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422 matches for "consumers":
Consumers' spending in the Eurozone slowed in the second half of 2017, providing a favourable base for growth in H1 2018.
Consumers' demand for cars slowed in the Eurozone at the end of the second quarter. New car registrations in the euro area rose 3.0% year-over-year in June, slowing dramatically from a 10.3% rise in May.
On the face of it, the timing of the drop in the E.C.'s measure of consumers' confidence, to its lowest level since July 2016 in April, is peculiar.
Evidence of slowing growth in Brazil consumers' spending continues to mount.
October's retail sales figures confirm that consumers have adopted a more cautious mindset since the summer, when retail sales increased at a faster rate than incomes.
We became more confident last week in our call that GDP growth will hold up better than widely feared in the first half of 2019, following signs that consumers have maintained their happy-go-lucky mentality, despite the ongoing political crisis.
Whatever happened to consumers' sentiment in March, the level of University of Michigan's index will be very high, relative to its long-term average.
Mexican consumers started the third quarter strongly, supporting our relatively upbeat view for the economy in the near term. Private consumption represents about 70% of Mexico's GDP, one of the consumption shares in the EM world, so the strength of spending is hugely important.
January's retail sales figures, released today, look set to indicate that consumers are keeping the recovery going, amid deteriorating business sentiment and faltering external trade.
Whichever way you choose to slice the numbers, consumers' spending is growing much more slowly than is implied by an array of confidence surveys.
We fear that private spending in the EZ slowed in Q1, despite rocketing survey data. This fits our view that household consumption will slow in 2017 after sustained above-trend growth in the beginning of this business cycle.
Last week's consumption releases were the first data from the real economy in the second quarter. In Germany, retail sales jumped 1.7% month-to-month in April, equivalent to a 1.0% rise year-over-year, an impressive start to the quarter. But our first chart shows that this still points to a moderate slowdown in Q2, consistent with mean-reversion following rapid gains in Q4 and Q1.
Friday's economic data added to the evidence of a Q1 rebound in EZ consumption growth.
We think today's consumer sentiment survey in France will show that the headline index was unchanged at 94 in May. The survey's forward looking components have weakened modestly in recent months, due to declines in households' outlook for their financial situation and standard of living in the coming 12 months.
Oil prices remain sticky, poised to hover close to a four-year high for the rest of the year.
Yesterday's economic reports in the Eurozone will rekindle the debate on hard versus soft data. The final composite PMI rose to 56.7 in September, from 55.7 in August, in line with the first estimate.
Friday's economic data in Germany suggest that households had a slow start to the year.
The national accounts for the fourth quarter showed that the economy relied on households slashing their saving rate to a record low in order to spend more. Now, growth in consumer spending will have to fall back in line with real incomes, which will increasingly be impaired by rising inflation.
Yesterday's data in the French economy provided the final confirmation that growth remained sluggish in Q2, and showed that households had a slow start to the third quarter.
The PMI survey points to a slight loss of momentum in Eurozone growth towards the end of Q3. The composite index fell to 53.6 in September from 54.3 in August, trivially lower than the initial estimate of 53.9. This is not enough to move the needle on the survey's signal for Q3 GDP growth, though; our first chart shows it pointing to stable growth of 0.4% quarter-on-quarter.
The preliminary estimate of GDP showed that the economy finished 2016 on a strong note. Output increased by 0.6% quarter-on-quarter, the same rate as in the previous two quarters. The year-over-year growth rate of GDP in 2016 as a whole--2.0%--was low by pre-crisis standards, but it likely puts the U.K. at the top of the G7 growth leaderboard. We cannot tell how well the economy would have performed had the U.K. not voted to leave the EU in June, but clearly the threat of Brexit has not loomed large over the economy.
OPEC's decision at the weekend to turn the oil market into a free-for-all means that the rebound in headline inflation over the next few months will be less dramatic than we had been expecting. Falling retail gas prices look set to subtract 0.2% from the headline index in both November and December, and by a further 0.1% in January. These declines are much smaller than in the same three months a year ago, so the headline rate will still rise sharply, to about 1.3% by January from 0.2% in October, but it won't approach 2% until the end of next year or early 2017,
Recent consumer confidence numbers have been strong enough that we don't need to see any further increase. The expectations components of both the Michigan and Conference Board surveys are consistent with real spending growth of 21⁄2-to- 3%, which is about the best we can expect when real income growth, after tax, is trending at about 21⁄2%.
If we had known back in June 2014 that oil prices would drop to about $30, the collapse in capital spending in the oil sector would not have been a surprise. Spending on well-drilling, which accounts for about three quarters of oil capex, has dropped in line with the fall in prices, after a short lag, as our first chart shows. We think spending on equipment has tracked the fall in oil prices, too.
Sharp increases in retail sales over the last two months suggest that consumers are not overly concerned by the risk that the U.K. could leave the E.U. next week. Sales volumes rose 0.9% month-on-month in May, and April's surge was revised larger, to 1.9% from 1.3%.
The response of U.K. producers and consumers to lower oil prices could not have been more different to those on the other side of the Atlantic. Counter-intuitively, U.K. oil production has grown strongly over the last year, while investment hasn't collapsed to the same extent as in the U.S., yet. Meanwhile, U.K. households have thrown caution to the wind and already have spent the windfall from the previous drop in oil prices, unlike their more prudent--so far--U.S. counterparts. With the costs still to come but most of the benefits already enjoyed, lower oil prices will be neutral for 2016 U.K. GDP growth, at best.
August's retail sales figures, released today, look set to show that growth in consumers' spending has remained subpar in Q3, casting doubt over whether the MPC will conclude that the economy can cope with a rate hike this year.
We have argued consistently since oil prices first began to fall that U.S. consumers would spend most of their windfall, so real spending would accelerate even as nominal retail sales growth was dragged down by the drop in the price of gas and other imported goods. At the same time, we argued that capital spending in the oil business would collapse, and that exports would struggle in the face of the stronger dollar.
It would be a serious mistake to conclude from July's retail sales figures that consumers' spending will be immune to the fallout of the Brexit vote. Households have yet to endure the hiring freeze and pay squeeze indicated by surveys of employers, or the price surge signalled by sterling's sharp depreciation. The real test for consumers' spending lies ahead.
The Eurozone has come under the spotlight for its growing external surplus, but domestic households have been doing the heavy lifting for GDP growth in this business cycle. During the last four quarters, consumers' spending has boosted year-over-year GDP growth by an average of 1.0 percentage points, in contrast to a 0.4pp drag from net exports.
We have been telling an upbeat story about the EZ economy in recent Monitors, emphasizing solid services and consumers' spending data.
Consumers' spending in the Eurozone stalled at the start of Q4. Retail sales slid 1.1% month-to-month in October, pushing the year-over-year rate down to a four-year low of 0.4%, from an upwardly-revised 4.0% jump in September.
Taken at face value, the retail sales data in the euro area suggest that consumers' spending hit a brick wall at the end of 2018.
Eurozone consumers had a slow start to the second quarter. Retail sales increased a modest 0.1% month- to-month in April, but the March headline was revised up by 0.3 percentage points, and the year-over-year rate increased by 0.2pp to 1.7% due to base effects.
The 10.3% year-over-year decline in private new car registrations in April likely is not a sign that the trend in either vehic le sales or consumers' overall spending is taking a turn f or the worse.
Data yesterday showed that consumers in the euro area increased their spending in February, following recent weakness. Retail sales rose 0.7% month-to-month in February, reversing the cumulative 0.4% decline since November. The year-over-year rate was pushed higher to 1.8% from an upwardly revised 1.5% in January.
The rate of growth of third quarter consumers' spending was revised up by 0.3 percentage point to 3.3% in the national accounts released yesterday.
The second estimate of Q1 GDP confirmed that the recovery has lost momentum and revealed that growth would have ground to a halt without consumers. GDP growth likely will slow further in Q2, as Brexit risk undermines business investment.
Sterling's depreciation, which began over two years ago, has inflicted pain on consumers but fostered a negligible improvement in net trade.
The outlook for French consumers' spending improved this month, at the margin. The headline consumer sentiment index was unchanged at 98 in November, but most forward-looking indicators rose. Consumers' spending in was flat in Q2 and Q3, following a 1.1% jump in the first quarter.
French consumer sentiment dipped slightly in June, but we see no major hit from ongoing labour market disputes. The headline index slipped to 97 in June, from 98 in May; this is a decent reading given the fourpoint jump last month. The headline was constrained by a big fall in consumers' "major purchasing intentions," but this partly was mean-reversion following a surge last month.
Consumers' spending in Mexico was relatively resilient at the end of Q1, but we think it will slow in the second quarter. Data released this week showed that retail sales rose a strong-looking 6.1% year-over-year in March, well above market expectations, and up from 3.6% in February.
The economic recovery would have lost more momentum last year had consumers not delved so deeply into their pockets. Real household spending increased by 0.7% and 0.8% quarter-on-quarter in Q3 and Q4 respectively, in contrast to investment and exports, which fell in both quarters.
Consumers' spending in Brazil slowed at the start of Q4, but we don't see this as the start of a downtrend.
Demand for new cars rebounded strongly last month, following the dip in October. Registrations in the EU27 rose 13.7% year-over-year in November, up from 2.9% in October, lifted mainly by buoyant growth in the periphery. New registrations surged 25.4% and 23.4% year-over-year in Spain and Italy respectively, while growth in the core was a more modest 10%. We also see few signs of the VW emissions scandal hitting the aggregate data. VW group sales have weakened, but were still up a respectable 4.1% year-over-year. This pushed the company's market share down marginally compared to last year. But sizzling growth rates for other manufacturers indicate that consumers are simply choosing different brands.
Today's huge wall of data will add significantly to our understanding of third quarter economic growth, with new information on consumers' spending, industrial activity, inflation and business sentiment. In light of the unexpected drop in the ISM surveys in August, we are very keen to see the Empire State and Philly Fed surveys for September.
Recent retail surveys have indicated that consumers are not suffering yet from Brexit blues. The BRC reported that year-over-year growth in total sales values picked up to 1.9% in July, from 0.2% in June. After adjusting for falling prices, this measure suggests that year-over-year growth in official retail sales volumes held steady at about 4% last month.
The sluggishness of consumers' spending and business investment in the first quarter means that hopes of a headline GDP print close to 2% rely in part on the noisier components of the economy, namely, inventories and foreign trade.
