Brexit has been behind thirty-seven resignations from the government responsible for managing the process, the latest being that of Prime Minister Theresa May herself. Having failed three times to get the Withdrawal Agreement through Parliament, she had little choice but to ask for an extension of the Article 50 period and then in the end to resign. The two candidates to take her place are the current Foreign Secretary, Jeremy Hunt, and his predecessor, Boris Johnson. Whilst Mr Johnson claims he can negotiate a changed deal and trigger Brexit from 31 October 2019 (the latest deadline), Mr Hunt plans to seek more time in order to renegotiate to allow for an orderly exit.
The robust GDP growth reported in 2018 is bound to slow this year. Sweden’s main trading partners have been hit by slowdowns, which is having a negative impact on export momentum. The slowdown in job creations will also strain household consumption. Yet it is the reduction in residential investment that is expected to curtail economic activity sharply in the months ahead. Although inflation should near the central bank’s 2% target by the end of the year, monetary policy will probably remain accommodating in the months ahead due to the uncertainty surrounding economic trends.
Denmark’s small open economy is bound to be hit by the economic slowdown affecting its main trading partners in the quarters ahead. Household consumption will remain the main growth engine thanks to job creations, wage growth and mild inflation. With consumer prices up only 0.7% y/y in May, inflation should remain mild. The Danish economy is also expected to benefit from an accommodating monetary policy in the quarters ahead, although this will depend on the policy stance adopted by the European Central Bank (ECB).
A high level of uncertainty can act as a drag on growth. Whether monetary easing will succeed in boosting growth will depend on the nature of uncertainty. Endogenous uncertainty follows from the normal development of the business cycle and rate cuts should succeed in reducing this uncertainty by boosting confidence of economic agents. Exogenous uncertainty is not driven by the business cycle but is triggered by other factors, such as, in the current environment, ongoing trade disputes. In this case, monetary policy effectiveness suffers and, despite rate cuts, the growth slowdown should continue until its root cause (exogenous uncertainty) is addressed.
High levels of uncertainty can have a profound impact on economic activity and financial markets. Our Pulse presents different metrics.
The slowdown since the start of last year is of a different nature in France, where it has manifested itself in manufacturing and services, compared to Germany, where it is very much concentrated in the manufacturing sector. Recent data show a somewhat improving picture in France whereas in Germany signs of stabilisation remain tentative. Under the hypothesis that concerns about trade relations (US-China, US-Europe) and Brexit will not disappear anytime soon, it seems difficult to expect a significant improvement in the near term. France could however surprise positively on the back of the measures to support the purchasing power of households.
Today’s Pulse for Germany suggests that the economy is doing even less well than the already diminishing expectations. But on closer inspection, it does not look half so bad.
The INSEE has just developed a new graphical tool, a tracer of business confidence, that helps position the French economy within its cycle and track economic trends. The recent past is characterized by changes in the economic situation of limited magnitude but quickly evolving: the cyclical upturn in 2017 was followed by a slowdown as soon as 2018 before going back into the expansion zone since the start of 2019 but timidly so (close to the frontier with the “slowdown” quadrant). What stands out from this chart is therefore more the hesitant, “caught in-between”, feature of the current economic situation in France rather than its favorable (and resilient) aspect
Despite a quite good 1st quarter 2019 in terms of economic growth (+0.4% q/q), the latest economic indicators sent mixed signals. Worries about the Purchasing Managers’ Index (PMI) in the manufacturing sector remain despite its stabilization, at a low level, in June (47.8). In the services sector, the PMI seems to be unaffected by the manufacturing woes.
Prospects for the economic growth in Mexico are deteriorating, owing to slower economic activity in the US, a tight fiscal stance and a persistent weakness in private investment. Real GDP growth for Q1 slowed to 1.2% y/y, from 1.7% y/y in Q4 2018. For the whole year, real GDP growth should reach 1.5% (from 2.0% in 2018) and risks are tilted to the downside. On the one hand, trade tensions with the US (following the US President’s announcement to impose tariffs on Mexican imports) will have a detrimental effect on business sentiment, even if the two countries have so far reached an agreement
According to Mario Draghi, a key question is how long the rest of the economy can remain insulated from the weakness in the manufacturing sector. Historically, the purchasing manager indices for manufacturing and services have been highly correlated, which can be partly attributed to the important role of services in the value chain of the manufacturing sector. The future resilience of the services sector in the eurozone will very much depend on what happens in Germany where the gap between the PMIs of the two sectors is abnormally high.
Our pulse indicators are sending a clear positive signal. Only the composite PMI surprised on the downside (51.2) and is below trend.
