Economic Outlook – 17 April 2016


Investors were treated to a mixed bag of US economic data this week. Retail sales for March (-0.3%) and industrial production for February (-0.6%) came in on the soft side, but weekly jobless claims for the week of April 9th fell to a 43 year low, suggesting ongoing job market strength.

Vehicle sales raced to an 18 million-plus rate during the August-October period, their fastest pace in a decade. This reflected some sales being pulled forward, which accounts for part of the recent weakness in vehicle sales, specifically, and retail sales, generally. Moreover, prolonging this payback, the suspicion is uncertainty has increased meaningfully in the past few months, eliciting an even more cautious approach by consumers, not only to big-ticket outlays, but to spending in general (this seems to be bothering businesses as well).

Consumer price inflation decelerated in March to 0.9% (from 1.0%). The core rate also edged down to 2.2% (from 2.3%). While inflation is unlikely to surge in the months ahead, the combination of higher energy prices, a weaker US dollar, and a tighter job market should nudge it closer to the Fed’s target over the next year, sufficient to ensure a continued gradual pace of monetary tightening. A further increase would have complicated the FOMC’s plans to slowly and carefully normalise policy in the face of global and financial headwinds. The report reinforces Chair Yellen’s claim that the recent upturn in core inflation may not “prove durable”, providing ammo to fend off any hawkish dissent at upcoming meetings.


As expected, the Monetary Policy Committee (MPC) at the Bank of England voted unanimously to maintain the Bank rate at 0.5% and also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at GBP 375 billion. The MPC’s best collective judgement is that it is more likely than not that the Bank rate will need to increase over the forecast period to ensure inflation returns to the target in a sustainable fashion.

The rate of inflation was 0.5% in March and the core measure, excluding volatile food and energy prices, rose to 1.5%. Upward pressure on consumer prices came from transport costs (airfares due to Easter being earlier than last year) and from clothing and footwear. This upward pressure was partially offset by a drop in food prices. CPI headline inflation remains well below the 2% target and this shortfall is due predominantly to unusually large drags from energy and food prices, which are expected to fade over the next year.

Overall production in the construction sector fell in February. Total new housing work increased due to private new housing that was counteracted by slowing public new housing. Infrastructure work and repair and maintenance work fell as well. The construction sector’s share of total GDP is less than 6% but the reading reflects a more gloomy construction sector.


In the euro area, the main event is the ECB meeting on Thursday. Policy changes are not to be expected, but Draghi is likely to sound dovish as inflation expectations are still very low and the effective euro is stronger.

Specifically Draghi is expected to re-open the door for rates cuts as the minutes (accounts) from the ECB meeting in March revealed that although Draghi ruled out further rate cuts at the press conference, the Governing Council is keeping the option alive: “The Governing Council would not rule out future cuts in policy rates, as new shocks could change the outlook for inflation’.

Despite soft words, the ECB is expected to remain calm over the coming months and wait to see the effect of its new policy initiatives. The focus will also be on further details about the TLTRO II loans.

On Thursday, data for consumer confidence in the euro area for April will be made available. Consumer confidence has trended downwards over the past couple of months due to increased economic uncertainty. The decline is expected to continue in April but at a slower pace compared to the last months. Note that although the consumer confidence has been declining significantly in 2016, it is still high from a historical perspective.


In China, even though annual GDP growth fell slightly in Q1, all monthly activity indicators showed increasing growth in March. This may indicate that the authorities have succeeded in stabilising growth via stimulus measures. The authorities have eased monetary policy, utilised fiscal policies and facilitated local governments’ infrastructure projects.

Growth in fixed investments increased more than expected to 11.2% year-on-year in March from 10.2% in January-February.

Property investments were behind the higher growth, but infrastructure investment growth (notably railways) increased as well. In addition, the figures show that fixed investments by state-owned companies are the main contributor to the growth increase.

Sources: Danske Bank, TD Economics, Handelsbanken, Scotiabank, BMO Capital.