united kingdom prospects - cebr.com · in the eurozone, primarily related to brexit. from 1.5%...

The Prospects Service

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Global ProspectsThe Prospects Service

Q3 2016

The Prospects Service © Centre for Economics and Business Research, 2016

Contents

Executive summary 3

Regional economic commentary 4

Global growth 5

Commodities, trade and exchange rates 6

Americas 10

Eurozone 16

Eastern Europe, Russia, and Turkey 24

Asia and Australia 28

Middle East and Africa 36

Global Prospects Q3 2016

The economic outlook covers nearly 90% of the global economy.

Figures are calculated at market exchange rates.

This report is produced by the Centre for Economics and Business Research (Cebr) as part of our macroeconomic trends, analysis and forecasting advisory membership service, The Prospects Service.

This report and all associated material shall remain the property of Cebr and are only made available to bone fide employees of organisations with a current and fully paid-up membership of The ProspectsService. Such materials may not be disclosed or transmitted to individuals or organisations outside the member organisation without prior written permission from a director of Cebr.

Cebr is not licensed in the conduct of investment business as defined in the Financial Services and Markets Act 2000. Any client considering a specific investment should consult their own broker or other investment adviser. Any views on investments expressed by Cebr, or on behalf of Cebr, are intended to be generic only. Cebr accepts no liability for any specific investment decision which must be at the investor's own risk.

Whilst every effort has been made to ensure the accuracy of the material in this report, neither the authors nor Cebr will be liable for any loss or damages incurred through the use of this report or associated materials.

2


Executive summary

• Since the last edition of Global Prospects, several new sources of downside risk have emerged. At the end of June, the UKvoted in a nation-wide referendum to leave the EU triggering a prolonged period of uncertainty for the UK and the othermember states.

• In the US, Hillary Clinton has been confirmed as the Democratic Party’s presidential candidate with Donald Trump as theRepublican Party’s nominee. Given that the current president is a Democrat, Trump’s election would lead to a greater shift inthe policy direction.

• Oil prices have slumped further amid a supply boost. This re-emphasizes the need for budget cuts across the exportingcountries of the Middle East. Although necessary, austerity increases the likelihood of social unrest.

• Sub-Saharan Africa is another emerging region facing challenges. These include political instability, poor commodity demand,and bad weather harming harvesting.

• Across Latin America the picture is mixed – while we expect Argentina to perform reasonably well, Brazil is unlikely to exitrecession despite a boost from the Olympic games taking place there in August.

• One factor stimulating growth will be loose monetary policy across many large economies. In the US, we expect just one raterise at the very end of the year, while the Bank of England looks set to cut the already low rates in response to the post-Brexiteconomic slowdown.

3



Regional economic commentary• The US may have seen a blip in growth early in Q2, but data later in the

quarter have been stronger. However, the recovery has been intensive injob creation but less good at improving the productivity of those alreadyworking, owing to a lack of business investment. This will createchallenges ahead, particularly in maintaining wage growth and consumerspending.

• This edition sees important downward revisions to the economic outlookin the Eurozone, primarily related to Brexit. From 1.5% previouslyexpected, we now forecast growth of just 1.3% over 2016. In the outeryears growth will accelerate gradually as supportive monetary policy feedsthrough to the real economy and as the new arrangements around theUK-EU relationship become clear. We expect growth to settle close to1.5%. Risks remain on the downside, with a banking crisis in Italy (theEurozone’s third-largest economy and nine times the size of Greece)holding the crown as the most alarming risk on the horizon.

• Expansionary policies in China are working their way through to the realeconomy, paving the path for a cyclical upturn. However, the long-runtrend is firmly one of a slowdown, as China matures and develops. In theouter years, policymakers will face the difficult task of deflating China’shuge debt pile without allowing this to result in a crash. Given recenttendencies to result to stimulus to support growth when clouds gather,we consider the risks of a sudden crash as having risen significantly for thelong term.

• India continues to attract high volumes of inward investment and isforecast to maintain its position as the top-performing major economy. Itslonger-term prospects have been improved by the prospect of anationwide goods and services tax, which would improve governmentrevenues and help integrate states within its fragmented federal market.

• South East Asia continues to face problems in 2016. The Philippineshas elected an authoritarian leader with few economic credentials,and the scandal over the country’s development fund continues inMalaysia. Growth is expected to be slightly lower than the region’susual, rapid pace.

• Japan continues to grow at a very sedate pace. While further fiscalstimulus is likely to continue and monetary measures may even beramped up, significantly higher growth is not expected. In terms ofstructural reform, the two measures that could conceivably help –higher immigration and female participation in the labour force – arepolitically unpopular and will not gain enough traction.

• Growth in sub-Saharan Africa is expected to slow considerably thisyear, to 1.4% - almost as low as the Eurozone. Its two biggesteconomies, Nigeria and South Africa, are flirting with recession, hit bydomestic and international headwinds. East Africa, while still a better-performer than the rest of Africa, will also face some challenges thisyear such as adverse weather shocks in Ethiopia and tight monetarypolicy in Kenya. Further ahead we expect growth to recover, reaching4.2% by 2021.

• Despite a slight pickup since the start of the year, oil prices remain lowcompared to historic levels. This has pushed governments across theMiddle East to speed up diversification efforts and implementausterity measures. While painful in the short term, further down theline such measures are necessary for sustaining growth. However,spending cuts must be implemented gradually in order to avoidstirring up social unrest.