It's tempting to conclude from the recent decline in consumers' confidence that growth in real spending will continue to weaken over the coming quarters, from the already modest 1.8% year-over-year rate in Q3.
Mexico's economy lost some momentum in Q4, due mainly to weakness in industrial and agricultural activity, but this was partly offset by the strength of the services sector as consumers' spending again carried the economic recovery. Real GDP rose 0.6% quarter-on-quarter in Q4, after a 0.8% expansion in Q3, the tenth consecutive increase. Year-over-year growth dipped marginally to 2.5% from 2.6% in Q3, but the underlying trend remains stable. In 2015 as a whole the economy expanded by 2.5%, up from 2.3% in 2014.
Evidence of a modest upturn in Brazilian consumers' spending continues to mount. Retail sales rose 1.0% month-to-month in April, pushing the year-over-rate up to +1.9%, from an upwardly-revised -3.2% in March.
Brazil's consumer recession seems never-ending. Retail sales fell 0.8% month-to-month in October, pushing the headline year-over-year rate down to -8.2% in October, from -5.7% in September. Recent financial market volatility, credit restrictions and the ongoing deterioration of the labour market continue to hurt consumers.
Mexico's economic outlook has dimmed recently, a point driven home by sentiment data released last week. Still, we think GDP growth will slow only marginally in Q4, to about 11⁄2% year-over-year. Consumers' spending likely will remain strong in the near term, thanks mainly to rising remittances from the U.S., driven by fear of policy changes under the Trump administration.
EZ consumers' spending slowed at the start of Q3. Retail sales slipped 0.3% month-to-month in July, pushing the year-over-year rate down to 2.6% from an upwardly revised 3.3% in June.
Consumer sentiment data yesterday from the major economies were mixed, signalling that support to Eurozone GDP growth from surging German household consumption is waning. The key "business outlook" index--which correlates best with spending--plunged to a 30-month low in October, while the advance GfK sentiment index dipped to 9.4 in November from 9.6 in October. We see little signs in retail sales data of slowing momentum, and also think consumers' spending rebounded in Q3. But our first chart shows that the fall in the GfK index implies clear downside risks in coming quarters.
Dire warnings that the plunge in s tock prices would depress consumers' confidence and spending have not come to pass. It's too soon to draw a definitive conclusion--the S&P hit its low as recently as the 11th--but peoples' end-February brokerage statements are on track to look less horrific than the end-January numbers, provided the market doesn't swoon again over the next few days.
December's retail sales numbers are the most important of the year for retailers, but they don't necessarily tell us anything about the future prospects for consumers' spending or the broad economy. The December 2016 numbers, however, might be different, because they capture consumers' behavior in the first full month after the election.
Mexican consumers' spending improved toward the end of Q2. Retail sales jumped by 1.0% month-to-month in June, pushing the year-over-year rate up to 9.4%, from an already solid 8.6% in May. Still, private spending lost some momentum in the second quarter as a whole, rising by 2.5% quarter-on-quarter, after a 3.8% jump in Q1. A modest slowdown in consumers' spending had to come eventually, following surging growth rates in the initial phases of the recovery.
Eurozone consumers' spending jumped in Q2, but we are pretty certain that a slowdown in retail sales constrained growth in Q3.
A downbeat French INSEE consumer sentiment report yesterday continued the run of poor survey data this week. The headline index fell to 95 in February from 97 in January, indicating downside risk f or Q1 consumers' spending. But we remain optimistic that private consumption will rebound solidly, following a 0.4% quarter-on-quarter fall in Q4.
Household sentiment in Mexico continues to improve, consistent with tailwinds from low inflation, accommodative monetary policy, and the improving labor market. The consumers confidence index rose to 94.7 in June from 92.0 in May, with four of the five components improving, especially big-ticket purchasing expectations and expectations for the economy.
The robust July retail sales numbers, coupled with the substantial upward revisions to prior data, should finally put to bed the idea that consumers have chosen spontaneously to raise their saving rate, accelerating the pace of deleveraging seven years after the financial crash. People just don't behave like that unless interest rates are soaring and the economy is rolling over, and that's not happening.
All the evidence indicates that growth in Eurozone consumers' spending is slowing. We think data today will show that the advance GfK consumer sentiment index in Germany was unchanged at 9.5 in April, but the headline index does not correlate well with spending. The "business expectations" index is better, and while it likely will increase slightly, our first chart shows that it continues to signal a slowdown in consumers' spending growth.
Yesterday's labour market data showed that growth in households' income has slowed significantly in recent months. Firms are both hiring cautiously and restraining wage increases, due to heightened uncertainty about the economic outlook and rising raw material and non-wage labour costs. Consumers' spending, therefore, will support GDP growth to a far smaller extent this year than last.
Leading indicators for consumers' spending in France are sending conflicting signals. Survey data suggest that households are in a spendthrift mood. Data yesterday showed that the headline consumer sentiment index was unchanged in March at 100, the cycle high.
Data yesterday suggest Eurozone consumers' spending rebounded towards the end of Q4. Retail sales rose 0.3% month-to-month in December, pushing the year-over-year rate down to 1.4%, from a revised 1.6% in November. A +0.3 percentage point net revision to the month-to-month data added to the optimism, but was not enough to prevent a slowdown over the quarter as a whole.
Evidence of slowing growth in Eurozone consumers' spending continues to mount. Retail sales in the euro area fell 0.5% month-to-month in March, pushing the year-over-rate down to 2.1% from a revised 2.7% in February. The headline likely was depressed by the early Easter. March had one trading day less than February, which was not picked up the seasonals.
We're inclined to place little weight on July's E.C. Economic Sentiment Survey, which showed that consumers' confidence has picked up to its highest level since October 2016; see our first chart.
Yesterday's retail sales data in Brazil surprised to the downside. Consumers are still being squeezed by high interest rates and a deteriorating labour market. Retail sales declined 0.6% month-to-month in August, leaving the year-over-year rate little changed at -5.5%.
The retail sales data, released yesterday, underline the struggle that Japanese consumers are facing against rising inflation.
The rate of growth of Brazil consumers' spending is perhaps beginning to stabilize, though at a very low pace. Core retail sales volumes were flat in Q4 after a 2.7% contraction in Q3, and sentiment data suggest this improving trend should continue, at least in the very near term.
The big story in global macro over the past 18 months or so has been the gigantic transfer of income from oil producers to oil consumers. The final verdict on the net impact of this shift--worth nearly $2T at an annualized rate--is not yet clear, because the boost to consumption takes longer than the hit to oil firms ' capex, which began to collapse just a few months after prices began to fall sharply. But our first chart, which shows oil production by country as a share of oil consumption, plotted against the change in real year-over-year GDP growth between Q2 2014 and Q2 2015, tells a clear story.
Retail sales fell sharply in September, highlighting that consumers still are spending only cautiously amid high economic uncertainty and falling real wages.
Chief U.K. Economist Samuel Tombs on U.K. Price Increases
Chief U.K. Economist Samuel Tombs discussing U.K. Consumer Confidence
Chief Eurozone Economist Claus Vistesen comments on Eurozone Consumer Confidence
The consensus for retail sales volumes to rise by a mere 0.3% month-to-month in November, after falling by 0.4% in September and 0.5% in Oc tober, looks too downbeat.
Yesterday's PMI reports repeated the message of a firm cyclical Eurozone recovery, despite investors' angst over deflation and the underwhelming Q3 GDP data earlier this month. The composite index in the zone rose to a 54-month high of 54.4 in November from 53.9 in October, lifted by strong output and solid new business growth. Our first chart shows the rise in the PMI points to slight upside risks in Q4 to the four quarter trend in real GDP growth of 0.4% per quarter.
Yesterday's second estimate of Q3 GDP confirmed that the U.K. economy has underperformed this year.
No subject in the EZ economy is a source of more dispute than Germany's ballooning current account surplus. The Economist recently identified he German surplus as a problem for the world economy.
The monthly industrial production numbers are collected and released by the Fed, rather than the BEA, so today's December report will not be delayed by the government shutdown.
Broad-based inflation pressures in Brazil remain tame despite the sharp BRL depreciation this year, totalling about 7% in the last three months alone.
If you want to know what's going to happen to the real economy over, say, the next year, don't look to the stock market for reliable clues. The relationship between swings in stock prices over single quarters and GDP growth over the following year is nonexistent, as our next chart shows.
October's colossal 1.9% month-to-month jump in retail sales volumes greatly exceeded the 0.5% consensus and even our own top-of-the- range 1.0% forecast.
Media reports allege that the Chancellor's Budget pared back the fiscal squeeze planned for the next couple of years. The Director of the Office for Budget Responsibility, Robert Chote, even compared the Chancellor to Saint Augustine, who supposedly said "make me pure, but not yet."
The commentariat was very excited Friday by the inversion of the curve, with three-year yields dipping to 2.24% while three-month bills yield 2.45%.
Markets cheered soaring business surveys in the Eurozone earlier this week, and recent consumer sentiment data also have been cause for celebration. The advance GfK consumer confidence index in Germany rose to a record high of 10.4 in June, from 10.2 in May.
Momentum in the EZ auto sector rebounded at the end of the second quarter.
Mexico's inflation is finally falling, giving policymakers room for manoeuvre.
Mexico's external accounts remain solid, despite adverse global conditions over the past year. The current account decreased to USD9.5B, or 3.2% of GDP, in the first quarter, just down from 3.3% a year earlier. Shortfalls of USD10.3B in the income account and USD4.7B in goods and services--mostly the latter--were again the key driver of the overall deficit.
German retail and consumer sentiment data for March have been mixed this week, but broadly support our call that growth in consumption should pick up soon.
Guo Shuqing, head of the newly formed China Banking and Insurance Regulatory Commission, has been named as Party Secretary for the PBoC.
Improving fundamentals have supported private spending in Mexico during the current cycle.
Consumer confidence surveys have risen since the elections to levels consistent with very rapid growth in real spending.
Figures yesterday from U.K. Finance--the new trade body that has subsumed the British Bankers' Association--showed that the mortgage market recovered over the summer.
Economic sentiment in the Eurozone's largest economy stayed solid at the start of the fourth quarter, despite subdued manufacturing and poor investor sentiment. The headline IFO business climate index fell slightly to 108.2 in October from 108.5 in September, due to a fall in the current assessment index. The expectations index rose, though, to 103.8 from 103.5 last month pointing to a resilient outlook for businesses and solid GDP growth in coming quarters.
