US Macro: Still on course for a softer 2019 – GDP growth surprised considerably to the upside on Friday, at 3.2% qoq annualised vs 2.3% consensus. However, stripping out the unusual supports from inventories (+0.7pp) and net exports (+1.2pp) leaves us with a far more modest growth rate of 1.3% – even weaker than our 1.5% forecast for Q1. This was driven by a significant – albeit expected – slowdown in private consumption (to 1.2% from 2.5%), and business investment (to 2.7% from 5.4%). The weakness in private consumption should unwind, given that it was likely driven by the government shutdown, which led to delayed salary and tax refund payments. However, investment is likely to slow further in Q2, as the tax cut stimulus continues to fade. The big picture story is that while consumption should remain solid in 2019, weaker investment will mean growth slowing to trend-like rates of c.2% for much of the year, down from well-above trend growth in 2018. We continue to expect annual average growth of 2.3% in 2019, a touch below the Bloomberg consensus (2.4%), and down from 2.9% in 2018.
Supports of Q1 will be drags on Q2 – What of the special factors that boosted growth in Q1? It is unusual for both net exports and inventories to make such significant contributions to GDP growth simultaneously, and we think both components will be a significant drag on growth in Q2 – we expect a sub-1% annualised reading, potentially close to zero. The details from Jan-Feb showed that inventories were boosted mainly by nondurable goods manufacturing, and in particular petroleum products. More timely data from the Department of Energy shows this is already unwinding. Trade data meanwhile have been erratic over the past year, distorted by tariff-related front-loading. A recovery in private consumption – already apparent towards the end of Q1 – is likely to drive a rebound in imports in Q2, while exports should pull back as tariff-related front-loading unwinds. This should see net exports subtracting from growth in Q2. (Bill Diviney)
Euro Politics: Spain moves to the left – The results of Sunday’s general election in Spain indicate that the country has moved to the left. The social-democratic PSOE led by prime minister Pedro Sánchez won 123 of the total 350 seats in parliament, which was a gain of 38 seats compared to the previous elections, and in line with the most recent opinion polls. The centrist Ciudadanos (Cs) also expanded its representation in parliament, gaining 25 seats more (57 in total) than in June 2016. The biggest loss was suffered by the centre-right Partido Popular (PP), which lost more than half of its seats in parliament and ended up with just 66. A party that did a bit better than had been suggested by the polls was left-wing left-wing Unidos Podemos (P-IU), although it still lost 29 seats and ended up with 42.
Mr Sánchez now has a number of coalition options. First, he could try to form a left-wing coalition with P-IU and a number of moderate-separatist regional parties (mainly Basque). According to the election results such a coalition would get only half of the seats in parliament, so could be voted in if only one member of another party would abstain (in the second round of voting only a simple majority is required). Alternatively, Mr Sánchez could try and form a majority coalition with Cs, which would give a total of 180 seats, although the leader of Cs has been very outspoken during his campaign stating that he would not join a government with Mr Sánchez. Moreover, Cs has also moved more to the right and has a tougher stance towards Catalonia than Mr Sánchez, who is also against a referendum but would be open to discussions about some more autonomy for the region. In any case, it seems that PSOE will play the main role in Spain’s next government, because parties on the right combined with Cs would hold only 147 of the seats in parliament – well below the majority threshold (176). A coalition government with a central role for PSOE is not expected to result in any radical changes to the outlook for Spain’s economy, nor its government finances. Negotiations between PSOE and its potential coalition parties will probably begin after 26 May when regional elections will be held in a majority of Spain’s autonomous communities, as well as the elections for the European parliament. (Aline Schuiling)