News
May 16, 2023

German ZEW index adds to recent growth worries

The third drop in a row for the German ZEW index marks a turning point for the worse as any growth optimism from the start of the year evaporates

All bad things come in threes. The ZEW index, which measures financial analysts’ assessment and expectations of economic and financial developments, signals a turn of the German economy for the worse. In May, the ZEW index decreased to -10.7 from 4.1 in April, the third consecutive drop. At the same time, the current assessment component also weakened, dropping to -34.8 from -32.5 in April.

Weak German macro data in recent weeks, as well as the US debt ceiling debate, banking turmoil and expectations of further rate hikes, seem to have dented analysts’ optimism.

Earlier optimism has disappeared for now

The ZEW index is definitely one of the worst-performing leading indicators in Germany when it comes to predicting GDP growth. However, it has a decent track record in predicting turning points in the economy. With this in mind, today’s ZEW sends a worrisome message: three consecutive drops are a new trend, a trend in the wrong direction.

To some extent, today’s index numbers are both backward and forward-looking. It’s both a reflection of recent weak macro data but also, once again, of a downscaling of growth expectations. The optimism at the start of the year seems to have given way to more of a sense of reality. A drop in purchasing power, thinned-out industrial order books as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy all argue in favour of weak economic activity. On top of these cyclical factors, the ongoing war in Ukraine, demographic change and the current energy transition will structurally weigh on the German economy in the coming years.

All of this doesn’t mean that the German economy will be stuck in recession for the next couple of years. But it does mean that growth will remain subdued at best and that the flirtation with stagnation will continue.

source: ing

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Ali Sabbaghi
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China manufacturing
News
April 18, 2023

China’s GDP for 1Q23 is better than expected

1Q23 GDP grew 4.5%YoY, much faster than the 2.9%YoY recorded for 4Q22. This is a better-than-expected data report. We expect that the government will hold back extra stimulus plans and the yuan should strengthen

GDP grew faster than expected in the first quarter of 2023 with consumption the main growth engine

China’s GDP increased 4.5%YoY in 1Q23, which was better than our forecast of 3.8%YoY, and stronger than the previous quarter’s 2.9%YoY.

The main reason for the faster-than-expected growth was much stronger growth in retail sales, which accelerated to 10.6%YoY in March and 5.8%YoY for 1Q23 after 3.5%YoY growth in January to February. Such rapid retail sales growth has not been seen since June 2021, when it grew 12.1%YoY. The growth in retail sales was mainly boosted by catering.

In contrast, we did not expect infrastructure investment growth to slow to 8.8%YoY for 1Q23, compared to 9%YoY growth in the first two months of the year though infrastructure investment still increased at a speed faster than overall fixed asset investment growth of 5.1%YoY in 1Q23 (5.5%YoY YTD in February).

Even with slower growth in March, we still believe infrastructure should grow faster from 2Q23 after the strong loan growth in March, much of which was for infrastructure projects.

Industrial production grew only at 3.9%YoY in March and 3.0%YoY in 1Q23 and was only slightly faster than the 2.4%YoY growth in the previous quarter. We see fairly modest growth in industrial production as a result of the drag imposed by weakening external demand in the US and Europe. By categories, most electronic production recorded contraction in 1Q23. Micro-computers, integrated circuits and smart devices fell 22.5%YoY, 14.8%YoY and 7%YoY in 1Q23, respectively, and reflecting the burden of US export bans.

China’s retail sales jumped, led by catering

China’s investment is led by infrastructure

Property investment is gradually recovering

Investment by the property sector contracted 5.8%YoY in the first quarter which is slightly worse than the 5.7%YoY contraction in the first two months of 2023. This could be due to the large housing inventories in the market even though property developers that have not defaulted on their bonds and loans should be able to get financing to continue their existing construction. 

On the other hand, residential property sales increase 7.1%YoY YTD in 1Q23 compared to 3.5% in 4Q22. This is quite encouraging as it suggests that some home buyers are regaining confidence in property developers. If pre-sold housing is digested by the market, property developers should be able to get fresh cash flow from home sales in 2024.

What is the implication of this GDP report?

With consumption as high as 10%YoY in March, there is no immediate need for fiscal stimulus to support consumers.

But the government will probably keep its plan of infrastructure investment as a supplementary growth engine as we expect the external market to deteriorate further in 2023.

In short, with this GDP report, we believe there is no immediate need for the government to put massive stimulus into the economy.

