Mixed but promising

by: Han de Jong

Economic data released last week was mixed. There were disappointments in the US, France and China. However, there were also some noticeable, positive surprises. Weighing up the positives and negatives, I am very much encouraged by last week’s data. The global economy is gaining some momentum.

Something positive is going on in Europe

While not all European data last week surprised on the upside, several series showed more strength than expected. This could easily be corrected in the months ahead, but the range of positive data is starting to paint a comprehensive picture that Europe might finally be finding a path to a sustainable recovery. As expectations concerning the eurozone economy have, understandably, been low in recent years, there is ample room for positive surprises.

Last week’s release of Germany’s November Ifo index of business sentiment provided a pleasant surprise. A modest rise was expected from 107.4 in October to 107.7. But the actual outcome was 109.3. Such a jump is by no means unprecedented, but it is unusual. This series has a strong track record as an indicator of economic growth in Germany. So the November reading is promising. The rival PMI series also registered an improvement in November according to its preliminary reading, though its rise was not as impressive. The ZEW index, which measures analysts’ confidence, also improved, not only for Germany but also for the eurozone as a whole. French data, on the other hand, disappointed as the preliminary PMIs in manufacturing and in services fell and were both weaker than expected. This helped pulling the preliminary eurozone composite PMI down for a second consecutive month. However, looking at other data, one has to say that France appears to be the odd one out. Industrial orders in Italy rose in September and were 7.3% higher than a year earlier, the best reading since May 2011. EU car registrations were up 4.7% yoy in October, slightly down from the 5.4% yoy in September, but growing at last. Dutch consumer confidence jumped from -27 to -15 in November. This is still below the historical average, but the rise has pulled this series clearly out of ‘depressed territory’, coming on top of a meaningful improvement in October as well. It is not entirely clear what has caused this sudden sharp jump. Indeed it could be an outlier, to be corrected shortly, but as other data is also showing a sudden and sharp improvement, one has to be hopeful that there is something very positive going on in the European economy.





In the UK, the CBI’s Industrial Trends survey showed another strong rise in industrial orders in November, after having disappointed in October, it must be said. This is a so-called diffusion index and it is difficult to interpret the absolute level of such indices. However, the November reading for orders to UK industry was the highest since 1995 and before that 1988.

Germany is, once again, the target for criticism as the country is running an external surplus in excess of 6% of GDP. This is a violation of the EU rules of the Macroeconomic Imbalances Procedure, which stipulates that countries are meant to take corrective action when their external deficit exceeds 4% of GDP or their surplus exceeds 6% of GDP. The Dutch surplus is even larger than Germany’s, but in the case of the Netherlands, it is not so easy to see what actions the policymakers could take to correct this imbalance as the government itself is the subject of an “excessive deficit procedure”. But the German government is not. It could, arguably, pursue a more expansionary policy, by raising spending on investment in infrastructure, for example. I would expect a heated debate but not a lot of action. This sort of criticism of Germany is not new. A similar debate took place soon after I joined the workforce in the 1980s and has been regularly repeated since. The difference between now and then is that we now have European rules that Germany is not compliant with. In the end, I think that an improvement in economic growth will trigger stronger wage increases in Germany which will lead to higher spending growth, including imports.

US data mixed as Obama’s approval rating slumps

US data is painting a diverse and very interesting picture. Home builders’ confidence held steady in November. Existing home sales fell 3.2% in October, the third consecutive month in which sales failed to rise. It seems plausible to conclude that the rise in borrowing costs after Bernanke mentioned ‘tapering’ in May is affecting the housing market negatively. It will be a reminder to the Fed that they need to act cautiously. The last thing they want is to undermine all the progress made in the economy during recent years. The Philly Fed’s index of business confidence in November was another negative piece of data, though it must be said that this series can be volatile. On the other hand, there was positive news from the Markit PMI, measuring business confidence, which rose from 51.8 in October to 54.3 in November, a meaningful rise. October retail sales were also relatively strong, rising 0.4% mom. This report also showed strength in its detail. As retail sales are reported in nominal terms, one has to take inflation into account when assessing the strength in real terms. According to the CPI report, headline inflation amounted to -0.1% mom in October. On a year-on-year basis, inflation fell to 1.0%. This was the lowest reading since 2009 when inflation was actually negative for a while. Finally, initial jobless claims fell to 323,000 from 344,000 in the latest reporting week, suggesting that the distortions of recent weeks are being left behind and the steady, though modest improvement of labour-market conditions is continuing.

When taking all the US data together, one must conclude that many parts of the economy are improving and that it looks like an acceleration of growth is in train, but that the rise in borrowing costs over the summer is weighing on parts of the economy.

President Obama’s approval rating has fallen to a record low according to a CNN poll. This most likely reflects the botched introduction of ‘Obamacare’. The website where people have to register continues to be plagued by technical difficulties. In what looks like a desperate attempt to keep things under control, the President has suggested that people could continue their current policies for another year, but this has apparently only created more confusion. It is starting to look as though the whole initiative is in danger of being watered down significantly. The result is that the Republicans are suddenly doing better in the polls, which, no doubt, will boost their self-confidence, perhaps making them less cooperative in discussions about the budget and the debt ceiling.

Japanese trade hint at improving global trends

Most Japanese economic data released last week was close to expectations. The exception was in trade numbers, which were stronger than anticipated. Export growth accelerated from 11.5% yoy in September to 18.6% in October, the highest since 2010. Import growth rose even more strongly: from 16.5% yoy to 26.1%, also the highest since 2010. This suggests that world trade growth is accelerating also.