5 February 2016 Monthly Economic Update - ing.nl · Monthly Economic Update February 2016 1 Global...
Transcript of 5 February 2016 Monthly Economic Update - ing.nl · Monthly Economic Update February 2016 1 Global...
Monthly Economic Update February 2016
1
Monthly Economic Update Half and half
Soft Chinese economic data is stoking fears of a hard landing, reinforcing
global risk aversion and weighing heavily on stocks, commodity prices, and
vulnerable EM currencies. But on top of further monetary easing by major
central banks, or a delay in tightening by the Fed, Chinese fiscal policy may
stabilise the macro-economy and markets. However, this may not be evident
until mid-year, and we do not hold our breath for a strong rebound.
US growth has shown a marked slowdown. And if this is a genuine loss of momentum,
and not just one of those periodic ‘soft patches’ the US experiences, then it is not
inconceivable that the US could slide back into recession. For now, this is not our base
case, but we will be watching closely to see if there is a further contraction in business
sentiment and investment, and if this spills over into labour demand and wages growth.
Even if this is nothing more than a slowdown, the odds against further tightening of policy
in 2016 are growing, and we have reduced our Fed funds forecast from two hikes to one
this year, and will be closely monitoring to see if we need to revise further.
Mario Draghi has hinted that more stimulus could be on its way from the European
Central Bank (ECB). Recent activity data has shown that the Eurozone is not immune to
financial market turmoil and weakness elsewhere, with recent numbers proving to be
disappointing. At the same time, inflation is likely to be depressed by further declines in
energy costs, with the ECB concerned that a prolonged period of negative headline CPI
inflation may lead to further drops in inflation expectations. Another rate cut seems more
likely than additional quantitative easing.
The UK’s referendum on ongoing EU membership looks set to be held this year, with the
uncertainty that it is likely to generate set to weigh on activity, asset prices and sterling.
Should the UK vote to stay, then this scenario is likely to reverse quickly. If the UK votes
to leave, then the country could face severe near-term pain, as investors, corporates and
households take fright as the UK steps into the unknown, while the government
negotiates the exit deal.
China’s annual Central Economic Work Conference in December emphasised “supply-
side structural reforms”, but the investor-friendly message was overshadowed by worries
that the central bank was pursuing a policy of competitive devaluation. We do not believe
they are doing so, but it requires action, not words, to persuade investors.
The Bank of Japan’s surprise decision to introduce negative rates is likely to be followed
by further action, perhaps as early as March, if the ECB cuts rates as is widely expected.
More importantly, this move perhaps marks the first tentative step towards QQE tapering.
The plunge in oil prices has been one of the main sources of market turmoil over the past
few weeks, with Brent crude prices down by 17% since the start of the year. Although our
base case for oil assumes a recovery in prices by 2H16, we consider a ‘lower-for-longer’
scenario in this report, which has prices averaging just US$31/bbl in 2017.
We are now backing away from our call for EUR/USD at parity this year. A less confident
Fed and less scope for higher rates at the short end of the US curve make it hard to now
justify new highs for the dollar. Instead, a stand-off involving the Fed, the ECB and the
BoJ over currency strength could serve to keep EUR/USD range-bound this year.
FINANCIAL MARKETS RESEARCH
Global Economics
5 February 2016
Mark Cliffe Head of Global Markets Research
Rob Carnell
Tim Condon
Padhraic Garvey
Hamza Khan
James Knightley
James Smith
Chris Turner
Peter Vanden Houte
GDP growth (% YoY)
Source: Macrobond, ING
10Y bond yields (%)
Source: Macrobond, ING
FX
Source: Macrobond, ING
-12
-10
-8
-6
-4
-2
0
2
4
6
-12
-10
-8
-6
-4
-2
0
2
4
6
00 02 04 06 08 10 12 14 16
Japan
Eurozone
US
Forecasts
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
00 02 04 06 08 10 12 14 16
US
Japan
Eurozone
Forecasts
60
80
100
120
1400.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
00 02 04 06 08 10 12 14 16EUR/USD (eop) USD/JPY (eop)
Forecasts
Monthly Economic Update February 2016
2
US: Teetering… Last month, we expressed our reservations about the resilience of US growth. These
centred on the slowdown in profit growth as shown by GDP data, some evidence of
excess supply in the new homes sector, the prospects for some inventory-led slowdown
and some slower investment spending.
These reservations have rather quickly and worryingly received considerable support
from the latest US GDP figures: only 0.7% QoQ for 4Q15 (annualised rate), which is a
fairly dramatic, though not unprecedented, slowdown in activity. This slowdown has
raised a rather alarming question just one month after the first Fed funds rate hike in over
nine years: ‘Is the US headed for a recession?’
Fig 1 4Q15 GDP breakdown
Fig 2 Quarterly US GDP
Source: Macrobond Source: Macrobond
Although this is a virtually unanswerable question, it is not a frivolous one. The abrupt fall
in US growth momentum over recent quarters is at least partly a response to a slower
profile in consumer spending. Since oil prices began to decline at the end of 2014,
households have benefited from a fall in headline consumer price inflation, which has
lifted their real disposable incomes and boosted spending. One common, but misplaced
question is: ‘Why has the US consumer not benefited from the fall in oil prices?’. The
simple response to this is that they have, but are not doing so any longer.
Since mid-2014, real US consumer spending has grown by more than 3.0% pa. Nominal
wages growth has averaged less than 2.0% and employment growth has been c.1.0%. The
only reason that real spending has grown at greater than a 3.0% pa rate until the latest GDP
release, is because zero inflation, thanks to falling energy prices, has meant that real wages
have grown about as fast as nominal wages. That is no longer true as inflation picks up.
Even with further declines in oil prices, there is a limit to how much lower oil can go. This
means that the scale of the cost of energy’s drag on inflation and, therefore, the boost to
real incomes and spending, cannot realistically be repeated this year.
More plausibly, though perhaps not until the second half of the year, some stabilisation in
the overseas macroeconomic and financial situation is likely to help to push oil prices higher
again. As it does so, inflation is likely to rise, keeping real incomes and spending growth
below 2.0% this year and, perhaps, next.
