Regional snapshot

Eurozone- continues to disappoint with no clear end in sight

Figure 3- What goes up must come down

Global economy watch - Sep 2012, Regional snapshot figures
  • Official figures show that the Eurozone contracted by 0.2% in the second quarter of the year. The sharpest declines were felt in the southern periphery where business confidence and prospects are at new lows; for example Italian industrial confidence is at a 37 month low. Germany and Austria are the only major nations to maintain positive growth in the Eurozone.
  • Amid the gloom, Mario Draghi, President of the ECB, proclaimed that he would do “whatever it takes”  to save the euro (echoing language used by the G20 following the global financial crisis in 2008-9). This could include buying the bonds of member states. As Figure 3 shows, this news helped ease Spain’s short-term  borrowing costs – its 2 year bond yields slid from 6.7% at the end of July to 4% by mid-August.
  • Draghi’s nerve is likely to be tested in September. The Dutch go to the polls on the same day as Germany’s constitutional court decides on the legality of the latest bailout fund, the ESM. And Spain could surprise policymakers by requesting a full-scale sovereign bailout, going alongside the banking bailout agreed in July.


Poland- a fast-growing consumer market on the doorstep of Europe

Figure 4- Poland continues to grow and is too big to ignore

Global economy watch - Sep 2012, Regional snapshot figures
  • As the Eurozone struggles to grow, a country on its doorstep is set to expand for the 20th year in a row. Poland’s is the largest economy in Eastern Europe. And it’s getting bigger; figure 4 shows it is expected to grow more quickly over the next five years than its competitors.
  • Poland’s first wave of growth came from attracting international manufacturers enticed by its low-cost workforce. We expect the next wave of growth to be driven by domestic consumption. Income per capita has doubled in dollar terms since 2004. The IMF estimates it will hit US$18,000 by 2017; more than Brazil and double the level of China. In responses, businesses are expanding their presence there; GAP opened its first store in Poland last year.
  • The outlook for capital investment is also rosy as Poland transitions to a modern European nation. In June, it co-hosted the Euro 2012 football championships. Over the medium-term, opportunities will open up for foreign firms to support or actively partake in construction and infrastructure projects. The energy sector will be particularly appealing to businesses: 80% of boilers, turbines and generators in Poland are over 20 years old. Most rely on coal. Poland needs to reduce its dependency on greenhouse gases and invest more in renewable technology if it is to meet strict EU-set targets. 
  • This transformation continues to be supported by a stable fiscal and financial environment. Polish banks are not exposed to risky peripheral sovereign debt – the only Polish bank which formed part of the EU stress tests, passed. Public debt levels continue to be manageable, supported by robust output growth. Finally, businesses in Poland are cushioned by changes in external demand as only 40% of its annual output is made up of exports compared to over 100% in Ireland.


Mexico - an invitation to invest in our 'closed shops'

Figure 5 – Mexico’s V-shaped recovery is partly attributed to its resilient financial sector

Global economy watch - Sep 2012, Regional snapshot figures
  • In a similar spirit to Poland, Mexico continues to grow strongly. Figure 5 shows that following a sharp decline in 2009, its economy registered a V-shaped recovery led by a combination of strong domestic demand and export growth. We expect this to continue, and project a growth rate of 3.6% in 2012.
  • The incoming Mexican president Enrique Peña Nieto has announced a GDP growth target of  6%, and is planning sweeping reforms to open up labour and product markets such as the telecoms, energy and media industries. These reforms should provide businesses with investment opportunities.
  • Mexico is relatively insulated from the challenges facing Europe. This is partly because one third of the Mexican economy is reliant on exports, of which around ¾ go to the US. But at the same time Mexican businesses continue to take steps to shift their focus from the US market to the emerging Latin American economies. We expect the subdued but solid recovery taking place north of the border to continue to benefit Mexican business.
  • In the medium-term, Mexico’s economy continues to be fundamentally sound. Having gone through a financial crisis in 1994, its banking system regulation has been assessed to be “ahead of new international standards” by the IMF.  It has a more youthful population than China and Brazil, and is expected to have a lower dependency ratio (number of workers that support pensioners and others in the workforce) than its peers in the future.


