What to expect this week – 11 November – 17 November 2019

Highlights

> —GDP growth for the third quarter in Germany (Nov.14) and the ZEW survey for November (Nov.12)
The industrial contraction during the third quarter and the fragility seen on the services sector during the third quarter will probably lead to a negative growth rate in the third quarter. Will this technical recession be sufficient to force a more accommodative fiscal policy ? —

> The Eurozone GDP and Employment for the third quarter (Nov.14) and industrial production for September (Nov.15)
The flash estimate for the GDP was at 0.2%, it will be confirmed. The question is on the employment dynamics. Since the beginning of 2018, its quarterly growth has been close to the GDP growth leading to a flat trend in productivity. This is not a positive news. —

> The UK GDP for the third quarter (Nov.11) and Employment for August (Nov.12)
The main concern for the UK is its low productivity growth. Since the beginning of the current recovery, it has grown by only 1%. The change may come in coming months with a downside adjustment on the labor market. —

> GDP growth for the third quarter in Japan (Nov.14)
The figure will take into account the jump in households’ retail sales in September. Their expenditures were increasing to compensate the increase in the VAT rate in October. This is the same phenomena that the one seen in April 2014 with the last TVA rate change. —

> Industrial production index in the US for October (Nov. 15) NY Fed manufacturing survey for November (Nov.15)
The industrial momentum is low in the US as it can be seen with the ISM manufacturing index below the 50 threshold for the last 3 months to October. This will probably push the industrial production index on the downside. —

> Chinese industrial production, retail sales and investment for October (Nov.14)
The momentum is lower in China. It reflects negative external shocks (exports growth is close to zero in recent months) and of an strong internal adjustment (negative growth for imports)

> —Retail sales in the US (Nov.15) and in the UK (Nov.14)
The US sales will continue to be robust as the labor market is still supportive and households are optimistic
In the UK, the perception is weaker as the labor market dynamics has turned negative recently.

> —Inflation in the UK and in the US for October
Will be lower than in September as the energy contribution will be more negative in October. —

> Inflation rates in the Euro Area (15), France (14), Germany(13), Italy(15) and Spain (14)
Confirmation of the flash estimates released at the beginning of the month. The Euro Area inflation rate in October was first estimated at 0.7%

Monetary policy and growth. The world economy at November 4, 2019*

The Federal Reserve, or US central bank, cut back its key rate for the third time this year at its October meeting, after previous moves in July and September. The federal funds rate now stands at 1.5-1.75%, which equates to the range in the dot plot after correction. The Fed also indicated that it does not plan to continue cutting interest rates in the near future.

The interesting aspect of the Fed’s decisions is that they are not dictated by US domestic trends. GDP grew 1.9% in the third quarter on an annualized basis, and 90% of this robust figure is driven by private domestic demand. So we are still seeing the paradoxical situation where the Fed’s decisions are not driven by the US domestic outlook, and we will need to keep an eye on this over the months ahead.

The other interesting aspect of Jay Powell’s press conference is that he only briefly touched on the situation and the glitches on the US money market, yetthis is a very worrying factor as the Fed has injected more than $200bn into its balance sheet to manage this crisis since mid-September. The Fed’s message is that it is not that important, but yet it has added $200bn to its balance sheet, given no explanations and pledged to continue hefty purchases until mid-2020 to ensure that the market remains liquid. This “move along, there’s nothing to see here” approach is disquieting, and we will really need to closely monitor this situation.

Christine Lagarde took over from Mario Draghi as ECB President on November 1, and there are two points worth noting on this change. Firstly, Christine Lagarde seems to be “Draghi-compatible”, and just like the former Italian ECB President, she has also made clear her aim of pursuing the development of the euro area by getting governments more involved and looking more to fiscal policy. She has taken a much more political stance than Draghi could right from this start, and this aspect will be both important and very interesting. The euro area lacks a political dimension, and Christine Lagarde could bring this to the table.

Third-quarter growth figures were issued for several euro area countries over the week. The non-annualized growth trend came out at 0.2% for the euro area as a whole, with 0.4% for Spain and 0.1% for Italy. The French growth figure came to 0.3%, in line with the two previous quarters.

This should lead to 1.2% growth for the euro area as a whole for the full year 2019, with a projected 1.3% for France, 0.2% in Italy and 2% in Spain, which has now made up its lag and is posting less vigorous growth.

Looking to the breakdown of figures for France, domestic demand plays a key role. Economic policy is designed to shore up domestic demand and offset any potential external shocks. It does not drive growth but it does rein in the risk of break points.

Looking to the US, growth we mentioned above for the country came to 1.9% in the third quarter and 0.5% on a non-annualized basis, which should lead to overall 2.3% growth for the full year.

The manufacturing ISM index in the US came out at 48.3 for October vs. 47.8 in September, marking the third month in a row below the 50 mark. Economic momentum is weaker, and out of the 18 manufacturing sectors assessed in the survey, only five stated that they are growing. Domestic demand is also weaker and less robust than a few months ago, so we are seeing the US economy change pace slightly.

US job market figures were also released, but stats for October were fairly solid with the economy creating 128,000 new jobs, plus the 42,100 that could have been created without the General Motors strike. Average private sector monthly job creation figures YTD come to 154,000, which is a solid but not excessive figure, and fairly close to stats in 2017. The White House’s very aggressive fiscal policy in 2018 had driven figures up.

Jobless numbers came to 3.6%, which is very low and the employment rate has increased. The job market is dynamic, and the yoy wage rate increase is only 3%. Wage gains are decreasing each month following on from the high of 3.4% in February.

