Macro Weekly
Group Economics
22 July 2016
Eurozone resilient, UK recession • Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5616
• •
nick.kounis@nl.abnamro.com
•
Early post-Brexit PMI survey indicators suggest the eurozone economy is resilient up until now… …though there was a hit to confidence raising risk of weakness ahead Meanwhile, the UK looks to be heading for recession, with the PMI contracting at the sharpest pace since the global financial crisis The ECB is in wait-and-see mode but will probably ease further in September, while we think the BoE will announce a bazooka in August
Eurozone so far resilient to Brexit… Early data suggest that the eurozone economy is coping well in the aftermath of the UK’s vote to leave the EU. However, there were signs that confidence has been hurt, and this may be a future headwind to activity. The eurozone composite (or wholeeconomy) output index dipped only slightly in July (to 52.9 from 53.1 in June). Though it did represent an 18-month low, it is not far from the levels seen for most of this year, with the index being trending around the 53 level. This is consistent with GDP growth of around 0.3% qoq. The indexes reporting on trends in output, orders and jobs remained resilient. …but signs of hit to confidence On the other hand, business optimism in the services sector deteriorated significantly. That index fell to 59.9 in July from 62.6 in June, taking it to the lowest since December 2014. Weaker business confidence, if sustained, could negatively impact decisions on output, orders and hiring in the coming time. So it is far too early to signal the all clear, especially since Brexit is actually seen having an adverse impact via an ‘uncertainty shock’. Only modest growth in prospect Our sense is that the PMI and GDP growth will soften and we expect the economy to grow only modestly in coming quarters. This should leave underlying inflationary pressures extremely subdued opening the door for further monetary easing in coming quarters (see below). Periphery relatively weak Looking at the country breakdown, both the German (55.3 from 54.4) and French (50 from 49.6) composite indexes rose in July. The fall in the overall index for the eurozone therefore suggests that the peripheral economies were hit more
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Macro Week kly – Eurozone e resilient, UK recession r – 22 July 2016
signific cantly, though h the breakdow wn of the other economies w will only be released later. UK ec conomy looks s set for rece ession The co omparable surrvey for the UK economy made m for depreessing reading g. The compo osite output in ndex collapsed d in July. It fell to 47.7 from 552.4 in June, taking it to the low west level sincce April 2009. The index is pointing p to a fa fall in GDP of around a 0.5% qoq. q One of th he most drama atic indicators in the surveyy was seen in service s sectorr business exp pectations. This index fell by y more than 100-points taking g it to the anuary 2009. This emphasises that the uuncertainty sho lowestt level since Ja ock is taking hold and is a already having a major impact on businesss activity. The PMI has been o one of the more reliable indicators of the UK economy and is consis stent with our base case tha at a recession is on the cardds. It also supp ports the view th hat the BoE w will ease policy y aggressively in August andd that sterling has further BP 150bn) an to fall. We expect a 25bp rate cutt, an expansion of QE (of GB nd an easing of BoE E lending cond ditions for ban nks. ECB in wait-and-se ee mode The ECB kept its po olicy rates and d target for ass set purchasess on hold as ex xpected yesterrday. In the pre ess conferenc ce following the decision, EC CB President Mario Dragh hi stressed tha at there was a lot of uncertaiinty about the outlook, but that the centra al bank was re eady to act if needed once a clearer picturre emerged. This T would possib bly be in Septe ember in the liight of the cen ntral bank’s neew forecasts. During D the Q&A Mr M Draghi wen nt out of his wa ay to stress th he ECB’s ‘readdiness, willingness and ability to act’ if need ded. We ex xpect the ECB B to step up its s QE programm me in Septem mber (with mon nthly asset purcha ases rising to EUR 100bn frrom EUR 80bn n). In addition , it is likely to extend the progra amme to the e end of next yea ar, compared to the soft deaadline of Marc ch 2017 curren ntly. The ECB will need to also announce measures to expand the elligible ector bonds in univerrse of public se n order to mee et these targetts (see our note here for more).
