We have flagged inflation as a major long-term risk going forward: if the recovery is as tepid as we expect, central banks will be inclined to err on the side of caution when it comes to withdrawing the unprecedented conventional and unconventional monetary stimulus. But we believe that there will be a familiar additional source of inflation risk - the mounting public debt burden. There is no doubt that, last winter, with the global economy slumping, central bankers welcomed the help they got from hugely expansionary fiscal policy. However, the result has been a massive increase in developed countries' public indebtedness - the extent of the debt build-up in some countries resembles the consequences of wars. Historically, developed economies have escaped high debt by growing out of it rather than inflating it away or defaulting (with the notable exception of Germany and Japan). Growth after World War II for example was fast, not least because war-ravaged economies were rebuilding their capital stocks.
This time around, however, eroding the debt through faster growth may not be an option. Instead, growth in many developed countries is likely to slow significantly going forward as labour forces shrink due to the demographic transition. Worse, population ageing will impose added pressure on public expenditure through higher pensions and healthcare costs. If outgrowing the debt is unlikely, and if governments lack the resolve to cut spending and/or raise taxes sufficiently, the remaining options are default and inflation. No policymaker in the developed world - and, by now, few in the developing world - would want to countenance default as an option. This leaves inflation. The question is familiar: could central bankers be forced to engineer inflation - ‘monetise the debt'? Almost all developing world central banks are independent from an institutional point of view. Indeed, one of the main reasons for setting up independent monetary authorities is precisely to avoid pressure from governments to inflate away the debt. So, central banks cannot be forced by their governments to generate inflation (unless governments were prepared to change the statutes of their monetary authorities; this would in most cases require going to the legislature).
With governmental coercion being unfeasible, is there a possibility that independent central bankers might generate inflation out of their own volition? If nothing else, they would take a big gamble with their hard-won credibility. And history teaches us that the reason behind most, if not all, episodes of very high inflation has been monetary expansion to finance government expenditure or reduce debt (see "Could Hyperinflation Happen Again?" The Global Monetary Analyst, January 28, 2009).
Still, there is a reason why a rational and forward-looking, independent central bank may want to consider generating (some) inflation. If the fiscal path is deemed unsustainable, it may be preferable to create limited inflation early on - to nip the debt problem in the bud - rather than to allow a mounting debt burden and having to inflate a lot more in the future.
So, it may be best to bite the bullet and allow inflation now. But how does one avoid throwing the credibility baby out with the debt bathwater? Above all, if a central bank is to inflate, it has to do so in a controlled fashion. Former IMF Chief Economist Kenneth Rogoff's proposal of a 6% inflation target for a limited period of time could be a way of doing it. We think that for Rogoff's proposal to work, the central bank would have to communicate explicitly to the public the level of inflation targeted, the duration of the new policy, and the timeframe for a return to a lower target - the exit strategy.
Another possibility would be to adopt price level targeting (PT). As we have argued before, PT could give the central bank wiggle-room to allow inflation to drift above target for some time without unanchoring inflation expectations (see "From Inflation Targeting to Price Level Targeting", The Global Monetary Analyst, July 15, 2009). If implemented correctly, the public would know that prices would ultimately return to the target path as the overshoot would eventually have to be corrected by an undershoot.
Still, the risks for a central bank that follows such a strategy are substantial. Beyond putting its credibility at stake, there could be a run on assets denominated in that central bank's currency. And that's not to mention the political ramifications - inflation is known to redistribute wealth from lenders to borrowers. Yet, policymakers have shown that they are prepared to resort to unprecedented means if circumstances demand. We live in interesting times.
Thus far, the euro area labour market has held up much better than its US counterpart. While the US unemployment rate has risen by more than 5pp in the course of the recession to 9.8% of the labour force, according to the latest data point, its euro area counterpart has only increased by about 2pp, albeit reaching roughly the same level at 9.7% in 3Q. This discrepancy is even more striking as euro area output contracted much more sharply than in the US, where the output reduction from the peak was about one-third bigger. In this note, we look at the reasons behind the greater resilience of the job market in the euro area and discuss its implications. We conclude that:
• First, there are likely more layoffs to come and we see EMU unemployment rising for most of next year. The labour market deterioration should take a toll on the consumer this coming winter, we think (see Euroland Economics: Consumers Holding Up Just a Little Longer, May 26, 2009).
