive quarters.

9/8/18: BRIC PMIs trace Global economy's slowdown at the start of 3Q

Recent PMIs for BRIC show a weaker start to 3Q 2018, in line with moderating growth outlook for the global economy:

In summary, Composite PMIs for July show Russia, China and Brazil underperforming global composite index, with India being the only BRIC economy trending in line with the global economy.  Much of this dynamic was down to Manufacturing sector, with Services supporting global economy to the upside:

The biggest downside momentum came from Russia's sub-50 reading in Manufacturing, followed by significant decline in growth activity in the sector in Brazil, and a more moderate slowdown in China:

For Russia, weaknesses in Manufacturing sector, for now offset by strengths in Services, are unpleasant reminders that the economy is still fundamentally on near-zero growth path, despite early 2018 hopes for 1.9-2 percent growth projections. For China, there are growing signs of the adverse impact of Trade War with the U.S. taking their toll on growth and cost dynamics.

12/1/18: Euromoney Credit Risk Survey of 2017

Euromoney Country Risk survey for 2017 is out with comments from, amongst others, myself: (https://www.euromoneycountryrisk.com/Analysis/ECR-survey-results-2017-EMs-back-in-vogue-as-global-prospects-soar-?LS=Adestra64171_&utm_source=Adestra&utm_medium=email&utm_term=&utm_content=ECR%C2%A0%20Q4%202017%20Survey%20Results%20-%20Emerging%20markets%20back%20in%20vogue%20as%20global%20prospects%20soar&utm_campaign=ECR%20Weekly%20Round%20Up%2012%20Jan%202018)

1/3/18: BRIC Manufacturing Sector ends 2017 with an upside

Quarterly Manufacturing Sector PMIs for BRIC economies have once again underperformed global indicators in 4Q 2017.

Global Manufacturing PMI for 4Q 2017 stood at 54.0, up on 53.0 in 3Q 2017 and marking the fastest rate of quarterly expansion in the sector on record (since 2Q 2013*). In comparison, BRIC Manufacturing quarterly PMI-based indicator stood at 51.6 in 4Q 2017, up on 51.0 in 3Q 2017. This marks the highest reading for the BRIC Manufacturing PMIs (quarterly basis) since 1Q 2013.

For individual BRIC economies:

Brazil Manufacturing Quarterly PMI measure was up at 52.4 in 4Q 2017, rising from 50.6 in 3Q 2017 and marking the third consecutive quarter of above 50.0 (nominal) readings. In statistical terms, 4Q 2017 was the first quarter with statistically significant growth signal since 1Q 2013, and marked the second fastest pace of expansion since 1Q 2011. With three consecutive quarters of above 50.0 nominal indicator readings, it is reasonable to assume that the Manufacturing sector recession of 3Q 2013-1Q 2017 is now over and the economy is moving into a new period of expansion.

Russia Manufacturing q-PMI measure slipped from 52.1 in 3Q 2017 to 51.5 in 4Q 2017. Russian Manufacturing has been posting distinctly weaker PMI readings in 2Q 2017 - 4Q 2017, with sharper pace of expansion of 4Q 2016 - 1Q 2017 being replaced by rather anaemic rates of growth since the start of 2Q 2017. This stands contrasted by Services sector that currently drives Russian economic growth. 

China Manufacturing posted q-PMI reading of 51.1 in 4Q 2017, marginally unchanged on 51.2 in 3Q 2017. Since 3Q 2016, Chinese Manufacturing was held within the pattern of weak growth, with q-PMIs ranging from 50.1 though 51.3. In fact, last time Chinese Manufacturing q-PMI reached above 51.3 was in 1Q 2013. Judging by PMIs, Chinese manufacturing is barely growing. Which continuously puts a big question mark over both the headline GDP figures coming out of China and the PMIs.

India Manufacturing qPMI jumped from 50.1 in 3Q 2017 to 52.5 in 4Q 2017, the highest rate in 12 quarters. Both Services (48.0) and Manufacturing (50.1) were very soft in 3Q 2017, and the to-date (through November 2017) reading for qPMI for Services sector (50.1) is still weak, so 4Q reading for Manufacturing qPMI is a welcome sign that things might be firming up on the growth side.

