A TEMPORARY SLOWDOWN IN GROWTH AND INFLATION
As expected, the ECB maintained its monetary policy status quo during its 26 April meeting. ECB chief Mario Draghi noted that the latest economic statistics indicated a softer picture for the first quarter but emphasised that they remain consistent with growth and higher inflation.
He also remarked that following the period of strong growth, a slowdown was only to be expected, and it may have been heightened by temporary factors such as the weather, strike action in some countries, and calendar effects.
The ECB President noted that the Governing Council had abstained from discussing future monetary policy and did not say when the asset purchase programme would end. The ECB is doubtless waiting for further information, in particular for June’s growth forecast updates, before making any moves.
Numbers for first-quarter growth were released after the ECB meeting and confirmed the slowdown that confidence surveys had previously signalled. Eurostat’s flash estimate of Eurozone growth, albeit devoid of any breakdown, showed growth slowing to an annualised +1.6% for the first quarter of 2018, following +2.7% in the fourth-quarter of 2017.
Among the larger economies, growth in France (+1.0% following +2.8%) and Germany (+1.2% following +2.5%) slowed markedly. Italy’s growth dipped slightly (to +1.2% from +1.3%) while in Spain it remained stable (at a healthy +2.8%).
April’s PMI numbers sent positive signals for overall economic conditions. Following two sharp monthly falls in a row, the Eurozone composite PMI reading stabilised at 55.2 in April, consistent with an annualised growth rate exceeding 2%.
Meanwhile, Eurozone inflation slipped in April. Year-on-year, underlying inflation fell from +1.0% to +0.7%, while headline inflation fell from +1.3% to +1.2%. The decline appears to be temporary, is probably due to the Easter holidays.
TOWARDS AN ECONOMIC RECOVERY
BEA preliminary estimates showed first-quarter US growth slowing to an annualised 2.3%, versus 2.9% in the previous quarter. Expectations had been for a sharp slowdown to 2.0%.
The slower pace was essentially due to weaker household consumption but it had sprung back sharply in March (+0.4%), following two poor months in January and February, and April retail sales were encouraging (+0,4% excluding volatile items). Residential investment barely moved while business investment remained strong. Inventory adjustments also underpinned growth.
Foreign trade contributed positively as imports stabilised following their sharp rise during the previous quarter and export flows continued strong.
Lower import volumes (-1.6%) together with higher exports (+2.9%) combined to shrink March’s trade deficit by the historically large figure of almost $9 billion, to $49 billion.
Positive momentum driving both exports and consumption at the end of the first quarter bodes well for second-quarter growth. ISM surveys fell back sharply in April but nonetheless remain consistent with solid overall growth levels. The manufacturing index fell two points from 59.3 to 57.3 as did the non-manufacturing index, from 58.8 to 56.8.
The labour market is sending positive signals. April’s private sector job creations jumped to 168,000 and March’s numbers were also revised sharply higher from 102,000 to 135,000. After sitting at 4.1% for six straight months, a fall-off in labour force participation nudged the unemployment rate down to 3.9%. Year-on-year hourly wages remained at +2.6%, but the Fed’s preferred measure, the quarterly employment cost index, rose at its fastest rate since 2009 (+2.9% year-on-year).
Despite the tighter labour market, inflation pressures remain subdued. US inflation excluding the volatile food and energy components rose sharply in March from 1.8% to 2.1% year-on-year. However, this jump was largely due to positive base effects from a fall in telecommunications prices in March last year, and underlying inflation remained stable at 2.1% in April.
A GOOD START TO THE YEAR
First-quarter Chinese growth remained at +6.8%, ahead of the government’s 2018 target zone of +6.5%. Consumption was particularly dynamic, spurred by the still-rapid growth of real incomes (+6.6% year-on-year). Consumption accounts for three quarters of this growth and remains the main driver.
Investment was also a supporting factor, thanks to a rebound in real estate and a recovery in private investment. Exports remained strong but imports were more dynamic. As a result, foreign trade was a drag on activity.
Thanks to this positive first quarter, the government is well placed to meet its annual growth target. April’s PMI indices show no signs of any weakness at the outset of the second quarter with the Caixin composite PMI rising from 51.8 to 52.3 and that of the NBS edging higher from 54.0 to 54.1. However, several risk factors still need monitoring.
A slowdown in shadow banking activities has steadily translated into less dynamic credit expansion (+12% for April year-on-year), with public investment now decelerating because local governments typically used this type of alternative financing for their infrastructure projects. The good news is that private investment could take over if the improvement is confirmed in the upcoming quarters.
The slowdown in credit is also dragging on home sales, which could have repercussions on property investments. However, a slowdown on a similar scale to that of 2014–2015 is unlikely. Dynamic sales in 2015–2016 have enabled the supply of housing units to adjust and higher property prices (+5.3% in April year-on-year) are underpinning investment.
The protectionist measures envisaged by the United States represent a risk to exports and growth. However, their macroeconomic impact, if they are implemented, will doubtless be limited because of substitute goods and the country’s falling dependence on export flows: in the past decade, the percentage of exports comprising China’s GDP has almost halved (20% in 2017).
The opinion expressed above is dated 15 May 2018 and is liable to change.
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