Macro Weekly – Still humming

by: Han de Jong

  • Global economy is still growing at a decent clip
  • Europe and China continue to surprise positively
  • Inflation pressures remain very modest
  • Fed likely to tart balance-sheet reduction soon
Macro-Weekly-28-July-2017.pdf (131 KB)

China stronger, not weaker, at least for now

The global economy continues to grow at a pace a little ahead of trend. While I was on annual leave during the last couple of weeks, Chinese statisticians released data on GDP growth and industrial production that was better than expected. Industrial production growth, for example, was up 7.6% yoy in June, against 6.5% in May. This could be noise, but it is certainly not weak. In fact, most analysts, including ourselves, have been expecting a moderate slowing of growth in China in the course of the year.  So far, it is not happening. As China’s economy plays a key role in the short-term direction of the global economy, this is important.

Ifo amazes; the tide is lifting all boats

During the last couple of days, economic indicators in the eurozone have consistently surprised positively, underscoring the continuation of the cyclical upturn. Countries considered relatively weak are benefitting too. There is, for example, widespread concern over the dynamism of the Italian economy, but the tide appears to be lifting all boats. The industrial sector in particular is showing impressive progress.

Italian industrial orders were up 4.3% mom in May (after -0.5%) in April. The yoy change rose from -2.2% to +13.7%. These numbers may be flattered by calendar effects, but the graph of industrial sales clearly shows an improving trend. The trend has been going up since early 2016. While sales were contracting on a year-on-year basis early 2016, they are now growing impressively. Industrial sales were up 7.6% yoy in May, versus + 4.1% in April.

The most recent survey of the Banque the France is showing rising optimism among French businesses, too. Meanwhile, the Markit PMI for the eurozone fell in July. But, arguably, the most authoritative of European business confidence indices is the German Ifo index. It registered its sixth consecutive monthly increase in July, reaching new a multi-decade high. The rise in this index over the last six months has been nothing short of impressive. Whether or not this will translate into equally impressive hard economic data remains to be seen, but as this survey has a long history and an impressive track record, I am inclined to put more weight on an index such as Ifo than on somewhat erratic so called harder data.

US GDP in line with expectations

The economic picture in the US is relatively stable: decent, but unspectacular growth with low inflation. Q2 GDP growth amounted to 2.6% qoq annualised on the first release of this gauge. That was a tad below expectations and Q2 was revised from 1.4% to 1.2%. Private consumption growth accelerated as expected. Corporate investment spending made a decent contribution to growth. Residential construction and the change in private inventories contributed negatively. The change in inventories in real dollars was actually marginally negative, which is unusual outside of recession, particularly given how low interest rates are and running inventory is cheap, It must mean business are cautious.

Continued very low inflation

The price measures in the US Q2 GDP report were weak and the Employment Cost Index for Q2 was only 0.5%, below expectations of 0.6%. This is all in line with recent reports on the various inflation numbers, which have shown a wide-spread easing of inflation pressures.

Fed will normalise, but extremely slowly

Following their most recent policy meeting the FOMC  issued a statement suggesting that the Fed may consider reducing its balance sheet starting in September, or at least announcing a starting date in September. Given that the global economy is humming along with the US among the countries most advanced in their economic cycle, it is very reasonable for the Fed to normalise its policy stand. But given the surprisingly subdued inflation picture there is no need whatsoever for the Fed to hurry. So, they can and will go very slowly.