The last time oil prices fell sharply, from mid-2014, when WTI peaked at $107, through early 2016, when the price reached just $26, the U.S. economy slowed dramatically.
Mexico's private spending stumbled at the start of the second quarter.
Yesterday's ECB meeting was comfortably uneventful for markets.
The consensus forecast for retail sales in December has been consistently too upbeat in recent years and we think most analysts are too sanguine yet again.
We're expecting to learn today that the economy expanded at a 2.6% annualized rate in the first quarter, rather better than we expected at the turn of the year--our initial assumption was 1-to-2%--and above the consensus, 2.3%.
Argentina's economy continues to recover steadily.
Yesterday's IFO report reinforced the message from the PMIs that the Eurozone economy stumbled slightly at the beginning of the first quarter. The headline business climate index fell to an 11-month low of 107.3 in January, from a revised 108.6 in December, hit mainly by a drop in the expectations component. Intensified market volatility and worries over further weakness in the Chinese economy likely were the main drivers. Last week's dovish message from Mr. Draghi, however, came after the survey's cut-off date, leaving us cautiously optimistic for a rebound next month.
Hot on the heels of yesterday's news that the NAHB index of homebuilders' sentiment and activity dropped by two points this month -- albeit from December's 18-year high -- we expect to learn today that housing starts fell last month.
The past year has been difficult for Asian economies, with trade wars, natural disasters, and misguided policies, to name a few, putting a dampener on growth.
Everyone needs to take a deep breath: This is not 1930, and Smoot-Hawley all over again.
The MPC held back last week from decisively signalling that interest rates would rise when it meets next, in May.
The two main national surveys--IFO and INSEE-- both beat consensus forecasts yesterday, supporting our story of that economic sentiment is holding up relatively well in the face increasing investor anxiety. In Germany, the main IFO business climate index rose marginally to 108.5 from a revised 108.4 in August, boosted by an increase in the expectations index to a six-month high of 103.3, up from 102.0 in August. The IFO expectations index points to real GDP growth rising 0.5%-to-0.6% quarter-on-quarter in Q3.
In the absence of any significant data releases today, we want to take a closer look at the outlook for wage growth, and the implications of an acceleration in hourly earnings for inflation.
The economy slowed less than we expected in 2017.
Yesterday's report on October private spending in Mexico was downbeat, suggesting that consumption started the fourth quarter on a weak footing.
We see no compelling reason to expect a significant revision to the third quarter GDP numbers today, so our base case is that the second estimate, 3.3%, will still stand.
The markets' favorite story of the moment, aside from the Fed, seems to be the idea that overstretched corporate finances are an accident waiting to happen. When the crunch comes, the unavoidable hit to the stock market and the corporate bond market will have dire consequences, limiting the Fed's scope to raise rates, regardless of what might be happening in the labor market. We don't buy this. At least, we don't buy the second part of the narrative; we have no problem with the idea the finances of the corporate sector are shaky.
Argentina's latest hard data suggest that activity is softening, but we don't see the start of a renewed downtrend.
On the face of it, June's retail sales figures suggest that households have splurged in Q2, re-energising GDP growth after its slowdown in Q1. Sales volumes rose by 0.6% month-to-month in June, completing a 1.5% quarter-on-quarter jump in Q2.
Consumer sentiment in the euro area has slipped this year, though the headline indices remain robust overall.
Mr. Trump laid out plans yesterday to impose a new 10% tariff on a further $200B-worth of imports from China, to be levied from next week.
Retail sales increased by 1.0% month-to-month in August, exceeding our no-change forecast and spurring markets to price-in a 65% chance that the MPC will raise interest rates at its next meeting on November 2, up from 60% beforehand.
Oil prices have risen by about $20 per barrel since last fall.
Mr. Trump fired the shot everyone was expecting this week with a 10% tariff on $200B-worth of Chinese goods, and a pledge to lift the rate to 25% on January 1.
The BoJ kept all policy measures unchanged at its meeting yesterday.
Friday's inflation data in the Eurozone added a dovish twist to the story ahead of the key ECB meeting later this month.
Peru's economic recovery gathered strength late last year.
Brazil's recovery is consolidating, with recent data flow confirming that the economy had an encouraging start to the year.
June's 0.5% month-to-month fall in retail sales volumes does little to change the picture of recent strength.
The March money and credit figures provide more evidence that the economy's weak start to the year won't be just a blip.
We have been puzzled in recent months by the sudden and substantial divergence between the Redbook chainstore sales numbers and the official data.
April's consensus-beating retail sales figures fostered an impression that the recovery in consumer spending is in fine fettle, even though the rest of the economy is suffering from Brexit blues. Retailers have stimulated demand, however, by slashing prices at an unsustainable rate. With import prices and labour costs now rising, retailers are set to increase prices, sapping the momentum in sales volumes.
Perhaps the single strongest U.S. economic data series in recent months has been construction spending, which has risen by more than 1%, month-to-month, in four of the past five months.
Eurozone inflation pressures snapped back in April. Friday's advance report showed that headline inflation rose to 1.9% year-over-year, from 1.5% in March, lifted by a jump in the cor e rate to 1.2% from 0.7% the month before.
March auto sales were much weaker than expected, falling by 5.5% month-to-month to a 25-month low, 16.5M. The average for the previous six months was 17.8M. The sudden drop in March likely was driven in large part by the huge snowstorm which tracked across the Northeast in the middle week of the month, so we think a decent rebound in April is a good bet.
Mexican retail sales jumped 1.0% month-to-month in October, the biggest gain since February, following a poor performance in Q3.
The intensity of the pressure on households' finances was highlighted last week by December's retail sales report, which showed that volumes fell by 1.5% month-to-month, the most since June 2016.
Signs of a slowdown in the labour market data are conspicuously absent.
Yesterday's barrage of economic data in the Eurozone added to the evidence that economic momentum is slowing.
Following our note yesterday about upside risks to wage growth and the question of how the Fed will respond, given their sensitivity to labor cost-push inflation risk in the past, we want to address a question raised by readers.
Today's data likely will show that EZ households' sentiment remained close to a record high at the start of the year.
We expect today's second estimate of Q2 GDP to confirm that the U.K. has been the slowest growing G7 economy this year.
If the plunge in the stock market last week, and especially Friday, was a entirely a reaction to the slowdown in China and its perceived impact on other emerging economies, then it was an over-reaction. Exports to China account for just 0.7% of U.S. GDP; exports to all emerging markets account for 2.1%. So, even a 25% plunge in exports to these economies-- comparable to the meltdown seen as global trade collapsed after the financial crisis--would subtract only 0.5% from U.S. growth over a full year, gross.
Advance Eurozone consumer sentiment fell disappointingly to -7.1 in July, from -5.6 in June, but it is consistent with a solid trend in retail sales growth. Household consumption in the zone has surged in the last four quarters, and a modest loss of momentum in Q3 and Q4 is a reasonable bet. But we see little risk of a sharp slowdown in the shor t run, and the trend in spending growth should stabilize at an annualised 1.5% this year.
Eurozone consumer confidence remained at its low for the year at the start of Q3.
If, like us, you have been cheered by the upturn in mortgage applications since November, you don't need to worry about the apparent drop in activity in the past couple of weeks. The numbers don't look great: The MBA's index capturing the number of applications for new mortgages to finance house purchase has dropped from a peak of 237.7 in the third week of January--ignoring September's spike, which was triggered by a regulatory change--to 213.3 last week.
Slower growth in households' spending was the main reason why the economy lost momentum last year.
The performance of Italy's economy in the first half of 2017 proves that the strengthening euro area recovery is a tide lifting all the r egion's boats.
Political risk in Brazil has increased substantially, following reports that President Temer was taped in an alleged cover-up scheme involving the jailed former Speaker of the House. If the tapes are verified, calls for Mr. Temer to face impeachment will mount.
Unlike other central banks, the MPC has stuck to its message that "an ongoing tightening of monetary policy over the forecast period" likely will be required to keep inflation close to the 2% target, provided a no-deal Brexit is avoided.
Yesterday's ZEW investor sentiment in Germany shows showed no signs that uncertainty over the U.K. referendum is taking its toll on EZ investors. The expectations index surged to 19.2 in June, from 6.4 in May, the biggest month-to-month jump since January last year, when investors were eagerly expecting the ECB's QE announcement.
Yesterday's barrage of French business sentiment data suggest that confidence in the industrial sector was a little stronger than expected in Q2.
The downshift in the rate of growth of retail sales, which has caused a degree of consternation among investors, likely has further to run. The Redbook chain store sales survey clearly warned at the turn of the year that a slowdown was coming, but forecasters didn't want hear the warning: Five of the seven non-auto retail sales numbers released this year have undershot consensus.
Sunday 28th will bring closure to an extraordinary presidential election campaign in Brazil.
We have been pleasantly surprised by the recent Redbook chainstore sales numbers.
Japan's headline CPI inflation is set to edge down in coming months, thanks to non-core prices.
Retail sales volumes jumped by 2.3% month-to-month in April, exceeding the 1.0% consensus and even our 2.0% forecast. It would be a big mistake to conclude, however, that households' spending will propel the economy forward this year like it did between 2013 and 2016.
April's retail sales figures, due Thursday, likely will show that spending recovered from snow-induced weakness in March.
Yesterday's data in the Eurozone did little to calm investors' nerves amid rising political uncertainty in Italy and tremors in emerging markets.
Recently data from Argentina continue to signal a firming cyclical recovery. According to INDEC's EMAE economic activity index, a monthly proxy for GDP, the economy grew 4.0% year-over-year in June, up from an already-solid 3.4% in May.
Behind all the talk of slowdowns and Fed pauses, we see no sign that the labor market is loosening beyond a very modest uptick in jobless claims, and even that looks suspicious.
August's 14-year high in the ISM manufacturing index, reported yesterday, clearly is a noteworthy event from a numerology perspective, but we doubt it marks the start of a renewed upward trend.
Fed Chair Yellen yesterday reinforced the impression that the bar to Fed action in December, in terms of the next couple of employment reports, is now quite low: "If we were to move, say in December, it would be based on an expectation, which I believe is justified, [our italics] that with an improving labor market and transitory factors fading, that inflation will move up to 2%." The economy is now "performing well... Domestic spending has been growing at a solid pace" making a December hike a "live possibility." New York Fed president Bill Dudley, speaking later, said he "fully" agrees with Dr. Yellen's position, but "let's see what the data show."
