The pace of capital goods orders in Germany in March suggests a further slowdown in investment in OECD countries over the coming months. Orders are down 5.9% year-on-year and this indicator is closely correlated with the investment profile of OECD countries.
This slowdown in orders is global. The rebound in the Euro zone is limited since over a year the decline in orders is still -6.5%. The rest of the world does not look encouraging either.
This is why I have doubts on the investment profile published by INSEE yesterday for the manufacturing sector for France. A 11% growth is expected for 2019 after 0% in 2018. This seems excessive since the survey shows a rapid slowdown in the second half. This means that the first semester has to be very strong. This is not necessarily consistent with what we see in the pace of investment of non-financial companies in the first quarter. The survey is probably a bit too optimistic. Capital goods orders continue to contract in April 2019. I do not imagine strong investments in France while the rest of the world is rather in an investment slowdown.
Concerns and uncertainties on
world economic activity having been gathering pace since the fall. The swift decline
in world trade reflects this change in pace, moving into the red with a
contraction of 0.4% in January vs. yoy growth of 4% in September 2018. This turnaround has triggered
concern from the OECD and the ECB, prompting them to slice back growth
projections for the euro area in particular.
The very heart of this economic
question is whether this shock is permanent and persistent, and in this respect,
there are two interrelated questions worth noting, as well as another third
The first point is the political
explanation for this downturn. Trade tariffs applied by the White House have
shifted the balance of trade between the US and China, leading to a swift slowdown
in trade in Asia since the start of the fall and acting as the main
contributing factor behind the decline in world trade as a whole. By targeting
China directly, Donald Trump is actually damaging the entire region.
The other aspect is the
uncertainty triggered by the White House’s political choices, as doubts on
trade following border tariffs are further heightened by the threat of fresh
trade moves. A case in point is the German automotive sector, which could be
hampered by a border tax of 25%, as the US threatens to impose tariffs on $11bn
in European exports to the US in retaliation for European subsidies to Airbus. The
WTO will have the final say, but there is also a further threat as Boeing is
now struggling with recent problems on its 737 Max.
Growth in China slowed again in 2018, with an average of 6.6% across the year vs. 6.9% in 2017. This remains a respectable figure, but it is the lowest since 1989 and 1990 as shown in the chart opposite. The 10-year average is also at a low, at around 8%. The 10% that had previously been typical of the Chinese economy is now a thing of the past, and expectations of a shift back to this trend are unrealistic. The Chinese economy is changing, setting the stage for a slower pace of growth.
A weighty challenge for the world as a whole Slowing Chinese growth often sets off the warning bells on world growth as a whole. Having hinged on developed countries during the period after the Second World War, growth is now dependent on the situation in China, which has displayed exceptional expansion since the start of the 1990s, creating strong and long-lasting impetus for the world overall.
The world growth driver is now China, rather than developed markets, and this shift is particularly vital as potential growth in developed countries has been on the wane since 2008. Right across the globe, from the US to France, growth that can be sustained in the long term while not generating permanent imbalances is weaker than before the 2007 crisis, and none of these countries can drive strong and self-sustaining growth from within their borders. Meanwhile, China managed to fuel momentum, taking over the role of developed economies – particularly the US – and benefiting the entire world economy.
So China managed to set the stage
for stronger growth the world over on a long-term basis, either by sparking
fresh competition on the Western markets, developing relationships with other
emerging countries (Asia, Africa, Latam) or attracting capital to take
advantage of Chinese growth, even if the price to pay for this was the transfer
According to IMF data (in current
dollars terms), Chinese GDP has gone from less than 2% of world GDP in 1991 to 6%
ahead of the 2007 crisis and then 16% in 2018, reflecting an astounding
acceleration and putting it on a par with the euro area.
Chinese GDP as measured in
purchasing power parity – a more coherent price and exchange rate system than
the dollar-denominated assessment – has been higher than the US figure since 2014
and above the euro area figure since 2011.
More generally speaking, an
increase in the weighting of China was achieved primarily at the expense of
Europe and Japan, while the US maintained its strong representation. This also
explains why the tension surrounding technological leadership is a Chinese-US
matter and excludes Europe, which was not sufficiently involved in supporting
China’s swift development.
A final point worth keeping in
mind is that Chinese imports equated to close to 80% of US imports in 2017. A
domestic Chinese shock affecting its imports would have a similar effect to a
shock on US domestic demand and hence on its imports, and the worldwide impact
of a shock on Chinese growth would be closer than many would expect to the
effects of a shock on US growth.
French economic growth is set to step up a pace in 2017 and 2018. It will benefit from a more buoyant world context, which has been visible in the surge in world trade over recent months. It will also be driven by activity in the euro area, which is enjoying a situation that we have not seen for some time. Business trends are picking up across all countries in the zone, even Italy, and business leaders are now much more optimistic than they were a few months ago.
The situation in the Eurozone is also characterized by fiscal policy that has become neutral, and monetary policy that is set to remain accommodative for a while to come. This means that for such times as inflation stays well below the ECB’s 2% target, the central bank will not change its monetary approach. To add to this, oil prices are not expected to rise sharply, so long-term rates will still stay very low. This overall context promotes risk-taking and encourages investment. Continue reading →
Published in French on October the 26th – Data expected this week but already published are briefly discussed.
8 points to keep in mind this week to highlight the macroeconomic momentum
1 – The improvement of the French economy is the real good news The business climate index, published by INSEE the French Statistical Institute, is above its historical average for the first time since August 2011.
It shows how deep and persistent was the negative shock that has hit the French economy since this period. Looking at the different sectors, building construction is the only one being still on the weak side. Services, Industry and retail trade contribute positively to growth. For the French economy we also notice in the INSEE quarterly survey that expected demand is improving rapidly. Continue reading →
Ten macroeconomic points to keep in mind this week
1 – The IMF has revised on the downside its forecast. In 2015 the world GDP will grow by 3.1% after 3.4% in 2014. Expectations for 2016 are marginally higher at 3.6%.
The main reason is in emerging countries which suffer with low commodity prices and the persistent weaker dynamics seen in China. The other point of concern is associated with higher Fed’s rates in the US. We feel a worried environment at this meeting
2 – The signature of the Trans-Pacific Partnership (or TPP) between the USA and 11 Asian partners (without China) is important. It is supposed to boost trade between all these members but we don’t know exactly what will happen in the balance of strength in this new framework. The arbitrage in case of conflict will be done by the World Trade Organization but we know that the role of states and companies will be different. This could be directly seen on the labor market conditions. As negotiations have been secret we need more details to clearly see the global picture and we will see with the experience how this TPP will work. Continue reading →