Economic Outlook – July 2019

A new president for the ECB

With the European elections behind them, EU leaders turned their attention to designating the future heads of the various EU institutions. Former German Defence Minister Ursula von der Leyen is to take the helm as President of the European Commission, while Christine Lagarde, the French IMF head, will take charge of the ECB in November. Ms Lagarde’s nomination is likely to ensure a certain degree of continuity in terms of ECB policy given that, like Fed chief Jerome Powell, she is not a trained economist and her personal monetary policy stance is still unclear. She is expected to rely heavily on the ECB’s teams and especially on the bank’s chief economist, Philip Lane, who is in charge of preparing monetary policy decisions. The baton should pass seamlessly to Christine Lagarde from Mario Draghi, whose decisions she has frequently applauded as head of the IMF. In terms of leadership, we can expect a more collegial approach from November onwards. In the meantime, various statements by ECB members are confirming Mario Draghi’s Sintra message signalling looser EU monetary policy.

Despite slower growth, the unemployment rate has continued to fall in recent months. In May, it settled at 7.5%, just 0.2 percentage points above the low seen at the turn of 2007-08. Eurostat data is relatively recent, but OECD data show that the last time unemployment rates were this low was at the end of the eighties.

Against this backdrop, domestic demand remains relatively robust with both retail sales and construction figures on positive trends. That said, the manufacturing sector and especially car manufacturing remain weak. New registrations fell 6% in June after briefly returning to the first-half 2018 levels that preceded the WLTP disruption.

Underlying inflation has settled at +1.1% following several months of volatility due to calendar effects. Broad money (M3(1)) growth continues to accelerate at +4.8%.

In the UK, Conservative party members voted Boris Johnson in as prime minister. While he insists that a no-deal Brexit is possible, MPs are working feverishly to avoid the scenario.


(1) All means of payment in a nation. Several aggregates are distinguished according to the degree of liquidity of their components.

M1 = Banknotes and coins + sight deposits.

M2 = M1 + sight investments (passbook accounts + home savings accounts).

M3 = M2 + highly liquid investments (term accounts, certificates of deposit, financial institution bills, short-term UCITS securities) and foreign currency deposits and debt securities.

M4 = M3 + commercial paper and Treasury bills.

Jobs report reassuring, but not enough for the Fed

June’s jobs report eased the concerns that surfaced in May. Having slowed to 72,000, new job creations rebounded to 224,000 in June. The unemployment rate remains almost unchanged and weekly jobless claims remain at low levels. Several members of the FOMC have referred to a clear slowdown in job creations as a signal justifying a softer monetary policy stance. However, June’s buoyant reading wasn’t enough to dissuade the FOMC (1) members from making statements expressing their inclination to lower the Fed funds rate. In addition, Fed President Jerome Powell did not use his semi-annual report to Congress as an opportunity to shift market expectations of an initial rate cut in July followed by further cuts before the end of the year.

Consumer spending data have shown no signs of slowdown in recent months. Annual consumption grew at 2.7% in May while core retail sales rose 0.7% in June. New vehicle registrations remained stable. Latest inflation readings suggest that the recent soft patch was only temporary. The Core Personal Consumption Expenditure deflator (2), which excludes food and energy, rose 0.2% on average in April and May and June’s consumer price data are pointing to another relatively strong reading. The annual rate currently stands 1.6%.

On the side-lines of the G20 meeting in Osaka at the end of June, Donald Trump and Xi Jinping agreed to a trade truce, which in turn enabled negotiations to restart. Time will tell if this development will dissipate the uncertainty evident in the confidence indicators.

June’s ISM (3) indices lost ground, but preliminary indicators for July, the New York and Philadelphia indices, turned higher to varying degrees. Significantly, capital goods orders excluding defence and aircraft remained at healthy levels.

Housing sector indicators are somewhat of a mixed bag with existing home sales still recovering while housing starts struggle. The multifamily sector is also struggling, but the NAHB (4) house builders’ confidence index picked up in July.


(1) The Federal Open Market Committee is a Fed committee charged with overseeing the nation’s open market operations (e.g., the buying and selling of United States Treasury securities).

(2) Ratio of price levels in two different years that accounts for inflation in the prices of goods and services so that comparisons can be made from one year to another.

(3) This index monitors changes in production levels from month to month.

(4) Housing Market Index based on the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.


First signs of a rebound?

China’s economy is still slowing down. Over five years, growth has gradually slowed from 7.5% in Q2 2014 to 6.2% in Q2 2019, its lowest level since China started publishing monthly growth data in 1992. The consumption-dependent tertiary sector continues to be the primary economic driver, rising at an annual rate of 7.0%.

June’s growth numbers are signalling better news. The rebound in retail sales that started in May continues, with the annual rate now at +9.8%, its highest since the start of 2018. Car sales have been the biggest contributors to the pick-up although registrations, which also include the fleet market, are less buoyant. After several disappointing months, industrial output rebounded to +6.3%, in line with its tendency over the last five years to hover around 6%. Investment data also improved.

The improvement is down in particular the fiscal and monetary measures deployed by the government to sustain growth. At 2.26 trillion yuan for June 2019, total social financing continued to rise and exceeded expectations for +1.9 trillion yuan.

Meanwhile, foreign trade struggled with the better trade balance due to falls in imports outstripping those of exports in the last 12 months. Although the G20 agreement prevents the current situation from deteriorating further, it does not undo the previously implemented tariff hikes.

Against this backdrop, confidence surveys have been under pressure. The composite PMI (1) indices continue to fall according to the official figures and Caixin’s (2) calculations, which are based on a private survey. The fall is broad-based, with both manufacturing and non-manufacturing surveys slipping lower.


(1) The Purchasing Managers’ Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors.

(2) PMI indicator of the strength of the Chinese economy.


The opinion expressed above is dated 24 July 2019, and is liable to change.

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