Macro Weekly – Evolving in line with our views

by: Han de Jong

  • Eurozone hard data looking better
  • US confidence data softer, but underlying growth remains firm
  • China slowing, but domestic momentum elsewhere strong enough to cope
Macro-Weekly-12-May-2017.pdf (131 KB)

The global economy has been characterised in recent quarters by impressively strong confidence indicators across an impressively large number of countries, but lagging harder data. As I have expressed here many times before, the range and strength of these confidence indicators is overwhelming and reason enough to be optimistic that the hard data will follow suit. The improvement in global cyclical conditions has been driven by a range of factors. Improving momentum in China, translating into stronger world trade growth has been an important one of them.

US confidence data softer, but underlying growth remains firm

This picture is now slowly but surely changing. US confidence indicators have recently weakened. This is not as bad as it may sound. These type of indicators cannot rise without limit. They are still pointing to solid growth. The weak Q1 GDP number does not paint the correct picture of underlying economic conditions in our view and the Q2 number is bound to be considerably stronger. The labour market continues to tighten as does the housing market. Various indicators also suggest business investment is picking up.

Eurozone hard data strengthening

Meanwhile, confidence indicators in the eurozone continue to strengthen. More important, harder data is now also picking up. German factory orders have grown robustly in recent months: 1.0% mom in March, after growing 3.5% in February. Industrial production is a tad weaker, growing 1.9% yoy in March. Industrial output growth in other countries is stronger. Industrial production in Italy was 2.8% higher in March than a year earlier. Manufacturing production in France was up 3.5% yoy in March, while Holland boasted a 4.0% rise yoy. It must be said, however, that the industrial production data for the eurozone as a whole, published by Eurostat, were disappointing. Total industrial output dropped 0.1% mom in March after a drop of also 0.1% in February. Energy was the main culprit as output in that sector fell 3.2% mom and 4.8% yoy. Other sectors were stronger: (intermediate product: +3.2% yoy; capital goods +2.7% yoy; durable consumer goods: +4.1% yoy and non-durable consumer goods: +1.7% yoy)


German GDP grew 0.6% qoq in Q1, a little faster than the 0.4% in the previous quarter. Real GDP was 2.9% higher than in Q1 2016, but that number was flattered by calendar effects. Correcting for these effects, GDP was up 1.7% yoy. Construction and business investment were the strongest drivers according to the statistics office, though they have not released details. There were 1.5% more people employed than a year earlier. This is all encouraging news, suggesting that the hard data in the eurozone is picking up, as we had expected.

Chinese trade data confirm confidence indicators softening

As the gain in economic momentum in China has been an important factor supporting stronger global growth, we need to keep a close eye on developments there. This is particularly important as Chinese policymakers have been taking measures to address potential financial instability. These measures are aimed at slowing credit growth. While this is sensible from a medium-term perspective, they have the potential to slow overall growth. Various business confidence indicators for April had shown a meaningful drop. More recently, trade data for April also show a loss of momentum. Import growth (in USD) slowed from 20.3% yoy in March to 11.9% in April. In assessing the importance of these developments, we must bear in mind that the Chinese economy grew very strongly in Q1 and a somewhat slower pace had to be expected. Chinese foreign-exchange reserves rose some USD 20 bn in April, suggesting the authorities have successfully dealt with the large capital outflows of some months ago. This is positive for stability.

Domestic momentum elsewhere strong enough to cope with Chinese slowing

It seems to me that the world economy will be able to cope with a slowdown in China as domestic momentum in many important economies has picked up and is set to become the main driver of growth in the remainder of 2017.

Inflation set to move higher, but only modestly

Inflationary pressures are creeping higher in many countries. Headline inflation numbers may ease in the months ahead, due to base effects, largely related to oil prices. But as growth in many countries is above trend and output gaps are narrowing, underlying inflation pressures are likely to build. Having said that, global excess capacity and technology are likely to keep a rise in inflation modest. April US inflation data confirms this view. Headline inflation amounted to 0.2% mom, core inflation was only 0.1%. The yoy rates were 2.2% and 1.9%, respectively, slightly down from 2.4% and 2.0%.

Central banks on their way slowly to ‘normalise’ policy

In this environment, central banks are likely to gradually ‘normalise’ their policies. For the US Fed that means raising rates. We think that two more rate hikes this year are likely in the US. Discussions about shortening their balance sheet will continue, but no drastic action is expected on that front any time soon.

The ECB will undoubtedly finish its current asset-purchasing programme, but their guidance is likely to change in the course of the year. They will most likely drop their ‘easing bias’ from their communication soon and announce that they will start tapering their asset purchases starting in 2018. Any rate hike in Europe will not occur before the second half of 2018.