Economic Outlook – 10 April 2016


Economic activity in the first quarter is expected to barely register a positive reading. Understandably, many will suspect that the US economy has hit a speed bump. That said, domestic demand continues to gain, with weakness still concentrated in mining, manufacturing, and trade. Indeed, widening in the real trade balance in February suggests trade will detract from real GDP growth in the first quarter.

Although goods-producing sectors of the economy are expected to improve only gradually, the US service sector continues to show strength. The ISM non-manufacturing index rose in March, increasing to 54.5 from 53.4 in February.

A fairly light week in terms of data was accompanied by a slew of Fed speeches and the release of the FOMC’s minutes from its March meeting. Particular emphasis on the Fed’s cautious approach to monetary policy normalisation was cited, highlighting risks surrounding the outlook for growth and inflation. The US labour market’s dynamic momentum has been confirmed, with robust job creations, low unemployment rate, rebound in the labour participation rate and wage growth. Key rate expectations should begin to pick up.

Since December, EUR-USD has strengthened significantly from levels of around 1.06 to rates around 1.14. Besides a hesitant Fed, the signals recently sent out by ECB president Mario Draghi have also played a role. How long this euro strength will continue depends largely on the US central bank.

Were it to soon follow up its December interest rate move with further steps, the exchange rate would likely fall again.


The Purchasing Managers’ Indices (PMIs) were reported this week. The services sector PMI increased to 53.7 in March from 52.7 in February, indicating that domestic demand is still the only driver of the economy. However, at these levels, quarterly GDP is expected to slow somewhat for Q1.

UK labour productivity as measured by output per hour fell by 1.2% from Q3 to Q4 2015 and was around 14% below an extrapolation based on its pre-downturn trend. By contrast, output per worker and output per job were broadly unchanged between the third and fourth quarters. On all three measures, labour productivity was about 0.5% higher in Q4 2015 than in the same quarter of 2014.

Total production output decreased more than expected in February, by 0.5% compared with the same month a year ago, which is the largest drop since August 2013. The largest contribution to the decrease came from manufacturing, the largest fall since July 2013. There were decreases in 10 of the 13 manufacturing sub-sectors, with the largest contribution coming from the manufacture of machinery and equipment not elsewhere classified. Total production output is estimated to have decreased by 0.3% between January and February.


European stocks got more of a lift from German exports than a drag effect from industrial output figures released by other countries. German export growth exceeded expectations with a 1.3% month-on-month rise in February (0.5% expected, -0.6% prior). The data arrived just before European cash equity markets opened and coincided with a lift in Dow futures around the same time. The rise is double the prior month’s dip and helps to chip away at a good portion of December’s weakness too.

French industrial output fell 1% month-on-month and the prior gain was revised down a touch to 1% from 1.3%. That’s the third decline in the past four months. Most industrial sectors were down. The only bright spots were autos that have jumped by almost 6% in the first two months of 2016, and food that has also risen for two months. Everything else was lower by contrast to the prior month when almost everything was higher.

In the euro area, the calendar for next week is extremely light in terms of data releases. There is consensus that one of the only interesting events is the release of euro area industrial production for February on Wednesday. Industrial production is expected to fall in line with the monthly decline of 0.5% for the German figure, which was released this week. The decline in February is likely to be accompanied by a downward revision to the strong print in January as also seen in Germany.


Next Friday China is set to release its Q1 real GDP report. Expectations are for growth to slow to 6.7% year-on-year (a bit below that at +6.6%), which would be the lowest reading since early 2009. Regardless of cooler growth, an as-expected reading would land nicely within the government’s target range of 6½%-to-7%, and should generate the usual commentary from officials, playing down more stimulus expectations.

Just a couple of weeks ago, PBoC Governor Zhou warned that “excessive monetary policy stimulus isn’t necessary to achieve the target”. Perhaps what will be more interesting is how the monthly data play out, namely industrial production and retail sales, as well as credit growth. The first two months of 2016 were quite weak and raised concerns about a hard landing. However, it is well known how wonky the early-year figures can be, given the sizeable impact that the Chinese New Year can have on the data.


The Bank of Japan’s short-term economic survey (Tankan) published in March indicates a slowdown in activity in Q1. The manufacturing and non-manufacturing sectors were both hit, although for the first, the present conditions index is approaching dangerously close to zero. The situation in both sectors is also likely to deteriorate in Q2. The expectations index fell sharpest in the manufacturing sector, however, swinging into negative territory for the first time in ten quarters.

Sources: Danske Bank, TD Economics, BNP Paribas, Handelsbanken, Wells Fargo, Scotiabank, Commerzbank, BMO Capital.