• The economic picture in Latin America remains mixed with Brazilexpected to remain in recession despite the boost from the Olympics.Mexico is also forecast to see subdued growth due to the weakoutlook in the US. Meanwhile, prospects for Argentina are lookingbright: After a difficult year of adjustment, we expect growth to reach3% next year.

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Global growth set to slow in 2016 as both advanced and emerging economies face headwinds

• We expect global growth to slow down from 2.9% in 2015 to 2.5%this year. At a regional level, parts of the world most responsible forthe slowdown are the Eurozone, the US, and Africa. Across theEurozone, weak domestic demand and banking sector fragility insome member states will contribute to an anaemic rate of growth.Weaker than expected Q2 growth in the US and a downwardrevision of the Q1 figure suggest that the recovery in the world’slargest economy is slowing. In Africa, both domestic (e.g. politicalinstability) and global (e.g. low commodity prices) headwinds playeda role.

• 2016 will be another year marked by low oil prices. For some netimporting countries this has been a welcome boost which hascontributed to an increase in consumer spending. One clearexception to this is the Middle East which relies heavily on oilrevenues. Therefore, the region is entering a period of austeritybut, if executed properly, this should actually support growth in thelong term rather than limit it.

• Over the medium term we expect growth to remain below pre-crisislevels and to hover below and near 3%. The lack of consumerdemand and investment in advanced economies as well as aslowdown in emerging markets are behind the weakness.

Risks

• A slowdown in China is less of a concern now than it was somemonths ago, but the need to rebalance the economy remains.

• The US is holding a presidential election in November. Dependingon the outcome, the country could significantly change its economicpolicies.

• Brexit will limit short term growth prospects in the UK and perhapseven the EU.

5

World real GDP, annual growth

Source: IMF, Cebr forecast

Forecast


© Centre for Economics and Business Research

Commodities, trade, and exchange rates


As disruptions pass and supply rises, oil prices fall further • In this edition of Global Prospects, we have marginally

revised down our oil price forecasts. We now expect abarrel of oil to cost an average of $42 in 2016,compared to an earlier forecast of $44. This means thatthe price of oil this year is less than half of what it wasas recently as 2014.

• The primary reasons behind the slight downwardrevision is an increase in supply. Certain causes ofdisruption, such as the wildfires in Canada, havedissipated and the US rig count is on the rise again.

• Additionally, oil is globally traded in US dollars.Therefore, as the US dollar has been strong in recentmonths this puts pressure on buyers holding othercurrencies, further contributing to the oversupply.

• Our longer term view remains little changed. We expectprices to rise gradually post-2016 as global growth picksup. However, prices will remain below 2014 levels forthe entire forecast period. On the demand side, slowergrowth in emerging markets and weaker demand acrossEurope will keep prices supressed. As far as supply goes,the boost in oil from the US and Iran will also weigh onprice growth.

Risks

• Major disruptions in large suppliers could push pricesup. Although we do not consider this a very likelyscenario, the spread of conflict in the Middle East toexporting countries such as Saudi Arabia could lead to asharp drop in supply.

Average of Brent, WTI and Dubai crude spot price, $/barrel, average across calendar year

Source: IMF, EIA, Cebr forecast

Forecast

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120

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Tentative signs of sustained upward momentum for non-fuel commodities

• The non-fuel commodity index has risen throughout2016 so far. We expect this to continue as supply seesfurther tightening in most industrial metals – a delayedresult of the 2015 rout in non-fuel commodities, but lagsare long in large-scale extraction projects. After somemonths on an upward trend, firms believe the pricecycle has turned and tentative asset buying is starting.This happens against a backdrop of deleveraging andscaling back of plans by major mining firms.

• On the demand side, the Chinese manufacturing sectoris giving ambiguous signals. On one hand, long-termpolicy fully intends to keep rebalancing away fromconstruction and infrastructure. It is consolidatingsteelmakers, which should allow it to reduce productioncapacity. Iron ore is likely to remain in a state of glut.

• However, for now China is still using expansionary fiscalpolicy which will keep demand for raw materials high.Overall, we expect steady price gains in the remainder of2016 and in 2017, and slower momentum thereafter.

Risks

• Upward price movement is not a foregone conclusionand movement will not be uniformly in that direction.Stockpiles of commodities are still high, especially inChina, which puts a ceiling on prices.

IMF non-fuel commodity index (2005=100)

120

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Forecast

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-15%

-10%

-5%

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Global trade growth to fall to lowest level since the Great Recession

• The slowdown in global trade growth is expected tocontinue in 2016, with the pace of expansion deceleratingto just 1.1% - almost a third of the pace of global growth.This also marks the weakest pace for global expansionsince the Great Recession in 2009. One of the reasons forthe slowdown is a weakening in global economic growthdriving the slowdown in global trade in a cyclical fashion.

• Part of the story behind the slowdown in world trade mayalso be a measurement failure. The global economy isunambiguously tilting away from goods towards services,and the latter are becoming increasingly tradeable.However, the ability to measure these flows is not catchingup at quite the same pace. As such, millions ofinternational transactions – in consumer data for example- are not properly feeding into the global trade data.

• Looking ahead to the longer term, growth in trade will pickup some pace as the global economy recovers. However,the pace will remain relatively subdued as newtechnologies enable low-cost production to take placelocally anywhere in the world, thus partly reversing someof the process of globalisation.

Risks

• A victory for Donald Trump in the US Presidential electionsposes a further important downside risk to our globaltrade forecasts given his negative remarks towardseconomic openness.