Another area we highlighted last month was investment. This turned negative in 4Q15. A fall
in investment could be more of a problem than the loss of the oil-price windfall gains to
consumer spending. Business investment could have slowed for a variety of reasons:
-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0%
Personal consumption
Imports
Government Consumption
Gross private investment
Exports
GDP
4Q15 Annualised QoQ%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
20
13
Q1
20
13
Q2
20
13
Q3
20
13
Q4
20
14
Q1
20
14
Q2
20
14
Q3
20
14
Q4
20
15
Q1
20
15
Q2
20
15
Q3
20
15
Q4
QoQ% Annualised
We were already getting
nervous about US growth…
…when 4Q15 GDP came in at
a measly 0.7% QoQ
The ‘R’ word is back on
people’s lips…
…though if it comes, it is
likely to be led by lower
investment, not consumption
The boost from lower oil
prices is largely spent in
terms of consumption…
…and any stabilisation is
likely to weigh on household
spending
Negative investment is
another worry…
Monthly Economic Update February 2016
3
because profit growth is stagnating; concerns about the global external environment; or
concerns over the outcome of the presidential election and the potential future corporate tax
environment.
Fig 3 Energy’s boost to consumer spending fading
Fig 4 10Y US Treasury forward curve and INGF
Source: Macrobond, ING Source: Bloomberg
We cannot say for certain which way business investment will go from here. But
investment is a sentiment-driven activity; sentiment is flighty, and the volatility of business
investment is sufficiently high to constitute one of the more vulnerable channels for any
future recession, though likely to pull consumer spending down with it, if it were to
contract sharply.
With growth slowing domestically and the external environment remaining challenged –
market risk aversion rising and macro developments in emerging markets not showing
any signs of calming down as yet, it is becoming increasingly difficult to imagine a
plausible scenario for the next rate hike. We have pushed back our profile for the Fed by
several quarters, which pushes out the second hike from 2016, leaving only one possible
hike this year. At this point, even that is looking rather far-fetched and we may end up
moving towards a ‘one-and-done’ forecast in coming months. This is a step too far for this
month’s forecast, and it is possible that we might see some more timely stabilisation,
which would require us to back pedal from a more aggressive adjustment this month. But
that is definitely the skew in risks for changes in forecasts for the month ahead.
We believe we need to see a number of things before the Fed reverses tack and starts to
loosen monetary policy again. It is not enough to see the unemployment rate move
higher. It could do so because of a surge in labour-force participation. But if it were to be
driven by a reversal in unemployment declines, maintained over several months, and
backed up by a marked slowdown or even reversal in non-farm payrolls gains, then it
could certainly follow. In the first instance, the December rate hike could be reversed. In
extremis, ‘QE4’ could be implemented. We think that the Fed will try to avoid going down
the negative rate route until all other channels are exhausted.
As a result of the Fed-rate forecast changes and lower inflation outlook, it is becoming
harder to justify an upward sloping Treasury yield profile. Our near-term profile, in fact,
sees further declines in bond yields, mainly reflecting our outlook for China, equity and oil
price weakness and a reversal of recent inflation increases. In the short term, our
forecasts undershoot the Treasury forward curve though they rise above forwards further
out, as we assume that the current gloom is overly depressing the outlook.
Rob Carnell, London
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
12 13 14 15
Employment growth
real wages (Boost fromenergy)
Real wages (non energycomponent)
Consumer spending, rhs
YoY%QoQ%
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
spot Jun-16 Dec-16 Jun-17 Dec-17 Dec-19
Forward curve
ING Forecasts
%
…there is no telling which
way it will go next, but its
decline is worrying
Justifying any Fed rate hikes
in 2016 is a tough act…
…but we need to see a labour
market reversal to see rates
cut and QE restarted
Bond yields should stay flat
or drop near term from here
before picking up
Monthly Economic Update February 2016
4
Eurozone: Not done yet
The ECB is not done yet. President Mario Draghi surprised financial markets at the press
conference in January by stating that it was necessary to review and possibly reconsider
the monetary policy stance at the next meeting in early March. Indeed, the latest
economic indicators indicate that the Eurozone is not totally immune to the slowdown in
other parts of the world, while inflation remains too low on the back of depressed oil
prices.
The European Commission’s sentiment indicator fell back in January to a level below the
fourth quarter’s average. Industry confidence took a hit on the back of a less buoyant
order-book assessment, with export orders being hurt by the slowdown seen in the
emerging world. Consumer confidence also suffered slightly, though labour market
expectations actually improved. December’s unemployment rate stood at 10.5%, the
lowest level since September 2011. With low energy prices continuing to support
purchasing power and unemployment expected to fall further, we believe that
consumption will maintain some momentum.
While credit growth softened somewhat in December of last year, the Bank Lending
Survey reported a net easing of credit standards, with credit demand expected to pick up
further. Although the Italian banking sector has been under close scrutiny recently
regarding the amount of non-performing loans (with the Italian government actually
having to put in place a scheme to alleviate the issue), the credit easing trend within the
larger Eurozone countries was actually most prominent in Italy.
In all large member states, apart from France and the Netherlands, fixed investment was
an important factor in the growth in credit demand by enterprises. With capacity utilisation
in industry increasing to 81.9% in January, the fledgling business investment recovery
seems unlikely to peter out soon. So in terms of credit easing, an additional monetary
push does not appear to be required. There is even a worry that a further cut in the
deposit rate might hurt banks’ profitability (as they are often unable to pass on negative
interest rates to their customers), pushing them to increase their credit margins.
Fig 5 Latest economic news disappoints…
Fig 6 …while inflation expectations remain depressed
Source: Thomson Reuters DataStream Source: Thomson Reuters DataStream
While we do not see the recovery faltering, it is clear that external conditions have
worsened lately. We, therefore, scale back slightly our growth forecast to 1.5% for this
year. This still incorporates a slight growth acceleration in the second half of the year. If
this fails to materialise, GDP growth could actually be lower in 2016F than in 2015.
-100
-80
-60
-40
-20
0
20
40
60
80
Ja
n-1
5
Fe
b-1
5
Mar-
15
Apr-
15
May-1
5
Ju
n-1
5
Ju
l-15
Aug
-15
Sep
-15
Oct-
15
No
v-1
5
De
c-1
5
Ja
n-1
6
Fe
b-1
6
Eurozone United States
Economic Surprise Index
-10
-5
0
5
10
15
20
25
30
35
Fe
b-1
1
May-1
1
Aug
-11
No
v-1
1
Fe
b-1
2
May-1
2
Aug
-12
No
v-1
2
Fe
b-1
3
May-1
3
Aug
-13
No
v-1
3
Fe
b-1
4
May-1
4
Aug
-14
No
v-1
4
Fe
b-1
5
May-1
5
Aug
-15
No
v-1
5
Consumers Industry Services
Inflation Expectations Survey
Mario Draghi has hinted that
more stimulus may be on its
way
Sentiment falls back, though
underlying fundamentals
remain good
Credit conditions continue to
ease
Rising capacity utilisation is
a hopeful sign for investment
No growth acceleration in H1
2016
Monthly Economic Update February 2016
5
Despite the continuing subdued growth pace, Europe is not really working on a growth
strategy, as European leaders are consumed by other more pressing issues. The first
review of the third bail-out plan for Greece only started recently, with the Greek
government and creditors still quarrelling over pension reform. Meanwhile, the refugee
crisis continues to divide Europe. In Germany, Chancellor Merkel, who was facing rising
opposition within her own party, is now preparing to make a U-turn, where Germany will
no longer accept an unlimited number of new refugees. At the same time, Donald Tusk
presented a proposal to meet some of Britain’s demands regarding limits on the welfare
system for new migrants, to be discussed at the European summit on 18-19 February
(which could reduce the probability of a Brexit).
