Macro Weekly More inflation please
Group Economics
Nick Kounis +31 20 343 5616
2 October 2015 Eurozone inflation turned negative, while inflation is low in most big economies even outside of energy prices. The eurozone in particular could do with more inflation and QE is the only tool the ECB has. Higher inflation targets would give central backs more room to employ conventional monetary policy as it would allow them to slash real interest rates. Eurozone inflation back in the red
The downside of lowflation
This week was marked by figures showing that eurozone
The 2% targets have not provided central banks with enough
inflation turned negative again in September. Headline inflation
of a buffer on the downside against the background of various
fell to -0.1% yoy from +0.1% in August. That was mainly due to
shocks. In particular, it is real interest rates that matter for the
a hefty drop in energy prices. It would be difficult to complain
economy and the lower the level of inflation, the high the level
about that, given it means a windfall gain for consumers.
of real interest rates. This becomes a problem especially given
Having said that, inflation is too low outside of volatile food and
the limited room that central bankers generally see for taking
energy prices. Core inflation stood at just 0.9% yoy, basically
nominal rates below zero. The problem may have become
less than half the level the ECB targets over the medium term
more acute recently as lower trend growth means that neutral
for overall inflation.
interest rates are also lower.
Lowflation everywhere
Challenges for monetary policy
Low inflation is a world-wide phenomenon. Headline inflation in
Take the example of the eurozone. Trend growth may have
Japan also recently turned negative, with the ex-food measure
come down by around 1% over recent years, from just over 2%
that the BoJ targets at -0.1% yoy in August. Ex food and
in the years before the crisis to just over 1% currently. The
energy inflation firmed, but to a still low 0.8%. Inflation is also
neutral rate may also have come down by around the same
low even in economies further ahead in the cycle. In the US,
amount, from around 3.5% pre-crisis to around 2.5% now.
the core PCE deflator, targeted by the Fed to be 2%, stood at
Given the inflation goal of the ECB, that means the real neutral
1.3% in August. UK inflation was 0% in August, while the core
rate is now at just 0.5%. This means that to get conventional
was at 1%. Even in many emerging markets, inflation is
monetary policy stimulative, real interest rates need to become
relatively low. China's consumer price inflation stood at 2% yoy
deeply negative. However, that is not possible given current
in August, while producer prices were down by a breath-taking
low levels of inflation and an effectively zero nominal bound.
5.9% yoy. Indian CPI inflation was running at 3.7% yoy in
Some notable economists - including Larry Summers and
August, while wholesale prices were down by 5% yoy. Only in
Olivier Blanchard - have made the case for higher inflation
Brazil and Russia is inflation high among bigger economies,
targets over recent years because of this dilemma. For
partly reflecting a slump in their currencies.
instance, a 4% inflation target would given much more room for real rates to drop.
The death of inflation Central bankers spent the 1980s and part of the 1990s trying
For now QE is the only game in town
to slay inflation. Legendary Fed Chairman Paul Volker raised
Given where we are now, QE is the only option the ECB has to
interest rates sharply to push down inflation. More generally
ease monetary conditions and that comes with its own
central banks introduced implicit and eventually explicit
problems. A stepping up of asset purchases seems likely in the
inflation goals. Helped by the entry of China in to the global
coming months. To get inflation back up, it needs to generate
trade system as a low cost manufacturing powerhouse, these
domestic inflationary pressures to offset external disinflationary
efforts proved remarkably successful. It can be argued that
forces. This week data showed the unemployment rate stable
they were too successful. All the major central banks in
at 11% in September. Still unemployment remains on a
advanced economies have adopted inflation goals of 2%. This
downward trend, and wages seem to be firming. Still there is a
seemed a reasonable level in the past, but it can and should
long way to go to generate significant domestic inflationary
be questioned today.
forces in the eurozone. In the meantime, the risk is that the inflation expectations of households, companies and investors decline, making it even more difficult for the ECB to meet its
2
Macro Weekly - More inflation please – 25 September 2015
inflation goal. In essence, low inflation could become a self-
generating a new downward leg for the euro. The eurozone
fulfilling prophesy.
could do with some extra upward pressures on inflation given that it is further away from generating significant domestic
US and UK labour markets closer to generating inflation
inflationary pressure than the UK or the US. If the Fed
The US and UK are further ahead in this process of course.