World trade, volumes, annual change

Source: Netherlands CPB, Cebr forecast

Forecast

9



Americas


US recovery slackens pace, but growth to continue

• US jobs figures have disappointed during 2016, particularlyduring the second quarter. While partly due to one-offfactors such as a strike, there has certainly been a trendeffect underlying this. We expect to see a continuation ofthis lacklustre growth pattern. Loose monetary policy willhelp to keep the recovery limping along. However, twoweak quarters in 2016 will limit the year’s overall figure.

• The US recovery appears to be maturing and is set to slow.The shape of the recovery has been similar in the UK.Employment has grown hugely over the course of therecovery, but that can only go so far.

• Productivity (output per worker) has risen only at ananaemic rate, far lower than that prevailing pre-crisis. Thiscan be partly traced to low investment in fixed capital,compared to pre-2007 trends. Low productivity growthstifles wage rises – also an observed feature of the post-crisis recovery – and so consumer spending also increasesat a relatively slow pace. This fulfils firms’ fears over poorprospects and saps the resolve to invest, completing thecycle.

Risks

• Our forecast depends on the success of Hillary Clinton’sDemocratic bid for president. Policy settings are hard toanticipate in the event of a Donald Trump win.

US real GDP, annual growth

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Forecast

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Fed likely to put off second rate rise further, again

• The US Fed funds rate stands at 0.5%. The FederalReserve was expected to make four rises this year. Afterthe Fed cut down its ambition to just two rises, marketsnow expect to see one or zero.

• Cebr expects to see one rate rise this year, as theuncertainty created by Brexit stays the central bank’shand. We only expect to see one rise in 2017, either inSeptember or December (the November meeting, whichfalls days before the presidential election, would be anunusual time to choose).

• Further out, normalisation of policy will be on a muchlower path than previously expected. Productivity growthis expected to be structurally lower across the developedworld. This results mainly from surplus productivecapacity worldwide, which has led to a large savings glutin turn pushing down the global interest rate. Investmentopportunities are too few. The Fed is finding out that itcannot turn back this tide. Fortunately low inflation isanother symptom of over-capacity, and so there is littleneed to raise rates in order to constrain a boomingeconomy. For the next few years - until these globalimbalances iron themselves out – equilibrium interestrates will not raise back to pre-crisis levels.

Risks

• A 2016 rise could still be easily derailed by poor data inthe third quarter.

United States policy interest rate and annual change in the consumer price index

-2%

-1%

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Interest rate Year on year CPI change

Source: Federal Reserve, Bureau of Labor Statistics, Cebr forecast

Forecast

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Canada emerges from temporary slowdown

• Canada (which reports monthly GDP data) has alreadyseen two months of contraction this year. The still low oilprices are constraining business investment, andrelatively weak performance in the US is acting asanother headwind for the economy. May is likely to showa third fall, owing to large-scale wildfires in Alberta whichcut oil output by around 1 million barrels per day.Rebuilding will mitigate the impact of the disaster, butnot immediately.

• The Liberal majority government, elected in October,campaigned on a platform of fiscal stimulus. It shouldfind this relatively easy to pass, but at around US$7.5bnthe size of the planned deficit is modest and it is unlikelyto have a transformative effect on growth.

• The Bank of Canada is keeping its options open, with apossibility of cutting rates as growth remains sluggish.This carries its own dangers, as house prices have risensubstantially in recent years and continue to do so; in theyear to June the increase was 11.2%. However, housingstarted out relatively affordable and so the market inCanada remains less detached from fundamentals(particularly earnings) than elsewhere.

Risks

• While nationally the situation is under control, Vancouversaw a 32% average house price rise in the year to June.

Canada real GDP, annual growth

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Forecast

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Brazil

No party at the Olympics as Brazil’s economy remains in the doldrums

• As the time of the Rio Olympics approaches, the economicpicture in Brazil looks markedly different from the oneprevailing when the city won the right to host the games back in2009. Far from a ‘rising BRIC’ of the future supported bybooming commodity prices and strong demand from China,Brazil’s economy today is suffering its longest recession sincethe 1930s. We expect things to improve somewhat this year asthe impeachment of President Rousseff is completed and thereformist policies of acting President Michel Temer restoreconfidence. Still, the turbulent first quarter has left animportant mark on the economy, and we expect a recession of3.3% this year despite some improvement in the second half ofthe year.

• Following this we expect growth to rebound to 0.5% in 2017and 1% in 2018 as the economy recovers from a low base butstill grapples with the political instability left behind by thetransition of power. Over the longer term the fundamentals forBrazil remain fairly positive. Despite weaker demand from Chinaand a softer outlook for commodity prices, Brazil’s economy isforecast to achieve growth of around 2% through to the end ofthe decade. This will be supported by the well-diversified natureof its economy, and by a strong potential for catch-up when itcomes to economic development.

Risks

• While it is almost certain that the impeachment of DilmaRoussef will be completed, we place a small chance (around10%) on Roussef managing to remain in power. This representsa downward risk to our forecasts.

Brazil real GDP, annual growth


Forecast

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Argentina Mexico

Argentina lone bright star among emerging markets

• Revised statistics for Argentina’s economy are painting aconsiderably bleaker picture compared to what waspresented before: The Latin American economy hasslipped double-digit places on the World EconomicLeague Table, and GDP per capita is reported to be lowerthan many emerging markets including Mexico, Malaysiaand Bulgaria. Looking ahead, we expect the short-termpain of Macri’s policies of monetary tightening andexchange rate liberalisation to help the ‘sick man of LatinAmerica’ recover. After a recession of 1% this year,Argentina is forecast to be one of the fastest-growingemerging markets for the remainder of the decade, withthe pace of GDP expansion nearing 4% as reform boostsconsumer and business confidence and as the weakerpeso helps exports.

