Macro Weekly – Not great, but not all gloom either

by: Han de Jong

  • ECB makes downward revisions, again
  • China slowing
  • Not all gloom
181214-Macro-Weekly.pdf (252 KB)

ECB president Draghi faced up to reality in his latest press conference when he said that while risks around the ECB’s forecasts are balanced, they are moving to the downside. The ECB also made downward adjustments to their growth and inflation forecasts, although the adjustments were small. Perhaps the most important one was the downward revision of the ECB’s core inflation forecast in 2020 from 1.8% to 1.6%. Draghi also gave some more clarity concerning how long the ECB will fully reinvest monies coming in from redemptions of their existing bond holdings. The (full) reinvestments will continue until after the start of the rate hiking process. Furthermore, Draghi sounded dovish, doing his best to say that the ECB will respond to undesirable economic developments.

Economic data in the eurozone has weakened this year and forecasters, including ourselves, have lowered their growth forecasts. Some of these adjustments are backward looking. Quarterly GDP growth amounted to 0.7% qoq in every quarter in 2017, slowing to 0.4% in 2018H1 and 0.2% in Q3. We do not think the economy will slow further from here (if we did, we might be forecasting a contraction). However, the 2019 GDP growth number will be lower than the 2018 number. One needs to keep in mind that the lower 2019 numbers are already baked in the cake and they do not indicate further slowing from the most recent pace.

The ZEW index for the eurozone, expressing the assessments of analysts, improved marginally in December: -21.0, versus -22.0 in November. The same index for Germany showed in interesting pattern. The subseries for ‘ current conditions’ fell further in December: 45.3, against 58.2. This is still a high level in historical perspective as the long-term average for the series is just below 0. However, the loss of altitude gathered pace in December. This series reached a high last January at 95.2 and after improving modestly in August and September it has fallen in three straight months. On a slightly more positive note, the ‘expectations’ subseries improved, rising from -24.1 to -17.5. This subseries has more or less stabilised since June.

The preliminary Markit PMIs were weak in December. This was particularly the case in France. The ‘gilet jaunes’ protests are likely to have had a negative effect. The services sector PMI in France dropped a massive 5.5 points to 49.6 in December. There is little doubt that the numbers, beside the effects of the protests, also reflect slower growth as such. The German manufacturing PMI fell for the 11th time of the last 12 months, although the decline was very modest (from 51.8 to 51.5) and the absolute level is still indicating growth.

Industrial production in the eurozone was up 0.2% mom in October and up 1.2% yoy, a little higher than September’s 0.8%. Digging into the data, it is clear that the problems in the car industry are hurting some countries more than others. Dutch manufacturing output, for example, was up 3.4% yoy in October (3.1% in September), while manufacturing output growth in Germany was clearly weaker.

China slowing

Chinese economic growth has been on a sliding trajectory. Nothing wrong with that, it is inevitable. What you don’t want is a severe slowing. Unfortunately, it is not always easy to have a very clear view on short-term cyclical fluctuations. Recent data disappointed. Industrial production growth slowed to 5.4% yoy in November, down from 5.9%. Output growth has moved close to 6% yoy for almost four years, but has, thus, now clearly fallen below. Retail sales growth also slowed: 8.1% yoy, versus 8.6% previously. It is not clear if this slowing is the result of earlier policy measures aimed at deleveraging of highly-indebted sectors or of the trade conflict.

What is clear is that Chinese policymakers have taken various measures aimed at supporting economic activity. As I have said before, the experience suggests that they will continue to do that until they have achieved their targets. As a result, I would not get too negative about Chinese growth prospects. What is also clear is that the Chinese have no option but to negotiate with the US and compromise on trade. The news that the Chinese will lift the retaliatory tariff on car imports is helpful.

Japan’s GDP gets hammered but ‘eco watchers’ more positive

Japan’s GDP contracted by an annualised 2.5% qoq in Q3. That sounds horrible, and it is. But we need to keep in mind that typhoons and an earthquake leading to power outages had a very negative impact. It certainly is not all gloom in Japan. The survey among so called ‘economy watchers’ showed increasing optimism. The two main indices in this survey started the year at a high level, then lost ground until the middle of the year, but have bounced back in recent months.