Near-Term Chinese GDP Revised Upward

Recent data highlighting an uptick in house building and infrastructure investment are among the factors that led Fitch Ratings to revise upward its GDP forecast for China this year and next.

The Chinese government has demonstrated determination to uphold near-term growth targets, while recent stimulus measures will likely support Chinese economic growth in 2016 and 2017 at an estimated 6.3% GDP growth rate, Fitch Ratings said. That rate represents an upward revision from prior expectations by the ratings agency of 0.1 and 0.3 percentage points, respectively.

“Higher monetary growth targets at the March National People's Congress and official pronouncements show a policy focus on stabilizing near-term growth at around the 6.5% target,” the firm said in a recent release. “We think this focus will remain at least until the 19th Party Congress in November 2017.” Still, that growth could slow to 5.8% by 2018, hampered by productivity and a rising debt load that may impact private investment.

Other Asia-Pacific countries also show signs of the government’s mix of stimulus and structural reform at the macroeconomic level, the ratings agency said. For instance, police-rate cuts in India and Indonesia should result in higher GDP growth, while low oil prices have managed to restrain inflation and reduce account deficits. Further, policymakers’ resolve to institute reforms that should translate into 8% growth in India in 2018-2019 and 5.7% growth for Indonesia in 2018. “Reforms, such as Indonesia's effort to improve purchasing power and the business environment, could play an important role in maintaining growth momentum should the external environment deteriorate,” Fitch Ratings economists said.

Historically low policy rates in Australia and South Korea should offset these nations’ dependence on global developments and maintain GDP growth in the 2.6% to 3% range through 2018.

In Japan, Fitch Ratings sees ongoing tepid growth of about 0.7% until 2018, as wage growth remains slow and a stronger yen threatens to reduce net exports and corporate profits. “The Bank of Japan has emphasized that it can engage in further easing, but it is not clear that its introduction of a negative-interest-rate policy is combating deflationary risks,” the firm said.

- Nicholas Stern, editorial associate

Flexibility, Diverse Customer Targets Equally Important to U.S Manufacturers

During the last decade, a number of events have underscored the importance of not limited a targeted sales and credit base too much to one area. A notable example came during the U.S. recession, which forced many manufacturers that previously sold almost exclusively to domestic customers to either pursue international markets or close down amid a drastic demand downturn. Analysis from the Census Bureau this week again underscored the importance of this.

For manufacturers, Wednesday's Census statistics illustrate that those with a domestic market orientation are faring better than those more focused on overseas markets. Notably, U.S. growth expectations for economic growth for the near term are improving from earlier estimates with analytical firms like Goldman Sachs, which predicts 3% growth in the second quarter, while the so-called emerging economies lose ground from previous gains in importance (e.g., China continues to watch growth rates slow, Brazil finds itself in the throws of political and economic meltdowns). It’s the reverse of the situation during the height of the recession, says NACM Economist Chris Kuehl, Ph.D.

“This is why the diverse customer base is so vital to long-term success,” Kuehl notes. “Selling globally is not a casual undertaking and requires focused investment in the parts of the world that offer the best chances for success. The U.S. manufacturer has to be nimble enough to get engaged when this is a good idea and smart enough to bail out when the conditions inevitably change.”

Wednesday’s release of preliminary Census data on trade for April showed the U.S. deficit grew by 3.4% in April to $57.5 billion. Total exports grew to $32.4 billion from March’s $30.8 billion, led by companies shipping industrial supplies, but imports surged by more than twice that dollar amount, settling at $176.8 billion in April. Capital goods imports increased the most, to $49.2 billion, with the foods, feeds and beverages, industrial supplies, capital goods, automobiles and consumer goods also showing growth last month.

- Nicholas Stern, editorial associate, and Brian Shappell, CBA, CICP, managing editor

How Much Damage Would a 'Brexit' Cause?

The war over whether the United Kingdom should remain part of the European Union is truly heating up, with both sides dragging out their most aggressive arguments. In many ways, this has become a “devil you know" debate.

Advocates for Britain staying in the EU point out that many of the issues the UK expressed the most concern over have been worked out to Britain's satisfaction. They assert that breaking away would be exceedingly risky and that data suggest such a break would cost upwards of 500,000 jobs and reduce 4% of GDP growth over the next three years. Supporters also suggest that price of houses would tumble by almost 19% and that dozens if not hundreds of businesses would have to close. Such references are the most panicked to date and a clear attempt to get the public in a state of high concern.

Those pushing for the exit are denying these figures accuracy. On the other hand, they have no more access to facts than those who remain committed to the EU.  They assert that once British business is free from the meddling of the Europeans, it will surge and actually create more jobs. Exit supporters also scoff at the idea that EU countries will cease trading with the UK and underscore that Europe does plenty of business with non-EU countries such as the United States, Canada, Japan, China, India and so on. Why would be doing business with the UK after the Brexit be any different?