• Fiscal and monetary tightening will keep a lid on theacceleration of Mexico’s economy this year, which isforecast to grow by 2.3% now. Further ahead, an‘unfriendly world economy’ – as described by Banxico,the country’s central bank – is expected to furtherchallenge Mexico and keep growth close to 3%. Key risksinclude the weakening of global trade due to Brexit and aweak recovery in the US.

Risks

• There are large bands of uncertainty around our forecastsfor Argentina given the continuous revisions to the backhistory of the GDP series and the volatility in inflation andthe exchange rate.

Argentina and Mexico real GDP, annual growth


Forecast

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Eurozone


ECB looking increasingly impotent as fragility in banking sector rules out further cuts and Brexit limits pool of eligible QE assets

• Eurozone prices have remained in ‘noflation’ territory in recent months, despitefresh stimulus measures introduced by the European Central Bank (ECB) inMarch. Looking ahead, we expect global cost-push factors to drive inflationgradually upwards. Specifically, supply disruptions in the oil market andunfavourable weather conditions for agriculture are forecast to push up the priceof global commodity prices. However, domestic demand will remain constrainedas the Eurozone recovery continues at an anaemic pace. While we expect to seeheadline inflation moving gradually towards the ECB’s target of 2% by the end ofthe forecast horizon, core inflation – a measure that excludes energy and foodprices– is forecast to remain subdued for longer.

• Looking at monetary policy, the UK’s decision to leave the UK could act as agame-changer for the ECB: The minutes from the Governing Council’s latest pre-Brexit meeting painted a picture of calm, hinting at no extra measures needed tosupport the recovery. However, while it is too early to call Brexit’s impact on theEurozone economy, initial signs point to a negative and significant transmission ofrisks. We thus expect downwards revisions to the ECB’s forecasts in September,something that would set the scene for further action. With the banking sector ina very weak position (July’s stress test results should shed more light on this),rate cuts look like a dangerous options as they would further hurt bankprofitability (something that Mario Draghi expressed great concerns about in hisJuly press conference). This leaves additional quantitative easing as the mostattractive option. However, Brexit risks have pushed up the price of safe-havenassets (such as German bonds), making them too expensive to be eligible for QEunder the current rules. As such, we expect to see a tweaking of the rules inSeptember, in order to expand the range of assets eligible for the programme.

Risks

• The use of more radical expansionary measures such as helicopter money is anupside risk to our forecast for inflation.

Eurozone policy interest rate and annual change in the consumer price index

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Interest rate Year on year CPI change

Source: European Central Bank, Eurostat, Cebr forecast

Forecast

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Brexit to act as blow to the Eurozone and ECB is running out ofrabbits• The Q3 edition of our forecasts sees significant downward revisions

to the Eurozone economy, primarily related to the UK’s unexpecteddecision to leave the European Union – something that we had notfactored into our previous forecasts. In the short term, Brexit’simpact on the Eurozone will be negative. We have already seenEurozone financial markets hit in the immediate aftermath of thevote, with bank shares suffering the most. As a result, we nowexpect the currency bloc to expand by just 1.3% over 2016.

• Further ahead, the outlook is more mixed. More supportive policy bythe ECB (we strongly expect to see new measures in September)should continue to support the recovery. Additionally, Brexit couldpotentially have positive long-term impacts for some of theEurozone economies if it kick-starts the move of London’s financialservices industry to either Paris, Frankfurt, Dublin, or Amsterdam.Finally, a move towards closer integration, while appropriate interms of economic rationale in the framework of the commoncurrency, risks alienating voters further and leading to the ultimatedownfall of the project. Structurally, the fundamentals point to slowgrowth given weak demographics, skills decaying due to prolongedperiods of youth unemployment, and a large infrastructure deficitgiven low levels of investment.

Risks

• A full-blown banking crisis in Italy represents a significant downwardrisk to our forecasts. The knock-on effects from such a shock in theEurozone’s third-largest economy could pull the bloc into recession.

Eurozone real GDP, annual growth

-5%

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Source: IMF, Cebr forecast. Group includes Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Forecast

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Pre-election boost ahead for Germany but Brexit to keep lid on growth

• As Germany prepares for elections in 2017 we expect tosee fiscal policy loosening somewhat (especially giventhe extremely low borrowing costs with German bondsdriven further down as Brexit created more demand forsafe-haven assets). This will support growth. At the sametime however, a number of headwinds are hittingGermany, including the uncertainty caused by Brexit andthe associated negative impact in the rest of Europe, theincreased threat of terrorism within Germany itself andin the wider area of continental Europe, and theincreased risks from China (see later slides). As a result,we expect growth to slow to 1.4% this year, down from1.7% in 2015.

• Further ahead, we expect growth to stabilise at modestlevels of around 1.3% per annum, with growth held backby weak demographics and a slowdown in Germany’sexport markets such as China and the rest of emergingAsia.

Risks

• An amicable outcome in the UK-EU post-Brexitnegotiations that would maintain the UK’s inclusion inthe European Single Market represents an upside risk toour economic forecasts for Germany . Germany is amongthe EU countries with the largest exposure to the UK.

