Economic Outlook – 12 November 2017

US

• On Tuesday, the JOLTS survey was released and indicated that demand for workers continues exhibiting strength. This is not necessarily a surprising story, given to low unemployment rate at just 4.1%, since December 2000. The job openings rate, which is the percentage of openings compared to the total level of employment including open roles, stayed flat on the month at a record high of 4.0%. This speaks not only to the high level of labor demand, but also to the elevated level of total employment, and indicates that the labor market remains on firm ground with room to run. The quit rate rose to 2.2%, but has fluctuated around the same level for essentially all of 2017. This could be at least partially driven by an ageing workforce as Baby Boomers enter the late stages of their careers, and job changes become less frequent as employees age.
• The Wells Fargo/Gallup Small Business Index fell 3 points to 103 in Q4, good for the second, only to Q3, strongest reading in the current expansion. Strong small business confidence has been primarily boosted by strong consumer spending driving sales higher, and rollbacks of business regulations under the Trump administration. The encouraging confidence measure among small businesses could indicate an improvement in business fixed investment that would help improve headline GDP growth. The primary issue plaguing small businesses surrounds the availability of quality labor, with 16.0% of owners reporting this as their top concern.
• US consumer credit grew $20.8 billion in September, beating market expectations and showing the strongest gain since November 2016. The growth was bolstered by revolving and non-revolving credit and is up 6.6% over the year. This supports continued increases in personal consumption, despite lagging income growth. At first glance, credit growth-absent-significant income gains could be construed as a possible snag. However, the debt service ratio, which is essentially a consumer’s cost of capital, sits at 5.5% of disposable income, well below all-time highs and levels seen in recession.
• The US House Ways and Means Committee, the tax-writing arm of the lower house, amended the tax reform proposal it put forth last week. The Senate Finance Committee unveiled its plan for the first time on Thursday. Among the key differences the two bodies will need to iron out is the effective date of the proposed corporate tax cut from 35.0% to 20.0%. In the House bill, the cut would go into effect next year, while the Senate’s plan calls for the cut to become effective in 2019. GOP leaders are under intense pressure to pass a tax bill before the end of the year after failing to enact any major initiatives during the Trump administration’s first year in office.
• According to the White House, $250 billion in trade deals were agreed during US president Donald Trump’s visit to Beijing. Skeptics noted many of the announced deals were not contractual obligations and some may have been agreed previously. Despite the skepticism, some Chinese trade barriers appear to have been lowered, notably on the importation of US beef, which was halted in 2003 as a result of a BSE (mad-cow disease) scare in 2003.
• US CPI and retail sales control group figures are due for release on Wednesday (both for October). CPI inflation is likely to have been affected by the fall in energy prices in October, when the retail price of fuel declined approximately 5.0% from September. Major changes are not expected in the other subcomponents compared with their growth in September. Hence, CPI inflation is expected at 0.0% month-on-month (1.9% year-on-year versus 2.2% year-on-year in September) and CPI core inflation was 0.2% month-on-month (1.7% versus 1.7% in September).
• On Thursday, industrial production data for October is due for release. Industrial production rebounded in September following the sharp fall in August. The current development in industrial production broadly reflects the strength of the economy and hence estimate industrial production increased 0.25% in October.

UK

• Already politically vulnerable owing to the Conservative Party’s poor showing in snap elections earlier this year and a lack of progress toward a controlled Brexit, British prime minister Theresa May found herself further weakened this week by a growing sexual harassment scandal that forced her defence minister Michael Fallon from office. Secretary of State for International Development Priti Patel was also forced to resign, for having undisclosed meetings with Israeli officials. With just weeks to go for the United Kingdom to come to a financial settlement with the European Union over Brexit, the sackings are perceived as a major distraction.
• UK services activity has slowed. Thus far over 2017 the sector has grown at an annualised rate of 1.2%, half the pace of the 2.5% growth delivered in 2016. Much has been written about the impact of a household income squeeze on this important sector. Rising inflation has brought real household income growth to a standstill, despite continued robust employment.When the focus is directed at some of the worst performing sub-sectors, this headwind certainly seems to have weighed on activity. Growth within the more consumer-centric distribution (wholesale and retail), hotels and restaurants sector has slowed dramatically. Households are perhaps cutting back on meals out and nights away. Business services meanwhile have been more resilient, particularly financial and professional services. However, these have not grown strongly enough to offset the weakness among more consumer-centric businesses. Household spending remains a dominant driver of the UK economy.
• UK CPI figures for October are to be released on Tuesday. Inflation remains at close to 3% on an annual basis, still driven mainly by the weak GBP. However, the positive contribution from the GBP is starting to fade gradually, although it will take some time before it affects inflation significantly. CPI is expected to rise 0.3% month-on-month, 3.2% year-on-year versus 3.0% in September.

