Global Daily – Signs of modest improvement in German economy later in the year

by: Aline Schuiling , Bill Diviney

Euro Macro: Germany’s ZEW expectations pre-signal a pick-up in growth in the second half of the year – The ZEW economic sentiment indicator (gauging the expectations about Germany’s economy during the next six months) increased in April. The sentiment indicator (measuring the balance of ‘improve’ minus ‘get worse’) rose from -3.6 in March to +3.1 in April, moving above the zero-level for the first time since March 2018. Changes in ZEW sentiment tend to pre-signal turning points in Germany’s business cycle relatively well, and the fact that the indicator has now returned into positive territory suggests that Germany’s economy has seen the worst. Indeed, we think that the dovish shift by the world’s main central banks has paved the way for some improvement in global trade in the second half of the year, which should support a pick up in growth in Germany as well. Given Germany’s high exposure to global trade and its relatively large industrial sector, the country was hit hard by the drop in world trade in the second half of 2018 and first months of 2019, with GDP growth underperforming the eurozone total. This situation should reverse in the second half of the year. Still, we merely expect a modest improvement in global trade and industry and not a sharp rebound, as the easing of financial conditions due to central bank policy has been moderate compared to the past. Moreover, monetary policy shifts work with long and variable lags. Therefore, we think the risks to Germany’s economy remain tilted to the downside. (Aline Schuiling)

US Macro: Housing up, manufacturing down – Industrial production unexpectedly contracted 0.1% mom in March, below consensus for a 0.2% gain (ABN: 0.1%). The print showed manufacturing flat on the month following a -0.3% decline in February, and is broadly consistent with what the ISM manufacturing PMI had been signalling in recent months. Given the continued global industrial sector weakness, we see scope for further weakness in the manufacturing sector before a bottom is reached, with investment likely to slow in 2019 following a very strong 2018. In contrast, the NAHB housing market index picked up a notch in April to 63 from 62. This follows a run of strong housing market data in recent months, with home sales in particular rebounding sharply in February, suggesting the housing market could be benefiting from the sharp decline in mortgage rates (now down more than one percentage point to 4.4%) since the start of the Fed’s dovish shift last November. While we expect a modest recovery in housing this year, and this should cushion the blow from a weakening manufacturing sector, it will not be enough to offset that weakness. As such, we continue to expect growth to decline to levels closer to trend for much of 2019, and this will likely keep the Fed comfortable with its on-hold policy stance for the foreseeable future. (Bill Diviney)