All, in, BRIC Manufacturing sector remains a weak contributor to Global growth. This weakness appears to be structural and consistent across a range of years. Dynamically, both Global and Manufacturing qPMIs are closely correlated and have been running in tandem since 2Q 2014.

*Please, note: my data for this indicator - not reported by Markit, but based on market’s monthly reports - goes only to 2Q 2013. Markit have repeatedly ignored my requests for data going back before that period, despite their claim that they assist independent academic researchers in gaining access to their data.

3/8/17: BRIC Composite PMIs: July

Having covered BRIC Manufacturing PMIs in the previous post (http://trueeconomics.blogspot.com/2017/08/3817-bric-manufacturing-pmis-july.html), and Services PMIs (http://trueeconomics.blogspot.com/2017/08/3817-bric-services-pmi-july.html), here is the analysis of the Composite PMIs.

Table below summaries current shorter term (monthly) trends in Composite PMIs:

Brazil has slipped into a new sub-50 Composite PMI trend in 2Q 2017 and, as of July, remains in the slump, although at 49.4, July Composite PMI reading signals much weaker rate of economic activity contraction than the June reading of 48.5. The problem for Latin America’s largest economy is that the hopes for an extremely weak recovery, set in 50.4 readings in April and May are now gone. In fact, 2Q 2017 average Composite PMI for Brazil stood at 49.8, which was stronger than July reading and marked the strongest performance for the economy since 3Q 2014. All in, July marked the start of the 14th consecutive quarter of Composite PMIs signalling economic recession.

Russia Composite PMI at the end of July stood at 53.4, a respectably strong number, signalling good growth prospects for the economy, but down from 54.8 in June and 56.0 in May. In fact, July reading was the lowest in 9 months. Given the economy’s performance in 1Q 2017, set against composite PMIs, the July and 1-2Q readings suggest that Russia is on track to record 1.0-1.5% growth this year, but not quite 2.0% or higher as expected by the Government. We will need to see 3Q and 4Q averages closer to 56-57 range to have a shot at above 1.5% growth.

China posted 2Q 2017 Composite PMI at 51.3, which is below July 51.9 reading. Still, July improvement is yet to be confirmed across the rest of 3Q 2017. China’s Composite PMI slowed from a recent peak of 53.1 in 4Q 2016 to 42.3 in  1Q 2017 and 51.3 in 2Q 2017.

India’s Composite PMI reflected wide-ranging weakening in the economy struck by both botched de-monetisation ‘reform’ and equally bizarre tax reforms. Sinking from appreciably strong 52.2 in 2Q 2017 to 46.0 in July, this fall marked the lowest PMI reading since 1Q 2009 and the second lowest reading on record. India’s economy has been in a weak state since 3Q 2016 when Composite PMI averaged 53.1. The PMI fell to 50.7 and 50.8 in 4Q 2016 and 1Q 2017 before recovering in 2Q 2017. This recovery is now in severe doubt. We will need to see August and September readings to confirm an outright PMI recession, but the signs from July reading are quite poor.

All in, in July, Russia was the only BRIC economy that came close (at 53.4) to Global Composite PMI reading of 53.5. Two BRIC economies posted a sub-50 reading. In 2Q 2017, Global Composite PMI was 53.7, with Russia Composite PMI at 55.4 being the only BRIC economy that supported global economic growth to the upside. In fact, Russia lead Global Composite PMIs in every quarter since  2Q 2016.

3/8/17: BRIC Services PMI: July

Having covered BRIC Manufacturing PMIs in the previous post (http://trueeconomics.blogspot.com/2017/08/3817-bric-manufacturing-pmis-july.html), here is the analysis of the Services Sector PMIs.

Brazil Services PMI continued trending below 50.0 mark for the third month in a row, hitting 48.8 in July, after reaching 47.4 in June. While the rate of contraction in the sector slowed down, it remains statistically significant. This puts an end to the hope for a recovery in the sector, with Brazil Services PMIs now posting only two above-50 (nominal, one statistically) readings since October 2014.

Russian Services PMI also moderated in July, although the reading remains statistically above 50.0. July reading of 52.6 signals slower growth than 55.5 reading in June. The Services sector PMIs are now 18 months above 50.0 marker, continuing to confirm relatively sustained and robust (compared to Manufacturing sector) expansion.

