Economic Outlook – 5 June 2016


The weak May payrolls data acts to overshadow the otherwise positive week for the US economy.

May car sales along with a strong April report for consumer personal income and expenditures added further comfort that the US economy was bouncing back from a weak first quarter.

Although the US payrolls report is notoriously volatile, the slowdown in job growth in May is likely enough to delay the Fed from raising rates for at least another month.

These latest results corroborate what the Fed’s Labor Market Conditions Index (LMCI) has been signalling, with its four consecutive negative readings through April and a likely further drop in May, the US labour market has hit some hefty headwinds.


UK lending data from the Bank of England for April showed that consumer credit growth eased some-what, while lending secured on dwellings fell significantly after a surge in Q1 due to the new tax implementation.

The numbers add to evidence that the government’s new levy on purchases of second homes and buy-to-let properties in April distorted the market at the start of the year.

The UK Purchasing Managers Index (PMI) for all sectors was published this week. The readings showed an overall better performance in May with the exception of the construction sector, where the index fell but remains on a level consistent with sector growth.

The manufacturing sector held up well despite a struggling industrial sector, but the higher reading is not strong enough for the indus-trial sector to contribute positively to GDP in Q2. The services sector PMI increased in May but not enough to support GDP in Q2.


As in April, the ECB left its monetary policy unchanged, leaving the European economy time to absorb the easing measures voted in March, including one of the biggest (if not the biggest), the T-LTRO II, which has not even started yet.

To justify the decision to maintain the current profile, Mario Draghi insisted that the easing effects of the measures announced in March have not been fully captured by the new projections.

Draghi also revealed the ECB’s position on the Greek situation. Despite the agreement that was reached in late May, the Governing Council has yet to reintroduce the waiver that would allow Greek banks to refinance normally via the central bank.

The Euro GDP components for Q1 2016 for the euro area are released on Tuesday. Overall GDP growth was solid at 0.5% quarter-on-quarter and the components are expected to reveal strong investment growth and still solid private consumption.

Investments have been picking up speed in Germany while consumption remained solid and similar numbers are expected for the euro area.

Looking ahead, investments will remain the main driver of economic growth as the uncertainty should fade after the UK referendum and the rising oil price is starting to put downward pressure on consumption.


Both Chinese manufacturing PMIs were rather stable in May, hinting that economic growth has stabilised. The official manufacturing PMI was unchanged at 50.1 in May compared to April, whereas the Markit Caixin manufacturing PMI fell slightly in May to 49.2 from 49.4 in April.

The outcome was almost in line with the consensus estimate. The stable May readings reinforce the view that the jumps in March were real and not just related to the Chinese New Year. In May, the seasonal swings related to the end of the Chinese New Year celebrations are definitely out of the data.

China faces the prospect of an exceptionally rapid rise in the percentage of over-65s in the overall population from 2020. The number of those of working age is already declining. It will be difficult for the government to counter the trend, and economic competitiveness will continue to suffer. This will condemn strong Chinese economic growth to be a thing of the past.


Sources: Danske Bank, BMO Capital, Commerzbank, Haendelsbank, TD Economics, BNP Paribas.