Yuan should be supported by this GDP report

USDCNY and USDCNH should strengthen on the back of this report. When comparing the fundamentals of the US and China, China’s economy is strengthening and will get stronger over the rest of the year. In contrast, the US economy will likely continue to slow. This should support the yuan against the dollar from the second quarter. Our forecast on USDCNY and USDCNH is 6.5 by the end of 2023.

source: ING

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Ali Sabbaghi
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Eurozone EUR
News
April 11, 2023

Eurozone retail sales decrease again in February despite upbeat surveys

Retail sales in February continued to decline, which makes it unlikely for a positive contribution to first quarter GDP. This suggests that there may be weakness in the economy and no strong rebound in growth is expected.

Retail trade volume down by 0.8% in the euro area and by 0.9% in the EU

Retail sales volume has declined since peaking above pre-pandemic levels and has fallen to levels well below. The decline accelerated in 2022 and there is no break from the trend yet. The spike in the value of retail sales last year due to inflation has now plateaued.

Sales figures for February were disappointing in all five major markets, with Germany and France experiencing the biggest drops of -1.3% and -1.5% respectively. This suggests that consumers are still struggling with high inflation and an uncertain economic future, despite a slight improvement in confidence levels. Although there has been a slight uplift in consumer sentiment, it remains at levels typically associated with an economic recession.

Although surveys such as PMI and Ifo showed a positive outlook for the economy in the first quarter, there has been no concrete evidence from actual sales data to support this. Unless there is a significant increase in March, retail sales are likely to decrease in the first quarter. However, it is important to note that retail sales may not accurately reflect the state of the economy as services have been performing well and there is a potential for increased production activity. Despite this, the current retail sales figures do not suggest a strong economic recovery.

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Ali Sabbaghi
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China
Market Analysis
April 6, 2023

What we expect from China’s first-quarter GDP report

With the Services PMI beating estimates, we’re expecting strong retail activity data for March. But weaker export demand should drag on GDP. The government could provide stimulus to the economy after the release of the first quarter GDP data on 18 April

Services is becoming a growth engine for the Chinese economy

The Caixin service PMI was 57.8 for March, up from 55.0 the previous month. This is the highest level in more than two years, since November 2020. The rise can be attributed to the subindices of employment, which is also at its highest level since December 2020, and robust new orders that led to tightness in capacity. 

With the faster recovery, there is rising price pressure seen in input prices but that has not been completely passed through to the selling price due to intensive competition.

Retail sales in March should grow faster

From what we have seen in the official non-manufacturing PMI and Caixin services PMI, retail sales in March should grow faster on a monthly basis. We should see a broad-based recovery of retail sales, except for automobiles, which should suffer from the end of subsidies for electric vehicles. 

That should lead to around 5% year-on-year growth of retail sales in March after 3.5%YoY year-to-date growth in February. If we are correct on this forecast, then retail sales in the first quarter should grow 4%YoY.

While this is still lagging behind the 5% GDP growth target set by the government in the Two Sessions meeting in March, we need to remind ourselves that China is at the beginning stage of its recovery. The speed of recovery of retail sales, representing the growth of the domestic market, should pick up faster in the second quarter. 

GDP lagging behind

GDP for the first quarter should lag behind the 5% growth target for the whole of 2023. We expect GDP to only grow 3.8%YoY in the first quarter of this year.

This is because of the slowing growth of external demand that should hurt exports and manufacturing activities. The removal of subsidies for electric vehicles has also led to the slowing production of automobiles compared to the same period last year. 

China GDP and new home price forecast

Stimulus is likely to follow the GDP report

We expect stimulus to follow quickly after the release of the GDP report for the first quarter.

1. Infrastructure

To keep the 5% growth target for 2023, the government needs to push forward infrastructure investments, most of which should be building metro lines and increasing the number of 5G towers as these are already in the plan for this year. 

2. Consumption

An extra stimulus could be resuming subsidies for electric vehicles after the sharp fall in automobile sales when the subsidies ended at the end of 2022. If the government believes that it has spare fiscal strength, it could also provide subsidies for consumer electronic goods. This could support the sales of domestic semiconductor companies.

The improving service sector should provide a stable wage for the labour force. The stimulus should further stabilise labour demand in the manufacturing sector. These are the foundation of the increasing appetite for buying homes again in the economy. As such, we expect a moderate increase in new home prices in 2023, which should induce retail sales further via the wealth effect.