Headline inflation has fallen back to 0.4% in January, while core inflation rose to 1.0%.
Energy prices remain the driving force in this regard and headline inflation could,
therefore, drop below 0% in coming months. Although the ECB should look through these
short-term fluctuations, too long a period of low inflation might indeed dispel longer-term
inflation expectations. That point was advanced again by Mario Draghi in his speech to
the European parliament in February.
More easing, therefore, seems likely, although some members of the Governing Council
try to downplay this possibility to prevent financial markets from running ahead of
themselves again. ‘Hawks’ within the Governing Council are more willing to vote in favour
of a new rate cut than to beef-up monthly asset purchases. That said, we believe that a
small increase (at least €5bn) in monthly asset purchases will be hard to avoid. Apart
from that, another 10bp cut in the deposit-facility rate looks like a done deal. The ECB
could go even further to push the euro exchange rate lower, but then we believe that a
two-tier system will be introduced, mimicking the recent decision of the Bank of Japan. In
that event, existing excess liquidity is likely to be remunerated at the current deposit rate
and additional excess liquidity at the new deposit rate, which might then be at -0.50%.
Peter Vanden Houte, Brussels
UK: Planning for the future It appears likely that the UK will hold its referendum on ongoing European Union
membership this year, rather than delay it until the next. Following talks between Prime
Minister David Cameron and Donald Tusk, the head of the European Commission, there
are signs that a deal on the UK’s demands involving immigration, sovereignty, economic
governance and competitiveness are close to being agreed on. This is then due to be put
to a vote at the European Council meeting on 18-19 February, with David Cameron likely
to call a referendum soon afterwards, with 23 June being the favoured date, according to
press reports.
At present, opinion polls suggest the Brexit referendum will be incredibly close. In most
polls, the number of people wanting the UK to stay in is narrowly ahead of those wanting
it to exit, but it is important to note that there is a large proportion of people who are
undecided, typically c.20% of the total electorate. Consequently, the deal that David
Cameron clinches, how it is explained to the nation and possibly, most significantly, how
the press portrays it, is likely to be critical in determining whether the UK stays in the EU
or not. On this count, it is important to note that several popular newspapers could
formally back the UK leaving the EU. In the last referendum back in 1975, only the
communist newspaper The Morning Star campaigned against the UK’s EU membership.
We recently published a detailed note on the Brexit referendum (The shock from Brexit: A
sharp but short blow from a UK EU exit, 27 January 2016). The uncertainty that the vote
Opinion polls suggest it will
be a close vote…
…and much of the press
favours exiting the EU
It appears likely that the UK-
EU referendum will be held
this year
Political issues have not
disappeared…
…Merkel prepares to make a
U-turn…
…with ‘Brexit’ risk adding to
the usual worries
Inflation could fall again
below 0%...
…increasing the likelihood of
new easing
Two tiers deposit rate might
be contemplated
Monthly Economic Update February 2016
6
may generate is likely to result in a loss of momentum in the UK economy, possibly paring
around a quarter of a percent off 2016F growth, relative to what might have been the
scenario if there was no referendum. Ahead of the referendum, UK and foreign businesses
are likely to take a ‘wait-and-see’ approach to hiring and investment, while consumer
spending and confidence could weaken modestly. The Bank of England is likely to ‘sit on its
hands’ and sterling is likely to continue softening in the build-up to the vote.
Fig 7 How the referendum could hit UK growth: A stylised path
Source: ING
Our base case is that the UK votes to remain a member of the EU and with the uncertainty
lifted, we expect to see sterling and UK asset prices recover, but they may not recoup all of
their declines immediately. Meanwhile, delayed investment and hiring is likely to be
implemented to some degree, likely leading to some strong activity readings in 4Q16F and
1Q17F.
We also feel that inflation could become an important issue post the Brexit referendum.
Sterling has already fallen by more than 7% since November on a trade-weighted basis and
we think it will fall further, nudging import costs higher. We also forecast a gradual increase
in commodity prices over the coming twelve months, while it is difficult to see the
supermarket food-price war exerting the same deflationary impulses it did in 2015. Add the
tight labour market and the possibility that wages do eventually respond (the number of job
vacancies broadly match the number of people claiming out-of-work benefits), and we could
see headline inflation start to rise swiftly. Indeed, we will not be surprised to see 3%+ CPI
readings in 2017. This leads us to believe that the Bank of England might have to tighten
monetary policy more swiftly than financial markets anticipate, from 4Q16F onwards.
If we are wrong and the UK does vote to exit, it is likely to have significant ramifications
for the UK and the EU. In the near term, the uncertainty that this will generate will
undoubtedly hurt confidence and likely lead to a retrenchment in activity. We see 2017F
UK GDP growth coming in c.1.5% YoY in such a scenario, versus 2.7% if the UK votes to
stay in the EU. Sterling’s plunge will elevate medium-term inflation risks, but we expect
the Bank of England to try to loosen monetary and financial conditions in such an
environment, with the Bank Rate being cut soon after the results are known. Sterling
could, therefore, test its 2011 lows, with EUR/GBP possibly touching 0.90 later this year.
James Knightley, London
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
2016 2017 2018 2019 2020
Assumed referendum date
YoY% GDP deviation versus if there was no referendum
UK votes to remain part of EU
UK votes to leave EU
UK votes to leave EU and then Scotland leaves the UK
Businesses and households
may become more cautious
in the build-up to the
referendum
We think the UK will vote to
stay, leading to stronger
growth from 4Q16F onward
Inflation could become more
of an issue over the next
twelve months
Sterling weakness, wage
hikes and higher energy
costs could boost CPI above
3%
Should the UK vote to leave
the EU, confidence is likely to
be hit hard…
… with growth slowing
sharply…
… and sterling and UK
interest rates heading lower
Monthly Economic Update February 2016
7
China: Negative feedback loop
The dip in China’s manufacturing PMI in January kept it in contraction territory for a sixth
consecutive month. Its Korean counterpart returned to contraction territory, where it had
been for 17 of the previous 24 months. Taiwan’s manufacturing PMI reversed half of
December’s two-point bounce and appears headed back into contraction territory, where
it spent eight months of 2015. The US manufacturing ISM remained in contraction
territory for a fourth consecutive month.
