Last week's economic data is telling a consistent story. That is to say, the data is fitting together nicely and is consistent with our long-held view that the global economy is gradually gaining momentum. The US is clearly waking up from hibernation, the eurozone is slugging along quite nicely and the UK continues to surprise positively. Fears for a serious (further) slowdown in emerging economies appear to be abating, and it is too soon after Japan's sales tax hike to take a strong view on that country's immediate cyclical outlook. All in all, we can't complain.
US waking up from hibernation
Han de Jong Chief Economist
Europe heading for elections
Elections for the European parliament will be held later this month. In a number of countries, parties favouring 'less Europe' are doing well in the polls. Some commentators have warned that the euro crisis might flare up after these elections, should such parties achieve very good results. We simply have to wait and see. The traditional parties are hoping that the improvement in economic circumstances will limit the electoral damage for them. While economic data has improved, it remains to be seen whether the improvement is strong enough to have a big impact on the elections. I note that the rebuilding of the governance structure of the euro implies a meaningful deepening of European integration. In my opinion that is a good thing. However, public opinion has moved the other way: the public wants less integration, not more. Public opinion is fickle, but I wonder how actual developments and public opinion can diverge for any serious length of time.
The star performer in Europe is the UK. Q1 GDP growth amounted to 0.8% qoq, not annualised, and no less than 3.1% yoy. Growth was broadly based. UK house prices continue to move higher. The Nationwide house price index was up 10.9% yoy in April, the first reading above 10% since 2010. Business confidence in manufacturing was also very strong in April and the Lloyds Business Barometer reached its highest level since the start of this series in 2012.
Business confidence in the eurozone was more or less unchanged in April. The Markit PMI was a touch higher after two months of decline, but the European Commission's index of economic confidence was slightly lower. This may reflect the normalisation of activity and growth levels after the mild winter. Some countries in the periphery continue their recovery. Unemployment in Ireland, for example, fell to 11.7% in April, down from a peak of 15.0% in 2012.
Inflation and credit data was not great but not very bad either. Eurozone inflation moved back up from the surprisingly low 0.5% registered in March. April inflation amounted to 0.7% yoy, although this was still below expectations. Unpleasant deflation would not appear to be an immediate threat. However, the consequences of unpleasant deflation would be very negative and it is therefore understandable that the ECB is considering taking out an insurance policy against it. Money and credit growth remain very sluggish. M3 growth eased from 1.3% yoy in February to 1.1% in March as credit to the private sector continued to contract at a modest pace. Against this background it is hardly surprising that the ECB is considering taking some further action. While ECB officials regularly state that they have lots of tools at their disposal, reality is that it is questionable if they really have so much ammunition that is likely to be effective and that they are willing to use. Large-scale buying of government bonds would not appear to be a real option for the ECB. Another LTRO is unlikely to be particularly effective and the ECB appears to be unwilling to cut interest rates decisively below zero. Given their worries about the small and medium sized companies, any measure taken by the ECB is most likely going to focus of improving the transmission of credit to that sector. But the implication of that would be that the potential size of the measures will be relatively moderate. The ECB's quarterly Bank Lending Survey suggests that pressure on the banks is easing. Credit standards remained unchanged according to the April issue of the report. That was an improvement. A positive element of the report was the banks reporting stronger loan demand from companies. Another positive was the improvement of risk perceptions. The credit cycle is known to lag the cycle in the real economy. So the improvement in cyclical indicators and the improvement in the bank lending survey are hopefully a sign that stronger credit and money growth data is just a matter of time.
US waking up from hibernation
US GDP barely grew in Q1, expanding a mere 0.1% qoq, annualised. The weather clearly was a main factor at play. Net exports, investment spending and the change in inventories were the culprits. We expect positive payback in Q2, but inventories remain a big uncertainty. In Q1 inventories continued to rise at a decent pace, but well below the build-up in the previous quarter. That is why they subtracted 0.6% from overall growth. It is certainly not unthinkable that the inventory cycle will keep Q2 GDP numbers relatively soft as well.
Other US data paint a much more upbeat story. Business confidence, as measured by the ISM rose more than expected in April, and the Chicago PMI in particular was very strong. The decline earlier in the year, which had most likely been caused or at least aggravated by the weather, has been largely overcome. Personal income and spending data were also impressive. Income was up 0.5% mom, while spending was up 0.9% mom in March. The piece of data most people tend to focus on is the employment report. The number of jobs expanded by 288K in April, the strongest reading in two years, and the numbers for the previous two months was revised up by 36,000. Unemployment fell to just 6.3%, though this was largely caused by a decline in the labour force, which can be erratic.
The data on business confidence, the labour market and income and spending strongly suggest that the US economy is gaining momentum quickly.