China Services PMI remained in the statistical doldrums, posting 51.5 in July gayer 51.6 in June. The indicator has never reached below 50.0 in nominal terms in its history, so 51.5 reading is statistically not significant, given PMIs volatility and positive skew. Overall, this is second consecutive month of PMIs falling below statical significance marker, implying ongoing weakness in the Services economy in China.

India’s Services PMIs followed Manufacturing sector indicator and tanked in July, hitting 45.9 (sharp contraction), having previous posted statistically significant reading for expansion at 53.1 in June. Volatility in India’s Services indicator is striking.

Table and chart below summarise short term movements:

Looking at quarterly comparatives, July was a poor month for Brazil Services sector, with July reading of 48.8 coming in weaker than already poor 49.0 indicator for 2Q 2017. In Brazil’s case, current recession in Services is now reaching into 12th consecutive quarter in nominal terms and into 15ht consecutive quarter in statistical terms. Russia Services PMI also moderated at the start of 3Q 2017 (52.6 in July) having posted average 2Q 2017 PMI of 56.0. Russia Services sector expansion is now into its 6th consecutive quarter (statistically) and seventh consecutive quarter nominally. The same, albeit less pronounced, trend is also evident in China (July PMI at 51.5 against 2Q 2017 PMI of 52.0). India Services PMI was under water in 4Q 2016, followed by weak (zero statistically) growth in 1Q 2017 and somewhat stronger growth in 2Q 2017. The start of 3Q 2017 has been marked by a sharp, statistically significant negative growth signal.

With Global Services PMI hitting 53.7 in July, against 53.8 average for 2Q 2017 and 53.6 average in 1Q 2017, BRIC economies overall are severely underperforming global growth conditions (BRIC Services PMI is now below Global Services PMI in 3 quarters running and this trend is confirmed at the start of 3Q 2017).

3/8/17: BRIC Manufacturing PMIs: July

BRIC PMIs for July 2017 are out, so here are the headline numbers and some analysis. 

Top level summary of monthly readings for BRIC Manufacturing PMIs is provided in the Table below:

Of interest here are:

• Changes in Brazil Manufacturing PMI signalled weakening in the economy in June that was sustained into July. Manufacturing PMI for Brazil has now fallen from 52.0 in May to 50.5 in June and to 50.0 in July. This suggests that any recovery momentum was short lived. 
• Russian Manufacturing PMI, meanwhile, powered up to 52.7 in July from 50.3 in June, rising to the highest level in 6 months. Good news: Russian manufacturing sector has now posted above-50 nominal readings in 12 consecutive months. Less bright news: Russian Manufacturing PMIs have signalled weak rate of recovery in 5 months to July and July reading was not quite as impressive as for the period of November 2016 - January 2017. Nonetheless, if confirmed in August-September, slight acceleration in Manufacturing sector can provide upward support for the economy in 3Q 2017, support that will be critical as to whether the economy will meet Government expectations for ~2% full year economic expansion.
• Chinese manufacturing PMI gained slightly in July (51.1) compared to weak May (49.6) and June (504.), but growth remains weak. Last time Chinese Manufacturing posted PMI statistically above 50.0 (zero growth) marker was January 2013. This flies in the face of official growth figures coming from China.
• India’s Manufacturing PMI fell off the cliff in July (47.9) compered to already weak growth recorded in June (50.9). Over the last 3 months, India’s Manufacturing sector has gone from weak growth, to statistically zero growth to an outright contraction.

Overall, GDP-weighted BRIC Manufacturing PMI stood at extremely weak 50.4 in July 2017, down from equally weak 50.6 in 2Q 2017. In both periods, BRIC Manufacturing sector grossly underperformed Global Manufacturing PMI dynamics (52.7 in July and 52.6 in 2Q 2017). Russia is the only country in the BRIC group with Manufacturing PMI matching Global Manufacturing PMI performance in July. Russian Manufacturing PMI was below Global Manufacturing PMI in 2Q 2017.

Net outrun: BRIC Manufacturing sector currently acts as a drag on global manufacturing growth, with both India and Brazil providing momentum to the downside for the BRIC Manufacturing PMIs.

