Group Economics
Macro Weekly Advanced economies stepping up
Nick Kounis +31 20 343 5616
7 August 2015 Worries about Greece appear to have been replaced by concerns about China and the global cycle more generally. It has been a bad start to the year, with global economic growth disappointing. However, advanced economy demand is stepping up a gear, and global industrial production will likely follow. Although downside risks to China’s outlook persist, we still expect a soft landing. Meanwhile, the Fed looks on track for a September rate hike, while the BoE is likely to wait until 2016. Greece appears to be moving closer to an ESM deal, but Grexit risks could well return in coming months.
Advanced economy demand is strengthening
Advanced economy services and domestic demand
It has been a disappointing few months for the global
Index
economy, with trade and industrial production weak. However,
% yoy
60
5
we see signs that global growth is about to step up a gear. Crucially, domestic demand in advanced economies looks to be in good shape. For instance, US consumer spending
3
55
1 50 -1
accelerated to 2.9% in Q2, confirming that the slowdown in Q1 was a temporary affair.
45
-3
40
Retail sales and car registrations in the eurozone showed the opposite pattern, but still continued to grow in Q2 after a robust
-5 99
01
03
05
Services PMI new orders
07
09
11
13
15
OECD domestic demand (rhs)
Q1 outcome. In addition, orders for German capital goods from the eurozone surged in June, a sign that investment in the
Source: Thomson Reuters Datastream, Markit
region is picking up. This is in line with the ECB’s Bank Lending Survey, which showed corporate demand for loans is
China hard landing fears
rising.
But what about China? Doesn’t the slump in the Chinese equity market and commodities suggest that the economy is
Services PMI a strong signal
set for a hard landing? Economic data are not consistent with
The Services PMI for advanced economies rose in July and
this view. There is scepticism about the GDP growth data,
has been on a rising trend over the last few months. The
which show the economy exactly hitting the 7% target in Q1
service sector is domestically-orientated and therefore usually
and Q2. Monthly data suggest that the economy slowed below
a good indicator of domestic demand (see first chart). The
the target earlier in the year, but has since regained some
current level of the Services PMI new orders component
traction towards the target.
suggests that OECD domestic demand is accelerating to around 3% in the second half of this year compared to the 2%
The Chinese equity market is disconnected from the economy.
average growth we saw in 2014, and around 2.5% in the first
When the stock market was booming earlier in the year, there
half of this year.
were no commentators heralding that this signalled a sharp change in the economy’s prospects. Commodity markets are
It’s all about demand
arguably a better indicator, but far from perfect. Some
In the end, economic growth is driven by end-user demand.
commodities are in a situation of over-supply. For instance,
The indications that industrial production has been trending
this is a key factor pushing down oil prices. In addition, China’s
below final demand might be a sign that companies have been
re-balancing has meant that overall growth is becoming less
running down inventories. As this process comes to an end,
commodity-intensive.
industrial production and trade will catch up with final demand and global growth will regain momentum in the coming
At the same time, the Chinese authorities will do what it takes
months.
to keep growth on track. Earlier in the week, there were reports