Discussing real estate in China offers important insight into China economy. There is a lot of granular data that when examined can give us a solid picture what of if going on China’s economy on a macro level. To that end today’s newsletter has more graphs than we typically include, but we wanted to really cohesively lay out the Chinese real estate market. Some graphs we have included with commentary, others without comment.
Despite elevated uncertainty and lowered growth expectations for 2019, the International Monetary Fund (IMF) still expects continued global economic expansion, thereby potentially placing it at variance with the expectations embedded in financial markets.
The remaining efficacy of monetary policy in the Eurozone is being undermined by the conspicuous absence of an interest rate buffer that could ultimately be detrimental to any future attempts to support aggregate demand.
Meanwhile, the Bank of Japan will continue its ultra-accommodative policy stance due to downside risks to medium and long-term inflationary expectations, but low corporate profits growth expectations limit downside equity market risks.
Current expectations for corporate profits growth in the Eurozone and China require downgrading due to their respective economic outlooks, implying downward pressure on equity prices.
Crucially, US corporate profit expectations have been scaled back to match revenue expansion, thereby indicating that analysts have finally embraced a more realistic approach towards the future path of operating margins.
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What a tough year 2018 was for emerging markets, in equities, fixed income and currencies. It seems to us that Asia’s fundamentals – whether it be earnings growth, debt vulnerability or external balance – were cast aside as concerns about trade wars, the strong dollar, interest rate rises and ‘liquidity’ took centre stage. In short, 2018 was a risk-off year. What about 2019?
We foresee more growth in the global economy in 2019 even if it is at a slower pace in the US (although a stronger one in China). We are of the view that the US rate cycle has already peaked and that the dollar will weaken as the year progresses. Moreover, we expect funds to focus much more on the relative attractiveness of emerging market valuations, especially in areas where currency and debt vulnerabilities are low.
The Conservative party and the DUP united in a rare show of support for Theresa May’s Brexit plans by backing her deal, subject to alternative arrangements being included in the Irish backstop.
A state-dependent break clause still looks like the most likely outcome to me, although pressure to include it in the main text makes it less tolerable for the EU. I still see the probabilities of a deal, no deal, and no Brexit as roughly 55:30:15.
All other amendments were defeated except one expressing opposition to no deal. Unlike the defeated Cooper amendment, it does not change process, although neither fundamentally affects the direction, despite market optimism it would.
The GFC and the subsequent Eurozone crisis served to highlight the fragility and sub-optimal nature of the Eurozone. Recent data suggest that European economies are slowing. The damage both economic and social and therefore political from the last two downturns has been very severe. Data this week and in coming months could well shift the consensus towards a 2019 European recession. Is it safe to conclude that Europe is just one recession away from the end of the experiment with the single currency?
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A cut in interest rates is coming. The case is compelling. Headline inflation is easing and is now running well below the RBI’s forecasts. System non-performing loans have peaked while the trade deficit is narrowing meaning the central can afford some largess. Given where real lending rates are and the fragility of the corporate profit cycle, lower policy rates would welcome and a positive of the India growth story. We reiterate our overweight Indian equities call.
BI held its benchmark rate steady due to current account concerns; in any event, bank credit growth suggests that the economy has considerable momentum despite international headwinds and the 2018 rate hikes. Widodo did enough to surpass Prabowo in the 1st of 5 presidential debates, although Prabowo avoided gaffes and both candidates lacked energy. Dubbed a ‘dud’ in headlines, it at least featured constructive discussion of bureaucratic reform. Widodo also promised a National Legislative Center to rectify conflicting and excessive regulation. A Charta Politik poll shows steady margins for Widodo and PDI-P as of late December and the sole reform-minded party, the new PSI, finally registered support of 1.5%. Planners remain at odds over a location for a downtown terminus of Jakarta’s elevated LRT — a project crucial for complementing the imminent MRT.
