Macro Weekly Shock adjustment
Group Economics
Han de Jong +31 20 628 4201
11 May 2015 Financial markets have shown violent moves during the last two weeks or so. And these moves have, to a large extent, been in tandem. Bond yields have risen sharply, particularly in Europe, the euro has strengthened and equities have sold off (especially in Europe). To be frank, I did not see this coming, so I can offer only post-mortem commentary. Such dramatic moves demand a verdict. Is this just a temporary correction or is it the beginning of a much longer and bigger move in markets? Taking economic fundamentals as my lead, I conclude that it is most likely temporary, although that does not necessarily mean that we will see a rebound in all markets concerned in the near future. Meanwhile, interpreting economic data is also becoming something of a challenge. How, for example, do disappointing US growth numbers and a steadily strengthening labour market add up? Well, they don't, really. Economics first
Perhaps expectations have adjusted upwards a little and
The European Commission updated its forecasts for the
maybe we are actually starting to see slightly more mixed data.
eurozone economy last week and did what most others have
I am not sure what is behind it. We have long highlighted the
done in the recent past. They raised the forecast for the
three major tailwinds for the eurozone economy: the euro, the
current year. GDP is now expected to grow by 1.5% this year
oil price and borrowing costs. The first two have reversed
while the Commission was previously forecasting 1.3%. They
somewhat in recent months and perhaps that has had an
left their 2016 forecast for growth unchanged at 1.9%. These
immediate impact. More likely, this is noise.
numbers, obviously, do not sound particularly impressive. We must bear in mind, though, that potential growth is even lower.
Last week's data on German industrial production was soft as
The Commission currently estimates that trend growth is only
output fell 0.5% mom in March. Eurozone retail sales were
0.8%. As a result, unemployment is projected to continue its
also weak in March, falling 0.8% mom. There is, however,
downward sloping trajectory. In fact, unemployment started to
always volatility in numbers of this nature, and recent trends
come down in Q2 of 2013 and has continued its gentle decline.
have been favourable. In addition, March data on industrial
As we now expect the eurozone to produce better growth
output in Spain and Italy surprised on the upside last week.
numbers, the pace of decline in unemployment should accelerate.
Our overall assessment of the eurozone economy does not change. Growth has picked up and is currently above trend.
Eurozone unemployment vs real GDP
That is not going to alter any time soon.
13
2.1
US more of a puzzle According to the GDP data, the US economy expanded at a
12 2.2 11 10
2.3
snail's pace in Q1. More recent data makes it likely that the number will be revised down into negative territory. Yet, the labour market appears to be completely ignoring this
9 2.4 8 7
2.5 02
04
06
Unemployment (%, lhs)
08
10
12
14
Real GDP in bn EUR (reverse scale, rhs)
development and decent employment growth is continuing. This is an odd combination that cannot last. Either GDP growth will pick up, or employment growth will weaken. The combination of weak GDP growth and continued improvement in the labour market led to an annualised increase in unit
Source: Bloomberg
labour costs in Q1 of 5.0%. This is the sort of number that freaks people out as they think it points to rising inflation
European economic data has consistently beaten expectations
pressures and downward pressure on corporate earnings. The
in recent months, but that pattern is now disappearing.
truth is that unit labour costs is a very volatile series. Over the