• Second, the lack of payroll reductions in the euro area put unit labour costs on a steep rise of 5.5%Y during 1H09. Contrary to the US, where unit labour costs are falling, profit margins are under pressure in the euro area due to a lack of (labour) cost cutting. Hence, a revival in corporate profits, measured on the gross operating surplus (the macroeconomic equivalent of EBITDA), might still be further away than in the US, especially if expectations for aggressive cost-cutting are disappointed.
• Third, with unemployment benefits being more generous (with a net replacement rate of around 66% compared to 57% in the US initially and of 46% compared to 30% later on), the lengthening in the dole queues yet to come will likely cause a further marked deterioration in public sector budgets. Note that unemployment benefits are also the main reason for greater sensitivity of euro area government budgets to swings in GDP growth.
• Finally, we highlight country differences and discuss their implications for intra-euro area divergences. While Spain, which already saw its unemployment rate more than double to almost 20% of the workforce, has likely seen most of the labour market reaction to the downturn, Germany, where unemployment was falling for the last three months, still has a large part of the adjustment ahead of it.
Several reasons for the different labour market performance on both sides of the Atlantic. First, despite some marked improvements over the last decade, tighter labour market regulations in continental Europe make hiring and firing still more expensive than in the Anglo-Saxon countries. Second, the use of short shift subsidies, which a number of countries, notably Germany and Italy, beefed up in response to the turmoil, seems much more widespread in Europe than in the US. Third, the greater internal flexibility regarding working hours (through flexible work-time arrangements, part-time work, overtime accounts, temporary plant closures - notably in the auto industry) gained over the last decade allow companies to adjust hours rather than payrolls. In addition, the rise in fixed-term contracts and temp-agency workers over the last few years allowed companies, mostly in the construction but also in the car industry, to cut payrolls. As a result, temp workers have borne the brunt of the layoffs thus far in many countries, but most notably in Spain. Fourth, Europe has started to see a contraction in the labour force as migration flows seem to reverse and secondary income earners withdraw from an increasingly difficult labour market to pursue other interests.
The greater cyclicality of labour force movements across national borders constitutes a new channel of labour market adjustment in the enlarged European Union, we think. With restrictions to the movement of workers within the EU being progressively lifted for the new member states in CEE, economic booms tend to attract foreign workers, allowing the boom to last longer without creating meaningful inflationary pressures. Vice versa, economic busts can cause them to withdraw from the national labour force again, thereby reinforcing the downturn through a further shortfall in demand.
Implications for the EMU labour market outlook are gloomy. For starters, we note that the labour market tends to be more of a lagging indicator in the euro business cycle, whereas in the Anglo-Saxon countries it tends to be more of a coincident indicator. This means that the labour market typically turns after the overall economy. Together with a lacklustre, sub-par recovery, this implies that there are likely more layoffs to come across the Continent. In addition, new entrants into the labour market find it increasingly difficult to find a job - a message that comes through loud and clear from a sharp rise in youth unemployment. As a result, we forecast a noticeable rise in the unemployment rate in the quarters ahead and expect it to peak out at around 10.7% of the labour force in the second half of next year. Our new employment indicator is a simple statistical model that projects near-term employment dynamics based on companies' hiring intentions surveyed on a monthly basis across several sectors by the European Commission. It suggests that there are indeed more layoffs on the way in the remainder of the year - even though the pace of job losses should slow from that seen in the first half of this year.
Tweaking the Hours Worked Rather than the Payrolls
If our conjecture that the hours worked are a major factor in adjusting the labour input in this recession turns about to be correct, then a return of job growth could be even further away than our current forecast shows. This is because, initially, companies will raise the hours worked up to and including working overtime before hiring new staff. After the end of the recession of the early 1990s, it took until early 1994 for employment to rise again. On the whole, we expect a sluggish recovery in the labour market. That said, we think that the increased flexibility at the fringes of the labour market - notably new flexible work arrangements - will prevent a hysteresis effect, which was typical of past recessions in Europe and where unemployment ratchets higher in the recession and fails to fall thereafter. On our updated forecasts, we expect employment to fall a further 1% in 2H09 and another 0.7% next year (see Euroland Economics: Much Better on Bottom Up, October 13, 2009). Even assuming that the labour force shrinks slightly going forward, this would likely push the unemployment rate close to 11% of the labour force in late 2010. It is only in 2011 that we expect to see the number of jobseekers coming down again.
