Credit Managers’ Index Saw Continued Strength in February, though Unfavorable Factors Could Remain Stubbornly in Place

Business overall is good and growth reflected in a variety of economic news lately has reached levels not seen since before the recession that started in 2008, according to the latest NACM Credit Managers’ Index (CMI), released today.

“The sense is that there has to be an improvement in the coming year if there is investment in infrastructure, tax reform and changes in the regulatory system,” said NACM Economist Chris Kuehl, Ph.D. “The challenge for the year is that these changes will take time. Nobody is sure what the patience level for consumer or business will be.”

The combined score in February’s CMI track in tandem with positive growth trends seen in economic indicators like the Purchasing Managers Index (PMI), as manufacturers continue upward momentum seen in the past two months, collect more dollars and extend more credit. “When manufacturers start to get their accounts caught up, this is a good signal that they are planning to start asking for more credit in the near future,” Kuehl said. Not all is well in the manufacturing sector, though, and unfavorable factors in the CMI improved slightly, though at a much less favorable rate, as some firms struggled to catch up with the broader recovery.

Data also show a rebound in a service sector that is leading the way for the CMI in February, backed by stronger demand from consumers. “Retail has been having a surprisingly good quarter and construction has been up along with the medical economy,” Kuehl said.

– Nicholas Stern, senior editor

For a complete breakdown of the manufacturing and service sector data and graphics, view the February 2017 report by clicking here. CMI archives may also be viewed on NACM’s website.

More Distressed, Leveraged Retailers Pose Risks for Commercial Creditors

A large number of U.S. retailers have slipped to the lowest and distressed tier of credit ratings—the number has tripled over the past six years to the highest level since the Great Recession—while more companies across all industries are in similar circumstances.

"Moody's-rated U.S. retailers rated Caa or Ca today make up just over 13% of our total rated retail portfolio, which is the highest level since the Great Recession, when this group comprised 16% of the portfolio," said Moody's Vice President Charlie O'Shea. "And the increase comes at the same time as the broader universe of Caa-rated companies is likewise growing."

During a lengthy period of low interest rates and “cheap money,” a new pool of B2- or B3-rated firms is created that have little room to spare from falling into the lowest rating tier, O’Shea said. “Among companies, Claire's, J.Crew, Tops and rue21 have all been hamstrung with weak credit metrics after taking on high levels of debt to fund acquisitions.”

As the same time that retailers’ credit ratings are slipping, debt maturities are on the rise, Moody’s said. Nineteen retail firms rated Caa/Ca by Moody’s owe approximately $5 billion in debt through 2021, with about 40% of this due by the end of 2018. “While the credit markets remain open to companies up and down the rating spectrum, that could change abruptly if investor sentiment turns,” Moody’s analysts said. “Among other considerations, interest rates have begun to trend upward, while U.S. speculative-grade companies have a record $1 trillion of debt coming due in the next five years, which could make refinancing much more difficult for distressed names.”

This group of struggling retailers also poses risks for more stable firms as they take more desperate measures to survive, “including highly promotional pricing that can border on irrational,” O’Shea said. The stronger companies then have to decide whether to match lower prices or relinquish sales. “And as companies under stress continue their downward spiral, liquidation and going-out-of-business sales inevitably follow, putting even more pricing pressure on their healthier competitors.”

– Nicholas Stern, senior editor

U.S. and German Manufacturing, Greek Debt Burden Prominent in Export Risk Outlook

This year is starting out strong in the U.S., with retail sales rising higher than expected in January and December numbers revised upward, according to the Euler Hermes Export Risk Outlook. Manufacturing is also showing signs of improvement, with two Fed regional surveys quite strong. The Philly Fed Index leapt to its highest level in 33 years. Inflation rose in January, with much of the increase from a rise in energy prices, the fifth consecutive increase. Gasoline prices also saw their fifth consecutive increase, to a 20.3% year-over-year pace.

