Economic Outlook – 14 August 2016


Productivity growth has been quite dismal in the current economic cycle. As the key determinant of a prosperous economy, the exceptionally weak trend in productivity does not bode well for the long-term economic outlook, but does support hiring and income gains in the short term.

As the Federal Reserve monitors incoming data to guide policy, indicators of inflation pressures remain subdued. Producer prices declined 0.4% in July on lower food and energy prices.

Core PPI, which excludes food, energy and trade services, was flat in July and little changed over the year. Import prices have also been relatively benign but edged up a bit in July. Fuel prices declined in the month but were offset by stronger non-fuel prices, specifically on imported industrial supplies and food & beverages.

Personal consumption was the strongest growth sector in Q2 GDP as the consumer has carried economic growth while the factory sector faces multiple headwinds. The headline number was flat in July as falling gas prices weighed on gasoline store sales while auto sales and non-store retail sales rose. Signals from other sales categories were not encouraging as sales were down for sporting goods, clothing, food & beverage, and building materials. Control group sales were also discouraging, remaining flat in July.

The US business inventories report for June presented an upside risk to revisions of private inventory investment in Q2 GDP. Inventories rose 0.2% but sales rose faster, pushing the inventory-sales ratio down. Retailers were responsible for the buildup as factories continued to reduce stockpiles.


Industry continued to face headwinds in June. Industrial production rose by 0.1% from May, while manufacturing production continued to fall in June. Production of consumer durable goods and intermediate goods fell in June, a sign that consumers are more carefully considering their spending decisions.

According to the RICS survey for July, UK house price growth posted its lowest reading in three years. Just 5% more respondents nationally saw a rise rather than fall in prices, a downward trend that is evident across the UK.

The London price indicator remains more downbeat (net balance of negative 33%), which is broadly consistent with an outright drop in prices in the capital.

The construction sector is a hurt. In June, the sector’s performance fell and is now -0.7% in Q2, compared to a previous estimate of a 0.4% decline. The reading most likely reflected great uncertainty in the run up to the referendum and a delay in investments before June 23. Looking ahead, with a PMI reading for the construction sector below 50 (the threshold that separates growth from contraction within the sector), the outlook does not look bright.


GDP in Q2 was reported to have increased by 0.3% compared to Q1 and by 1.6% compared to Q2 last year.

Germany is the main driver of economic growth; GDP was stable, at 0.4%/1.7% quarter-on-quarter/year-on-year respectively. Net trade and private and government consumption contributed the most.

Italy reported a flat quarterly GDP reading in Q2 and is struggling with bad loans within the banking sector.

In Spain, the GDP reading in Q2 was strong, at 0.7% compared to Q1, while France reported no growth at all in Q2.

Overall, it appears that the Eurozone has lost a bit of momentum as it entered the current quarter. Although industrial production (IP) rose 0.6% in June relative to the previous month, it was not strong enough to completely reverse the 1.2% decline in IP that occurred in May. Smoothing through the monthly volatility shows that IP has more or less stalled in recent months.

Focus remains on the impact on the economy of the UK’s decision to leave the EU with the release of ZEW expectations. The impact has been seen mainly on investor sentiment as reflected by the decline in ZEW expectations in July, while the impact on economic sentiment has been limited as seen in resilient PMI figures.

This week, more information will be released about Sentix investor confidence, which increased again in August and thereby points to higher ZEW expectations.

The ECB is set to release the account (minutes) of the monetary policy meeting in July. At the meeting, Mario Draghi was slightly more hawkish than expected as he said the ECB’s assessment following the UK’s EU referendum “is that the euro area financial markets have weathered the spike in uncertainty and volatility with encouraging resilience”.


Exports continued to decline, contracting for four straight months as global headwinds hindered spending and investment.

Renminbi’s devaluation last year still provide some buffer for waning demand for local made goods but the Chinese government still has rooms for further easing if incoming data suggests growth may fall short of the 6.5% to 7.0% target this year.

CPI held up well compared to quicker price deceleration and even deflation in other parts of the world while factory gate deflation diminished.

Importantly, Chinese investments in machinery and equipment in the industrial sector are weak, as the heavy industries in particular suffer from overcapacity. Growth in infrastructure and construction investments fell as well. Growth of private companies’ investment reached a new record low and state-owned enterprises’ investment fell in July. Public sector investments have until now held up well.

Sources: Danske Bank, Haendelsbank, Wells Fargo, HongLeon Bank.