Global daily insight 16 november 2016

Daily Insight

Group Economics Macro & Financial Markets Research

16 November 2016

US-European growth gap even before Trump Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

Global Macro: US outperformance set to continue – Data published yesterday (see below) suggested that the US economy’s outperformance relative to the eurozone was already in place in Q3, and looked set to last into Q4. Eurozone GDP growth in Q3 came in at just above 1% annualised, compared to US economic growth of 2.9% (which could be yet revised up). What is more, early data for October – in the shape of retail sales – suggest that the US economy remained robust going into Q4. At the same time, there does not seem to be much upward momentum in the eurozone. Next year, this narrative is likely to persist, with US economic growth likely to get a boost from fiscal stimulus in the second half. Early signs are that Mr Trump’s fiscal package could be worth around 3% GDP over 2017-2018, which would significantly boost economic growth and inflation. This will lead to a somewhat faster pace of Fed rate hikes next year and hence we see room for US Treasury yields to see another leg up in 2017. On the other side of the Atlantic, the ECB will likely further extend QE through to September 2017. This points to a further rise in the US-Germany yield spread and a more significant rise in the dollar versus the euro as well as other currencies.

(Nick Kounis) US Macro: Strong US retail sales in October - After a few months of weak retail sales, October’s report built on September’s strong recovery. Retail sales increased 0.8% in October, from an upwardly revised 1.0% the previous month. This upward revision suggests that third quarter GDP growth could be a bit higher than the 2.9% qoq initially reported. At the same time, core retail sales, which are more closely related to the consumer spending component of GDP, increased 0.8%. Most of the components of the retail sales report improved, particularly car sales and building materials. Looking forward, consumer confidence remains at high levels, while the labour market should continue to show healthy (though moderating) job growth. On top of this, the prospects of a personal income tax cut proposed by elected-President Trump should support consumption growth.

Given that Fed policymakers put a strong weight on consumption growth in their monetary policy decision, we think that this report will make FOMC members more confident to support a rate hike in December. (Maritza Cabezas) Euro Macro - German economy disappoints in Q3, but offset by Italy - GDP growth in Germany slowed down from 0.4% qoq in Q2 to 02% in Q3, which was somewhat below the expectations. Although the details of GDP have not yet been published, the Statistisches Bundesamt mentioned that private consumption, government consumption and construction investment had a positive impact on growth, whereas investment in machinery and equipment and net exports reduced growth. Looking forward, we expect the German economy to rebound in Q4. The global industrial sector has gained traction in the second half of this year. This should support German exports, industrial production and should also result in a pick-up in fixed investment. Stronger industrial output was also signalled by jumps in the Ifo expectations index for the industrial sector and Germany’s manufacturing PMI in September and October. Having said that, we expect growth to remain more moderate than

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Daily Insight - US-European growth gap even before Trump - 16 November 2016

in the first quarter of the year, when it came out at 0.7% qoq. Looking at the eurozone overall, an upward revision to Italy and strong growth in Portugal left overall eurozone growth unchanged at 0.3% qoq. We doubt stronger growth in the periphery will last and expect overall eurozone growth to remain moderate. The rise in inflation on the back of higher energy prices is depressing real income and will weigh on consumption growth, while rising political risk in Europe should continue to weigh on overall sentiment and limit the pace of investment growth. (Aline Schuiling)

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Daily Insight - US-European growth gap even before Trump - 16 November 2016