In the U.K., services continued to drive growth in the fourth quarter. Despite an uptick in inflation, consumer spending remained resilient. Exports grew strongly. Euler Hermes expects the U.K. economy’s resilience to persist until the direct Brexit negotiations begin with the European Commission, likely in the middle part of this year. Consumer spending is expected to take a hit with a rise in inflation and drive down growth in the second half of the year.

In Greece, recent short-term debt relief measures, approved in January and aimed at reducing the interest burden, are positive in the view of Euler Hermes. This is due to the fact that 80% of the debt is held by institutions and that principal repayment will not start for another 17 years. The credit insurer believes that acceptance of the International Monetary Fund as a technical advisor rather than a financial contributor would be the best for the parties involved as Greek financing needs are lower than planned.

In Germany, the Ifo Business Climate Index and the Manufacturing PMI showed an acceleration of new orders, with the PMI also revealing a strong increase in new export orders. Though global trade was weak last year, it is expected to accelerate in 2017. German export volumes are forecast to pick up markedly this year, Euler Hermes said.

– Adam Fusco, editorial associate

Global Growth on Track for Improvement This Year and Next, though Risks Remain

Forecasts for global economic activity point to growth this year and next, though several risks remain to cloud the picture. According to a new Moody’s Investors Service report, G-20 countries are on track for increased growth of 3% in 2017 and 2018, up from 2.6% last year.

"Specifically, we see four major systemic risks to our forecasts: 1) global economic risks associated with shifts in US trade; 2) risks to global financial markets and emerging market economies if U.S. interest rates were to rise faster than anticipated and/or the U.S. dollar were to appreciate sharply; 3) risks of a sudden and sharp deceleration in China; and 4) political and fragmentation risks in the EU and the euro area," said Madhavi Bokil, a Moody’s vice president and senior analyst.

Trade with countries that the U.S. has large trade deficits with, including China and Mexico, could be impacted by large tariffs, and “…could potentially be inflationary and harmful for near-term growth as they are likely to be met with retaliatory actions,” Bokil said.

In the U.S., an expected bump from stimulating fiscal policy should ramp up growth to 2.4% this year and 2.5% in 2018, up from a prior forecast of 2.2% and 2.1% growth, respectively.

In Asia, India is likely to see the fastest growth rate of any G-20 economy at 7.1% this year, though demonetization of 86% of the nation’s circulating currency in the fourth quarter of 2016 weighed on a previous forecast of 7.5%, Moody’s said.

Growth in China is set to slow to 6.3% this year and 6.0% in 2018 from 6.7% in 2016. “The Chinese economy's solid growth performance last year, in part through significant policy support, has further helped reinforce various positive dynamics, such as firming commodities prices,” Moody’s analysts said.

In European nations’ economies, ongoing growth and resilience could be tested if the European Central Bank tapers, analysts said. In Germany, Moody’s raised its growth forecast to 1.6% this year and next, up from 1.5% and 1.4%, respectively. The nation’s economy has been buoyed by a robust labor market, rising wages and low interest rates; these factors should continue to be in play in the near term. The U.K. is the only G-20 economy Moody’s expects to decelerate this year—to 1% from a 2% estimation in 2016—as the country carries on negotiations for its departure from the European Union.

Emerging markets for the most part should help lift the global economy in 2017 and 2018, though the outlook for specific countries like Mexico remains stormy. Moody’s has continued to revise downward its growth forecast for Mexico to 1.4% this year and 2% in 2018 from 1.9% and 2.3%, respectively, in a November forecast. Trade restrictions from the U.S. could increase risk aversion and lead to reduced investment in the country, Bokil said.

"In summary, global demand is rebounding after weak economic activity in 2016, and much of the adjustment to lower commodity prices is now behind us," said Elena Duggar, a Moody's associate managing director. "However, structural factors, such as aging populations and high debt levels, combined with a reduced pace of globalization, put a cap on long-term trend growth."

