Posts tagged ‘growth’
Since the summer of 2014 the economic landscape has changed in ways which ought to have brought joy to consumers in various parts of the world. The oil price has collapsed: good news for significant net importers like the USA. There, as in Britain too, job growth has brought the country to near-full employment. In the UK last year we saw positive, sustained growth in real wages for the first time since the Great Recession. In Europe and Japan, which have lagged those other economies in growth terms, central banks have tried to oil the wheels with rate cuts and the expansion of unconventional monetary measures.
Yet this week there were headlines in Britain about the weakness of consumer behaviour. It looked a running certainty earlier this year that the market panic was overdone. But are there signs showing here of strength for the bear case after all?
Looking at the UK first of all: no, not really. Consumer confidence reached 15-year highs last year, and while the survey measure has lost some steam into 2016 it remains above the running average over the year before that. Scrabbling around for negatives, the rate at which new car registrations increased fell to +6.5% in 2015 from +8.6% previously. This is hardly disastrous. And broad retail sales growth across all sectors averaged +4.5%, an 11-year high. The GDP print for Q4 2015 put the annual increase in household expenditure at +2.7%, up a little on 2014 and in line with long run averages. And while readers will know this blog is ambivalent on the subject of housing itself at present, mortgage approvals staged a recovery last year too after falling away in 2014 and that pickup has continued since year end.
The picture is a little cloudier across the Atlantic, but again, far from catastrophic. The personal consumption component of GDP for Q4 grew by +2.7% on the year – also in line with long term averages – though in this instance down from +3.2% in Q4 2014. Retail sales growth has fallen more obviously too, to a 12-month running average of +2.7% to March of this year down from +4.1% across calendar 2014. What is equally interesting, however, is that auto sales over the same period averaged 17.4m, up by a full 1m on 2014 and running at a 15-year high. Existing home sales, too, quickened in pace to the highest level since the credit crunch. Perhaps this is a sign that the net impact on consumption from oil has been disappointing, but that credit expansion has fueled asset purchases instead (a supposition reinforced by a rise in the level of student debt per capita). One can be ambivalent about this again, of course – but it is expansionary economic activity driven by consumer behaviour.
At the other end of the growth spectrum, Japan has had a terrible time of it in recent quarters. At the same time, recovery from yet another period of economic contraction has seen the downturn in household consumption as listed in the GDP figures abate, to a year-on-year pace of -1.3% for Q4 2015 as against -2.0% for Q4 2014. Car sales growth as well as broad retail sales growth has been flat; nationwide housing starts have risen measurably while condominium sales in Tokyo have declined again. So a more mixed picture here, but one which has not been declining any more than it has been showing signs of vibrancy overall.
Finally, Europe has also suffered something of a lost decade, having been through a double-dip recession which the US and UK were spared. Yet here the strength of the consumer has actually been most noticeable. The running 12-month average pace of retail sales growth is stronger now than it has been at any time since 2001. The household consumption component of eurozone GDP rose to an annual +1.7% in 2015 from 0.8% a year earlier, and sits well above the average of +1.1% seen since the zone began life in 2000. Data on building permits and mortgages outstanding show a marked rise over the last year, and passenger car registrations have been rising at a running average of +9.6% over the last twelve months up from +3.5% during 2014. It is most obvious to attribute stronger consumer demand here to cheap energy – as the eurozone is the biggest net oil importer by some distance, this is after all the most obvious place to look. (We should also note, however, that the unemployment rate has begun to fall at a faster pace in recent quarters too.)
For growth investors, growth rates have the constant potential to disappoint. These remain nervous, and volatile times. But if we take a good look at the available data there is nothing to suggest that developed-world consumption has done anything more than fail to respond to the theoretically benign tailwinds of cheap oil and monetary expansion in the way that some might have hoped. This is not the same thing as failing to respond at all.
The bells of doom continue to toll, with headlines appearing in recent days about the forthcoming global recession (e.g. yesterday’s news wires, business TV channels, the financial press, etc.) Now it is true that the MSCI World Index of developed-market stocks has just suffered its biggest monthly fall since all the way back in the distant past of August 2015. But does this really augur a global recession, similar to the Great Recession of 2008-9?
In times of crisis this blog believes that it behoves us to seek refuge in facts.