Lack of labour cost cutting should dent profits. While wage pressures in the euro area are subdued and might moderate further in the quarters ahead, the unit labour cost dynamics show that even without major wage pressures, cost pressures for companies can arise due to a sharp fall in labour productivity caused by output shrinking a lot faster than employment. This, to some extent, reflects the fact that in Europe labour costs - at least in the near term - have the characteristics of fixed costs and, hence, are hit by sharp drops in operating leverage as capacity utilization rates reach fresh record lows of less than 70%, way below the trough seen in the early 1990s recession. These labour cost pressures, which we in the past have identified as the major factor driving the macroeconomic profit cycle (see European Economics: Profit Cycle - As Good as it Gets? April 26, 2004) could also be reinforced by many European governments struggling to plug holes in national social security funds. Faced with ever bigger funding shortfalls in their social security funds, governments might be tempted to raise non-wage labour costs, notably the contribution rates to social security schemes, which then will boost non-wage labour costs. In addition, for many multinationals headquartered in the euro area, the stronger EUR will likely introduce an adverse translation effect for overseas earnings, even if they are perfectly hedged in their currency exposure by producing where they sell their products. Our FX team expects further EUR strengthening in the coming quarters to 1.60 for EUR/USD by the end of 2010.
Potential risks around our base case. Like many other forward-looking components of the monthly business surveys, hiring intentions have started to rebound in recent months, suggesting that companies have started to scale back their layoff plans. That said, even at these improved readings for hiring intentions, our employment indicator is still pointing to considerable lay-offs in the remainder of this year. Moreover, the latest batch of business surveys brought no further upgrade to companies' output plans, no meaningful rise in order demand and only a muted improvement in current output. Against this backdrop, we cannot rule out that companies will adjust their staffing plans too. This would point to further downside risks to consumer spending. And as we argued in a recent note, we are concerned about potential setbacks to the euro area recovery in the quarters ahead as the main source of upside surprises so far seems to stem almost entirely from the inventory cycle, rather than a sustainable revival in consumer and investment spending.
Economic Environment
Saudi Arabia has managed to weather the global economic downturn, and its near-term outlook remains positive, in our view. We expect the economy to contract by 1.6% this year, mainly due to a projected decline of about 11.4% in the oil sector. We expect growth in the non-oil sector to remain positive this year, albeit at lower levels, owing to a potential slowdown in the growth of domestic spending, partly due to a reduction in consumer confidence, a contraction in bank lending and a more cautious approach to private sector investment. Nevertheless, these factors have been partly mitigated by large, counter-cyclical government spending. As a result, we believe that the non-oil sector will likely grow by about 2.8% in 2009. We expect inflationary pressures to ease significantly this year, in line with the weaker global economic environment and the sharp decline in international food prices.
We project the budget and external balances to be weaker in 2009, but they will likely remain positive. The Saudi government's fiscal response to the global economic downturn has been aggressive and timely. In addition to announcing one of the largest discretionary fiscal stimulus packages in the G20 (around 9% of GDP to be spent during 2008-10), it has repeatedly affirmed its commitment to the 5-year US$400 billion domestic investment program in infrastructure and oil. We expect the country's current account balance to remain slightly positive in 2009. However, the outflow of funds will likely be significant as banks channel their excess liquidity abroad and non-bank entities face tighter conditions in international credit markets. On balance, we project net official reserves to end the year around 8% lower than in 2008, but not below US$400 billion.
The Saudi authorities have been proactive in their monetary response to the global economic downturn, but policy traction has been hampered by weak credit growth. Starting in 4Q08, the government, in conjunction with the Saudi Arabian Monetary Agency (SAMA), started implementing a number of measures designed to ease the liquidity constraints on the banking system and support the flow of domestic credit. These included: (i) cutting the policy rates; (ii) cutting the bank reserve requirements; (iii) guaranteeing all bank deposits; and (iv) increasing government deposits in the banking system. As a result, domestic liquidity has continued to improve, as reflected by the drop in the 3-month Saudi interbank rate (which currently stands at about 0.7%). However, the effectiveness of the government's monetary easing has been significantly dampened by the banks' increasingly conservative approach to lending since 3Q08. Total bank credit grew by only 4.4%Y in August 2009, compared to around 32%Y a year earlier. Financial institutions seem to be placing greater emphasis on improving their overall liquidity and on strengthening their balance sheets than on expanding them.
