Look at this map. Who then can expect a trade deal between China and the USl The real question is about techno leadership? Huawei has a step ahead of the US.
The Chinese company already has deep discussions with many countries throughout the world. From Asia to Europe, Africa and Latin America the Chinese web is already impressive. On the other side, the US has forbidden purchases of infrastructures coming from Huawei. Australia, New Zélande, Japan and Taiwan follow the same rule. But it is a minority.
Recently, the US has generate pressure on Germany to forbid the German to buy Huawei products in the renewal of their mobile network. Germany has not changed its mind and has allowed Huawei to compete.
The balance of strength at the global level may change rapidly at the expense of the US.
How to expect an agreement that would validate the dominance of one over the other? From China to the US?
With the decline of -0.9% in December, the industrial production of the Euro zone fell by -5.3% over the last quarter (annualized rate). and -2.1% over one year. The slowdown in world trade is an explanation that the European slowdown has itself accentuated.
There is now a more complete picture of industrial activity in 2018. The US is doing well, Japan is still very volatile but Europe is falling back quickly, lacking an internal dynamic capable of offsetting external shocks. We always fall back on this eternal question of coordinated dynamics to get better. Dependence on impulses from the rest of the world is now too important and this is very worrying
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.
Post Hoc Ergo Propter Hoc
During the debate on the French Presidential elections, one contender has presented a graph showing a divergence between industrial production in Germany on one side and in France, in Spain and in Italy on the other. For Marine Le Pen the Eurozone was the explanation. There is a divergence but that’s not that simple.
Later in the debate, Le Pen said that the UK performance was exceptional compared to France. One reason was the capacity for the UK to manage its currency.
The temptation is strong to show a graph with industrial production in France and in the United Kingdom. I did it with indices rebased at 100 in 1999 (Eurozone inception) Profiles are the same. It means that the explanation related to the Euro is not relevant as UK doesn’t have the Euro as a currency.
The profile of the French economy cannot be read only by its membership of the Euro Area. This issue is more complex than a sentence in a debate. The economy is not as simplistic as some wants to present it.
After the deep drop in the ISM surveys for August (see here and here) we have had two new important data. Retail sales were down by -0.3% in August after +0.06% in July and core retail sales were down -0.1% in July AND in August. Therefore carry over growth for Q3 at the end of August was 1.8%% at annual rate (after 6% in Q2) for retail sales and 0.7% for core sales after in Q2. Q2 data were exceptional and not the beginning of a strong trend.
The risk is a low contribution of households’ consumption to GDP quarterly growth. Households’ expenditures were a strong support for GDP in the second quarter. This will probably not be the case for Q3. This means a probable downgrade of growth for 2016. We were at 1.4% for the whole year, it will probably be lower.
After a rebound in July (+0.6%), the industrial production index was down in August (-0.5%). For the manufacturing index data were -0.4% and +0.4% for August and July. Therefore carry over growth for Q3 at the end of August is a modest +2.3% (at annual rate) for the industrial index (after -0.6% in Q2) and for the manufacturing index data were +0.7% and -1% respectively. The momentum is still low. The YoY comparison shows that the industrial index is down by -0.7% and the manufacturing index is up by just 0.1%.
After the ISM, employment it is now retail sales that follow a weak trend while the industrial production index is neutral. Where is the risk of an overheating economy mentioned recently by Eric Rosengren from the Boston Fed. It was a cool summer in the US and the Fed has absolutely no reason to change its monetary policy at its next week meeting
Rebound of the UK consumer confidence index in August
After the referendum on Brexit, June the 23rd, households were worried by the consequences of the “Leave” option. They thought that the impact would rapidly be negative. The consumer confidence index dropped deeply in July. It was driven by the uncertainty related to the 12 month outlook for the economy.