28/4/17: Russian Economy Update, Part 4: Aggregate Investment

The following is a transcript of my recent briefing on the Russian economy. 

This part (Part 4) covers outlook  for aggregate investment over 2017-2019. Part 1 covered general growth outlook (link here), part 2 covered two sectors of interest (link here) and part 3 concerned with monetary policy and the ruble (link here).

From the point of Russian economic growth, investment has been the weakest part of the overall ex-oil price dynamics in recent years.

Rosstat most recent data suggests that the recovery in seasonally adjusted total fixed investment continued in 1Q 2017, with positive growth in the aggregate now likely for the 2Q 2017:

• 4Q16 investment was down about 1% from 2015
• Total investment rose from 22.12% of GDP in 2015 to 25.63% in 2016, and is expected to moderate to 22.23% in 2017, before stabilsing around 22.9% in 2018-2019
• The investment dynamics are, therefore, still weak going forward for a major recovery to take hold
• However, 2017-2019 investment projections imply greater rate of investment in the economy compared to 2010-2014 average
• However, last year fixed investment was down by 11% from 2014
• This is primarily down to Rosstat revision of figures that deepened the drop in investment in 2015
• About a quarter of total aggregate investment in Russia comes from small firms and the grey economy
• Rosstat data suggests that such investment was roughly unchanged in 2016 compared to 2015
• Other fixed investments, which are mostly investments of large and mid-sized companies, shrank by about 1% in 2016
• This compounds the steep drops recorded in the previous three years (down 10% in 2015 alone), so the level of investment last year remained below that of the 2009 recession
• Investments of large and mid-sized companies within oil & gas production sector rose robustly in 2016
• This marked the third consecutive year of growth in the sector
• Much of the increases was driven by LNG sub-sector investments which is associated (at current energy prices) with lower profit margins 
• On the positive side, investments in LNG facilities helps diversify customer base for Russian gas exporters - a much-needed move, given the tightening of the energy markets in Europe
• In contrast to LNG sub-sector, investment in oil refining continued to shrink, sharply, in 2016 for the second year in a row, 
• Other manufacturing investment also recorded continued sharp declines
• The same happened in the electricity sector
• In contrast, following two years of contraction, investment in machinery and equipment stabilised for the mid- and large-sized corporates
• Construction sector activity was down 4% y/y in 2016, marking third consecutive year of declines
• Exacerbating declines in 2015, commercial and industrial buildings completions fell again in 2016
• Apartments completions also fell y/y marking the first drop in housing completions since 2010

As the chart above illustrates:

• The forecast if for 2017-2019 improvements in investment contribution to growth, with trend forecast to be above 2010-2014 average
• However, historically over 2000-2016 period, investment has relatively weak/zero correlation (0.054) with overall real GDP growth, while investment relative contribution to growth (instrumented via investment/growth ratio) has negative correlation with growth even when we consider only periods of positive growth
• This implies the need for structural rebalancing of investment toward supporting longer-term growth objectives in the economy, away from extraction sectors and building & construction

Going forward:

• Russia's industrial / manufacturing production capacity is nearing full utilisation 
• The economy is running close to full employment
• Leading confidence indicators of business confidence are firming up
• Corporate deleveraging has been pronounced and continues
• Corporate profitability has improved 
• Nonetheless, demand for corporate credit remains weak, primarily due to high cost of credit 
• Most recent CBR signal is for loosening of monetary policy in 2017, with current rates expected to drop to 8.25-8.5 range by the end of 2017, down from 10% at the start of the year
• Irrespective of the levels of interest rates, however, investment demand will continue to be subdued on foot of remaining weaknesses in structural growth and lack of reforms to improve business environment and institutions

Taken together, these factors imply that the recovery in fixed investment over 2017-2019 period is likely to be very slow, with investment recovery to pre-2015 levels only toward the end of forecast period.

Thematically, there is a significant investment gap remaining across a range of sectors with strong returns potential, including:

• Food production, processing and associated SCM;
• Transportation and logistics
• Industrial machinery and equipment, especially in the areas of new technologies, including robotics
• Chemicals
• Pharmaceuticals and health technologies

28/4/17: Russia Cuts Headline Rate by 50bps

Bigger than forecast move by the Russian Central Bank to cut rates (down 50bps against consensus - and my own - forecast of 25bps cut) signals the CBR's comfort with inflationary expectations forward.