Inflation in the euro area came out at 0.7% in October vs. 0.8% in September, with this slowdown mainly triggered by energy’s negative -0.3% contribution in October. However, this tendency is set to turn around over the last two months of the year as oil prices collapsed at the end of 2018, so inflation is poised to increase slightly in November and December.

Looking to the week ahead, we note the global ISM index, which is the weighted average of composite indices for the manufacturing and non-manufacturing sectors in the US, and which usually fairly closely tracks GDP growth trends. September’s figure was particularly low and slightly above the 50 mark, which fits with sluggish growth of 1.5%, so October’s stats will be particularly important in judging the pace of US growth: if it is excessively weak, the Fed could well change its strategy to keep rates on hold that it set out at its latest meeting.

The Markit survey global manufacturing sector figure will also be announced on Monday, and this indicator has pointed to a contraction in world manufacturing since May. Chinese external trade balance figures for October will also be released on November 8, and the decline in imports points to weaker Chinese demand, while stagnating exports reflect lackluster world trade, particularly as it is dictated by US trade policy.  

September’s German industrial orders will be issued on November 6, and the pace is very much in line with OECD corporate investment figures. The slowdown trend witnessed since the start of the year is worrying for future global economic performances.

Have a good week


The post is available in pdf format

  • *Posted on my French blog on Monday the 4th (here)

What to expect this week – 4 November – 10 November 2019

Highlights

> The ISM global index (5) will be the major data this week. It is consistent with the GDP growth momentum and was particularly weak in September compared to what was seen last summer. A weak number may trigger a change in what the Fed could do in a foreseeable future.

> The Services Markit indices will be released on November 5. But the Euro Area data on manufacturing (4) and on services (6) will be released a little later this month as November 1 is off in most continental Europe countries.
The world markit index for the manufacturng sector will be available on Monday
> The Monetary policy Committee of the Bank of England will meet on November 7. Nothing is expected on its monetary policy stance but extension of the Brexit may imply comments on the impact for the UK economy.
> In the US, we look systematically at details on the labor market. The global employment index of the ISM survey and the JOLTS survey will bring these information. The ISM global index on the labor market was below the 50 threshold in September and maybe a source of concern in case a continuous weakness.

> The Chinese external trade (8) will provide new information on the impact of the trade war on the Chinese economy.


> In Germany, there is a string of data with the industrial orders (6) the industrial production index (7) and the trade balance (8). All of them will highlight the impact of the negative environment on the German short term momentum. Will they increase the risk of a long recession ?
> Japanese households’ expenditures in September at the eve of a VAT rate hike (October). In March 2014 they spend a lot just before the higher VAT rate in April 2014. Have we had the same behavior ?
> General elections in Spain (10) – The probability of a strong majority is low

Eurozone growth painfully above 1%

GDP growth in the Euro zone is 1.2% (annualized rate) since the last quarter of 2017.
The figure of 0.2% (0.75% annualized rate) for the third quarter of 2019 does not change this trend. The carry over for 2019 at the end of the third quarter is 1.1% and growth over the year will be around 1.2% at best.
 After the catch-up in 2017, the economy of the Euro zone no longer has the capacity to accelerate. What does one do with the German budget surplus?Can we use it and put in place a more proactive fiscal policy in order to lock in a higher growth trajectory? See here in French

The Fed lowers its benchmark rate but stop there

The Fed lowers its benchmark rate to 1.5-1.75%. It says it wants to take a break. It downplayed expectations of another cut this year. The three drops this year are consistent with the September dots’ graph. Now the real rate of the fed is negative while the unemployment rate is at 3.5%. Always a very strange configuration.

We are waiting for the press conference to find out what Powell will say about the money market, which is not stabilizing. There is a real concern.

On this latter point, the message from Powell was clear. Stay away, it is not your business. It’s a bit scary, isn’t it ?

France – Robust but unenthusiastic growth

GDP growth in France was 1% in Q3 versus 1.1% in the first quarter and 1.4% in the second (annual rate). The carry over for 2019 at then end of the third quarter is 1.2%. If growth is again at 1.2% in the last quarter then GDP will have grown by 1.3% on average over the year after 1.7% last year. The chart shows a rapid rise in activity since the beginning of the recovery in 2013 with a trend at 1.45%. We also note the particular character of the year 2017 during which the expansion had an exceptional character (2.4%). Since the last quarter of 2017, the annualized average growth is only 1.25%. It is this figure that is probably closest to the capacity of the French economy.

Domestic demand is at the heart of this expansion, while foreign trade contributes negatively. A sharp rise in imports was observed while exports continue to grow. The rise in imports comes after a negative figure in Q2. There is a catch-up effect.
The rise in consumption has been stable on average since the beginning of the year at around 1.2%. It was at 1.3% for Q3 to compare with 1.5% in Q1 and 0.9% in Q2. Investment rose 3.8% after 2.1% in Q1 and 5.1% in Q2. These two components are at the heart of French growth. Note the continued growth of business investment despite a mediocre international environment. This may result from the temporary improvement of margins (double CICE effect and lower expenses in 2019) and a proactive economic policy in 2020 to support domestic demand. It is most encouraging. The slowdown in housing investment is worrisome but in line with what is happening in the private real estate market. The market is less dynamic with housing starts declining.

This internal dynamic reflects the economic policy that supports domestic demand to limit risk on growth. The increase in purchasing power resulting from the various bonus and the drop in the housing tax and the increase in employment, that will be seen again in the third quarter (November 8), are as much support for this internal demand. This promotes business investment.
The dynamics of the economy is not excessive. There is no strong upside on growth however the risk of rupture is limited. This is essential in a risky international context