Recent data on the German industrial production show a rapid drop in the economic activity. The quarterly change was already at -5.5% in the third quarter (annual rate). At the end of November, the carryover for the last quarter of 2018 is at -7.8%. There is a strong consistency between the quarterly change in the industrial production index and the GDP as it is shown on the graph. During the third quarter of 2018 the GDP was down -0.8% and related to the strong decrease in the German production this winter, the GDP may again shift downward in the last quarter. Germany would then be in recession. The impact could be strong on the Euro Area’s momentum and leading to a downward revision of the EA growth forecast (the starting point for 2019 would be lower). The convergence to potential growth (1.6%) would then be quicker than expected. The ECB will not change its monetary policy before long.
ISM index dropped: a healthy adjustment. In the USA, the fall of the ISM may reflect a return to a more normal situation? For many months, this indicator for the manufacturing sector was well above the CFNAI index which is a measure of 85 indicators of the economic activity (prepared by the Chicago Fed). This situation, which has been a regular occurrence since 2004, always ends with a sharp and brutal adjustment of the ISM to the CFNAI. The adjustment always takes place in this direction. Finally, the overly optimistic expectations contained in the ISM index adjust to the “real economy” which does not present excessive optimism. This adjustment is rather healthy.
Thelatest outlook note from French national statistics body INSEE (full-length version in French, English summary available here) suggests that the French economy will not be affected on a sustainable basis by the recent wave of social unrest in the fourth quarter of the year. The pace of growth over the first half of 2019 fits with the trend witnessed since 2013, apart from 2017, which was an exceptional year.We can see this return to normal on the chart below, showing the half-on-half change in economic activity as reflected by GDP. The pace has returned close to pre-2017 stats and growth is near its potential rate. In these figures, average growth is set to come to 1.5% in 2018 and carry-over at the end of 1H 2019 at 1%.
We can see this return to normal on the chart below, showing the half-on-half change in economic activity as reflected by GDP. The pace has returned close to pre-2017 stats and growth is near its potential rate. In these figures, average growth is set to come to 1.5% in 2018 and carry-over at the end of 1H 2019 at 1%.
The French government is still expecting a robust recovery for the last three months of 2018 and for 2019. Companies’ surveys for October do not allow such optimism. The main point is the rapid slowdown in the manufacturing sector. It was the leading sector in 2017 and its dynamics was an important contributor to the strong expansion seen this year. It was a source of impetus for the rest of the economy. Its current lower momentum is a source of concern. The retail sales sector is weak reflecting question on purchasing power for every French consumer. My expectations is that the French economy is back to the trend seen before 2017. It means that the forecast for GDP growth is close to 1.4%. This is consistent with what these surveys say. No strong recovery is expected and the French economy will converge to its potential growth which is lower than 1.5%.
The following graph shows the transitory recovery of 2017.
The ISM index for the manufacturing sector is, in August, at its highest since May 2004. It was then at 61.3 versus 61.4 in May 2004.
The reading of this index is puzzling for different reasons
1 – Since 2011, the average growth in the US is 2.2% but the trend was 2.7% between 2000 and 2007. But the ISM index was, on average, higher since 2011 than before the crisis. Its average was 54.1 from January 2011 to August 2018 but only 52.1 from January 2000 to December 2007. A higher ISM index doesn’t not reflect a stronger growth momentum. We can see that also when looking at the manufacturing production index. On the same periods, the annual growth rate was 1.8% from 2000 to 2007 but 1.15% from 2011 to July 2018.
In other words, the index is higher than in the past while growth is lower.
2 – There is a robust index calculated by the Federal Reserve of Chicago. The CFNAI (Chicago Fed National Activity Index) is the synthesis of 85 indicators (industrial production, employment, personal income,….). It’s reading is easy with an average at zero and a standard deviation of one.
The CFNAI is an accurate measure of the business cycle based on observed variables. Usually the two profiles are consistent as the graph shows.
Recent data show a persistent divergence between the two. The CFNAI is close to 0 while the ISM is at a high historical level. It is probably too high giving a wrong signal of the US growth strength.
Central bankers are progressively adopting a pro-cyclical behavior. The global growth momentum is now lower and central banks’ strategy now have a restrictive bias. In the US, Canada, UK and in many emerging markets, central banks’ rates are higher than at the beginning of the year. This has already changed expectations and it will continue with a downside risk on the economic activity. Continue reading →
These two graphs this morning in the “Daily Shot” of the Wall Street Journal show the lower world trade momentum. All the indicators converge to a lower dynamics. With US tariffs and retaliation the risk is an extended downward trend.
The virtuous loop seen in 2017 between trade and activity had an impulse coming from very accommodative monetary policies all around the world. There is no new central bankers’ impulse. It is even the contrary. Investors now expect that the next trend will be on the tighter side after the Fed.
Moreover the uncertainty associated with the lower global economic mood (from non cooperative strategies from the US, UK, Italy and retaliation measures) reduces the economic horizon and therefore the will to invest from corporate companies.
In other words, after a surge in 2017 coming from central banks’ impulse, there is a downside adjustment which is amplified by non cooperative behavior from many governments.
The main risk at the global level is a rapid growth slowdown. It could be sooner than later.