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Macro Watch: China’s Belt and Road forum; US GDP; Spanish general election


China’s second forum on its Belt and Road Initiative will take place in Beijing, US economic growth is expected to have slowed marginally in Q1 and Spain will hold its third general election in four years.

The European Commission will publish its indicator for consumer confidence across the bloc. In March, the index touched -7.2, up from -7.4 in the previous month. Although sentiment remains well below the cyclical high of -3.4 that it reached in December 2017, it is still running above its long-term average of -10.5. Elsewhere, Mexico’s unemployment rate is expected to hold steady at 3.4% in March, but some leading indicators point to a slight deterioration in H2. In recent years, the country’s labour market has been solid, with the unemployment rate nearing historic lows (it averaged 3.3% in 2018 and 3.4% in 2017). However, in December, the jobless rate touched 3.6%, owing to layoffs in the construction sector (a project to build a new airport for Mexico City was cancelled that month).

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In Australia, consensus expectations suggest that headline inflation – as measured by the consumer price index – will decline to 1.5% in Q1 from 1.8% in the previous quarter. The two core measures – the trimmed mean and the weighted median – should also edge lower to 1.6-1.7%, thereby reinforcing the dovish bias that the Reserve Bank of Australia adopted recently. Elsewhere, the Ifo Business Climate Index for Germany is expected to inch higher to 100 in April. Last month, the index showed tentative signs of stabilisation: it rose to 99.6 from 98.7, while the expectations component rose to 95.6 from 94 in February. Meanwhile, the Bank of Canada is likely to stand pat on rates. Last month, the central bank adopted a more dovish tone. A reference to rates moving higher over time disappeared from its statement and it was replaced by a more cautious stance: “the outlook continues to warrant a policy interest rate that is below its neutral range”. We expect that it will maintain this new rhetoric in April. In addition, the central bank will also publish its quarterly Monetary Policy Report. We expect little change to growth forecasts as the impact from higher oil prices should offset slightly weaker external demand. However, the report will probably suggest that risks to the country’s economic outlook are skewed to the downside amid trade policy uncertainty – a message that would be in line with recent comments from the Governor Stephen Poloz.

Thursday Icon The Bank of Japan (BoJ) should maintain its current interest rate setting and confirm its quantitative and qualitative monetary easing with yield-curve control, pinning the policy rate at -0.1% and the 10-year yield close to zero. The BoJ is unlikely to consider changes to monetary policy this year. It will need to monitor a potentially negative impact on the economy from the country’s planned increase in consumption tax, which takes effect in October. In addition, the BoJ will release its updated economic forecasts. In recent months the momentum towards the central bank’s 2% inflation target has faded somewhat, which may be reflected in the updated forecasts. Importantly, the new forecasts will extend to 2021 for the first time. In Beijing, China’s second forum on its Belt and Road Initiative (BRI) will get underway. The first summit took place two years ago and this forum has been heralded as the country’s most important diplomatic event of 2019. President Xi Jinping will probably launch BRI 2.0 to alleviate some concerns expressed by participating countries. We expect that the government will place greater emphasis on development aid, free-trade zones and industrial parks, while downplaying concerns over infrastructure. It may also pay greater attention to debt sustainability. That said, worries about debt, transparency and Chinese influence are likely to persist in most Western countries. In Brussels, European Union (EU) and Japanese leaders will gather for a summit to discuss trade (following the introduction of the EU-Japan free trade agreement in February), strategic cooperation (in areas such as connectivity and climate change) and preparations for the G20 summit (which takes place in Tokyo). Elsewhere, the Swedish central bank will probably keep its interest rates unchanged at -0.25% following a 25bps rate hike in December. Although many major developed central banks have taken a dovish turn in recent months, the Riksbank has bucked the trend. In February, it continued to signal that a rate hike is likely “during the second half of 2019”. The Turkish central bank will also hold its monetary policy meeting. It is likely to keep interest rates unchanged at 24%. That said, it may ease its policy later this year, once there are more convincing signs of a sustained downward trend in inflation. Across the Atlantic, investors will dissect the US durable goods data for March. Recently, non-defence capital orders – excluding aircrafts – have been sluggish. In February, they declined by 3.4% on a three-month-on-three-month annualised basis, signalling subdued business investment in the coming months.
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Japan's unemployment rate is likely to be little changed at 2.3% in March – its lowest level since 1994. This suggests the labour market is tight. Meanwhile, figures for the country's industrial production and retail sales should continue to improve in March, having rose 0.7% and 0.4% respectively in the previous month. In Russia, we expect no changes to the country’s monetary policy. Last month, the central bank adopted a dovish tone. Indeed, Central Bank of Russia Governor Elvira Nabiullina expressed more confidence in a benign outlook for inflation, suggesting that there may be some room for easing policy later this year. Elsewhere, credit-rating agency Fitch will review the UK’s sovereign debt rating. In February, Fitch placed the UK’s AA credit rating on negative watch amid growing uncertainty about Brexit. However, it is unlikely to adjust its rating at this stage after the UK was granted a six-month extension to Brexit negotiations. The new deadline – 31 October 2019 – means that the near-term risk of a no-deal outcome remains low. In the US, consensus forecasts (at the time of writing) suggest that Q1 GDP will come in at a seasonally adjusted annualised rate of 1.8%. That compares to growth of 2.2% in the last three months of 2018. Consumption probably slowed to a seasonally adjusted annual rate of about 1%, down from 2.5% in Q4. Although the government shutdown earlier this year probably had a modest impact on consumption, available monthly hard data for Q1 suggests that other areas probably picked up the slack. In particular, net trade and inventories should make a decent contribution to growth in Q1.  Meanwhile, investors will eye Spain’s general election. The country will hold its third election in four years on Sunday, 28 April. Recent polls point to a rise in support for the Socialist Party, but they also suggest that the election will deliver another hung Parliament. As such, it will probably take some time to form a coalition – and the odds that it will be left-leaning are rising.


Chinese growth beats expectations in Q1

Source: Reuters Datastream, based on China’s National Bureau of Statistics and the People’s Bank of China, as at April 2019.

China’s economy expanded by 6.4% year-on-year in Q1, matching growth in the fourth quarter of last year. It follows a sharp slowdown in H2 2018 and the reading topped analysts' expectations, which pointed to a modest decline to 6.3% year-on-year. The Q1 data suggests that fiscal and monetary stimulus, which was employed by Chinese authorities in recent months, has already started to stabilise growth. Money growth – leading GDP growth by two-to-three quarters – suggests that we can expect growth of 6%-6.5% for the rest of the year (in line with the government’s new target). Indeed, that would support global growth, favouring broad-based stabilisation. However, China’s stimulus has been more limited and targeted than before. For example, the last round of tax cuts largely benefit domestic consumers. As such, external spill-overs are likely to be more contained.


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