Politics: Despite a critical domestic press reaction and a lack of sensational moments, the first presidential debate produced the most detailed high‑level discussion of bureaucratic reform in more than a decade. Overall, President Joko Widodo fared better than his challenger, Gerindra Chair Prabowo Subianto, but both seemed lacking in energy. Both also succeeded in avoiding pitfalls: Widodo’s running mate, the aging cleric Mar’uf Amin, caused no major embarrassment for the ticket; and Prabowo maintained an even temper with no unseemly rants. The candidates traded barbs: Prabowo hit home by questioning Widodo’s decision to appoint a “top law enforcement official” (i.e., the attorney general) who is a party representative; and Widodo twice inflicted damage by citing Gerindra’s lack of women in its leadership and its nomination of corruption convicts for legislative offices. Widodo unveiled a plan for a National Legislative Center (Puslegnas). The debate, translated in full by Ref Wkly, seems unlikely to alter the candidates’ poll positions (Page 2). The president approved the release of the 80‑year‑old icon of terrorist groups, Abu Bakar Basyir (p. 15). Widodo visited a fair for businesses run by impoverished households and, oddly, purchased 100,000 1‑liter bottles of dishsoap from one vendor. At best, the episode may indicate a preoccupation with his family’s catering business; at worst, it shows haphazard handling of his personal finances (p. 16).
Surveys: Charta Politik measured President Joko Widodo’s margin as being virtually unchanged at 19 percentage points in late December. It also confirmed that PDI‑P’s nomination of Widodo is a major reason for its popular support. The pro‑reform Solidarity Party (PSI) finally registered detectable support of 1.5 percent (p. 17).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Infrastructure: Differences between the central and provincial government persist over where to locate the terminus of the Light Rail Train (LRT) in downtown Jakarta. A large land plot south of Landmark Tower has been vacant for decades – but the central government prefers a less central location (p. 19).
Economics: The rupiah has partially rebounded amid easier external financing conditions in recent weeks, but Bank Indonesia (BI) nonetheless decided this week to maintain its benchmark rate at 6.0 percent – due to a persistently high current account deficit. In part, the deficit reflects Indonesia’s considerable economic momentum. Nonetheless, rising fuel imports and falling oil production signal continued current account pressure ahead, necessitating vigilance from BI (p. 20).
No longer playing catch up? The “world-leading” PLA
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
One of the important ongoing debates in the country has been on the topic of Job creation. In the absence of a official household survey, the government has been releasing data on new retirement accounts with EPFO as a proxy for formal sector job creation. That data though is subject to significant limitations and is most likely over-stating job creation currently due to the ongoing tax incentives. That said, even taken at face value, the EPFO data by itself is not suggestive of strong job creation in the economy. The EPFO data at best suggests a total of 8 million jobs being created in the organised sector when the total number of jobs required to be created outside Agriculture is probably 2x of that. Thus, unless a clear assessment of the performance of the unorganised sector can be made, any rigorous assessment of the labour market cannot be made. There is a urgent need for a formal, household survey to assess the labour market. And there is no reason why a country like India cannot commission and successfully execute a survey once a quarter.
For the last few years people have been referring to China+1, the ‘one’ sometimes being Vietnam. Is it now time to be thinking of ‘The One’? There is certainly evidence that businesses are on the move. Admittedly, this is not new – low end footwear, clothing and toy companies have been moving to Vietnam for years. But the US-China trade dispute appears to be changing mind sets. The proof is in the pudding, see Vietnam: Economic Prestidigitation, where we noted Vietnam’s foreign direct investment boom.
Now that we know China’s GDP posted the lowest growth rate in decades in December 2018, a lot of attention has turned to stimulus. A key outlier of stimulus is getting consumers to spend, so today we take a look at consumer spending and household consumption overall. Yet, first we need to take a look at disposable income and just where it is coming from.
China’s quarterly numbers are in and China’s economic growth decreased to 6.4%. We are reviewing the most recent numbers and examining some inconsistencies.We believe there are pronounced weak spots in China’s GDP growth and expect to see that downward pressure in the Chinese economy going forward.
There is a certain scenario in which the Indonesian market in 2019 could outperform on relative basis. If global growth slows while the resilient household sector holds up, capital inflows coud prove sufficient to cover the current account and avert yet more depreciation.