Let’s start with Europe. Yesterday’s EU Commission forecast carried a lower estimate of economic growth for the eurozone this year than it did at the time of the autumn forecast last November, it’s true, and this has been taken in some quarters as support for the bear case. But the revision is negligible: down from +1.8% to +1.7%. It still represents an increase on 2015, not a diminution. And in absolute terms these kinds of numbers are breakneck for the poor old euro area, where growth has averaged a meagre +1.3% real over the whole period of the single currency’s existence and a paltry +0.7% over the last ten years, marred as they were by the double dip recession. Logic, too, is not on the side of the bears here: Europe as a whole is the single biggest importer of crude oil by some distance. So while Norway and Scotland are not enjoying crude prices of $30 per barrel, last year’s figures for the eurozone economy bear out the massive positive effect they have had on the continent more broadly. The forecast numbers for this year do the same.
Crossing the Atlantic, the picture in the US and Canada is more mixed. With its oil economy hit hard Canada’s GDP growth has fallen away to zero in recent months, and is predicted to come in at 1.2% for 2015 overall – less than half the growth rate of the previous year. Last week’s US print for Q4, up only 0.7% on an annualized basis, was weak but roughly as expected: markets had been bracing themselves for the effects of the strong dollar on growth. Though even then it is worth noting that the greenback has plunged somewhat over recent days amid all the disappointment. And for the current calendar year the consensus is for growth of 2.4% – a little below trend, perhaps, but not, in any way, shape, or form, a recession.
Another ocean away, Japan only just emerged from a real life recession back in 2014. The consensus GDP forecast for 2016 is +1.0%, and with consumer and business confidence strengthening into the end of last year there is no sign that this represents unreasonable optimism. With the long run in mind one might observe that growth of 1% per year is not desperately exciting, that this is connected to the country’s demography and that there are lessons for many other economies on this front soon similarly to be learned – but that is another, much larger, story.
Hopping across the seas around China and her neighbours – minding our step over those disputed archipelagoes on the way – emerging Asia is not very convincing as a recessionary prospect either. Only this week the Chinese government published a revised growth target of 6.5-7%: this is below the double-digit rates of expansion to which we became accustomed prior to the Great Recession but not exactly sluggish, and quite some distance from an economic contraction. South Korean growth is forecast to tail off a bit this year, true – all the way down to +2.9% from +3.0% last year. Growth in Malaysia too is expected to come off the boil, reaching a mere +4.5% this year. Still it is not all bad news for the Asian economies: growth rates are actually expected to increase this year in India, Indonesia, the Philippines, Thailand and Taiwan.
Lest we allow ourselves to be lulled into a false sense of security, there are countries where growth prospects remain quite bleak. Mineral economies for instance, such as those of Brazil, Russia and Venezuela, are forecast to contract again this year, albeit at less alarming rates than in 2015. These are the areas where cheap oil tends to be a net economic negative. Elsewhere, however – for most of the world – it is a net positive. (The figures on this subject are readily available if any “oilmageddon” bears reading this piece care to look at them.)
Finally, the idea that we are going to be driven into a recession by the stock market’s late gurgitations is the height of self-regarding ludicrousness. Just think: back in the 1990s, NASDAQ were putting adverts on in the middle of News At Ten, Cisco Systems was worth about as much as Belgium and day trading was the easy route to fulfilling the American dream. Then everything collapsed in 2000. And the effect on the US economy? Real GDP growth in the fourth quarter of 2001 fell to +0.2% on the year. That is as bad as things got. There was never any recession.
Equally it is almost impossible to make a reasoned, cold case for a global recession this year. Predictions to the contrary are not without their use though. They tell us something about sentiment, and suggest – perhaps quite strongly so – that the current dislocation might present the more level-headed investor with a buying opportunity or two.
One of the key themes this blog identified on the eve of 2014 was earnings growth. Equity valuations in the major markets had reached territory that needed to see a higher denominator in the p/e ratio or risk looking overvalued.
Since then we have seen a quarterly contraction in the US, patchy outcomes for GDP across the Eurozone and tax-related volatility in the Japanese economy. There has thus been reason to suspect that this growth would disappoint. And that is before considering any confidence impact from events in Ukraine, the Middle East and elsewhere.
So the Q2 US earnings season which opened in early July was arguably more important than most. When it opened, consensus expectations as followed by Bloomberg were for a 4.5% increase on the prior year, barely higher than the 4.2% increase in nominal GDP over the same period.