Indonesia - building roads to sustain future growth

Figure 6- Creaking infrastructure needs to be upgraded

Global economy watch - Sep 2012, Regional snapshot figures
  • Announcing its comeback from the aftermath of the Asian financial crisis, Indonesia, a G20 economy, has stated it wants to become one of the 10 major economies in the world by 2025.  The first hurdle it needs to overcome is to upgrade its creaking infrastructure.
  • Figure 6 shows the state of its transport network ranks poorly against its main competitors. The government is urgently addressing this by reforming legislation and funding projects. Having recently achieved investment grade status, the government is planning to fund $20 billion capital spending in 2013, with a further $100 billion estimated to come from the private sector. Reforms enacted 8 months ago have simplified land acquisition rules, providing a more certain environment for potential investors.
  • Indonesia presents business opportunities to invest in long-term projects. Newer, better and more efficient infrastructure should bring lower transport costs, and provde easier access to the 4th largest market in the world and as a cheap hub to the rest of Asia.
  • Perhaps recognising this potential, the US government signed a memorandum of understanding on infrastructure cooperation in August. Specialised engineering and construction conglomerates located in the US could gain a first-mover advantage in the Indonesia markets.
  • Our outlook on Indonesia remains favourable. The latest figures show robust domestic demand fuelled by investment contributing to an impressive 6.4% y-on-y GDP growth. Our main projection is for the economy to grow by 5.9% in 2012.


Australia- surfing its commodity boom and stable environment

Figure 7 – Private non-financial corporation profits as share of GDP

Global economy watch - Sep 2012, Regional snapshot figures
  • Australia is one of the few advanced economies that has fared exceptionally well following the global financial crisis; its economy has posted only two quarters of negative growth since 2005. Unlike most of its peers, its public, business and financial balance sheets are manageable For example, bad loans make up only 1.9% of total loans in the banking system compared to 17.2% for Greece. 
  • Mining has been a major driver of its good performance in recent years, which could leave the economy susceptible to a drop in commodity prices. However, as Figure 7 shows non-mining profits (and in particular construction and financial services) are around three times as large as mining profits. Nevertheless, Australia will be vulnerable if there is a significant easing of global demand for commodities. 
  • The Australian economy will continue to outpace other advanced economies over the next two years as the mining boom continues. We project the Australian economy to grow by 3.1% and 3.5% in 2012 and 2013 respectively.


Focus: Funding for lending in the UK

Figure 8 - Credit growth to the private sector has been disappointing

Global economy watch - Sep 2012, Regional snapshot figures

Lending by banks to households and businesses is stagnant. Figure 8 shows that credit growth has been below trend for 47 months in the UK. To counter this, the Bank of England last month launched a new scheme Funding for Lending Scheme (FLS). It seeks to provide incentives for banks to lend more money into the real economy by allowing them to borrow cheaply on wholesale markets.

What’s so special about the FLS?

Firstly, it’s a significantly bigger scheme than its predecessor; the National Loan Guarantee Scheme (NLGS) was around a quarter of the size of the FLS.  Secondly, it aims to relieve pressure on lenders by reducing the cost of bank funding. And thirdly, it actively encourages the passing on of cheap money to the private sector by monitoring the volume of loans. Penalties are set if lending drops.

What does this mean for business?

The FLS should help reduce volatility in the wholesale money markets and limit the spread between market interest rates and the base rate. This could help small businesses in particular access cheaper funding.

Will it work?

The issue of lending to businesses is as much about the demand for credit as its supply. Surveys from the Bank of England show that demand for credit for this quarter is expected to stagnate. UK businesses appear to be adopting a wait-and-see strategy until the Eurozone crisis is solved.  So while this scheme should help, it is unlikely to have a major impact on business investment and economic growth until confidence returns.