To suggest Goldilocks is back would be an overstatement, but…

by: Han de Jong

  • US moving in Goldilocks’ direction
  • Europe’s growth stabilising
  • China’s growth stable, though public investment weakens
180914-Macro-Weekly.pdf (135 KB)

The global economy was characterised by solid, synchronised growth last year and lower than expected inflation. It was the typical Goldilocks state of the economy. This year is different: slowing growth, trends in different regions diverging and modestly rising inflation. This combination meant the end of Goldilocks. Macro data of recent days suggest the world economy might be moving back towards a Goldilocks state again. But I fear the direction of the data of recent days may not last.

US inflation down

Inflation in the US was lower than expected in August. Headline inflation amounted to 0.2% mom as the yoy rate fell from 2.9% in July to 2.7%. The core rate came in at 0.1% mom and the yoy rate was 2.2%, down from 2.4%. This is good news. The Fed focuses on the core PCE measure of inflation, but the drop in the yoy CPI numbers may also be reflected in the PCE numbers. Producer price inflation for August contained a comparable message. Headline PPI and the core PPI both fell 0.1% mom in August. These numbers will not make the Fed change its plans to continue its tightening at a pace of one hike per quarter. On the other hand, the inflation numbers are no reason whatsoever to accelerate the pace of tightening. That is the good news in these numbers.

Firm growth

The US economy has been firm this year and the data continues to show strength. Business of ‘small businesses’ (we would call the companies covered in the survey SMEs) improved further in August. The NFIB index rose from 107.9 in July to 108.8 in August. As far as I can see, that was a record high for this series for which I can find data back to the mid-1970s. The August retail sales data did not look very strong. The headline series was up only 0.1% mom (these are nominal numbers, so you have to adjust for inflation). But we have to bear in mind that this series is prone to significant adjustments.
The July rise of 0.5% was revised up to 0.7%. Excluding cars, the mom rise was 0.3% and the previous month was revised up from 0.6% to 0.9%. More impressive are the yoy numbers. Including cars, retail sales were up 6.6% yoy in August, marginally down from 6.7% in July, but up strongly from the beginning of the year: 3.9% in January. On average, retail sales were 5.5% up in nominal terms in the first eight months of the year. Excluding cars, the yoy rate in August was 7.3% and sales have been 6.0% higher than last year in the first eight months.

US industrial production is showing a similar trend. Total production was up 0.4% mom in August, after 0.4% in July (originally reported as 0.1%). Manufacturing production expanded by 0.2% mom after 0.3%. The yoy pace of growth accelerated to 4.9% in August, by far the highest for the year. Back in January, the growth rate was a more modest 2.8%. Data from the logistics space tie in with this, with container shipping and rail freight rising along with shipping rates. I think it is fair to say the US business cycle is looking very healthy.

The rest of the world not doing too badly

The economy is less strong outside the US. True, Chinese growth rates are still higher than US rates, but compared to potential growth, the US performance is more impressive. Recent Chinese data suggest the economy is doing ok, but there is nothing spectacular. Retail sales growth in August was 6.1% up yoy, slightly higher than in July, but essentially stable compared to previous months. The same is true for industrial production. Growth accelerated modestly from 8.8% yoy to 9.0% in August. Investment growth in China continues to decelerate. This is due to the public sector. But recent measures by Chinese policymakers suggest that infrastructure spending will strengthen in due course. Private sector investment has remained strong. The suggestion that investment has weakened in response to the threat of US import tariffs would appear to be off the mark.

ECB make marginal adjustments as confidence improves somewhat

The ZEW index of analysts’ confidence improved in the latest month, bot for the eurozone as a whole as well as for Germany. This was the second monthly gain after a long stretch of falling confidence. This is good news and in line with our thinking that growth in the eurozone will now stabilise.
The ECB lowered its growth forecasts for this year and next, but only by 0.1% in both years. More important in my view, they lowered their inflation forecast for 2019 and 2020 by 0.1%. We think their forecasts are still too high and will be revised lower.

Erdogan not happy, or is he?

The Turkish central bank raised rates from 17.75% to 24%, exceeding market expectations. Allegedly, president Erdogan was unhappy. He has stated before that he does not believe in fighting inflation with higher interest rates, or defending the currency with higher rates, for that matter. I have no insight into what goes on behind the scenes, but I think it was quite obvious they needed to raise rates. The problem was that it had to be done in a face-saving way for the president. Perhaps the president became convinced that a rate hike was inevitable. But he was undoubtedly unwilling to do a public U-turn. The way it was done now may have been the solution. A big rise in the official rate and the president sulking but doing no more than that.