EU

• In line with ECB’s latest move to reduce its monthly asset purchases but for a longer period, both European Commission and ECB expressed increased optimism over growth prospects in the Euro region. The European Commission upwardly revised Eurozone 2017 growth forecast to 2.2% from 1.7%, and expects the quicker pace of growth to sustain through 2018 (revised to 2.1% from 1.8%) before easing to 1.9% in 2019. Unemployment rate is expected to improve while inflation is expected to remain subdued. ECB’s economic bulletin revealed that the latest macro data are “consistent with a continued robust growth pattern in the second half of 2017”.
• Key European stock indexes lost ground during the week. Investor sentiment was apparently hurt by lacklustre corporate earnings and uncertainty over whether the U.S. will be able to pass and finance tax reforms. As the third-quarter earnings season comes to a close, the vast majority of stocks on the STOXX Europe 600 Index have reported, and earnings upside surprises are at their lowest levels since the second quarter of 2016. Industrial and consumer goods stocks were laggards compared with other sectors. The blue chip UK FTSE 100 index, Germany’s DAX 30, France’s CAC 40, and Spain’s IBEX 35 all ended the week lower.
• In the euro area, the German GDP estimate for Q3 is due for release on Tuesday. German GDP growth has been strong in the first half of 2017, reporting 0.7% and 0.6% quarterly growth in Q1 and Q2, respectively. Activity indicators also remained strong in Q3, indicating a continuation in the solid growth figures. Although PMIs saw a large fall in July, dragging on the average PMIs for Q3, they recovered quickly in August and September and remain at high levels. Thus, another solid GDP figure is in order, with a likely 0.6% quarter-on-quarter growth in Q3.

China

• People’s Bank of China governor Zhou Xiaochuan warned again that his country’s financial system is becoming significantly more vulnerable because of high leverage. Risks are accumulating, the central banker bluntly warned, that are “hidden, complex, sudden, contagious and hazardous.” Zhou said China should open up markets, relax capital controls and reduce restrictions on non-Chinese financial institutions to counter the rise in leverage.
• China’s exports grew at a robust clip in October and the country’s foreign exchange stockpile increased for the ninth straight month, providing Beijing with two pieces of data underscoring the strength of the economy as policymakers prepare for a period of deleveraging and slower growth. China’s exports rose 6.9% in October from a year ago, slower than September’s gain and trailing forecasts. Imports surged a stronger-than-expected 17.2%, reflecting official efforts to rebalance the economy to favour consumption. China’s overall trade surplus rose to a lower-than-expected $38.2 billion, while its politically sensitive surplus with the US narrowed to $26.6 billion from September’s record-high $28.1 billion.
• China’s central bank reported that its foreign currency reserves rose by $700 million to $3.1 trillion at the end of October. Analysts scrutinise China’s reserves every month because they show how much Beijing is dipping into its cash stockpile, the world’s biggest, to support its currency. October’s gain marks a turnaround from one year ago, when China’s war chest dropped to a five-year low and stoked fears that widespread capital outflows would lead to a disorderly devaluation of the yuan. However, this year’s string of monthly gains and a rebound in the yuan have led some analysts to believe that Beijing may relax capital controls.
• Focus turns to the monthly batch of industrial production, retail sales and fixed-asset investments, which are released at the same time. In particular, the focus needs to be on steel production and electricity production in the industrial production data, as these tend to capture the swings better in the business cycle than the overall industrial production number. Steel production is expected to move lower, as the winter season approaches when production curbs have been put on the big polluting industries– not least steel. Overall, there is a downside risk for Chinese industrial data in coming quarters (such as PMI manufacturing), as the production curbs hit and a new reform push with focus on deleveraging of state-owned enterprises may cause growth to slow more than expected in the short term. However, this would be short-term pain for longer term gain, which has also been recommended by the IMF.

Sources: MFS Investment Management, Danske Bank, T. Rowe Price, Wells Fargo, Standard Life Investments.