An adverse policy framework is depressing key sectors and hampering investment – at a time when the current account deficit (Cad) is jeopardizing stability. The administration of President Joko Widodo, who is cruising to re-election, shows little urgency about rectifying recent declines in Foreign Direct Investment (FDI). These concerns have underpinned our bearish outlook for the market in 2019 (see Indonesia: The Year of Dithering Dangerously). But in the event of a sharp global slowdown this year, Indonesia has potential – on a relative basis – to outperform.
Indonesia’s economy is poorly integrated with the international arena, and this ‘decoupling’ can offer insulation from global turbulence under certain conditions. And the key driver of GDP is household consumption, which has shown resiliency by sustaining a 4.9‑5.1 percent pace of annual growth over the past five years. As global growth deteriorates, Indonesia’s stalwart consumer‑growth engine may stand out and garner attention; if so, this may attract the capital inflows needed to cover the Cad.
However, risks remain high due to a background context that features policy flaws and institutional dysfunctions. Reforms to address the investment climate could bring about a substantial upward re‑rating – but prospects for Widodo to move assertively in this direction seem poor. In the continued absence of meaningful reforms, macro-economic stability will remain fragile, vulnerable to abrupt reversals in short‑term portfolio flows. Given Indonesia’s weak export performance and growing dependence on imported oil, the currency would face renewed pressure in the event of excessive Federal Reserve hikes or global shocks. However, in a scenario of global deceleration without undue turbulence, Indonesia has potential to outperform.
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Faster employment growth lowered the unemployment rate to 4.0% in Nov-18, contrary to expectations. The labour market still looks to be tightening.
The BoE will provide its annual update of supply-side conditions in its 7-Feb Inflation Report. I expect it to maintain its 4.25% NAIRU estimate.
Stronger wage growth suggests an effective tightening of the labour market. Excess demand and inflation provide hawkish pressure, albeit neutered by Brexit.
The Fed’s new patient approach to raising the federal funds rate will hinge critically on co-operative incoming economic data, notably subdued inflation signals.
Measures of US inflationary expectations remain well-anchored, thereby providing the Federal Open Market Committee (FOMC) with policy breathing space, while labour market conditions will continue to be closely monitored for overheating risks.
US monetary policy requires both nimbleness and flexibility, analogous to the conduct of the 1990s, although the advanced age of the current cycle raises the risks of a policy mistake.
The Fed has effectively been forced by excessive financial market volatility to return to issuing forward guidance, as investors struggle to envisage the return to a normal environment where short-term interest rate volatility is higher compared to long-term yields.
Fed policy adjustment is being complicated by further declines in the term premium demanded by bond investors that simultaneously boosts financial accommodation, supports the real economy and flattens the yield curve.
The equity market in the fourth quarter of 2018 was throwing off recession-like signals with the 19.8% drop in equity prices from the S&P 500’s all-time high through the near-term trough of December 24, 2018. We see the decline as a correction from an overvalued position in late September rather than as point to an impending recession.
Key to the outlook for equities and the economy are economy-wide profit margins (share of nonfinancial corporate profits in output). It appears the balance between price increases and productivity-adjusted labor costs has improved as productivity has accelerated despite a pickup in the growth of labor compensation. The corporate tax cut has spurred post-tax margins close to record highs.
We expect nonfinancial corporate profit growth of 7% on average over the next two years, which should support equity prices. However, the scope for a strong further rebound in equity prices is challenged by our outlook for rising corporate bond yields (our valuation model suggests rising profits and higher yields roughly cancel each other out in our valuation model).
The globe is facing more than an ordinary business cycle.
Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.
On Thursday 27 December 2018 the General Statistics Office (GSO) in Hanoi announced that Vietnam had grown by 7.08% (7.1% to us mere mortals) for full year 2018. Magically, this was exactly the same number as that forecast by the Asian Development Bank in April, long before the travails that affected the rest of the region in the second half of the year. It was also an outlier among economic forecasters (with the IMF in July projecting just 6.6% for last year). Even more magically, the GSO was able to produce this number just before the end of the year when, officially, money supply data were only available up to September and credit data to July. Hey presto, economic statistics are magic!
Truth be told, Vietnam is an object lesson in the worth of most macroeconomic statistics collected by governments at the insistence of the IMF: pinches of salt should be handed out with each release.
