Euro Macro: Inflation jumps higher, whereas core edges lower – The first couple of eurozone countries have published inflation data for April. They all reported a jump in headline inflation. Spain recorded a 0.7pp rise in HICP headline inflation (to 1.9%), while headline inflation in Belgium (only CPI available and no HICP) increased by 0.3pp (to 1.2%) in April. In Germany HICP inflation increased to 2.1% up from 2.0% in March. The detailed data that have been published so far as well as the written statements by the individual statistical bureaus clearly indicate that the rise was totally due to a jump in energy price inflation. Indeed, as oil prices collapsed a year ago during the first wave of the pandemic, the yoy rate of change has soared in April. Some German states reported a rise in the inflation rate of transportation costs (mainly fuel) of more than 2pp. In Belgium, energy inflation increased to 8.2% in April, up from 2.3% in March. Meanwhile, core inflation seems to have declined in April. Spain’s statistical bureau mentions that the estimated annual variation rate of underlying inflation (CPI excluding non-processed food and energy products) decreased by 0.3pp (to 0.0%) in April, which is more than two points below headline CPI inflation (of 2.2% in April). In Belgium, core CPI inflation declined to 0.8% in April, down from 1.0% in March. Finally, some German states reported a decline in services price inflation.
On 30 April, the first estimate for eurozone HICP inflation will be published. We had estimated a rise in headline rate to 1.7% in April, up from 1.3% in March and a stable core rate (at 0.9%). However, based on the information from the individual countries, it seems that the core rate might actually have declined a bit, meaning that the headline rate could also end up a bit lower than we have estimated. Looking ahead, headline inflation will probably rise further in the coming months, with the peak likely at around 2%. However, the factors driving the move – food, energy prices, statistical effects from tax changes and some service sector price rises once lockdowns end – are transitory in nature and inflation will fall sharply from the start of next year onwards. An important factor that will limit the core inflation rate is that a large amount of slack has built up in the economy during the pandemic. All in all, we expect core inflation to remain well below the ECB target during the next 2-3 years. (Aline Schuiling & Nick Kounis)
US Macro: Strong GDP blunted by sharp inventory drawdown – Q1 GDP came in a touch weaker than our and consensus forecasts at 6.4% annualised (consensus: 6.7%, ABN: 7.5%). Underlying growth was however much stronger once you remove the effect of a sharp inventory drawdown and the drag from net exports – in the absence of these factors, growth would have been closer to 10% annualised. The strength was naturally driven by private consumption, with a combination of rapidly easing pandemic restrictions and successive rounds of fiscal policy support pushing consumption back up to just-shy of pre-pandemic levels; this alone contributed 7.4pp to Q1 growth. Government spending also surged during the quarter, adding 1.1pp, as did investment, which added 1.9pp. Investment continued to recover strongly for the most part – particularly equipment investment – but one surprising area of weakness was in structures, which declined for a sixth consecutive quarter and is now 18% below its peak level in Q3 2019. This suggests significant room for recovery as the investment cycle picks up momentum over the coming year. All told, we expect GDP growth to accelerate further in Q2, as services sector demand picks up further, and the inventory drawdown goes into reverse – we currently forecast growth of around 8% annualised. Growth should then slow in second half of 2021, as much of the reopening effects start to dissipate, but will still be well above trend. We continue to expect GDP to have recovered back to its pre-pandemic level in Q2 21, and for the output gap to have closed by H1 2022 – potentially sooner given the pace of the recovery so far. (Bill Diviney).