China: good prospects with
the danger of overheating
The vigour of Chinese growth so far this year has been surprising and we expect GDP to grow by 10.1%in 2010. The growth prospects for 2011 and 2012 are around 9%, a slightmoderation that should help tomitigate the increasing risk of overheating that’s hovering over the economy.
This economic recovery, together with a strong upswing in inflation (at 4.4% year-on-year inOctober, the highest of the last two years) will speed up the removal of expansionarymonetarymeasures.
In particular, and for the second time in just a few weeks, China’s central bank has raised the cash reserve ratio (to 18.5% for large banks and between 16%and 16.5% for small institutions) and has accumulated a total rise of 250 basis points since the start of the year.
Other restrictivemeasures have been put in place recently: the unexpected rise in the reference rate (from5.31%to 5.56%) and the relaxation of controls that kept the exchange rate practically fixed against the dollar. The tightening up ofmonetary conditions will continue throughout 2011.
For the next year, we expect new actions on the cash reserve ratio, in the order of 150 basis points in total, as well as a couple of rises in the interest rate.With regard to exchange rate policy, we expect the renminbi to appreciate very gradually, around 4%annually and in line with its current performance. According to China,
any sharp appreciation in its currency might harmthe country’s economic growth, which is strongly dependent on investment (a large part in the export sector) and on the foreign sector itself.
Given the persistent risk of bubbles in the real estate sector, themonetary authority has also promoted policies aimed at cooling this sector down, fromlimitations to granting credit to raising theminimum deposit required to acquire housing, including raisingmortgage interest rates.
As a result, house prices rose by 8.6%yearon-year inOctober, below the annual average of 10.6%.
On the other hand, fiscal policy will continue to be active throughout 2011, focusing on improving social benefits and supporting domestic consumption, and somewhat less on infrastructure investment. All this with the aimof rebalancing the country’s sources of growth towards a greater emphasis on domestic consumption and private investment.
Lastly, once again China’s trade balance posted a robust surplus in October totalling more than 27 billion dollars, higher than the figures for September and August. This is largely due to the lower growth in imports, which were below consensus forecast. This strong trade figure, together with strong capital in-flows, has been reflected in amarked rise in foreign reserves in the third quarter.
Once again, the size of the Chinese trade surplus and themoderate appreciation of the renminbi (hardly 3%since it announced its flexibilization inmid-June) have increased the risk of protectionist action fromitsmain trading partners, particularly theUnited States, which has the largest bilateral deficit with China. These protectionistmeasures, the recent inflationary tension and the danger of bubbles in house prices constitute China’s threemajor short termrisks.
Brazil: and, after a good 2010,
Bem-vindo 2011!
After a fleeting recession, Brazil undertook solid recovery which allowed it to achieve annual GDP growth in 2010 of around 7.2%, the highest figure for the last three decades. Domestic expenditure, with investment at its head, took over as themain engine, somuch so that foreign demand continues to deduct fromgrowth due to the continuing strength of the real and the determined recovery in imports.
Leading indicators point towards moderation in activity over the coming months, stabilizing at growth levels more in line with its potential, around 5%, for 2011. Nonetheless, the current situation places the new government of Dilma Roussef, the first female president in Brazil’s history, in a very good position, with notable economic growth, record low unemployment and domestic confidence at a record high.
Among themain risks facing the Brazilian economy in the short term are particularly the fast deterioration
in the current account balance and the continuing appreciation of the real. Intervention in the foreign exchange market has intensified in the lastmonth and a half but neither these actions nor the higher duty levied on bond capital in-flows to 6%in October have been able to stop the advance of the real (2% since January and 7%since June). Only the relative recovery in the dollar has recently led to a lull. However, we don’t expect any definitive change in trend while there are still differences in growth and profitability between Brazil and other, moremature economies. This will continue to reduce the competitiveness of the manufacturing sector and therefore the country’s export potential.
In spite of a growth rate above its potential and industrial capacity utilization around 85%of the total installed capacity,macroeconomic policy has preserved the expansionary tone adopted when the crisis started, so that
there’s still a latent risk of overheating.
Inflation picked up again in October, exceeding 5%and therefore the target of 4.5%, so that we expect the series of interest rate rises that stopped in August to start again in 2011, sooner rather than later if exchange rate trends allow.