Factory orders in Germany probably jumped in September, following a string of losses in the beginning of Q3. We think new orders rose 1.0% month-to-month, pushing the year-over-year rate slightly lower, to 1.8% from 2.0% in August. A rebound in non- Eurozone export orders likely will be the key driver of the monthly gain, following a 14.8% cumulative plunge in the previous two months. The rise will be concentrated in capital and consumer goods, and should be enough to offset a fall in export orders within the euro area. Our forecast is consistent with new orders falling 2.0% quarter-on-quarter in Q3, partly reversing the 3.0% surge in the second quarter, and raising downside risks for production in Q4.
The slump in the Markit/CIPS services PMI in November to its lowest level since July 2016 provides the clearest indication yet that uncertainty about Brexit has driven the economy virtually to a stand-still.
The run of above-consensus news on the U.K. economy came to an abrupt end last week, as a series of survey indicators for January took a turn for the worse. After six months of breathing space, the economic consequences of the Brexit vote are increasingly being felt.
Yesterday's final PMI data for February confirmed the story from the advance reports.
Chile's IMACEC economic activity index rose 2.4% year-over-year in January, down from 2.6% in December, and 3.3% on average in Q4, thanks mostly to weak mining production.
It's probably happening a decade too late, but the EU is now moving in leaps and bounds to restructure the continent's weakest banks. Yesterday, the Monte dei Paschi saga reached an interim conclusion when the Commission agreed to allow the Italian government to take a 70% stake in the ailing lender.
The simultaneous weakening of the ISM manufacturing and non-manufacturing surveys in recent months is one of the more disconcerting shifts in the recent macro data.
The apparently imminent imposition of 25% tariffs on imported steel and 10% on aluminum does not per se constitute a serious macroeconomic shock.
China hit back against the Trump-administration tariffs yesterday, targeting Mr. Trump's electorate.
Investors focussed last week on Chair Powell's semi-annual Monetary Policy Testimony, but he said nothing much new.
Colombia's GDP growth hit a relatively solid 2.8% year-over-year in Q4, up from 2.7% in Q3, helped by improving domestic fundamentals, which offset the drag from weaker terms of trade.
Data yesterday showed that Momentum in the EZ retail sector stumbled through middle of Q2.
The relative strength of the investor and consumer confidence reports for March, released this week, signal a better outlook for the Mexican economy.
Peru's inflation continues to surprise to the downside, paving the way for an additional rate cut next week.
Headline Eurozone PMI data have declined steadily since the beginning of the year, but the June numbers stopped the rot.
The slowdown in quarter-on-quarter growth in households' real spending to 0.4% in Q1--just half 2016's average rate--was driven entirely by a 0.1% fall in purchases of goods. Households' spending on services, by contrast, continued to grow briskly. Indeed, the 0.8% quarter-on-quarter rise in households' real spending on services exceeded 2016's average 0.5% rate.
LatAm financial markets have performed solidly in the first sessions of the year, with most regional currencies trading more strongly against the USD.
Chile's growth dynamics were robust in August, according to the latest data. Production rose and consumption remained strong during most of Q3. Indeed, industrial output increased 5.1% year-over- year, up from an already strong 3.1% increase in July, and contrasting sharply with the 2% fall in Q2.
Our conviction that the economy continues to grow at a snail's pace increased yesterday following the release of August's Markit/CIPS services survey.
Investors with long sterling positions should not pin their hopes on Friday's GDP report to reverse some of the losses endured over the last week.
Friday's industrial production report in Germany capped a miserable week for economic data in the Eurozone's largest economy.
Early results suggest that Mr. Macron has comfortably beat Marine Le Pen to become French president, defying a leak of emails and other documents from his En Marche campaign over the weekend. The final results won't be published until Monday morning, but the initial estimate indicates that Mr. Macron will edge Ms. Le Pen by 65.1% to 34.9%.
The housing market perhaps is where the adverse impact of Brexit uncertainty can be seen most clearly.
In contrast to the strong December trade numbers in France--see here--yesterday's German data were soft. The seasonally adjusted trade surplus dipped to €21.5B in December, from €22.3B in November.
Brazil's industrial sector is still struggling, despite recent signs of better economic and financial conditions.
Convention dictates that we lead with yesterday's Fed meeting, but it's hard to argue that it really deserves top billing.
A flawed theory still is circulating that the economy might outperform over the next two quarters because firms will stockpile goods due to the risk of a no-deal Brexit.
Yesterday's economic reports showed that the German economy firmed at the end of Q1, but this doesn't change the story for a poor quarter overall.
Yesterday's detailed Q3 GDP data in the Eurozone confirmed that the economy has gone from strength to strength this year.
The release yesterday of the weekly Redbook chainstore sales report for the week ended Saturday August 4 means that we now have a complete picture of July sales.
It would be a mistake to conclude from July's car registrations data that the market finally has turned a corner.
Yesterday's EZ PMI data surprised to the downside. The composite PMI in the euro area dipped to 52.9 in August, from 53.2 in July, below the initial estimate 53.3. The headline was marred by weakness in the German services PMI, which crashed to a 40-month low of 51.7, from 54.4 in July.
The EZ retail sector slowed at the start of Q3, though only slightly.
At first glance, car sales appear to be staging a strong recovery, mirroring the better news on high street spending in Q2.
We are surprised by the EU's reaction to Mr. Trump's announcement that the U.S. will impose tariffs on steel and aluminium.
Net trade has been a major drag on the economy's growth rate in recent quarters, and February's trade figures, released today, are likely to signal another dismal performance in the first quarter.
Speculation that another general election is imminent is rarely out of the news. At present, betting markets see about a 35% chance of another election in 2019, broadly the same chance as one in 2022, when it is currently scheduled to be held.
Recently released data in Mexico are sending weak signals for the business outlook, and the Texcoco airport saga won't help.
Consumption remains an important source of economic growth in LatAm.
Japan's labour market is already tight, but last week's data suggest it is set to tighten further.
Banxico yesterday left its policy rate unchanged at 3%, the highest level in a decade.
Households' saving decisions will play a key role in determining whether the economy slips into recession over the next year. Indeed, all of the last three recessions coincided with sharp rises in the household saving rate, as our first chart shows. Will households save more in response to greater economic uncertainty?
The advance international trade data for December were due for publication today, but the report probably won't appear.
Mr. Draghi snubbed investors looking for hints on policy and the euro in his Jackson Hole address--see here--on Friday.
The stock market loved Fed Chair Powell's remarks on the economy yesterday, specifically, his comment that rates are now "just below" neutral.
Friday's consumer sentiment data in the two main Eurozone economies were mixed.
Friday's euro area inflation reported capped a difficult week for EZ bondholders, although most of the damage was done beforehand by the advance German data.
Friday's inflation and labour market data in the Eurozone were dovish.
Why should Japan, the U.S., the Euro Area, the U.K. and Japan all have the same inflation target?
Inflation in Mexico remains relatively sticky, limiting Banxico's capacity to adopt a more dovish approach, despite the subpar economic recovery.
Former Treasury Secretary and thwarted would-be Fed Chair Larry Summers has been arguing for some time that the Fed should not raise rates "...until it sees the whites of inflation's eyes". As part of his campaign to persuade actual Fed Chair Yellen of the error of her intended ways, he argued at the World Economic Forum in September that the strong dollar has played no role in depressing inflation. Never one to miss an opportunity to diss the competition, he wrote that Stanley Fischer's view that the dollar has indeed restrained inflation is "substantially weakened" by the hard evidence. Dr. Summers' view is that inflation is being held down by other, longer-lasting factors, principally the slack in the lab or market, rather than the "transitory" influences favored by the Fed.
The failure of House Republicans to support Speaker Ryan's healthcare bill has laid bare the splits within the Republican party. The fissures weren't hard to see even before last week's debacle but the equity market has appeared determined since November to believe that all the earnings-friendly elements of Mr. Trump's and Mr. Ryan's agendas would be implemented with the minimum of fuss.
The April international trade numbers were startlingly, and surprisingly, horrible. The deficit in trade in goods leaped by $6.2B -- the biggest one-month jump in two years -- to $67.1B, though the headline damage was limited by a sharp narrowing in the oil deficit, thanks to lower prices, and a rebound in the aircraft surplus.
Mexican economic data was surprisingly benign last week.
Retail sales in Mexico plunged at the end of Q4, but we think households' spending will continue to contribute to GDP growth in the first quarter.
Momentum in the euro area's money supply slowed last month. M3 growth dipped to 4.7% year-over-year in February, from a downwardly-revised 4.8% in January. The headline was mainly constrained by the broad money components. The stock of repurchase agreements slumped 24.3% year-over-year and growth in money market fund shares also slowed sharply.
Data to be released this Friday should show that Japan's labour market remains tight, though the unemployment rate likely ticked back up in February, to 2.6%, after the erratic drop to 2.4% in January.
The two-year budget deal agreed between the administration and the Republican leadership in Congress will avert a federal debt default and appears to constitute a modest near-term easing of fiscal policy. The debt ceiling will not be raised, but the law imposing the limit will be suspended through March 2017, leaving the Treasury free to borrow as much as necessary to cover the deficit. As a result, the presidential election next year will not be fought against a backdrop of fiscal crisis.
Our hopes that tax cuts and lower energy inflation would lift French household consumption in Q4 were badly dented by yesterday's consumer sentiment report.
Fourth quarter GDP growth is likely to be revised down today.
Last week's advance EZ GDP data for the first quarter suggest the economy shrugged off the volatility in financial markets. Eurostat's first estimate indicates that real GDP in the euro area rose 0.6% quarter-on-quarter in Q1, up from 0.3% in Q4, and above the consensus, 0.4%.
Auto industry watchers at WardsAuto and JD Power are in agreement that today's September sales numbers will be little changed from a year ago, at around 17.5M.
The national accounts look set to show that GDP growth in the fourth quarter was even stronger than previously estimated. Earlier this month, quarter-on-quarter growth in construction output in Q4 was revised up to 1.2%, from 0.2%. As a result, construction's contribution to GDP growth will rise by 0.07 percentage points.