(December) and the BoE (February 2016) start to raise rates
The US labour market continues to improve. This week’s data
as we expect that should also be helpful in triggering further
showed that growth in non-farm payrolls disappointed in
euro weakness.
September (142K, following 136K in August), but we still think the recovery of the US labour market remains on track,
Manufacturing weak, services better
although the pace of the recovery seems to have shifted down
The dichotomy between external and domestic developments
a touch recently. Meanwhile, the UK labour market looks to be
is also visible in the difference in the trends between activity in
already starting to push up inflation. Unit labour costs rose by
manufacturing and services. The eurozone manufacturing PMI
2.2% in Q2 up from 0.3% in Q1. The tightening labour market
was down to 52 in September from 52.3 in August. The
finally seems to be pushing up wages. We expect this to
services PMI also declined but remained at a more healthy
develop in the US as well in the coming months.
level of 54. Similarly, German factory orders declined in August. Although domestic orders and orders from the rest of
US economy adds 142K jobs
the eurozone rose, there was a slump in orders from outside of
000’s
%
600 400 200 0 -200 -400 -600 -800 -1000
12 10
the eurozone. The US ISM manufacturing index fell to 50.2 in September from 51.1 in August, taking it to the lowest level since May 2013. Weaker global demand, dollar strength and cut backs in oil sector investment have hurt industry. On the
8
other hand, most indicators suggest that domestic demand
6
remains strong.
4
06
07
09
10
Non farm payrolls (lhs)
12
13
2
China and EM risks
0
The PMI reports out of China were rather mixed, but in general
15
Unemployment (rhs)
Source: Thomson Reuters Datastream
External disinflationary forces The global economy is currently a source of significant disinflationary pressure. It is not only commodity prices that are falling. Global manufactured goods prices have also been falling sharply. This partly reflects over-capacity in China's industrial sector. However, falling commodity prices also seem to be feeding through into producer prices, while manufacturing activity has also been weak. The global manufacturing PMI fell to 50.6 in September from 50.7 in August, taking it to its lowest level since July 2013. The output price index fell further below the 50-mark last month. For the US, the strength of the dollar is adding to these disinflationary forces. Another round of euro weakness would help In the case of the eurozone, euro weakness had been offsetting weakness in global prices. However, the euro's levelling out over recent months means that this is no longer the case. Eurozone producer prices excluding energy fell by 0.5% yoy in August. Another round of QE would be helpful in
emphasised the downside risks to the economy. The Caixin and official NBS manufacturing PMIs were roughly steady in September, but that left them at low levels consistent with weak industrial sector growth. Although the NBS services PMI remained at decent levels, its Caixin counterpart showed a sharp slowdown. The latter raises the risk that the weakness in the economy is broadening. Still we continue to think that policymakers have the tools to keep the slowdown gradual and that they will employ them. Wider emerging market risks were also emphasised this week. Emerging market PMIs remained soft in September. At the same time the Institute of International Finance warned that emerging markets would see a net capital outflow of USD 540 bn this year. This would be the first net outflow since 1988. EMs generally have higher FX reserves than in the past, which should allow them to avoid a systemic crisis. However capital outflows lead to a tightening of financial conditions, which is weighing on growth. Overall, our base case scenario is for continued but moderate global economic growth as waning EM growth is offset by a gradual recovery in the advanced economies.
