WERO n°4: US, Eurozone, France, UK

1/31/2018 - Report
ic_blogtagMalaysiaHungaryUkraineMexicoUnited Arab EmiratesUnited StatesFranceUnited KingdomAeronauticsBrexitEurozoneGross Domestic Product (GDP)GrowthInterest rate


U.S.:  Consumers drive the economy

Q4 GDP growth was markedly stronger than the headline +2.6% q/q annualized rate indicated. Busi-ness investment gained a solid +6.8%, and residential investment made a sharp +11.6% increase after two consecutive negative quarters. The only real downside to the report was that a surge in imports caused the trade deficit to swell, knocking off a full -1.1pp of the headline growth rate. Most importantly, personal consumption (PCE) grew a very strong +3.8% in the quarter and is now running at +2.8% y/y. One worry though is that consumers are spending most of their income to fuel con-sump¬tion, driving the savings rate down to 2.4%, the fifth lowest monthly reading since 1959. However, income is starting to trend up, growing +2.1% y/y vs. only +1% just five months ago.

In addition, consumers have the willingness to spend as January consumer confidence rose +2.3 points to 125.4, still near November’s 17-year high. Durable goods orders gained an outsized +2.9% m/m, driven by defen¬se aircraft. After stripping out volatile components, orders shrank -0.3% but the y/y rate is still a hot +8.4%. Inflation remained tame in December as the (PCE) core rate rose a tick to a still slow +1.5% y/y.

Eurozone:  Strong growth contrasts with ECB’s easing bias

Eurostat’s first flash estimate has put Q4 real GDP growth at +0.6% q/q. This means the Eurozone continued to expand almost as strongly as in the previous quarters. For 2017 as a whole, economic growth reached a respectable +2.5%. And there is also a good basis laid for 2018 – we continue to forecast GDP growth of at least +2.2%. Furthermore, the latest sentiment indicators and especially further rising capacity utilization in the Eurozone’s industrial sector contribute to the positive picture. 
The current economic momentum shows in retrospective that the loose ECB monetary policy is having an effect (naturally with a time lag). Looking ahead, the current monetary policy stimulus – the ECB's balance sheet continues to grow – may be too strong. At last week’s Governing Council meeting the forward guidance was left unchanged. However, the ECB's easing bias appears no longer appropriate and is likely to be dropped soon. Starting in October, the monthly bond purchases should be scaled back from EUR30bn to zero.

France:  Ignition, supply side

GDP growth ended 2017 with a new steady figure of +0.6% q/q in Q4, the fifth quarter with about +0.5% growth. This growth was supply-side driven. Corporates increased their inventories which added +0.4pp to full-year 2017 growth, a usual pattern of growth acceleration when firms bank on future demand increases. Moreover, corporates continued to increase their capacity utilization rate which reached 85.8% in Q1 2018, a level rarely seen in the past. This triggered strong corporate fixed investment growth of +4.3% in 2017. And low vacancy rates in housing boosted household investment growth to +5.1% in 2017.

Yet, overall domestic demand did not accelerate in 2017 (+1.9%, after +2% in 2016) as private consumption grew by just +1.3% (after +2.1% in 2016). We forecast full-year growth to accelerate from +1.9% in 2017 to +2.1% in 2018, driven by domestic demand (+2.3%) which should be fueled by consumption (+2%) and a new strong increase of corporate investment (+5%). External demand will also be supportive, since export expansion is expected to accelerate to +4.7% (from +3.5% in 2017) as a result of higher demand from the Eurozone.

UK:  Economy set to enter a downtrend in 2018

Q4 2017 GDP growth came in at +0.5% q/q, slightly above the +0.4% q/q observed in the previous quarter. This took growth for 2017 as a whole to +1.8%. While only a slight dip compared to the +1.9% expansion seen in 2016, this is the lowest growth rate for the British economy since 2012. Whereas the preliminary Q4 growth estimate seems to underline the British economy’s resilience 18 months after the Brexit vote, in our view it’s downhill from here with the slow-burning growth deceleration that is already underway set to become more pronounced in 2018.

Brexit uncertainty will have a dampening impact on investment while the consumer squeeze will continue in 2018 in the context of inflation outpacing wage growth and weakening house prices. Meanwhile the modest growth contribution from the external sector – thanks to the favorable global growth outlook – will not prove strong enough to offset the expected slowdown in domestic demand. We forecast UK GDP growth to reach just +1.4% this year – one of the lowest growth rates across the EU.

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