On the face of it, the February consumer spending data, due today, will contradict the upbeat signal from confidence surveys. The dramatic upturn in sentiment since the election is consistent with a rapid surge in real consumption, but we're expecting to see unchanged real spending in February, following a startling 0.3% decline in January.
Yesterday's data dump in the EZ delivered something investors haven't seen for a while, namely, positive surprises.
The Prime Minister achieved a rare victory yesterday, when the Commons passed the government-backed Brady amendment.
Today's advance EZ CPI report likely will show that inflation pressures eased in May. We think inflation slipped to 1.5% year-over-year, from 1.9% in April, as the boost to the core rate from the late Easter faded.
The September consumption data were a bit better than median expectations, with real spending rebounding by 0.6%, led by an 15.1% leap in the new vehicle component.
Yesterday's economic reports added to the evidence the euro area economy as a whole is showing signs of resilience in the face of still-terrible conditions in manufacturing.
Today's October ADP measure of private payrolls likely will overshoot Friday's official number.
Yesterday's barrage of economic data in the Eurozone offered a good snapshot of the grand narrative.
Data released yesterday show that the Chilean economy had a weak start to the second half of the year.
This Budget will be remembered as the moment when the Government finally threw in the towel on plans to run sustainable public finances.
While we were enjoying a rare sunny bank holiday in the U.K., data showed that Eurozone money supply growth slowed at the start of Q3. Broad money growth--M3--fell to a 10-month low of 4.5% year-over- year in July, from 5.0% in August.
The February activity report in Colombia showed a modest pick-up in manufacturing activity and strength in the retail sales numbers.
News that the U.K.'s departure from the E.U. has been delayed by six months, unless MPs ratify the existing deal sooner, appears to have done little to revive confidence among businesses.
Markets' expectations for official interest rates have shifted up over the last fortnight, and the consensus view now is that the MPC will hike rates before the end of this year. As our first chart shows, the implied probability of interest rates breaching 0.25% in December 2017 now slightly exceeds 50%.
The 0.18% increase in the core PCE deflator in December was at the lower end of the range implied by the core CPI. It left the year-over-year rate at just 1.5%.
Neither the strength in October consumption nor the softness of core PCE inflation, reported yesterday, are sustainable.
Japanese retail sales were unchanged in October month-on-month, after a 0.8% rise in September.
Markets will be extremely sensitive to economic data in the run-up to the MPC's next meeting on August 3, following signals from several Committee members that they think the cas e for a rate rise has strengthened.
Friday's detailed GDP data in Germany confirm that the euro area's largest economy performed strongly in the second quarter.
Today's Eurozone data will provide further details on what happened in Q4. Advance data suggest that industrial production rose a modest 0.1% month- to-month, lifting the year-over-year rate to 4.3% in December, from 3.9% in November.
Today's March CPI ought to provide further support for the idea that the trend rate of increase in the core index is running at about 0.2% per month, an annualized rate, if sustained, of about 2.5%.
President Xi Jinping yesterday reiterated China's commitment to reform and the opening of its economy at a highly-anticipated speech at the Boao forum.
The ECB made no changes to its policy stance yesterday.
A reader sent us last week a series of five simple feedback loops, all of which ended with the Fed remaining "cautious". For example, in a scenario in which the dollar strengthens--perhaps because of stronger U.S. economic data--markets see an increased risk of a Chinese devaluation, which then pummels EM assets, making the Fed nervous about global growth risks to the domestic economy.
Friday was a busy day in the Eurozone economy. The third detailed GDP estimate confirmed that growth was unchanged at 0.4% quarter-on-quarter in Q2, pushing the year-over-year rate down by 0.4 percentage points to 2.1%, marginally below the first estimate,2.2%.
The MPC was relatively bullish on the outlook for households' spending when it signalled its view, in February's Inflation Report, that the case for raising interest rates before the end of this year had strengthened.
Brazil's economy remains mired in a renewed slowdown, and low--albeit temporarily rising-- inflation, which is allowing the BCB to keep interest rates on hold, at historic lows.
Mexican economic growth was subdued during the first half of the year, and we expect it to remain weak over the coming months. The economy has been held back largely by external headwinds, especially low oil prices and disruptions to activity in the US, its main trading partner.
German exports flatlined for most of 2018, driving the trade surplus down by 7.3% amid still-solid growth in imports.
Brazil's headline CPI has been well above the upper limit of the BCB's target zone since January 2015. We expect this situation will continue for some time, due to the lagged effect of last year's sharp increases in regulated prices, El Niño, the BRL's sell-off in 2015, and, especially, widespread price indexation.
The U.S. Commerce Department on Tuesday released a list of Chinese imports, with an annual value of $200B, on which it is threatening to impose a 10% tariff, after a two-month consultation period.
The reported rebound in January retail sales was welcome, but the overshoot to consensus was matched, more or less, by the unexpected downward revisions to the December numbers.
Yesterday marked President AMLO's first 100 days in office, with skyrocketing approval ratings and improving consumer confidence.
The Mexican industrial sector is struggling. December industrial output fell 0.4% month-to-month, the third consecutive drop, driven mainly by a similar decline in mining/oil output.
The spectacular 1.3% rebound in manufacturing output last month -- the biggest jump in seven years, apart from an Easter-distorted April gain -- does not change our core view that activity in the sector is no longer accelerating.
The undershoot in the April core CPI wasn't a huge surprise to us; the downside risk we set out in yesterday's Monitor duly materialized, with used car prices dropping by a hefty 1.6% month-to-month, subtracting 0.05% from the core index.
This week's data confirmed Mexico's strong economic performance over the first few months of this year.
Today's industrial production data in the Eurozone will extend the run of soft headlines at the start of the year.
The French manufacturing sector slowed more than we expected in Q1.
The U.K. is one of the smallest winners among advanced economies from the precipitous decline in oil prices. British oil production still fulfils about 55% of the U.K.'s demand, even though it has declined by two-thirds since its 1999 peak. Oil consumption therefore exceeds production by a much smaller margin in the U.K. than in most other European countries. As a result, the boost to the U.K. economy from the $10 decline in oil prices over the last month isn't much to write home about.
German Q4 GDP data this week will give little comfort to investors searching for signs of a resilient economy in the face of increased market volatility. The consensus expects unchanged GDP growth of 0.3% quarter-on-quarter, consistent with solid and stable survey data. But downbeat industrial production and retail sales data point to notable downside risk.
The underlying U.S. consumer story, hidden behind a good deal of recent noise, is that the rate of growth of spending is reverting to the trend in place before last year's tax cuts temporarily boosted people's cashflow.
Advance data indicate German inflation rose to 0.4% year-over-year in November, up from 0.3% in October, lifted by higher food and energy price inflation. The upward trend in food prices won't last, but base effects in energy prices will persist, boosting headline inflation significantly in coming months. The details show that services inflation was stable at 1.2% last month, despite state data indicating a fall in volatile leisure and entertainment inflation, while net rent inflation was also stable, at 1.1%.
EZ bond markets were stung earlier this week by a Bloomberg story suggesting that the ECB, in principle, has agreed on a QE exit strategy which involves "tapering" purchases by €10B per month. The story also specified, though, that the central bank has not discussed when tapering will begin.
Advance data indicate that Q1 annualized GDP growth in the U.S. was a trivial 0.2%. And in the U.K., annualized growth is estimated to have slowed to 1.2%, from 2.4% in Q4.
Data released over the holidays suggest that money supply dynamics in the Eurozone remain solid, but also that growth is no longer accelerating. M3 growth slipped to 5.1% year-over-year in November from 5.3% in October, partly due to a sharp monthly fall in the stock of repurchase agreements. Momentum in narrow money, however, also dipped. M1 growth slowed to 11.2% year-over-year from 11.8% in October, mainly due to a modest fall in overnight deposit growth.
...The data were all over the map, with existing home sales plunging while consumer confidence rose; Chicago-area manufacturing activity plunged but national durable goods were flat; real consumption rose at a decent clip but pending home sales dipped again. Markets, by contrast, are little changed from the week before the holidays. What to make of it all?
The first major data release of 2016 showed manufacturing activity slipping a bit further at the end of last year, but we doubt the underlying trend in the ISM manufacturing index will decline much more. Anything can happen in any given month, especially in data where the seasonal adjustments are so wayward, but the key new orders and production indexes both rose in January; almost all the decline in the headline index was due to a drop in the lagging employment index.
Inflation in the euro area edged higher in November, but our prediction of a rebound in the core proved to be wrong. Headline inflation increased to 1.5% in November, from 1.4% in October.
The Bank of England's stress tests highlighted that banks have made further progress in strengthening their balance sheets over the last year. But while banks have retreated from taking risk onto their balance sheets, others have stepped in to fill the void.
Economic survey data have been upbeat recently, but key Eurozone data releases yesterday suggest the ECB will be under pressure to increase monetary policy stimulus further this month. The advance inflation estimate showed that the euro area slipped back into deflation in September, as inflation fell to -0.1% year-over- year, from +0.1% in August. The fall was mainly due to a 8.9% collapse in energy prices, though, and we are very confident the relapse is temporary.
Yesterday's EZ CPI report points to a dovish backdrop for next week's ECB meeting. Advance data show that inflation was unchanged at 0.2% year-overyear in August, lower than the consensus, 0.3%. The headline was held back by a dip in the core rate to 0.8%, from 0.9% in July; this offset a lower deflationary drag from energy prices.
Our view that households will continue to spend more in the first half of this year, preventing the economy from slipping into a capex-led recession, was not seriously challenged yesterday by the BRC's Retail Sales Monitor.
Yesterday's advance CPI data for the major EZ economies suggest that today's report for the euro area as a whole will undershoot the consensus slightly.
House purchase mortgage approvals by the main street banks jumped to 40.1K in January, from 36.1K in December, fully reversing the 4K fall of the previous two months, according to trade body U.K. Finance.
We're expecting the FOMC to vote unanimously not raise rates today, but we do expect a modestly hawkish tilt in the statement. Specifically, we're expecting an acknowledgment of the upturn in business investment reported in the Q4 GDP data, and of the increase in market-based measures of inflation expectations, given that 10-year TIPS breakevens are now above 2% for the first time since September 2014.
