What to expect next week ? (September 23 – September 29, 2019)


> Corporate surveys will highlight the business cycle foreseeable future. The IFO will be released on Tuesday 24 as will be the French Climat des Affaires. The French momentum is currently higher than in Germany as this latter is more exposed to the international backdrop. The Italian survey on corporate confidence will be out on September the 27th and may show the impact of a pro-European government on corporate confidence.

> Markit surveys, flash estimates, will be released on Monday the 23rd for the Euro Area, France, Germany and the US. The Japanese release will be done on September the 24th. These surveys are important but I will carefully look at the New Export Order indices in the Euro Area, US and Japan. Its average is clearly consistent with the world trade profile. In August it was as low as 46.6 giving a signal of continuous contraction in trade. September date will be important.

> Consumer confidence in the US (24 for the conference board and 27 for the Michigan), in France (25), Germany(26) and Italy (27). The US conference board will give us relevant signals on the US labor market dynamics. France index will remain above its average, way above the level it has a year ago when the yellow vests demonstrations started.

> Consumption expenditures in the US (27) and Fed’s preferred measure for inflation for August will be released on August the 27th. Consumers’ behavior is the strongest support of the current US growth momentum. Nevertheless it can be very volatile. We expect that it will be strong in August, consistently with retail sales. No strong expectations on inflation. The July core inflation rate is 1.6%.

> Inflation for September in France and Spain.
> New Home sales in August in the US. The real estate market has been stronger recently. A confirmation is expected as interest rates were low in August.

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NextWeek-September 23- September 29-2019

The shock in the manufacturing sector in Germany: IFO vs Markit

The modest rebound in the IFO index in March is sometimes interpreted as the counterpoint to the drop of the Markit index released last Friday.
There is indeed an opposition in March between the pace of the two indicators. One goes up again while the other is down.

However, what shocked in the Markit survey is the sharp downturn in the manufacturing sector, while the services sector was doing quite well. The manufacturing index was 44.7 against 47.6 in February. It contracts for the third month in a row. In contrast, the composite services indicator (calculated as the non-manufacturing ISM) is stable in March at 53.7 as in February.
The culprit is the manufacturing index. Yet when comparing the manufacturing index of Markit and that of the IFO we have exactly the same profile.

The peak of the two indices is almost the same and the break observed since the beginning of 2018 is similar.
The shock on the German economy reflects the rapid slowdown in the world trade momentum. The impact on the German economy is through the manufacturing sector whether measured by IFO or Markit.
The pace of service between the two measures is not the same and this is what differentiates synthetic indicators from the two surveys. But services are more reflective of the domestic market than the sensitivity of the German economy to world trade via the manufacturing sector.
The external shock is strong and brutal in Germany and it has first to be stabilized before the beginning of a recovery. It will take time and this justifies the pessimistic forecasts for Germany.

Germany and France on a slower momentum

According to companies’ survey in Germany and in France the economic activity was marginally down in August. German’s companies were a little more pessimistic for the 6 month period to come.
Even if levels are different we perceive in the following graph that there is a kind of stability in economic activity during the last twelve months. This synchronization of the business cycle suggest that France and Germany cannot really expect a stronger growth momentum in the short run. In other words, it seems that German and French economic activity are not able to accelerate from their current level. It’s not worrisome for Germany as its unemployment rate is low but it is problematic for France as its unemployment rate is just below 10%. As there is no impulse from outside as world trade trend is flat, it means that the impulse must come from inside. The ECB has done the job so we must expect a more proactive fiscal policy in order to jump on a higher trajectory. Continue reading

Daily Column – IFO Rebound in November: is it sufficient?

Every morning I record a podcast in French (see here) on a specific topic. The text below is the translation of this morning podcast.

After the rebound of the ZEW index, the IFO synthetic index was up in November. Is it sufficient to sweep away all the uncertainties on the German short-term economic prospects? Certainly not
After 6 months of free fall, the two indices, ZEW and IFO, have a rebound and this one is not spectacular. For the IFO it just erases the drop seen in October. For the ZEW it has not this magnitude. Figures are still low in November Continue reading

IFO in Germany – Positive Signals on Economic Activity in Q3

The IFO index for the month of August stood at 107.5. It is its highest level since April 2012 (in February 2013 the index was at 107.4).
We see in the first chart that this rise of the German index is also found in the ZEW and PMI / Markit survey. The first two are well above their long-term average (0 on the chart), while the index of the PMI survey is just about it.
In other words, the dynamics of German business is robust. Continue reading

Germany – Update after the IFO survey for April

The IFO index was lower in April. Its level was 104.4 versus 106.7 in March and a local peak at 107.4 in February. April index is below the first quarter average was 106.1 but above the IFO historical average (100.9). There is no downside break but the momentum is weaker with uncertainties for the near future.

On the first chart the IFO new trend is consistent with the ZEW and PMI lines. Both have recently changed direction; in March for the PMI and in April for the ZEW.
We can imagine that the improvement seen at the end of last year was consistent with what was seen in Asia. As it is mentioned on this blog there was a better outlook in China since last fall and a contagion to other Asian countries. The first April survey in China has shown a weaker picture and that’s probably one reason of the new trend seen in Germany.

On the second chart expectations for sectorial sector indices are shown. The recent improvement came from construction and manufacturing. For both sectors the trend has reversed. As I did not understand the construction upside profile I’m not surprise by its new trend. On manufacturing the issue is probably related to Asia as I mentioned it above.

Concerning the current situation index (third chart) figures are usually lower but the width of change is limited compared to expectations.

IFO index reflects a lower level of activity. We have to be attentive to the manufacturing sector as it is an important engine for German growth and as it gives informations on the global economy.
The risk of recession is still low but the ECB could reduce this risk at its next meeting by lowering interest rates and having a message saying that monetary policy will remain accommodative for a long time period in order to  change investors and companies’ expectations.

Continue reading