Daily Macro: Growing Pains & PBoC Cut/US-China Clash/Railways & Airports & Bonds/More Babies Please/Moon Landing and more

In this briefing:

1. Growing Pains & PBoC Cut/US-China Clash/Railways & Airports & Bonds/More Babies Please/Moon Landing
2. Philippines: Time to Mull over the Risks of the ‘twin Deficit’ Syndrome
3. Strong U.S. Employment Report For December Should Alleviate Concerns About The Outlook
4. The Eurozone at 20 Part 1: Is It Working?
5. FLASH: UK Partially Recovers into 2018 Yearend

1. Growing Pains & PBoC Cut/US-China Clash/Railways & Airports & Bonds/More Babies Please/Moon Landing

China News That Matters

• PBoC responds to disappointing start to another year of slowing growth
• Talks planned but US-China “clash of civilisations” deepens
• Ever faster trains, new airports from Beijing to Antarctica – and more debt
• Two-child policy fails to avert demographic crisis
• Beijing nails first ever landing on moon’s far side

2. Philippines: Time to Mull over the Risks of the ‘twin Deficit’ Syndrome

• We remain upbeat on 2019 growth prospects (6.5%-6.6%) amid fading inflation risk. However, we don’t see a return to the ‘sweet spot’ with the risks of swelling macro imbalances as highlighted in our macro strategy piece recently. Domestic demand, which will underpin growth prospects, has a larger impact on the trade shortfall rather than oil price fluctuations.

• Anticipated costs from a hefty current account gap would be the sustained compression of official reserves with a corresponding peso liquidity drain. Managing the hefty current account deficit likely to probe more than 3% of GDP as investment- driven growth persists, would require the combination of a weaker PHP and positive, real interest rates. Aside from attracting portfolio flows, real interest rates would encourage private sector savings in our twin deficit situation. Positive real rates could also curb the private sector’s strong debt appetite. A staggered 2% bank reserve cut anticipated this year when monthly inflation is closer to 5% or less, would provide partial relief to peso liquidity loss arising from the BSP’s net dollar sales in the inter-bank FX market.

• Fiscal deficit has to be kept in check and within the range of 3% of GDP. Public sector credit risk has been buoyed by the implementation of the 2nd phase of excise hikes on diesel and gasoline products this year amid low oil prices. More fiscal reforms are pending in Congress that could be delayed by the mid-term elections. 

• Against a backdrop of hefty fiscal and external gaps, it’s premature to contemplate lower policy rates with receding inflation risk. The full impact (or pass-through) of the cumulative 175bp hike in lowering inflation expectations to within the BSP’s inflation target range of 2-4%, has yet to be seen. While BSP’s policy bias may ‘sound’ dovish in the new year, maintaining its policy rate at 4.75% amid receding inflation, would signal policy focus on lingering macro stability issues.

• PHP may revisit historic highs of 55-56 on the back of swelling macro imbalances in the near-term although correction to the 54-55 range would depend much on the US Fed finally declaring an end to its rate tightening cycle and thus, terminate the strong USD episode, with BSP sticking to its current policy rate.

• We continue to like ‘steepeners’ in the long end as debt supply from the government and private corporate debts to fund ambitious investment plans would likely persist. The expected backdrop of upbeat growth prospects coupled with our view of the BSP ending its monetary tightening cycle (ahead of the Fed) amid waning inflation risk, bode well for local equities and short-duration bonds.

3. Strong U.S. Employment Report For December Should Alleviate Concerns About The Outlook

Ahead of Friday’s employment report for December pessimism about the economic outlook was running high.  The employment report, however, showed unambiguous strength in the U.S. economy with a surge in payrolls, broad-based employment gains by sector, faster wage growth, and a sharp increase in hours worked.

4. The Eurozone at 20 Part 1: Is It Working?

As we reach the 20th anniversary of the introduction of Euro, now is a good time to assess the success or failure or the single European currency. From the perspective of employment it is fair to say the Euro has been nothing short of a catastrophe. Over the past 20 years the average rate of unemployment in the Eurozone has been 9.4%, or about 3 times higher than the level most economists would consider to be a normal level of frictional unemployment. The total number of man-years of lost output as a result of unemployment now mounts to over 280 million of which perhaps 185 million man-years of unemployment are structural rather than frictional. Given current productivity levels those 185 million lost man-years could account for up to USD 6 trillion of lost output. That is a heavy cost the blame for which arguably lies with the politicians who pushed ahead with a largely political project while ignoring the obvious economic ramifications of the single currency. As is nearly always the case when analyzing the Eurozone the average and the total hide a wide range of outcomes between countries.

5. FLASH: UK Partially Recovers into 2018 Yearend

• The UK’s services PMI rebounded by 0.8 points to 51.2 in Dec-18, which was above Consensus expectations but consistent with historical payback after large falls.
• I still expect the ONS to report growth in the equivalent services sectors of 0.5% in 4Q18, despite the PMI continuing to point weaker than that.
• Unfavourable rounding helps constrain my forecast for Nov-18 GDP growth to 0.1% m-o-m. Recent downside news in energy output reversed the upside from retail.