Euroland domestic demand unimpressive, trade boost peaking?

Posted on Wednesday, March 7, 2018 at 02:44PM by Registered CommenterSimon Ward | CommentsPost a Comment

Euroland domestic demand slowed during the second half of 2017, with strong GDP expansion sustained by a rise in net exports, reflecting global economic buoyancy. Monetary trends suggest that domestic demand will remain subdued in 2018, while global cooling and euro appreciation may drag on trade performance. The consensus assessment of economic prospects may be overly positive.

Revised figures released today confirm an earlier estimate that GDP grew by 1.3%, or 2.6% at an annualised rate, during the second half of 2017 (i.e. between the second and fourth quarters). The “news” was in the expenditure breakdown: domestic final demand rose by only 0.6%, while a rise in net exports contributed 0.9 of a percentage point to GDP expansion. Total domestic demand grew by just 0.4% as inventory accumulation was cut back between the second and fourth quarters.

Two-quarter growth of domestic final demand peaked as long ago as the second quarter of 2016, with the moderation since then consistent with a decline in six-month real narrow money growth from a peak in January 2015 – see chart. Monetary trends recovered modestly in the first half of 2017 before turning down again late in the year. Domestic final demand growth may stabilise or rebound in early 2018 but prospects for the second half appear lacklustre.

GDP growth has probably remained solid in early 2018, partly reflecting a rebound in inventory accumulation, but global cooling, the stronger euro, softer domestic final demand and a fading of the inventories boost may combine to produce a significant slowdown during the second half of the year.

The recent dependence of GDP growth on net exports may heighten ECB concerns about euro appreciation but any attempt by President Draghi to “talk down” the currency at this week’s press conference would risk enflaming US protectionist sentiment.

Global money update + is the stocks cycle peaking?

Posted on Monday, March 5, 2018 at 03:34PM by Registered CommenterSimon Ward | CommentsPost a Comment

Incoming monetary news continues to suggest that the global economy will lose momentum over the remainder of 2018. This slowdown will probably be driven partly by a rolling over of the US / global stockbuilding or inventory cycle.

With near-complete January monetary data now available, six-month growth of real narrow money in the G7 plus emerging E7 economies is confirmed to have fallen to its lowest level since 2008. Real broad money growth also weakened further – see first chart.

Real narrow money growth has fallen similarly in the G7 and E7 groupings, suggesting a synchronised economic slowdown across developed and emerging economies – second chart.

Euroland, the UK, Canada and Australia, among others, have released January monetary data over the past week. Real narrow money growth recovered slightly in Euroland – see previous post – but there were further falls in the UK and Canada; Australia, meanwhile, moved into contraction – see third chart.

The US may have joined Australia in negative territory in February, judging from weekly data – see fourth chart*. As previously discussed, US narrow money trends rebounded strongly 3-5 months after previous large tax cuts were legislated, so we are on the alert for a recovery in the data starting over March-May. 

The primary indicator used here to assess the status of the global inventory cycle is the annual change in G7 stockbuilding expressed as a percentage of GDP – equivalent, to a very close approximation, to the contribution of stockbuilding to annual G7 GDP growth. This series has reached troughs every 14 quarters on average since the 1960s, consistent with economists’ assessment based on earlier historical data of a cycle length of between three and five years – fifth chart.

The negative impact of stockbuilding on annual G7 GDP growth reached a maximum in early 2016 – a fading of this drag was an important driver of accelerating global activity in late 2016 / 2017. The contribution turned slightly positive in the third quarter of 2017 but fell back in the fourth quarter. A reasonable hypothesis is that companies were surprised by the strength of final demand in late 2017, so were unable to increase inventories to the extent desired.

If this hypothesis is correct, firms would be expected to boost production and stockbuilding strongly in early 2018 in an effort to restore the desired ratio of inventories to sales. This appears to be happening: the US ISM manufacturing inventories index, which is based on the net percentage of firms reporting a rise in stock levels, correlates with the G7 stockbuilding growth contribution and surged in February, reaching a high level by historical standards – fifth chart.

The finished inventories index of the Markit global manufacturing purchasing managers' survey also rose sharply last month.

The expectation here is that the growth impact of G7 stockbuilding will peak in the first or second quarter of 2018, fading during the second half and turning negative ahead of the next cycle trough, which – based on the historical average cycle length – could occur in mid-2019.

*The final data point in the chart is an estimate based on the average level of the nominal money stock in the three weeks to 19 February and an assumed 0.2% rise in consumer prices  (seasonally adjusted).

Euroland money data better but still signalling slowdown

Posted on Wednesday, February 28, 2018 at 03:26PM by Registered CommenterSimon Ward | CommentsPost a Comment

Euroland monetary growth recovered modestly in January but a slowdown since mid-2017 continues to suggest a loss of economic momentum through late 2018. The OECD’s Euroland leading index is confirming a prospective downshift in economic growth.

As usual, the monetary analysis here focuses on non-financial M1 / M3, the forecasting performance of which is superior to the headline M1 / M3 measures*.

Non-financial M1 rose by a solid 1.1% between December and January, with non-financial M3 up by 0.6%. Six-month growth of the two aggregates reversed a decline in December but remains lower than during the first half of 2017 – see first chart.

The recovery in six-month nominal growth, moreover, was roughly matched by a further rise in six-month consumer price inflation, so real money expansion was little changed, having reached its lowest since 2014 in December – second chart.

The ECB publishes a country breakdown of overnight deposits, which account for more than 80% of M1. This breakdown suggests that the slowdown in Euroland real narrow money since mid-2017 has been driven by France and Spain – third chart. Better French economic data since the election of President Macron may have been coincidental and temporary, while the Catalonia political crisis may be dragging on Spanish prospects.