– Nicholas Stern, senior editor

Eurozone Growth Nears Six-Year High

The pace of economic growth in the eurozone improved to come close to a six-year high in February, according to the IHS Markit Flash Eurozone Purchasing Manager’s Index (PMI). Signs bode well for the recovery to maintain itself in the coming months, with job creation the best in over nine years, order book growth picking up and business optimism moving higher.

Europe started to see solid growth numbers last year. “The eurozone has been expanding in a variety of areas—employment is up, productivity is up and there has been a solid improvement in measures like the PMI as well as measures such as the durable goods and production numbers,” said NACM Economist Chris Kuehl, Ph.D. “There have even been some suggestions that inflation has started to emerge. This is in a region that has been worried about deflation for most of the last 10 years.”

The Markit Eurozone PMI reached 56 in February, up from 54.4 in January and the highest since April 2011. Both manufacturing and services saw growth accelerate to rates not seen since 2011. February also marked the largest overall increase in new business since April 2011 and the largest monthly rise in employment since August 2007. Service sector jobs were created at a pace not seen in nine years and factory employment displayed the second-largest rise in almost six years.

The PMI “indicates that companies are currently firmly focused on expanding in the face of rising sales and fuller order books,” said Chris Williamson, chief business economist at IHS Markit. “The big surprise was France, where the PMI inched above that of Germany for the first time since August 2012. Both countries look to be growing at rates equivalent to .6% to .7% in the first quarter.”

“Trouble spots remain throughout the global economy, however,” Kuehl said. “Some of this has been worsened by the confusion over U.S. trade policy, but the bottom line is that there is reason enough for business people, investors and consumers to build more confidence.”

– Adam Fusco, editorial associate

China Blacklists Commercial, Private Debtors with Public Shaming, Travel Ban

When it comes to incentivizing delinquent payers to fulfill their obligations, China has taken matters to another level with its blacklisting and public shaming of millions of citizen debtors of various stripes.

According to media reports, the Supreme People’s Court of China recently announced its blacklist of 6.73 million citizens who have been banned from taking flights, while 2.22 million people can no longer travel by high-speed trains in the nation. The debtors list is comprised of people who are accused of taking advantage of legal loopholes to avoid paying debts from commercial and civil cases. (China lacks a personal bankruptcy law.) The government blocks the personal ID card numbers of the debtors that are needed to buy and check in for flights and trains, as well as stay at hotels.

As part of its social credit system, the Chinese government has opened an online search to the public for any such debtor, and even publicizes the debtors on LED screens and billboards—all in an effort to reign in the growth of debt that’s been accrued over the past several years, according to the gbtimes. For instance, household debt in the country has grown from 17% of GDP to 40% in recent years. According to credit insurer Atradius, the current economic slowdown in China will continue to lead to increasing overdue invoices and longer payment terms this year, while insolvencies are expected to rise further as well.

Individuals with commercial or personal debts can get themselves removed from the blacklist by paying back their debts.

 – Nicholas Stern, senior editor

Various Data Sets Point to Positive Economic Growth Trends this Year

Confidence in the economy is on the rise in the U.S, in Europe and even in Japan, and various data sets undergird a solid foundation for the rosy projections that the positive outlook will be sustained through 2017.

The bulk of the positive trends in the marketplace are the result of positive activity seen in 2016. In the last month, retail sales climbed 0.4%, while retail activity improved 5.6% over the last year, even without the support of auto sales that had been sustaining the retail community. Now, consumers are busy buying all manner of things and seem geared to do so through the spring. Retailers are expecting a good year and maybe even the best they have seen since the recession.

Meanwhile, industrial production has been realizing decent gains—the Purchasing Managers’ Index (PMI) is at 56, the highest it’s been in over two years. Even more encouraging: the New Orders Index is now above 60. Factory orders are up 0.2% despite the fact that demand for autos and auto parts is somewhat lower than it has been. The mining sector of the industrial production trio was also up by 0.4% over last year. This is significant given that it has been a sector that has dragged on the economy for several years now. The per-barrel price of oil has not returned to the heights once occupied, but near $60 a barrel is almost double what it was just about a year ago.

