Macro Weekly – Unusual gap between eurozone and US manufacturing confidence

by: Han de Jong

  • With the volatility of recent months now probably behind us, the most remarkable trend is the widening gap between eurozone and US manufacturing confidence
  • World trade was weak in April, but Asian May data suggests a material improvement has occurred in global trade in May
  • Brexit negotiations off to a decent start
  • A further fall of oil prices should not do the dame damage as in 2014/15
Macro-Weekly-23-June-2017.pdf (127 KB)

The acceleration of global growth which started in the course of 2016 has been led by the manufacturing sector. In recent months, manufacturing business confidence in a range of countries has become more volatile. In addition, trade statistics have also become more volatile. So the question is what will happen next? Can growth be maintained near the recent level or is it going to slow in a material way? We know that China has played an important role in the acceleration of growth, but also that the policymakers there have taken a range of measures to address the threat of financial instability. As a side effect, these measures, which are aimed at curbing lending, put a dampener on economic growth. And, indeed, we think Chinese growth peaked in Q1 this year. But by how much will it slow?

Lunar New Year and Easter

Economic data in the first few months of the year can be somewhat erratic due to the two important events that impact on economic activity in the short term, but move around on the calendar: Chinese New Year and Easter. This makes reading the tea leaves of the global business cycle a little harder sometimes during the first couple of months.

As we are leaving these distortions behind us, I think the world is not looking too bad. The economy of the eurozone is doing particularly well. Consumer confidence has been on the rise for some time and continued its improvement in May, reaching its highest level since 2007.

It seems that the tide is lifting all boats. While there is wide concern that the Italian and the French economies have too little growth dynamism, the improvement in the global economy leads to a strengthening of these economies as well. France’s statistics office, INSEE, carries out an monthly business conditions survey. One of the elements in the survey is companies’ expectations for production. These rose sharply in June, to a level not exceeded since 2000.

A strange gap

The preliminary reading of the eurozone Markit manufacturing PMI also strengthened: 57.3 versus 57.0 in May. The rise has been uninterrupted since August last year. That’s impressive. This makes it all the more surprising that the same indicator for the US is heading in the opposite direction. It has now fallen for five months in a row. This is unusual and I cannot see any particularly likely explanation. If pressed to find one, perhaps one could argue that the divergence of monetary policy, with the Fed tightening and the ECB still providing aggressive stimulus, could play a role. But I would think such an explanation is far-fetched. The divergence of confidence is unlikely to last, so I would expect convergence in the months ahead.

In the UK, the CBI’s industrial trends survey showed a strong improvement in the orders position of companies. Its index for total orders rose sharply in June, reaching its highest level since the late 1980s!!

Weakness in other data

The US PMIs are not the only soft indicators. The eurozone’s services sector PMI weakened materially in June: 54.7, versus 56.3 in May, while the US services PMI eased fractionally (53.0, versus 53.6 in May). These were certainly not good numbers. I am, however, strongly inclined to put more weight on the data for the manufacturing sector. Manufacturing is, admitted, considerably smaller than services, but it leads the business cycle.

Italy also produced some poor numbers. Industrial orders fell 0.7 mom in April after falling 4.3% mom in March. In the yoy comparison, the number tumbled from +9.2% in March to -2.2% in April. The Dutch CPB compiles monthly data on world trade. According to their latest numbers, global trade contracted 2.1% mom in volume terms in April, though that followed a rise of 2.2% the month before.

Quite some April data has been soft and the CPB world trade data confirms it. There are a couple of points to be made about this combination of weak data. First, the CPB data is prone to significant revisions. The 2.2% March rise was originally reported as 1.5%. That is a big revision. Second, the disappointing April trade data was almost entirely caused by emerging Asia. And we had, indeed, seen weakness in a lot of the national data in the region released earlier.

Asian trade data looking very healthy

The more recently published national data in Asia has been stronger again, suggesting that what we are looking at is some volatility around a robust trend. Recent days have seen May trade data released in Japan and Thailand. Export growth in these countries accelerated in May. 14.9% yoy against 7.5% yoy in April in Japan, while Thai exports growth amounted to 13.2% yoy in May, against 8.5% in April. Imports showed a similar trend. A few days earlier, Chinese data for May had shown a similar trend. So this data looks consistent. Korean statisticians release preliminary trade data after the first 20 days of each month. Weakish trade had not occurred in April in Korea, but in May, although this might be a matter of definitions. Anyhow, the June data was much stronger. Export growth accelerated from 3.4% yoy in May to 24.4% yoy in June. And imports from 11.7% to 20.7%. This all suggests that world trade growth has been volatile in recent months but that underlying momentum remains solid.


The Brexit negotiations are underway. And the start has not been too bad. UK Prime Minister Theresa May told her colleagues that EU nationals residing in the UK before a not yet specified date (but not a date before the day article 50 was invoked by the UK government) will be allowed to stay. The other European leaders acknowledged this as a good first step although they said that the initial proposal left many questions unanswered. Sadiq Kahn, the mayor of London, appears to share the concerns of the European leaders. One million of the three million EU nationals living in the UK are living in London. So Kahn has a vested interest.

The ECB took a firm position on the location and the supervision of the clearing of euro denominated derivative contracts. This is an important element of the business conducted in the City of London. The ECB is pushing for a change in EU law in order to keep the clearing activity in the EU, preferably in the eurozone. This is an important issue. It is big business and it is important business. There are clear economic aspects to be considered as well as political ones. But there are also risks aspects to be considered. The clearing industry can draw on an unrivalled talent pool in London and London has an established regulatory framework. The clearing industry is a key part of the plumbing of the European financial system. Moving the entire industry implies risks. Having said that, it can be understood that the ECB wants to get this key activity closer to home and more directly under its own scrutiny.

Oil and 2014/15

Oil prices are under pressure. While a further decline is not our main scenario, it is worthwhile to consider what might happen if prices go down to levels seen early 2016. The fall in prices that started mid 2014 had a significant impact on the global economy and on financial markets. There is bound to be concern over a repeat, but it is probably reasonable to point out a couple of important differences. First, prices fell from USD 110 in 2014 to USD 30 early 2016. That is a big drop. If prices go to the same level again, it is at least from a much lower base. The companies that got into financial difficulties, in particular the shale producers in the US, have had time to put themselves on a sounder financial footing. They have also been able to lower production costs. In addition, drilling activity is currently much lower than it was early 2014. It is therefore unlikely that capital spending in the sector will drop by as much as it did then. So a preliminary conclusion I would draw is that the macroeconomic impact and the impact on credit quality in the sector is going to be significantly less this time around.