Near-Term Outlook
The near-term economic outlook for Saudi Arabia is positive. We expect the projected rebound in global growth to bolster the demand for crude oil and lead to an increase of about 10% in Saudi crude oil production over the next two years, which we estimate will reach an average of 9 mbpd by 2011. We also expect growth in the non-oil sector to accelerate on the back of stronger domestic consumption and continued investment momentum (in both private and public sectors), along with improved credit conditions. As a result, we see real overall output growing by 3.6% in 2010 and 4.7% in 2011. We expect headline inflation to continue trending downward as the tightness in the housing market is gradually eased over time. Based on our assumption of higher oil prices over the near term, the country's fiscal and external balances are likely to improve. We estimate that, by 2011, Saudi Arabia's fiscal and current account balances will stand at around 11.5% and 9.8% of GDP, respectively. These levels are somewhat lower than the large surpluses registered over the past four years. The reason for this is that we expect the government's expansionary fiscal stance to lead to higher public spending and larger import volumes, thereby mitigating the positive impact of higher oil prices. Moreover, we estimate that the breakeven oil price for the average fiscal and current account balances over 2010-11 will be around US$61 and US$64 per barrel, respectively.
In addition to our base case scenario discussed so far, we present below two alternative scenarios. In these scenarios, we have attempted to capture some of the risks - both upside and downside - that could affect our near-term outlook. In view of the current global environment, we believe that these risks are mostly symmetrical around the base case. As such, we assign a subjective probability of 20%, 60% and 20% to our bear, base and bull scenarios, respectively. Needless to say, the actual outcome will depend not only on exogenous external developments, but also on local factors, not least of which is the extent of the government's commitment to stimulate demand over the near term.
Longer-Term Challenges
A. Economic Diversification
The Saudi economy continues to be dependent on a volatile oil sector and a relatively large public sector for growth. The size of the oil sector is often reported in real terms in order to control for the commodity's price volatility. Although this method does provide a better gauge for measuring the direct economic share of this sector, it may under-represent the indirect contribution of oil to the economy. Hydrocarbons constitute about 90% of total goods exports from Saudi Arabia. The government's income from oil also constitutes about 80-85% of its total revenues. The government's dependence on such a volatile source of financing is in and of itself a cause for concern. But this issue is further accentuated by the relatively large role that the public sector itself plays in the domestic economy. Government expenditures to non-oil GDP currently stand at around 76%. Moreover, the share of the government sector in real non-oil output is close to 32%. In other words, not only is the government heavily dependent on oil, but the rest of the economy is also reliant on government spending for growth.
Meanwhile, the private sector's contribution to national output has remained relatively stable over time, increasing by only 3pp over the past 20 years to about 68% of real non-oil GDP. To be sure, the historically large size of the public sector is attributable to the fact that the country's oil revenues accrue directly to the government. During periods of high oil prices, this has allowed it to successfully mitigate the inflationary impact of massive oil inflows by channelling excess revenues - i.e., those that exceeded domestic absorptive capacity - abroad in the form of foreign savings. A good example was the 2003-08 period, during which time the Saudi government accumulated around US$860 billion in oil revenues; a significant portion of this - around US$400 billion - was channelled abroad in the form of foreign reserves. These reserves provide the government with a comfortable cushion against future adverse oil shocks. They also help to ease any market uncertainty regarding its ability to fund the planned development projects. However, we believe that they do not reduce the need for further efforts to diversify the economy away from oil and reduce the role of the public sector in the future. Only by doing so will Saudi Arabia achieve robust and sustainable economic growth in the long term, in our view.
