Economic Outlook – May 2016


Growth accelerated in the first quarter, probably driven by private consumption. First-quarter growth gathered pace and reached an annualised +2.1%. This is the highest rise in GDP since the recovery, excluding Q1 2015. Although a detailed analysis shall only be available early in June, the composition of French growth together with various national press reports suggest that this healthy figure is the result of stronger private spending.

Economic momentum waned in the first quarter, particularly in industry. After firm growth in January, industrial output declined in February and again in March. However, the decline may have been exacerbated by the timing of the Easter holidays, and the Eurozone Manufacturing PMI has been relatively stable in recent months.

Confidence surveys are consistent with slightly weaker growth in the second quarter. The preliminary estimate for the composite PMI stands at 52.9 for May, which is consistent with growth in the region of 1.5% and a risk of economic slowdown in the second quarter, although not slow enough to compromise the ongoing recovery.

Political risk could also be back in the spotlight in June. In addition to the UK referendum, parliamentary elections in Spain will take place on June 26th because the various political party alliances have been unable to form a government. So far, as good first-quarter growth figures show (+3.2% year-on-year), the political uncertainty has not dragged on Spanish growth but this could change if the uncertainty persists.



US growth stalled in the first-quarter. According to preliminary estimates, GDP growth slowed to an annualised 0.5%, penalised by the fall in non-residential sector investment and, to a lesser extent, by both foreign trade and falling inventory levels. Conversely, growth was buoyed by household consumption and residential investment.

Preliminary second-quarter economic data lend themselves to an upturn in the economy. April’s retail sales excluding volatile components posted their highest increase in almost two years at +0.9% and ISM surveys have recovered from their low point at the start of the year. The non-manufacturing ISM came in at 55.7 in April and the manufacturing ISM at 50.8.

Job creations remain on the right track despite a slowdown in April. If the pace of 171,000 private sector job creations recorded in April was to continue until the end of the year, then unemployment, which currently stands at 5.0%, would fall within the Fed’s end-2016 target range (4.6%-4.8%), all other things being equal.

The Fed is not ruling out raising rates in June. In the minutes of April’s meeting, the Fed opened the door to higher rates in June, provided that economic recovery is confirmed, employment statistics are good, and inflation gathers pace. The market now sees the probability of this scenario as one-in-three, whereas in mid-May it was estimated at less than one-in-ten. However, it seem unlikely that the Fed will act in June, given that the markets have yet to price in rates increases and that the Brexit referendum, which is a significant risk factor, will still not have taken place.

If the UK votes to remain and data continue to improve, the Fed is likely to act in July.



In the run-up to the Brexit referendum, first-quarter UK growth lost steam. The preliminary estimate of annualised GDP reveals a slowdown in growth to +1.6%, down from +2.4% in the fourth quarter. In the absence of a breakdown of the various demand-led growth contributors, it is difficult to assess the impact of political uncertainty on the economy. However, it is likely that economic agents have withheld expenditure until after the results of the Brexit referendum.

Political uncertainty continues to weigh on business confidence and the economy. The composite PMI has deteriorated rapidly since the beginning of the year to reach 51.9 in April, compared to 56.2 in January. Monthly GDP as calculated by the NIESR also points to a growth slowdown in April.

The labour market is no longer improving, but inflation trends are upwards. After a rapid decline between late 2013 and the end of 2015, unemployment has stabilised at 5.1% in recent months, while wage inflation is relatively low at +2.1% year-on-year in March. Year-on-year inflation slowed to 0.3% in April and underlying inflation to +1.2%, but the trend is still upward.

The polls appear to put the Remain vote ahead. Although there is no clear majority for one side or the other, telephone surveys, which are considered to be the most reliable, give the Remain vote a seven point lead. Bookmakers’ odds are another source of information and they suggest there is a two-thirds chance that the Remain campaign will win.


The opinion expressed above is dated May 2016 and is liable to change.


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