Economic data are manipulated around the world by governments. True economic conditions are apparent to anyone who is on the ground (which makes life difficult for fund managers who are not visiting countries they invest in regularly). And in Vietnam, after one day of meetings, we would conclude that, even if the 7.1% number is just pie-in-the-sky, economic growth and general economic conditions are very good.
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On Tuesday 29 January, amendments to the UK government’s ‘plan b’ will be voted upon, and some with opposing aims may pass.
Potential Europhile amendments include some that conditionally oblige a request to extend Article 50. It may pass this stage, but does not mean the EU would agree.
Eurosceptic proposals seek to show that a deal is agreeable after fixing the backstop. I still ultimately expect a codicil that conditionally breaks the backstop.
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
Politics: Corruption moved to the fore of campaign sparring, as National Mandate Party (Pan) founder Amien Rais accused President Joko Widodo of “crimes of omission”. The attack may reflect mounting grounds for concern about the poll position of Pan, which risks suffering exclusion from the next parliament. Prabowo Subianto and his campaigners continue to issue vague insinuations, rather than highlighting the plain fact that four active investigations are embroiling Widodo‑government ministries (Page 2). Basuki Purnama left prison and asked to be called ‘BPT’. Megawati’s cool treatment of the former Jakarta governor reflects her diffidence about championing pluralism (p. 3).
Disasters: Flooding has killed dozens and displaced thousands in 10 districts of South Sulawesi, including Makassar. The governor faults past management of watersheds (p. 4).
Electoral System: Yet again, the State Administrative Court (PTUN) has contradicted the General Election Commission (KPU), putting the latter at odds with the Election Oversight Agency (Bawaslu) in a case pertaining to Oesman Sapta Odang (OSO), the Hanura chair who is speaker of the Regional Representatives Assembly (DPD). Although OSO is disreputable, Hanura is tiny and the DPD virtually powerless, the case nonetheless poses risks for the KPU’s prestige and effectiveness (p. 5).
Justice: The spiritual leader of the former terrorist organization Jemaah Islamiyah (JI), Abubakar Baasyir, has not yet won release. He must first issue a written statement declaring loyalty to the Republic of Indonesia and the pluralist state ideology Pancasila (p. 7).
Policy News: The president finally enacted a long-planned regulation to require natural-resource exporters to recycle their foreign-exchange earnings through domestic banks. Some coal producers complain that the move conflicts with the terms of their offtake-and-financing agreements. But the measure holds promise for rectifying the tight onshore dollar liquidity that has long rendered the rupiah highly volatile (p. 9). A new tax IT system is undergoing procurement, with full deployment targeted for 2023 (p. 11).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Jakarta: The March opening of the MRT – and all 13 stations – is on schedule (p. 12).
Equity markets across emerging countries in 2018 faced significant headwinds primarily due to rising US Fed rates that led to a capital outflow as well as higher commodity prices including crude oil that affected the profitability of companies. India was no exception.
The corporate results in India were a mixed bag. While sales have finally recovered from the impact of demonetization and GST transition, the profitability was impacted due to high commodity prices and rising provisions due to higher bad loans for the banks.
On a positive note though, a number of things seem to have fallen in place in 2018 like NCLT lead NPA resolution, bank management changes, increased capacity utilization, lower inflation, falling commodity prices. If the same trend were to continue in 2019, we are confident that macros will turn more favorable and improved corporate sales can translate into better earnings growth. This we believe may augur well for Indian equities.
Recently, we have profiled a spat of news items focusing on China’s employment numbers and efforts to better handle migrant workers. On Monday, some updated data on employment numbers and migrant workers was released. Much of the focus on Monday was on GDP, but there are some gems among the employment data that can shed light on the China’s employment numbers and the impact it could have on the wider economy.
