Euroland relative economic prospects / BoP suggesting euro support

Posted on Thursday, June 6, 2019 at 04:17PM by Registered CommenterSimon Ward | Comments1 Comment

Euroland first-quarter GDP details released today support the view here that the Kitchin inventory cycle downswing is further advanced than in other regions – a positive for relative economic prospects.

Firms continued to increase stock levels in the first quarter but the rise, expressed as percentage of GDP, was the smallest since the fourth quarter of 2017. Stockbuilding, by contrast, increased further in the US, Japan and UK and is high by recent historical standards – see first chart.

GDP growth depends on the change in stockbuilding. The annual change has turned significantly negative, consistent with the cycle moving towards a low, while a survey-based leading indicator may be bottoming – second chart.

Euroland money trends also suggest that economic news will hold up better than elsewhere – see previous post.

An improvement in relative news could contribute to a rally in the euro, which has yet to reflect a strengthening of the basic balance of payments position* since mid-2018 – third chart.

As shown by the fourth chart, this strengthening has been driven by a cessation of net outflows on the direct and portfolio investment accounts, in turn reflecting the ending of QE – much of the liquidity previously being created by the ECB was “exported”.

Euroland / US interest rate differentials remain heavily negative but have narrowed, a trend that may continue as US economic weakness causes markets to expect more significant Fed policy easing – fifth chart. The ECB, meanwhile, may be reluctant to consider rate cuts or restarting QE before President Draghi’s successor takes the helm at end-October.

*Current account plus net direct and portfolio investment flows.

Labour market watch: more downbeat news

Posted on Tuesday, June 4, 2019 at 10:48AM by Registered CommenterSimon Ward | Comments1 Comment

The view here remains that global economic weakness is spreading to labour markets, implying that it is becoming entrenched and will require more significant policy easing to reverse. Three news items in recent days are consistent with this development.

First, the global manufacturing employment index moved below 50 (to 49.9) in May, meaning that more companies (weighted by size) cut rather than added jobs last month. Turning points in the employment index usually lag those in the new orders index, which also fell further in May, suggesting additional weakness in the employment measure – see first chart.

Secondly, following news of further falls in German vacancies and Japanese job offers, Australian job advertisements plunged in May to their lowest level since 2016 – second chart. Accompanying commentary claimed that holiday timings and election uncertainty were largely responsible, implying a June rebound; an alternative interpretation is that the decline in advertisements had paused in April and the big May fall reflects a catch-up effect.

Thirdly, Japanese labour market cooling was confirmed by a further decline in May in the component of the consumer confidence index measuring employment prospects over the next six months – third chart. The recent fall in overall confidence is ominously similar to the slide preceding the April 2014 sales tax rise; consumer spending contracted by 2.0% in the year to the fourth quarter of 2014.

UK corporate money trends flashing red

Posted on Friday, May 31, 2019 at 02:15PM by Registered CommenterSimon Ward | CommentsPost a Comment

A previous post noted that UK corporate narrow money trends were giving a recession warning. The signal has strengthened in April data released today, with the six-month change in real M1 holdings of private non-financial corporations (PNFCs) moving deeper into negative territory – see first chart.

Corporate money weakness is consistent with a squeeze on finances and suggests a faster decline in investment along with job cuts – now being signalled by vacancies data.

The six-month change reached similar levels in 2010-11, following which GDP slowed but did not contract. The global economic backdrop, however, is weaker now, while the negative impact of Brexit uncertainty may not be fully captured in the money numbers.

GDP, moreover, was still far below potential in 2010-11 – recessions usually occur only after the “output gap” has closed.

As previously explained, household narrow money resilience offers little reassurance, as it appears to reflect a portfolio switch out of mutual funds. A broad household savings aggregate encompassing M4 holdings, National Savings and mutual funds ("M4++") has barely grown in real terms over the last six months, suggesting a consumer spending slowdown – second chart.

Labour market watch: job openings rolling over

Posted on Friday, May 31, 2019 at 09:35AM by Registered CommenterSimon Ward | CommentsPost a Comment

Last week’s flash PMIs for May confirmed that economic weakness has spread to the US, and from manufacturing to services. The next stage of the downswing, according to the analysis here, will be a crumbling of labour market resilience, which – together with slowing inflation – will add to pressure for central bank policy easing. This is the first of a series of short posts focusing on incoming labour market news.

A previous post noted that UK vacancies (three-month moving average) fell for a third consecutive month in April, signalling a likely decline in employee numbers. The first chart shows that measures of job openings / vacancies rose across economies into early 2018 but are now flatlining or falling across the board.

A drop in German vacancies in May was accompanied by a surprise rise in unemployment – even after adjusting for a reporting change. German aggregate hours worked, meanwhile, fell in the first quarter – second chart.

Euroland money trends suggesting relative resilience

Posted on Wednesday, May 29, 2019 at 10:54AM by Registered CommenterSimon Ward | Comments1 Comment

Euroland money growth was little changed in April and continues to give a hopeful message for economic prospects. Global weakness and a reversal of UK pre-Brexit stockbuilding, however, may delay a recovery in momentum until late 2019 / 2020.

Six-month growth rates of real narrow and broad money, as measured by non-financial M1 / M3, edged lower in April but remain well above lows reached in July and March 2018 respectively. The rise from those lows has already been reflected in a small revival in two-quarter GDP momentum – see first chart.

Euroland real narrow money growth, unusually for recent years, is above levels in both the US and China.

In addition, the Kitchin inventory cycle downswing may be further advanced in Euroland relative to other regions. In Germany, in particular, inventories subtracted 0.3 percentage points (pp) from the quarterly change in GDP in the first quarter, following a 0.5 pp drag in the fourth quarter. US inventories, by contrast, contributed positively to GDP growth in the latest three quarters, by a cumulative 0.8 pp.

The recovery in real money growth suggests that the manufacturing PMI is at or close to a bottom – second chart.

The main reason for caution is the likelihood of further US / Chinese economic weakness depressing exports and, by extension, business investment. Exports, moreover, have been supported by UK Brexit-related stockpiling, which is now reversing.

Current conditions may be the mirror-image of those in 2016-17. Real narrow money growth moderated over this period but US / Chinese economic strength boosted exports / investment and delayed a peak in the manufacturing PMI until December 2017. Global weakness may now postpone a Euroland economic recovery until 2020.