Daily Insight
Group Economics Macro & Financial Markets Research
21 July 2016
Please ignore the UK jobs data Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
UK Macro: Data resilience is a mirage - A couple of UK economy reports apparently signalled that the UK economy was holding up relatively well in the run-up to and aftermath of the UK’s vote to leave the EU, which boosted sterling. For instance, ILO employment rose by 176K in the 3-months to May, and the ILO unemployment rate dropped to 4.9% in that period (a level not seen since 2005). Meanwhile, the BoE’s regional economic agents report provided some encouraging anecdotal evidence of the post-Brexit impact. It noted that ‘there was no clear evidence of a sharp general slowing in activity’. However, this view of the UK economy looks to be far too optimistic. For instance, the ILO labour market numbers are lagging as they refer to the period February – May. The claimant unemployment numbers – up to June – have shown the stock of people claiming unemployment benefits rising. In addition, the BoE Agents’ survey also reported that ‘following the EU referendum, business uncertainty had risen markedly’. This is likely to impact decisions over the coming months. We continue to take the view that UK economic growth will slow sharply and that the economy will experience a recession, while sterling has significantly further to drop. Euro Macro: Commission assesses impact of Brexit - The European Commission expects the UK’s decision to leave the EU to result in lower economic growth in the UK, but also in the eurozone. The main impact will come from heightened uncertainty, which will reduce both consumer and investment spending. The EC presents mild and severe scenarios, depending on the extent of the ‘uncertainty shock’. This gives a range of estimates for the impact of GDP growth in 2016-2017. For the eurozone, the adverse impact is in a range of 0.3-0.6 percentage points through to the end of next year. This compares to 1 to 2.7 pp for the UK. Our own downward revisions (published at the end of last month) were at the high end of the EC’s range, reflecting that we expect the uncertainty to be prolonged by long and difficult negotiations between the UK and EU. Meanwhile, eurozone consumer confidence fell to -8 in July from -7 in June, showing only a modest deterioration following the UK's vote to Brexit. However, note that consumer confidence can move relatively slowly and with a lag compared to business confidence/business activity surveys. So the true test will come with Friday's flash PMIs. The jury is therefore still out on the extent of the confidence effect on the eurozone. Rates markets: What’s priced in for the ECB? – We expect the ECB to remain on hold today but to ease monetary policy further in September. What do markets expect and how does that compare to our own forecasts? In line with our base case, no action is expected at today’s meeting. Looking further ahead, 3-m Euribor futures are around 3bp lower than current rates at year end and 8bp lower by the end of next year. This implies at face value that a high probability of a 10bp deposit rate cut is priced in by the end of next year. However this probably overestimates the implied probability. This is because markets are also likely expecting some downward impact on Euribor rates due to the increasing amount of excess liquidity in the system due to QE. Only around a third of economists surveyed by Bloomberg expect a deposit rate cut. It is difficult to assess market pricing of further QE, but the same survey reports that the consensus of economists expects an extension of QE past March 2017. However, only a small minority expects an increase in the size of purchases. Our base case is that the ECB will keep the deposit rate on hold, but that it will extend QE to the end of next year as well as increasingly monthly purchases to EUR 100bn. If we are right, we would then expect yield curves to flatten, given current expectations.
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Daily Insight - Please ignore the UK jobs data - 21 July 2016
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Daily Insight - Please ignore the UK jobs data - 21 July 2016