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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
BI held its benchmark rate steady due to current account concerns; in any event, bank credit growth suggests that the economy has considerable momentum despite international headwinds and the 2018 rate hikes. Widodo did enough to surpass Prabowo in the 1st of 5 presidential debates, although Prabowo avoided gaffes and both candidates lacked energy. Dubbed a ‘dud’ in headlines, it at least featured constructive discussion of bureaucratic reform. Widodo also promised a National Legislative Center to rectify conflicting and excessive regulation. A Charta Politik poll shows steady margins for Widodo and PDI-P as of late December and the sole reform-minded party, the new PSI, finally registered support of 1.5%. Planners remain at odds over a location for a downtown terminus of Jakarta’s elevated LRT — a project crucial for complementing the imminent MRT.
Politics: Despite a critical domestic press reaction and a lack of sensational moments, the first presidential debate produced the most detailed high‑level discussion of bureaucratic reform in more than a decade. Overall, President Joko Widodo fared better than his challenger, Gerindra Chair Prabowo Subianto, but both seemed lacking in energy. Both also succeeded in avoiding pitfalls: Widodo’s running mate, the aging cleric Mar’uf Amin, caused no major embarrassment for the ticket; and Prabowo maintained an even temper with no unseemly rants. The candidates traded barbs: Prabowo hit home by questioning Widodo’s decision to appoint a “top law enforcement official” (i.e., the attorney general) who is a party representative; and Widodo twice inflicted damage by citing Gerindra’s lack of women in its leadership and its nomination of corruption convicts for legislative offices. Widodo unveiled a plan for a National Legislative Center (Puslegnas). The debate, translated in full by Ref Wkly, seems unlikely to alter the candidates’ poll positions (Page 2). The president approved the release of the 80‑year‑old icon of terrorist groups, Abu Bakar Basyir (p. 15). Widodo visited a fair for businesses run by impoverished households and, oddly, purchased 100,000 1‑liter bottles of dishsoap from one vendor. At best, the episode may indicate a preoccupation with his family’s catering business; at worst, it shows haphazard handling of his personal finances (p. 16).
Surveys: Charta Politik measured President Joko Widodo’s margin as being virtually unchanged at 19 percentage points in late December. It also confirmed that PDI‑P’s nomination of Widodo is a major reason for its popular support. The pro‑reform Solidarity Party (PSI) finally registered detectable support of 1.5 percent (p. 17).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Infrastructure: Differences between the central and provincial government persist over where to locate the terminus of the Light Rail Train (LRT) in downtown Jakarta. A large land plot south of Landmark Tower has been vacant for decades – but the central government prefers a less central location (p. 19).
Economics: The rupiah has partially rebounded amid easier external financing conditions in recent weeks, but Bank Indonesia (BI) nonetheless decided this week to maintain its benchmark rate at 6.0 percent – due to a persistently high current account deficit. In part, the deficit reflects Indonesia’s considerable economic momentum. Nonetheless, rising fuel imports and falling oil production signal continued current account pressure ahead, necessitating vigilance from BI (p. 20).
No longer playing catch up? The “world-leading” PLA
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
For the last few years people have been referring to China+1, the ‘one’ sometimes being Vietnam. Is it now time to be thinking of ‘The One’? There is certainly evidence that businesses are on the move. Admittedly, this is not new – low end footwear, clothing and toy companies have been moving to Vietnam for years. But the US-China trade dispute appears to be changing mind sets. The proof is in the pudding, see Vietnam: Economic Prestidigitation, where we noted Vietnam’s foreign direct investment boom.
Now that we know China’s GDP posted the lowest growth rate in decades in December 2018, a lot of attention has turned to stimulus. A key outlier of stimulus is getting consumers to spend, so today we take a look at consumer spending and household consumption overall. Yet, first we need to take a look at disposable income and just where it is coming from.
China’s quarterly numbers are in and China’s economic growth decreased to 6.4%. We are reviewing the most recent numbers and examining some inconsistencies.We believe there are pronounced weak spots in China’s GDP growth and expect to see that downward pressure in the Chinese economy going forward.
There is a certain scenario in which the Indonesian market in 2019 could outperform on relative basis. If global growth slows while the resilient household sector holds up, capital inflows coud prove sufficient to cover the current account and avert yet more depreciation.