Germany real GDP, annual growth

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Italy’s banks number one risk for the Eurozone

• The Italian economy is expected to slow down again this year after afalse dawn of accelerating growth in 2015. While its economic ties toBritain are relatively weak, there will still be a negative impactthrough the indirect knock-on impacts from the rest of the Eurozone.Additionally, Italy’s banking sector remains a dangerously weak spotfor the country itself but also for the Eurozone as a whole. At ninetimes the size of the Greek economy, a banking crisis in Italy seriouslyrisks Eurozone break-up. Overall, we expect to see growth of just0.4% this year, accelerating gradually after that to settle at around1.0% over the medium term.

• The outlook for the French economy has been revised down inresponse to the UK’s vote to leave the EU, which will negativelyimpact on its continental neighbour through weaker trade links.There is a potential silver lining for France in the form of the financialsector in the City of London relocating to Paris, but any benefits fromsuch a development would be realised in the outer years. On top ofBrexit, France has been hit by the headwind of multiple terroristattacks this year, which have started to negatively impact tourism.After a strong Q1, partly helped by the hosting of the Euro cup,growth stalled in Q2. Overall we expect to see expansion of 1% thisyear, gradually accelerating to around 1.5% in the medium term.

Risks

• Italy faces a constitutional referendum in October. Should PrimeMinister Renzi fail to get his way, he may be forced to resign. Withthe populist Five-Star Movement leading the polls, new electionswould represent a downward risk to our forecasts.

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France Italy

France and Italy real GDP, annual growth


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21

Brexit shifts Grexit out of the spotlight but fundamentals in Greece are weak – we expect deeper recession this year

• Greece has shifted back from the headlines in recent months asBrexit has taken centre stage. However, this does not mean that thecrisis has gone away. While we expect to see some boost in tourismover Q3 this year as Greece gains business due to heightenedterrorism threads in neighbouring Mediterranean countries such asTurkey and France, this won’t be enough to kick-start a recovery.Continued political uncertainty and austerity measures such ashigher taxes and cuts in spending will keep a lid on growth this year.In fact, we expect the recession to deepen to -0.7% this year.

• Further out in the forecast horizon, we expect the economy torebound marginally in 2017, with growth gradually accelerating toreach 3.0% by 2019 as the economy recovers from a very low base.However, a long-term sustainable recovery is contingent on Greece’sdebt situation stabilising and on the government’s commitment topro-growth reforms. The recent clash between the IMF and Germanyover the IMF’s participation in the programme and debt relief sets anegative tone to the stability of the troika. Further releases by theIMF in July over its regrets regarding the Greek programme areexpected to further worsen its relationship with other members ofthe troika.

Risks

• The inclusion of Greek bonds (e.g. Greek banks’ EFSF bonds) in theEuropean Central Bank’s quantitative easing programme as the Bankseeks to expand the range of assets eligible for the programmerepresents an upside risk to our forecasts for Greece.

Greece real GDP, annual growth


Forecast

21



-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Portugal Spain

Geopolitical risk in the rest of Mediterranean to boost Iberian tourism

• Spain’s political gridlock after inconclusive election results in bothDecember and June looks likely to be approaching an end, with themainstream right-wing Partido Popular (PP) party most likely to lead aminority government. The end of uncertainty is expected to boostbusiness confidence in the short term, helping Spain achieve growth of3.2% this year. This will be further supported by strong tourism figuresas Spain gains from challenges facing competitor destinations such assuch as Turkey (terrorism), North Africa (terrorism), or Greece (refugeecrisis). But the long-term looks more fragile. Spain suffers from highlevels of unemployment and slow wage growth, as well as from atroubled banking sector and unresolved corruption scandals. We expectthe economy to slow down towards 1.5% by the end of the forecasthorizon, albeit with growth remaining well above the Eurozone average.

• Portugal will be hit by Brexit in the form of subdued exports. A weakerpound is also expected to discourage British holidaymakers from visitingthe Atlantic country. Still, growth will slow only marginally, as othertourists continue to visit due to unfavourable circumstances incompetitor countries of Southern Europe. Additionally, the EuropeanCommission’s decision not to fine Portugal and Spain is expected toprovide some confidence to markets about the two economies.

Risks

• A strengthening of the independence movement in Catalonia followingrecent developments regarding Scotland’s position in the UK after Brexitcould spark significant policy uncertainty in Spain and represents adownward risk to our forecasts.

Portugal and Spain real GDP, annual growth


Forecast

22



Below the headlines of statistical magic, Ireland’s economy looks increasingly fragile after Brexit

• The Irish economy was reported to have grown by animpressive 26.3% in 2015. This however has largely to dowith the high number of so-called ‘tax inversion’ deals,whereby corporations – usually US ones – acquire a smallerforeign company to take advantage of lower corporationtaxes. Beyond the volatility, another important result of thisis that the GDP figures are not as informative about theunderlying health of the Irish economy. Gross NationalProduct (GNP) is a better measure for this reason, yet evenGNP recorded a rise of around 19% in 2015.

• Looking ahead, downward revisions to our US and UKforecasts imply a weaker outlook for Ireland too as it isdependent on the two economies for exports andinvestment. GDP growth is expected to remain around 2.5%throughout the forecast horizon – this is still better than theEurozone average but a significant slowdown for Ireland.

Risks

• ‘Brexit’ is a double-edged sword for Ireland. On the onehand, the Republic will certainty lose out given the UK’sstatus as a key export market. But over the longer termIreland may benefit somewhat if Brexit leads to a massexodus of London’s financial services industry towardsDublin.

