Daily Insight
Group Economics Macro & Financial Markets Research
15 September 2016
Risks to Eurozone Q3 growth Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Euro Macro: Economy starts Q3 on a weak note - Industrial production in the eurozone fell by 1.1% mom in July following an upwardly revised 0.8% increase in June (was 0.6%). The 3m-o-3m growth rate decreased to -0.4% from -0.3% in June. We think the slowdown in the industrial sector was largely due to still sluggish growth of the global economy, a stronger euro and uncertainties related to Brexit and political risks in the eurozone more generally. This was also reflected in drops in business confidence and consumer sentiment in July-August. On the expenditure side of the economy, retail sales were strong in July, rebounding by 1.1% mom after declining by 0.1% in June, but data from Germany and Italy suggest that car sales slowed down that month. Still, it seems that private consumption expanded at a decent pace going into Q3 after a soft Q2. Fixed investment disappointed in Q2 as it was flat. Although a sharp rebound in orders from other eurozone countries for German capital goods in July suggested that fixed investment was picking up, the production of capital goods actually was the weakest component of total production in July (1.7% mom). Overall, it seems that investment will remain sluggish in Q3. In our scenario for eurozone GDP growth we expect 0.3% qoq growth in Q3, the same pace as in Q2. However, the July data suggest that the risks to this outlook are slightly tilted to the downside. (Aline Schuiling)
BoJ view: Rate cut and increase in asset purchases expected - We do not think that the BoJ has reached its limits, but there is limited room left for aggressive easing. We expect the central bank to increase its asset purchase programme by 5-10 trillion yen per year and to extend the range of assets at the Monetary Policy Meeting on 21 September. We do not expect any further increase of the ETF programme. However, we do expect the BoJ to cut the policy rate by 10bp to -0.2%. To reduce the impact for banks, the interest rate on funding through the Loan Support Program will likely also be lowered to -0.2%. An appropriate policy mix, including reforms in the labour market and a fiscal stimulus plan, would increase the effectiveness of the BoJ’s actions, though it is unclear whether we will see the government delivering in the near term. Turning to the implications for the currency markets, we expect hedging of foreign currency flows to support the yen if it were to move to levels above 105 against the dollar and maintain our 2016 year end USD/JPY forecast at 103. For more on this topic, please see our note Japan Watch: Has the BoJ reached its limits? (Maritza Cabezas & Roy Teo). BoE preview: No change in policy seen at today’s MPC – We expect the MPC to keep both its policy rate and target for asset purchases unchanged at the MPC meeting today. When it announced the monetary stimulus package in August, it had hinted that additional measures could follow soon, in particular an additional interest rate cut. However, the macro data has clearly surprised to the upside since then. Most spectacularly, the manufacturing and services PMIs bounced back sharply in August, more than making up for the collapse in July. They suggest that the UK economy is likely to settle in a trend of modest economic growth rather than recession following a short-lived shock immediately after the EU referendum. In our view, this means that the BoE’s August forecast that the UK economy would see average growth of 0.7% next year, has already been overtaken by events. We
Insights.abnamro.nl/en
Bloomberg: ABNM
2
Daily Insight - Risks to Eurozone Q3 growth - 15 September 2016
therefore do not expect further monetary stimulus in the months ahead. Having said this, it is too early for the MPC to rule this out. In particular, the Committee may feel that it needs to see more economic data before becoming more optimistic. It will update its economic forecasts in November, and this may be the moment the MPC adopts a somewhat more positive tone on the outlook and suggests it has done enough to cushion the economy. (Nick Kounis)
DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in th e document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are a dvised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. Š Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO
3
Daily Insight - Risks to Eurozone Q3 growth - 15 September 2016