This is the challenge of economic analysis on such a subject. Who is to know what happens in the future? It is not as if the UK is declaring war on Europe and insisting that all trade relations cease. It is not as if the Europeans are going to punish the UK out of spite to their own detriment. The reality is that business people in both regions are motivated as they have always been. If they see money in the transaction, they will engage in it. There are many companies that have developed close ties to their suppliers and customers and will not allow the changed political environment to alter that very much.

--Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

Manufacturing Output Drops for First Time Since Financial Crisis

U.S. manufacturing output estimates showed worrying signs for this segment of the economy today as it fell for the first time since September 2009, while new orders expanded at the slowest rate so far this year.

“The weak manufacturing PMI data cast doubt on the ability of the U.S. economy to rebound from its disappointing start to the year in the second quarter,” said Chris Williamson, chief economist at Markit Economics. Many firms monitored by Markit said uncertainty about the economy led clients to delay spending, prompting firms to cut production schedules.

The Markit Flash U.S. Manufacturing Purchasing Managers’ Index now tracks at 50.5, down from April’s 50.8 reading and barely above the neutral level of 50, Markit said. The reading was dragged down by a renewed fall in production, weakened new order growth and more cuts to input stocks. Also, reduced foreign client demand slowed overall new orders from U.S. manufacturers as new export sales fell for the second consecutive month.

Outstanding manufacturing work fell for the fourth month in a row in May, as the rate of backlog depletion remained unchanged from April, Williamson said. Stocks of inputs decreased for the sixth consecutive month, while inventories of finished items increased marginally after April’s slight reduction.
Further, “Any uplift in prices was largely due to higher commodity prices, notably oil. Core price pressures look to have been once again subdued by weak demand,” he said. “The survey is signaling that manufacturing will act as a drag on economic growth in the second quarter, leaving the economy once again dependent on the service sector, and consumers in particular, to sustain growth.”

- Nicholas Stern, editorial associate

Materials Costs Rise as Construction Index Ticks Up in 2Q

The nonresidential construction index report (NRCI) ticked up in 2016’s second quarter, driven by improvements in the overall and local economies where construction industry executives conduct the most business. Notably, the uptick in activity and associated demand for materials means most suppliers are selling their products to contractors at higher prices.

The NRCI increased to 61.3 in the second quarter, up from 55.6 the previous quarter, according to construction industry management consulting firm FMI, which conducts the quarterly report. The index, of which a reading exceeding 50 indicates expansion, shows that outlooks for commercial, education, health care, lodging, manufacturing and office projects all increased in the second quarter.

“That is a solid recovery, and almost every component of the NRCI moved in a positive direction this quarter,” FMI concluded. “The main exceptions are the costs of labor and construction materials, which are holding down the rise in the NRCI score.”

The index for the cost of construction materials fell 13 points in the second quarter to 25.2, which is an indication that are contractors are seeing higher prices, FMI said. Approximately 51% of survey respondents reported that construction materials’ costs rose from last quarter, 47.6% said they were the same, and 1.4% found price easing from the previous quarter.

However, the three-year business outlook for commercial construction projects dropped to 45.6 this quarter from the previous reading of 45.7, keeping both readings below the expansion threshold. Projects related to education, healthcare and manufacturing did improve, remaining above the contraction/expansion dividing line, FMI said.

- Nicholas Stern, editorial associate

Late B2B Payments Rising in Eastern Europe

The Eastern European economy is set to rise by 1.1% this year, led by growth in Poland, according to a new Atradius survey. However, respondents say trade credit risk in the form of late payments from foreign businesses is increasing.

Eastern European-based businesses surveyed by the trade credit insurer said 63.4% of their foreign business-to-business sales were conducted in cash, with the remainder using credit-based sales. Slovakia reported the least amount of credit sales at 26.7%, while Hungary was the most credit-friendly Eastern European nation, with 53.6% of sales conducted on credit.

In some countries, credit versus cash sales diverged dramatically based on whether the business was conducted with a domestic or foreign entity, Atradius said. In Turkey, spread was greatest--Turkish businesses conducted 48.1% of their sales on credit to local businesses compared with just 32.4% with foreign businesses.

Late payments are also a big issue in Eastern Europe, with some 85% of respondents seeing late business-to-business payments for invoices over the past year, with an average of 43% of invoices in the region remaining outstanding, Atradius said. Insufficient availability of funds was the main reason cited for late payment from both foreign and domestic accounts. Default rates for domestic invoices grew 3.8% this year over last, while those for foreign invoices climbed 6.6%—some 20% of respondents in the region expect DSO to worsen in the coming year. Poland reported the highest average DSO for domestic invoices at 71 days, with Turkey close behind at 63 days. More than 60% of the value of domestic invoices in Turkey was paid late this year, up from 55.2% last year.