Ireland real GDP, annual growth

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

GNP GDP


Forecast

23



Eastern Europe, Russia, and Turkey


EU funding for Eastern and Central Europe comes into question following Brexit

• Growth in the largest of the forecast Eastern and CentralEuropean economies, Poland, slowed in the first quarter of2016. The slowdown can be partially explained by the timingof EU funding distributions, but a weaker manufacturingsector and slumping consumer confidence also played acrucial role. As the UK is an important export market forPoland, the country faces downside risks following Brexit.

• Over 2015 two countries in the region, Ukraine and Belarus,faced a recession. In 2016, we expect the Ukrainian economyto grow, but just barely. Growth will be supported by a weakcurrency which will support exports and also by the fact thatparts of the Russian-held war-torn territory are no longerincluded in official data. On the other hand, Belarus willprobably face a recession for the second consecutive year. Aslow oil prices and economic turmoil in Russia continue to takea toll.

• In Croatia, snap elections have been scheduled for Septemberafter the existing government collapsed earlier this summer.This will further postpone the necessary economic reforms.

Risks

• Although the short term impacts of Brexit on the countries ofEastern and Central Europe will be minor, further down theline the UK’s decision to leave the EU could have implicationsfor this part of the continent. For example, Poland maintainsclose economic links with the UK and counts on its support invarious EU-level policy issues. Additionally, Bulgaria is amongthe recipients of EU funding which may be diminished shouldthe UK stop contributing to the EU budget.

Eastern and Central Europe real GDP, annual growth

25

Source: IMF, Cebr forecast. Group includes Belarus, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, and Ukraine.

Forecast

-6%

-4%

-2%

0%

2%

4%

6%

8%

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21



-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Russian economy still in weak shape but the worst is behind it

• Russia remains in a precarious state. The EU hasprolonged sanctions in response to the Ukraine crisisand there is no sign that they will end, constrainingaccess to capital. The economy is still in recession.

• Revenues from oil exports will be slightly lower thanrequired. The government assumes a $50/barrel oilprice, with which it could keep the deficit to 3% ofGDP, but Cebr judges the average 2016 price asunlikely to stand at that level. The cuts will be hard forthe government to make, given its reliance on militaryand other government employment for support.However, without another strong power faction itsposition is not at risk.

• The government will not cave into the temptation toprint money to cover its deficit. It is unlikely also toallow its base rate to fall from the current 11.5%,though that would help spur spending and investment.The sustained food import ban and sanctions, whichleads to shortages of certain goods, ensure thatinflation will stay high.

Risks

• Risks lie to the upside for Russia. With the UK headingout of the EU, the sanctions regime may be weakenedgoing forward.

Russia real GDP, annual growth


Forecast

26



-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Terrorism and a failed coup limit capital inflows to Turkey and harm the tourism industry

• On July 15th portions of the Turkish armyunsuccessfully staged a military coup againstpresident Erdogan. The events resulted in over 250casualties and in the immediate aftermath thepresident responded by sanctioning around 6,000people from the military, judiciary, and educationsectors.

• In the short term the president will continue to usethe attempted coup as validation for tightening hisgrip on power. However, assuming that his actions donot result in great civil unrest we do not expect anotable impact on GDP.

• As a result of escalating security risks, the tourismsector has been greatly impacted. This is one of thereasons we expect growth to slow from 3.8% in 2015to 2.9% this year.

• In late June Russia lifted its tourism ban to Turkey, butgiven the safety concerns this will probably to little toencourage visits to the country.

Risks

• One indicator that could be impacted by the coup and thefrequent terrorist attacks around the country is capitalinflows. A great drop in foreign investment would dampenthe growth outlook.

Turkey real GDP, annual growth


Forecast

27



Asia and Australia


Japan looks to more radical solutions to shake off stagnation

• Growth in the Japanese economy is likely to be very lowbut stable over coming years. The Abenomics plan hasnot delivered a lasting boost. Having tried all threeapproaches to accelerate expansion, without cleareffects, it is likely that growth will simply proceed slowlyover the next decade.

• Structural reform has gained little traction in a countrywhere immigration is very low and only around half ofwomen work. Fiscal and monetary easing, by contrast,are happening, but have had modest effects, mainly dueto depreciation. We expect that to continue. Thegovernment’s target to reduce the budget deficit to 1%of GDP will not be met, and inflation expectations willremain below target even in five years’ time and withnegative interest rates.

• More ambitious easing schemes are needed. Monetaryfinancing of government debt (essentially, wiping it outthrough money creation) was mooted, but apparentlyrejected by the central bank. This is now fairly neutral tosavers due to the ultra-low yields on Japanesegovernment bonds.

Risks

• Risks are to the upside if the central bank tries a radicalapproach to raising demand and inflation, such asmonetising government debt or unconditional cashtransfers (“helicopter money”).

Japan real GDP, annual growth

-6%

-4%

-2%

0%

2%

4%

6%

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21


Forecast

29



China begins to stabilise as stimulus pays off

-5%

0%

5%

10%

15%

20%

25%

30%

Q2

-20

09

Q4

-20

09

Q2

-20

10

Q4

-20

10

Q2

-20

11

Q4

-20

11

Q2

-20

12

Q4

-20

12

Q2

-20

13

Q4

-20

13

Q2

-20

14

Q4

20

14

Q2

20

15

Q4

20

15

Q2

20

16

30

0

5

10

15

20

25

Year on year change in Chinese industrial production

Year on year change in Chinese electricity consumption

Source: National Bureau of Statistics of China, National Energy Administration of the People’s Republic of China

• Leading indicators in China point to continued growthwith the pace stabilising, probably thanks to theexpansionary policies pursued by the governmentearlier this year. Growth in electricity consumption forexample, a timely indicator for production activity,remained in positive territory in Q2 2016. At 3.8%, it isfairly close to Q1’s multi-year high of 4.8% andimportantly far from the negative or near-zero growthseen in earlier figures.

