Global Daily – Data continue to suggest consensus for Eurozone growth is too high

by: Bill Diviney , Aline Schuiling

Euro Macro: Drop in Germany’s factory orders signals GDP contraction in Q1 – German factory orders plummeted in the final month of last year. They fell by 1.6% mom in December, following a 0.2% decline in November. Orders (although volatile on a monthly basis) have been on a downward trajectory since the start of last year. As a result the yoy rate of change declined from -4.3% in November to -7.0% in December, which is the lowest rate since the middle of 2012. Interestingly, orders for motor vehicles, trailers and semi-trailers moved back into positive territory in December (+ 4% yoy) after they had plummeted in the five months before due to one-off distortions related to the introduction of new emission standards.

We think that the drop in factory orders in the final months of 2018 confirm the picture that was painted earlier by the Ifo manufacturing business climate indicator and the manufacturing PMI for January, which is one of Germany’s industrial sector and exports having moved deeper into contraction mode at the end of 2018-start of 2019. Indeed, the sub-component of intermediate goods orders, which tend to be a quite accurate leading indicator for Germany’s exports growth, dropped by 3.5% qoq in Q4 as a whole, following -1.7% in Q3. Although Germany’s 2018Q4 GDP growth has not been published yet, the annual growth data for 2018 as a whole indicates that GDP expanded modestly in Q4, probably because rebounding growth in final domestic demand compensated for declining exports and industrial production. However, a more pronounced drop in exports and industrial production in 2019 Q1 could push GDP growth to zero or slightly into negative territory.

The consensus forecast for Germany’s GDP growth for this year is 1.4%. This is significantly above our own forecast of 1%, while we think that even this looks too high now given the recent data flow. The same is true for the eurozone as a whole. (Aline Schuiling)

UK Politics: Selmayr meeting suggests attempts at a backstop compromise – The UK parliament’s Brexit select committee met with European Commission Secretary General Martin Selmayr on Monday to discuss the Brexit process. It has since emerged that Mr Selmayr asked Brexit-supporting MPs whether inserting a letter (dated 14 January) with assurances over the backstop into PM May’s Withdrawal Agreement would be enough to garner their support. While those MPs did not give a clear response to the suggestion, it does suggest the EU is scoping support for potential changes, and that Brexit-supporting MPs – by not rejecting the idea outright – are looking for a reason to now support the deal, perhaps out of fear that rejecting the deal again could lead to Brexit not happening at all (if, for instance, to prevent No-deal parliament votes to extend or revoke Article 50, perhaps to hold a referendum).

Such ‘assurances’ for instance included ‘providing the necessary political impetus and resources to help achieving the objective of making this period [the backstop] as short as possible’, and to cut short the time the backstop is in place, ‘should national ratifications be pending … the commission is ready to propose provisional application of relevant parts of the future relationship.’ This letter as it stands has no legal weight. Should it be inserted into the Withdrawal Agreement, the UK could potentially use it as legal evidence in any potential dispute over the backstop arrangement. Whether this would be enough to sway Brexiteers remains to be seen, given that many are demanding either a time limit or the right to unilaterally withdraw from it. Much would depend on the legal advice of the Attorney General. However, it is a sign that there are moves to a potential compromise on the issue. (Bill Diviney)