What with the first round of the French presidential election on 23/04/17 and the UK’s impending and (until just after noon GMT on 18/04/17) unexpected general election, macroeconomic data has been pushed somewhat into the background.
But there have been a number of interesting developments. Preliminary Purchasing manager indices (PMIs) showed further gains in the eurozone in both the manufacturing and services sectors. The composite PMI rose to its strongest level in six years (see exhibit 1 below). Our team is positive with regard to the outlook for economic growth in the eurozone, but sceptical that actual GDP growth will accelerate as much as the PMIs indicate. Eurozone exports and imports lost some momentum in February, while industrial production unexpectedly fell.
Exhibit 1: Changes in the composite Purchasing manager indices for the US and eurozone between 2010 and April 2017
Source: Markit, BNP Paribas Asset Management, as of 24 April 2017
In the US, both sector indices fell, with the composite falling for the fourth straight month. Regional business sentiment indicators and sentiment among home builders has also disappointed lately. At first sight, industrial production looked okay in March, but the 0.4% month-on-month drop in manufacturing production showed underlying weakness. Growth looks to have been very modest in the first quarter and the acceleration in the second may be limited.
In Japan, the manufacturing purchasing manager index improved in April after a dip in March. The divergence between the domestic and external sector is still striking. Data on domestic spending has continued to be weak, while exports and imports surged in February. From a domestic growth perspective, stronger growth in imports than in exports is actually negative for the first quarter.
In China, the latest data confirms that the recovery in activity is still very much on track.
Chinese GDP increased to 6.9% year-on-year in first quarter 2017, with nominal GDP up 11.8% over the same period. This was the fastest expansion of GDP growth in China in the last 18 months. The Chinese data showed a marked acceleration in fixed-asset investment, with the annual growth rate rising from 8.0% to 9.2%. The sectoral split of activity shows a pick-up in the secondary sector, with growth up to 6.4% in the first quarter from 6.1% in the final quarter of last year, while growth in the service sector growth slowed to 7.7% from 8.3%. It seems likely that the stimulus-induced upturn in activity in China has played a pivotal role in the change in sentiment in markets since summer 2016.
Stable growth in China is a near-term positive, but we still see some risks…
Money growth in China has slowed and broad bank credit, including credit to the government, even more so. Thus, fiscal and monetary stimulus appear to be wearing off. In early March Chinese authorities announced an M2 growth target of 12 % for 2017, down from last year’s 13 % with a prioritisation of risk control over stimulus in 2017. It remains to be seen how the Chinese economy copes with less stimulus. Maybe improving trade in Asia, where we have seen some positive developments, can compensate to some extent.
Xi Jinping, China’s president, will preside over a changing of the ruling Communist Party’s key personnel at a congress later this year. Between now and then it is expected that the Chinese administration will do everything to maintain economic stability.
Exhibit 2: In China, both money growth and broad bank credit are falling, raising the question of how the Chinese economy will cope with less stimulus (the graph shows changes in M2 and total bank liabilities for the period between 2006 and April 2017)
Source: Bloomberg, BNP Paribas Asset Management, as of 24 April 2017
Written on 24 April 2017