France: Recovery on track…but where to?
Preliminary GDP data for Q4 2015 show growth of +0.2% q/q, compared with +0.3% in Q3. Growth was mainly driven by investment (+0.8% q/q), notably by companies. Private consumption fell as a result of falling energy and clothing expenditures (reflecting a cool but not cold winter). Worryingly, inventories contributed to growth (+0.5pps) for the second quarter in a row. Overall, the economy increased by +1.1% in 2015, in line with our expectations, with private consumption (+1.4%) acting as the main contributor (+0.8pps). A combination of low oil prices, a weak EUR and lower financing costs led to increasing company profitability and turnover, thereby spurring corporate investment. Household investment, picking up in Q4 2015 for the first time since 2013, is likely to increase by +0.4% in 2016. As a result, total investment will contribute positively for the first time since 2012, leading to our +1.4% GDP growth forecast for 2016. Given a +0.35% carry-over, our forecast requires around +0.4% quarterly growth, on average, in 2016.
U.S.: Fed on hold on signs of weakness
The Fed left interest rates unchanged last week, citing “global economic and financial developments” and the fact that “economic growth slowed late last year.” It is unlikely that the Fed will hike again in March, suggesting only two rate hikes, at the most, for all of 2016. GDP increased at a weak annualised rate of +0.7% q/q in Q4 2015, putting full-year growth at +2.4% and the forecast for 2016 remains unchanged at +2.3%. Net exports, business investment and inventories acted as drags on Q4 growth, while residential investment and consumption contributed positively. Even so, consumption increased by only +2.2% q/q annualised, despite disposable incomes improving by +3.2%. The manufacturing sector remains weak, with December durable goods orders down -5.1% m/m (-0.6% y/y). The less-volatile core component fell -4.2% m/m and -7.5% y/y, the weakest since December 2009. The ISM manufacturing index inched up +0.2 points to 48.2 in January, but it was the fourth consecutive month below 50, signalling contraction. The report was not entirely gloomy as new orders gained +2.7 to 51.5 with five of the ten components now above 50, compared with only two last month.
Japan: An unexpected move…but more will follow
Disappointing indicators, including wholesale and retail sales decreasing for the fifth consecutive month, to -3% y/y in December 2015, core CPI nearing zero (0.1% y/y in December) and consumer confidence registering 42.5 in January, led the BoJ to supplement its quantitative easing programme by pushing interest rates below zero. A rate of -0.1% will apply only to reserves in excess of the “macro added-on balances” that financial institutions deposit at the Central Bank. The measure is part of the overall aim of boosting consumption and corporate investment, as well as reinforcing the portfolio rebalancing effect, by anchoring the yield curve downwards. However, transmission to the economy may prove inadequate unless expectations of higher nominal growth materialise. This will require further easing from the BoJ in the form of more negative rates, an increased pace of asset purchases and/or expansion of non-government bond purchases. Officially switching to a nominal GDP level targeting regime would also help.
UK: Slowing momentum
data for Q4 2015 show an increase of +0.5% q/q, relatively stable compared with Q3 (+0.4%). The GDP breakdown will be available on 25 February but growth was entirely driven by services, particularly the financial sector, while manufacturing and construction continued (for the third consecutive quarter) to provide no stimulus. For the full-year 2015, GDP growth was +2.2%, below expectations, given downward revisions to previous quarters. Going forward, we expect private consumption will continue to be the main driver of GDP growth, but momentum is deteriorating. On the corporate side, capacity utilisation rates signal a slowdown in company investment at a time when overall investment is already markedly lower than in European neighbours. Meanwhile, uncertainty relating to a potential Brexit is still evident, with inward FDI slowing at the end of 2015. All this puts further pressure on the BoE to maintain a dovish stance until late autumn, with an increasing probability of no move this year.