Central banks have taken a notably more dovish tone since the turn of the year but, as European Central Bank (ECB) President Mario Draghi’s measured presentation on 6 June showed, policymakers are walking a tightrope. On the one hand, it is necessary to reassure markets that the bazooka is primed to fire. On the other, there is a hesitation about going off half-cocked before stores of dry powder are replenished. Slow reversal of past rate cuts diminishes one tool and bloated balance sheets reduce scope for further quantitative easing (QE). Global growth figures are the key determinant for how long central bankers can hold off as well as being vital to justify the expanded valuation multiples for most quality equities.
The UK’s GDP figures to April, released on 10 June, showed the economy contracted 0.4 per cent in the month of April, although growth was 0.3 per cent higher from February to April, compared with the previous three-month rolling period (November 2018 to January 2019). Some headline writers seized on the 24 per cent decline in car manufacturing between February and April, as companies slowed operations in preparation for the UK’s original scheduled departure from the European Union. Overall, however, manufacturing was a positive contributor to GDP – driven by stockpiling for the EU departure, which has had a distorting effect in trying to read trends.
Europe is undoubtedly a major factor in the UK’s less than stellar performance, although the now hackneyed phrase 'Brexit uncertainty' only tells part of the story. Commenting on the subdued UK performance, Alessandro Capuano, global head of brokerage and business development at Fineco Bank, highlighted low growth on the continent as a factor: “It is ironic that the economic weakness in the EU is one of the main reasons dragging down UK growth.”
The UK’s Brexit impasse clearly doesn’t help multinational businesses, but there are global reasons for the contraction of the auto industry, as demonstrated by the cool-down experienced by Germany, Europe’s auto-exporting powerhouse economy. Last Friday, the Bundesbank cut growth forecasts for 2019 to 0.6 per cent (they had been expecting 1.6 per cent last December). In France, industrial production data was mildly positive, but the more important services data due at the end of June will give a better indicator of the Fifth Republic’s economic health. Arguably UK buyers, stockpiling ahead of the passed March Brexit deadline, gave a boost to European exporters. However, the UK’s trade deficit (Feb-Apr) has widened more significantly with non-EU partners since the last three-month period.
Highly significant numbers out at the end of this week, after Investors Chronicle has gone to press, include the industrial production data for Germany and the whole eurozone (13 June); China and Japan (both 14 June). Output figures for these key regions will show the extent to which concerns about trade disputes and geopolitical tensions are a drag on growth. It will be interesting to compare the figures with data out of the US. These include retail sales figures (the American consumer is still relied on to provide demand for the wares of the world) as well as industrial output and production utilisation (ie productivity) figures, which may indicate how America has fared relative to other countries given President Trump’s hardball stance on trade.
US small business optimism data (11 June) and unemployment claims (13 June), may provide evidence of whether the US’s new exceptionalism is benefiting its citizens. US consumer price index (CPI) data on 12 June, will hint if there is inflationary danger to the Federal Reserve potentially cutting interest rates if the economy needs a boost. It will also be noteworthy if tariffs on $250bn of Chinese goods (25 per cent on $200bn-worth) are affecting US shopping baskets.
Next week… will we have a better idea of policymakers’ next moves?
Despite the potential for trade disputes to raise the price of consumer goods, arguably deflation is a bigger worry. Next week, eurozone CPI and Harmonised Index of Consumer Prices (HICP) updates, are released on the same day (18 June) as key ZEW sentiment and current conditions data for Germany and the rest of the eurozone, respectively. This is followed on 20 June by releases on eurozone consumer sentiment. How this holds up – along with French, German and eurozone PMI manufacturing and services figures on 21 June – and how the inflation numbers look against Mr Draghi’s 2 per cent target could decide how soon his hand is forced.
To an extent, central bank chiefs like Mr Draghi and his counterpart at the US Federal Reserve, Jerome Powell, are hostages of the political climate and the narrative around world trade. Mazars’ chief economist, George Lagarias, says: “If they [central bankers] fall themselves victims of this sea change in the global political order, that’s when investment risks may become systemic.”
This view isn’t without merit, although neither is the idea there shouldn’t be some redress to trade imbalances that have allowed China to gain a strategic march on the US over the past three decades. The trouble is, by bombastically shaking up the old globalist consensus, Mr Trump risks blowing away central bankers’ shrinking monetary policy fig leaf and exposing the difficulty of dealing with the real systemic affliction of major economies: debt.
