Daily Insight Euro investment upswing
Group Economics Macro & Financial Markets Research Nick Kounis & Aline Schuiling
+31 20 343 5616
7 August 2015
Germany’s factory orders jumped higher in June …. … capital goods orders from the eurozone particularly strong, boding well for fixed investment BoE looks likely to hold off with rate hikes until next year following Super Thursday
Germany’s industrial sector buoyant
Euro capital goods orders and investment growth
The volume of German factory orders increased by 2% mom in
% yoy
June, which was well above the consensus forecast and followed a modest decline in May. As a result, orders rose by
% yoy
10
40
5
20
0
0
more than 3% qoq during Q2 as a whole, suggesting that industrial production will gain momentum in the coming months. Germany’s industrial sector is reaping the fruits of a
-5
-20
weak euro, falling energy prices and historically low interest
-10
-40
rates. Moreover, growth in the majority of Germany’s export
-15
markets is picking up, while domestic demand is strong as well. Jump in capital goods orders from the eurozone …
-60 03 04 05 06 07 08 09 10 11 12 13 14 15
Eurozone fixed investment (lhs) Eurozone orders for German capital goods (rhs) Source: Thomson Reuters Datastream
The details of Germany’s orders data show that foreign orders expanded the most in Q2 (+6% qoq). Orders from other
BoE will not raise rates until next year
eurozone countries were up by more than 8%, while orders
For the first time the BoE published the Inflation Report, MPC
from non-eurozone countries increased by 4.5%. By far the
minutes and its policy decision around the same time, while
sharpest rise was recorded in capital goods orders from the
Governor Mark Carney followed up shortly after with a press
eurozone (+12% qoq). Although this series tends to be volatile,
conference. Investors concluded that the general message
the less bumpy yoy growth rate has clearly picked up as well
from this over-load of information was that the BoE would be
(see graph).
relatively cautious in raising interest rates. So-called ‘Super Thursday’ at the BoE led to a scaling back of short rate
… reflect stronger investment growth in the eurozone … The sharp rise in Germany’s capital goods orders from the
expectations and a softening of sterling.
eurozone bodes well for investment growth in the region.
However, the message was probably a bit more balanced than
Indeed we expect eurozone investment growth, which has
the market reaction suggested. In particular, Governor Carney
remained moderate during the current economic upswing so
made it clear that inflation would over-shoot the Bank's target
far, to gain traction in the coming quarters.
over the medium term if the Bank Rate followed the path implied by financial markets. The MPC expects ongoing robust
… as profitability rises and financial conditions ease
growth to lead to a reduction in economic slack, which will
Investment should be supported by improved corporate
push up inflation over time. This means that the Bank Rate will
profitability. The gross operating surplus and mixed income
need to rise at some point in the first half of next year.
(national accounts measure) of eurozone non-financial corporates rose by 2.4% qoq in Q1 and was 3.3% higher than
Following the reports, we have pushed back our forecast for
in the same quarter a year ago. On top of that, banks have
the first increase in the Bank Rate to 2016 Q1 from the fourth
been easing lending standards on loans to companies since
quarter of this year previously. We think that the Bank Rate will
the middle of 2014. Combined with historically low levels of
rise by 100bp next year in total, taking it to 1.5%.
interest rates and easing financial conditions in general, this will further support fixed investment growth.