As noted in my regular advisory call on the Russian economy earlier this week (transcript here), inflation fell substantial in 1Q 2017, with current FY 2017 forecast sitting at around 4.3 percent. In line with this, CBR started cutting rates at the end of March, moving from 10% to 9.75% for its benchmark one-week auction rate. Today, the CBR lowered the rate to 9.25%.

According to CBR: "“Inflation is moving towards the target, inflation expectations are still declining and economic activity is recovering. Given the moderately tight monetary policy, the 4 percent inflation target will be achieved before the end of 2017 and will be maintained close to this level in 2018-2019.”

Median Bloomberg estimate is for the rate to fall to 8.5% by the end of the year. As I noted in the call: "I expect ...year-end (2017) rate target of around 8.25-8.5% if inflation remains on the path toward 4.3% annual rate, or 8.75-9% range if inflation stays around 4.6% annual rate".

The latest move helps the cause of the Federal budget (championed by the Economic Ministry) that needs to see ruble lose some of its attractiveness as a carry trade currency. In recent months, ruble has been the third best performing currency in the world, resulting in investors willing to borrow in foreign currencies to invest in rubles denominated assets. The net effect of this on the Russian economy is improving demand for imports and deteriorating budget dynamics (as Russian budget operates ruble-based expenditure, funded to a large extent by dollar and other forex revenues from exports of primary materials).

Nabiulina's move today, however, should not be interpreted as the CBR surrender to the Economic Ministry agenda of lowering ruble value. Instead, the rate cut is clearly in line with inflation targeting and also in line with previously stated CBR concerns about investment environment in Russia. Russian aggregate investment has been extremely weak in recent years, and economic recovery needs to involve a dramatic reversal of investment volumes to the upside, especially in areas of technology, R&D, and product and processes innovation. High interest rates tend to significantly reduce investment by making capital expenditure more expensive to fund.

27/4/17: Russian Economy Update, Part 3: Ruble and CBR Rates

The following is a transcript of my recent briefing on the Russian economy. 

This part (Part 3) covers outlook  for ruble and monetary policy for Russia over 2017-2019. Part 1 covered general growth outlook (link here) and part 2 covered two sectors of interest (link here).

Outlook for the ruble and CB rates

The ruble has appreciated this year about 6.6% against the US dollar, from 61.15 at the start of 2017 to just above 57.10 so far, and 3% against the euro from 64.0 to 62.06, compared to the start of 2016, ruble is up on the dollar ca 21.3% and on the euro some 22.4%

• The ruble has been supported by the strengthening in the trade surplus in late 2016 into early 2017, and by improved foreign investment inflows
• The ruble has been on an upward trend after hitting the bottom at the start of 2016
• However, rate of appreciation has fallen in recent months, while volatility has risen
• March real effective (trade-weighted) exchange rate (RER) was up nearly 30% y/y, as reported by BOFIT (see chart below)
• As noted by some researchers (e.g. BOFIT), “in Russia, exchange rate shifts tend to pass through relatively quickly and strongly to consumer prices, so ruble strengthening tends to curb inflation” which, in turn, increases private and fiscal purchasing power
• Another effect of the ruble appreciation is that it lowers government ruble-denominated tax revenue through direct link between energy exporting taxes (oil and gas) and oil prices, which are denominated in dollars 

For domestic businesses, a stronger ruble:

• Reduces their price competitiveness with respect to imports, but also 
• Lowers the cost of imported capital, technology and intermediates
• Majority of Russian manufacturers are relatively highly dependent on such imports and have very limited non-ruble exports

• Stronger ruble has very limited effect on the volume of Russian exports, primarily due to heavy bias in exports in favour of dollar-denominated energy and other primary materials
• Ruble appreciation reduces the costs of foreign debt service for firms (a positive for larger firms and banks) and can lead, over time, to lower borrowing costs within Russian credit markets (a positive for all firms)

In line with the export-import effects discussed above:

• Volume of Russian exports grew by over 2 % last year (primarily driven by oil and gas prices recovery and continued elevated volumes of Russian production of primary materials), plus by another (second consecutive) year of grain harvests 
• In 2017, export growth should slow as both harvest and energy prices effects dissipate
• Volume of exports of goods and services fell 1.87% in 2014, 0.41% in 2015 and 0.68% in 2016. Current forecasts suggest that the volume of exports will rise 4.5-4.6% in 2017
• Volume of imports was much harder hit by the crisis
• Volume of imports of goods and services fell 7.6% in 2014, followed by 25.0 drop in 2015 and 4.0% decline in 2016
• Current forecasts suggest strong, but only partial recovery in demand for imports, with volumes expected to rise 7.0-7.2% in 2017
• Key driver for imports growth will be the recovery in aggregate demand, plus appreciation of the ruble
• Key downward pressure on imports will continue to come (as in 2016) from trade sanctions and from ongoing reforms of public and SOEs procurement rules and systems (more on this later)
• Russia’s current account surplus contracted last year to less than 2% of GDP, printing at USD 22.2 billion, down from USD69 billion in 2015
• 2017 projections of the current account surplus range widely, although no analyst / forecaster projects a negative print, despite expected increase in imports
• IMF’s most current (April 2017) projection is for 2017 CA surplus of USD51.5 billion
• This level of CA surpluses would stand above the 2014-2016 average (USD 49.6 billion), but below 2010-2013 average (USD67.4 billion) and lower than 2000-2007 average (USD 55.7 billion)
• If IMF projection comes through, CA surplus will be supportive of significantly tighter fiscal deficit than currently projected by Moscow
• As a percentage of GDP, CA surplus is expected to come in at 3.30% in 2017, slightly above 2014-2016 average of 3.19% and slightly below the 2010-2013 average of 3.42% of GDP

Inflation

• With Russian inflation falling and current account surplus strengthening, 2017 will witness further pressures on the ruble to appreciate vis-à-vis the dollar and the euro
• Russia’s annual inflation fell below 5% in 1Q 2017
• The CB of Russia has kept a relatively tight monetary stance, holding the key rate at nearly 10% through most of 1Q, as consistent with the CBR strict targeting of the inflation rate (4% inflation target set by the end of 2017)
• CBR dropped rate to 9.75% at the end of March, noting a faster-than-expected drop in inflation and a slight decline in inflation expectations 
• Inflation fell from 4.6% in February to 4.5% in March and 4.1% as of mid-April
• 12-month forecast now at 4.3%
• CBR governor Nabiullina said the central bank does not share the finance ministry's view of a overvalued ruble, which is consistent with her projecting continued cautious stance on inflation
• Finance Minister, Anton Siluanov, recently stated that the ruble is overvalued by 10–12%
• Consistent with this, I expect a 25 bps cut at April 28th meeting of CBR Council and year-end (2017) rate target of around 8.25-8.5% if inflation remains on the path toward 4.3% annual rate, or 8.75-9% range if inflation stays around 4.6% annual rate

27/4/17: Russian Economy Update, Part 2: Two Key Sectors

Two key sectors to watch

Now, looking at some sectors across the Russian economy

Manufacturing:

• In 2015, total volume of manufacturing output dropped 5.4% and in 2016 it was basically unchanged on foot of robust growth in the chemical sector (+5.6% growth) and food sector (ca 2% growth)
• Other positive growth sectors were Pulp & Paper and Rubber & plastics, Wood products and Machinery and Equipment. The latter sector has been in a free-fall since 2012
• Negative growth continued in Transport vehicles (negative growth since 2014), Metals and products (also in decline since 2014)
• Production of oil products fell, ending years of growth starting even before 2007
• Construction materials experienced their second year of declining output
• Electrical machinery & equipment continued to contract for the fourth year in a row

• Corporate Leverage:
• Overall, economy continued to deleverage out of debt, especially external debt. CBR data shows that by the end of 2016, private sector external debt stood at USD470 billion, of which more than ¾ was held by non-financial corporates and ¼ held by the banks.
• The external debt/GDP ratio was stable and benign at 36%
• Corporate debt is largely - 80% - non-ruble denominated, while the same number for the banks was around 87%
• Corporate deleveraging slowed down substantially in 2016 as debt rollovers fell and debt renegotiations/restructurings declined
• Changes in ruble valuations had positive effect on debt burden in the oil and gas sector (forex earnings) and negative effect on debt burden in domestic producers
• If in 2014-2015, companies used receipts of funds from parent holding enterprises to roll over maturing debt, in 2016 these funds were increasingly used to pay down debt. In effect this means that the first part of the deleveraging cycle has swapped external debt for internal debt, while current phase of the cycle is witnessing overall debt levels reductions.