We, therefore, expect GDP to grow faster at 6.0%YoY in the second quarter. We keep the full-year GDP forecast at 5% as external demand should be a concern for the year.

source: ING

Ali Sabbaghi
0
uk-finance economy
Market Analysis
April 2, 2023

Positive signs for the UK economy

The UK economy grew in the last quarter of 2022 and avoided recession. England’s Office for National Statistics reported that gross domestic product, the value of all goods and services produced in England, increased by 0.6% in the fourth quarter of 2022, after falling by 0.1% in the previous quarter. This growth was caused by the increase in consumer spending and business investment, as well as the increase in exports.

A recession is when the economy shrinks for two consecutive quarters, which can lead to job losses and lower living standards. The UK economy has not fully recovered from the impact of the pandemic, but current growth is a positive sign, the Office for National Statistics said. This is good news for the job market and people in the UK who rely on a strong economy to thrive.

Ali Sabbaghi
0
March 30, 2023

US growth was not strong in the fourth quarter!

Jobs remain strong

The latest report from the US Department of Labor shows that the number of jobless claims increased relatively last week. It rose 6,000 to 266,000 on a seasonally adjusted basis for the week ending March 26. The rate is in line with economists’ expectations for 265,000. The four-week moving average of claims, which smooths out weekly swings, rose 4,000 last week to 258,500. Despite the increase, the U.S. labor market remains strong, and unemployment insurance claims remain near historic lows. However, the increase in unemployment insurance claimants could be due to the recent increase in Covid-infected cases across the country, which has led to renewed restrictions and quarantines in some areas.

The US economy is expected to continue to grow

It remains to be seen whether this trend will continue in the coming weeks. Additionally, the US Commerce Department cut its estimate for fourth-quarter GDP growth to 6.7% from an annualized rate of 6.9%. This decline is due to a downward revision in consumer spending and business investment. This revision is not unexpected; Because many economists had already predicted that the strong growth seen in the third quarter of 2022 would not continue in the fourth quarter. Despite the downward revision, the US economy is expected to continue growing, albeit at a more moderate pace than last year. The labor market remains tight, with job openings at record highs and unemployment at historic lows. This has led to increased pressure on employers to increase wages and improve working conditions in order to attract and retain workers.

There are concerns about the effect of the increase in inflation and interest rates on economic growth

In response to the tight labor market, some companies have implemented innovative strategies to attract workers, such as offering bonuses, increasing benefits, and providing training and development opportunities. Others have turned to automation and artificial intelligence to help streamline operations and reduce the need for human resources. Overall, the US economy is in a strong position, but there are concerns about the potential impact of rising inflation and interest rates on economic growth. The Federal Reserve has signaled that it may start tapering its asset purchases later this year, which could lead to higher borrowing costs for businesses and consumers.

Rising energy prices and supply chain disruptions put upward pressure on prices

In addition, rising energy prices and supply chain disruptions will put upward pressure on prices, which could lead to higher inflation in the coming months. Despite these challenges, many economists are optimistic about the U.S. economy in the near term. The labor market is expected to remain tight with strong demand for labor in many sectors. This should continue to support consumer spending and economic growth in the coming months. However, the long-term outlook is more uncertain; Because the economy is still struggling with the covid pandemic and other challenges.

Ali Sabbaghi
0
German Eurozone
News
March 29, 2023

German Ifo continues upward trend

Another improvement in sentiment in the German economy as the Ifo index increased for the sixth month in a row in March. However, we fear that the latest financial turmoil will reach the real economy in the coming months.

In March, Germany’s most prominent leading indicator, the Ifo index, increased for the sixth month in a row, coming in at 93.3 from 91.1 in February. Lower wholesale gas prices and the reopening of the Chinese economy have boosted economic confidence. Both the current assessment and expectations component increased significantly.

Divergence between financial markets and real economy

The financial market turmoil of the last few weeks has not yet affected economic sentiment – at least not economic sentiment measured by company surveys. The latest economic sentiment indicators nicely illustrate that for now, financial market turmoil appears to be ringfenced and has not affected the real economy: while the ZEW index, filled in by financial analysts, dropped, PMIs and now the Ifo index increased. We are more careful, however, and remind everyone that the Ifo index can react with a delay of one to two months to unexpected events and financial market turmoil can clearly affect the real economy over time.

The German economy will continue its flirtation with recession. But what is more important: the ongoing war in Ukraine, ongoing structural changes, an ongoing energy transition and the impact of the most aggressive monetary policy tightening in decades are the main drivers of what looks like subdued growth for a longer while.

source: ING

Ali Sabbaghi
0

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