German real overnight deposit growth has fallen by less but from a lower level. Strong German GDP growth during the second half of 2017 relied on net exports – domestic demand rose by only 0.25% per quarter. Italian real deposit growth has been relatively stable recently.

The OECD’s Euroland composite leading index, which typically lags monetary trends by several months (and excludes money measures), confirms softer economic prospects. The normalised version of the index is estimated to have declined in January, the first fall since August 2016, with a further reduction projected for February – fourth chart**. The normalised index is designed to predict GDP relative to trend, so the shift from rising to stable / falling suggests that recent strong growth will give way to trend or slightly below-trend expansion.

The turnaround in the index mainly reflects a recent cooling of business and consumer surveys, along with weaker stock market performance.

*Non-financial = covering holdings of households (HHs) and non-financial corporations (NFCs), i.e. excluding financial sector money.
**The OECD is scheduled to release a January reading on 8 March but most of the component information is available, allowing an independent calculation.

Euroland economic news softening on schedule

Posted on Wednesday, February 21, 2018 at 11:59AM by Registered CommenterSimon Ward | CommentsPost a Comment

Previous posts (e.g. here) argued that the Euroland economy would slow from around spring 2018. Weaker February PMI results are consistent with this forecast. As usual at economic momentum peaks, the consensus is likely to emphasise the still-strong level of survey indicators, playing down the change of direction. Money trends, by contrast, suggest a further significant cooling over coming months.

Six-month growth of real narrow money, as measured by non-financial M1 deflated by consumer prices, peaked most recently in June 2017, falling in December to its lowest level since 2014. Allowing for a typical nine-month lead, this signals a likely decline in economic momentum from around March 2018 through September, at least. Two-quarter GDP growth, in fact, may have peaked in the third quarter of 2017, although recent data have tended to be revised upwards – see first chart.

Business surveys lead activity by up to three months, implying that they should reflect monetary trends six months or so later. The second chart shows the manufacturing PMI and output expectations from the EU Commission manufacturing survey, along with six-month real narrow money growth lagged by six months.  The survey indicators appear to have peaked on schedule in December, with the February decline in the PMI likely to be echoed by next week’s EU Commission survey. The relationship suggests a further fall in the PMI towards the 50 level by mid-2018.

Why have monetary trends weakened despite ECB President Draghi’s best efforts to delay policy “normalisation”? The view here is that narrow money is demand-determined and influenced importantly by spending intentions, explaining its leading relationship with activity. Sectoral figures show that money holdings of both households and corporations have slowed. Spending intentions may have been dampened by a combination of higher inflation, firmer long-term yields, euro strength, incipient global cooling, Brexit worries and concern that some governments will face financing difficulties as the ECB’s QE backstop is withdrawn.

Will global money trends stabilise soon?

Posted on Tuesday, February 20, 2018 at 10:30AM by Registered CommenterSimon Ward | CommentsPost a Comment

The global real money measure tracked here appears to have slowed further in January, reinforcing the expectation of a significant loss of economic momentum later in 2018.

The US, China, Japan, Brazil and India have released January monetary data, together accounting for two-thirds of our G7 plus E7 aggregate. Assuming unchanged money growth in other countries, and incorporating near-complete inflation data, six-month expansion of G7 plus E7 real narrow money is estimated to have reached another nine-year low – see first chart.

With six-month industrial output growth expected to have been little changed from December, real narrow money expansion is likely to have fallen short of output growth for a second month, suggesting unfavourable prospects for equity markets – see previous post.

The fall in real narrow money growth since mid-2017 reflects both lower nominal expansion and a pick-up in six-month consumer price inflation – second chart.

Money trends suggest significant downside risk to consensus economic growth expectations but are still far from signalling a recession – every global downturn since the 1960s (at least) was preceded by a contraction of real narrow money. The expectation here is that global real money growth will stabilise or recover slightly over coming months, for two reasons.

First, six-month consumer price inflation may have reached a near-term peak in January, assuming that commodity prices stabilise at their current level – third chart.

Secondly, US narrow money growth may revive into mid-2018 as tax cuts lift disposable incomes and spending intentions. Stronger US monetary data may offset weaker trends elsewhere.

We examined the behaviour of US narrow money growth around three previous major tax cuts, signed into law by Presidents Johnson (1964), Carter (1978) and Reagan (1981). These were the top three initiatives since 1950 ranked by impact on existing revenues, according to a Treasury study, involving losses of 1.6%, 0.8% and 2.9% of GDP respectively. For comparison, the Tax Cuts and Jobs Act of 2017 is projected to cut revenues by 1.1% of GDP*. The three prior reductions occurred against a backdrop of rising interest rates, as now.

Surprisingly, there was a consistent pattern across the three episodes: six-month narrow money growth declined before and just after legislation was passed but then rose for 5-6 months, subsequently falling back again – fourth chart.

This pattern could reflect uncertainty about the success and details of legislation holding back spending and activity pending its passage. In addition, some beneficiaries of tax cuts may lack liquid resources or access to credit, delaying the boost to their spending until reductions flow through to disposable incomes.

The recent monetary slowdown fits the historical pattern and the suggestion is that narrow money growth will recover temporarily in Q2 and Q3 2018.

Such a revival could warrant a more positive view of US economic prospects for late 2018 / early 2019 but would not alter the forecast of a near-term slowdown. Global prospects, of course, will also hinge on developments in China, where money trends suggest an increasing risk of a “hard landing” unless the authorities reverse policy restriction soon – see previous post.

*All figures refer to static impact over four years, except 1964, which refers to full impact in single year.