A sigh of relief followed the publication of first quarter GDP data. However since, growth concerns have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from concerns over the extent of the slowdown and its consequences in terms of economic risks. It also emanates from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market
Although household consumption remained rather buoyant at springtime, foreign trade as well as investment may have weakened. In June, the business survey results were lacklustre, while the Federal Reserve opened the door to cutting interest rates. Already back on the campaign trail, President Trump is unlikely to soften his hard line on tariffs, although he will surely remain as unpredictable as ever. The economy is likely going to need some support.
With the export sector hard hit by US tariff measures and private consumption growth weakening, investment growth has slowed. Although domestic demand could pick up in the short term, bolstered by monetary easing and fiscal stimulus measures, export prospects depend on the outcome of trade talks between Beijing and Washington, which remains highly uncertain. The authorities are bound to use foreign exchange policy sparingly to avoid creating a source of financial instability. Moreover, the current account surplus has improved again in recent months.
Although Japan’s economic openness is relatively limited, the high concentration of Japanese exports to China, and the other Asian countries in general, creates a major external risk for the dynamics of Japanese growth. This situation is squeezing the manufacturing sector, but for the moment, its difficulties do not seem to have carried over to the other sectors of the economy. The VAT increase planned for October should encourage households to make some early purchases, while the high level of uncertainty is hampering corporate investment. In this environment, the Bank of Japan is expected to maintain a very accommodating monetary policy, although this is unlikely to trigger a sustainable upturn in price inflation.
The months pass but nothing seems to change. Growth in the manufacturing sector is struggling to accelerate in a persistently uncertain international environment, while buoyant domestic demand is boosting activity in services. The stronger-than-expected first quarter performance sends a more optimistic message than economic surveys. Faced with a downturn in inflation expectations and the downside risks to the Eurozone’s economic scenario, the European Central Bank (ECB) has been proactive again. It is prepared to ease monetary policy further and the new measures have been set up much earlier than expected. Yet faced with stubbornly mild inflation and only limited manoeuvring room, the ECB is bound to take a frugal approach.
As international trade slows, the economy is mainly supported by expansionary fiscal and monetary policies and real disposable income growth. After a mild contracted in Q2, the economy is expected to grow modestly in the second half of the year. In 2020, exports may strengthen again and growth could return to close to potential. Due to its deep integration in global value chains, Germany is relatively hard hit by the global trade slowdown. This integration has undoubtedly brought benefits by improving productivity and skill-intensity. However, it has also accentuated income inequality.
The signs of stabilisation seen at the beginning of the year have been followed by improvements in confidence surveys. The upturn in consumer confidence has been the most marked and the most encouraging of these. The rather more mixed nature of the economic data available tempers these positive signals somewhat, and leads us to forecast stable growth in Q2, at 0.3% q/q, making this the sixth quarter in a row to see growth at around this pace. This stability, which is remarkable in and of itself, is likely to continue over the coming quarters according to our forecasts. It is a good sign of the resistance of French growth to downward pressures. Under our scenario, this resistance demonstrates a degree of effectiveness in the measures taken to support consumers and businesses.
In Q1 2019, Italy came out of recession. The overall scenario remained mixed. The GDP annual growth rate was negative. Imports strongly declined and exports slightly increased, with a positive contribution of net exports. Both households and firms remained cautious, postponing consumption and investment. Cyclical indicators suggest a disappointing evolution in coming months, making more challenging the fulfilment of public finance objectives. The Italian Government approved an update of the 2019 Budget, with the public deficit around 2% of GDP, reaching an agreement with the European Commission and avoiding the disciplinary procedure.
Spanish growth is still robust, but that does not mean it is totally immune to the European slowdown. Although growth is expected to slow this year, it should have no trouble holding above an average annual rate of 2%. After winning April’s legislative elections, Pedro Sanchez is still seeking a majority that would enable him to head the executive branch and form a new government. Spain officially exited the European excessive deficit procedure recently. Although a budget has not been formally adopted for 2019, the authorities are aiming for a primary surplus.
GDP growth is slowing due to the strong deceleration in global trade. Nevertheless, the economy continued to operate close to its potential until 1Q 2019 thanks to the strength of domestic demand, underpinned by strong disposable income growth and an expansionary fiscal policy. As the government has lost its majority in the Senate, it needs the cooperation of the opposition parties for passing new legislation. However, a government crisis is not imminent. Even if GDP growth is expected to slow below its potential in the coming quarters, public finance metrics will continue to improve up to 2020.
Over the next quarters economic growth will remain stable. Rising labour market capacity constraints and a lower contribution by net international trade are weighing on the overall outlook. With also uncertainties in the international (trade war, Brexit) and national (government formation talks) context unlikely to dissolve anytime soon, our base case is one of below potential growth up until 2020.
The economic recovery continues. Growth is accelerating and for the moment it has reached the lower range of expectations. After four and a half years in power, Alexis Tsipras passes on the helm to Kyriakos Mitzotakis, leader of the centre-right New Democracy party, which has led in the polls since 2016. The new Prime Minister is unlikely to call into question the prescribed public finance trajectory as the country exits the European financing programme.
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).