• Further evidence for this stabilisation is present in theindustrial production figures, where growth acceleratedslightly to 6.2%. This is again probably linked to thegovernment stimulus policies from earlier in the year,which were concentrated on the industrial side of theeconomy.

• The Manufacturing Purchasing Managers’ Index (PMI), afurther leading indicator of China’s manufacturingsector, stood at 50.0 in June 2016, only a marginal fallfrom May’s figure of 50.1.

• However, preliminary data for the services industry havebeen mixed. While the PMI rose to an 11-month high of52.7 in June (from May’s 51.2), other indicators arepointing to a slowdown. Given the services’ sectorincreasingly important role in the Chinese economy, thiswill be an important space to watch to assess thesustainability of China’s growth going forward.



Some indicators suggest that worryingly, the services sector is losing steam

31

Year-on-year change in Chinese electricity consumption, on aggregate and in the services sector


Source: National Energy Administration of the People’s Republic of China, Cebr analysis

-5%

0%

5%

10%

15%

20%

25%

Q2

-20

10

Q3

-20

10

Q4

-20

10

Q1

-20

11

Q2

-20

11

Q3

-20

11

Q4

-20

11

Q1

-20

12

Q2

-20

12

Q3

-20

12

Q4

-20

12

Q1

-20

13

Q2

-20

13

Q3

-20

13

Q4

-20

13

Q1

-20

14

Q2

-20

14

Q3

-20

14

Q4

-20

14

Q1

-20

15

Q2

-20

15

Q3

-20

15

Q4

-20

15

Q1

20

16

Q2

20

16

Electricity Consumption - Aggregate Electricity Consumption - Services


This year’s stimulus measures represent an important risk for the Chinese economy further out in the horizon

• We have revised up our forecasts for China’s performance in 2016, to6.6% annual growth on the official statistics. Strong annual growth of6.7% in both Q1 and Q2 was largely supported by stimulus policies,which in turn were mainly concentrated in infrastructure and property.While this has propped up growth for this year, it represents a risk for thesustainability of the Chinese economy in the medium and long term.

• Specifically, the stimulus policies reveal an obsession with growth targets,which we see as distracting away from the real needs of the Chineseeconomy. These lie in reforms that can help China transition away frombeing the ‘world’s factory’ to an economy driven by consumption and theservices sector. This requires a greater say for market forces and theletting go of weakening sectors and enterprises so that more promisingones can compete in a level-playing field. Looking back at the investmentthat supported strong growth so far this year, this has mainly beenundertaken by state-owned-enterprises, rather than by the privatesector, which to us looks worrying for the reasons indicated above.

• Looking ahead, we maintain our view that there are two likely scenariosfor China. What we call a ‘fast landing’ involves an acceptance that therebalancing and transition process will involve painful bumps and trade-offs, that should be allowed to take place sooner rather than later (hencethe ‘fast’ label, as growth is allowed to weaken faster). This scenario seesChina gradually slowing down towards 4% annual growth by 2021.

• The second scenario involves the ‘extend and pretend’ approach of morestimulus to sustain strong growth, despite concerns for a growing debtpile that could create important challenges for the economy when thenext cyclical downturn hits. We see this scenario as increasingly likely,involving a recession towards the end of the decade.

China real GDP, annual growth

0%

2%

4%

6%

8%

10%

12%

14%

16%

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Fast landing Slow landing


Forecast

32



0%

2%

4%

6%

8%

10%

12%

14%

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

India maintains position as top-performing major economy

• Confidence remains high in the Indian economy, withnational and international investors exhibiting a highwillingness to put capital in the country.

• Billions are theoretically promised via thegovernment’s 12th economic plan to new infrastructureprojects in all areas – transport, housing, energy andutilities. Private investors are also keen to borrow, butbanks lack the confidence to lend to them. Supplybottlenecks often impede activity, thoughinfrastructural inadequacies can be the cause of thosevery bottlenecks.

• A particularly promising innovation is the goods andservices tax, which has been in the works for manyyears. The government is optimistic that it may be ableto pass this tax through the upper house of parliamentby April 2017. While this has dented consumerconfidence when passed in other economies, India’schronic difficulties with tax collection and itsfragmented federal economy mean that a unified GSTcould be very beneficial.

Risks

• The Reserve Bank of India’s governor, Raghuram Rajan,will leave in September. His guidance has contributedto the recent high confidence in the Indian economy,and there is some risk of higher inflation following hisdeparture.

33

India real GDP, annual growth

Source: IMF, Cebr analysis/forecast. Pre-2012 figures are Cebr estimates comparable with India’s revised GDP series (re-based to and published from 2011/12).

Forecast



Philippines likely to see slowdown after change of administration

• The Philippines has elected a hardline nationalist president,Rodrigo Duterte, who made promises to execute drugdealers and other criminals a centrepiece of his campaign.Little is known of his economic policy, but it will be hard tofollow Aquino, whose technocratic regime managed asustained period of remarkably high growth rates andimproved investor confidence in the economy. Cebr expectsa slower pace going forward.

