GRI's Weekly Risk Outlook

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by: Global Risk Insights

Eurozone Q4 2014 figures to reflect a moderate growth acceleration. Japanese Q4 2014 data expected to show that the Nippon economy is no longer in contraction. Central Banks of Peru and Chile to hold interest rates steady until inflation outlook becomes more benign. All in this week's WRO.

Eurozone growth: Consumption boost

On Friday 13th February, Eurostat will release its Flash Estimate Q4 2014 GDP data for the Eurozone. In spite of the fact that an expenditure breakdown by components will not yet be available, expectations based on economic activity surveys and hard activity data reveal that consumption will be the main driver of a growth acceleration.

Aided by upside developments relating to a fall in oil prices, the launch of a full-blown quantitative easing program by the European Central Bank (NYSE:BCE), a sharp decline in market interest rates across the Eurozone and a depreciation of the euro, real income growth is expected to have increased significantly.

This sizeable purchasing power gain and the concomitant increase in consumption growth across the Eurozone will likely be reflected in a higher pace of growth, particularly as consumption makes up about 55% of total GDP in the single-currency bloc.

With tailwinds in the form of growing industrial production, exports and retail sales, GRI expects a moderate acceleration in GDP growth, to the magnitude of no more than one percentage point vis-à-vis Q3 2014 (for yearly and quarterly figures). If so, expect GDP growth accelerating to about 0.3% and 0.9% for quarterly and yearly estimates, respectively.

Moreover, with the approval of the dubbed Juncker Plan and the creation of the European Fund for Strategic Investment - expected to become operative by mid-2015 - the EUR 315 billion fund should provide a substantial boost to investment in the Eurozone. Although this does not imply that the Eurozone is out of the woods, it points to an improved growth outlook, with consensus projecting an above 1% yearly growth for 2015.

Downside risks to this outlook however continue to linger. Most notably, developments in eastern Ukraine and the potential for further escalating tensions with Russia could amplify market uncertainty towards the Eurozone, particularly as trade with Russia has taken a hit amid materializing threats by Europeans to apply further sanctions on Moscow.

In addition, even though the ECB has agreed to lift the waiver on Greek government debt, negotiations over a new deal are still ongoing and uncertainty will continue to prevail at least until the Greek government softens its position and shows more willingness to compromise with its creditors.

Japan: Contracting no more?

On 16th February, Japan's Cabinet office will release data on Q4 2014 GDP. Expectations are for figures to reflect a rebound of the Japanese economy, as the Nippon country seeks to surface out of negative territory - following two consecutive quarters during which its GDP contracted.

The accelerating growth push is seen to be driven primarily by an uptick in consumer spending and expanding exports, both aided by the fall in oil prices and the depreciation of the yen.

Constituting about 60% of GDP, private consumption is seen to have grown by 0.7% in the reviewed quarter, up from 0.4% in Q3 2014. Largely driven by the fading effect of the notorious April 2014 consumption-tax hike, the overall increase in private consumption has been supported by improved income conditions (most notably higher winter bonuses) and the purchasing power gains derived from lower oil prices.

Adding to the catalyst effects of rising consumption on GDP growth, capital expenditure is also seen to have improved as a result of Japanese firms enjoying strong earnings due to the weakening currency. Having contracted in the previous two quarters, Capex is seen to have expanded by 1%, shedding light on the fact that capital investment seems to be on a path to recovery.

For the remainder of 2015, the Japanese economy looks set to continue growing in positive territory, particularly as domestic demand is bolstered by the improvement in real purchasing power - brought about by lower oil prices. As a result, economists have revised their figures and now expect the economy to have expanded by an annualized GDP rate of 3.7% in 2014, tempering fears that Japan was derailing towards a prolonged contraction.

Chile & Peru: Steady rates for now

On Thursday 12th February, the Central Banks of Peru and Chile will hold their respective monetary policy committee meetings. As explored in last week's WRO, the main Latin American countries under investors' radars are on an easing monetary policy path, bar Brazil - as it continues to struggle with rising inflation - at its highest level in 12 years.

For Peru and Chile, their apparent easing cycle will however be slower than had been anticipated as their annualized inflation figures remain above their respective upper targets for price levels.

In the case of the latter, inflation surprised on the upside in January, with a 0.1% rise relative to December 2014. This essentially brought annualized inflation to 4.5%, a figure that remains above the Chilean central bank's "tolerance" range of 2-4%.

With nine out of the twelve components of the Chilean composite price index increasing over the past month, headline and core inflation remain elevated, prompting the monetary policy committee to be reluctant on cutting rates further. Indeed, a weakening currency combined with high inflation do not bode well for cutting rates. For this reason, GRI expects the Chilean central bank to keep its policy rate steady at 3% in Thursday's meeting.

In the wake of a surprise rate cut in Peru last month, it has become evident that any further easing will only take place if the inflation outlook turns more benign. Although prompted by the worst GDP slump since 2009, the January 2014 cut seems to have been reactionary.

Indeed, even if annual headline inflation inched down to 3.1% last month, the figure remains above the Peruvian Central Bank's upper target of 2%, suggesting that the monetary policy committee will keep rates steady at the upcoming meeting - but without discarding further easing in the months ahead to stimulate much-needed domestic investment.