Do we have lift-off?

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After the weather distortions of the first quarter of the year, recent economic data suggests that the improvement in cyclical conditions is continuing. As we have highlighted, Europe and the US are in the lead as far as direction is concerned. Within Europe, the performance of the UK economy is particularly encouraging.

Recent economic data suggests that the improvement in cyclical conditions is continuing. Han de Jong Han de Jong Chief Economist

Various indicators in a range of countries are suggesting that corporate investment is strengthening. We believe that this recovery 'has legs' and will continue. Emerging economies will generally be able to tag along. All this will set the scene for an acceleration of corporate profit growth. Geo-political risk, more specifically the situation in Ukraine, continues to be a cloud hanging over this generally positive picture.

Germany and the UK

Last week's data for Germany and the UK were very positive. Business confidence in Germany, as measured by the authoritative Ifo Institute strengthened in April, beating expectations. The headline series rose from 110.7 to 111.2. The - arguably - more important 'expectations component' rose from 106.4 to 107.3 following two months of decline. That was particularly impressive as we had assumed the readings for the first couple of months of the year had benefitted from the unusually mild weather. The positive picture painted by the Ifo index is confirmed by the Markit PMI. This is also true for the eurozone as a whole. The composite PMI for the eurozone rose from 53.1 to 54.0 in April, largely thanks to the services sector, although the manufacturing gauge also moved up a little. A noticeable divergence showed up again between Germany and France as the French confidence indices declined. My colleague Aline Schuiling has written about this, showing that the French Markit PMI data is weaker than other, more traditional indices for the French economy, although it must be said that the Banque de France confidence indicators also weakened a little in April.

20140428 Eurozone monthly production in construction

Construction output data for the eurozone was strong in February. Output rose 6.7% yoy in February, although this was a little below January's 8.0%. The improvement in the trend is very noticeable, although the weather must have played an important, positive role. Looking at the country breakdown, the improvement in Spain was particularly encouraging, where output was up 23.9% yoy.

The UK economy continues to shine and show a remarkably strong recovery. Retail sales were up 4.2% yoy in March, up from February's 3.3%. Perhaps more interesting was the CBI quarterly business confidence survey. It showed business optimism rising to its highest level since 1973!!!!! Historical comparisons of such indices are perhaps not that relevant as 'mood' is difficult to compare over long periods, but still... Also encouraging was that companies' intentions to invest were at their highest level since 1997.

20140428 UK Business optimism and retail sales.jpg

US durable goods confirming the picture

A similar conclusion can be drawn from the US durable goods order report for March. While less extreme than the UK's CBI survey, the durable goods report in the US also suggests that investment spending is on the up. Orders rose by 2.6% mom in March following a rise of 2.2% mom in February. Orders for non-defence capital goods, excluding aircraft rose 2.2% mom in March, after a decline of 1.4% in the previous month. Shipments rose 1.0% mom, after +0.6% in February.

Other US data was a little weaker. The Markit PMI for the manufacturing sector was a touch lower in April (55.4 versus 55.5 in March), while the services-sector series fell by more 54.2 versus 55.3 in March). However, the absolute level of these indices is at an encouraging level, suggesting continued growth.

The US housing market has turned from a leader of the cycle into a drag. Existing and new home sales fell in March, although the trend of rising prices continued. For now, we are not worried about it as the data may still reflect the bad weather. Wait and see.

This week will see some important data releases, among which is the GDP report for the first quarter. US GDP grew at a pace of over 3% annualised in the second half of last year. This trend was unsustainable and the bad weather most likely helped to push the overall growth rate considerably lower in the first quarter this year. However, recent data generally suggest that the economy has picked up speed again and that Q2 will show considerable 'pay back'.

Japan: highest inflation in years

The hike in the Japanese sales tax in April pushed inflation to the highest level since 1997. Headline inflation in the Tokyo area stood at 2.9% yoy in April (1.5% in March). Excluding fresh food and energy, inflation accelerated from 0.4% in March to 2.0% in April. How this will affect the wider economy remains uncertain. Many commentators make the comparison with 1997 when sales tax was likewise raised and the economy subsequently fell into a slump. One big difference with then is that the global economy is now strengthening, although not so much in the region. But things were worse in 1997 when the Asian economy soon fell victim to the Asian crisis.

One point of concern is Japan's export performance. The value of exports was 1.8% higher in March than a year ago. This represents a meaningful deceleration. Only six months earlier, export growth amounted to over 15%. It is unclear what exactly is causing this weakness. It could be a combination of bad US weather and softer import growth by China.


The situation in Ukraine continues to be a shadow hanging over the generally positive economic  landscape. In our main scenario we continue to assume that the situation will not escalate to an extent that will greatly affect the global economy. It must be said, however, that such developments are hard to predict. If all the players act rationally (that is to say, follow the lines of argument we find rational) we should be OK.


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