• Thailand faces continued anaemic growth as its rulingmilitary junta is likely to delay elections, again, after thelatest deadline of 2017. With the class and regionalfaultlines that originally led to the coup still extant,instability is a possibility. The military economic leadershipalso has a poor track of approving projects. However, it hascommitted to higher social spending in a bid to gain support.

• The Malaysian prime minister Najib Razak faces continuedproblems over the country’s development board, 1MDB (1Malaysia Development Berhad). Malaysian courts havecleared him of wrongdoing, but investigations in the US andSwitzerland are ongoing. Turmoil within the government istherefore a real risk.

Risks

• Tensions have risen again in the South China Sea, with Chinarefusing to recognise the Hague’s ruling that its territorialclaims have no legal basis. China is ASEAN’s largest tradingpartner, so this is potentially very disruptive.

ASEAN real GDP, annual growth

0%

1%

2%

3%

4%

5%

6%

7%

8%

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Source: IMF, Cebr forecast. ASEAN, the Association of South East Asian Nations, includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam

Forecast

34



Australian election yields continuity, with similar economic implications• After a tight election at the end of June, the Liberal-

National coalition held on to power with a reduced,wafer-thin majority of just one seat. Malcolm Turnbullremains prime minister The Senate was also contested,with the coalition also remaining the largest party there.Little change in economic policy is expected. Thelegislative gridlock that led to the “double dissolution”(meaning election of both houses of parliament at once)will therefore persist.

• Australia is isolated from other advanced economies andinstead follows the Chinese business cycle, which meansgrowth has slowed recently but no steep fall hasoccurred nor is one anticipated. The Reserve Bank ofAustralia is likely to lower rates in the near future tomaintain competitiveness against other exporters.

• Consumer confidence was recently recorded at nearmulti-year highs; the coalition has eased its fiscallycontractionary stance and is likely to stick to that in viewof a slowing global economy.

Risks

• Gridlock in the Australian parliament may become aproblem for the growth rate.

Australia real GDP, annual growth

0%

1%

2%

3%

4%

5%

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21


Forecast

35



Middle East and Africa


Austerity measures in the Middle East necessary, buy may spark unrest

• As oil prices remain low compared to historic levels, countriesacross the Middle East are being forced to implement austerityplans. While spending cuts, subsidy elimination and public sectorredundancies weigh on growth in the short term, they are exactlythe kinds of difficult policies necessary to ensure prosperity furtherdown the line.

• This is especially true for Gulf Cooperation Council (GCC) countriesthat need to get their public spending at a level that can bematched by lower oil revenues. Difficult decisions now, will supporta more stable economic outlook in the medium and long term.

• However, it is important to implement austerity measures graduallyin order not to stir up social discontent. This is especially a risk inSaudi Arabia, where the deputy crown prince has increasingly beentaking over responsibilities from the king. The deputy crown princehas shown signs that he will take a more aggressive approach toimplementing economic reforms – a move which is perhapsnecessary, but must be handled as cautiously as possible.

• We expect the combined economies of the five non-GCC countrieswe examine (Egypt, Iran, Iraq, Lebanon and Jordan) to expand by3.2% in 2016 and 3.6% in 2017. The return of Iran to global tradewill be one of the factors driving growth.

Risks

• One of the main downside risks in the region is the increasedlikelihood of public unrest motivated by austerity measures.Additionally, military activity in Yemen and Syria as well as regionalefforts to fight the so-called Islamic State are not drawing to aconclusion as rapidly as was anticipated.

Middle East real GDP, annual growth

Source: IMF, Cebr forecast (GCC = Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE)

Forecast

37

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Gulf Cooperation Council Egypt, Iran, Iraq, Lebanon, Jordan



0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Further downward revisions to the outlook for sub-Saharan Africa, with recession in the cards for its two biggest economies• Data for 2016 so far paint a very negative picture for sub-Saharan

Africa, which has led us to revise our forecasts downwards. This buildson downwards revisions in the Q2 edition of this report, bringing torate of GDP expansion for the ‘Africa 8’ to just 1.4% this year – theslowest seen since 1992. This is due to a mix of headwinds. These aremainly external, such as weak commodity prices, heightened globaluncertainty, and a slowdown in China, but also internal, such asunfavourable weather conditions and political instability.

• Nigeria and South Africa look particularly fragile. In the former, highinflation and restrictions on imports and foreign currency are hurtingthe economy, which will see near-zero if not negative growth thisyear. Further down the line we expect to see an improvement as oilprices (one of Nigeria’s main sources of income) rise. But structuralchallenges will persist. Meanwhile, South Africa’s growth is expectedto be constrained by monetary and fiscal tightening, but also by non-policy factors such as a drought and power shortages.

• The picture is considerably brighter in East Africa, with growth closeto 6-7% for Kenya and Tanzania throughout the forecast horizon. Thispositive trend is forecast to persist as integration in the East AfricanCommunity continues. At the same time, agriculture-intensiveeconomies such as Ethiopia and the Ivory Coast are expected to see aslowdown this year due to bad weather conditions associated with ElNiño.

Risks

• A sooner-than-expected hard landing in China is a downwardrisk to Africa’s post-2016 recovery.

“Africa 8” real GDP, annual growth

Source: IMF, Cebr forecast. Group includes South Africa, Angola, Nigeria, Ghana, Cote d’Ivoire, Kenya, Tanzania and Ethiopia

Forecast

38


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