Manufacturing represents the leading edge of a global growth slowdown. We believe the
50% crash in global oil prices in the second half of 2014 caused the manufacturing slump
by depressing commodity producers’ spending. However, we think causality became two-
way in the third quarter of 2015, when China’s stock market crash and the ‘811’
devaluation turned China’s growth uncertainty into a driver of oil prices. The negative
feedback loop is straining public finances and external payments positions in commodity-
producing countries, forcing some (Azerbaijan and Nigeria, most recently) to seek
multilateral assistance.
Global oil prices, which were down 17% (on an average basis) in January and another
10% in the first two days of February on weak China PMI data, need to at least stabilise,
to prevent rolling balance of payments crises from sweeping through commodity-
producing countries with current account deficits, in our view. Stabilisation of China’s
manufacturing sector and/or USD depreciation will suffice, in our view. Based on ING’s
USD forecast, hope rests with China’s manufacturing sector.
The negative feedback loop is a powerful headwind to an export-led recovery. In fact,
data for Korea, a reliable guide to global trade, showed that trade plunged 19% YoY and
13% MoM in January, indicating to us that world trade growth was still slowing. A
spontaneous bounce in US spending growth could short-circuit the feedback loop and
spark an export-led recovery, but ING’s forecasts for the US do not warrant optimism (see
the section on the US above).
Instead, hope rests with fiscal policy, where the requirement is to reverse the 2015
slowdowns in infrastructure and real estate investment growth (Figure 8). There has not
been much new news on either front since we reported a month ago. To recapitulate, the
December Economic Work Conference identified improving weak links in infrastructure
and reducing the inventory overhang in the housing market as main tasks for 2016.
Funding issues may have contributed to the slowdown in infrastructure investment growth
in 2015. While state budget financing of fixed asset investment increased 22%, the
impact was nearly offset by a 5% decline in domestic loan financing. The anti-corruption
drive and creditworthiness concerns may have made banks reluctant to continue funding
local-government infrastructure projects.
The local-government debt swap specifically targets creditworthiness concerns by
enabling local governments to refinance maturing obligations, including those of financing
platforms, with low-interest, low risk-rated special government bonds. The programme got
off to a slow start in 2015, but gathered steam in the second half. According to press
reports, it is due to increase in size to CNY5tr (7.5% of GDP) in 2016, from CNY3.2tr last
year. The press also reported that the central government is due to increase bond
issuance for local governments from CNY0.6tr to CNY1tr and the fiscal deficit from 2.7%
of GDP to 3.0%.
Faster real-estate fixed asset investment growth requires halting the contraction in home
construction, which in turn requires reducing the inventory overhang (Figure 9). In late
January, in a first follow-up to the Central Economic Work Conference, Jiangxi became
Oil prices need to at least
stabilise, if not increase
No export-led recovery
Support for housing
… as the global slump
continued
Manufacturing was weak
almost everywhere in
January…
It’s mostly fiscal
Securing funding
Relieving bank concerns
about creditworthiness of
local governments
Monthly Economic Update February 2016
8
the first province to offer farmers cash subsidies for their first city-home purchase. This is
a flanking policy supporting urbanisation through hukou supply-side reform. In a second
follow-up in early February, the PBOC and the CBRC jointly announced a cut in minimum
down-payment ratios for first and second home purchases. Housing support policy is a
watching brief, but our baseline is that after contracting by 15% for two years, housing
starts will be flat this year and that real-estate investment growth will accelerate.
“There is a communication issue” related to China’s exchange rate regime, IMF’s MD
Lagarde told a panel discussion in Davos. It has complicated the conduct of monetary
policy, in our view. We believe the authorities wish to reduce borrowing costs but do not
want a blowout in the USDCNH forward curve as that which followed the last policy
interest rate and RRR cuts; investors appeared to view them as acts of desperation. Also,
foreign exchange reserves, depleted in part by hot money outflows, are only US$330 m
above the US$3tr mark, which we consider to be a ‘line in the sand’.
We expect the authorities to increase their room to manoeuver by restricting international
capital flows. The first sign was last September’s macro-prudential measure, subjecting
banks’ forward foreign exchange positions to a 20% reserve requirement. This year, the
PBOC imposed the onshore RRR requirement on USDCNH accounts in an effort to
narrow the USDCNH premium to USDCNY. SAFE launched a personal foreign exchange
supervision system to crack down on the flight of capital. Banks have been given window
guidance about corporate-client USD purchases and SAFE recently instructed banks to
strengthen the management of foreign exchange business related to overseas direct
investment.
We expect tightened exchange controls and macro-prudential regulations to enable the
PBOC to cut interest rates, resist CNY depreciation pressure and keep foreign exchange
reserves above US$3tr. We forecast two 25bp PBOC policy interest rate cuts by year-end
(the Bloomberg median forecast is for one 25bp cut in the one-year lending rate to 3.85%
and two 25bp cuts to the one-year deposit rate to 1.00%). Our year-end USDCNY
forecast is 6.65, which keeps our version of the CFETS-NEER stable for ING’s
USD/Majors forecasts (spot 6.54; Bloomberg consensus 6.78; NDF 6.91).
Fig 8 China: Fixed Asset Investment (% YoY)
Fig 9 China: Residential Floor Space for Sale (months
of sales)
a/ Share of total investment in 2015 in parenthesis.
Source: Bloomberg, ING Bank
Source: EMED data service, ING Bank
Tim Condon, Singapore
0
5
10
15
20
25
30
35
40
2010 2011 2012 2013 2014 2015
Total Manufacturing (33%)
Real estate (17%) Infrastructure (23%)0
5
10
15
20
25
30
35
2008 2009 2010 2011 2012 2013 2014 2015
A communication issue…
The bottom line
Increasing policymakers’
room to manoeuvre
Monthly Economic Update February 2016
9
Oil: The ‘lower-for-longer’ scenario
After a weak 2015, crude oil started 2016 on another bearish note, with Brent down 17%
since the start of 2016 to US$30.7/bbl on 2 February 2016. While our base case
considers a recovery in crude oil prices by 2H16F, we identify four key factors, which
justify the formulation of a ‘lower-for-longer’ scenario that has prices averaging just
US$31/bbl in 2017F.
1) Demand disappoints
IEA data shows that oil demand in Organization for Economic Cooperation and
Development (OECD) countries increased at a four-year-high rate of 1.7% YoY in 3Q15
to 46.7MMbbls/d, while global oil demand also increased at a four-year-high pace of 2.4%
YoY. However, demand growth is still lagging behind the 2.9% growth reported in global
oil supply.
