Economic Outlook – May 2019

Domestic demand and services underpin growth

After a sharp slowdown in the second half of 2018, the Eurozone economy grew by more than expected in the first quarter of 2019, posting 1.6% on an annualised basis compared with 0.9% for Q4 2018. Reasons for the improvement include a rebound in German growth (1.7%, previously 0.1%), Italy’s exit from recession (0.9%, previously -0.4%), and faster growth in Spain (3.0%, previously 2.2%). France saw a slight pullback from 1.4% back to 1.2%.

Even though a full breakdown of the headline numbers will not be published until June 6th, partial country data are available. In Germany, domestic demand has remained buoyant, although inventories have been significantly run down for the second consecutive quarter. Unsurprisingly then, manufacturing dragged on growth while activity across other sectors gathered pace. For the first time since the 2008–09 recession, the manufacturing sector contracted for three straight quarters.

The slowdown in manufacturing is above all the result of inventory adjustments amid both uncertainty in global trade and normalisation in the car-manufacturing sector. Meanwhile, exports have reached new highs and domestic demand continues on an upward path.

April and May’s PMI and IFO surveys continued to display weakness and are pointing to a further contraction in the second quarter and sustained adjustments to inventories. If final demand levels remain healthy, then this inventory related weakness in manufacturing is clearing the way for a second half-2019 rebound in growth.

Eurozone PMI surveys have now spent three months at low levels. May’s flash composite PMI only nudged up to 51.6 from 51.5 and is in line with annualised growth of approximately 1%. At 47.7, the manufacturing PMI is firmly entrenched in contraction mode while the services PMI expanded to post 52.5, underscoring the decoupling between the sectors.

This situation could persist for as long as employment and consumption remain unaffected by the manufacturing slowdown. While consumption has closer ties to services, manufacturing is subject to the vagaries of global trade. Eurozone employment data continue to send a positive message as Q1 2019 employment growth rose faster yet again (up from 1.2% to 1.4% year-on-year). Similarly, retail sales are not showing any signs of slowing down.

The opinion expressed above is dated 28 May 2019, and is liable to change.


Economic slowdown on the horizon

Following a very robust first quarter for growth (3.2%), April’s economic data indicate that the US economy slowed at the start of the second quarter. Manufacturing continues to slip, falling 0.5% for the month. Similarly, retail sales fell 0.2%, while durable-goods orders excluding defence and aircraft also contracted by 0.9%. The latter reached new highs in March but were subsequently revised sharply down. On May 24th, the Atlanta Fed’s model estimated that in Q2 2019, the US economy will have expanded 1.3% on an annualised basis.

May’s confidence surveys sent a mixed message. Markit PMI surveys deteriorated sharply. Preliminary readings for the manufacturing PMI show a drop from 52.6 to 50.6, while the services PMI fell from 53.0 to 50.9, with both feeding into a weaker overall composite PMI, which also fell from 53.0 to 50.9. The accompanying statement indicated that trade war concerns continue to take centre stage and comments by President Trump at the start of May might also have contributed to falling confidence levels. Bucking the trend was a brighter consumer confidence picture. The Michigan index posted strong gains to reach cycle highs, while the Conference Board index continues to improve.

Although growth at the start of the second quarter is showing signs of a slowdown, the labour market remains buoyant, as testament to the health of the US economy. Weekly jobless claims turned back up from mid-April to reach a peak of 230,000 at the end of the month, but they subsequently turned back down to settle at 211,000 in the week ending May 18th, confirming that the recent spike was more down to the volatility of the data surrounding the Easter holiday period than to any real deterioration in economic conditions.

In terms of inflation, April’s numbers fell slightly short of expectations at 2.0% year-on-year for the headline number and 2.1% year-on-year excluding food and energy (compared with 1.9% and 2.0% respectively in March). Minutes from the Federal Reserve Bank meeting at the end of April confirmed that the FOMC members viewed the slowdown in inflation over recent months to be only temporary. It seems unlikely that recent price weakness will prompt the Fed to lower rates. The central bank will doubtless be increasingly aware of any alterations in factors affecting growth, which in large part depend on how the trade talks evolve.

The opinion expressed above is dated 28 May 2019, and is liable to change.


Growth loses steam

China’s economic data for April were released on May 15th but failed to confirm the improvement seen in March. Although some pullback from the previous month’s very upbeat numbers had been expected, it was worse than anticipated.

Economic indicators softened across the board. Industrial output dropped from 8.5% to 5.4% year-on-year, retail sales from 8.7% to 7.2% despite the slower contraction in car sales, and investment from 6.5% to 5.7%. April’s softer picture coincides with the month’s downturn in PMI surveys, as well as that of the slowdown in both lending and exports. Exports to the US in particular have dropped off since the end of 2018, falling 13.1% year-on-year, while those to the rest of the world have slipped just 0.5%.

Calendar and taxation effects may have worsened the overall deterioration in China’s economic data, with retail sales being particularly affected by holiday periods. China’s National Bureau of Statistics attributed the weaker spending to the fact that there were two fewer days of holiday compared with 2018. When adjusted, retail sales were actually stable. Meanwhile, tax changes apparently weighed on April’s industrial output numbers, with the strong rise in March connected to VAT cuts that came into effect on April 1st. Manufacturers may have stockpiled goods to benefit from steeper deductions.


All told, the softer economic picture is probably not as bad as it looks. Nonetheless, with US-Chinese trade talks in full swing, conditions are challenging, especially since the effects of the higher customs duties are yet to be felt (up from 10% to 25% on $200 billion worth of Chinese products).

Although the direct impact of these customs duties on Chinese growth should be relatively contained, their secondary effects could deliver a heavier blow to confidence and the markets. Estimates suggest GDP could be affected by approximately 0.4 percentage points in the period spanning 2019 and 2020.

The current backdrop means that the hope raised by March’s better data, that of scaling back on stimulus to restrain rising debt levels, has been quashed for the time being.

The opinion expressed above is dated 28 May 2019, 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.