US Against Europe Economy: A Temporary Brake On Activity In Q1’18

The catalyst for European high yield spread widening against US was index composition changesThe catalyst for European high yield spread widening vs US was index composition changes

Intermoney | The reasons behind the cooling off in activity on both sides of the Atlantic during Q1’18 are more important than the cooling off itself. In fact, the characteristics of these reasons are those which allow us to have confidence about the improvement in activity in the spring in both the US and Europe. That said, we should remember this fact is completely compatible with the fact that doubts remain in the medium-term.

The worse economic performance at the start of the year is nothing new in the US and has happened, with different degrees of intensity, in 2011, 2014, 2016, 2017 and, undoubtedly, it will be repeated in 2018.

During the years mentioned above, we saw the impact of temporary issues like adverse weather conditions which, for example, were key to explaining the fall back in activity in the US in Q1’14. The difference between then and now is the big question of whether the moderation in activity will extend to Europe. That said the reasons for that will oblige us to consider the cooling off as temporary and hope it will normalise in the spring/start of the summer.

Going back to the casuistry of the US, the last minutes of the Federal Reserve meeting flagged “the delay in some repayments of personal taxes,” which would have been a determining factor for US spending. At the end of 2017, US household debt was at record highs of $15.251 billion in absolute terms. And although the important thing is to consolidate its adjustment with respect to GDP (77.3%), we should not overlook the fact that this figure conceals very different household situations, against a backdrop where the savings rate is 3.4% and has been 3.2% on average over the last year.

This does not mean there is any doubt about private consumption in the US in the short-term. It is benefiting from the labour market’s good performance.

Meanwhile, at the start of the year, there have been a range of atypical events happening throughout the Old Continent. In Germany, the strikes in the services sector have taken over from those in the industrial sector. In France, there have been the protests against Macron’s reforms.

The previous questions have had an impact on real data, with that related to industry most worthy of note. In Germany, manufacturing activity slipped -1.5% in the month of February and its quarterly advance was curbed at 0.5%. But that was not an isolated case, as there was an 0.8% monthly decline in the region as a whole, with the quarterly rate standing at 0.3%. So the advances recorded in this area were the exception in February, although we can expect a progressive normalisation during the spring, despite what some advanced indicators have revealed.

Turning back to Germany, the use of installed capacity has risen to 88%, a very high figure and in line with the need to continue to invest at a solid pace.

Meanwhile, the positive inertia of European demand is real and the exchange of goods intra-EU has increased 6.6% annually in the year to February, although it has fallen back since the record highs of December.

Today, on the other hand, the central scenario is consistent with global growth similar to the 3.7% registered last year. As trade frictions mutate in a real protectionist scenario, no major effects would be immediately visible. So we should avoid the disturbances in the short-term and put in their proper context questions like the poorer performance of EU exports compared with the highs of December, a situation which is in line with a logical normalisation process. In fact, the abnormal thing would have been if exports from the community partners outside the EU (in seasonally-adjusted terms) had maintained their strong increases of November and December, which gave rise to a 2.9% quarterly uptick in Q4’17.

Overall, and although we are still not satisified with the trend in household consumption, there are reasons to hope for a recovery in Eurozone indicators in the spring, after the cooling off of activity in Q1’18. A fact which will not be homogenous, as sustained dynamic advances in Spain (0.7% on a quarterly basis) will coexist with the cooling off in France (+0.3% quarter) and Germany. A situation which can be extended to Italy. Its former central bank has indicated this could be possible due to the worse performance in the industrial sector, with hopes for a quarterly uptick in the economy of just 0.2% in Q1’18.