In the US, although vehicle miles travelled have been increasing at a healthy pace of c.3-
4% YoY, the proportionate increase in fuel efficiency resulted in a stable-to-very-
moderate growth in gasoline demand. In China, a larger industrial slowdown has offset
positive growth in automotive fuel.
2) Supply lingers
OPEC crude oil production increased to a record high of 33.1MMbbls/d in January 2016,
with spare capacity at a five-year low, as Middle Eastern countries compete against each
other for market share. The Saudi and Iranian light oil discount to European buyers
increased to a five-year high of US$4.85/bbl, while Russia and the US have managed to
maintain production despite a pullback in prices, falling rig counts and labour cuts.
Political tensions between Iran and Saudi Arabia have increased since the start of the
year after the kingdom’s execution of prominent Shiite cleric Nimr Al-Nimr, hampering
concerted action by OPEC. Although high-cost producers, including Venezuela, appear
desperate for price support, options are limited, as any production cuts could be
compensated by non-OPEC producers (principally the US and Russia) without any
material support to prices.
3) Services remain cheap
The oil and gas price sell-off has resulted in significant contract renegotiation for oil field
service firms, including lower rig rates and labour costs. The impact is concentrated in
North America, where midstream operators have engaged in a wave of merger and
acquisition activity to yield lower costs. With midstream services remaining cheap,
producers across the world have an incentive to keep pumping oil.
4) Investors exacerbate trends
The net position held by money managers in the NYMEX WTI contract (the number of
long contracts held, minus the number of short contracts) has fallen to its lowest point
since 2009, suggesting that hedge funds, pension funds and other ‘smart money’
investors are betting on lower crude oil prices. With the number of paper contracts being
several orders of magnitude higher than physical barrels, speculator sentiment tied to the
dollar or equities can outweigh fundamental marginal price dynamics, depressing prices
even if demand rises and production falls.
Demand growth is still
lagging behind the growth
reported in global oil supply
OPEC crude oil production
increased to a record high in
January 2016
Oil field service firms have
engaged in significant
contract renegotiations
The net position held by
money managers is at a
multi-year low
Monthly Economic Update February 2016
10
Fig 10 Crude oil demand/supply (YoY%)
Fig 11 OPEC crude oil production (MMbbls/d)
Source: Bloomberg, IEA Source: Bloomberg
Fig 12 Price forecasts (US$/bbl)
2015 2016F 2017F
1Q 2Q 3Q 4Q 1QF 2QF 3QF 4QF 1QF 2QF 3QF 4QF
Base case ICE Brent 55 64 51 45 30 30 35 40 50 55 60 65
NYMEX WTI 49 58 47 42 30 30 35 40 50 55 60 65
Bear case ICE Brent 55 64 51 45 25 20 20 25 25 30 35 35
NYMEX WTI 49 58 47 42 25 20 20 20 20 25 30 30
Source: Bloomberg, ING forecasts
Hamza Khan, Amsterdam
Japan: More to come
Last week, the Bank of Japan caught markets off guard and introduced negative interest
rates. The move, which will complement the existing QQE programme, takes the form of
a three-tier system, where only future current account balances are subject to a negative
rate (similar systems exist in Switzerland, Sweden and Denmark). This decision took
rates to -0.1%, although the overriding message was that this is likely to be just the first of
potentially many rate cuts to come.
Perhaps the biggest lesson of all of this is that the BoJ is more sensitive to JPY strength
than had been earlier thought. Heading into the meeting, the yen was stronger on a
trade-weighted basis than it was before the October 2014 meeting. Going forward,
currency movements are likely to be a key gauge of whether we can expect further cuts.
In March, this is likely to heavily depend on what the ECB delivers and, given that further
stimulus is widely expected, there is a high chance the BoJ will follow with a 10bp cut.
The case for near-term action is likely to be boosted by a further drop in consumer
inflation expectations (an important factor in the BoJ’s reaction function), which are driven
primarily by expected changes in food prices rather than oil. With the effect of a
significant yen depreciation in 2014 filtering out of the numbers, food inflation is set to fall
fairly noticeably over the next few months (Figure 13) and, in turn, weigh on expectations.
-1%
0%
1%
2%
3%
4%
5%
1Q11 1Q12 1Q13 1Q14 1Q15
Demand Supply
Falling inflation expectations
will keep pressure on the BoJ
to cut rates
The Bank of Japan surprised
markets with the introduction
of negative rates
JPY movements will be a
helpful barometer of any
further rate cuts
Monthly Economic Update February 2016
11
Fig 13 Inflation expectations on a downward trend?
Fig 14 Trade-weighted JPY
Excludes impact of 2014 consumption tax hike
Inflation expectations based on Cabinet Office survey and calculated by respondents expecting prices to go up less those expecting prices to go down
Source: Macrobond, ING
Source: Macrobond
While the probability of a near-term cut seems fairly high, we do not think that this will
evolve into an aggressive easing cycle. The limitations of QQE are now well documented
and we feel that an acknowledgment of this was implicit in January’s decision (after all,
QQE would have been the go-to tool if it was seen as a viable option). Thus, rate cuts are
now the major weapon in the BoJ’s arsenal and they will be wary of running out of
ammunition too quickly. In the longer term, the BoJ is likely to have to consider scaling
back the pace of JGB purchases. While it is hard to pin down when this process will
commence, it could come as early as autumn (post-election) or, failing that, after the April
2017 consumption tax hike. Either way, when the decision is taken, it is likely to be
coupled with further rate cuts to dampen any adverse market impact.
James Smith, London
FX: Waving goodbye to parity
It looks increasingly difficult to forecast EUR/USD hitting parity this year. Our prior call for
a low of 0.98 in 2Q16 had been premised on higher US inflation and bearish flattening of
the US Treasury curve, which would drive the dollar side of this story. Yet, with the oil
profile a lot lower than we had expected and fears of the US slowdown spreading, we
now see 1.05 as the low point for EUR/USD this year.
When justifying the rate hike last year, Fed ‘neutrals’/‘hawks’ highlighted that neither the
dollar nor oil prices would continue to adjust at their 2015 pace forever. This meant that
their depressing influence on US headline would abate. The problem for the Fed,
however, is that oil prices have continued to plunge and the dollar has continued to surge
against major US trading partners, such that the expected return of inflation to target now
likely looks to be delayed.
