Global Daily – Eurozone inflation to slow again

by: Aline Schuiling , Arjen van Dijkhuizen

Euro Macro: Eurozone inflation jumps higher on energy prices – The flash estimate for eurozone inflation in December showed that headline HICP inflation increased to 1.3% yoy, up from 1.0% in November. The break-down in main components reveals that the jump was entirely due to energy price inflation, which increased to 0.2% in December, up from -3.2% the month before. We see some further upward pressure on headline inflation in the next month or two as recent oil price rises feed through, but it should fall back thereafter. Meanwhile, core inflation stabilised at 1.3% in December, with the inflation rate of non-energy industrial goods stable at 0.4% and services price inflation edging lower to 1.8% from 1.9%. The decline in services price inflation suggests that the price rise in services other than package holidays slowed down significantly, as the details of Germany’s regional inflation data showed that the inflation rate of package holidays jumped higher in December. This suggests that there could be some payback from package holidays in January, which could reduce core inflation somewhat that month. Looking further ahead, we think that core inflation will move lower more sustainably in the course of this year. Underlying inflationary pressures should ease because growth in the eurozone economy has slowed down to levels somewhat below the trend rate since the start 2018 and we expect growth to remain subdued in the first half of 2020. Moreover, the weakness in the global economy should weigh on prices of non-energy industrial goods.  (Aline Schuiling)

Euro Macro: Eurozone consumption slowing – The volume of retail sales in the eurozone increased by 1.0% mom in November, following a 0.3% mom decline in October (revised up from -0.6%). Nevertheless, it seems that private consumption slowed down in Q4 after it expanded by 0.5% qoq in Q3. Importantly, the 3month-over-3month growth rate in retail sales declined to 0.2% in November, down from 0.5% in October. Considering that the series is very volatile, it is likely that the rise in November will be followed by some payback in December, which suggests that retail sales were weaker in Q4 than in Q3, when they rose by 0.5% qoq. On top of that, car sales seem to also have slowed down in Q4. The 3month-over-3month growth rate in new passenger car registrations dropped to -8.0% in November, down from -0.6% in October. Even if registrations were to grow robustly in December, they would still have contracted slightly during Q4 as a whole. Combined with the fact that consumer sentiment has edged somewhat lower in Q4 and the unemployment rate has stopped falling, it seems that private consumption growth slowed down. (Aline Schuiling)

China Macro: Growth to stabilise in 2020 –  Last year, the slowdown of the Chinese economy deepened due to the impact of the escalated trade/tech conflict with the US and previous financial deleveraging, combined with a specific drag coming from the car sector. We expect the ‘Phase One’ deal between the US and China reached last month (still to be signed formally mid-January) to be supportive, as it puts the tariff tit-for-that on hold, at least for now. The direct effect of the modest tariff reductions agreed will be small, but the truce will help to reduce (though not eliminate) uncertainty, limit downside risks and restore confidence. Combined with the filtering through of Beijing’s piecemeal fiscal and monetary easing, we expect the car sector and overall industry to bottom out this year, contributing to a stabilisation in China’s GDP growth. We expect the impact of the swine flu on CPI inflation to fade in 2020 and stimulus to remain ‘piecemeal’  rather than ‘big bazooka’, as the authorities still have to cope with longer-term constraints such as the need to keep overall leverage in check and prevent overheating of real estate markets. While our base scenario foresees stabilisation in the Year of the Rat, risks remain (particularly US-China tensions that make China’s transition even more challenging, developments in Hong Kong and Taiwan and risks related to China’s debt bubble and the rising number of defaults). For more background see our China 2020 Outlook, Growth to stabilise in the Year of the Rat, published yesterday (Arjen van Dijkhuizen)