The third data point supporting the notion of growth is that inflation is showing some real growth. There was growth of 2.5% in January, the fastest pace since 2012. The Fed has been seeking inflation near or slightly over 2%—thus far, the measures have fallen a little short. Their preferred measure is the Personal Consumption Expenditure, which stands at 1.6%. The Fed is looking at the core rate of inflation and does not consider items like food and fuel as these prices can be extremely volatile from one month to the next. Without some inflation, it is hard for producers to raise prices and wages while consumers adopt a “wait and see” attitude as they expect prices to keep falling or at least remain steady.

– Chris Kuehl, Ph.D., NACM economist

Transaction Banks Adopt New Global Payments Service

Major transaction banks around the world are using a new global payments innovation (gpi) service from financial messaging service provider SWIFT. The service, which went live for payments in January, is intended to offer faster, more transparent and traceable cross-border payments, according to the company.

“We are delighted that SWIFT gpi is now live and is already enhancing the cross-border payments experience for corporate treasurers,” said Christian Sarafidis, chief marketing officer at SWIFT. “A year ago the global financial community pledged to dramatically improve the cross-border payments experience, and today marks a major milestone in delivering on that promise. It further demonstrates the ability of SWIFT and the financial industry to collaborate, innovate and rapidly introduce new solutions.”

Banks currently exchanging gpi payments across 60 country corridors include ABN AMRO, Bank of China, BBVA, Citi, Danske Bank, DBS Bank and ING Bank. Numerous additional banks are expected to follow suit in the coming months.

Corporate treasurers are provided with real-time, end-to-end views on the status of their payments through the service’s Tracker feature and are notified when payments have been credited to beneficiary accounts. SWIFT said that it will introduce gpi Observer, a quality-assurance tool that monitors participants’ adherence to the gpi business rules. The next phase of gpi is expected to include additional digital services, such as one for rich payment data.

“Customers require more certainty, transparency and traceability in their cross-border payments; SWIFT gpi is delivering this today,” said Wim Raymaekers, head of SWIFT gpi. “And with nearly 100 leading transaction banks already signed up, SWIFT gpi is set to rapidly expand with more banks, new features and additional payment services.”

– Adam Fusco, editorial associate

Expected Easing Tax, Regulatory Pressures to Sustain U.S. Residential Housing Sector Recovery This Year and Next

Since the Great Recession, investment in the U.S. residential housing sector has followed a slow road to recovery from the peak of 6.7% of GDP that it reached in early 2006, according to a new Wells Fargo report. The apartment sector has led the overall industry’s recovery to the 3.8% of GDP level it enjoys now, while single-family homebuilding continues to lag. A variety of factors—from slower population growth to people’s reduced mobility to the Millennial generation’s decision to delay new household formation—are at play in the decline.

Still, Wells analysts believe there are signs the recovery will stay on track over the near term, starting with household formation. As the older edge of the Millennial cohort approaches 35, “Growth in household formations should ramp back up to 1 million net new households this year and 1.1 million new households in 2018,” said Mark Vitner, senior economist, and Misa Batcheller, economic analyst—both with Wells. Add in demand for replacement and second homes, the overall housing demand should reach close to 1.28 million this year and 1.38 million in 2018, though new home construction is expected to lag and home prices should continue to rise at a greater rate than inflation.

“We have slightly increased our forecast for new home sales and housing starts for 2017 and 2018 based on the expectations that the Trump administration will succeed in cutting income tax rates and also ease some regulatory burdens for builders, developers, lenders and home buyers,” the analysts said.

