Global Daily – Eurozone disinflation to spread to core in coming months

by: Aline Schuiling , Bill Diviney

Euro Macro: Core inflation to be dampened by upcoming labour market deterioration and weak global price pressures – A number of eurozone countries published early inflation data for August today and the eurozone aggregate number is on the agenda for tomorrow. Harmonized HICP inflation in Germany declined to 1.0% in August, down from 1.1% in July and in Spain it fell by 0.2 percentage points between July and August, to just 0.4%. Detailed regional data from Germany reveal that the decline in inflation was concentrated in energy price inflation, which declined in every region. Moreover, Spain’s statistical bureau mentioned that lower electricity price inflation was the reason for the decline in overall inflation. The numbers from Germany and Spain are in line with our forecast for the eurozone of a decline in the headline inflation rate from 1.0% to 0.9% and core inflation continuing to hover around 1.0%. Looking further ahead, we expect core inflation to slow down somewhat in the coming quarters on the back of the ongoing slowdown in economic growth in the eurozone. Indeed, growth has been at levels well below the trend since the middle of last year and has slowed further to levels close to stagnation since the middle of this year. This should not only weigh on the labour market and reduce wage growth, but should also depress price pressures in general. In addition, the global manufacturing downturn will likely weigh on goods price inflation. (Aline Schuiling)

​US Macro: Growth to slow further in coming quarters – Q2 GDP growth was revised down marginally in the second estimate, to 2.0% from 2.1% in the advance estimate. The small headline revision masked some bigger underlying changes, with private consumption revised up from 4.3% to 4.7% annualised, and residential investment revised down to -2.9% from -1.5% previously – the latter having now contracted for six consecutive quarters. Exports were also downwardly revised (to -5.8% from -5.2%), while business investment was unrevised at -0.6%. Looking ahead, we expect the weakness in business investment to persist, while the strength we have seen in private consumption and government spending is unsustainable, in our view. The strength in private consumption in Q2 was essentially payback from the government shutdown-related distortions in Q1, with the fundamentals underpinning consumption having weakened in the year to date – both payrolls and wage growth have slowed. With consumer confidence looking to have peaked, and payrolls likely to slow further, we expect private consumption (70% of the US economy) to grow at below trend rates (1-1.5% annualised) over the coming quarters, down from 2.5-3.0% in recent years. At the same time, government spending is due to slow in the next fiscal year (starting in Q4); as such, headline GDP growth is likely to have slowed markedly by Q4. Taken together, we continue to look for growth of 2.2% in 2019 and just 1.3% in 2020 – the latter well below consensus forecasts of 1.8%. See our Short Insight: Why the Fed will keep cutting, for more on the US macro outlook. (Bill Diviney)