Growth resumes in the Eurozone. For the EA, it is 0.4% and for Spain 0.7%. Even Italy is recovering and returning to positive territory. France disappoints. Despite strong measures taken on purchasing power, political uncertainty penalizes activity. It could last
French GDP growth decelerated slightly in the first quarter of 2019 even though the rounded figure stands at 0.3% (non-annualized) as in the previous two quarters. Despite the stimulus measures announced at the end of 2018, growth has not been boosted by the increase in households purchasing power.
Achieving the government target at 1.4% for 2019 on average would require growth of 0.43% in each of the remaining three quarters. It’s ambitious.
The annual change in activity is 1.1% in the first quarter, well below the trend observed since the 2013 recovery at 1.4%.
After the acceleration of 2017, resulting from the very buoyant global environment, the growth of the French economy can not deviate from the figure of its potential growth estimated generally between 1.2 and 1.3%.
For the moment, the measures implemented by the government are not able to go beyond this and this is worrying in a context where the sharp rise in the price of gasoline is a threat to the purchasing power that would penalize consumers’ demand.
Contributions to quarterly GDP growth are easy to remember. Domestic demand contributed 0.3%, inventories increased GDP by 0.3%, while net exports slowed growth with a contribution of -0.3%.
The important point is the slight acceleration of household consumption whose contribution goes from 0 in Q4 2018 to 0.2% in the first quarter. This is barely above the average observed since the recovery (0.15%) while government measures explicitly targeted consumption.
Government spending is growing at a slower pace, and this is the same for investment, whose contribution is decreasing marginally, notably because of the contraction of household investment. On the corporate side, the investment is a little stronger than in the last quarter of 2018 and that’s good news. However, this remains very limited (see the graph in appendix). This is insufficient to instil a solid dynamic into the cycle of the French economy.
The bad surprise comes from foreign trade whose pace is less robust than the monthly figures suggested until February. The contribution is frankly negative even if the contribution of imports is less negative than in Q4 2018. Exports stagnate and penalize growth. The French economy is also penalized by the world trade slowdown.
The accumulation of stocks has driven growth upward. Its pace in the second quarter will depend on the dynamics of demand. If this strengthens stocks will continue to fill. On the other hand, if the demand is lower, because the price of gasoline increases a little too fast, then companies could reduce these stocks which would penalize the profile of the activity.
The French GDP for the first quarter of 2019 will be published Tuesday morning at 0730. After a figure of 0.3% (non annualized figures according to the French tradition) over the last three months of 2018, the consensus is at 0.3%.
My expectation is that 0.3% would rather be the bottom of a range between 0.3 and 0.5%.
During the first three months of the year, there was a clear improvement in industrial production (+ 1.2% carryover for Q1 at the end of February against -0.4% in the last quarter of 2018). There is also a recovery in the pace of the business climate survey. In the last quarter of 2018, this index fell by 2.1 points compared to the previous quarter, whereas it stabilized over the first three months of the year.
It should also be noted that household consumption is slightly positive when it contracted in the last quarter of 2018. Finally, foreign trade could have a neutral impact, with exports (in value) growing a little faster than imports but Given the deficit, the contribution will be close to neutrality.
The big unknown is about business investment. Capital goods orders are shrinking rapidly, suggesting a lower capital expenditure despite the stabilization of business surveys.
Looking at the industrial production and surveys, GDP is expected to pick up slightly in Q1 at 0.4%. If business investment is less dynamic than expected then it will converge to 0.3%. If all goes well (the services sector momentum is improving in the INSEE survey, if the investment is more robust than expected and consumption accelerates in March) then the figure of 0.5% could be reached.
The UK GDP growth was at +0.4% during the second quarter (1.5% at annual rate). The carry over growth for 2018 at the end of the second quarter is 1%.
I have updated my graph on the deviation from the pre-referendum trend. There is no catch up while Eurozone countries are still above the trend. The impoverishment of the United Kingdom after the referendum continues. Not sure it was a good idea for the Bank o England to increase its main rate this month. The increased uncertainty on the Brexit negotiation will not allow a rapid reversal as uncertainty is the main enemy of long term investments, those which improve productivity.
This simple graph from the Wall Street Journal is just a measure of the constraints that have been imposed to Greece since the beginning of their adjustment. The US depression is just small potatoes compared to Greece.
How many years will be needed for the Greek people to come back to their pre-crisis level? At a 2% growth rate per year it would take about 15 years. In other words, the time for adjustment is around 25 years. This is a generation. Continue reading
Strong growth during the second quarter
GDP growth was marginally stronger during the second quarter in the Euro Area. It was at 0.56% (2.26% at annual rate) after 0.51% (2.04% AR) during the first three months of this year. The growth profile has been slightly modified with this publication. Formerly, GDP growth for the first quarter was at 0.58%.
Carry over growth for 2017 at the end of the second quarter is 1.7%, close to 2016 average growth. We see on the graph that during the last three quarters growth is stable and close to 2% (at annual rate).
When we look at corporates’ surveys (see below), we can infer that GDP growth could be close to 0.5% (2% at annual rate) during the last two quarters of 2017. In that case the average growth for 2017 could be at 2.1%. Continue reading
The first quarter growth was weak in the USA. The first estimate was a mere 0.2% at annual rate. The question now is about a possible rebound in Q2. Many observers have calculated that usually, in the recent past, the first quarter had a low growth number but was followed by a rapid rebound that corrects the GDP trajectory. Last year there was also a weak period during the first three months due to climate hazard. But the second and third quarters have shown a strong rebound in economic activity.
Last week, we have had April figures for retail sales and industrial production. The temptation is to compare the current momentum to 2014.
The graph below presents the 3 month change for the two indicators. I have drawn an ellipse on the two April episodes, in 2014 and 2015. We see that profiles do not look the same. There was a strong acceleration in 2014, not in 2015 during which industrial production has collapsed. This means that the probability of a recovery is low if 2014 is taken as a model.
Moreover, last year during the climate hazard, inventories were dramatically reduced, having a strong negative contribution to the first quarter GDP growth. In the second quarter, they were up, contributing to 1/3 of the strong 4.6% growth.
This year, inventories were up in the first GDP estimate. As demand is weak, an inventory building if it exists will be mild. It will be another source of GDP weakness for the second quarter.
In its latest forecast, the Fed of Atlanta has reduced its GDP 2nd quarter estimate to only 0.7% at annual rate. If it is the case, for the whole 2015, GDP growth could be close to 2%.
The question then, is to know, if this new environment will reduce, or not, incentives for the Fed to lift-off its rates? Janet Yellen has mentioned that the dollar has recently hurt exports momentum and US companies’ results have been constrained by the strength of the greenback.
Higher Fed’s interest rates could push the dollar higher with a risk on the US growth momentum.
To avoid a supplementary weakness of the US economy, it could be better to postpone the lift-off. We know that almost all voting members support such a move but current economic conditions do not.