Banking sector:

• In contrast to 2014-2015, the ruble valuations acted largely to reduce debt burdens in the banks, as ruble appreciation in 2016 supported the forex valuation of the foreign debt 
• Banks deleveraging continued in 2016, at a pace that is roughly ½ the rate of 2015 and 2014 
• Data from the CBR show total banking sector assets fell last year by 3.5% in nominal terms
• Controlling for FX effects (ruble appreciation), total assets were up ca 2% at the end of 2016, compared to the end of 2015
• Stock of loans outstanding to the corporate sector was down roughly 4%, while stock of loans to households rose by more than 1%
• However, overall household credit contracted 7% in 2015, making 2016 recovery weak 
• Non-performing loans (NPLs) are declining as a share of the assets base, with decline accelerating in recent months
• NPL ratio for corporate loans still exceeded 6%
• Household credit NPL ratio was about 8%
• Aggregate banking sector 2016 profits rose five-fold to $15 billion y/y
• Three large SOE banks (Sberbank, VTB and Gazprombank) accounted for over half of the banking sector profits
• The CBR has continued to weed-out poorly run and non-performing banks using tools ranging from full shut down to forced mergers 
• At the start of 2017 there were 623 active credit institutions in Russia, of which 205 institutions had general banking licenses
• At the same time in 2016 there were 733 active credit institutions

26/4/17: Russian Economy Update, Part 1: Growth Outlook

The following is a transcript of my recent briefing on the Russian economy. This part (Part 1) covers general economic outlook for Russia over 2017-2019. 

Growth outlook and recovery analysis

Russia's Composite PMI = 56.7 in 1Q 2017, the strongest growth performance since 4Q 2006

• In both Manufacturing and Services sectors, Russian economy has outperformed in 1Q 2017 global economic growth momentum

• Russia is currently the strongest BRIC economy for the fourth consecutive quarter

• Russian Manufacturing PMIs averaged 53.2 in 1Q 2017, unchanged on 4Q 2016 and up on 49.1 average for 1Q 2016  

• 3rd consecutive quarterly PMI reading for Manufacturing that sits above 50.0 marker

• Russia Services PMI for 1Q 2017 came in at a blistering pace of 56.8, up on already significant growth in 4Q 2016 at 54.6 and significantly above 1Q 2016 reading of 50

• All in, this was the fourth consecutive quarter of Services PMIs above 50.0

• Energy and commodities prices

• Lack of structural reforms within Russia

• Key support was higher output in natural gas and the broader extractive sector (+ more than 1% y/y in 1Q 2017)

• Seasonally adjusted manufacturing output recovered in March, but still down almost 1 % y/y.

• Growth will be led by private domestic demand which also stimulates imports; and

• Firmer oil prices.

• The latest forecasts of the CBR and Econ Ministry expect GDP increasing by 1–2% pa over 2017–2020

• The forecasts assume the annual price of Urals crude to average USD40–50 a barrel

• Key drivers for growth assumed to be household consumption and fixed investment (both expected to rise 2–3 % pa)

• In contrast, imports are expected to outpace in growth terms exports, with current account surplus falling, although remaining in the ‘black’ at USD6-8 billion range

• The financial account deficit (excluding currency reserves) is expected to be within the range of USD6–10 billion annually

• GDP growth will be expected to fall to around 1% if Urals price falls to USD35 a barrel and zero growth will kick in at the USD25 per barrel. This astonishingly low level for zero growth oil price is a testament to aggressive deleveraging of fiscal and private sector balancesheets during the 2014-2016 recession

• Approaching presidential elections of 2018 may put pressures on Moscow to increase public spending. While this would be running contrary to current budgetary plans, it will provide a short run boost to growth. However, such a boost would come at the expense of reducing Russian fiscal policy resilience in the longer term

