July 11, 2018 ( Lagos ): Across EMs, economic growth in China held onto its steam in the first quarter of 2018 with GDP printing at 6.8% YoY—the same rate as the previous two quarters—on the back of robust consumption and private investment. Precisely, retail sales printed solid at 9.8% YoY (Q1 18: 9.8%, Q4 17: 9.9%) reinforced by higher disposable income, and a tight labor market. Also, fixed investment maintained its growth rate of 7.5%. 

Irrespective, net exports declined due to a faster growth in imports with China recording its first current account deficit in almost two decades in March. Consequently, China’s economy gradually shifted from an investment fueled economy to consumption fueled, with consumption accounting for 77.8% of growth. On monetary stance, the PBOC8 surprisingly left its key rates unchanged at its last meeting due to concerns of economic slowdown based on recent data on retail sales and investment which pressured the PBOC to ignore its previous tactic of raising rates in tandem with the Fed. 

Elsewhere on China’s political clime, the National People Congress scrapped the term limit on the president’s term in office making President Xi Jinping rule indefinitely (after winning the March 2018 election).

In line with their expectation of a sustained pick-up in India’s economy, output growth expanded 7.7% YoY in the first quarter (Q4 17: 7.0%) on the back of solid growth in government and private investment spending. For context, government spending grew 16.8% YoY (Q4 17: 6.8%) while private capital investment expanded 14.4% YoY (Q4 17: 9.1%).

Further supporting the growth picture is household consumption which accelerated by 6.7% compared to 5.9% in Q4 17. On inflation, India’s annual CPI rose to a 4-month high in May at 4.87% YoY (Q1 18: 4.60 %) amid rising prices of food and fuels on the back of higher crude oil price11. Consequently, the Reserve Bank of India (RBI) responded by raising its benchmark policy rate by 25bps to 6.25%12, alluding to upside risks of higher oil prices on inflation and uncertainty in global financial markets.

Over in Brazil, consolidating on its impressive run since exiting the historic recession in Q1 17, Brazil’s economy improved – up 20bps to 0.4% YoY in Q1 18, reflecting resilience on the demand and supply side of the economy. On the demand side, the growth emanated from private consumption (+0.5% YoY), private capital outlay (+0.6% YoY) and exports (+1.3% YoY). 

Similarly, the supply side strengthened as commerce, public administration, real estate, mining and agriculture expanded over Q1 18. However, in Q2 18, PMI plunged from a 2018 high of 53.4pts in March to 49.8pts in June 2018 which guides to slowdown in economic activities over the period. This followed a two weeks trucker’s strike which plagued major sectors of the economy, as private truck drivers protested over hike in energy13 prices, which cascaded to higher prices and pushed inflation to a 15- month high in June (4.39%). 

In addition, the currency depreciated (12% YTD), on the back of capital flight ahead of the presidential elections in Q4 18. Consequently, the apex bank (Banco de Brasil) retained the Selic rate at 6.5% to strike a chord between subpar headline inflation, currency stability and economic growth.

Economic growth remained resilient in Mexico, with Q1 18 growth up 60bps to 1.1% YoY. Bulk of the expansion emanated from both the agriculture (5.1% YoY) and services (3.1% YoY) sectors. On prices, inflation for the month of May printed at 4.51%, 151bps higher than its Central bank’s (Banxico) target of 3% for 2018. 

This is largely due to YTD depreciation of the Peso (-2.3% to 20.11 peso/$) as rate hikes in US and political concerns, in the run-up to the recently concluded Presidential elections, weighed on the Peso. In response, Banxico’ s MPC14 voted unanimously to raise its benchmark interest rate by 25bps to 7.75%.

Over in EM Europe, Russia’s economy improved over Q1 18, growing by 1.3% YoY (Q4 17: 0.9%), with expansion emanating majorly from the Manufacturing and Mining sectors which benefited from higher crude oil prices to offset contraction in the ICT, Health care and Transportation sectors. However, leading indicators suggest economic growth momentum slowed in Q2 18 as business conditions deteriorated in May and June with both PMI readings contracting to 49.8pts and 49.5pts respectively after 21 consecutive months of expansion. 

This was in part fueled by the pass-through of western imposed sanctions on Russia. In response, the Bank of Russia15 cut interest rates further by 50bps to 7.25% at its monetary policy meeting, in a bid to support growth.

Over in Turkey, the economy advanced 7.4% YoY in Q1 2018 (Q4 17: 7.3%). The growth was fueled by a jump in household consumption and fixed investment, a feed-through from higher government spending and a state-backed credit guarantee fund. 

Meanwhile, the country’s currency turned out to be one of the worst performing among the emerging markets with a 23% YTD depreciation in the Lira. The hit on the Lira reflected the global tightened monetary stance, domestic political uncertainties and worries over the independence of the Central Bank of Turkey16. As a result, inflation rose to a 6-month high of 15.39% in June (May: 12.15%). Accordingly, the central bank raised its benchmark interest rate by a total of 500 bps in H1 2018 to 17.75% to salvage the Lira.

Reporting for EasyKobo on Wednesday, 11 July 2018 in Lagos, Nigeria

Source: ARM Securities Limited

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