More consistency in the data

by: Han de Jong

Big Picture 31 March 2014 - More consistency in the data.pdf ()

The distortions to the economic data are now almost history. Severe cold and snowstorms in the US and heavy snow in Japan have recently had a negative impact on economic activity and on data-collecting, making it difficult to gauge the underlying trends. Western Europe, on the other hand, had an unusually mild winter and Spring came weeks earlier than last year when the end of the winter decided to let us feel what cold is. But with the weather returning to normal, the underlying trends are starting to come through again in the data. And these trends are consistent with our long-held optimistic views.

European confidence holding up despite weaker US and Ukraine tension

The European Commission’s Economic Sentiment Index is, arguably, the most important mood measure for the eurozone economy. It combines business confidence in various sectors and consumer confidence. Its March reading was above expectations, higher than the February reading, and above the long-term average for the series. The 102.4 measured in March compares with 100.7 for the long-term average and was the highest reading since 2011. The fact that the average has now been exceeded for three consecutive months suggests that the eurozone economy is probably growing at a pace equal to or slightly above its potential growth rate. That potential growth rate of perhaps some 1.5% (or even a touch lower) is not impressive, but the implication is that there is a good chance that unemployment will eventually start coming down if growth can continue at this pace. There is, of course, a long way to go to bring unemployment to bearable levels.

Other confidence indices were actually less positive

Germany’s Ifo index of business confidence fell from 111.3 to 110.7 as expectations weakened for a second consecutive month. The level is still very high and the decline in the expectations component can be related to weather-induced weakness in the US or to the tension in Ukraine and Crimea. However, the drop in the expectations component bears watching. The Markit eurozone PMI was also a fraction lower in March than in April.

Bundesbank more open to QE

Bundesbank president Jens Weidman last week surprised by suggesting that his institution would not in principle object to ECB purchases of government bonds or other bonds as long as the purchases did not constitute monetary financing of budget deficits. Such remarks are welcome as they indicate a willingness to consider quantitative easing as a tool. We do not think that it indicates the ECB is about to use that tool.

D-day for Japan

The moment of the increase in Japan’s sales tax from 5% to 8% is upon us. This hike is a contribution to the effort to bring public finances under control. It comes over a year into the Abenomics programme. The programme has, so far, succeeded in raising inflation and boosting real growth of the Japanese economy. It must be said, though, that these achievements were relatively simple as fiscal stimulus raised growth and the drop in the exchange rate pushed up inflation. Now these processes need to become self-sustaining. The tax hike will do the opposite, so it is interesting to see how the economy will cope. Should activity drop back a lot, then the Bank of Japan will undoubtedly step up its effort to push the economy in the desired direction. Going into the tax hike, the economy is performing reasonably well. Just to highlight one indicator, small-business confidence has moved higher in recent months, rising significantly in March and reaching its highest level since the 1980s! That may perhaps be more of a backward-looking indicator than a forward-looking one. In addition, the third arrow of Abenomics – structural reform – designed to raise the potential growth rate and the efficiency of the economy, is lagging behind. It does not look as though the measures taken so far as part of Abenomics will be sufficient to achieve its targets. But there is time yet for the policymakers to act. First, let’s see how the economy responds to the increase in the sales tax.


Pieces of the US puzzle starting to fit together again

Of all main countries, the US had the most unusual weather. With the arrival of Spring, weather patterns are returning to normal, and so are economic statistics. Last week was light on data, but it is clear that the consumer and the labour market are doing all right. Jobless claims fell to 311,000 last week, a new low for the year. During the past 12 months, this level was bettered on only four occasions, but these tended to be caused by special factors. The Conference Board reported that its gauge of consumer confidence rose in March to its highest level since early 2008. Personal income and spending were in line with expectations for February, both rising 0.3% mom.


The durable goods report was less positive. The headline series rose 2.2% mom in February, which was an excellent number, but this turned out to have been strongly affected by aircraft orders. Non-defence, ex-aircraft orders were down 1.3% mom after rising 0.8% mom in January, which had earlier been reported as a 1.7% mom increase. While the trend is positive, one would hope that investment would pick up a little more during this phase of the recovery. Given strong corporate balance sheets and elevated profitability, we think this is likely going forward.

Pick-up in industrial production in some Asian countries

Taiwan, South Korea and Singapore all experienced a bounce in output growth in February. The yoy growth rates for industrial production shot up to 7.0%, 4.3% and 12.8%, respectively. That is up from January’s -1.8%, -4.3% and 4.4%, respectively. This is encouraging, although there is one big caveat. Chinese New Year was in January this year, against February last year. Nevertheless, the data was positive.