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The Chief Economist's weekly update

The Chief Economist's weekly update

To help you navigate through the economic news, here is a summary of last week’s main events and what to look out for next week.

Last week’s key economic news (from 20 to 24 Jan. 2020):

  • In the US, the first estimates of the manufacturing index have slightly disappointed with data below 52 on moderate demand, but the services PMI has increased slightly more than expected, to 53. Finally, the composite PMI has increased above the 53, pointing towards moderate but positive growth trend. On housing, prices (FHFA house price index) showed some moderation on a monthly basis (0.2% m/m), but its trend remained healthy. Existing home sales rebounded strongly, reversing the last month’s fall; inventories decreased, and prices put in sustained rises (7.8% y/y).
  • In the eurozone, the first ECB meeting of the year confirmed its ongoing strategy and began the process of reviewing it. Christine Lagarde refrained from giving any personal preference on inflation targeting or other matters but insisted on a review of all aspects of the ECB’s strategy, opening the door to new calculations and methods to fulfil the bank’s price stability mandate. Separately, the ECB’s bank lending survey revealed that banks tightened their credit standards – mainly for housing but also for corporates; consumer demand for loans is rising fast, while corporate demand is decreasing. On the economic front, the manufacturing PMI has rebounded slightly more than expected, but it remained below 50. The services PMI has moderated, but it remained above the 52 level: the weakness was due to a weak number in France, probably related to the strikes, while the estimate for German services has strongly rebounded. In addition, French business confidence fell slightly in the retail sector but remained stable in services and construction; it increased slightly in manufacturing on less negative views on orders and production. Italian industrial orders decreased; sales remained fragile, which was also due to weak foreign demand. In Germany, expectations on the ZEW index increased further to levels above those last seen in 2016/17, revealing rising confidence in the financial world.
  • In Japan, the BoJ left its current strategy unchanged but revised its 2020 and 2021 growth outlooks up slightly (to 0.9% y/y and 1.1% y/y, respectively) after the government launched new budgetary stimulus measures; in contrast, inflation outlook was revised down slightly to 1% y/y for 2020 and 1.4% y/y for 2021. On the economic front, final industrial production (December) fell by more than expected (-1% m/m; -8.2% y/y). In parallel, machine tool orders (December) and exports (December) were still heavily depressed. First estimates for manufacturing and services PMIs were more positive and the services index has rebounded above the 50 level thanks to higher new orders. Inflation has recovered from the lows past month, but it remained just below 1% y/y for both headline and core inflation at 0.9% y/y.
  • In the UK, the first estimates for the manufacturing and services PMI have shown a stronger than expected rebound, even though the manufacturing PMI remained just below 50. Other business surveys (the CBI trend on orders and business optimism) also rebounded strongly after a long downward trend: all these data point to a rebound in activity in the coming months, but doubts persist as to whether or not it is enough to remove the pressure on BoE to ease its rates further. Labour data generally remained on a healthy trend with unemployment remaining low (3.8%), however, the rise in employment slowed slightly in recent quarters. Wage growth remained sustained (3.2% y/y), but the trend moderated slightly from the peak seen in last summer’s rise (4% y/y). House prices (Rightmove house price index) rebounded strongly in the wake of the general election, showing a return of confidence and investors in the sector.
  • Central bank meetings: Malaysia cut rates from 3% to 2.75%.
  • The first estimates of the manufacturing and services PMI was mixed, but showing a more positive environment in Europe, UK and Japan. The dynamic was slightly different between services and manufacturing across regions, but the composite index was at least stable or firmer in all regions. Besides PMI, other indicators were generally constructive: real-estate sentiment is positive in several countries and prices are rising strongly, as is demand for loans; confidence has returned, even though real activity data are still fairly weak. Investors need to be patient as the financial markets are already showing signs of improvement.
  • While the signing of an agreement between the US and China caused hopes of an upturn in global trade to re-emerge, the spread the coronavirus served as a reminder of the fragility of the global economy, as well as of the significant impact of pandemics in the past.
  • Climate change and so-called “green” investments dominated debate in Davos, but it remains to be seen if this new direction will be translated into investment and economic data.


Important for the scenario for next week:

  • In the US, it will be a busy week, with the FOMC meeting dominating the news. This should not change the current strategy: the bank should be pleased by current growth but uncomfortable with inflation, with obvious different dynamics in CPI, PCE data and on wage growth. Changes in rates require a major change in the underlying growth and inflation scenarios according to the latest Fed statements. On the strategy review, the FOMC should adopt a smooth average inflation target in the future (i.e. an under/overshoot of the 2% mark); the Fed will continue to stay vigilant on liquidity, possibly intervening with regular repo operations.
  • The consensus expects early estimates for Q4 GDP growth to print at 2.1%, i.e. the same trend as in Q3: there are downside risks to these estimates as consumption has been slightly more volatile and a bit weaker than in Q3, while investment and trade should continue to present headwinds, while housing should remain strong. On the supply side, regional business surveys (Chicago PMI, Dallas Fed and Richmond Fed) should rebound after weak and volatile data over the last two months; the consensus also expects durable goods (December) to rebound after weak data, however, downside risks could prevail due to ongoing adjustments to Boeing’s output and the PMI manufacturing continuing to remain mediocre. On the consumer side, personal income and spending (December) should remain moderate, after strong data in November; core PCE is expected to stay on a stable trend (1.6% y/y) despite the slight uptick seen in health costs and CPI data. Consumer confidence is expected to increase further (Conference Board index), while further erosion could be seen in the Michigan index; nevertheless, both indices should remain at high levels. A range of data will be published on housing (new home sales, S&P CoreLogic prices, pending home sales), which should reveal an ongoing positive trend.
  • In the eurozone, the first Q4 GDP estimates should reveal weak growth at the end of the year (0.1%/0.2% q/q) coming in at 1.1%–1.2% y/y for 2019; the same moderate/weak scenario could be expected at country level (France, Italy) for Q4 GDP estimates, except probably for Spain. The EC confidence index for sectors (industry, services and consumers) should print some improved figures for industry, a stable trend in services, but persistent uncertainties at consumer level (unrest in France, political uncertainties in Italy). Early inflation estimates (January) should reveal some moderation in the trend from the previous figure (1.3% y/y for December); the unemployment rate (December) is expected to remain stable at 7.5% and no major changes are expected in the M3 and credit trends.
  • At country level, important data will include, besides first estimates of Q4 GDP, French consumption (December), which should be weaker than expected due to strikes and unrest; in Germany, the Ifo index should continue to bottom out, while retail sales and consumer confidence (GFK index) should remain volatile; no change is expected on the German labour trend, with unemployment continuing to be low. Unemployment rates will be also published in Italy and Spain.
  • In Japan, industrial production (December) will probably remain volatile, but some rebound could be expected in preliminary data related to the slight improvement in the auto sector. The labour market should remain on a positive trend and unemployment should stay low, even if it is only growing modestly. Consumer confidence should make up more ground and retail sales should remain volatile after the ups and downs in data following the VAT rise.
  • In the UK, the major event will the BoE’s MPC meeting: pressures have increased on the bank as data (activity, inflation) weakened further at the end of the year, and after several BoE members, including Mark Carney, mentioned that more support could be in the pipeline; money markets are putting the odds of a rate cut at this meeting at over 50%. On the economic front, the main indicators published during the week will be consumer confidence (GFK index), which should recover progressively, monetary aggregates (M4) and credit, along with a range of business and housing surveys.
  • Central bank meetings: Hungary, Chile and Colombia.
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