Economic Outlook – 14 February 2016


The risk-off sentiment was palpable through much of the week, as equites and oil sold off, while safe heaven assets rallied. Markets have recovered some ground on Friday, following better-than-expected retail sales report which helped to dissuade fears about the health of the US economy.

Another key concern among investors this week was the health of the financial institutions in the environment of low and, in some cases, increasingly negative interest rates.

Deteriorating financial conditions and increased risks to growth were highlighted by Janet Yellen this week. These will likely slow the pace of rate normalisation; however, given that the US economy remains in solid shape, the Fed is expected to still be able to deliver two more quarter-point hikes later this year.

Retail sales posted a 0.2% rise in January, while core sales rose an impressive 0.6% for the month. While some price effects remain, the strong pace of sales suggests that consumer spending remains robust enough to support modest economic growth.

Import prices continued to slide to start the year, falling 1.1% in January, but the pace of declines has begun to diminish. Business inventories rose 0.1% in December while November’s inventories were revised slightly higher to a decline of 0.1%.

On Wednesday, the minutes from the FOMC meeting of 26-27 January will be made available. Here a broader insight into the different views among the FOMC members will become clearer. It could attract some attention as Yellen’s testimony was more or less just a repetition of the January FOMC statement. However, since the meeting, uncertainty in financial markets and risk of a systemic crisis have both increased and these should keep Fed on hold until the September meeting.


Draghi will speak in the EU Parliament on Monday. His words will be followed closely by investors as they look to see whether he provides any new comments on possible further easing. Last week he sounded very dovish and his comments have to some evoked memories of the remarkable ‘whatever it takes’ speech from 2012.

Real GDP Growth in the EU was 0.3% quarter-on-quarter in Q4, maintaining the moderate pace of Q3. Although this was widely expected, there were some fears that the disappointing retail sales and industrial production figures would imply another drop in the pace of growth. Hence, overall 2015 growth ended at 1.5% up from 0.9% in 2014, but with a tendency of growth slowing over the year.

There is limited information about the underlying growth drivers, but according to statements following the German GDP numbers, fixed investments in construction was markedly up and government spending rose due to the handling of the refugee crisis. Furthermore, foreign trade had a downward effect on growth, which could be attributed to waning demand from emerging economies.

Retail sales figures have strongly hinted that household consumption was a drag on growth after being the prime growth driver in 2015. Another point worth noting was that Greece went back into technical recession.


The December 2015 UK trade release is the first opportunity to analyse 2015 as a whole. The UK’s annual trade deficit reached GBP 34.7 billion in 2015; an expansion of GBP 0.3 billion from 2014. Over the same period, the goods deficit widened by GBP 1.9 billion to GBP 125.0 billion.

The widening was partially offset by an increase in the services surplus, which rose by GBP 1.5 billion to GBP 90.3 billion. The UK’s deficit on trade in goods and services was estimated to have been GBP 2.7 billion in December 2015, a narrowing of GBP 1.3 billion from November 2015.

The industrial sector continued to face headwinds in December last year. Total production output is estimated to have decreased by 0.5% between Q3 and Q4 2015. This decrease was larger than the forecast decrease of 0.2% contained within the preliminary estimate of GDP in Q4 2015.

The largest contribution to the total production quarterly decrease came from mining and quarrying, which decreased by 2.3%, while manufacturing output remained unchanged during the same period.

Total production output is estimated to have increased by 1.0% between 2014 and 2015. Of the four main sectors, manufacturing output was the only one to fall, decreasing by 0.2%.

Total production output is estimated to have decreased by 0.4% in December 2015 compared with December 2014. The largest contribution to the fall came from manufacturing, which decreased by 1.7%.


Sources: Danske Bank, TD Economics, BNP Paribas, Handelsbanken, Wells Fargo.