Late payments from foreign customers also impacted Turkish businesses the most, with 53.1% of the total value of Turkish export sales on credit coming in late, up from 49.8% last year. One surprising result of the survey found that Poland reported the lowest domestic and foreign payment default rates in Eastern Europe, but also the highest days sales outstanding (DSO). “This most likely reflects the proportion of export invoices more than 180 days overdue (14.3% of the foreign receivables’ value). This is nearly three times higher than that recorded in the other countries surveyed in the region,” the firm said.

Importantly, late payments of business-to-business invoices caused 27.2% of Atradius survey respondents to delay payments to their own suppliers. Businesses in Czech Republic, Slovakia and Turkey were the most affected by this, with about 30% saying they had to delay their outbound payments. More than 18% of respondents had to take steps to correct cash flow, and 17.2% said they had revenue loss. Meanwhile, 12% of businesses in the region said they defaulted on payments to suppliers.

- Nicholas Stern, editorial associate

Money Laundering Scandals Highlight Central American Credit Weaknesses

A lack of effective anti-money laundering controls in several Central American banks as highlighted in the recent ‘Panama Papers’ scandal brings an added layer of risk to the region’s banks and opens them to increased risk associated with deteriorating reputations.
Unrelated incidents related to money laundering since late 2015 have exposed weaknesses in the regulation of Central American banks, which are already under pressure from slowing economic growth, according to a report released today by FitchRatings. “Rated banks in the regions said that correspondent banks have reduced funding lines this year given weaker economic prospects and, in our opinion, news about weak governance and poor transparency is likely to cause a further drying up of wholesale funding for the region.”
In April, the Panama Papers revealed information about over 11 million financial and legal records relating to offshore companies arranged by Panamanian law firm Mossack Fonseca. Although the scandal is not directly related to Panamanian banks, the sector’s credibility has still been undermined, the ratings agency said. In the same month, authorities confiscated some $20 million of preference shares at Guatemala’s Banco de los Trabajadores under suspicion that illicit earnings funded the investment. In that case, however, the regulators took swift action and the banks ratings were not affected. In another case, authorities forced Honduras-based Banco Continental into liquidation in October 2015, as its principal shareholder was prosecuted for money laundering in the U.S. In addition, Panamanian regulators turned against Balboa Bank & Trust Corp. in May after U.S. authorities said one of its largest shareholders had been accused of money laundering, causing a rating downgrade as the bank defaulted.
The overall operating environment in Central American countries keeps bank ratings low there, but poor or ineffective corporate governance further constrains that environment, according to FitchRatings. To date, Fitch assigns investment-grade ratings to seven banks in Panama and one in Costa Rica, while other Central American banks earn BB or B ratings that “incorporate weaknesses in the governance and regulatory environment compared with higher-rated countries.”
- Nicholas Stern, NACM editorial associate
FCIB members have access to the Credit and Collections Survey results of credit professionals doing business in Central America and Mexico. For more information on how to join and take advantage of this insider knowledge, go to

Wave of Middle East Countries Downgraded on Oil Prices, Debt Issues

Triggered by factors from lower oil prices to rising debt levels, Moody’s Investment Service this month has downgraded several Middle Eastern countries’ credit ratings outlooks over the near term. Moody’s announced the following credit changes on Saturday:

Saudi Arabia —Downgraded to Aa3 from A1, but assigned a stable outlook. Low oil prices have negatively impacted the government’s finances, as well as external accounts and reserve buffers. Real gross domestic product (GDP) growth is expected to drop to 1.2% this year from 3.5% in 2015, with an average 2% growth figure over the next five years. That tracks much lower than the 5% average reported from 2011 to 2015, Moody’s notes. Still, Saudi Arabia’s plan to reduce economic and fiscal dependency on oil, for instance, even if partially implemented, “should sustain Saudi Arabia’s credit profile at its current level,” Moody’s said.

Bahrain—Downgraded to Ba2 from Ba1, as well as assigned a negative outlook. The rating agency anticipates Bahrain’s government debt burden and affordability to deteriorate significantly during the next two to three years. In 2015, the nation’s fiscal deficit was an estimated 13.1% of GDP, and Moody’s expects that deficit to rise to 16% this year. That agency predicts that will narrow “only gradually” later this decade.

