The Japanese economy will remain in a state of stagnation because of, rather than in spite of, the combination of economic policies pursued by the BoJ and the government. We have downgraded our 2015 growth forecast to 0.7%, from 1.0%, and expect growth slow further to 0.6% in 2016. While Japan’s headline inflation continues to decline in y-o-y terms, the underlying trend is for increased price pressures, which will likely prevent the BoJ from easing further in 2015. However, the need to fund the large fiscal deficit will pressure the central bank to expand its quantitative easing programme over the medium term. Government bond yields are set to rise considerably.
Recent weeks have shown that the Japanese yen still retains some safe haven qualities despite the BoJ’s efforts to keep the currency weak. The combination of a reversal in global carry trades and plunging oil prices have provided both technical and fundamental upside pressure to the yen, and further gains look likely in the near term. However, further strength is likely to be self-limiting as it could undermine domestic inflation and trigger further monetary stimulus by the BoJ.
Due to the lack of appetite for spending reforms, the Japanese government will continue to rely on the BoJ’s bond buying programme to fund its fiscal deficit amid rising social security payments and interest costs. Ultimately, the cost of avoiding undertaking deep fiscal austerity measures will be slow real GDP growth, higher inflation, and the potential for more volatile financial markets.
The weakening yen continues to undermine Japan’s economy by reducing export receipts in US dollar terms in spite of the rise in export volumes. However, these negative effects are being concealed by the windfall gains of lower energy imports, which look likely to remain in place over the medium term.
Japanese Prime Minister Shinzo Abe faces rising political challenges, mostly stemming from opposition to his remilitarisation legislation, and this is detracting from structural economic reforms. Although Abe’s approval rating has suffered, there are no immediate successors, meaning that he will survive in office for now. His biggest test will be the Upper House elections in July 2016.
Major Forecast Changes
We have downgraded our 2015 growth forecast to 0.7%, from 1.0%, and expect growth slow further to 0.6% in 2016. The deteriorating outlook for China and other emerging markets poses the main risk in the near term, while a combination of poor demographics and a build-up of economic distortions will ensure long-term growth is weak.
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A weak currency will be the key pressure point for the Kenyan economy over the coming quarters. Although we still hold a positive outlook for economic growth over this period, we expect tighter monetary conditions and FX inflation pass through to take a toll. The politicisation of sharp ethnic divisions remains the key threat to Kenya’s long-term political stability. Terrorism linked to Kenya’s military involvement in Somalia is likely to remain a risk, but it does not pose a systemic threat to political stability.
Despite a tense security situation, we believe that a booming consumer story, a robust outlook for investment and lower oil prices will see real GDP growth in Kenya expand at around 6.3% annually over the next few years.
The Kenyan economy will receive an added boost from lower oil prices over the coming quarters. We believe that Kenya – a net fuel importer – stands to benefit more than many of its regional peers.
Concerns about public spending are rising in Kenya. While we predict that the country will see its fiscal deficit narrow modestly over the coming years, we believe that the country’s public finances are in less rude health than this trend suggests.
Major Forecast Changes
The release of rebased GDP figures has led to substantial revisions to our estimates of Kenya’s current account and fiscal deficits when presented as a fraction of GDP. Our general view on economic growth and the development of the Kenyan economy remains largely unchanged.
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We expect the Kuwaiti economy to see modest growth over 2015 and 2016, forecasting real GDP growth of 2.5% and 1.9%, respectively, from 2.7% in 2014. After a long period of stagnation, the Kuwaiti investment outlook appears to be improving, while the prospects for consumption remain bright. However, we again highlight Kuwait’s ever-volatile political situation as the key downside risk to economic activity.
Kuwait has seen a flurry of populist legislation recently, including several measures specifically targeting expatriate workers. This runs the risk of increasing uncertainty within the private sector, as well as cementing perceptions of the country as a hub of policy instability. We expect tensions to remain between the government and the legislative branch, even with the election of a renewed ‘loyalist’ parliament.
We forecast average consumer price inflation for Kuwait of 3.5% and 4.0% for 2015 and 2016 respectively, up from 2.9% in 2014. While we expect a slight fall in Kuwaiti food inflation over the near term on the back of lower global prices, a tight supply picture in the real estate market will fuel housing inflation over the coming quarters, in a trend seen across the GCC.
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