- Eurozone industrial production took a turn for the worse in Q3…
- …signalling that today’s GDP report for that quarter will show only weak growth
- BoE makes major change to unemployment forecast, but signals rate hikes will take a while
- China’s plenum: more questions than answers after four days of silence
Eurozone GDP to have grown modestly in Q3
Industrial production in the eurozone fell by 0.5% mom in September, following a 1.0% rise in August. The outcome was somewhat weaker than expected and there were also some (small) downward revisions to the June and July numbers. Consequently, industrial output shrank by 0.2% qoq in the third quarter as a whole, while we had anticipated stabilisation. This implies that there is a downside risk to our forecast for Q3 GDP growth (to be published at 11:00 CET), which we have estimated to be 0.2% qoq. Nonetheless, we still expect GDP to have expanded modestly in Q3, as the combined data for retail sales, car sales and the PMI services sector activity index during the third quarter suggest that private consumption continued to grow moderately (in Q2 it expanded by 0.1%). Moreover, improved business confidence and rising domestic and foreign orders for German capital goods suggest that fixed investment in the eurozone performed roughly the same as in Q2 (0.2% qoq). Working in the opposite direction, however, the appreciation of the trade weighted euro during the past twelve months (by around 8%) will probably weigh on net exports in Q3, which should have had a negative impact on growth.
BoE signals rate hikes could start during 2015
In the UK, the BoE became more optimistic on growth, unemployment and inflation in yesterday’s Inflation Report. The most eye-catching change was a major shift in its view of how long it would take unemployment to reach its 7% threshold. On an unchanged interest rate scenario, it expects the magic number to be reached at the end of next year. At the time of the August report, it projected that the threshold would not be reached before 2016Q3. At the time, there was widespread incredulity at that forecast. So with this revision, the central bank is actually coming back down to planet earth. Nevertheless, Governor Mark Carney was quick to point out that reaching the threshold would not trigger a rate hike, but rather would mark the time when the MPC would consider whether one was necessary, taking into account the momentum in the economy and the outlook for inflation. This gives the central bank a lot of flexibility. Our view is that the unemployment rate will reach the 7% threshold in Q3 of next year, and that the policy rate will likely be moved up early in 2015.
China plenum points to gradual economic reforms
On Tuesday, a communiqué was published by the Chinese authorities at the end of the third plenum. As expected, it highlighted some general guidelines for the reform path in China over the coming years. A decision document will likely be published next week with additional information. The statement mentions among other issues a larger role of the market to determine key prices, the need to clarify the role of the government, rural reform, environmental protection and more openness for the economy. The new elements are related to the emphasis made to property rights, highlighting that the majority of farmers should participate equally in the processes of modernization and the urban rural dual structure should be disbanded. This paves the way for “new” urbanisation. The statement issued mentions that a central committee will form a leading group for deepening structural reforms. We think that in the coming year, there will be more clarity on the polices and their implementation. This implies that China will have time to consolidate its growth next year (our forecast 8%), without feeling the weight of reforms on growth. We expect that in 2015 we will begin to see how these reforms filter through the economy, which partly explains our forecast of 7% growth.