What to expect next week ? (July 1 – July 7, 2019)

Highlights

  • The ISM index for the manufacturing sector (July 1) will be the main indicator in the coming week. The slowdown in the US business cycle may be confirmed in June. 
  • The US labor market is the other main indicator (July 7). Its dynamics has recently changed as it adjusts to the new business cycle shape.
  • The Markit indices for the manufacturing sector (July 1) and for the services sector (July 3) will show the risk of a global recession for the manufacturing sector. The hope for the Eurozone is a strong services sector index that will allow an extension of the growth momentum.
    The Tankan survey in Japan will be out on July 1.
  • Employment in Germany for June (July 1) and retail sales for May (July 3) will show the possibility of maintaining a robust domestic demand or if it is necessary to have a stronger economic policy to cushion the impact of world trade negative shock on the German economy.
  • Retail sales in the Euro Area (July 4) for May will be a good proxy on the strength of the internal demand for the Euro zone.

    The document is here NextWeek-July1-July7-2019

What to expect next week ?

What do I expect as being important next week: 7 points at least
Markit and ISM indices in the manufacturing sector (June 3)
German Industrial Orders for April (June 6)
US employment for May (June 7)
Euro Area inflation rate for May (June 4)
 ECB meeting (June 6)
Trade war (no specific date)
Inversion of the US yield curve
The document is available here What to expect Next Week June 3 – June 7 2019

The Euro zone slows sharply in March

The publication March’s Markit indices confirms the downward pressure on activity in the manufacturing sector. The leading indices published for the Euro zone, Germany and France, on March 22, have been revised downward. This is never a very good signal as to the strength of the activity. This revision was marginal in the Euro zone (from 47.6 to 47.5) and in France (49.8 to 49.7) but more marked in Germany from 44.7 to 44.1. This latter has not been so low since July 2012.
For the Euro zone, the index has not been as low since June 2013 but at the time the movement was bullish while here it reflects a deterioration of the activity.
For the other two major countries, Spain and Italy, there is a slight rebound in Spain from 49.9 in February to 50.9 in March, but the Italian situation continues to deteriorate, from 47.7 to 47.4.

A good explanation is the pace of international trade. Germany is frankly penalized by the contraction of trade due to an openness rate higher than 44% of GDP. Any shock on world trade has an immediate impact on it.
More generally, because of the intensive trade between countries of the zone, any external shock is amplified by a contagion effect and penalizes the activity of all. This had been a very positive uptrend in 2017 but is declining today.
Germany saw its export orders revised downwards compared to the March estimate (38.9 vs. 39.5 initially). For France, the figure is unchanged.

The proactive economic policy of the Eurozone can only be seen on monetary side with a very accommodative policy but it cannot go further in that direction to limit the impact and the spillover effect of the shock. Except for a sudden and unexpected reversal of world trade, the trend in the Euro zone is here to stay. It should be possible to support domestic demand for this through budgetary means. This is not the current mood at the European level even if France plays constrained by the social unrest

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.

The yellow vests and the French economic outlook

The French economy remains under pressure at the beginning of 2019. Business leaders do not want to commit to the long term because of the uncertainty that hangs over the immediate situation. Since November, there has been a clear drop in orders for capital goods. It may imply a sharp slowdown or even a decline in productive investment around the turn of the year.leading to a low trajectory. The protracted social unrest is beginning to weigh on employment, as shown by the rapid slowdown in hirings as measured by the French Social Security for the fourth quarter of 2018.
We can not spontaneously wait for relay from the European countries. The composite indicator calculated by Markit for the Euro zone is at its lowest since July 2013. The impetus will not come from there.
The difficulties of reducing social uncertainty will weigh on the profile of 2019 growth, which will probably have to be revised downwards. We must now think about a growth rate of around 1% for the whole year. The “Grand Débat” launched by the French President Emmanuel Macron to reduce the current social unrest and the preparation of the European elections next May, where new lists (yellow vests) appear, will maintain this deleterious climate. This will not help either employment or purchasing power. France goes around in circles.

France: the growth momentum is lower than expected

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.france-semester growth.png 

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