Still, this impact will be moderated by the expectation that such changes will take time to accomplish. Thus Wells sees new home sales rising by 10.1% this year and 9.7% in 2018, with single-family starts rising at a similar level, though home price appreciation is likely to decline as builders focus on lower-cost suburban areas and in states with lower housing costs, such as Texas, Florida, Georgia and the Carolinas.

Look for more coverage of the U.S. construction sector outlook in this week’s NACM eNews.

– Nicholas Stern, editorial associate

European Commission Releases Economic Forecast

For the first time since 2008, the economies of all European Union member states are expected to grow throughout an entire forecasting period, in this case from 2016 to 2018. Even those members who suffered the most during the recession were expected to have returned to growth last year, according to the European Commission’s Winter 2017 Economic Forecast. Higher-than-usual uncertainty dogs the outlook, however.

“The European economy has proven resilient to the numerous shocks it has experienced over the past year,” said Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs. “Growth is holding up and unemployment and deficits are heading lower. Yet with uncertainty at such high levels, it’s more important than ever that we use all policy tools to support growth. Above all, we must ensure that its benefits are felt in all parts of the euro area and all segments of society.”

The eurozone has experienced real GDP growth for 15 consecutive quarters. Employment is growing at a robust pace and unemployment continues a downward trend. The driver of recovery is still considered to be private consumption while investment growth remains subdued. The commission expects GDP growth in the eurozone of 1.6% in 2017 and 1.8% in 2018, an upward revision from the Autumn Forecast due to better-than-expected performance in the second half of 2016. Risks loom large, however, and mostly on the downside.

“In these uncertain times … it is important that European economies stay competitive and able to adapt to changing circumstances,” said Valdis Dombrovskis, vice president for the Euro and Social Dialogue. “This requires continued structural reform effort. We also need to focus on inclusive growth, ensuring that the recovery is felt by all. With inflation picking up from low levels, we cannot expect current monetary stimulus to last forever.”

With the recent increase in energy prices, inflation has picked up too and is expected to reach higher levels this year and next. Core inflation, however, is set to rise only gradually. Growth rates among member states may be affected by the U.S. dollar’s appreciation and higher long-term interest rates.
The high uncertainty in the forecast is attributable to the still-unknown policies of the new U.S. administration, as well as the upcoming elections in Europe and the “Article 50” negotiations with the U.K.

Fiscal stimulus in the United States could have a greater impact on growth than expected, in the short term; in the medium term, recent crises loom large as risks to the growth forecast, as do the U.K.’s vote to leave the European Union, potential trade disruptions and monetary tightening in the U.S.

– Adam Fusco, editorial associate

Insurance Companies Coming to Place Cybersecurity at High Priority

North American insurance companies are taking risks from cyberattacks very seriously these days and include them among the top board-level priorities, according to a recent survey conducted by Moody’s Investors Service.

Property and casualty, reinsurance, life and health insurance firms are significantly ramping up their governance, oversight and investments in cybersecurity, including “…more formalized reporting to executive management and their boards,” the ratings agency said. “Among survey respondents, essentially all maintain incident response plans for multiple cyberintrusion scenarios, and most insurers test their vulnerability to these annually," Moody's Senior Vice President Alan Murray said. “Cyberattacks can have serious tangible consequences for insurers, exposing them to legal actions, regulatory scrutiny, fines and other expenses," he said. "In addition, an insurer's reputation is at stake."

(See NACM’s eNews on a recent report from financial messaging provider SWIFT about how to mitigate the fraud risk associated with suspicious financial transactions.)

The insurers’ cybersecurity plans often list responses to attacks that will minimize damages while most firms also conduct security testing by having people attempt to breach their systems at potential weak points, Moody’s said. The insurance companies surveyed also said they use threat intelligence services and tools to both prevent and deter attacks.

The companies have increased their cybersecurity staffing by almost 30% during the past three years, as they’ve also increased their outsourcing efforts to rein in costs and keep up with the latest in cybersecurity tools and methods, the ratings agency said. About two-thirds of those polled said they increased outsourcing and employed a median of 10 cybersecurity vendors that provide a wide variety of services.

