Eurozone: ECB goes lower for longer
The ECB has taken another timid step in what looks set to be a very gradual exit process from its ultra-expansive monetary policy. At its October meeting the ECB announced an extension of its QE program into 2018 albeit at a reduced pace. Asset purchases will be continued until at least the end of September but from January onwards the monthly quota will be halved to EUR30bn. Due to the careful communication on behalf of the ECB over the past few months – which had prepared the grounds for another tapering step – the market reaction proved muted. Overall the ECB’s announcement is quite dovish, which is likely to help keep a lid on EUR appreciation. For one it left the door open for a further QE program extension in size and/or length should economic or financial conditions deteriorate again. In addition forward guidance remained unchanged and with the reinvestment of principal payments to be continued for an extended period of time after the end of the QE program, the ECB will have a strong presence in bond markets for some time to come. Moreover the ECB’s lower-for-longer decision means that an interest rate hike from current record lows is unlikely to be implemented before 2019.
China: Q3 GDP and Congress
Real GDP growth edged down to +6.8% y/y in Q3 (from +6.9% in Q2) due to slower expansion in the secondary sector (+6%) while services remained strong (+8% y/y). Monthly data point to a solid rise in nominal retail sales in September (+10.3% y/y) but weaker investment growth (+7.5% y/y in January-September). Overall, economic growth continues to be supported by fiscal measures and solid expansion of private consumption and is on track to achieve the government target of “+6.5% or higher”. A gradual tightening of financing conditions helps to reduce financial risks (shadow banking activities, e.g.) but also translates into lower growth in investment and debt-intensive activities (construction, heavy machinery, e.g.). This more balanced economic performance provided a favorable background for the last Communist Party’s Congress and echoed president Xi’s speech on the need to bring China on healthier economic footing by containing financial risks. Assuming that financial authorities pursue a more prudent stance in 2018, economic growth is forecast to decelerate to +6.3%.
Germany: Boom goes on
Already upbeat sentiment in the German economy improved further in October. The Ifo business climate index notched up a steep 1.4 points and now stands at 116.7 points – a new record. Particularly encouraging is the fact that business expectations have improved appreciably. The economy was last so upbeat about the future almost seven years ago. We do not think that October PMIs published earlier by Markit contradict the Ifo figures. Markit reported a minimal drop in the Manufacturing PMI from 60.6 to 60.5 points. This leaves the index still well above the 50.0-threshold that signals an expansion in economic activity. Overall the latest sentiment surveys confirm our view that the boom in Germany will continue well into next year. To date we have been assuming a slight slowdown in growth momentum in the second half of 2017. The latest figures suggest that this slowdown has become at least less likely. This means that the risks to our current forecast of annual average growth of +2.2% this year and +2% next (in calendar-adjusted terms) are more on the upside than the downside.
France: Gimme some more!
Business confidence is still hovering at high levels (11 points above its long-term average in October, back to December 2007 levels) and bullish views on reforms are probably adding to the current opti-mism. In Q4, the capacity utilization rate increased to 84.9% and the share of firms reaching production bottlenecks ascended to 32.4% (highest rates since Q2 2008), giving good traction to the EH corporate investment forecast (+3.6% in 2017). Moreover, high expectations are currently nurtured in the corporate sector as the expected changes of demand indexes are the best since Q4 2000 (+21.5 for foreign demand, +16.6 for domestic demand). Moreover, corporates are currently expecting the implementation of long-awaited reforms. The government opened a six-month consultation in order to revamp corporate laws and address some well-known French bottlenecks, namely high DSOs (EH estimated it at 72 days in 2016, compared to 53 in Germany), poor access to credit for SMEs, as well as time and cost needed to register property or resolve insolvency. These are necessary conditions to push growth above +2% (EH currently forecasts +1.7% in 2017).