Macro Weekly – Politics dominate economics

by: Han de Jong

  • EU very unsure about independence for Catalonia
  • Passing of US budget looking more likely
  • Who will succeed Janet Yellen?
  • Xi Jinping delivers a 3.5 hour address to the 19th CPC National Congress
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Chinese data a little firmer in Q3 and September

Economic data was relatively scarce in recent days and there was nothing to make me change my view on where the global economy is heading. Chinese GDP and some other Chinese data was a touch stronger than expected, as my colleague Arjen van Dijkhuizen highlighted yesterday. Q3 GDP growth amounted to 1.7% qoq and 6.8% yoy according to the official statistics. That was slightly lower than the 6.9% yoy registered in Q2, but still ahead of the official target for the year of 6.5%. Industrial production growth reaccelerated a little in September: 6.6% yoy, versus 6.0% in August. YoY retail sales growth and M2 growth were also up modestly in September.

Japan’s trade data for September confirm ongoing strength. Exports and imports were up 14.1% yoy and 12.0% respectively. This was a little weaker than in August, but the series are volatile and the trend is for gaining momentum.

US mixed, but hurricanes still distorting the data

US data was somewhat mixed. Housing starts and building permits were down in September, the third consecutive monthly decline for housing starts. It is not clear to what extent the hurricanes have affected the data. We will have to wait and see. US industrial production was up 0.3% mom in September, while manufacturing gained 0.1% mom. This followed mom declines of 0.7% and 0.2%, respectively. Here too, the impact of the hurricanes is hard to estimate. Expect this data to improve in the months ahead.

On a more positive note, business confidence in the New York Fed district (Empire State index) strengthened in October: 30.2, versus 24.4 in September. The last time this gauge was higher was a one-off in 2009, a one-off in 2006 and a couple of months in 2004. A similar measure compiled by the Philly Fed also strengthened in October, is at a level that is historically very high, but lower than earlier this year. The US labour market appears to be overcoming its hurricane distortions. Initial jobless claims fell to just 222,000 in the most recent week, the lowest for this cycle.

Eurozone vehicle registrations were soft in September, registering only a 1.4% yoy increase. Confidence among analysts, as measured by the ZEW continues to be firm, though. The expectations component for the German economy rose to 17.6 in October, up from 17.0, while the assessment of current conditions in Germany eased modestly: 87.0 in October versus 87.9 in September. This is historically still a very high level.

Three and a half hours

While economic data did little in recent days to excite, political developments were more remarkable. Chinese leader Xi Jinping’s speech at the 19th National Congress of the Communist party of China lasted almost three and a half hours. (This is Fidel Castro type of stuff.) Clearly, the speech writers must have been under pressure and didn’t have time to keep it short. Xi painted his vision for the future for China and, as expected, this vision is ambitious. Central in this vision is that the Communist Party stays in power and that living standards will continue to rise.

The US Senate cleared the way for the US budget to be passed. This makes it much more likely the Trump tax cuts will be implemented. The President is also busy sorting out the Fed. He has promised to announce who will succeed Janet Yellen as chair before 3 November. Most of the candidates would likely continue current Fed policies. However, one of the leading candidates is John Taylor, known for the Taylor rule he made up for setting policy interest rates. While calculations of the Taylor rule vary, most of these calculations would have official rates currently clearly above prevailing levels. It remains to be seen how much impact one man can have, even if he is at the top. There is a lot of ‘institutional knowledge’ in a central bank, driving policy. But Taylor’s appointment would create some uncertainty.

Last, the EU appears to be extremely uncomfortable with the independence ambitions of Catalonia. It is clear that the violence used by the Spanish government on the day of the referendum was excessive, but few EU leaders are willing to say that. The Belgian PM, Charles Michel, is an exception. Fair play to him. While the Spanish government may formally speaking be right, their rigid attitude isn’t helping.