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Broadgate: Weekly Briefing 20/5

20th May 2014

Japan – Japan’s economy grew at the fastest pace in nearly three years in the first quarter, due to increased spending ahead of a sales tax increase on 1 April.

Official data showed GDP rose 1.5percent in the January-to-March period, against a revised 0.1percent in the prior quarter. The figure beat forecasts for 1% growth, and was led by consumer spending which rose by 2.1%.

Private consumption accounts for approximately 60percent of Japan’s economy. However, economists warned that spending may taper off now that the April tax hike has been introduced.

“Japan’s economy expanded rapidly ahead of the sales tax hike, but is set to slump thereafter,” Marcel Thieliant, Japan economist at Capital Economics, said.

“Looking ahead, the economy will certainly contract in the second quarter of the year, as consumers rein in spending after the tax hike, and residential investment is set to plunge.”

Germany – German economic growth picked up pace in the first three months of 2014, while France’s economy failed to grow, the latest figures show.

German gross domestic product (GDP) grew by 0.8percent, driven by stronger domestic demand, the country’s statistics office said.

In contrast, growth in the French economy was flat, with an official figure of 0percent.

Russia – Russia’s first-quarter economic growth will likely prove to be the slowest since a 2009 recession, as the country’s standoff against the U.S. and its allies over Ukraine hampers investment, a survey of economists showed.

Gross domestic product advanced 0.7percent in January-March from a year earlier after a 2percent gain in the previous quarter, according to the median estimate of 19 economists in a Bloomberg survey. The Economy Ministry projects that output expanded 0.8 percent in the period. The U.S. and the European Union responded to President Vladimir Putin’s takeover of Crimea from Ukraine with sanctions and warned they are ready to take further measures if the former Soviet republic’s May 25 presidential election is disrupted. The $2trillion economy was stalling even before the penalties hit. The International Monetary Fund said April 30 that Russia is already in recession.

“The main driver for the slowdown is the contraction of investment,” Vladimir Osakovskiy, chief economist for Russia at Bank of America Corp. in Moscow, said. “Investment weakness is due to a combination of much higher borrowing costs and the deterioration of the political and economic outlook. The latter is at least partly due to rising sanction risk from the West.”

Gold – Gold sales at jewelers in Hong Kong have declined as mainland shoppers buy less, the Chinese Gold & Silver Exchange Society reported, adding to signs of a slowdown in consumption by the world’s largest user after 2013’s surge.

Demand dropped about 30percent from a year ago, during the Golden Week break that began May 1, owing to the holiday being shorter this year and there were fewer visitors as luxury spending fell and gift-giving slowed.

While China surpassed India as the biggest user last year, the buying frenzy sparked by gold’s slump into a bear market last April hasn’t been repeated, according to Heraeus Metals Hong Kong Ltd. Lower consumption in China this year may help to extend declines in prices as investors press on with sales from exchange-traded products.

India – Indian stock markets have risen to a record high this week, after exit polls suggested the Narendra Modi-led Bharatiya Janata Party (BJP) and its allies are on course to win the general election.

India’s main stock index, the Sensex, rose 1.7% to 23,941.32 points in early trade on Tuesday. This follows a 2.4% gain on Monday, ahead of the exit poll results.

Analysts said investors were hopeful that a BJP win could help reverse the slowdown in India’s economy.

Exit polls released by Indian media organisations on Monday evening showed the BJP-led National Democratic Alliance (NDA) well ahead in terms of predicted seat wins, and the governing Congress trailing badly.

Spotlight on: The World Cup effect

For most Brazilians, winning a World Cup on home soil would be priceless. For companies ranging from retailers to airlines, the event is bad for business.

More than two-thirds of malls expect a “significant” drop in traffic during the World Cup next month as soccer fans stay in front of their TVs and shopping centers restrict hours because of public holidays, an Ibope poll released May 13 shows. Banco Santander SA says a drop in business travelers will cut sales for airlines like Gol Linhas Aereas Inteligentes. Hotels and restaurants are also bracing for a slowdown.