“However, vendor reliance also has potential risks,” Moody’s said. “For instance, a vendor may not provide flexibility and responsiveness in all scenarios, and/or products and services of vendors may not align with an insurer's particular business models.”

– Nicholas Stern, editorial associate

U.S. TPP Exit May Forestall Growth in Asia Pacific

The withdrawal of the United States from the Trans-Pacific Partnership (TPP), formalized by President Donald Trump on Jan. 23, may have profound economic implications for some Asian Pacific countries, according to credit insurer Atradius. The trade agreement between 12 Pacific Rim countries remains in a kind of limbo with the loss of a major member. The U.S. by itself accounts for over 60% of the total GDP of the agreement’s signatories.

In Australia and New Zealand, food producers and exporters and service providers would have benefited from the increased market access provided by the TPP. Japanese auto manufacturers, currently facing barriers to long-term growth, would have gained better access to the U.S. market.

Decreased import tariffs from the TPP would have given Malaysia improved access to the U.S. and other TPP markets for palm oil exports. Access to the large duty-free market under the TPP would have provided significant increases in exports for Malaysian manufacturing and textile sectors.

Removal of duties on many types of goods would have benefited largely export-oriented Singapore. The TPP would also have allowed Singaporean IT, construction and consultancy companies to bid for projects in Malaysia, Mexico and Vietnam, which were previously closed to foreign bidders, Atradius said.

Vietnam’s GDP would have grown an additional 10% over the next 10 years under the TPP, according to estimates. The country was expected to be a major beneficiary of a U.S.-led TPP. Reduced tariffs would have helped growth in the country’s food, textiles, furniture and consumer electronics industries. Export growth by 50% over the next decade was predicted for its textile/footwear manufacturers alone, through better access to Japanese and U.S. markets. A failed TPP will leave Vietnam more dependent on China, Atradius said.

The U.S. exit from the TPP gives China the opportunity to shape trade policy in the region itself, though it was not a member of the TPP. The country is already promoting its own trade agreement known as the Regional Comprehensive Economic Partnership, which includes some TPP members such as Japan and Australia. While growth prospects in the region remain, opportunities for more rapid growth are now reduced, given the U.S. exit, Atradius said.

– Adam Fusco, editorial associate

Growth Expected for Textile and Clothing Sector, but Trade Protectionism Could Stall Trade

If no major incident proves as a spoiler this year, projected growth for the international textile and clothing sector should take place, with an expected 3.5% climb in exports to $925 billion, according to a recent report by credit insurer Euler Hermes.

Price increases are returning to the sector because of firmer demand prospects, analysts said. Also, more resilient long-term demand is in the forecast thanks to the growing middle classes in emerging markets. The use of man-made fibers will serve to keep price volatility in check, rather than relying on the more fickle markets for cotton or wool. In 2016, for example, cotton prices rose 5.7% on average as producer prices stagnated in China and decreased 1.8% in India.

Still, this volatility in raw materials, as well as increasing wages for workers, is putting pressure on profitability, Euler Hermes analysts said. Intense competition is another headwind for a sector already impacted by the growing e-commerce sector. Shifting consumer preferences for fast fashion are leading textile and clothing firms to become more flexible in their production.

“A rise in protectionist mood and the termination of Trans-Pacific Partnership trade deal talks could land a blow to the T&C sector,” analysts said. “Tariffs and regulations are already high and pinpointed as impeding sector growth.”

– Nicholas Stern, editorial associate

Kamakura Index Shows Improvement in Corporate Credit Quality

The Kamakura Corporation recently reported that its troubled company index finished January at 8.42%, representing a decrease of 1.23 from the month prior. On a year-over-year basis, the index decreased 5.29%, indicating an overall improvement in credit quality. The index measures the percentage of 38,000 public firms in 68 countries that have an annualized one-month default risk over 1%. Declining credit quality is indicated with an increase in the index, while a decrease means improving credit quality.

