point de vue conjoncturel avril 2019

Economic Outlook – April 2019

Economic data and surveys indicate contrasting scenarios

PMI indices have stabilised at mediocre levels in recent months. April’s eurozone flash composite index came in at 51.3, comparing favourably with its January low of 51.0. The rebound in the services index has been more striking than in manufacturing, which fell until March before edging higher from 47.5 to 47.8. Index levels are currently in line with economic growth of around 0.5%.

The main economic data for the first two months of 2019 have now been released. After rising 1.9% in January, manufacturing slipped just 0.2% in February. Retail sales rose in both months, recouping all of December’s steep fall. Construction spending jumped 3.0% in February to reach highs unseen since 2010. Although vehicle registrations fell in March, the drop came after a steep five-month recovery since the low of September 2018. If we assume little change in the yet-to-be-published March numbers, then altogether we are looking at growth of approximately 3.0%. Economic data traditionally reflect accelerating growth better than surveys and such a wide gap between the two is not unprecedented.

Underlying inflation slowed to +0.8% in March but with Easter falling late this year, the impact of travel costs will have had an influence on the slowdown.

ECB chief Mario Draghi summed up the central bank’s latest meeting by stating, in response to a question, that the gathering had been more of an expression of the Governing Council’s stance than an operational meeting. Details over the bank’s long-term refinancing operations will be formulated and provided in due course. The key information to come from this meeting was that the ECB will be considering how any unwelcome side effects from negative rates on bank intermediation should be mitigated.

Mario Draghi stated that Europe’s banking sector is overcrowded and that cost structures probably weigh more heavily on banking profits than negative interest rates. In terms of the economy, although the central bank noted some signs of weakness, it also saw solid underlying momentum and suggested that factors slowing growth were temporary and would fade. Although the ECB’s current stance seems fitting, it is ready to step in if downward risks materialise and Mario Draghi stressed that the full range of instruments could be used if necessary.

On the Brexit front, the EU and UK have negotiated a delay until the end of October, unless the UK comes to domestic agreement in the interim. The UK Parliament rejected both PM Theresa May’s withdrawal agreement and the no-deal Brexit scenario.


No signs of a slowdown

At 3.2%, US GDP expanded more than the expected 2.3%. Following two slow quarters, growth has started to gain pace. While consumption fell after a poor start to 2019, both foreign trade and inventories contributed strongly.

March’s numbers swept aside other more worrisome data. Disturbingly weak jobs creations in February gave way to a March figure of 196,000, a level in line with trends in recent years. Retail sales excluding volatile components jumped 1.0% and vehicle sales surged 5.6%.

The recovery in businesses’ durable-goods orders excluding defence and aircraft continued, rising 1.3% in March to reach new highs. The ISM surveys show a rebound in the manufacturing sector to 55.3 and a slip to 56.1 in non-manufacturing, but both figures indicate healthy growth.

After a poor 2018, the US housing sector is starting to show signs of improvement. The same cannot be said for building permits, which for the past two years have hovered around 1.2 million. March’s annualised 1.14 million figure came in at the lower end of the range and contrasts with the NAHB home builder confidence index, which has been rising since December 2018. Housing sales data are more upbeat, with new homes sales rebounding sharply since December 2018. At 692,000, despite remaining below their all-time zenith, they have almost reached their December 2017 high. In the resale market, February was a strong month which compensated for almost all of the declines since the start of 2018, but the March numbers came in lower.

A bounce in energy prices drove headline inflation higher but underlying inflation has slowed in recent months, slipping to 2.0% in March compared with 2.4% in the summer of 2018.

The clearest sign of an upbeat US economy can be found in weekly jobless claims, which at 196,000 for the week of 12 April hit lows not seen since 1969. A notoriously volatile series, the following week’s jobless numbers rebounded strongly in the run-up to Easter.


The end of an era?

On 30 April, Emperor Akihito will abdicate to his son, Crown Prince Naruhito, marking the dawn of the Reiwa era. A few months after Emperor Akihito inherited the throne, Japanese stocks reached their speculative bubble highs. Over 30 years later, the Topix is still trading 40% below its level at the time. Emperor Akihito’s Heisei imperial era will be remembered for the collapse of that stock market bubble, persistent deflation and, more recently, extremely loose monetary policy to combat the downward price spiral. Will the Reiwa era be known as that which saw a conclusive end to Japan’s deflation?

Weather-related effects and natural-disasters depressed Japan’s third-quarter 2018 GDP, but the archipelago enjoyed a growth rebound in the final quarter of the year. However, weakness across the industrial sector, which fell an annualised 10% in the first quarter of 2019, raises the likelihood of an overall contraction in the first three months of the year. The fall in industrial production is doubtless exaggerated given that since hitting a low of 49 in February, the manufacturing PMI has been rising gradually to reach 49.5 in April. External demand can certainly be considered one of the causal factors dragging on growth as exports have been sluggish for several months. China’s stimulus package should benefit Japan’s economy in the near future.

For two years, the services PMI has been relatively stable, between 51 and 53. In March, it stood at 52. However, consumer spending, which has been soft since the start of the year, should pick up again as households attempt to pre-empt VAT rises planned for October 2019.

Labour market conditions remain extremely tight even though the data show no further signs of improvement amid uneven growth. Unemployment is 2.5%, the jobs-to-applicants ratio sits at 1.63, and the number of hours worked is still at its highest level since the 1970s.

In March, the BoJ’s preferred measure of inflation that excludes fresh food and energy rose 0.4% year-on-year, but this was in large part due to softer prices over the same period in 2018. Taken over the last six months, core prices rose a healthier 0.8%. That said, much steeper price rises will be needed for the central bank to adjust its monetary policy.


The opinion expressed above is dated April 26th, 2019, and liable to change.

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