Macro Weekly – Re-accelerating instead of slowing?

by: Han de Jong

  • Eurozone economic sentiment continues its ascent
  • US regional business confidence indices recover
  • US core PCE decelerates further
  • China breaks North Korean coal embargo
170929-Macro-Weekly.pdf (83 KB)

Global economic growth has exceeded expectations this year, in some cases by a significant margin.  As the growth momentum increased, so did the expectations that a peak was near and that a reversal must be around the corner. Strangely, that isn’t happening. In fact, if anything, it looks like global growth is gaining momentum.

What fits?

The European Commission’s broad index of Economic Sentiment rose further in September, reaching its highest level in over 10 years. This suggests that eurozone GDP growth is likely to accelerate a little from the recent pace of 0.5-0.6%. This strength was echoed in the Netherlands’ producer confidence index, which rose from 5.4 in August to 8.5 in September, the highest level in almost 10 years. Various French and Italian of such indices are also firming further.

The picture in the US is slightly more complicated. Various, though not all regional business confidence indices had softened somewhat in the course of the year. Dallas, Richmond and Kansas business confidence have shown a similar pattern this year and they were all released in recent days, all three showing a bounce. The latest Chicago PMI, an index that had not weakened this year, also showed strength. This suggests that economic growth in these regions is re-accelerating.

US durable goods orders were solid in August. The headline series is volatile. It showed a 1.7% increase on the month. A better gauge for corporate investment activity is the subseries ‘orders for non-defence capital goods, ex-air’. It was up 0.9% mom in August after a 1.1% mom rise in July. This series is rising at an annualised pace of around 6.5% so far this year. Not spectacular, but certainly good. Shipments of non-defence capital goods ex-aircraft were up 0.7% mom, after July’s 1.1% mom increase. The annual pace of growth so far this year is some 6% in this case.

What doesn’t fit?

Economic data is rarely completely unambiguous. Against a range of strong data, some weak data can usually be found. This is also the case now. While the European Commission’s index of Economic Sentiment continues its upward trajectory, the authoritative German Ifo index of German business confidence fell from 115.9 in August to 115.2 in September. It was its second consecutive monthly drop. We need to keep a close eye on this. The divergence between the Ifo and the Commission’s Economic Sentiment index is unusual. One would not expect it to last long.

The US housing sector is also relatively weak. New home sales dropped to an annual pace of 560,000 in August, down from 580,000 in July and from a peak of 638,000 in March. They were also down from a year earlier. US consumer confidence was also a touch softer in September, though this was not material.

Perhaps somewhat more material is what is happening to metal prices. Many metal prices had risen since June. However, prices for copper, nickel, iron ore and coking coal have all eased during September. This may be short-term volatility, but it bears watching.

When I weigh up all the evidence released in recent days, my conclusion is that it supports the view that global economic growth is accelerating, not slowing.

Inflation weakness: transient or not, that is the question.

Eurozone headline inflation was unchanged from August at 1.5% in September. But the year-on-year rate of core inflation eased an inch from 1.2% to 1.1%. These numbers highlight that the ECB is struggling to meet its target, despite the economy growing very nicely. At least in Europe one can still argue that, despite solid economic growth, sufficient slack left in the economy is holding inflation down.

The situation in the US is more complicated. Unemployment is at a level that normally sets off wage inflation, oil prices and other commodity prices are have risen, the dollar has weakened and the Fed’s monetary policy is still accommodative. Nevertheless, core inflation has eased this year, against expectations. The Fed has taken the view that lower-than expected (core) inflation is a temporary phenomenon. However, weaker data for six months running is starting to look like a trend. The most recent data for the Fed’s favourite inflation measure, core-PCE, was, again, softer than expected. The yoy rate fell to 1.3%, from 1.4%. I have long expressed the view that this is largely driven by structural changes in the economy, related mainly to technology. In my opinion, there isn’t much the Fed can do about this, nor should they try. So the weaker-than-expected inflation numbers should not prevent the Fed from normalising monetary policy, but they should be aware that the new normal for interest rates is lower than it was in the past due to this low inflation.

China ending the embargo on coal imports from North Korea

Late last year, the UN announced an embargo on importing coal from North Korea. China is by far the biggest buyer of North Korean coal. So the effectiveness of such an embargo depends on compliance by China. China, indeed, completely stopped importing coal from North Korea in March. Chinese imports of North Korean coal remained zero for four months. As coal is one of the most important, if not the most important single export products for North Korea and China is its main export market, this must have hurt and must have led to a problem of foreign exchange in Pyongyang. But in August, China appears to have resumed these coal imports. This is all according the Chinese trade statistics. We think they are probably accurate. There is no way for us to find out why this is all happening. We are inclined to speculate that the coal export embargo was putting financial pressure on Pyongyang, which the Chinese may now have seeked to relieve. The resumption by China of coal imports from North Korea appears completely inconsistent with more recent news that China is actually increasing the pressure on North Korea. To be continued ……