An adverse policy framework is depressing key sectors and hampering investment – at a time when the current account deficit (Cad) is jeopardizing stability. The administration of President Joko Widodo, who is cruising to re-election, shows little urgency about rectifying recent declines in Foreign Direct Investment (FDI). These concerns have underpinned our bearish outlook for the market in 2019 (see Indonesia: The Year of Dithering Dangerously). But in the event of a sharp global slowdown this year, Indonesia has potential – on a relative basis – to outperform.
Indonesia’s economy is poorly integrated with the international arena, and this ‘decoupling’ can offer insulation from global turbulence under certain conditions. And the key driver of GDP is household consumption, which has shown resiliency by sustaining a 4.9‑5.1 percent pace of annual growth over the past five years. As global growth deteriorates, Indonesia’s stalwart consumer‑growth engine may stand out and garner attention; if so, this may attract the capital inflows needed to cover the Cad.
However, risks remain high due to a background context that features policy flaws and institutional dysfunctions. Reforms to address the investment climate could bring about a substantial upward re‑rating – but prospects for Widodo to move assertively in this direction seem poor. In the continued absence of meaningful reforms, macro-economic stability will remain fragile, vulnerable to abrupt reversals in short‑term portfolio flows. Given Indonesia’s weak export performance and growing dependence on imported oil, the currency would face renewed pressure in the event of excessive Federal Reserve hikes or global shocks. However, in a scenario of global deceleration without undue turbulence, Indonesia has potential to outperform.
Faster employment growth lowered the unemployment rate to 4.0% in Nov-18, contrary to expectations. The labour market still looks to be tightening.
The BoE will provide its annual update of supply-side conditions in its 7-Feb Inflation Report. I expect it to maintain its 4.25% NAIRU estimate.
Stronger wage growth suggests an effective tightening of the labour market. Excess demand and inflation provide hawkish pressure, albeit neutered by Brexit.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
BI held its benchmark rate steady due to current account concerns; in any event, bank credit growth suggests that the economy has considerable momentum despite international headwinds and the 2018 rate hikes. Widodo did enough to surpass Prabowo in the 1st of 5 presidential debates, although Prabowo avoided gaffes and both candidates lacked energy. Dubbed a ‘dud’ in headlines, it at least featured constructive discussion of bureaucratic reform. Widodo also promised a National Legislative Center to rectify conflicting and excessive regulation. A Charta Politik poll shows steady margins for Widodo and PDI-P as of late December and the sole reform-minded party, the new PSI, finally registered support of 1.5%. Planners remain at odds over a location for a downtown terminus of Jakarta’s elevated LRT — a project crucial for complementing the imminent MRT.
Politics: Despite a critical domestic press reaction and a lack of sensational moments, the first presidential debate produced the most detailed high‑level discussion of bureaucratic reform in more than a decade. Overall, President Joko Widodo fared better than his challenger, Gerindra Chair Prabowo Subianto, but both seemed lacking in energy. Both also succeeded in avoiding pitfalls: Widodo’s running mate, the aging cleric Mar’uf Amin, caused no major embarrassment for the ticket; and Prabowo maintained an even temper with no unseemly rants. The candidates traded barbs: Prabowo hit home by questioning Widodo’s decision to appoint a “top law enforcement official” (i.e., the attorney general) who is a party representative; and Widodo twice inflicted damage by citing Gerindra’s lack of women in its leadership and its nomination of corruption convicts for legislative offices. Widodo unveiled a plan for a National Legislative Center (Puslegnas). The debate, translated in full by Ref Wkly, seems unlikely to alter the candidates’ poll positions (Page 2). The president approved the release of the 80‑year‑old icon of terrorist groups, Abu Bakar Basyir (p. 15). Widodo visited a fair for businesses run by impoverished households and, oddly, purchased 100,000 1‑liter bottles of dishsoap from one vendor. At best, the episode may indicate a preoccupation with his family’s catering business; at worst, it shows haphazard handling of his personal finances (p. 16).
Surveys: Charta Politik measured President Joko Widodo’s margin as being virtually unchanged at 19 percentage points in late December. It also confirmed that PDI‑P’s nomination of Widodo is a major reason for its popular support. The pro‑reform Solidarity Party (PSI) finally registered detectable support of 1.5 percent (p. 17).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Infrastructure: Differences between the central and provincial government persist over where to locate the terminus of the Light Rail Train (LRT) in downtown Jakarta. A large land plot south of Landmark Tower has been vacant for decades – but the central government prefers a less central location (p. 19).