With less than a month to go before the tournament starts, the international soccer championship isn’t giving Brazil’s sluggish economy the lift supporters like former President Luiz Inacio Lula da Silva and Finance Minister Guido Mantega had hoped for. Latin America’s largest economy missed a chance to use the World Cup to fuel long-term growth by not following through with all planned projects to modernize infrastructure, while economic activity in the short term isn’t likely to get a boost, said William Nobrega, managing partner at The Conrad Group, an investment advisory firm for private equity.

“It would have had a positive impact not only on short-term but also long-term economic growth, that didn’t happen,”Nobrega said. The World Cup will“at best” have a neutral impact on gross domestic product.

2 Percent Growth

The tournament comes at a time Brazil is heading toward its fourth straight year of GDP growth below 2percent. The prospect of host cities granting workers more days off may hurt the economy further, Santander said in a report dated May 9.

“With a substantial number of additional holidays during the 32 days of the tournament, our economics team expects a slowdown in economic activity that could impact all companies, ”Santander analysts including Pedro Balcao-Reis said.

Retail businesses like clothing, pharmacy and gasoline stations are also expected to see a decline in sales during the period, according to Moody’s Investors Service analyst Barbara Mattos.

“Possible holidays during the games damage the companies’productivity as they won’t have the same number of working hours,” she said in an e-mail.

UM Investimentos, a brokerage in Rio de Janeiro, is one of those companies. “Volume is lower on the days of the games,” Chief Executive Officer Marcos Maluf said, adding that the day after a game trades will be back to normal.

Route Changes

Brazil’s national air regulator, known as Anac, expects carriers to change routes ahead of the games to adjust for lower-than-expected demand. As of May 1, airlines had sold only 21percent of the seats on flights in June to and from the 12 host cities, Anac said.

Santander estimates that Gol’s revenue during the month-long event will be cut by about 13percent, as an increase in tourists won’t be enough to offset a 70percent drop in business travelers. The negative impact on bigger rival Latam Airlines Group SA will be about half of Gol’s as Brazil represents 50percent of the company’s carrying capacity, the bank’s analysts wrote.

“As corporate clients pay much higher prices, even with the expected increase in leisure prices, the overall impact on prices should also be negative,” the analysts said. “We expect a negative impact on both volume and prices.”

Hotels in Sao Paulo, South America’s business hub, are also suffering.

Occupancy Rates

While World Cup hotel occupancy rates in Rio are already above 90percent, only about 30percent of the rooms are booked in Sao Paulo, where the opening game takes place on June 12, said Joel Renno Jr., director for strategic development at Hotel Urbano, a Rio-based online travel agency. Agencies blocked a large number of rooms in Sao Paulo, hoping to boost rates for a surge in demand that never followed, he said.

“There was overshooting, everybody is much more bullish than what’s really the situation,” Renno Jr. said on May 6.“What we have heard from the market is that it’s about to start a process of super-aggressive promotions from hotels, with rates dropping drastically.”

To be sure, the World Cup is turning out to be a financial boon for some Brazilians. Real estate broker Norbert Hartmer said he is renting luxury apartments to Asian billionaires in Rio’s best neighborhoods for as much as $180,000 for the month.

A three-bedroom residence in Leblon, Rio’s most exclusive neighborhood, goes for an average of 3,500 reais ($1,590) a day during the World Cup, according to Rio’s regional real estate brokerage council.

Government Estimates

The Brazilian government expects the event to mobilize 3.7 million local and foreign tourists, generating 6.7 billion reais in spending linked to the tournament, according to a May 13 statement from the country’s communication secretariat.

Some host cities including Rio, where the tournament’s final will be played on July 13, have declared public holidays on game days to try to ease traffic jams.

“Productivity levels for Brazil during the entire month of the games are just going to go through the basement because you are going to have rolling holidays,” The Conrad Group’s Nobrega said. “Even without official holidays, there are a lot of people who are just not going to go to work.”

WCE

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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