The percentage of corporations with default probabilities ranging between 1% and 5% was 6.88% at the end of January, a decrease of .85% from the month prior. Those with default probabilities from 5% to 10% were 1.09%, a decrease of .28%. The index went from 9.65% on Jan. 2 to 8.39% on Jan. 30. Volatility has been muted over the past several months, Kamakura said.

Among the 10 riskiest firms in January, six were from the United States, three were from Canada and one was from Great Britain. There were three defaults during the month among those rated. With a one-year default probability of 31.95%, Vanguard Natural Resources remained the riskiest firm, Kamakura said. Since 1990, the average index value has been 14.77%.

– Adam Fusco, editorial associate

Negative Ratings for Nonfinancial Corporate Companies in Asia on Track to Moderate in 2017

Nonfinancial companies in Asia are set to see some relief from negative credit ratings pressure over the next year or so as commodities prices rebound, but the potential for backsliding may come from higher U.S. interest rates or reduced stimulus levels in Europe.

"Our expectation that the negative rating trend will moderate in 2017 reflects the partial recovery made by commodities prices, the fact that the monetary policy of major central banks—with the exception of the U.S. Fed—will likely stay accommodative, continued solid growth in the U.S., and growth in China stabilizing at close to the official target," said Clara Lau, a Moody's Investors Service group credit officer. "At the same time, several factors will likely lead to uncertainty in the capital markets and could reverse the stabilizing rating trend in 2017."

Lau believes that if the U.S. Federal Reserve raises rates this year, it would negatively impact Asian companies, particularly those holding large U.S.-dollar debt without matching cash inflows. Also, if the European Central Bank reduces its monetary stimulus program in 2017 while the Chinese government continues tightening capital outflows, it could bring about more volatility in the markets.

During the fourth quarter of 2016, the share of ratings with negative implications—either negative outlooks or those under review for downgrade—was 29%, the lowest level for the entire year, Moody’s said. Meanwhile, the share of ratings with a stable outlook grew to 65% by the final quarter of 2016, compared to 60% during the prior two quarters.

Chinese firms made up the majority of negative bond ratings in 2016 while the negative ratings concentrated in the metals and mining, as well as property developers, sectors, the ratings agency said.

– Nicholas Stern, editorial associate

Japan’s Structural Issues Hold in 2017 while Growth Elsewhere in Asia May Be Tamed by China Risks

Although a strong dollar should help increase business sentiment in Japan this year, the nation faces a host of challenges going forward, including very high public debt that’s mostly held by Japanese creditors and a declining working-age population, according to a series of reports from credit insurer Atradius on the economic outlook of Asia’s major economies. (See this week’s eNews on the payment and insolvency issues in China and growth in India.)

Deflation has been a major issue in Japan, with GDP growth fizzling below 1% in 2017, and analysts expect more of the same this year.

“To achieve a sustainable rebound and to boost the country’s long-term economic performance, there is an urgent need to make the labor market more flexible, to end protection for farmers, doctors and pharmaceutical companies, and to introduce more business deregulation,” Atradius said.

The Philippines’ GDP is anticipated to rise more than 6% in 2017, with private consumption accounting for some 70% of the economy and a growing middle class set to contribute to ongoing growth over the near term, the credit insurer said. Foreign direct investment in the country has tripled from 2009 to 2015. Infrastructure projects are big in the country right now, from railways and airports to roads and port development.

In Vietnam, real GDP growth is also expected to increase more than 6% in 2017, fueled by agricultural exports, while private consumption should grow thanks to low inflation, low local interest rates and rising wages, the credit insurer said.