The ECB has eased policy slightly, by extending its forward guidance on policy rates. On the other hand, the conditions on TLTRO III are slightly less generous than those on the previous operation. Importantly, a discussion has started within the Governing Council on how to react should the environment worsen. Understandably, given the eurozone fundamentals, the ECB is not yet in a hurry to react to the prolonged uncertainties. This is a matter of keeping its powder dry
In the United States, the tide hasn’t turned yet for consumers: on the positive side, our barometer points to low unemployment, strong consumer confidence and dynamic household revenues and spending. Inflation is also mild, which boosts purchasing power. Even so, the horizon is not all rosy. Positioned in the forefront of the economic cycle, industrial leaders report a decline in output, which was one of the barometer’s weakest scores in April, and their expectations did not pick up in May.
In a recent survey of 469 CFOs of US companies, 84% expect that the US will have entered recession by the first quarter of 2021. This raises the concern of self-realising bearish expectations. A positive correlation between business confidence and company decisions could reflect (anticipations of) strong fundamentals. It could also be due to animal spirits. The role of the latter is confirmed by empirical research by cesifo using data for German companies. In the aggregate, optimistic animal spirits have a bigger impact than pessimistic animal spirits.
After strengthening in February, credit impulse in the eurozone was relatively stable in March 2019 for households, but weakened slightly for non-financial companies. Demand for credit is expected to rise in the second quarter of 2019 across all loan categories. Although banks are planning to loosen conditions for consumer loans, they intend to tighten them slightly for home loans and business loans.
Survey data released this week provide mixed signals with an improvement of consumer confidence, a weakening of the ifo business climate index in Germany and a stabilisation of the INSEE indicator in France. The IHS Markit PMIs show a stabilisation in recent months in manufacturing, at a subdued to low level, and in services, at a more satisfactory level. Several drivers of domestic demand remain supportive. Nevertheless, unease remains, mainly for reasons on which the eurozone has no control and where the risk of further tariff increases is top of the list.
Over the past few months, the news flow for the German economy has definitely improved. Manufacturing output strengthened for the second consecutive month, although remaining well below last year’s level. Also industrial orders rose slightly, although falling short of market expectations. Even though consumer confidence slightly weakened April, it remained at a very high level.
Most leading economic indicators are in line, or even above, expectations. Activity in the manufacturing sector remains subdued, the Purchasing Managers Index (PMI) reaching only 47.9 in April. This poor performance is partially offset by the resilience of the PMI Services Index which is below its long-term average but still well above the 50 threshold (52.8 in April).
According to Jerome Powell, the fundamentals supporting the US economy remain solid. First quarter growth has been robust but underlying concerns about the quality of growth have emerged. Growth has benefitted from a drop in imports and rising inventory levels while residential investment acted as a drag. In the coming months, imports should rebound and inventories should witness a scale back. The onus will fall on consumer spending and corporate investment to neutralise the effects of these anticipated headwinds on growth.
According to the first INSEE’s estimate, real GDP growth remained stable at 0.3% q/q in Q1 2019. This figure is in line with our expectations but it paints a mixed picture, an even more mixed one than during the two previous quarters.
The United Kingdom has had positive trade balances with the rest of the world since 1966 and the European Union (EU) since 2005. The financial services sector is a major contributor. As far back as the Office of National Statistics (1966) statistics of foreign trade in financial services show, the sector has always had a trade surplus. The same has been true for the EU since 1999, for which this surplus even increased fivefold until 2011 (GBP 21.5 bn). The decline observed between 2012 and 2014 was almost erased between 2015 and 2018 (GBP 20.4 bn). The UK financial services sector has a surplus vis-à-vis each of the major EU economies, starting with France, the EU market with the largest surplus in the EU since 2014 (GBP 4.5 bn in 2018)
Through economic consolidation measures implemented since 2016, Egypt has corrected its macroeconomic imbalances and regained the confidence of international investors. Foreign currency liquidity has returned to satisfying levels, the public account deficit is narrowing, although debt service is maintaining the fiscal deficit at a high level. Inflation is still relatively high but easing. Economic prospects are favourable. So far, the macroeconomic recovery has failed to trigger new momentum capable of accelerating growth and creating jobs. The weight of public sector and a large informal sector reduce the economy’s responsiveness to positive macroeconomic signals. Structural reforms are necessary to preserve the achievements of ongoing reforms.
The relationships between government debt, economic growth and interest rates are complex and varied. In general, a recession causes an increase in government debt and a decline in government borrowing costs. A prolonged period of monetary accommodation during a cyclical upswing can cause the average nominal interest rate on government debt to drop below the rate of nominal GDP growth. Depending on the level of the primary balance, such a situation can, under certain conditions, create leeway for fiscal expansion in order to support growth.
The first quarter turned out to be strong after all. The just released first estimate for first quarter GDP showed an annualised quarter over quarter increase of 3.2%, ahead of the consensus number of +2.3% and better than the previous quarter (+2.2%). Data released earlier this month had suggested that March looked good though not great.