U.S. & Canada: Strengths and weaknesses
New home sales in the U.S. fell -1.5% m/m in March, the third consecutive decline, with median prices falling -3.2%, the third decline in four months. Although existing home sales increased by +5.1% m/m in March, it was not enough to offset February’s -7.3% decline, and the y/y rate is a weak +1.5% despite a +5.7% y/y price gain. Consumer confidence slipped two points to 94.2 in April and the expectations component fell to 79.3, the lowest in 27 months, perhaps reflecting concerns about the presidential elections. Manufacturing data are discouraging; durable goods orders gained only +0.8% m/m in March (expectations of +1.6%) and the y/y rate was -2.5%. Both the Philadelphia and Dallas Fed manufacturing surveys showed contraction in April, the 16th consecutive month for Dallas. Meanwhile, in Canada, the economy continues to improve. February retail sales increased by +0.4% m/m, compared with expectations of +0.2%, after +2% in January; gains were widespread. Q1 GDP is likely to be as high as +3% q/q annualised. Consumer price inflation in March was 0.2% m/m and 1.3% y/y but the core rate increased to 0.7% m/m and 2.1% y/y. The CAD has risen over +10% this year, so inflationary pressures may lessen in the coming months.
UK: Reality check
Q1 GDP growth estimates of +0.4% q/q suggest that economic activity remains subdued. Services increased by +0.6% (down from +0.8% in Q4 2015) and were the only positive contributor to growth. Manufacturing, construction and agriculture all contracted, by -0.4% q/q, -0.9% and -0.1%, respectively. Earlier indicators already pointed to a decreasing growth momentum, with industry capacity utilisation falling below its long-term average of 80.4%, to 79.7% in Q1, retail sales decreasing by -1.3% m/m in March and weaker business confidence amidst Brexit fears (the quarterly average of the Manufacturing PMI stands at its lowest level since 2013). The economy’s exposure to the U.S. and to China may explain part of the slowdown. Uncertainty around the 23 June referendum on EU membership will accelerate the slowdown in growth in Q2. Overall, we expect 2016 growth will decelerate to +1.9% (from +2.3% in 2015). In this context, the BoE is likely to remain dovish, at least until the end of the year, as inflation is expected to remain below 1% in 2016. The depreciation of the GBP (-7% since December 2015) will boost UK corporate competitiveness only moderately.
Emerging Markets: Some respite, for now
Commodity prices and exchange rates have recovered from their January historic lows and are now trading around their Q3 2015 levels. A debt-driven pick-up is coming from construction and property in China, where steel mills are adding new output and metal prices are on the rise. China is the world’s largest consumer of industrial metals (around 50% of the market) and remains the largest contributor to global oil consumption growth. This recovery has spread to other commodities, including oil, and partly explains current easing conditions for commodity exporters’ exchange rates. Indeed, some of the strongest recent appreciations, 10-20%, have been recorded by previous worst performers, including Brazil, Russia and South Africa. While China’s cyclical mood provides some forewarning of fluctuations in commodity prices and currencies, the structural outlook has not changed, with these asset classes providing limited upward momentum because key commodities (including oil, iron ore and coal) remain oversupplied and key emerging markets (including China) still need to rebalance their economies.
Sweden: Actively navigating headwinds
The Central Bank expanded its asset purchasing programme for H2 2016 by a further +SEK45bn in order to tame the appreciation of the SEK and to boost inflation. In March, consumer prices increased by 0.8% y/y, higher than in previous months but not enough to reach the 2% target. The government recently presented its Spring Fiscal Budget for 2016-2017, with plans to increase spending in order to integrate the ever-growing influx of refugees (more than +160,000 were registered in 2015). The projected +4.6% increase in public spending is to be financed by strong growth (+3.5% in 2016) and associated higher tax receipts of +SEK22bn in 2016 (0.5% of GDP) and further budget consolidation through taxes will generate an additional +SEK26bn in 2017 (0.6% of GDP). The fiscal deficit is forecast to widen to -0.7% of GDP in 2017, before moving back to equilibrium by the end of 2018.