Still, Vietnam is quite vulnerable to economic downturns in the broader Asian marketplace, where it sends about half of its exports, Atradius said. Also, “Vietnam was supposed to be a major beneficiary of the U.S.-led Trans-Pacific Partnership (which would have led to a significant increase of its medium-term growth prospects), but the decision of the U.S. administration to withdraw from the agreement has left its future in limbo,” the firm said. The business environment in the country is getting better, but ongoing infrastructure problems, corruption and the high level of state intervention in state-owned enterprises dampen productivity gains.

Malaysia should see GDP growth rise by about 4% this year, and economic growth in the country is primarily driven by private consumption and investment, Atradius said. The main risk to the economy is slowdown in China—the nation’s principle recipient of exports. “Malaysia has a well-developed financial sector, with well-capitalized banks, good credit quality and a low share of nonperforming loans (about 1%). However, a risk factor is the high level of private debt, which could become a problem if interest rates rise substantially,” the credit insurer said.

– Nicholas Stern, editorial associate

U.K. Construction Sector Loses Momentum in January

January saw a slowdown in construction sector growth in the United Kingdom, with both business activity and incoming new work expanding at weaker rates than at the end of last year. Regardless, confidence over the year ahead picked up to its strongest level since December 2015, according to the U.K. Construction Purchasing Managers’ Index (PMI) from Markit/CIPS.

“U.K. construction firms experienced a subdued start to 2017, with all the key categories of activity losing momentum,” said Tim Moore, senior economist at IHS Market. “While house building retained its position as the fastest-growing part of the construction sector, the latest upturn was the weakest since the post-referendum rebound emerged in September 2016.”

The seasonally adjusted PMI registered 52.2 in January, down from 54.2 in December. All three subsectors—housing, commercial and civil engineering—recorded softer rates of output growth in January.

“New business volumes also expanded at a softer pace in January, but there were more positive trends in terms of staff hiring and business optimism regarding the year-ahead outlook,” Moore said. “The latest survey revealed an accelerated rise in payroll numbers at construction companies, as well as the fastest upturn in subcontractor usage since the end of 2015.”

Staff hiring in the construction sector at the start of 2017 was attributed to planned project starts in the coming months. The increase in employment numbers was the fastest for eight months, indicating sustained improvement in business confidence among construction companies. More than half (51%) of those surveyed foresee a rise in business activity over the next year. Meanwhile, the weak pound continued to have an inflationary impact on the sector in January, with purchasing costs increasing at the strongest rate in over eight years.

– Adam Fusco, editorial associate

Manufacturing Gains Seen in Latest ISM Index

Ongoing gains in production, new orders and employment nudged the January ISM manufacturing index higher to 56.0 today for the fifth month in a row and represented the highest index reading since November 2014, when oil prices began to slip.

“The reasons for the surge are varied and there does not seem to be one single factor driving the enthusiasm right now,” said NACM Economist Chris Kuehl, Ph.D. “Those who indicate a reason for their optimism point to hopeful signs from the Trump administration on issues like deregulation, tax reform and infrastructure build. At the same time, there is concern that too little focus has been directed at the ongoing issue of labor shortages.” (See Kuehl’s analysis of manufacturing trends in the latest NACM Credit Managers’ Index.)

The production component of the index increased a point to 61.4, passing the 60 mark for the first time in over two years, while new orders grew to 60.4, according to an analysis of the data by Wells Fargo.

Nondefense capital goods orders ex-aircraft rose 0.8% in December, while core capitals goods orders have increased in six of the past seven months, “…a feat that is quite rare,” said John Silvia, chief economist at Wells Fargo.

Prices are growing in the factory sector as evinced by the prices-paid category of the index, which climbed 14.5 points to 69.0 over the past two months. “Fifteen industries reported paying increased prices for raw materials in January, while none reported paying lower prices,” analysts said.

Meanwhile, the employment component of the index rose 3.3 points to 56.1, the second-highest reading since the beginning of 2013, Wells said. This morning’s strong reading is an encouraging sign for some additional recovery for manufacturing employment in Friday’s jobs report and suggests solid momentum to start 2017, Silvia said.

– Nicholas Stern, editorial associate