US Macro: Further signs of a manufacturing slowdown – Following the poor Chinese trade data yesterday, the manufacturing weakness that began in the US late last year looks to be carrying over into 2019 – at least based on the regional Empire State Manufacturing Survey (this covers only manufacturers based in New York State). This fell to 3.9 in January, down sharply from 11.5 in December, but consistent with the recent sharp decline in the broader national ISM manufacturing PMI. The weakness was evident in both the current conditions and the forward-looking expected conditions indices. The decline has come about more abruptly than we had projected, and is likely being triggered by the global weakness we have seen in manufacturing over the past half year or so. Indeed, the US was for much of this period a positive outlier, supported as it has been by tax cuts and strong domestic demand. However, the exceptional strength we had seen since 2017 was never expected to be sustained, particularly against the backdrop of softening global growth.
The weakness in manufacturing poses downside risks to our growth outlook for 2019, where we expect quarterly momentum to slow from the 3-4% annualised pace of recent quarters to a 2-2.5% pace over the next few quarters – levels that are just above trend (c.1.8%). While manufacturing and investment are slowing, however, private consumption should remain strong, supported by continued jobs and wage growth, and solid household balance sheets. Government spending is also projected to rise significantly this year, keeping growth above trend. While the government shutdown is persisting somewhat longer than expected, it affects only around a quarter of federal government workers, and many of these are continuing to work for the time being without pay. As such, we judge the growth impact of the shutdown to remain limited, although it could become more meaningfully disruptive if it continues into February – posing an additional downside risk to the outlook. (Bill Diviney)
Euro Macro: Germany escapes from technical recession – Germany’s Statistisches Bundesamt published its 2018 annual economic growth figures today. GDP expanded by 1.5% in 2018, down from 2.2% in 2017. In line with what had already been suggested by trade data and the quarterly growth numbers for 2018Q1-Q3, the weakening of growth was concentrated in net exports, which had contributed 0.3 percentage points to total GDP growth in 2017, but reduced it by 0.2pp in 2018. Moreover, private consumption growth slowed, which probably was partly due to the temporary distortions in car purchases due to the introduction of new emission standards in September, but also due to the rise in inflation on the back of a jump in energy price inflation during the period February-October 2018. Investment in machinery and equipment, in contrast, accelerated in 2018, growing by 4.5% – up from 3.7% in 2018. The annual growth number allows us to make a first estimate of Q4 GDP growth, which we think expanded by around 0.3% qoq, after it contracted by 0.2% qoq in Q3. As such, any fears for two consecutive quarters of contraction (i.e. a technical recession) have proved to be unwarranted. Looking ahead, we expect annual growth to moderate further in 2019, largely because we expect a weak start to the year. Still, in the course of 2019, we expect global policymakers to facilitate a modest recovery in world trade growth, which should support a pick-up in Germany’s exports. Moreover, domestic demand should continue to grow robustly. (Aline Schuiling)