B. Population Growth and Unemployment
Saudi Arabia's young population holds great potential for the future, but will the job opportunities be there? Over the past 30 years, the Saudi population has grown at an average annual rate of about 3.75%, compared to 1.83% for other developing countries and 0.47% for industrial nations. As a result, Saudi Arabia now has one of the youngest populations in its peer group. Among Saudi nationals, which account for about 75% of the total population, close to 48% are 19 years old or less. The dependency ratio in Saudi Arabia, which stands at around 69% among Saudi nationals and 55% for the population as a whole, is higher than that of other high-to- middle income countries. This, along with the fact that a large proportion of Saudi women do not participate in the workforce, explains why no more than 23% of Saudi citizens are actively employed or seeking employment. Within this relatively small labor force, the official unemployment rate stands at about 10% in aggregate, and at 7% among Saudi males. Notwithstanding the possibility that the actual rate of unemployment may be even higher, one needs to also consider the potential for significant underemployment among working Saudi nationals. Relatively well-compensated and less-demanding government jobs may be accentuating labor market inefficiencies by reducing the incentive for nationals to join the private sector. Although official data on the exact proportion of Saudi nationals working in the public sector are not consistent, it is safe to assume that it is in the range of 25-50%.
The issue of unemployment is further accentuated by the large number of Saudi nationals who will soon be joining the labor force. Based on official college enrolment figures, we estimate that about 500-600,000 new graduates will be seeking job opportunities over the next five years. This amounts to an increase of about 6-7% in the size of the current labor force. Anecdotal evidence also points to a potential mismatch between the academic qualifications of college graduates and the growing needs of the private sector for more technically oriented skills. The substitution of Saudi nationals for expatriates through the government's Saudization program may provide a partial relief to this problem. However, this may also lead to higher operational and efficiency costs for private sector enterprises that currently benefit from a flexible pool of well-trained expatriate workers. Creating additional public sector jobs may be another alternative, but this could partially derail the government's efforts to grow the private sector and diversify the economy away from oil. In sum, the issues of population growth and structural unemployment are central to the Saudi growth story and we expect them to be of primary concern to policymakers over the medium-to-long term, in our view.
C. Structural Reforms
The authorities' efforts on structural reforms have been largely successful, but more is still needed. Following the slump in oil markets during the late 1990s, the authorities embarked on a wide-ranging structural reform program aimed at fostering sustainable long-term economic growth and strengthening the role of the private sector. This included, but was not limited to, the establishment of a Supreme Economic Council (1999), the adoption of a foreign investment law and the creation of the Saudi Arabia General Investment Authority (2000), the promulgation of a new capital market law and the creation of the Capital Markets Authority (2003), the introduction of a new insurance law (2003) and competition law (2004), as well as opening the door to the licensing of new foreign bank branches. These efforts have surely paid off, as reflected in Saudi Arabia's favorable reviews in the IFC's Doing Business Report, where it was ranked 13th globally this year, up from 24th two years ago and ahead of all other Middle Eastern countries. Greater international confidence in the country's long-term potential has also been reflected in the significant inflow of foreign direct investment, which totalled around US$93 billion over 2005-08.
However, despite these significant strides, there continues to be a strong need for additional reforms on a number of levels, including: (i) strengthening and modernizing the country's legal framework, particularly in the areas of business and commercial law; (ii) aligning the objectives of the country's educational institutions with the needs of its growing private sector; (iii) increasing the depth, stability and sophistication of domestic financial markets by fostering a higher degree of transparency, greater involvement by institutional investors, and deeper bond markets; (iv) further enhancing the efficiency of the public sector through fiscal reforms aimed at rationalizing government expenditures, involving the private sector through partnership programs, and gradually diversifying revenues away from oil; and (v) increasing the overall level of institutional transparency so as to ease foreign investors' concerns with respect to potential political and social risks. In sum, the current period of oil abundance could provide the government with the necessary resources to implement its ambitious program of structural reforms. Persisting along this path will be critical if Saudi Arabia it to achieve its impressive, long-term economic potential, in our view.
GDP
Economic growth remains robust in 3Q09: The Chinese economy grew 8.9%Y in real terms in 3Q09, recovering further from 7.9% in 2Q. On a seasonally adjusted basis, sequential quarter-on-quarter growth slowed, as expected, to 2.3% (+9.6% annualized), from the very strong 4.5% in 2Q. On the other hand, nominal GDP growth (at 6.4%Y in 3Q, implying a 2.3%Y decline in the GDP deflator) remained undermined by deflation, offsetting the gains in the terms of trade. Though a tad below our forecast (+9.5%Y, +2.9%Q), the pace is undoubtedly robust, in our view, characterizing the economic recovery as on track, but not yet overheating, calming fears of an imminent shift in policy stance towards tightening. Should we mark-to-market our full-year growth forecast to reflect the latest result, it would imply a figure that is moderately below our current projection of 9%, and we will likely revisit this in the coming weeks.
