Euro Macro: Stronger Q1 growth unlikely to be sustained – Eurozone GDP growth (flash estimate) strengthened to 0.4% qoq in 2019Q1, up from 0.2% in 2018Q4. The outcome was stronger than the consensus and our own forecast. No details of growth have been reported yet at the eurozone level, but monthly economic data and detailed Q1 GDP data from some individual countries suggest that the strength (as was expected) was concentrated in private consumption, particularly in car sales. Indeed, new car registrations bounced back sharply in Q1 (+7.5% qoq) after they had collapsed in the second half of 2018 (-11.4% qoq in Q4) due to temporary distortions from the introduction of new emission standards. Also France (GDP growth at 0.3% in Q1, the same as in Q4) reported a rise in private consumption growth to 0.4% qoq in Q1 from 0.0% in Q4. Finally, Italy (GDP growth to 0.2% from -0.1%) reported a rise in new car registrations by almost 30% qoq in Q1, while final domestic demand actually contracted. We think the temporary shift in car sales was responsible for around 0.2pps extra GDP growth in Q1 in the eurozone in total (around 0.3pps in Italy alone). That said, monthly changes in car registrations suggest that the rebound in Q1 will likely be followed by contraction in Q2, as sales declined both in February and in March, implying a negative spill-over into Q2.
In contrast to private consumption, fixed investment in machinery and equipment probably slowed down in Q1, although growth in residential investment seems to have remained strong. Indeed, orders for German capital goods by other eurozone countries fell by 4.5% 3Mo3M in February, which bodes ill for fixed investment growth in Q1. Finally, growth in exports weakened significantly in France (to 0.1% qoq in Q1, from +2.2% in Q4) and Spain (to -0.5% from +0.7%). Belgium (GDP growth at 0.2% qoq in Q1, down from 0.4% in Q4), did not report any details of growth, but considering the economy’s large exposure to foreign trade, it seems that declining exports played some part in the weakening of growth. Looking forward, we expect growth to slow down again in Q2, as private consumption growth should weaken while exports and investment are expected to remain sluggish on the back of still lacklustre world trade growth. Only later this year, we do expect a more sustainable rise in GDP growth to around the trend rate (of around 0.3-0.4% qoq) due to a moderate improvement in global trade growth. (Aline Schuiling)
FOMC Preview: Powell to signal continued comfort with wait-and-see approach – The Fed is widely expected to keep rates on hold at tomorrow’s FOMC meeting conclusion, though we do see a chance that it reduces the IOER rate by 5bp in a technical move (see Could the Fed deliver a technical rate cut?). While we won’t get an update to the dots projections at this meeting, there will be a press conference, and we expect Chair Powell to continue to sound comfortable with the Fed’s current ‘wait and see’ neutral policy stance. Growth indicators have firmed since the last meeting in March, though the Committee is likely to acknowledge the temporary factors driving the strength in Q1 GDP (see Weaker investment to drive slower US growth). However, inflation has actually softened, and is likely to remain muted over the coming year at least, in our view.
Persistent inflation weakness could raise the risk of a policy framework shift – The mix of trend-like growth and muted inflation should mean rates remain on hold over our forecast horizon to end-2020, but the persistent weakness in inflation – and the downward pressure this might be putting on inflation expectations – is likely to embolden those on the FOMC who are pushing for a change to the policy framework, which is currently under review. The Fed will hold a conference on the policy framework on 4-5 June, before conducting its own assessment, and will publish its conclusions in H1 2020. This could lead to the Fed adopting an ‘average inflation over the cycle’ target, so that 2% is seen not as a ceiling on inflation, but truly a symmetric target. As things stand, PCE inflation has mostly undershot the Fed’s 2% target since it was formally adopted in 2012, and has averaged just 1.4%. An ‘average over the cycle’ target would – all else equal – imply an easier policy stance, and is likely to mean a higher bar for a resumption of rate hikes, and a lower bar for rate cuts. While this is unlikely to mean any near-term easing in policy, it does raise the risk of easier policy later next year, when the review is complete. (Bill Diviney)