What to expect this week – 11 November – 17 November 2019

Highlights

> —GDP growth for the third quarter in Germany (Nov.14) and the ZEW survey for November (Nov.12)
The industrial contraction during the third quarter and the fragility seen on the services sector during the third quarter will probably lead to a negative growth rate in the third quarter. Will this technical recession be sufficient to force a more accommodative fiscal policy ? —

> The Eurozone GDP and Employment for the third quarter (Nov.14) and industrial production for September (Nov.15)
The flash estimate for the GDP was at 0.2%, it will be confirmed. The question is on the employment dynamics. Since the beginning of 2018, its quarterly growth has been close to the GDP growth leading to a flat trend in productivity. This is not a positive news. —

> The UK GDP for the third quarter (Nov.11) and Employment for August (Nov.12)
The main concern for the UK is its low productivity growth. Since the beginning of the current recovery, it has grown by only 1%. The change may come in coming months with a downside adjustment on the labor market. —

> GDP growth for the third quarter in Japan (Nov.14)
The figure will take into account the jump in households’ retail sales in September. Their expenditures were increasing to compensate the increase in the VAT rate in October. This is the same phenomena that the one seen in April 2014 with the last TVA rate change. —

> Industrial production index in the US for October (Nov. 15) NY Fed manufacturing survey for November (Nov.15)
The industrial momentum is low in the US as it can be seen with the ISM manufacturing index below the 50 threshold for the last 3 months to October. This will probably push the industrial production index on the downside. —

> Chinese industrial production, retail sales and investment for October (Nov.14)
The momentum is lower in China. It reflects negative external shocks (exports growth is close to zero in recent months) and of an strong internal adjustment (negative growth for imports)

> —Retail sales in the US (Nov.15) and in the UK (Nov.14)
The US sales will continue to be robust as the labor market is still supportive and households are optimistic
In the UK, the perception is weaker as the labor market dynamics has turned negative recently.

> —Inflation in the UK and in the US for October
Will be lower than in September as the energy contribution will be more negative in October. —

> Inflation rates in the Euro Area (15), France (14), Germany(13), Italy(15) and Spain (14)
Confirmation of the flash estimates released at the beginning of the month. The Euro Area inflation rate in October was first estimated at 0.7%

Eurozone growth painfully above 1%

GDP growth in the Euro zone is 1.2% (annualized rate) since the last quarter of 2017.
The figure of 0.2% (0.75% annualized rate) for the third quarter of 2019 does not change this trend. The carry over for 2019 at the end of the third quarter is 1.1% and growth over the year will be around 1.2% at best.
 After the catch-up in 2017, the economy of the Euro zone no longer has the capacity to accelerate. What does one do with the German budget surplus?Can we use it and put in place a more proactive fiscal policy in order to lock in a higher growth trajectory? See here in French

French growth fails to accelerate in the first quarter despite measures on purchasing power

French GDP growth decelerated slightly in the first quarter of 2019 even though the rounded figure stands at 0.3% (non-annualized) as in the previous two quarters. Despite the stimulus measures announced at the end of 2018, growth has not been boosted by the increase in households purchasing power.
Achieving the government target at 1.4% for 2019 on average would require growth of 0.43% in each of the remaining three quarters. It’s ambitious.

The annual change in activity is 1.1% in the first quarter, well below the trend observed since the 2013 recovery at 1.4%.
After the acceleration of 2017, resulting from the very buoyant global environment, the growth of the French economy can not deviate from the figure of its potential growth estimated generally between 1.2 and 1.3%.
For the moment, the measures implemented by the government are not able to go beyond this and this is worrying in a context where the sharp rise in the price of gasoline is a threat to the purchasing power that would penalize consumers’ demand.

Contributions to quarterly GDP growth are easy to remember. Domestic demand contributed 0.3%, inventories increased GDP by 0.3%, while net exports slowed growth with a contribution of -0.3%.

The important point is the slight acceleration of household consumption whose contribution goes from 0 in Q4 2018 to 0.2% in the first quarter. This is barely above the average observed since the recovery (0.15%) while government measures explicitly targeted consumption.
Government spending is growing at a slower pace, and this is the same for investment, whose contribution is decreasing marginally, notably because of the contraction of household investment. On the corporate side, the investment is a little stronger than in the last quarter of 2018 and that’s good news. However, this remains very limited (see the graph in appendix). This is insufficient to instil a solid dynamic into the cycle of the French economy.

The bad surprise comes from foreign trade whose pace is less robust than the monthly figures suggested until February. The contribution is frankly negative even if the contribution of imports is less negative than in Q4 2018. Exports stagnate and penalize growth. The French economy is also penalized by the world trade slowdown.

The accumulation of stocks has driven growth upward. Its pace in the second quarter will depend on the dynamics of demand. If this strengthens stocks will continue to fill. On the other hand, if the demand is lower, because the price of gasoline increases a little too fast, then companies could reduce these stocks which would penalize the profile of the activity.

