Macro Weekly – A little better in Europe, while US business sentiment rises

by: Han de Jong

  • Economic conditions in the eurozone are stabilisingThis should be good for Europe
  • Business confidence in the US on the rise in May
  • Mixed Chinese data, Japan’s GDP contracts
180518-Macro-Weekly-EN.pdf (55 KB)

The economy of the eurozone was going great guns in the second half of last year, but then slowed. Confidence indicators weakened for several months and hard data followed suit. The most recent indicators suggest that the slowdown is bottoming out.

Confidence as measured by the ZEW index stabilised in May. The ZEW gauge for the eurozone actually inched higher: 2.4 against 1.9 in April, but that is obviously still a lot lower than readings of around 30 during the second half of last year. The same indicator for just Germany showed expectations stable in May at -8.2 and the assessment of current conditions falling only marginally: 87.4 against 87.9 in April. All this is after several months of falling numbers.

Eurozone industrial production had a decent month in March, rising 0.5% mom and the yoy rate accelerating from 2.6% in February to 3.0%. April car registrations also improved. They were up 9.6% yoy in April against a drop of 5.3% in March, though the timing of Easter may have affected some of this data.

So it looks like the soft patch isn’t getting any worse. Given some improvement in trade flows in Asia and a lack of reasons why eurozone growth should decelerate further, we think that a modest improvement in cyclical conditions is likely in the months ahead. Nevertheless, it probably remains fair to say that the ‘best is behind us’, meaning that the fastest growth of recent quarters will not be bettered any time soon.

Meanwhile, it looks like Italy is heading for a great new economic experiment with a coalition government of parties that have never been in government and that actually have significantly different views on economic policy. This makes it hard to predict what will happen and it remains to be seen how long a new government will be able to stay in power. But it looks certain that a meaningful stimulus will be unleashed. This is set to widen the budget deficit and it also remains to be seen how the bond market will react. The spread of Italian government bonds over German ones widened recently, but remains surprisingly low. We think the risks are for a further modest widening of the spread.

US confidence on the up

It is hard to say if this is the result of the Trump stimulus or of something else, but the earliest May business confidence indices in the US are pointing to rising optimism. The Empire State index rose from 15.8 in April to 20.1 in May. Even more impressive was the jump in the Philly Fed index, which rose to 34.4, up from 23.2. The May reading has brought this index close to the highs seen in the second half of 2016. This is promising.

Harder data was also firm. Industrial production rose by 0.7% mom in April after also 0.7% in March. Manufacturing output was up 0.5% in April, having been unchanged in March. April retail sales were up 0.3% mom, after 0.8% in March. The so called ‘control group’ of retail sales registered a rise of 0.4% mom after 0.5% in March. These are all healthy numbers.

Meanwhile, trade negotiations between the US and China are ongoing. Rumours come out and are then denied. China was said to have agreed to narrow its bilateral trade surplus with the US by USD 200 bn a year, but it was denied by Chinese officials. I would, indeed, find it hard to believe that Chinese authorities would be willing to agree to that also because it would be a promise that will be extremely hard to keep without very significant government intervention. Our base case remains that we are seeing extremely assertive negotiation tactics, but that a full-blown trade war is unlikely.

Mixed Chinese data while Japan’s economy shrinks in Q1

Japan’s GDP contracted by an annualised 0.6% qoq in Q1. That was a little worse than expected, but the fact that GDP contracted was not a surprise. The Q4 2017 data was revised lower from 1.6% to 0.6%. The soft data for Q1 was in line with various other indicators released earlier and trade data released by other countries in the region all showing softness. A modest improvement has come through in data covering more recent months.

Chinese data released in recent days has been mixed. Retail sales growth has decelerated to 9.4% yoy in April, down from 10.1% in March. On the other hand, growth of industrial production was reported as having grown more strongly in April: 7.0%, against 6.0% in March. That was the strongest reading since two spikes of 7.6% early and mid-2017, respectively. This data can be volatile, but it is encouraging. In any event, it does not suggest that the Chinese economy is going through a phase of significant slowing. We maintain our view that the aim of a gradual slowdown will continue to be achieved. We are forecasting 6.5% GDP growth this year, but the risks to that number are on the upside.