Chile's April retail sales data, released on Monday, show that private consumption started the second quarter on a solid footing. Sales rose 3.0% month-to-month, pushing the year-over-rate up to 7.9% from 1.4% in March and an average of 4.0% in Q1. The headline was boosted by a favourable calendar effect, as April this year had two more trading days than April 2015.
CPI data today in France and Germany will confirm that current inflation rates remain very low in the euro area. Inflation in Germany likely rose to 0.3% year-over-year from 0.0% in September, in line with the consensus and initial estimate. State data indicate that the rise was driven by surging fresh food prices and slightly higher services inflation, principally due to a jump in the volatile recreation and culture sector. Looking ahead, food prices will drop back, but energy inflation will rise rapidly as last year's plunge drops out of the year-over-year comparison, while upward core pressure is now emerging too.
Outside the battered energy sector, the most consistently disconcerting economic numbers last year, in the eyes of the markets, were the monthly retail sales data. Non-auto sales undershot consensus forecasts in nine of the 12 months in 2015, with a median shortfall of 0.3%.
Today brings yet another broad array of data, with new information on housing construction, industrial production, consumer sentiment, and job openings.
In order to support current market pricing, the MPC will have to be more specific about the timing of the next rate hike in the minutes of next Thursday's meeting.
Economic data released yesterday underscored that Brazil emerged from recession in the first quarter, but further rate cuts are needed. Indeed, the monthly economic activity index--the IBC-Br--fell 0.4% monthto- month in March, though this followed a strong 1.4% gain in February.
The Mexican economy gathered strength in Q3, due mainly to the strength of the services sector, and the rebound in manufacturing, following a long period of sluggishness, helped by the solid U.S. economy and improving domestic confidence.
Swap markets currently price-in RPI inflation falling to 3.0% this time next year, from 3.2% in November, before recovering to 3.8% at the start of 2020.
The euro area's external surplus remained resilient toward the end of 2017, in the face of a stronger currency. The seasonally adjusted trade surplus rose to €22.5B in November, from €19.0B in October, lifted primarily by a jump in German exports.
Brazil's consumer sluggishness in Q3 and early Q4 eased in November.
The most important retail sales report of the year, for December, won't be published today, unless some overnight miracle means that the government has re-opened.
Yesterday's data in the EZ provided a little more evidence on what happened in Q1.
Eurozone GDP data on Friday were better than we expected, but were still soft compared to upbeat market expectations. Real GDP rose 0.3% quarter-onquarter in the third quarter, down slightly from 0.4% in Q2, and lower than the consensus forecast for another 0.4% gain. These data are not a blank check for ECB doves, but they probably are enough to push through further easing in December. This looks odd given growth in the last four quarters of an annualised 1.6%--the strongest since 2011--and probably slightly above the long-run growth rate.
Last week, the MBA's measure of the volume of applications for new mortgages to finance house purchase rose 1.7%.
Evidence in support of our view that the U.S. industrial slowdown is ending continues to mount, though nothing is yet definitive and the re-escalation of the trade war is a threat of uncertain magnitude to the incipient upturn.
The FTSE 100 has fallen by 4% over the last two weeks, exceeding the 1-to-3% declines in the main US, European and Japanese markets. The FTSE's latest drop builds on an underperformance which began in early 2014. The index has fallen by 10% since then--compared to rises of between 10% and 20% in the main overseas benchmarks--and has dropped by nearly 15% since its April 2015 peak. We doubt, however, that the collapse in U.K. equity prices signals impending economic misery. The economy is likely to struggle next year, but this will have little to do with the stock market's travails.
Demand for new cars in the Eurozone bounced back strongly last month. Accelerating growth in the major economies lifted new registrations by 14.6% year-over-year in February, up from a 6.8% increase in January. Surging growth in Italy was a key driver, with new registrations jumping 27.3%, up from an already sizzling 17.4% in January.
Economic data in the Eurozone auto sector remain under the influence of the aftershock from the EU's new emissions regulation--WLTP-- introduced in September.
The acceleration in real consumption over the past year reflects the upturn in real after-tax income growth. This, in turn, is mostly a story of falling gasoline prices, which have depressed the PCE deflator. Gross nominal incomes before tax rose 4.2% year-over-year in the three months to September, exactly matching the pace in the three months to September 2014. But real income growth, after tax, accelerated to 3.3% from 2.5% over the same period, as our first chart shows.
The headline retail sales numbers for October looked good, but the details were less comforting.
The industrial production trajectory in Mexico looked strong going into Q3, but Friday's report for August threatens to change that picture.
Colombia's economy defied rising political uncertainty at the start of the year. Retail sales growth jumped to plus 6.2% year-over-year in January, up from -3.8% in December and -1.8% in Q4.
The consensus for a mere 0.3% month-to-month rise in retail sales volumes in November looks too timid; we anticipate a 0.7% gain.
Brazil's economic situation has improved this year, and we still expect the recovery to continue over the second half, despite recent political volatility and soft Q2 data.
CPI inflation increased to 2.9% in May, from 2.7% in April, exceeding the no-change expectation of both the consensus and the MPC, as well as our own 2.8% forecast.
Manufacturing is not in recession, yet, despite the reams of gloomy analysis of the sector, including our own.
Macroeconomic data in the euro area were mixed in our absence.
CPI inflation picked up to 0.5% in March, from 0.3% in February. The jump was entirely attributable to core inflation, which leapt to 1.5%--its highest rate since October 2014--from 1.2%. With core inflation on track to rise further over the next year, we continue to think that markets will be caught out by interest rate rises later this year.
Industrial production data yesterday confirmed downside risks to today's GDP data in the Eurozone. Output fell 0.3% month-to-month in September, pushing the year-over-year rate down to 1.7% from a revised 2.2% in August. Weakness in Germany was the main culprit, amid stronger data in the other major economies. A GDP estimate based on available data for industrial production and retail sales point to a quarterly growth rate of 0.4% quarter-on-quarter, but we think growth was rather lower, just 0.2%, due to a drag from net trade.
Data released last week in Brazil reinforced our view of a modest, final, interest rate cut this week, despite the recent strength of the USD and volatility in global markets.
November's consumer prices figures, released tomorrow, look set to show that the U.K.'s spell of negative inflation has ended. CPI inflation is set to pick-up decisively over the coming months, even if oil prices continue to drift down. In fact, fuel prices likely will contribute to the pick-up in inflation from October's -0.1% rate. November's 1.5% fall in prices at the pump was smaller than the 2.3% drop in the same month last year, so the year-over-year rate will rise. Fuel's contribution to CPI inflation therefore will pick up, albeit very marginally, to -0.47pp from -0.50pp in October.
Private consumption remains resilient in Brazil and recent data suggest that growth will continue over the coming months.
Don't worry about the weakness of the recent retail sales numbers. The three straight 0.1% month-to- month declines tell us nothing about the underlying state of the consumer.
No matter how you choose to slice-and-dice the recent retail sales numbers, the core data for the past couple of months have been disappointing. Our favorite measure--total sales less autos, gasoline, food and building materials--rose by just 0.1% month-to- month in May but then reversed this minimal gain in June.
China's industrial production grew at an annualised 7.2% rate by volume in Q1, according to our estimates, up from an average 5.9% rate in the six quar ters through mid-2016.
The trend in retail sales no longer looks quite so flat, following yesterday's May report. The level of sales volumes in April was revised up by 0.3%.
German inflation eased in May, but the underlying upward pressure on the core is increasing. Yesterday's data showed that inflation fell to 1.5% year-over-year in May, from 2.0% in April, as the boost from the late Easter reversed. Inflation in leisure and entertainment services was driven down to +0.8%, from +3.3% in April, as a result of sharply lower inflation in package holidays and airfares.
Eurozone GDP data last Friday suggest the cyclical recovery continued at the end of last year. Real GDP in euro area rose 0.3% quarter-on-quarter in Q4, the same as in Q3, lifted by growth in all the major economies. This was in line with the consensus forecast, but noticeably higher than implied by monthly industrial production and retail sales data.
The FTSE 100 fell further yesterday, briefly to levels not seen since November 2012, but its drop over recent months is not a convincing signal of impending economic disaster. The economic recovery is likely to slow further, but this will reflect the building fiscal squeeze and the sterling-related export hit much more than the wobble in market sentiment.
Colombia's retail sector surprised to the upside once again in December, despite a number of domestic headwinds. Sales jumped 6.2% year- over-year, up from 4.9% in November, marking an impressive end to the quarter. The underlying trend improved significantly in Q4, as shown in our first chart. A double-digit rise in auto sales was the main driver, offsetting weakness in other key components.
Consumption has been a serious weak spot in Brazil over the past year. After reaching record growth rates in 2010, it has gradually slowed to its lowest pace in more than ten years.
EZ households' demand for new cars was off to a strong start in 2017. Car registrations in the euro area jumped 10.9% year-over-year in January, accelerating from a 2.1% rise in December. We have to discount the headline level of sales by about a fifth to account for dealers' own registrations. Even with this provision, though, the January report was solid. Growth rebounded in France and Germany, and a 27.1% surge in Dutch car registrations also lifted the headline. We think car registrations will rise about 1.5% quarter-onquarter in Q1, rebounding from a weak Q4. But this does not change the story of downside risks to private spending.
Consumption remains a serious weak spot in Brazil's economic cycle. High inflation, rising interest rates, surging unemployment, plunging confidence, and the government's belt tightening, have trashed Brazilians' purchasing power. Retail sales surprised to the downside in April, falling 0.4% month-to-month, equivalent to a huge 3.5% contraction year-over-year, down from a revised 0.3% gain in March. The underlying trend is awful, as our first chart shows.
The consumer in Brazil was off to a strong start to the first quarter, and we expect household spending will continue to boost GDP growth in the near term.
October's retail sales figures, published last Thursday, extended the month-long run of near consistent downside data surprises.
A rebound in quarter-on-quarter growth in households' spending in Q2, following the slowdown to just 0.2% in Q1, looks less likely following April's money data.
The pitiful 0.7% expansion of the economy in the fourth quarter is not, in our view, a sign of things to come. It is also not, by any means, a definitive verdict on what happened in the fourth quarter; the data are subject to indefinite revision. As they stand, the numbers are impossible to square with the 2.0% annualized increase in payroll employment over the quarter, so our base case has to be that these data will be revised upwards.
Chief Eurozone Economist Claus Vistesen on French Consumer Spending.
We wrote last month about how the Caixin services PMI appeared to be missing the deterioration in several key services subsectors.