• Continued tensions in Syria can spillover into a [limited] conflict involving Russia and either Turkey or the U.S.-led coalition or even the U.S. forces. Such an event would trigger massive spike in geopolitical uncertainties and will undoubtedly severely disrupt markets and investment flows, as well as global trade flows

• Emerging tensions (with growing Russian involvement) around North Korea, where Russian traditional role of being a distant secondary guarantor to China is gradually moving up the scale, just as China appears to be more accommodative of he Western demands

• Currently stable, but nonetheless risky and ambiguous outlook in Eastern Ukraine, with continued risk spillovers (albeit much more subdued) to Easter European politics

• Still evolving (and for now benign) re-alignment of powers in Central Asia that can spiral out of control 

• Emerging and occasionally visible (albeit relatively benign) policy confrontations with Belarus

• Potential for re-igniting of the Nagorno-Karabakh conflict

• Internal protests focusing on lack of meaningful anti-corruption reforms, especially set against the backdrop of continued, but abating, internal power struggles, involving some close past allies of the Kremlin – struggles that occasionally involve accusations of corruption and graft

• Internal issues relating to human rights abuses, especially and most recently, highly visible and robust accusations of suppression of LGBT minorities in Chechnya

Another factor is import recovery: 

• Imports recovery can run stronger than forecast, hitting largely modest in scale, although rather successful in the short run in some sectors, policies aimed at import substitution

• This stability suits both the West and Russia, where the sanctions are supporting domestic producer

• Given these dynamics, there is no pressure for Russia to abandon its current trade sanctions stance, despite the public statements by the Government to the contrary

• This is exemplified by the lack of changes in trade relations with Turkey post-normalisation of relations, and especially by March 2017 changes to Turkish tariffs on Russian exports of grains (corn and wheat)

• In mid-March this year, Turkey imposed 130% import tariff on imports of certain food items from Russia, including wheat and corn imports

• Although Turkey is one of the largest export markets for wheat and corn for Russian producers (Russian exports last year valued at roughly USD550 million), Russia did not attempt to trade food tariffs for its own import bans on Turkish products, including fruit and vegetables

• A year-old ban is beneficial to both Turkey and Russia from geopolitical perspective, even though it fuels higher inflation in Russia so much so that instead of relaxing its own prohibitions, Russia expanded the imports ban for Turkish goods to a wider range of plant materials

Overall, in the long run, achieving faster sustainable and resilient growth will require deeper structural reforms. These include: improving the business environment and institutional structures, accelerating modernization of the capital base and adoption of new technologies, raising R&D and technological capital investments, accelerating modernization of management systems, and significantly reducing the state share of the economy, including the extent of the State Owned Enterprises (SOEs) dominance across a range of sectors

• Implementation of such reforms will support private investment and raise productivity growth rates for both TFP and labour productivity

• Structural reforms would also reduce economy’s dependence on extraction industries and, if targeted toward processing sectors, can significantly improve value added component of these sectors, helping to de-link economic growth from energy prices and commodities prices in general

• While the Economic Ministry is now tasked with drafting a set of economic policy reforms to cover the period through 2035, to-date, we have no indications which reforms are being considered. We are unlikely to see any official drafts prior to the onset of the 2018 Presidential election campaigns, and the impact of any such reforms is unlikely to materialise before 2020.

Despite some robust numbers, the economy remains relatively exposed to the downside risks, including

Somewhat deflating the leading indicators, Rosstat reported that seasonally and workday-adjusted industrial output recovered in March on a relatively weaker February

After a two years-long recession, real GDP growth should be + 1.3-1.6% this year (mid-point 1.4-1.5%)

Continued sluggish performance in 2017-2019 is due to the economy already running near full capacity and lacking deeper structural reforms to boost long term growth potential. Thus, my expectation is for real GDP growth to remain around 1.4-1.5% mark over 2017-2019

Risks:

Biggest short-term risk (upside and downside): the price of oil

A second risk factor involves geopolitical and political triggers that could hit Russian growth outlook hard, either directly or indirectly via increased political instability and adverse investors’ and entrepreneurs’ perceptions

Relating to both, imports substitution drive and the issue of geopolitical risks, the current sanctions regime (for both Russian sanctions vis-a-vis Western producers and Western sanctions vis-a-vis Russian economy) appears to be stable

Stay tuned for more transcripts

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