- Eurozone domestic demand slowly recovering
- China keeps GDP target at 7.5% and reinforces focus on reforms that will improve quality of growth
- Winter weather continues to weigh on US labour markets
Eurozone retail sales start the year on a strong footing
The volume of retail sales in the eurozone jumped by 1.6% mom in January, following a 1.3% decline in December. The rebound in January has lifted the 3 months-over-3 months growth rate to 0.1%, from -0.6% in December. Combined with a 3.2% 3m-o-3m rise in new passenger car registrations, this bodes well for private consumption growth in the first quarter of this year. Looking forward, we expect consumption to continue to grow moderately in the coming quarters. The detailed Q4 GDP data show that private consumption grew by 0.1% qoq in Q4, while government consumption fell by 0.2% and fixed investment expanded by 1.1%. As a result, final domestic demand increased by 0.2%. This reflects that the downward impact of a number of factors that have weighed on domestic demand during the past few years (high and rising unemployment, fiscal austerity, house price corrections and bank deleveraging) is easing, although that they should prevent demand from accelerating rapidly. The idea that the domestic side of the eurozone economy is slowly recovering was also underlined by an upward revision to the services sector PMI for February.
China keeps economic growth target at 7.5%
The Chinese government maintained the GDP growth target of 7.5% unchanged from 2013, but this target will not be a floor as in the past. The government is busy with an ambitious reform agenda which has already put some downward pressure on growth. Indeed volatility can’t be ruled out in the coming months and the growth target even suggests that some stimulus could be on the way. In this same report the government announced that the inflation target would be 3.5% and that fixed investment growth would be 17.5%, almost 2ppts lower than the 19.6% yoy growth in 2013. This suggests that the rebalancing strategy in favour of consumption remains a priority. The premier also called for a balanced monetary policy. This could be interpreted as looser credit policy. In fact, January’s new loans growth surprisingly surged after several announcements that the government was seeking to reduce high credit growth. Tackling pollution remains high on the reform agenda. But also financial reforms, which include further liberalization of interest rates and the widening of the RMB floating band and the management of local government debt remain priorities. The currency reacted positively.
Winter weather continues to weigh on US labour market …
Private employment rose by just 139K in February, according to ADP, which was lower than the consensus forecast of a 155K gain in employment. Moreover, there were substantial downward revisions to January (from 175K to 127K) and to December (from 227K to 191K). All this reinforces the view that the winter weather affected the labour market recovery over the past few months. Indeed, the decline in February’s ISM non-manufacturing index from 54.0 to 51.6 was for a large part driven by the employment sub-index (from 56.4 to 47.5). All this suggests that the risks to our forecast of a 150K gain in nonfarm payrolls in Friday’s labour market report are skewed to the downside.
…though Q1 GDP does not look as bad as initially feared
Still, Q1 GDP does not look as bad as initially feared, in our view. This is because Monday’s personal spending figures showed that while goods consumption was hampered by the winter weather, this was offset by stronger spending on gas and utilities, helping total real spending to rise by a sturdy 0.3% in January. Moreover, Monday’s small gain in February’s ISM manufacturing index was mostly driven by a strong increase in the inventory sub-index (from 44.0 to 52.5), which tends to correlate well with the monthly business inventories series. In turn, this suggest that the risk of a sharp inventory correction in Q1 has diminished somewhat. Indeed, based on the monthly data published so far, we estimate that first quarter GDP growth will come in at around 2.5%.