Indeed, big early-year falls in Asian FX and NAFTA trading-partner currencies of CAD
and MXN have continued to propel the Fed’s broad trade-weighted dollar ahead at a 10%
pace. A Fed model released late last year suggested that such a move could knock 0.5%
off core inflation and up to 1.5% off GDP, but crucially, GDP is hit with a longer lag.
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
45
50
55
60
65
70
75
80
85
90
2012 2013 2014 2015 2016
Inflation Expectations (Balance) - 6M Lead lhs
Food CPI (YoY%) rhs
INGF
80
85
90
95
100
105
110
Jan13
Apr13
Jul13
Oct13
Jan14
Apr14
Jul14
Oct14
Jan15
Apr15
Jul15
Oct15
Jan16
Japan Narrow NEER4 April 2013 = 100
Start of QQE Level
QQE2 Level - October 2014
The move to negative rates is
the first tentative step
towards scaling back QQE
It looks increasingly difficult
to forecast EUR/USD hitting
parity this year
The dollar has continued to
surge against major US
trading partners
Monthly Economic Update February 2016
12
Fig 15 USD trade-weighted $ has continued to surge
Fig 16 Impact of 10% USD rally on inflation & exports
Source: Bloomberg
Source: Federal Reserve Staff
What this all means is a less-confident Fed and US authorities possibly getting sucked
back into a global currency war. With ING dropping one Fed hike out of the profile this
year and contemplating whether to remove his other forecast hike as well, we can no
longer justify a view of US market interest rates driving the dollar to new highs.
Instead then, we see EUR/USD largely trapped in a 1.05-1.15 range this year, where the
top-side should be limited by the threat of more aggressive ECB action. That said, it
would probably take much more substantial QE from the ECB rather than a modest 10-
20bp cut in the deposit rate for the ECB to drive EUR/USD substantially lower (see our
recent FX Focus on the subject).
A similar scenario applies to USD/JPY. Here, it looks like the BoJ is prepared to cut rates
further into negative territory to avoid the JPY strengthening too quickly. The range
appears to be 115-125. We do see more downside risks to USD/JPY, however. If the US
slow-down were to accelerate, fears over the lack of available BoJ tools to address JPY
strength could see outside risk of a USD/JPY move to 110.
Chris Turner, London
Rates Strategy: Angst attack
The move of the 10yr Bund yield to 30bp is an echo of similar price action that we saw at
the beginning of last year, and that tailed out with a brief break below 10bp in April, but
then 1% was briefly touched in June. That is the range: effectively 0-1%. At 1% there is a
realistic expectation for future rate hikes, and this fits with a zero real rates environment
assuming that core inflation is running at c.1%. At 0%, there are no rate hikes discounted,
practically ever and the implied market discount for inflation and growth is dour, to say the
least. At 30bp on the Bund yield, we are closer to the latter than the former, which
equates to quite a negative market mood.
There is a lot of negative news already priced in, but just as the oil price at US$30/bbl
could hit US$20/bbl or lower, so too could the Bund yield pop back down to 10bp or
lower. We doubt it is structurally fundamentally justified down there, but that does not
mean it could not test lower. The path of least resistance is in that direction from a tactical
perspective given the remarkable start that we have had to the year from a cross asset
performance perspective. Note the following contrasts: (1) YTD Eurozone bonds have
-15
-10
-5
0
5
10
15
20
80
85
90
95
100
105
110
115
Jan 91 Jan 94 Jan 97 Jan 00 Jan 03 Jan 06 Jan 09 Jan 12 Jan 15
% YoY change in Real Trade Weighted Dollar (RHS)
Fed's Trade Weighted Real Broad Dollar
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
0 4 8 12
Estimated Effect of 10% USD Appreciation on US Core Inflation
Estimated Effect of 10% USD Appreciation on US Net Exports, rhs
Deviation from baseline (pp), annual rate
Contribution to GDP (% deviation from baseline)
Quarters after shock
What this all means is a less-
confident Fed and US
authorities possibly getting
sucked back into a global
currency war
We see EUR/USD largely
trapped in a 1.05-1.15 range
this year
We do see more downside
risks to USD/JPY, however
Bund yield at 30bp is
discounting no rate hike,
practically ever
Core bond market total
returns running heavily
positive
Negative total returns in risky
bond markets, especially
high yield
Monthly Economic Update February 2016
13
returned 2.0%; (2) German bonds have returned 2.9%; (3) US Treasuries have returned
2.5%; and, at the other end of the spectrum (4) USD High Yield has returned -2.0%; (5)
EUR High Yield has returned -1.3%; and (6) Local Currency Emerging markets have
returned -0.9% in USD terms, all YTD.
While stresses in high beta spread can persist given the uncertainties in play, questions
would increasingly have to be asked on the viability of sustained falls in German yields. A
move from 30bp to say 10bp would add in the region of an additional 1% to total returns,
at which point the logic of locking in a near 4% YTD return would look far too tempting to
ignore. This holds for strategic plays and also structural plays, all the way to pension
funds with receiver overlays that are heavily in the money. Fixed rate payer overlays and
a short duration preference becomes the dominant preference at that juncture. That is
unless there is the belief we are staring down the barrel of a depression, which is unlikely
in our opinion, and especially with the ECB fully engaged in the reflation game (and
importantly still with a strong degree of conviction).
Correlation with US rates remains a key ingredient too, especially as US macro
circumstances and Fed policy is typically a forward indicator for Eurozone rates. The US
core inflation environment remains in the 2% area, with wages growth a tad higher and
forward looking wage guesstimates a tad higher still. So, with the 10yr Treasury yield
some 10bp below 2% and the 10yr swap a further 15bp lower the market is quite
negative in terms of the fundamental discount, trading on a (mild) negative real yield. A
more neutral valuation would see the 10yr trade at the inflation rate plus a 50bp term
premium (ie, 2.5%) and even at that level real rates would be zero (which appears to be
the equilibrium for now, as alluded to by Janet Yellen at the Dec FOMC meeting).
The call for the Fed funds rate is important for framing where long term rates can get to
on the downside. This is so as, notwithstanding a term premium, the positioning of long
term rates is a function of expectations for short end rates (as priced via forward break-
evens). So, if the Fed were “one and done” an implication is the 10yr rate could be priced
as the Fed funds rate (50bp) plus a term premium (around 50bp) which equates to about
1%, or 1.25% if the term premium were 25bp higher, or 1.5% if the market were to
discount a mild eventual upside risk for the funds rate in the future. A bottom line
implication is a “one and done” Fed could well see the 10yr rate test 1.5% (or lower).
From that level, the push factor that could keep rates down could be a move into a lower
growth disinflationary phase (not our central view). In contrast the pull factor that could lift
rates could be a sustained 2% inflation environment and evidence of growth persistence
(our preferred view).
