So far the US, China, Euro Area, France, Italy, Spain and the UK have reported the first cut of Q1 GDP growth and all are either the same as for Q4 or lower and some really quite low (France, Italy and the UK). The major economies still to report are likely to fit in with this pattern, but with India outpointing China as the fastest growing G20 economy with a run-rate of over 7% annualised.
China’s official numbers are solid as usual but it seems clear Mr Xi is trying to force radical structural changes by cutting back on industrial production and exports in favour of Consumption and Services with consequences that may be difficult to hide. The global pattern of the same or lower is also evident in Retail Sales and Industrial Production but both are still going strong in the US, China and France. Looking forward the PMI surveys are sending mixed signals: the JP Morgan Global Manufacturing PMI is being supported by the US and Germany but numbers are softening elsewhere and even in Germany the IFO Business Climate Index slipped lower for the fifth consecutive month.
Inflation remains moderate in most economies but in the US the core PCE index at 1.9% is approaching the Fed’s target of 2%, which should keep official rates moving higher. New Chair Jerome Powell is treading a fine line between downplaying Forward Guidance (so painstakingly delivered by Janet Yellen) and keeping everyone guessing (like the bad old days) and yesterday’s FOMC Statement was bland rather than Delphic. UK and Euro Area inflation may be boosted temporarily by the dollar’s current surge but it will take a lot of supply constraints to make an impact.
Overall, the Euro Areas latest stream of data is proving quite disappointing, with business surveys becoming more cautious and consumers not spending as much as confidence surveys suggest they might. Other shadows are US sanctions on German cars, popular resistance to Mr Macron’s reforms in France and political deadlock in Italy (some Italians would argue the latter is a good thing).
A new recession seems unlikely soon, however, and there is still time for Mrs Merkel to work up some enthusiasm for Mr Macron’s European reforms but the lady looks like following a different track….into retirement.
UK down but not out
There is little doubt that Brexit uncertainties are taking their toll on the UK economy, albeit in a slowdown rather than a slump. The very poor first Q1 GDP reading at +0.1% may well be revised higher but it seems all too consistent with subdued activity in both the Manufacturing and much larger Services Sectors.
More ominously, Retail Sales have been negative month on month in 3 out of the last four months to March and are now only 1.1% up on a year ago and Consumer Credit slumped in March.. It makes sense to look to save more and in London to delay upgrading one’s housing. This is what BoE Governor Carney was getting at when he suddenly changed tack on interest rate rises. Mr Carney may never live down the epithet of ‘unreliable boyfriend’ and he is certainly on Brexiteers’ black list for the BoE’s doom-laden forecasts immediately at the time of the referendum.
The Bank was not alone, however, as many forecasters assumed that businesses and consumers would react as if a hard Brexit was likely if not inevitable. Many international and domestic investors took fright on this basis and UK equities have remained undervalued ever since. I have to say I did not make that assumption and, accordingly, did not expect an immediate slump but rather the sort of ebbing tide currently underway. The BoE came to the same opinion in Q2 last year, albeit while remaining quite pessimistic. The Office for Budget Responsibility and ‘the consensus’ of economists took another 6 months to get there. What is quite revealing is that Economists for Brexit’s (i.e. in favour) bullish forecasts were right at first but have got more and more wrong since the end of 2016, which is what happens when political preferences dictate assumptions for economic forecasting rather basic errors.
I certainly consider my own political views wholly irrelevant to my analysis and might add that if anyone thinks I am being unduly pessimistic I would say that while we are not yet at Low Tide Mrs May (unlike Canute) may yet be able to move the economy from ebb to flood.
