Albania will remain attached to a relatively low growth trajectory over the coming years, amidst weak private consumption and government fiscal consolidation efforts.
More efforts need to be made to implement structural reforms aimed at tackling corruption and improving labour market flexibility, if Albania is to have any hope of converging with historically more developed regional peers.
Albania’s large and entrenched trade balance shortfall will ensure that the country’s current account remains firmly in deficit over the coming years.
Uncertainty in neighbouring Greece throughout the country’s 2015 debt crisis will increase the scope for regional instability. It will also weigh on demand for Albanian exports to Greece and remittances inflows from Albanian workers based in Greece.
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Real GDP growth is highly likely to slow over the coming years owing to a number of factors: slowing growth in the working age population, a high share of government spending relative to GDP, a reversal in the country’s terms of trade and the growing risk of deflation. These impediments will result in real GDP growth averaging 2.3% over the next decade, down from 2.9% over the past decade.
The Australian Labour Party remains in prime position ahead of the general election (to be held by January 14 2017). Malcolm Turnbull’s appointment as Australia’s 29th Prime Minister in October will do little to improve the Liberal-National’s coalition sliding popularity. We remain bearish on the Australian dollar despite the large fall we have already seen in the currency. While valuations are no longer a headwind to the currency, the trend remains very bearish. Weak economic growth owing to falling investment and correction in the property market amid elevated indebtedness does not bode well for the AUD.
Australia’s fiscal accounts are unlikely to return to a surplus any time soon, given downside risks to revenue collection and a lack of expenditure cutbacks. Total revenue collection will remain poor as the economy continues to weaken, which will weigh heavily on tax receipts. Meanwhile, objections to spending cuts from the public, opposition and crossbench senators as well as other state governments indicate that the Australian government will struggle to keep its expenses and borrowing on a sustainable trajectory. While there is currently no danger of a fiscal crisis, our core view is that this growing burden of the government will undermine the productivity of the private sector and take its toll on economic growth over the medium term.
Australia’s current account picture is gradually improving in spite of deteriorating terms of trade, thanks to higher export volumes and lower income outflows. Going forward, we maintain that a current account surplus is likely as the Australian dollar depreciates, but this will increasingly be driven by lower imports, to the detriment of the domestic economy.
We expect the Reserve Bank of Australia (RBA) to cut its cash rate by 50 basis points (bps) to 1.50% by H116 as overall economic growth deteriorates owing to a slowdown in residential construction activity, declining investment in the resources sector amid depressed iron ore and coal prices, intensifying drought fears, and tightening financial conditions.
Major Forecast Changes
- We lowered our cash rate forecast for 2016 to 1.50% (versus 2.00% previously) as worsening economic activity amid subdued inflation will prompt the RBA to reduce its key policy rate by 50bps by 1H16.
- We lowered our end-2015 and end-2016 AUD forecasts to USD0.6600/ AUD and USD0.6000/AUD, respectively (from USD0.7000/AUD and USD0.6600/AUD previously) given that fundamentals remain poor and that the Aussie remains on a downtrend.
- We revised our 2015 and 2016 current account deficit as a share of GDP forecasts to 3.5% and 3.0%, respectively (versus 2.3% and 1.7% previously), given the greater than expected widening of the goods and services trade deficit.
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Algeria’s economic growth will slow markedly over 2016. Under the pressure of lower oil prices, the government will adopt a greater shift towards spending cuts and protectionism. These trends will weigh on investment and consumption over the coming quarters, and we forecast the economy to grow by only 1.9% in real terms – the weakest rate since 2009.
The Algerian dinar will continue to gradually weaken against the US dollar throughout 2016, albeit at a slower pace. Oil prices are not set for a quick recovery, and the trade fundamentals of Algeria’s economy remain bleak – factors that will weigh on the currency. However, the government will be reluctant to permit too great a slide of the dinar as pressures on households rise.
While lower oil prices will put further pressure on the Algerian regime over the coming years, we do not expect a return to the unrest of the late 1980s. The ruling elite will remain successfully in control for the time being, despite the sclerotic state of the economy.
Algerian President Abdelaziz Bouteflika’s fragile state of health will intensify the regime’s internal divisions, with rival factions competing against each other in the battle for succession. This will nurture policy paralysis and weaken Algeria’s already-limited pace of political and economic reform. However, whoever ultimately emerges as the next president is highly unlikely to change the structure of the regime or improve the system of governance.
Although the Algerian government has called for more foreign investment into the country, we expect FDI inflows to remain sparse in the years ahead. Foreign investors will remain deterred by numerous restrictions and Algeria’s weak business climate, and we do not anticipate any comprehensive liberalisation of the economy.
Algeria is set to move into an even more protectionist direction in response to the fall in international oil prices. However, renewed steps to limit imports and strengthen the domestic production base will have highly limited success
Core Views As a result of ongoing political violence, a significant degree of productive capacity (both physical and human) throughout the Libyan economy has been lost. Road, housing and utility infrastructure have suffered considerable damage and will take years to repair under even the most stable of political environments. Moreover, given the importance of the hydrocarbon industry, damage to oil production and refining infrastructure will pose significant long-term challenges. Libya’s political and security climate will remain volatile through 2016, as competing militias compete for control over the country’s vast resource wealth. A lack of institutional capacity will hamper reconstruction efforts. Libya lacks the institutions necessary to carry out much-needed investment projects. Low oil prices, coupled with protracted political instability, will result in minimal new investment in the oil sector over the coming years. The economy’s growth potential will depend on three key variables: the speed and scale of oil production; the state of the underlying security environment; and the state of the utilities sector – in particular, the provision of a stable supply of electricity. Rapid growth rates in 2016 result from base effects, and mask key structural weaknesses in the country.
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