Friday 29 Mar 2024
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SINGAPORE (June 30): Citi Research’s global economic outlook for 2H 2016 is currently caught between two opposing forces: the recently revealed Leave outcome in the UK’s EU referendum, and rebounding activity in global markets which suggests “further firming ahead”.

In a Wednesday report, the Citi Global Economics team say likely snap elections will bring about a possibility of an outcome that could avoid, or potentially also confirm, Brexit.

Much has been speculated about the global financial and political impacts of Brexit. Yet, Citi Research’s forecasts mostly continue to remain mild for now.

Brexit-related headwinds small for Singapore
Growth momentum for Singapore likely slowed towards end 2Q, and Citi points out that global capex weakness and the structural drag from onshoring of production in China could possibly weigh on exports. Consumer spending also continues to remain challenged.

In Singapore’s case, Citi says indirect impact via exposure to a broader EU slowdown is larger, with strong disinflationary pressures that continue to be part of “the broader policy objective of real effective exchange rate (REER) depreciation to restore competitiveness”.

The research house’s assumed Brexit impact on y-o-y GDP growth for Singapore is a 0.2-0.3% decrease from 2016 to 2018, while inflation is estimated to lower by 0.1-0.2% y-o-y in the same period. These figures, although marginal, are still the highest among those of Singapore’s Asia Pacific peers.

Global growth predicted to remain positive
Financial uncertainty, due to the UK’s vote to leave the EU, has expressed itself “immediately” in financial asset and credit markets – but weighs in mainly in the UK and EU.

Nonetheless, Citi continues to expect a global growth of 2.4% for this year, as well as a slightly lower 2.6% global growth estimate for 2017 from last month’s 2017 forecast of 2.8%. The team explains that its small 2017 growth revisions that demonstrate a “moderate impact of Brexit” are due to increasing evidence that global activity has rebounded in the second quarter from its low level in 4Q15-1Q16.

It also anticipates stronger Chinese and US growth to lift global growth in the second half of this year due to expectations of a dovish Fed, moderate policy stimulus in China, and a modicum of fiscal and monetary easing in other advanced economies.

‘Benign’ US and China economic data
In early June this year, US non-farm payrolls reported its smallest gain since September 2010. Citi considers this scenario an outlier, and foresees job growth to bounce back to 100-150k per month. The research house notes that market activity in the US is rebounding “as expected” in 2Q, and projects continued moderate growth of around 2% for the remainder of 2016 and 2017.

As for China, the team says economic activity is “relatively steady” based on recent economic data. It believes there is “enough policy stimulus to prevent the economy from continuing to slow as it did in 2015 and early 2016, but not enough to stage a cyclical rebound”. There may be some indicators to suggest a “moderate pickup” in industrial activity in the second half of 2016 as well.

On a positive note, Citi says that Brexit could bring forward the “looming correction” of China’s current financial imbalances due to its private credit boom over the last decade. In the research team’s opinion, such imbalances could possibly lead to a “long-lasting slowdown in economic growth” or “a financial crisis even without the disruptions caused by Brexit”.  

Guard is still up against Brexit
“We suspect there are notable downside risks to our central scenario for the Brexit implications and the outlook for the world economy we describe,” acknowledges the team. It says Brexit could trigger the acceleration and growth of rising protectionism and opposition to capitalism around the world, although it may not be the cause of such developments. Other potential policy implications include further threats to globalisation.

The team also admits that financial markets may turn out to “react more violently to Brexit” than it currently anticipates — especially European banks which are currently already challenged by legacy asset quality problems and low profitability.

Citi expects the focus on fiscal policy to “dial up gradually” and that Brexit will reinforce a “modest bias” to ease fiscal policy further in the EU. The team reiterates that regardless of what is to come, it does not anticipate such changes to be drastic.  

“More radical measures, such as helicopter money (monetised fiscal easing), remain off the table virtually everywhere”.

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