Eurozone GDP numbers for the first quarter were a disappointment as the Dutch economy contracted much more than expected and French and Italian data were also weaker than anticipated. Strong German growth was unable to compensate. However, other data continues to paint a picture of an ongoing recovery.
More important, the data contained elements that provide reason for cautious optimism.
Han de Jong Chief Economist
Some peripheral countries in particular are on the mend, although their road to economic health is still long and possibly treacherous. Despite the fact that some of last week's US data was less than brilliant, a compelling picture is emerging of a strengthening economy. First quarter Japanese GDP data exceeded expectations. More important, the data contained elements that provide reason for cautious optimism that growth can be sustained after the tax hike in April. China's slowdown continued, though the pace of the slowdown is very modest and the government announced some additional measures aimed at supporting economic growth. Overall, I am very happy with our view of a further improvement in global economic momentum throughout the course of this year and into next year.
Eurozone growth disappoints
Eurozone GDP was up 0.2% qoq in Q1. That was only half the growth expected. On a yoy basis, growth accelerated to 0.9%, up from 0.5%.
This is, of course, not very strong, but one must bear in mind that potential growth is not all that much higher. The weather has had an impact, though the effect differs per country. In Germany, for example, mild winter weather leads to additional activity in construction, boosting growth. On the other hand, lower use of natural gas leads to lower output in the Netherlands, where mild winter weather tends to limit activity. Furthermore, we must bear in mind that GDP data can be volatile and we know little about the breakdown of growth in the various components. Results for France (0.0% qoq, +0.8% yoy) and Italy (-0.1% qoq, -0.5% yoy) were particularly disappointing.
Other data, such as business confidence suggest that the recovery is ongoing and a little stronger than Q1 GDP data is suggesting, although there were not many interesting other data releases last week. EU car registrations were up 4.6% yoy in April, a drop from 7.4% in March. For the eurozone, the numbers were lower at 2.8% and 4.7%, respectively. The country breakdown reveals huge differences. What is striking is the strong performance of the countries that received financial support in recent years. Portuguese car registrations, for example, were up 53% yoy in April, from +43% in March. This number is undoubtedly flattered by the low base, but is still impressive and is hard to tie in with the 0.7% drop of Portuguese GDP in Q1. Spanish car registrations were up 29% yoy in April while Ireland booked an increase of 28% yoy. Greek registrations were up a more modest 2.1% yoy. German registrations were down 3.6% yoy.
Convinced of the US recovery
While several US data releases were less than brilliant last week, I think a relatively compelling picture is being painted by all the data together. Industrial production fell 0.6% mom in April, following a rise of 0.9% in March. Home builders' sentiment also weakened as the NAHB index fell from 46 to 45 in May. Retail sales were soft as well in April, rising a mere 0.1% mom, but the March number was revised higher to show a 1.5% increase on the month. Taking the two months together, retail sales look anything but weak.
On the strong side, jobless claims fell to 297,000 last week, the first reading below 300,000 in a long time. The trend of jobless claims is a powerful economic indicator. And the trend shows that the labour market is firming. Confidence among small businesses is also improving. The sentiment index of the National Federation of Independent Business rose to 95.2, from 93.4. While this is not a major data release and the survey is relatively small, the increase is welcome, as small businesses are the backbone of the economy and their business conditions had remained weak since the start of the recovery in 2009. More recently, this sentiment gauge has come back to life, suggesting that the recovery is finding a much more solid base. Regional indices of business confidence were also relatively strong. The Philly Fed index was unable to hold on completely to last month’s strong rise, but eased only slightly in May: 15.4, versus 16.6 in April. The Empire State index, which measures business confidence in the New York Fed district, rose strongly in May: 19.0, versus 1.3 in April. Consumer confidence weakened a little in May according to the preliminary data from the University of Michigan, but housing starts and building permits were relatively strong in April.
Headline inflation was up 0.3% mom in April, as core inflation amounted to 0.2% mom and 1.8% yoy, up from 1.7% in March. The trend in inflation will need to be monitored closely in the months ahead. It appears that inflation has bottomed. If inflation picks up more strongly than anticipated, this may force the Fed into action sooner than anticipated. We do not expect any Fed action for a long time yet, but we need to follow the inflation trend closely.
Japan and China
Japan's GDP expanded at a 1.5% qoq pace in Q1. That was better than expected. Consumption made an important contribution, which was expected as households tried to beat the increase in the sales tax in April and brought purchases forward. There will be payback in Q2 for this. However, business investment surprised on the upside and that is unlikely to be related to the sales tax increase. There is, therefore, reason for cautious optimism that the drop in growth in the near term will not be so bad.
China's retail sales and industrial output data confirmed that the slowdown in growth is continuing, though at a snail's pace. In addition, the government has encouraged local authorities to speed up growth in housing construction a little, a sign that the government is trying to provide modest, targeted stimulus in order to prevent too severe a slowdown. We think they will be successful at stabilising growth near target.