People don't like to see the value of their portfolios decline, and it is just a matter of time before the benchmark measures of consumer sentiment drop in response to the 7% fall in the S&P since mid-August. Sometimes, movements in stock prices don't affect the sentiment numbers immediately, especially if the market moves gradually. But the drop in the market in August was rapid and dramatic, and gripped the national media.
Yesterday's economic data in Brazil suggest that retailers suffered in the second quarter, hit by the effect of the truckers' strike, but private consumption remains somewhat resilient.
Data released yesterday in Brazil are consistent with our view that private consumption will continue to drive the recovery over the second half, offsetting the ongoing weakness in private investment.
Advance April consumer survey data will likely confirm that households remain the standout driver of the cyclical recovery in the euro area. We think the headline EC consumer sentiment index rose to -1.0 in April from -3.7 in March.
Chile's economy is showing the first reliable signs of improvement, at last. December retail sales rose 1.9% year-over-year, up from 0.4% in November, indicating that household expenditure is starting to revive, in line with a pick-up in consumer confidence and the improving labor market.
Survey data in the Eurozone were mixed yesterday. In Germany, the advance GfK consumer sentiment index slipped to 10.0 in October, from 10.2 in September, marginally below consensus forecasts. The details, reported for September, also were soft.
The recent slowdown in labour cash earnings growth in Japan halted in September.
The adverse consequences of the Brexit vote will become painfully clear in 2017.....
The latest iteration of the Atlanta Fed's GDPNow model puts second quarter GDP growth at 4.1%. Assuming a modest upward revision to growth in the first quarter -- the data will be released Friday -- that would mean average growth of 2.5% in the first half, in line with our forecast for the year as a whole, and rather better than the 1.6% growth recorded in 2016.
Yesterday's data don't significantly change our view that first quarter GDP growth will be reported at only about 1%, but the foreign trade and consumer confidence numbers support our contention that the underlying trend in growth is rather stronger than that.
Japan's Nikkei services PMI dropped to 51.0 in September from 51.6 in August, continuing the downtrend since June. For Q3 as a whole, the headline averaged 51.5, down from 52.8 in Q2; that's a clear loss of momentum.
When Fed Chair Powell said last week that the "surprise" weakness in the official retail sales numbers is "inconsistent with a significant amount of other data", we're guessing that he had in mind a couple of reports which will be updated today.
Household sentiment in France continues to improve, consistent with tailwinds from low energy prices and accommodative monetary policy. INSEE's measure of consumer confidence rose to 94 in April, up from 93 in March, the highest since November 2010.
Developments over the last month have heightened our concern about the near-term outlook for households' spending.
Improving consumer fundamentals continue to underpin growth in private spending in Mexico, according to retail sales and inflation reports published this week. March retail sales were much stronger than expected, jumping 3.0% month-to-month, after averaging gains of 0.8% in the preceding three months. And sales for the three months through February were revised up marginally.
Yesterday's consumer confidence report in Germany was soft, in contrast to surging business sentiment data earlier in the week.
Media reports suggest that the underlying trends in retailing--rising online sales, declining store sales and mall visits--continued unabated over the Thanksgiving weekend.
January's retail sales figures look set to show that growth in consumers' spending remains stuck in low gear.
December's consumer price figures, released tomorrow, likely will reveal that CPI inflation rose to 1.4%--its highest rate since August 2014--from 1.2% in November. Inflation will take even bigger upward steps over the coming months as the anniversary of sharp falls in commodity prices is reached and retailers pass on hefty increases in import prices to consumers.
Consumers' spending has staged an impressive recovery in the Eurozone, and remains the key driver of accelerating GDP growth. Outside Germany, however, households have struggled, and are still faced with tight credit conditions.
Yesterday's labour market data delivered a further blow to hopes that consumers' spending will retain enough momentum for the MPC to press ahead and raise interest rates this year. The most striking development is the decline in year-over-year growth in average weekly wages to just 1.9% in December, from 2.9% in November.
Whichever way you choose to slice the numbers, retail sales growth has slowed this year. Ex-gasoline, ex-autos, core, whatever, sales growth in year-over-year terms is notably weaker now than at the end of last year. It is equally, true, however, that after-tax incomes have risen at a robust pace--up 3.8% in the year to May, exactly the same pace as in the year to May 2014--so consumers in aggregate have plenty of cash to spend. So, what's holding people back at the mall? Why aren't they spending more?
January's consumer price report, released today, likely will show that CPI inflation jumped to 1.9%--its highest rate since June 2014--from 1.6% in December. Inflation will continue to take big upward steps over the coming months, as retailers pass on to consumers large increase in import prices and energy companies increase tariffs.
Brazil's retail sales plunged in August, falling 0.9% month-to-month--the seventh consecutive contraction -- and with a net revision of -0.6%. The broad retail index, which includes vehicles and construction materials, dropped 2.0% month-to-month, the biggest fall this year, due mainly to a 5.2% collapse in auto sales, reversing July's unexpected increase. In annual terms, headline sales fell by an eye-popping 6.9% in August, after the downwardly-revised 3.9% drop in July. In short, the sales data show that consumers are suffering. They will struggle for some time yet.
Today's retail sales figures for August likely will rebut the widespread view that spendthrift consumers will prevent a sharp economic slowdown. We look for a 1% month-to-month decline in retail sales volumes in August, well below the -0.4% consensus forecast.
The Colombian economy has been able to grow this year despite the plunge in oil prices since the middle of 2014. Gains in consumers' spending and investment have offset part of the hit from falling exports. But private spending growth, nonetheless, slowed considerably during the first few months of the year, as shown in our char t below, in part due to rising prices for imported goods after the depreciation of the COP, as well as broad-based concerns over the state of the economy.
The Portuguese economy has faltered recently. In the year to Q2, real GDP rose only 0.8%, down from a 1.5% increase in the preceding year. Slowing growth in investment has been the key driver, but consumers' spending has weakened too.
Households remain the key driver of the cyclical recovery in the Eurozone. We have seen, so far, little sign that investment will be able convincingly to take over the baton if momentum in consumers' spending slows. The average rate of growth of investment since 2013 has been 0.5%, about two-thirds of the pace seen in previous cyclical upturns. Weakness in construction--about 50% of total euro area investment--has been one of the key factors behind of the under performance.
In the wake of the September retail sales report, we can be pretty sure that real consumers' spending rose at a 2¾% annualized rate in the third quarter, slowing from the unsustainable 4.3% jump. That would mean consumption contributed 1.9 percentage points to headline GDP growth.
Today's official retail sales figures look set to show that consumers tightened their purse strings at the start of this year, following last year's spending spree. We think that retail sales volumes rose by just 1.0% month-to-month in January; that would be a poor result after December's 1.9% plunge. Surveys of retailers have been weak across the board. The reported sales balance of the CBI's Distributive Trade Survey collapsed to -8 in January, from +35 in December. The balance is notoriously volatile, but the 43-point drop is the largest since the survey began in 1983.
Yesterday's data on EZ car sales added to the evidence that consumers' spending is slowing. We now reckon sales will rise by 1% quarter-on-quarter in the third quarter, after gains averaging 2.6% in the first half of the year.
On the face of it, recent retail spending surveys have been puzzlingly weak in light of the pick-up in employment growth, still-robust real wage gains and renewed momentum in the housing market. We think those surveys are a genuine signal that retail sales growth is slowing, and expect today's official figures to surprise to the downside. But retail sales account for just one-third of household spending, and, in contrast to the early stages of the economic recovery, consumers now are prioritising spending on services rather than goods.
The softness of the headline September retail sales numbers hid a decent 0.5% increase in the "control" measure, which is the best guide to consumers' spending on non-durable goods.
Yesterday's industrial production, construction output and trade data for November collectively suggest that the economy lost a little momentum in the fourth quarter. GDP growth likely slowed to 0.5% quarter-on-quarter in Q4, from 0.6% in Q3. Growth remains set to slow further this year, as inflation shoots up and constrains consumers.
Today's trade figures likely will continue to show that the benefits from sterling's depreciation are being outweighed by the costs. Exports still are barely growing, but consumers are about to endure a substantial import price shock. The monthly trade deficit has been extremely volatile over the last year, generating a series of excessively upbeat or gloomy headlines. The truth is that the deficit has been on a slightly deteriorating trend, as our first chart shows. We think the trade deficit likely narrowed to £3.8B in December, from £4.2B in November, bringing it closer to its rolling 12-month average of £3.0B.
Retail sales ex-autos have undershot consensus forecasts in eight of the 11 reports released so far this year, prompting interest rate doves to argue that consumers have not spent their windfall from falling gas prices. But this ignores the impact of falling prices--for gasoline, electronics, furniture, and clothing--on the sales numbers, which are presented in nominal terms.
Brazil's consumer recession finally eased in November. Retail sales jumped 2.0% month-to- month, following an upwardly-revised 0.3% drop in October, and the year-over-year rate rose to -3.5% from -8.1%. November's astonishing performance probably reflects seasonal adjustment problems related to Black Friday discounting. Sales have climbed in the last four Novembers, suggesting that consumers' pre-Christmas spending patterns have shifted permanently.
The first look at real consumers' spending for the second quarter will be discouraging, at least at the headline level. We expect to see a 0.1% month-to-month decline in real consumers' spending in April, below the +0.1% consensus.
The upward revisions to real consumers' spending in the fourth quarter, coupled with the likelihood of a hefty rebound in spending on utility energy services, means first quarter spending ought to rise at a faster pace than the 2.2% fourth quarter gain. Spending on utilities was hugely depressed in November and December by the extended spell of much warmer-than-usual weather.
Brexit and fiscal headwinds have lessended...but consumers' spending will struggle in 2018
Consumers are buckling under high inflation...but the MPC won't add to their woes by hiking rates
It's unrealistic to have a repeat of the second quarter's 4.2% leap in consumers' spending as your base case for the third quarter. It's not impossible, though, given the potential for the saving rate to continue to decline, and the apparently favorable base effect from the second quarter.
Today's Q4 GDP report in the Eurozone likely will show that growth slowed again at the end of last year. We think GDP growth dipped to 0.2% quarter-on-quarter in Q4, down from 0.3% in Q3, and risks to our forecast are firmly tilted to the downside. The initial release does not contain details, but we think a slowdown in consumers' spending and a drag from net exports were the main drivers of the softening.
