Macro Weekly – Crunch time for Europe

by: Han de Jong

  • Poor data in Europe continues …
  • … April data must give more guidance
  • US: steady as she goes (the economy, not politics)
  • China: retail sales growth stronger, industrial production weaker, but all only marginally
180420-Macro-Weekly-EN.pdf (105 KB)

The string of disappointing eurozone economic data has continued in recent days. The expectations component of Germany’s ZEW index of confidence among analysts dropped sharply again in April: -8.2, down from 5.1. The assessment of current conditions held up much better, but also fell: 87.9, down from 90.7 in March. The Italian industrial sector, which had been surprisingly strong last year, weakened in February. Growth of industrial sales fell from 5.3% yoy in January to 3.4%, while industrial orders growth decelerated from 9.6% yoy in January to 3.4%. We need to bear in mind that these series can be volatile.

Why this weakness?

I addressed the issue of weak economic data in the eurozone in this commentary last week. My message was that I could not really see why eurozone economic growth (and Asian growth to a lesser extent) would be falling sharply suddenly. Admitted, growth was far above trend in the last couple of months of 2017 and was always likely to move lower, but it is simply hard to find a good reason for a sudden and significant slowdown now. Some people suggest the economy may have hit bottlenecks all of a sudden or that the ECB stimulus has suddenly lost effect. I find these explanations hard to believe. Yes they can have an impact, but I fail to understand the suddenness of their impact.

I argued last week, and still think, that a more likely explanation is provided by a combination of temporary factors, on top of the fact that growth must at some stage slow to trend. I mentioned the weather, strikes, the fly epidemic and China. If I am right, the various cyclical indicators should show some improvement soon. Some key confidence indices for April will be released in the coming days, starting with the preliminary Markit PMIs, followed by the April Ifo index. The fact that the German April ZEW expectations index fell sharply in April is unpleasant, but this is not the best leading indicator. Besides, it was interesting that the assessment of current conditions held up much better. But this needs monitoring closely. If April data continue to disappoint, we would need to consider the possibility that we are missing something and that growth forecasts need to be reduced.


Part of my explanation for only a temporary dip in eurozone growth is that China slowed more than usual in February due to Chinese New Year. Chinese imports were very weak in February, as were German exports. This should be temporary as the data for the full quarter for the Chinese economy look good. GDP growth was stable at 6.8% yoy. Retail sales growth accelerated to 10.1% yoy in March, from 9.4% previously, while growth of industrial production eased marginally: 6.0% versus 6.2% in January/February.

As I argued last week, the trend of Chinese trade is important to the global cycle. And, reassuringly, Chinese import growth reaccelerated to 14.4% in March, up from 6.3% in February. Trade data from Taiwan and Korea released earlier had signalled a similar trend. However, Japan’s trade data for March was a disappointment. Export growth had been above 10% for most of 2017. It then fell back to a meagre 1.8% yoy in February and only marginally strengthened to 2.1% in March.

US solid

US cyclical indicators have relatively solid in recent days. The Empire State business confidence index eased in April: 15.8 versus 22.5 in March, but the Philly Fed index strengthened a little: 23.1, up from 22.3. These are high levels. Jobless claims, housing starts, building permits and retail sales were all solid. Industrial production growth amounted to 0.5% mom in March after a gain of 1.0% in February. Manufacturing output was softer, growing only at a 0.1% mom pace, after 1.5% in February..