The French GDP will accelerate in Q1

The French GDP for the first quarter of 2019 will be published Tuesday morning at 0730. After a figure of 0.3% (non annualized figures according to the French tradition) over the last three months of 2018, the consensus is at 0.3%.
My expectation is that 0.3% would rather be the bottom of a range between 0.3 and 0.5%.
During the first three months of the year, there was a clear improvement in industrial production (+ 1.2% carryover for Q1 at the end of February against -0.4% in the last quarter of 2018). There is also a recovery in the pace of the business climate survey. In the last quarter of 2018, this index fell by 2.1 points compared to the previous quarter, whereas it stabilized over the first three months of the year.
It should also be noted that household consumption is slightly positive when it contracted in the last quarter of 2018. Finally, foreign trade could have a neutral impact, with exports (in value) growing a little faster than imports but Given the deficit, the contribution will be close to neutrality.
The big unknown is about business investment. Capital goods orders are shrinking rapidly, suggesting a lower capital expenditure despite the stabilization of business surveys.
Looking at the industrial production and surveys, GDP is expected to pick up slightly in Q1 at 0.4%. If business investment is less dynamic than expected then it will converge to 0.3%. If all goes well (the services sector momentum is improving in the INSEE survey, if the investment is more robust than expected and consumption accelerates in March) then the figure of 0.5% could be reached.

French growth’s low momentum

The French GDP growth was 1.1% (at annual rate) during the fourth quarter of last year. The same number than during the third quarter.
Social unrest has had no impact on the headline figure. Nevertheless, details show that the private sector domestic demand stalled (0.2%) during the last quarter after a strong 2.4% growth in the third quarter. Households’ consumption was 0 and investment contribution was at 0.2% versus 0.9% in Q3. On companies’ side, investment contribution decreased on the same scale (0.2% after 0.9%). Residential investment was down with a negative contribution (-0.1%).
The good surprise was on exports’ side with a strong increase at 9.8% vs 0.7% in the third quarter. Therefore and despite a rapid imports’growth, the external demand contribution was positive at 0.9% after 1.1% in Q3.
Inventories have had a marginal negative contribution.

For 2018, the average growth was at 1.5% after 2.3% in 2017 but the end of 2017 was the peak of the cycle and the economy is now converging to its potential.
In 2019, with 1.2% per quarter which is close to the 2018 average, growth will be at 1.1%. We have a forecast at this level. It way below the government forecast at 1.7%. We can’t expect a strong reversal in the GDP momentum that could justify such a forecast.
In 2019 consumption will be pushed up by all the measures on purchasing power that has been announced by the President Macron in December. But as long as social unrest remains companies will not boost their investment. The improvement seen on exports will not last. World trade is slowing down rapidly and France will follow this trend.
In other words, the French economy has a limited growth momentum (just 0.9% from Q4 2017 to Q4 2018). With social unrest and uncertainty on external trade, the French economy will continue this trend close to 1% in 2019.

The cost of the Brexit for the UK

After the referendum on June. 23, 2016, the British economy has followed a lower profile. This comes from changes in expectations: uncertainty about Brexit rules has created a wait and see behavior and opportunities in other countries have changed people and companies’ mind about investing in the UK.

Therefore the economic trend has changed. We can see that in the graph below. The trend from the start of the recovery in 2013 to the second quarter of 2016 has been extended to the first quarter of 2018. There is a widening gap between real GDP measured by the ONS and the pre-Brexit trend. It the cost of Brexit for the UK. We see a real change after the referendum. Continue reading

France – GDP growth at 1.9% in 2017

The French GDP growth in 2017 has accelerated to 1.9% on average after 1.1% in 2016. The quarterly sequence of the GDP expansion was steady at 0.6% per quarter except 0.5% in the third quarter.
The carryover growth for 2018 at the end of 2017 is 0.9% which slightly higher than a year ago. At the end of 2016 it was at 0.4% for 2017. The effort that has to be done to converge to 2% in 2018 on average will be lower than in 2017. It is just a 0.42% increase per quarter (versus 0.58% in 2017).
The very positive part of the fourth quarter report was the strength of corporate investment.

The government budget for 2018 has been defined with a 1.7% growth (or 0.33% per quarter). This means that we can expect higher receipts compared to what was forecasted. The government credibility will be measured by its ability to use these extra receipts to reduce expenditures not to increase them. In the past these type of temporary receipts were systematically spent in permanent expenditures leading to a persistent budget deficit. We can expect a different strategy from the president Macron.

A reduction in expenditures and therefore lower demand would be consistent with what we currently perceive on the business cycle. A recent survey has shown that it was quite impossible for companies to increase their production. The production capacity utilization rate is at a peak, production bottlenecks are growing and there are difficulties in hiring.
With these constraints in mind, a boost in demand through higher government expenditures would be a mistake. The target is to reduce these constraints through incentives on investment (through public investment) and education. That will be the main government task in 2018.

The graph below shows that the current growth trend is slightly lower than before the 2008 crisis. It means that there will be no catching up and that the cost of the crisis is permanent. The gap between the current GDP level and the trend from 2000 to 2008 is -8%. The GDP level would have been 8% higher without the crisis. This is quite big and this gap will widen in coming years as I do not expect a catchup of growth.
FR-2017-Q4-GDPTrend.png