Consumers' spending in Brazil weakened at the end of Q4, but we think households will support GDP growth in the first quarter.
The recession in Brazilian consumers' spending continues, but the severity of the pain is easing. Retail sales plunged 0.9% month-to-month in March, pushing the year-over-rate down to -5.7%, from a revised -4.2% in February. The March headline likely was depressed by the early Easter.
This week brings a wave of data on all aspects of the economy, bar housing. By the end o f the week, we'll have a better idea of the shape of consumers' spending, the industrial sector and the inflation picture, and estimates of third quarter GDP growth will start to mean something.
Sooner or later, the surge in consumers' spending power triggered by the drop in gas prices and the acceleration in payrolls will appear in the retail sales data.
Data this week confirmed that private spending in Colombia stumbled in June. Retail sales fell 0.7% year-over-year, from an already poor -0.4% in May. The underlying trend is negative, following two consecutive declines, for the first time since late 2009. Domestic demand remains subdued as consumers are scaling back spending due to weaker real incomes, lower confidence and tighter credit and labor market conditions.
Consumers' spending in the second quarter is still set to be less than great, thanks in part to unfavorable base effects from the first quarter, but a respectable showing of about 2¾% now seems likely. The core May retail sales numbers were a bit stronger than we expected, with gains in most sectors, and the upward revisions to April and March were substantial.
Mexican manufacturing data continue to offer a counterweight to strong consumers' spending and services numbers. Output in the key manufacturing sector contracted by 0.2% month-to-month in September, due mainly to severe external headwinds. But the year-over-year rate was unchanged at 3.3%, with a flat underlying trend. Total industrial output, by contrast, rose 0.4% month-to-month in September, pushing the year-over-year rate up to 1.7%, from an upwardly-revised 1.1% gain in August.
Car sales continue to offer solid support for consumption spending in the Eurozone. Growth of new car registrations in the euro area fell trivially to 10.6% year-over-year in September, from 10.8% in August, consistent with a stable trend. Surging sales in the periphery are the key driver of the impressive performance, with new registrations rising 22.1% and 17.1% in Spain and Italy respectively, and surging 30% in Portugal. Favorable base effects mean that rapid growth rates will continue in Q4, supporting consumers' spending.
October's money data show that households and firms have regained the appetite for borrowing that they lost immediately after the referendum. But the recent rise in swap rates and the deterioration in consumers' confidence likely will cut short the revival in consumer lending, while persistent Brexit uncertainty likely will continue to subdue firms' investment intentions.
Today's wave of economic reports are all likely to be strong. The most important single number is the increase in real consumers' spending in July, the first month of the third quarter.
In the wake of April's 0.2% increase in real consumers' spending, and the upward revisions to the first quarter numbers, we now think that second quarter spending is on course to rise at an annualized rate of about 3.5%.
A sharp increase in unsecured borrowing has played a big role in supporting consumers' spending over the past year. The stock of unsecured credit, excluding student loans, increased by 8.2% year-over-year in September--the fastest growth since February 2006--boosting the funds available for households to spend by around 1%.
We already have a pretty good idea of what happened to consumers' spending in March, following Friday's GDP release, so the single most important number in today's monthly personal income and spending report, in our view, is the hospital services component of the deflator.
If we're right with our forecast that real consumers' spending rose by just 0.1% month-to-month in February -- enough only to reverse January's decline -- then it would be reasonable to expect consumption across the first quarter as a whole to climb at a mere 1.2% annualized rate.
While we were out, the data showed that consumers' confidence has risen very sharply since the election, hitting 15-year highs, but actual spending has been less impressive and housing market activity appears poised for a marked slowdown.
It probably would be wise to view the increase in the ISM manufacturing index in December with a degree of skepticism. The index is supposed to record only hard activity, but we can't help but wonder if some of the euphoria evident in surveys of consumers' sentiment has leaked into responses to the ISM. That said, the jump in the key new orders index-- which tends to lead the other components--looked to be overdue, relative to the strength of the import component of China's PMI.
Consumers' spending in the euro area weakened at the end of Q4, but we think households will continue to boost GDP growth in the first quarter. Data on Friday showed that retail sales fell 0.3% month-to-month in December, pushing the year-over-year rate down to 1.1%, from a revised 2.8% in November.
German GDP growth likely accelerated in the second quarter, following a disappointing 0.3% quarter-on-quarter expansion in Q1. Growth in the manufacturing sector remains modest, and the trend in consumers' spending remains solid. Industrial production was unchanged in May, pushing year-over-year growth to 2.1% from a revised 1.1% in April.
Core inflation--a long lagging indicator in the euro area-- will rise next year, in response to surging consumers' spending. Our first chart shows that services inflation likely will be a key theme in this story. Even allowing for a structural drag on inflation due to high unemployment outside Germany, cyclical risks to services inflation are tilted firmly to the upside.
Car manufacturers have been at the sharp end o f the slowdown in consumers' spending this year. In response, several brands have launched generous scrappage schemes, giving buyers a big discount when they trade in their old vehicle.
Yesterday's detailed EZ GDP report showed that real output rose 0.3% quarter-on-quarter in Q3, the same pace as in Q2. The year-over-over rate rose marginally to 1.7% from 1.6%, trivially higher than the first estimate, 1.6%. The details showed that consumers' spending and public consumption were the key drivers of growth in Q3, offsetting a slowdown in net trade.
German manufacturing data continues to offer a sobering counterbalance to strong services and consumers' spending data. New orders plunged 1.7% month-to-month in September, well below the consensus, pushing the year-over-year rate down to a 1.0% fall from a revised 1.7% increase in August. These data are very volatile, and revisions probably will lift the final number slightly next month, but the evidence points to clear risks of a further decline in the underlying trend of production.
The improvement in the August services PMI has generated hyperbolic headlines suggesting the U.K. is on a tear despite the Brexit vote. Taken literally, however, the PMIs suggest that the revival in business activity in August only partially reversed July's decline. Meanwhile, the impact of sterling's sharp depreciation on the purchasing power of firms and consumers has only just begun to be felt.
The second estimate of Q3 GDP last week confirmed that the Brexit vote didn't immediately drain momentum from the economic recovery. But it is extremely difficult to see how growth will remain robust next year, when high inflation will cripple consumers and the impact of the decline in investment intentions will be felt.
February's money and credit figures supported recent labour market and retail sales data suggesting that consumers are increasingly financially strained. Households' broad money holdings increased by just 0.2% month-to-month in February, half the average pace of the previous six months.
Taken at face value, the preliminary estimate of Q2 GDP suggests that the economic recovery weathered Brexit risk well. But growth received support from some unsustainable sources, and also probably was boosted by a calendar quirk. Meanwhile, with few firms or consumers expecting a vote for Brexit prior to the referendum, Q2's brisk growth tells us little about how well the economy will cope in the current climate of heightened uncertainty.
Whether the economy enters recession will hinge more on corporate behaviour than on consumers. Household spending accounts for about two thirds of GDP, but it is a relatively stable component of demand. By contrast, business investment and inventories--which are often overlooked--are prone to wild swings.
Yesterday's advance consumer sentiment index in the Eurozone confirmed the upside risks for consumers' spending in Q4. The headline index rose to a 17- year high of +0.1 in November, from -1.0 in October.
August's money and credit figures show that households' incomes remain under pressure, indicating that the recent pick-up in growth in consumers' spending likely won't last.
Consumption and investment spending by state and local government accounts for just over 10% of the U.S. economy, making it more important than exports or consumers' spending on durable goods, and roughly equal to all business investment in equipment and intellectual property.
Household spending has been the sole source of growth in the economy so far this year, amid worsening investment and net trade. Today's official retail sales figures, however, look set to show that consumers suffered the Brexit blues in June.
August's retail sales figures create a misleading impression that consumers can be relied upon to pull the economy through the next six months of heightened Brexit uncertainty unscathed.
On the face of it, the surge in retail sales volumes in September suggests that the U.K. consumer is in fine fettle and can prevent the economic recovery from losing momentum as exporters struggle and government spending retrenches. But the underlying picture is less encouraging and consumers won't be able to sustain the recent robust growth in real spending when inflation revives next year.
If we are right in our view that the lag between shifts in gasoline prices and the response from consumers is about six months--longer than markets seem to think--then the next few months should see spending surge.
Sharp falls in energy prices have been a boon for consumers, freeing up considerable funds for discretionary purchases. Domestic energy and motor fuel absorbed just 4.7% of consumers' spending in Q2, the lowest proportion for 12 years and well below the 6.7% recorded three years ago.
Last week's GDP figures illustrated that the economy is extremely vulnerable to a slowdown in households' spending. Our chart of the week, on page three, shows that consumers were alone in making a significant positive contribution to GDP growth last year.
The expectations components of both the Michigan and Conference Board measures of consumers' confidence have risen sharply since gasoline prices rolled over.
The second estimate of Q4 GDP, published on Thursday, probably will show that the economy slowed more abruptly last year than previously thought and that it has become very dependent on consumers for momentum.
The slowdown in retail sales in the first quarter and the recent pick-up in the number of retailers seeking protection from creditors begs the question: are consumers retrenching, or just spending their money elsewhere?
Real GDP in Germany grew 0.7% quarter-on-quarter in Q4, thanks mainly to a 0.4% contribution from private consumption, and a 0.2% boost from net trade. Household consumption grew 2.2% annualised in 2014, the best year for German consumers since 2006.
The U.S. household sector carries substantial gross debts, even after the sustained deleveraging since the crash of 2008. The gross debt-to-income ratio stood at 105.3% in the second quarter of this year, down from the 135% peak in late 2007 but still well above the 88% average recorded in the 1990s, which was not a decade of restraint on the part of consumers.
Payroll growth rebounded to 223K in May, after two sub-200K readings, and we're expecting today's June ADP report to signal that labor demand remains strong.
Chief U.K. Economist Samuel Tombs on U.K. Inflation
Why is the EZ current account surplus rising and net exports falling at the same time?
Chief US economist Ian Shepherdson on June Consumer Confidence data
Chief U.K. Economist Samuel Tombs on the U.K. Economy in 2018
Chief US Economist Ian Shepherdson on Consumer Confidence figures for April
Chief U.K. Economist Samuel Tombs on Consumer Price Index, June
Chief U.K. Economist Samuel Tombs on the U.K. CBI survey, November
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