Industrial Production
Pick-up attributable to export recovery... Industrial value-added grew 13.9%Y (+1.3%M SA) in September (+12.3% in 3Q versus +9.1% in 2Q, +8.7% YTD), ahead of our (+13.5%) and market (+13.2%) forecasts. We believe that this is attributable to the narrowing decline in exports (-15.2%Y in September versus -23.4% in August), as delivery for exports recorded a single-digit (-9.9%Y) decline for the first time this year.
...though domestic demand is still the key growth driver: Needless to say, the manufacturing sector remains dependent on domestic demand for growth as external demand still takes time to recuperate. This is evidenced in the continued outperformance of local enterprises (shareholding companies +16.6%Y in September, collectives +13.5%, SOEs +11.8%) over foreign-invested producers (+8.9%).
Trade
A pleasant surprise in September... After disappointing results for several months, sticking out like a sore thumb in China's sound recovery story, trade data finally provided an upside surprise in September, adding to the good news from Korea and Taiwan in the same month. Even though we had forecast a narrowing in the year-on-year declines in shipments compared to results reported for August, the improvements were much larger than expected. In September, the year-on-year drop in exports narrowed to 15.2% (-23.4% in August), while imports slipped only 3.5%Y (-17% in August). On a seasonally adjusted month-on-month basis, exports and imports grew 6.3% and 8.3%, respectively, the strongest pace since April, picking up from 3.4% and 1%, respectively, in August.
...with manufactured imports reclaiming positive growth ahead of expectation: The strong recovery in domestic demand lifted imports of manufactures by 1.8%Y, returning to positive growth for the first time in 11 months. Overall imports of primary products are still declining year on year (-14.7% in September versus -29.1% in August), primarily due to lower international prices, but copper (+49% in value in September) and aluminum (+51%) intakes have already returned to positive growth, while ferrous metals demand is also recovering steadily (iron ore -4%, steel products -10%). We remain convinced that the worst is over for the trade sector. As year-on-year declines in shipments are likely to narrow significantly in the coming months, we believe that we remain on track to reach our full-year forecasts for exports (-16%) and imports (-13%).
Retail Sales
Further pick-up, in line with expectations: Retail sales growth picked up further to 15.5%Y (+1.4%M SA, +15.4% in August, +15.1% year to date), in line with forecasts, although the acceleration was partly driven by easing deflation, suggesting that sales growth in real terms likely remained broadly stable. Autos (+44.5%Y in September), furniture (+34%) and construction and decoration materials (+30.2%) remain the leaders in terms of growth in sales, consistent with the domestic investment demand-driven nature of the current economic upcycle.
Fixed Asset Investment
Strong, and still a key growth driver... Although external demand is showing signs of recovery, while domestic consumption has surged ahead with robust growth, fixed investment, having kick-started the rebound from the recent recession, remains a key growth driver for the economy as a whole. Nationwide FAI grew 33.2%Y in 3Q (+33.4% year to date), while urban FAI grew 35.1% in September (+32.9% in 3Q, +33.3% year to date).
...and increasingly driven by private sector initiatives: Although policy-driven investment projects, such as those in infrastructure (e.g., railways +87.5% year to date), continue to record the strongest growth, the recovery in private sector investment, especially real estate development (+37.1%Y in September, +17.7% year to date), is helping to relieve the reliance on government initiatives to power growth.
Monetary Data
Expansion sustained at fast pace in September, supportive of economic recovery: September turned out to be another strong month for money and loan growth, defying fears in recent months that the authorities are adopting a noticeably tighter monetary stance upon realizing a cyclical rebound in the economy since 2Q09. New loan creation picked up for the second straight month, to Rmb517 billion (+38%Y). Nevertheless, this is still consistent with our belief that monetary growth is normalizing after the strong pace in 1H09. Year to date, new loans totalled Rmb8.67 trillion, up 149%Y. Meanwhile, broad money M2 growth reached 29.3%Y in September, the highest level since the high-inflation periods of the mid-1990s. Nevertheless, we expect normalization in monetary expansion towards a more sustainable level, so the slowdown in loan creation should not constrain real economic expansion, or be interpreted as policy tightening, in our view.
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