Macro Weekly – Amazing stuff

by: Han de Jong

  • Brexit uncertainty rises
  • US data continues to undershoot expectations
  • Chinese trade data encouraging
Macro-Weekly-9-June-2017-2.pdf (110 KB)

I am amazed

My colleagues Nick Kounis, Aline Schuiling and Georgette Boele have already commented on the UK election result. There isn’t much more to say about it at this stage. Since my colleagues’ earlier note PM Theresa May has visited the Queen after securing DUP support for a minority Tory government.

I am not an expert on UK politics, but the whole thing is starting to look like a farce. My astonishment started when it became clear that Theresa May was going to take the UK out of the EU the ‘hard’ way. It seemed to me that was completely ignoring the 48.1% of voters who voted to remain in the EU. Then I was amazed when May called an early election. That was a totally unnecessary gamble, risking to be punished by the electorate for arrogance. The Tories had a working majority. Then I was amazed by the campaign and in particular that May refused to participate in debates with other party leaders. I was also amazed that the campaign did not focus entirely on which Brexit deal the UK wants. The whole purpose of the elections was to provide May with a stronger, and I suppose, clearer mandate. Then surely that is what the campaign should have focussed on.

And today I am amazed that May wants to stay on as PM despite the elections resulting in a hung parliament. Unbelievable. So let me recap the reasons for my amazement: First May aims for a hard Brexit without it being clear that is what the UK people want, then she calls a completely unnecessary election, then she fights a poor campaign in which she refuses to engage with other leaders and which seems to completely lack the right focus, then the election result is a disaster for May, but despite all this, she wants to stay on as PM. I am flabbergasted. I think that UK politics will be unstable at best in the period ahead and that the uncertainties surrounding the Brexit negotiations have increased. Ironically, the chances of a softer-than-hard Brexit (whatever that is) have probably increased. So perhaps something good can still come out of this mess.

Encouraging Chinese data

The most important set of economic indicators of recent days came from China in my view. Having successfully engineered an acceleration of economic growth that has shown up since the second half of 2016, Chinese policymakers have more recently, been trying to address risks of financial instability. In doing so, they are effectively reversing earlier stimulus. It looks to us as though the Chinese economy reached a growth peak in Q1 of this year. The big question is how fast growth will slow. Recent trade data is encouraging. The dollar value of imports was up 14.8% yoy in May, against 11.9% in March. Export growth accelerated more modestly: 8.7% versus 8.0%. This is very relevant because China’s imports are other countries’ exports and the stronger growth of these imports has been a key stimulus to global trade in recent quarters. This most recent set of data suggests that any slowdown in the Chinese economy is not (yet) affecting world trade.

Another important economic indicator in China is foreign-exchange reserves. They dropped sharply between mid 2014 to early 2017, by USD 1 trn in total. Since January this year, reserves have inched higher, by some USD 50 bn in total, half of which was achieved in May. The improvement shows either that policymakers have a better grip on capital flows or that confidence is improving. Either way, it is probably a positive sign.


US data continues to disappoint, but jobs market looking good

US economic data has disappointed in recent months. That does not mean the data has been bad, just that they have failed to match expectations. So far, this is not something to worry about particularly. I would say it is noise, at least for now. Some parts of the economy remain solid. Initial jobless claims continue to be very low and the so called JOLTS report showed that the number of job openings in April was the highest on record (I can find the series going back to 2001.

Ex-FBI boss James Comey’s testimony to Congress was perhaps more exciting than the economic data. It is unclear, at least to me, how damning his testimony was for president Trump and whether or not the Russia links can lead to an impeachment and to Trump being forced to step down. In case it comes to that, it does not look likely that it will happen in a hurry.

German output growth

There was not a lot of European data to comment on in recent days. Perhaps most relevant were German orders and industrial production data. Orders were weak in April falling 2.1% mom after +1.1% in March, though they were up 3.5% yoy, versus +2.5% in March. Industrial production was up 0.8% mom (after -0.1%) and + 2.9% yoy, the highest since early 2014. German exports and imports were also solid in April. This is all testimony to the fact that the German economy is doing well, though not growing spectacularly.

Eurostat raised the growth numbers for Q4 2016 and Q1 2017. This has lifted overall growth numbers for this year and last and we have, indeed, adjusted our forecast for this year and next.

The ECB decided to change its guidance, but only modestly. They dropped the remark that they may cut interest rates further should they deem than necessary. A little to our surprise the ECB maintained the phrase that asset purchases could still be stepped up should that be considered necessary. The ECB maintained its commitment that interest rate increases will only get onto the agenda after ‘an extended period of time and well past the horizon of the net asset purchases’. It is clear that normalisation of monetary policy is going to be a very slow process. The ECB prefers to err on the side of being behind the curve, compared to ahead of the curve. I think that makes sense as a principle.