Business confidence is proving resilient despite the recent turmoil in financial markets. The PMI composite index for the Eurozone as a whole was down slightly in the first quarter, but remained in line with figures seen over the last twelve months. It rose slightly in March from 53.0 to 53.1 (see Figure 1).
Economic indicators available for the first two months of the year hint at decent first-quarter growth of close to 2.0% on an annualised basis. Industrial output fell in February, but not enough to offset January’s sharp increase. In addition, retail sales remain on a very positive trend and new car registrations increased sharply during the first quarter.
Labour market improvements are ongoing and should continue to buoy domestic demand. The Eurozone employment rate increased by 1.2% year-on-year in the fourth quarter of 2015, a record high since the first quarter of 2008. The improvement was particularly marked in the countries most affected by the 2011-2013 crisis, such as Spain and Italy.
The ECB’s monetary policy measures continue to feed into funding conditions and support the credit market. The average cost of borrowing for new loans to non-financial corporations continued to lower in February, dipping beneath 2% for the first time to settle at 1.98%. The ECB’s quarterly bank lending survey in April reveals continued easing of credit conditions and increased demand.
Year-on-year inflation was zero in March but is expected to recover in the months ahead. It remains held back by the shifts in energy prices but this effect should diminish if oil prices and the euro stabilise at current levels. Core inflation was up to 1.0% year-on-year.
Political risk is a factor to watch, particularly in Spain. The May 2nd deadline for forming a new government is fast approaching. If the different political parties fail to appoint a government leader, new legislative elections will have to be held, probably in June.
Poor first-quarter growth figures are likely, in particular due to household consumption. Whilst February’s figures showed improvement, January was disappointing and monthly car and retail sales data for March are not encouraging. On April 13th, the Atlanta Fed estimated first-quarter growth at an annualised rate of 0.3%.
The ISM surveys suggest a rebound in growth in the second quarter. After a dip below 50, the ISM manufacturing index was reassuring in March, increasing from 49.5 to 51.8. The rise was chiefly due to a strong rebound in the new orders component, which reached its highest level since November 2014 (see Chart of the week « United States: rebound of the PMI »). The ISM Services index is also on the right track at 54.5 (see Figure 2).
Despite the signs of economic slowdown at the beginning of the year, the labour market remains dynamic. Weekly unemployment figures are close to historic lows and March’s job report was solid with 195,000 private sector job creations. The unemployment rate rose from 4.9% to 5.0% but can be explained by a rise in labour force participation. Wage growth was stable at 2.3% year-on-year.
Inflation figures, which had strengthened in recent months, have now slowed. Prices excluding energy and food rose by 0.1% in March, after January and February’s sharp 0.3% increases (see Chart of the week «United States: slightly higher inflation figures»). Year-on-year, core inflation reached +2.2% and headline inflation +0.9%.
The economy relapsed in the fourth quarter of 2015. Japanese GDP contracted by 1.1% year-on-year following third-quarter growth of +1.4%. Household consumption was chiefly to blame, whilst private investment was vigorous. Foreign trade contributed positively to growth due to the fall in imports, despite exports also falling.
Economic data and confidence surveys suggest slow first-quarter growth. Household consumption remained low in the first two months of the year and the composite PMI index dipped back beneath 50 in March, falling from 51.0 to 49.9. In addition, industrial output fell by 5.2% in February, although, this is the result of temporary factors that should diminish from March onwards. Going forwards, the impact of the earthquakes that have rocked Southern Japan will need monitoring.
The labour market remains very positive and wages are starting to increase slightly. The unemployment rate remained low in February at 3.3%, and the number of job vacancies per unemployed worker was at its highest level since December 1991. Against this tight labour market backdrop, the average basic salary increased by 0.6% year-on-year in February, the biggest increase since November 2005 (see Figure 3).
Inflation remains below the Central Bank’s 2% target. Headline inflation stood at +0.3% year-on-year in February and inflation excluding energy and food at +0.8%, a similar pace to recent months.
China’s growth slowed in the first quarter of 2016, but remained within the 2016 target range of 6.5%-7.0%. It came out at +6.7% year-on-year compared with +6.8% for the previous quarter. However, year-on-year GDP masks a marked slowdown in annualised quarter-on-quarter growth from 6.1% to 4.5%.
Economic data shows that the authorities’ stimulus policies are starting to yield results (see Chart of the week «Will the encouraging figures become cause for concern?»). Figures for March show positive economic momentum at the end of the first quarter: investment grew at its fastest pace in nine months (+11.2% year-on-year), industrial output and retail sales improved and credit expansion continued to grow.
The real estate market is recovering gradually but there is still room for improvement. Real estate investment continued to rebound in March and housing starts have continued to gather pace. Housing sales (by volume) were up 40.3% year-on-year. However, whilst the stock of unsold homes has normalised in large cities, the adjustment process still has far to go in the smaller ones.
March’s PMI surveys were encouraging. The composite index broke back through the 50 threshold from 49.4 in February to 51.3, its highest reading in almost a year (see Chart of the week «A significant upturn in China’s PMI indices»).
The opinion expressed above is dated April 2016 and is liable to change.
This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.