Euro Macro: Investment in Germany strong despite fall in confidence – The preliminary estimate for Q1 GDP growth in Germany showed it declined to 0.3% qoq, down from 0.6% in 2017Q4. No detailed data were published, but according to the press release of the Statistisches Bundesamt the slowdown was concentrated in foreign trade and government consumption. As we have communicated before, we think the weakness in foreign trade in Q1 was partly due to temporary factors. Indeed, we expect foreign trade to pick up again in the coming quarters, albeit that it should remain weaker than in the second half of 2017, when net exports contributed around 0.4pps to qoq growth in both Q3 and Q4. Government consumption declined on a quarterly basis for the first time in almost five years in Q1. This could be related to the fact that following the General Election of September 2017, it took until the middle of March 2018 before the new Merkel IV government was sworn into office. Therefore, we think government consumption should pick up in the coming quarters as well. On a more positive note, private consumption grew modestly in Q1, while fixed investment increased substantially. The Bundesamt mentions that investment in construction was especially strong, but that investment in machinery and equipment was markedly up as well. Accelerating fixed investment growth has been a key part of our base scenario for the German economy for a while. It seems that investment was unaffected by the decline in business confidence in the first months of this year, which suggests that it will indeed be a major pillar behind growth in 2018, supported by favourable financial conditions, solid profit growth and high capacity utilization. On top of that, it seems that the drop in business confidence has come to a halt, as was illustrated by stabilising ZEW economic sentiment in May. (Aline Schuiling)
China Macro: Mixed signals from April data – Earlier today, Chinese activity data were published and they provided mixed signals. Industrial production growth came in better than expected and accelerated to 7.0% yoy, up from the seven month low of 6.0% reached in March. However, retail sales and fixed investment disappointed, slowing to 9.4% yoy (March: 10.1%) and 7.0% yoy ytd (March: 7.5%), respectively. Earlier this month, the PMIs showed a marginally improving picture (driven by the services indices) and Chinese trade data also firmed compared to March. All in all, Bloomberg’s monthly GDP estimate for April was reported at 7.2% yoy, somewhat up from the average reached in Q1-18 (7.0%). So far this year, the economy has been supported by ongoing strong external demand and some rebound in real estate sectors driven by robust land sales. This has offset ongoing drags from targeted tightening and a somewhat slower trend growth of credit. Moreover, in light of rising risks stemming from tensions with the US, the authorities have softened their financial deleveraging campaign a bit. They have for instance cut bank reserve requirements, mainly to ease the pain for smaller institutions that rely strongly on wholesale funding. Going forward, we still expect the Chinese economy to resume a very gradual slowdown in the course of this year, although ‘upside risks’ to our annual growth forecast for 2018 (rounded at 6.5%) have risen somewhat (Arjen van Dijkhuizen).