Resorting to monetarymeasures appears to be evenmore likely as littlemovement is expected in the fiscal area. In the mediumterm, themain risk will lie precisely in this area. The continuation of quasi-fiscal stimuli for growth and the high investment in infrastructures required by the football World Cup in 2014 and the 2016 Olympicsmight result in excessive public debt. Nonetheless, there’s no doubt that the new cabinet will do its utmost to keep its commitment to macroeconomic stability acquired by the last few governments and that stood themin such good stead when the crisis hit. This commitment continues to be of vital importance tomaintain credibility and to promote balanced growth in thelong term.
In any case, and at least froma macroeconomic point of view, Brazil is undoubtedly a privileged place to welcome in 2011.
Mexico: consolidating its recovery
The recovery in economic activity in the first two quarters of the year will help the Mexican economy to grow by around 5% in 2010, thanks to the good performance by foreign demand (especially fromthe United States) and a significant base effect. The data for the third quarter, with growth of 5.3%year-on-year and 0.7% between June and September, confirmthemoderation in the pace of growth, also confirming, without doubt, the continuation of the Aztec recovery, which is still benefiting fromthe resistance of a foreign sector that, little by little, is being supported by domestic spending.
Themeasured reaction of investment and consumption and the gradual recovery in domestic confidence suggest that the recovery will continue in the coming months. Nonetheless, we can still see a slowdown in the pace of activity, in line with themoderation in the rate of growth of the world’s economy, the inventory cycle getting back to normal and by domestic expenditure not taking over sufficiently as a driving force in the
economy, affected as it is by the slow recovery in credit and confidence.
In 2011 we therefore expect a lower GDP growth than that for this year, around 3.7%. The recovery in oil prices has slowed up the decline in the fiscal balance, so we expect the deficit to be around 2.2% of GDP at the end of 2010. Nonetheless, reducing fiscal revenue’s dependence on oilmust still be tackled in themedium term.Without far-reaching fiscal reforms thatmanage to reduce revenue’s oil dependence, the deterioration in the public accountsmight become a significant burden and some rating agencies could downgrade their sovereign debt rating forMexico, affecting the peso and complicating price containment.
For themoment, restrained domestic demand, the absence of any notable exchange rate pressures and the low utilization of production capacity have all relieved pressure on prices. In spite of the recent upswing due to more expensive farmproducts, we don’t expect inflation to exceed 4%by the end of 2010. Given this situation, and a scenario of gentle recovery in domestic expenditure and the gradual weakening of the foreign sector, we don’t predict any changes inmonetary policy until the end of 2011.Moreover, the recent decision by the Federal Reserve to start a new quantitative easing programmemight even delay these rises until early 2012.
Another of the challenges facing the Mexican economy obviously comes from the huge dependence of its export and manufacturing sectors on the economic situation of the United States. In the first tenmonths of the year, the US market absorbed 69%ofMexico’s vehicle exports. That’s why the Aztec recovery runs the risk of coming to a greater halt than expected if its northerly neighbour’s economy slows down toomuch. If this happens, we should remember that Mexico has little fiscalmargin to implement additional stimuli.
In any case, theMexican economy has got back on the track of sufficiently robust growth so that, providing there are no surprises, it should be able to close its output gap bymid-2011.
Stability to hold on to what has been gained Oil prices remained stable, once again staying below the 85-dollar benchmark after having clearly passed this in the last few weeks. Between 20 October and 19 November, the price of crude rose inappreciably by 1.6%, standing at 84.22 dollars per barrel (Brent quality, for onemonth deliveries), an increase of 8.3% for the year so far.
The expansion of emerging economies will continue to support oil prices in the first half of 2011. However, the difficulties of advanced economies will keep these risesmoderate and we expect 2011 will end with crude notmuch above 85 dollars per barrel.
Stability also dominated commodities after having achieved huge gains the previous month, with The Economist index remaining practically the same for themonth but accumulating a gain of 19.0%for the year so far. Foods performed unevenly while, among metals, of note was the 22.2% rise for palladium, in clear contrast to the slight drop in the price of platinum. Both preciousmetals are used in automobile catalysers, the former in petrol engines and the latter in diesel, which aremore popular in Europe. This trend is consistent with the slight upswing in US consumption and the certain cooling off in Europe’s growth prospects over the lastmonth.
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China: good prospects with the danger of overheating