Economics: The rupiah has partially rebounded amid easier external financing conditions in recent weeks, but Bank Indonesia (BI) nonetheless decided this week to maintain its benchmark rate at 6.0 percent – due to a persistently high current account deficit. In part, the deficit reflects Indonesia’s considerable economic momentum. Nonetheless, rising fuel imports and falling oil production signal continued current account pressure ahead, necessitating vigilance from BI (p. 20).
No longer playing catch up? The “world-leading” PLA
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
UK retail sales retreated to their still-bullish trend level in Dec-18. A higher than usual share of consumption appears to have been pulled forward for Black Friday.
The significantly weaker outcome for December trims my monthly GDP forecast to 0.0% but leaves 4Q18 at 0.3% q-o-q. The earlier reversion to trend removes that source of depression from growth in the new year.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The Fed’s new patient approach to raising the federal funds rate will hinge critically on co-operative incoming economic data, notably subdued inflation signals.
Measures of US inflationary expectations remain well-anchored, thereby providing the Federal Open Market Committee (FOMC) with policy breathing space, while labour market conditions will continue to be closely monitored for overheating risks.
US monetary policy requires both nimbleness and flexibility, analogous to the conduct of the 1990s, although the advanced age of the current cycle raises the risks of a policy mistake.
The Fed has effectively been forced by excessive financial market volatility to return to issuing forward guidance, as investors struggle to envisage the return to a normal environment where short-term interest rate volatility is higher compared to long-term yields.
Fed policy adjustment is being complicated by further declines in the term premium demanded by bond investors that simultaneously boosts financial accommodation, supports the real economy and flattens the yield curve.
The equity market in the fourth quarter of 2018 was throwing off recession-like signals with the 19.8% drop in equity prices from the S&P 500’s all-time high through the near-term trough of December 24, 2018. We see the decline as a correction from an overvalued position in late September rather than as point to an impending recession.
Key to the outlook for equities and the economy are economy-wide profit margins (share of nonfinancial corporate profits in output). It appears the balance between price increases and productivity-adjusted labor costs has improved as productivity has accelerated despite a pickup in the growth of labor compensation. The corporate tax cut has spurred post-tax margins close to record highs.
We expect nonfinancial corporate profit growth of 7% on average over the next two years, which should support equity prices. However, the scope for a strong further rebound in equity prices is challenged by our outlook for rising corporate bond yields (our valuation model suggests rising profits and higher yields roughly cancel each other out in our valuation model).
The globe is facing more than an ordinary business cycle.
Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.
On Thursday 27 December 2018 the General Statistics Office (GSO) in Hanoi announced that Vietnam had grown by 7.08% (7.1% to us mere mortals) for full year 2018. Magically, this was exactly the same number as that forecast by the Asian Development Bank in April, long before the travails that affected the rest of the region in the second half of the year. It was also an outlier among economic forecasters (with the IMF in July projecting just 6.6% for last year). Even more magically, the GSO was able to produce this number just before the end of the year when, officially, money supply data were only available up to September and credit data to July. Hey presto, economic statistics are magic!
Truth be told, Vietnam is an object lesson in the worth of most macroeconomic statistics collected by governments at the insistence of the IMF: pinches of salt should be handed out with each release.
Economic data are manipulated around the world by governments. True economic conditions are apparent to anyone who is on the ground (which makes life difficult for fund managers who are not visiting countries they invest in regularly). And in Vietnam, after one day of meetings, we would conclude that, even if the 7.1% number is just pie-in-the-sky, economic growth and general economic conditions are very good.
A cut in interest rates is coming. The case is compelling. Headline inflation is easing and is now running well below the RBI’s forecasts. System non-performing loans have peaked while the trade deficit is narrowing meaning the central can afford some largess. Given where real lending rates are and the fragility of the corporate profit cycle, lower policy rates would welcome and a positive of the India growth story. We reiterate our overweight Indian equities call.
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