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Macro Week kly – Eurozone e resilient, UK recession r – 22 July 2016
Ma ain economic c/financial forrecasts GDP P grow th (%)
2014
2015
2016e
2017e
Unitted States
2.4
2.4
1.7
1.8
3M inte erbank rate United States S
Euro ozone
0.9
1.6
1.3
1.0
Eurozo one
1 14/07/2016 21/07/20 016
+3M
2016e
+12M
0.68
0 0.70
0.7
0.70
1.00
2017e 1.5
-0.30
-0 0.30
-0.35
-0.35
-0.35
-0.35
-0.1
0.6
0.6
0.7
Japan
0.06
0 0.06
-0.1
-0.10
-0.10
-0.1
Unitted Kingdom
3.1
2.2
1.5
0.5
United Kingdom
0.49
0 0.52
0.3
0.30
0.30
0.3
Chin na
7.3
6.9
6.5
6.0 1 14/07/2016 21/07/20 016
Japan
3.4
3.1
2.9
3.1
Inflation (%)
2014
2015
2016e
2017e
+3M
2016e
+12M
2017e
Unitted States
1.6
0.1
1.4
1.9
US Trea asury
1.53
1.57
1.4
1.40
1.60
1.8
Euro ozone
0.4
0.0
0.3
1.5
German n Bund
-0.13
-0 0.01
-0.2
-0.20
-0.10
0.1
Japan
2.8
0.8
0.0
1.0
Euro sw w ap rate
0.31
0 0.35
0.4
0.35
0.55
0.6
Unitted Kingdom
1.5
0.0
0.5
2.3
Japane ese gov. bonds
-0.26
-0 0.23
-0.2
-0.30
0.20
0.0
Chin na
2.0
1.4
2.0
2.0
UK giltss
0.80
0 0.84
0.8
0.50
0.30
0.2
Worrld
3.5
2.9
3.1
3.2
Key y policy rate
21/07/2016
+3M
2016e
2017e
1 14/07/2016 21/07/20 016
+3M
2016e
+12M
2017e
Fed deral Reserve
0.50
0.50
0.50
1.25
EUR/US SD
1.11
1.10
1.10
1.10
1.10
1.10
Euro opean Central Bank
-0.40
-0.40
-0.40
-0.40
USD/JP PY
105.3
10 05.8
100.0
103.0
105.0
110
Ban nk of Japan
-0.10
-0.30
-0.30
-0.30
GBP/US SD
1.33
1.32
1.27
1.20
1.25
1.35
Ban nk of England
0.50
0.25
0.25
0.25
EUR/GB BP
0.83
0 0.83
0.87
0.92
0.88
0.81
Peo ople's Bank of China
4.35
4.35
4.10
3.85
USD/CN NY
6.69
6 6.68
6.70
6.80
6.90
7.00
Worrld
10Y intterest rate
Curren ncies
Sou urce: Thomson Reutters Datastream, AB BN AMRO Group Ec onomics.
Ma ain economic//financial forrecasts
Day
Date e
Time
Country
Monday M M Monday
25/07/2016 25/07/2016
01:50:00 10:00:00
JP DE
Merchandise trade exports - % yoy Ifo - busine ess climate - index
Tuesday T T Tuesday T Tuesday T Tuesday T Tuesday T Tuesday
26/07/2016 26/07/2016 26/07/2016 26/07/2016 26/07/2016 26/07/2016
14:00:00 15:00:00 15:00:00 16:00:00 16:00:00
HU BE US US US FR
We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday
27/07/2016 27/07/2016 27/07/2016 27/07/2016 27/07/2016 27/07/2016
10:00:00 10:30:00 14:30:00 16:00:00 20:00:00 20:00:00
Thursday T T Thursday T Thursday T Thursday T Thursday T Thursday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday
Period
Latest outcom me
Consensus
A ABN AMRO
Jun J Jul
-11 108.7
-12 107.6
107.3
Base rate -% Business confidence c - index S&P/Case Shiller house price i ndex New home es sold - % mom Conference Board cons. confid ence - index Total jobse eekers - thousands
Jul 26 J Jul M May Jun J Jul Jun
0.9 0.7 0.5 -6.0 98.0 9.2
0.9 -0.6 0.0 1.2 95.5
96.0
EC GB US US US US
M3 growth - % yoy GDP - % qoq New durab ble goods orders - % mom Pending ho ome sales - % mom Federal Fu unds Target Rate - Up pper bound Federal Fu unds Target Rate - Lo ower bound
Jun 2Q QA Ju n P Jun Jul 27 Jul 27
4.9 0.4 -2.3 -3.7 0.5 0.25
5.0 0.5 -1.2 1.4 0.5 0.25
28/07/2016 Field Not Appl 06:30:00 28/07/2016 09:55:00 28/07/2016 09:55:00 28/07/2016 11:00:00 28/07/2016 28/07/2016
BE NL DE DE EC DE
CPI - % yoyy Producer confidence c manufactu uring - index Unemploym ment - % Unemploym ment change - thous ands Economic sentiment monitor - index CPI - % yoyy
JJul J Jul J Jul J Jul J Jul Ju ul P
2.2 5.4 6.1 -6 104.4 0.3
6.1 -3 103.7 0.3
29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016 29/07/2016
JP JP JP JP JP FR FR EC EC EC EC RU US BE US US
Policy rate - % Annual rise e in monetary base CPI - % yoyy Unemploym ment - % Industrial production p - % mom GDP - % qoq Consumerr spending - % mom Core inflatiion - % yoy CPI - % yoyy Unemploym ment - % GDP - % qoq Key rate % GDP - % qoq annualised GDP - % qoq Chicago Fe ed - business confidence - index Univ. of Micchigan cons. confidence - index
Jul 29 Jul 29 Jun Jun Ju n P 2Q QA Jun Ju ul A J Jul Jun 2Q QA Jul 29 2Q QA 2Q QP J Jul Ju ul F
-0.1 80.0 -0.4 3.2 -2.6 0.6 -0.7 0.9 0.1 10.1 0.6 10.5 1.1 0.2 56.8 89.5
01:30:00 01:30:00 01:50:00 07:30:00 08:45:00 11:00:00 11:00:00 11:00:00 11:00:00 12:30:00 14:30:00 15:00:00 15:45:00 16:00:00
Key Economic In ndicators and Eventss
Sou urce: Bloomb erg, Reu uters, ABN AMRO Gro oup Economics (we provide p own forecastss only for selected ke ey variab les and eve ents) FOM C (v) vo ting; (nv) no n vo ting
4.8 0.3 -1.0 0.5 0.3
4.7
103.5 0.3 -0.3 100.0
-0.5 3.2 0.6 0.2 0.1 0.9 0.1 10.1 0.3 10.4 2.5 53.6 91.0
0.8 0.1 10.1 0.2 2.7 54.0