Our central judgment therefore centres on, 1. Momentum risk for more downside for core
yields in the coming weeks (and perhaps months), but then, 2. A trek back to levels that
we saw at the end of 2015 (US 10yr at 2.3% and German 10yr at 65bp). There are
however three headwinds that threaten the upside for core rates, centering on China, the
price of oil and performance of risky assets (Equities in particular, but also High Yield and
Emerging Markets bonds). As noted in this report, China poses a systemic threat
premised on its elevated leverage conditions / manufacturing recession combination, but
it’s a managed problem that implies mini painful but takeable hits, rather than one big
systemically damaging wallop. The oil price is a bigger unknown, as the leveraged energy
sector poses an elevated default risk in USD high yield space that could also spill over to
the banks. While we view this story as overblown, in a way there is far less certainty here
than on the China view, partly as if something did blow up here its ramifications are closer
to home, with contagion into the central macro picture posing a potentially bigger risk.
The growth / contagion threat coming from Emerging Markets is also front and centre
when it comes to framing core rates. Idiosyncratic risk factors have resulted in significant
net outflows from Emerging Markets spanning the likes of China, Brazil and Turkey.
Any significant rally in the
Bund yield from here paves
way for strong logic for
locking in total returns
US 10yr rates now trading
with implicit negative real
yields, thus straying from fair
value in the 2.5% area
However, if the Fed were to
be one and done the 10yr
rate can easily get to 1.5% or
lower
Headwinds include China,
the oil price and the
performance of risk assets
The HY / Oil dynamic is
potentially more troubling to
a managed China story
Emerging markets are
showing stress, but only in
selected centres
Monthly Economic Update February 2016
14
There have also been prior net outflows from Russia in play which rocked the RUB, and
generally such stressed centres have suffered from capital flight. Turkey’s current
account deficit for example was only 50% financed by capital flows in 2015 compared
with 100% in previous years. Draconian measures being undertake in China are also
being enacted with a view to stemming net outflows. More recently, and at the other
extreme, we note that the likes of local currency Mexico had been pressured from a pure
carry perspective, with (now) concessional Brazil a beneficiary.
A typical barometer of stress at times like this comes from elevated balance of payments
deficit positions. Even if they are fully financed by capital flows today, that may not
necessarily be the case tomorrow. The usual suspects here include Turkey, South Africa,
Brazil, Colombia, Peru and to a lesser extent the likes of Indonesia, Ukraine, and
Kazakhstan. Of these the likes of Indonesia, Turkey, Colombia, South Africa and
Kazakhstan would have the lowest FX reserves as % of GDP, but not worrying low with
the exception of Ukraine, Nigeria and Argentina which have FX reserves of less than 10%
of GDP. So far however, such concern has found a fillip through FX depreciation where
needed, and there has not been a blowout apart from a build in FX concessions.
Risks are elevated, but not flashing at a burning red. The most likely route down a more
dangerous path is a correlation of circumstances, where a combination of China, the oil
price, Equities, USD HY and high beta EM together build a critical mass of negativity that
is elevated enough to act as a cumulative and significant drag on sentiment. Broadly
speaking this in fact is how January has played out, with most of the damage in fact away
from bond markets in equity market performance. Balanced bond portfolios have not
done too badly in relative terms, helped by core and semi-core performance.
In the coming weeks more of the same is probable. A subsequent rebuild of the Fed hike
discount would eventually signal a significant calming of concern. However, we need first
to get beyond the feeling that a big calamity lies just around the corner. That will take time
and is akin to running the gauntlet. Hence the continued near term bid to core bond
markets, the stability of front ends and the pressure on risky assets in turn a reflection of
capital outflow pressure, ranging from negative alpha to FX stress implications. Look for
valuations to become a bigger influence as we progress through Q1 though, with for
example Germany likely to overshoot to the downside in yield, and for value to get bought
into in the spreads environment on a selective basis. Certainly the pain of an eventual
uptick in core yields should be countered by fading longs into the breakeven protection of
selected spreads. Not there yet though as risk-off is set to persist a little longer.
Padhraic Garvey
No contagion as of yet, but
correlation is in play
The barometer of stress
centres on USD leverage and
ability to finance current
account deficits
Price action in January was
dominated by the fear factor
More of the same in prospect
in the coming weeks
Barring an actual calamity of
substance, core risks getting
too rich and spread too
concessional in due course
Monthly Economic Update February 2016
15
Fig 17 ING global forecasts
2014 2015F 2016F 2017F
1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY
United States
GDP (% QoQ, ann) -2.1 4.6 5.0 2.2 2.4 0.6 3.9 2.0 0.7 2.4 2.2 1.9 1.6 2.3 1.9 2.2 2.6 2.1 2.2 2.2
CPI headline (% YoY) 1.4 2.1 1.8 1.1 1.8 -0.1 0.0 0.1 0.5 0.1 1.2 0.9 1.4 1.6 1.4 2.2 2.4 2.2 2.1 2.2