3
Macro Weekly - More inflation please – 25 September 2015
Main economic/financial forecasts GDP grow th (%)
2013
2014
2015e
2016e
1.5
2.4
2.7
2.9
United States
-0.2
0.9
1.6
2.0
Eurozone
Japan
1.6
-0.1
0.7
1.2
United Kingdom
2.2
2.9
2.8
2.6
China
United States Eurozone
3M interbank rate
24/09/2015 01/10/2015
+3M
+12M
2015e
0.33
0.32
0.6
1.3
0.6
2016e 1.6
-0.04
-0.04
0.00
0.00
0.00
0.00
Japan
0.17
0.17
0.2
0.2
0.2
0.2
United Kingdom
0.58
0.58
0.7
1.5
0.7
1.7
24/09/2015 01/10/2015
2016e
7.7
7.3
7.0
6.5
World Inflation (%)
3.1 2013
3.2 2014
3.0 2015e
3.5 2016e
+3M
+12M
2015e
United States
1.5
1.6
0.2
2.1
US Treasury
2.13
2.04
2.3
2.7
2.3
2.7
Eurozone
1.3
0.4
0.1
1.4
German Bund
0.59
0.55
0.5
1.3
0.5
1.4
Japan
0.3
2.8
0.7
1.0
Euro sw ap rate
0.98
0.93
0.8
1.6
0.8
1.6
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.33
0.33
0.7
1.0
0.7
1.0
China
2.6
2.0
1.5
2.0
UK gilts
1.76
1.74
2.0
2.6
2.0
2.7
World Key policy rate
4.3 01/10/2015
3.9 +3M
3.7 2015e
3.8 2016e
24/09/2015 01/10/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.50
0.50
1.50
EUR/USD
1.13
1.12
1.00
1.05
1.00
1.10
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
120.1
119.9
128
135
128
135
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.53
1.52
1.49
1.50
1.49
1.49
Bank of England
0.50
0.50
0.50
1.50
EUR/GBP
0.74
0.74
0.67
0.70
0.67
0.74
People's Bank of China
4.60
4.35
4.35
4.35
USD/CNY
6.38
6.36
6.55
6.70
6.55
6.75
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
Key Macro Events Day
Date
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
ABN AMRO
Monday Monday Monday Monday Monday Monday Monday
05/10/2015 05/10/2015 05/10/2015 05/10/2015 05/10/2015 05/10/2015 05/10/2015
09:00:00 10:00:00 10:00:00 10:30:00 11:00:00 15:45:00 16:00:00
CH EC EC GB EC EC US
Total Sight Deposits bn PMI services - index Composite PMI output PMI services - index Retail sales - % mom ECB announces weekly QE details ISM non-manufacturing, index
Sep F Sep F Sep Aug
465 54.0 53.9 55.6 0.4
54.0 53.9 56.7 0.0
54.0 53.9
Sep
59.0
58.1
Tuesday Tuesday Tuesday
06/10/2015 06/10/2015 06/10/2015
08:00:00 14:30:00
DE US PL
Manufacturing orders - % mom Trade balance - USD bn Reference rate - %
Aug Aug Oct 6
-1.4 -41.9 1.5
0.3 -43.4 1.5
-0.2
Wednesday Wednesday Wednesday Wednesday
07/10/2015 07/10/2015 07/10/2015 07/10/2015
08:00:00 09:00:00 21:00:00
DE CH US JP
Industrial production - % mom Foreign currency reserves - CHF mln Fed Reserve consumer credit - USD bn Policy rate - %
Aug Sep Aug Oct 7
0.7 540031.4 19.1 80.0
0.0
-0.1
Thursday Thursday Thursday Thursday Thursday Thursday
08/10/2015 08/10/2015 08/10/2015 08/10/2015 08/10/2015 08/10/2015
01:50:00 13:00:00 13:00:00 13:25:00 13:30:00 20:00:00
JP GB GB NL EC US
Machinery orders private sector - % mom Policy rate - % BoE size of asset purchase programme - GBP bn CPI - % yoy ECB account of the monetary policy meeting of 3 September FOMC minutes Sept. 16-17
Aug Oct 8 Oct Sep
-3.6 0.5 375.0 0.8
2.8 0.5
Friday
09/10/2015
10:30:00
GB
Trade balance - GDP mln
Aug
-3371.0
-2066.7
-0.1
1.5
19.1 80.0
Sep
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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