Mario Draghi, ECB President, is likely to broaden QE programme early; US Fed may signal the timing of increasing interest rates in December meeting; Shinzo Abe’s Liberal Democratic Party expected to win in Japan; Currency depreciation in Nigeria will bring public discontent ahead of February 2015 elections. All in this week’s GRI Weekly Risk Outlook.
Mark your words, Draghi
In the wake of a further fall in oil prices following the OPEC meeting in Vienna, eurozone annual inflation cooled down to 0.3% at the end of November, the lowest figure since early 2013. This sheds light on the prospects that the ECB might be forced to broaden its quantitative-easing program earlier than expected. At the upcoming December 4 meeting in Frankfurt, we expect announcements of further monetary policy easing upon the publication of its economic forecast figures, in particular an imminent or – more likely – a Q1:2015 boost in sovereign bond purchases.
Following Mr. Draghi’s remarks during the European Banking Congress on 21 November – asserting that the ECB would do what it must to raise inflation (and inflation expectations) and reiterating that the larger the volume of asset purchases, the bigger the effects – we expect the ECB to abide by its forward guidance of “whatever it takes” to uphold its credibility, prevent further deflation and keep the eurozone afloat.
Fed tightening on the cards, but when?
The US economy seems to be coming out of the woods for the first time since the outburst of the financial crisis. With figures for Q3:2014 GDP growth revised upwards to 3.9% (Seasonally Adjusted Annual Rate – SAAR) and the expectation that there will be a 240,000 increase in the payrolls print and concomitant fall in the unemployment rate to 5.7% (from 5.8% in October) next Friday, the question now arises as to when the Fed will begin to tighten monetary policy. If the economy continues on this robust path, a Fed rate hike next year is on the cards.
For this reason, we expect the mid-December FOMC to provide signals on the timing of its eventual decision to start increasing interest rates. In global terms, this will mark the inception of a progressive move in unwinding the unconventional monetary policy environment that has dominated developed markets for the past years, prompting risk averse investors to place their money back into the safer havens of the developed markets’ treasury bills.
Elections looming in Japan, LDP expected to win
Against the backdrop of a Q3:2014 contraction in GDP and general elections fast approaching (14 December), the state of the economy has taken the forefront in Japan. With opinion polls showing that half of the electorate disapproves the Prime Minister’s economic policy, many of the voters feel disgruntled as their purchasing power has taken a hit in the wake of a rise in prices driven by the depreciation of the yen. In spite of this, opinion polls still shed light on the strong support for Shinzō Abe’s ruling Liberal Democratic Party (LDP).
With 35-40% of respondents claiming they would still vote for the LDP, we expect the incumbent party to win the general elections with ease, particularly in view of the disarray that reigns among the opposition parties. If so, we expect a continuity of Abenomics in the wake of the elections.
Macroeconomic imbalances to raise political heat ahead of elections in Nigeria
Falling oil prices prompted investors to rightly bet on a forced devaluation of the naira. The Nigerian currency plunged to an all-time low last week, down over 10% since January 2014. The central bank has been actively intervening to support the naira for days, with over $1bn spent in the past two weeks but without success in halting the currency slide. Current gross foreign reserves are equal to more than seven months of import cover, high enough to manage the exchange rate for now, but not for too long.
Given the uncertainty surrounding the February 2015 general elections, the naira will be vulnerable to speculative attacks in the coming months, similar to the one experienced by Turkey earlier this year and Russia more recently. The inevitable decision by the Nigerian Central Bank to devaluate the naira this week will exacerbate the effects of FX pass-through effects, especially due to the economy’s high degree of import-dependence.
We expect these knock-on effects to cause nation-wide discontent as Nigerians become increasingly disgruntled towards the government’s impotence in taming the prevailing insecurity in the north-east while their purchasing power takes a hit. This will no doubt reduce the electoral chances of the ruling People’s Democratic Party (PDP) at general elections in February 2015, with the rising opposition All Progressive Congress likely to undermine the PDP’s long-standing political hegemony.
Despite some headwinds in the form of softening world trade volumes, subdued deflationary growth in the eurozone and Q3:2014 GDP contraction in Japan, the fall in oil prices – down from 40% since a June 2014 peak – will support consumer spending and lower business costs, with global policy settings becoming more supportive, particularly in view of the expected increases in asset purchase programs by the European Central Bank (ECB) and Bank of Japan (BoJ).
Although EM growth will continue to be a mixed bag, a recovering US economy bodes well for global GDP growth, which is set to remain firm at about 2.6% in 2014, with slight improvements in 2015, but still sub-par for a recovery period.
The GRI Weekly Risk Outlook (WRO) provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, the WRO presents a series of potential upside/downside risks, shedding light on how political decisions impact economic outcomes.
The GRI Weekly Risk Outlook is put together by GRI analyst Jose Luengo-Cabrera. Infographic by Jack Detsch.