The job of an economist is easy. There is lots of macro data every day to keep us busy commenting on. When in school, economists are taught that everything in the economy is related to everything else, so there should be a high degree of consistency in the data flow. Until special factors start to dominate, that is. We have had a lot of those special factors lately. Unusually bad weather in the US – and for an extended period. The weather in Western Europe has been unusually mild. Japan also had a dose of different weather with Tokyo, experiencing its heaviest snowfall in February in 45 years. It does not stop there. Chinese data is always hard to assess at the start of the year due to Chinese New Year, and its trade data is affected by ‘over-invoicing’. On top of all that, the current geo-political tension is getting in the way of a clear picture on the underlying strength of the global economy. I hear you say: “no excuses, tell us where we are heading”. Fair enough! We continue to be optimistic. We expect global growth to surprise on the upside this year and that will make it so much easier to deal with the various problems we have.
Ukraine: breathe in…and out
Last week started with nervousness. Equity markets lost a lot of ground on Monday. By the time pundits had written their commentaries, mostly saying not to worry but to expect volatility to persist, markets decided otherwise and equities recouped most losses before the ink of the commentaries was dry. It is actually encouraging to see that there was essentially no contagion within the emerging markets space. Looking at the ‘vulnerable five’ (India, Indonesia, South Africa, Brazil and Turkey) there was no consistent, lasting noticeable effect on their equity markets or currencies. In fact, equities and currencies in Indonesia, India and South Africa have rallied for a couple of weeks and this pattern was only briefly interrupted last Monday.
I am not a political analyst, nor an historian, but when I assess the current situation, I must conclude that a nasty conflict in Crimea and beyond is unlikely at this stage, although this depends on Russia’s ambitions. The situation of Crimea is straightforward, I think. Let me sum up. The Russian military control the peninsula; The majority of the population of Crimea seems to be OK with that and would rather be part of Russia (as they have been in the past) than of Ukraine; Western governments and the Ukraine government don’t like it, but have no means to change the situation. You don’t need to be Einstein to guess what will happen to Crimea. Where it becomes more tricky is the question how many other areas Russia would want to ‘annex’ in this way. And another tricky point is the (in)stability of Ukraine itself. For now, financial market participants seem to have concluded that the effects from the conflict on the economy and the financial markets will remain limited.
Here is investment
Economists have been saying for a while that the next phase in the global economic recovery should be an increase in corporate investment. Recoveries usually play out in a standard scenario and in the current phase you want to see stronger corporate investment. Investment creates jobs, jobs generate income, income is spent. Without investment picking up, the cycle dies prematurely. Well, here is good news: corporate investment picked up nicely in the eurozone in the second half of last year. We have argued for a while that the production of capital goods and orders for capital goods in the eurozone are pointing to strengthening capex spending. Last week, Eurostat published details of the Q4 GDP data. Gross fixed capital formation was up 1.1% qoq, after 0.6% in Q3. This is very encouraging. Overall, GDP grew at a modest 0.3% qoq, but a drawdown in inventories subtracted 0.3%. So, final sales were actually up 0.6%. That is really respectable.
More encouraging news came from German production and orders data. Industrial orders rose 1.2% mom and 8.4% yoy in January. That’s not bad! Industrial output was up 0.8% mom, while the December data was revised from -0.6% to +0.1%. On a yoy basis, output gained 5.0% – the best since 2011 – and the graph reveals an accelerating trend. Having said that, we must keep in mind that the weather was unusually mild so perhaps it is a mistake to get carried away. Indeed, construction output (which is part of industrial output) soared 4.4% in January following a 2% jump in December. Yet, another pleasant surprise was the upward revision to the February eurozone PMI data and solid eurozone retail sales for January, though here too, the weather is a big caveat and we have to bear in mind that eurozone retail sales data is notoriously volatile and prone to substantial revisions.
US data mixed, but positives outnumber negatives
We still do not know what to make of US data, due to weather effects. On balance, optimism seems warranted. The personal income and spending report for January was strong, suggesting that consumer spending growth is not affected too much by the weather, although there has been a shift in spending patterns with much stronger spending on fuel etc. compensating for weaker spending elsewhere. The February jobs report surprised on the upside and earlier months’ data was revised higher. The stronger than expected gain in payrolls in February occurred against a background of a huge number of people reporting that they did not work because of the weather. Hours worked fell sharply, but it looks like this was also caused by the weather. Jobless claims during the week of 1 March fell to their lowest level since early December, suggesting that the labour market is getting over its weather problem. It wasn’t all sunshine in the US data last week. Business confidence in the services sector fell sharply in February. The ISM non-manufacturing fell from 54.0 in January to 51.6. This was actually the lowest reading since 2010! This needs careful monitoring and consideration. For now, I am willing (actually, I am quite keen) to say that this data looks odd given the other data and I assume it reflects a temporary dip. The drop on the confidence index was largely driven by a sharp fall in the employment component. But the payrolls report last Friday did not confirm that. In fact, employment gains in the services sector were actually remarkably strong.
China growth target and disappointing exports
The Chinese government announced the GDP growth target for the current year. It is unchanged from last year’s target: 7.5%. They did change the targets for underlying components a little, with the target for investment spending growth set lower and consumer spending higher. This is all good news. Chinese leaders do not like a loss of face, and significantly undershooting the target would not be appreciated. We still think that Chinese policymakers have the means to boost growth should that become necessary. As a result, we consider it unlikely that China will experience a material slowdown this year.
Having said that, the exports data for February was a blow. February exports were down a shocking 18.1% from last year’s (January: +10.6% yoy). A similar move was absent from the imports data: February +10.1%, January +10.0%. As is so often the case, this data is hard to interpret. Chinese New Year makes the data at the start of the year volatile. And with the Lunar New Year being a little later this year than last year, February data is affected negatively. But then, January data should have been stronger. There are, however, two other possible distortions to the exports data. First is the ‘over invoicing’ exporters got involved in last year. This is believed to have bloated last year’s numbers, making the year-on-year comparisons very hard, and, in fact, meaningless. The other possible distortion is the bad weather in the US.
Overall, despite all these temporary factors playing havoc with the data, I think that optimism on the global outlook is warranted and I expect a convincing (further) improvement to come through in the data during the next few months.