Federal funds (%, eop)1 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.25 0.25 0.25 0.50 0.50 0.50 0.75 0.75 1.00
Fed monthly average asset
purchase total
65.0 45.0 25.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
3-month interest rate (%, eop) 0.30 0.20 0.20 0.20 0.30 0.30 0.15 0.40 0.60 0.65 0.80 0.80 0.85 1.05 1.10 1.30
10-year interest rate (%, eop) 2.71 2.53 2.49 2.17 1.90 2.35 2.03 2.20 1.80 1.70 1.90 2.20 2.20 2.30 2.40 2.40
Fiscal balance (% of GDP) Fiscal Year 2014/15 -2.8 Fiscal Year 2015/16 -2.7 Fiscal Year 2016/7 -2.4 Fiscal Year 2017/18 -2.3
Fiscal thrust (% of GDP) 0.0 0.2 0.2 0.0
Debt held by public (% of GDP) 74.1 74.2 73.8 73.2
Gross public debt/GDP (%) 102.4 102.6 102.2 101.8
Eurozone
GDP (% QoQ, ann) 0.9 0.2 1.2 1.5 0.9 2.2 1.6 1.2 1.4 1.5 1.5 1.5 1.6 1.8 1.5 1.7 1.8 1.8 1.9 1.7
CPI headline (% YoY) 0.7 0.6 0.4 0.2 0.5 -0.3 0.2 0.1 0.2 0.1 0.3 0.2 0.5 0.8 0.5 1.3 1.5 1.6 1.7 1.5
Refi minimum bid rate (%, eop) 0.25 0.15 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
3-month interest rate (%, eop) 0.28 0.21 0.08 0.08 0.02 -0.01 -0.04 -0.14 -0.19 -0.25 -0.26 -0.27 -0.25 -0.23 -0.22 -0.20
10-year interest rate (%, eop) 1.70 1.25 0.95 0.54 0.18 0.76 0.59 0.65 0.35 0.40 0.60 0.75 0.90 1.10 1.20 1.30
Fiscal balance (% of GDP) Fiscal Year 2014/15 -2.4 Fiscal Year 2015/16 -2.1 Fiscal Year 2016/17 -1.8 Fiscal Year 2017/18 -1.6
Fiscal thrust (% of GDP) -0.2 0.1 0.2 0.1
Gross public debt/GDP (%) 95.1 93.9 93.4 92.5
Japan
GDP (% QoQ, ann) 4.5 -7.6 -1.1 1.3 -0.1 4.4 -0.5 1.0 -1.2 0.6 1.5 1.7 1.4 1.9 0.8 4.7 -6.1 -0.4 1.3 0.6
CPI headline (% YoY)2 1.6 3.6 3.3 2.7 2.7 2.3 0.5 0.2 0.2 0.8 0.1 0.0 0.7 1.2 0.5 1.7 2.7 2.6 2.5 2.4
Excess reserve rate (%) 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
BoJ asset purchase total 213 227 249 270 290 310 330 350 370 390 410 430 450 470 485 500
3-month interest rate (%, eop) 0.15 0.15 0.15 0.15 0.17 0.17 0.17 0.17 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15
10-year interest rate (%, eop) 0.64 0.56 0.52 0.32 0.39 0.45 0.35 0.26 0.05 0.02 0.02 0.04 0.06 0.08 0.13 0.17
Fiscal balance (% of GDP) Fiscal Year 2014/15 -7.4 Fiscal Year 2015/16 -7.1 Fiscal Year 2016/17 -6.7 Fiscal Year 2017/18 -6.3
Fiscal thrust (% of GDP) 0.4 -0.8 0.0 0.0
Gross public debt/GDP (%) 211.0 212.0 212.6 213.0
China
GDP (% YoY) 7.4 7.5 7.3 7.3 7.4 7.0 7.0 6.9 6.9 7.0 6.7 6.6 6.5 6.3 6.5 6.7 6.6 6.4 6.4 6.5
CPI headline (% YoY) 2.3 2.2 2.0 1.5 2.0 1.2 1.4 1.7 1.5 1.5 1.5 1.4 1.6 1.5 1.5 1.5 1.3 1.4 1.7 1.5
PBOC 1yr deposit rate (% eop) 3.00 3.00 3.00 2.75 2.50 2.00 1.75 1.50 1.25 1.00 1.00 1.00 1.00 1.00 1.00 1.00
PBOC 1yr best lending rate (% eop) 6.00 6.00 6.00 5.60 5.35 4.85 4.60 4.35 4.10 3.85 3.85 3.85 3.85 3.85 3.85 3.85
7-day repo rate (% eop) 4.19 4.07 2.91 5.07 3.80 3.30 2.39 2.49 2.25 2.00 2.00 2.00 2.00 2.00 2.00 2.00
10-year T-bond yield (%, eop) 4.54 4.09 4.07 3.62 3.60 3.62 3.27 2.86 2.75 2.50 2.50 2.50 3.30 3.40 3.50 3.60
Fiscal balance (% of GDP) Fiscal Year 2014/15 -2.0 Fiscal Year 2015/16 -3.5 Fiscal Year 2016/17 -3.2 -3.0
Fiscal thrust (% of GDP) n/a n/a n/a n/a
Public debt (% GDP), incl. local
govt.
56.6 60.2 60.0 60.0
UK
GDP (% QoQ, ann) 3.6 3.4 2.5 2.5 2.9 1.5 2.2 1.8 2.0 2.2 2.7 2.2 1.8 3.2 2.3 3.0 2.6 2.9 2.7 2.7
CPI headline (% YoY) 1.7 1.7 1.5 0.9 1.5 0.1 0.0 0.0 0.1 0.0 0.6 0.9 1.3 2.1 1.4 2.7 3.1 3.2 2.9 3.0
BoE official bank rate (%, eop) 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25 1.50 1.75
BoE Quantitative Easing (£bn) 375 375 375 375 375 375 375 375 375 375 375 375 375 375 375 375
3-month interest rate (%, eop) 0.50 0.55 0.66 0.55 0.55 0.58 0.58 0.65 0.60 0.65 0.70 0.90 1.20 1.50 1.70 1.95
10-year interest rate (%, eop) 2.74 2.67 2.42 1.76 1.90 2.00 1.75 2.00 1.70 1.90 2.10 2.20 2.40 2.60 2.70 2.90
Fiscal balance (% of GDP) Fiscal Year 2014/15 -4.9 Fiscal Year 2015/16 -3.7 Fiscal Year 2016/17 -3.0 Fiscal Year 2017/18 -1.5
Fiscal thrust (% of GDP) -0.9 -0.9 -1.5 -0.7
Gross public debt/GDP (%) 80.8 82.8 82.8 79.7
EUR/USD (eop) 1.38 1.36 1.26 1.21 1.05 1.10 1.12 1.09 1.08 1.05 1.05 1.10 1.12 1.15 1.18 1.20
USD/JPY (eop) 103 102 109 120 120 123 120 120 120 120 120 120 118 117 116 115
USD/CNY (eop) 6.21 6.20 6.14 6.21 6.20 6.20 6.36 6.52 6.67 6.72 6.66 6.60 6.57 6.55 6.53 6.50
EUR/GBP (eop) 0.83 0.80 0.78 0.78 0.71 0.71 0.74 0.74 0.75 0.78 0.76 0.76 0.76 0.77 0.78 0.80
Oil (US$/bbl, pa, eop) 108 110 103 77 55 64 51 39 30 30 35 40 50 55 60 65
1Lower level of 25bp range
2Includes effect of April 2014 and 2017 consumption tax increases
Source: ING forecasts
Monthly Economic Update February 2016
16
Disclosures Appendix This publication has been prepared by ING (being the commercial banking business of ING Bank N.V. and certain subsidiary
companies) solely for information purposes. It is not investment advice or an offer or solicitation to purchase or sell any
financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when
published, but ING does not represent that it is accurate or complete. The information contained herein is subject to change
without notice. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this
publication. This publication is not intended as advice as to the appropriateness, or not, of taking any particular action. The
distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose
possession this publication comes should inform themselves about, and observe, such restrictions. Copyright and database
rights protection exists in this publication. All rights are reserved. ING Bank N.V. is incorporated with limited liability in the
Netherlands and is authorised by the Dutch Central Bank.