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Cold season
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Cold season

Richard Conway Weekly bulletin February 2019
As the saying goes, “When America sneezes, the world catches a cold”. This time around however, the world seems to have caught a cold all on its own. American economic growth is in rude health by comparison.
German weakness continues

Despite a narrow escape from recession in Q4, only the most optimistic of commentators would suggest that all is well with the German economy.

Final GDP figures last Friday confirmed that growth flatlined in the final three months of 2018 following a 0.2% decline in Q3. More timely survey data from Markit and the ifo Institute suggested that the outlook may not be much rosier for Q1 either.

Weak manufacturing jumped out as a particular cause for concern, with the PMI slipping well below the 50 level that is usually considered to separate expansion from contraction. Dips in the ifo business climate index did little to boost the mood. The latter is now around lows last seen during the euro crisis.

Germany is not alone

Separate figures from Germany’s neighbours were not much better either. Italian industrial orders were sharply down, the Eurozone’s current account surplus has narrowed, and France appears to be treading water according to a set of PMIs that are struggling to make the move into expansionary territory.

Room for manoeuvre

This will make for uncomfortable reading for officials in Brussels and Frankfurt.

Reasonable US economic performance has allowed Mr Powell and his colleagues at the Fed to normalise policy much faster than other central banks and provides welcome breathing room should things turn sour again. American economic growth may soften in the coming year or two, but at least there’s room for manoeuvre.

Not so in the Eurozone.

Eurozone inflation remains weak

Inflation is looking weaker by the day in Europe, with headline CPI having fallen to 1.4% year-on-year and core inflation at 1.0%. Prices measured by the former fell by a full 1.0% in the month of January. That this was slightly ahead of consensus will be little consolation.

These latest figures largely tie the hands of the ECB. Tapering bond purchases is a step in the right direction, although rates remain the tried and tested policy instrument. The ECB’s main refi rate has remained at 0% since 2016, and any further south would be uncharted territory.

Cold or flu

Clarity on US-China trade tensions and a resolution of Brexit negotiations should take some of the pressure off, but the worry is that these may not be enough. What is a cold at the moment might develop into flu, and if it does, the ECB may run out of medicine.

For more information, please contact Richard Conway, Associate Director at JCRA, at richard.conway@jcrauk.com.

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