Negative surprises were in abundance in industry in February. Contrary to expectations, industrial production weakened further in December due to a sharp decline in construction activity. The only hopeful sign was the strong rebound in the car industry (+7%). The forward-looking indicators also surprised on the downside.
In recent years, Germany has posted substantial current account surpluses, well above the level justified by economic fundamentals. This can be attributed to a substantial increase in savings of the government and the corporate sector. Many observers consider Germany’s current account surplus as a threat to the eurozone economy and urge the German authorities to reduce it by boosting wages and investing in infrastructure. These demands have largely been ignored. Supported by model simulations, the German authorities argue that these measures would be detrimental to the German economy, while having hardly any effect on the other eurozone countries. They call for more structural reforms in the European Union, such as a further opening of the services sector.
The first year in office of the new president Joao Lourenço’s reveals a rather positive shift in economic policies, given his determination to clean up politics and the scope of the economic reforms engaged so far. The abandon of the currency peg has eased some pressures on the fx market though they still remain important. The financing package recently signed with the IMF will help to implement structural reforms aimed at diversifying the economy by fostering the development of the private sector. Nevertheless, the overall near-term economic outlook remains embedded in international oil price developments due to the lack of economic diversification. Additionally, the still ailing banking system keeps on straining the private sector
Considering its considerable weight in world GDP, slower growth in China causes spillover effects. Over the past 12 months, countries which are more exposed to China in terms of exports have seen a bigger drop in their new export order assessment. In Germany there is a close correlation between the Chinese purchasing managers index and the assessment of exports in the PMI. This shows that Germany and, by extension, Europe as a whole should hope that recent Chinese growth support measures will be successful.
In the United States, positive cyclical surprises have become rare: employment figures and the ISM purchasing managers’ index were the only statistics that surpassed expectations in January. Yet these are solid indicators. Moreover, although industrial output and retail sales were disappointing, they were probably caused by poor weather conditions (extreme cold wave) or temporary factors (government shutdown). For the moment, the US economy still seems to be poised for a smooth landing.
Since early 2018, based on the purchasing manager indices, a large number of countries have witnessed a decline in the assessment of new export orders which was bigger than the decline of the general climate in manufacturing. This suggests a dominance of foreign demand shocks, rather than domestic shocks, in explaining slower overall growth. The drop in new export orders echoes the significant slowdown in world trade growth. This is probably related to slower Chinese growth and, in many countries, slower growth in capital expenditures, which have a higher import content than consumption. Trade-related uncertainty may also play a role.
During the last quarter of 2018, the annual growth of loans to private non-financial sector in the euro area stabilized at around 3.3%. However, survey data have showed a lower increase in the net demand of both households and enterprises since the beginning of 2018. Furthermore, and unlike in 2018, banks no longer plan to ease their conditions in 2019 Q1. In addition to the economic slowdown, these factors could weigh on the developments of loans outstanding in the euro area during the next quarters
Morocco’s goods exports increased by more than 10% for a second year in a row in 2018, thanks to the good dynamics of phosphates exports and, above all, thanks to the rapid growth in the automotive industry. Since the launch of Renault’s factory in Tangier in 2012, exports of cars have doubled. They are now the largest source of exports and outlook is promising since several projects are in the pipe. The move to higher-value added export products improves the resiliency of the Moroccan economy to external shocks. However, spill-over effects remain limited notably due to a shortage of highly skilled labour force. Expected at 3% in 2019, the economic growth will be insufficient to reduce unemployment, especially for young people living in urban areas.
The European Commission now expects 1.3% growth for the eurozone this year, down from 1.9% in its previous forecast. This downward adjustment doesn’t come as a surprise, considering the declining trend of several survey indicators. The recent performance of these indicators in tracking GDP growth is mixed, which makes the assessment of the current growth momentum challenging.
Most economic data remain low regarding their long-term average. Following three months of decline, the PMI services stabilized in January (51.2) and surprised on the upside. Economic growth in the Eurozone remained stable at 0.2% q/q in Q4 2018, reflecting divergent developments. In particular, Italy slipped into recession in late 2018 while French growth was resilient. Core inflation, still well below ECB’s medium-term inflation target, was above expectations.
The election of Mexico’s new president, Andres Manuel Lopez Obrador, raises numerous questions. Although the new president and his team enjoy strong popular support, investors are worried about the policies he is proposing for the next six years. Some of the proposals do not seem to be compatible with his promise to maintain fiscal discipline, central bank independence and economic pragmatism in general. Several existing reforms are being called into question, notably in the energy sector. Given Mexico’s strong economic fundamentals, these contradictions are unlikely to have much of a short-term impact
Although US growth remains strong, global headwinds, softer survey data and tighter financial conditions have put the FOMC in risk management mode. Policy remains data dependent, but a patient stance will be adopted before deciding on the next move in monetary policy. Inflation, which remains well under control, facilitates this wait-and-see attitude. Markets are now pricing in a policy easing in the course of 2020. More than anything else, this shows to which extent uncertainty has taken its toll on confidence.
According to the INSEE first estimate, French real GDP rose by 0.3% q/q in Q4 2018. This figure is not a strong one but this is still relatively good news as growth was slightly above expectations (surprising on the upside for the first time in 2018) and slightly above Eurozone growth (for the second quarter in a row).
Geared towards the wealthiest households, President Trump’s tax cuts have not exactly matched the America First agenda. A famous foreign car brand, which can be identified by the small statue on the front hood, has just announced record high US sales for the year 2018. And it is not the only winner. By fuelling demand at a time when the economy was already operating at its potential, American policy resulted in a widespread increase in imports and a huge trade deficit. It is now at a record high at almost USD 900 billion. Higher trade barriers did not really help, as the deficit widened primarily with China. *Read also Chart of the Week published on 10 October 2018
The recent “economists’ statement on carbon dividends” offers important policy prescriptions for the US to address global warming. It explicitly refers to the need for a border carbon adjustment system so as to maintain competitiveness versus countries that would not have introduced a carbon tax. The authors recommend that the carbon tax proceeds be equally distributed to US citizens. It could be envisaged to use these proceeds in a way which takes into account the distributional aspects of environmental taxes whilst promoting energy efficiency investments.
In China, real GDP growth slowed to 6.4% in Q4 2018 year-on-year from 6.5% in Q3. The slowdown in the industrial sector worsened in Q4 while growth in the services sector remains more dynamic. Regarding demand components, exports have weakened markedly in the two last months of 2018, mostly due to the impact of US tariff hikes on imports of Chinese goods. Growth in household consumption has continued to decelerate (especially in the car market).
Hungary’s Prime Minister Victor Orban, who intends to lead a eurosceptic, sovereigntist and anti-immigration front in European elections next May, can boast of a favourable macroeconomic situation. Economic growth continued to accelerate in 2018 thanks to a mix of expansionist economic policies, European structural funds and an upturn in domestic lending. GDP growth is estimated at an average of 4.5% in 2018, the highest level since 2004 and above its long-term potential. It is expected to slow in 2019. The “Orban model” is striking a fragile balance between interventionism and pro-business measures. A small open economy, Hungary is highly integrated in European and global supply chains and then is dependent on the global business cycle
Market reaction suggests that the parliamentary vote, with a wide majority, against the Brexit deal which had been negotiated with Europe, has reduced the likelihood of a no-deal Brexit. Whether this feeling of relief lasts will depend on how the discussions on possible outcomes evolve. The economic headwind which comes with this prolonged uncertainty, for the UK but also for the companies in the EU which trade with the UK, will not go away soon.
