Morningstar's "Perspectives" series features investment insights from selected third-party contributors. Here, Craig Botham, Emerging Markets Economist for Schroders comments as part of Morningstar’s Guide to What the Experts Say.
Russia
Russian GDP contracted 1.9% year-on-year in the first quarter of 2015. Though better than expected, this is still a painful fall for any economy. Further contraction seems inevitable given the lagged effect of monetary policy and the fiscal tightening underway.
As the data released today was only a flash estimate, there is no breakdown by industry or expenditure. Looking at the higher frequency data would suggest that consumption and investment dragged on growth for the quarter, with both contracting over 6% versus the first quarter of 2014.
Industrial production was also negative but performed better than expected, perhaps buoyed by rouble weakness. For the rest of the year, it is difficult to envisage a recovery in either consumption or investment, given the weakness in real wages in the first quarter, and the structurally lower oil price.
The data has prompted policymakers in Russia to turn much more optimistic on growth prospects for 2015, and some revision of forecasts is probably warranted. However, the extreme rouble weakness of the first quarter now looks to be behind us, the full impact of monetary and fiscal tightening is yet to be felt, and though oil has recovered it looks unlikely to rise to 2014 levels, limiting investment and earnings growth. Warning lights might be improving for Russia, but only to shift from one hue of red to another, not from red to green.
China
In a move that should prove helpful at the margin, the People’s Bank of China (PBoC) has delivered another cut to the benchmark lending and deposit rates. We expect this aggressive easing trend to accelerate during the rest of 2015.
Both the lending and deposit rates were cut by 25 basis points, taking the lending rate to 5.1% and the deposit rate to 2.25%. At the same time the ceiling for the deposit rate was raised to 1.5 times, from 1.3 times previously; banks are able to offer a slightly higher deposit rate than previously, if they wish.
So far, rate cuts in China have depressed net interest margins at banks, which felt unable to lower deposit rates but were compelled to reduce the rate on existing lending. As a consequence, the rate on new lending, important for refinancing costs, stayed higher as banks attempted to recoup their diminished margins. This time, however, listed banks have been reducing their deposit rates as well as their lending rates, suggesting not only less pressure on net interest margins but also a greater marginal impact on debt costs for corporates and households.
The PBoC’s quarterly report showed that despite the easing measures introduced, effective rates in China remain elevated, and the low level of inflation means real effective rates are higher at present than their 2014 average.
Given the apparent shift to more aggressive easing, we now expect an accelerated pace of monetary easing for the rest of 2015, in effect frontloading the stimulus we had expected for 2016. One implication might be that April’s data is weaker than expected, certainly the trade and PMI data so far would suggest as much. We think GDP growth is likely to slow further in Q2.
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