Oman—Downgraded to Baa1 from A3, assigned a stable outlook. Despite fiscal consolidation efforts, the ratings agency expects that a protracted period of low oil prices will negatively impact Oman’s sovereign credit profile more than previously anticipated. The country is vulnerable to oil price shocks, with hydrocarbons accounting for an average of 67% of its total exports and oil and gas revenues composing 87% of government revenue this decade. Moody’s expects real GDP growth to decline 2% this year and by 0.8% in 2017.

Kuwait—Confirmed as Aa2, but assigned a negative outlook. Government finances have deteriorated, with a deficit of 1.1% of GDP in fiscal year 2015 to 2016, down from a surplus of nearly 30% the year before. Moody's believes Kuwait's low levels of indebtedness and its very large reserve buffers provide space to accommodate the deterioration in its fiscal balance. However, Kuwait has a weaker business environment and policymaking than many of its Aa2 peers. Over the medium term, this could erode its economic and fiscal prospects.

Qatar—Confirmed as Aa2, but assigned a negative outlook. Low oil prices are expected to be manageable for Qatar, as the IMF believes the country has a low fiscal and external breakeven point in terms of oil prices at $53 per barrel and $45 per barrel, respectively, for this year and 2017. However, Qatar’s medium-term debt trajectory is very sensitive to small cuts in growth and increases in the average deficit position that could cause a debt burden to divergence from the Aa2 median, Moody’s said.

- Nicholas Stern, NACM editorial associate

U.S. Business Inventories Grow in March, Alongside Sales

Total U.S. manufacturers’ and trade inventories grew in March—by the highest rate since June 2015—alongside total distributive trade sales and manufacturers’ shipments, helping keep the total inventories-to-sales ratio flat in the month.

The U.S. Census’ measure of business inventories is a good barometer of business confidence, says NACM Economist Chris Kuehl, Ph.D. “There was far too much inventory only a few months ago and there has been a concentrated effort to work that down ever since,” he said. “As long as companies are not adding inventory, there is going to be a general production lull in the economy as a whole.” Indeed, in March, business inventories rose 0.4% from February’s figure to $1.819 trillion, while inventories were up 1.5% over the prior year, Census said.

Retailers led the total inventories rise with a 1% increase in March, though manufacturers and wholesalers also saw slight increases. Within retail inventories, auto inventories jumped the most with a 2.3% increase, which is not unexpected given the decline in March auto sales, Wells Fargo Senior Economist Tim Quinlan noted. “While the inventory adjustment may continue, we expect less of a drag on GDP growth moving forward,” he said. “However, inventories are notoriously volatile.”

The inventory-to-sales ratio remained unchanged from February to March at 1.41.

Inventory expansion followed a March increase in sales, which were up 0.3% to an estimated $1.289 trillion, year-over-year. Still, sales fell 1.7%. Merchant wholesales performed best among industries in March, with sales growing 0.7%. Retailers, on the other hand, disappointed with a sales decline of 0.3% in March.

- Nicholas Stern, NACM editorial associate

Increasing Fuel Costs Key to Import Prices’ Rise

Led by higher fuel prices, the price index for U.S. imports and exports in April increased.

Consecutive 0.3% import index increases for U.S. imports in March and April marked the first monthly advances since June 2015. These are the largest monthly increases since May 2015, the Labor Department said in latest release. Over the past year, import prices dropped 5.7%, the smallest annual decline since December 2014. In April, prices for fuel imports grew 3.3%, following a 7.6% rise in March. Labor attributed the April increases to a 4.1% rise in petroleum prices, offsetting the 10.5% plunge in natural gas prices. Despite the recent increases, import fuel prices have dropped 36.4% over the past year. Higher prices for nonfuel industrial supplies and materials, foods, feeds and beverages and automobiles offset declining consumer and capital goods prices, Labor said.

Also of note, import prices from China dropped 0.1% in April—Chinese imports have not seen price increases since December 2014, Labor said. In contrast, import prices from Mexico, Canada and the European Union all rose in April, with Canadian import prices increasing the most at 1.4%.

“Looking ahead, we expect import price inflation to climb higher in the coming months on anticipation of further oil price stabilization and more gradual appreciation of the U.S. dollar,” said Sam Bullard, senior economist with Wells Fargo.

Export prices grew in April by 0.5%, the first monthly advance in the index in a year, according to Labor. Still, year-over-year, the export price index declined 5%. Prices for soy beans led agricultural exports, showing a 4.4% rise, with overall agricultural export prices increasing 0.5% in April. Over the past year, agricultural export prices were still down, dropping 9.7%.

Nonagricultural export prices grew by 0.5% in April on the back of a 0.3% rise in March, driven by industrial supplies and materials and capital goods increases, Labor said. Year-over-year, nonagricultural export prices were still down 4.6%.

- Nicholas Stern, NACM editorial associate