In early August, however, just as the S&P 500 had fallen back towards 1900, things were looking rather better. By this time the first 200 companies had reported their results. The increase in EPS was averaging 12%. The analyst consensus began to catch up, and the final outcome for Q2 was then expected to reach 8.2%.
Now the season is essentially over with 499 companies having reported. Index earnings for the S&P rose by 10.3% over the prior year. In price terms the 500 is up by more than 18% over the last 12 months, but supported by that bottom line growth the exuberance does not appear irrational – especially if most of the momentum can be maintained, as is expected.
There was an interesting story out this morning on European earnings growth too. With the sovereign debt crisis and the double dip recession, the outcomes for reported EPS on the Stoxx 50 have been dire. But for the first time since April 2012, there are now more positive than negative earnings revisions coming from analysts covering European stocks. In the words of one such:
“There are signs that the pressure on European companies … is beginning to abate. We’re beginning to see small upgrades in earnings estimates overall for the first time in absolutely ages.”
There is a connection here to recent euro weakness, and a further connection to the open mouth operations of the ECB. There is also a lot of ground to make up: simply stripping out reported losses reduces the historic p/e on the Stoxx to 16.1x from over 23x. For the S&P 500 this makes almost no difference – 18x drifts lower to 17.8x.
These markets are not a steal any more – in isolation, certainly. (Relative to bond markets they still look very cheap, but that says just as much about poor value in rates.) It has been a long wait for many to see real, underlying growth actually return to growth assets. What it needs to do now is continue.
Markets barely had enough time to recover from Mario Draghi’s last “rock star” performance at the ECB before he shocked them with yesterday’s encore. Back in June he left his fans with the rhetorical question: “Are we finished? The answer is no.” Yesterday he proved it, lifting the lid on a plan for purchasing about €700bn worth of asset-backed securities while slicing another 10bp off policy rates. Only six of the fifty-seven economists and investment banks surveyed by Bloomberg expected the rate move, and the ABS programme, though trailed at the June ECB press conference, has also come surprisingly quickly.
Three months ago it looked as though Mr Draghi was playing to the crowd as much as anything. Two questions now emerge:
- Has anything substantial happened in Europe since June which has increased the need for emergency monetary measures?
- If not, how necessary are the ECB’s announcements as “open mouth operations”?
Look at the growth numbers reported in August and it is tempting to answer question (1) with a “yes”. Across the eurozone as a whole, GDP for Q2 was flat, down from an already-muted 0.2% rise in Q1. Stagnation in France was no surprise but it was a mild shock to see Italy back in recession. At the same time, headline inflation has continued to fall back with the annual CPI increase to August down at 0.3%. There has also been heightened concern in recent weeks over events in eastern Ukraine, with some commentators attributing weakness in European business investment to fears over escalating sanctions against Russia.
At the same time, however, it’s not that simple. The PMI composite indicator of economic output for the eurozone remains well into positive territory, despite the usual variation between countries, and the economic sentiment indicator (of consumer and business confidence) remains well off its 2012 lows – and indeed well above the levels associated with the three quarters of positive growth witnessed from Q2 2013. The ECB along with the consensus expects GDP to grow again this quarter, albeit at the accustomed muted rate. Even on the inflationary front much of the decline is down to cheaper energy prices: the “core” CPI rate for August, which as it excludes volatile items such as food and energy is supposed to be a more accurate reflection of the economy’s underlying price dynamics, actually rose for the second time since May to 0.9%. On balance, then, it does not seem reasonable to believe that there has been a material deterioration in the fundamental prospects for the eurozone over the last three months.
This does nothing to detract from the importance of question (2). At yesterday’s press conference (the full text of which can be read here), Mr Draghi had the following important, and in this blog’s view unarguable statement to make in the tangential final section of his answer to a question about fiscal policy:
[I]n many parts of the euro area, there are several reasons why growth is not coming back, but one of them is actually that there is lack of confidence. There is lack of confidence in the future, lack of confidence in the prospects, in economic prospects, of these countries.
It is an indisputable fact that much of the world’s confidence in recent years has relied for better or for worse on the perceived actions of central banks. The ECB understands this. And the reaction to this week’s news, together with one key longer-term trend, seems to indicate that they are getting the confidence-building part of their operation right.
First the reaction yesterday: Stoxx 50 up by 1.8% on the day, credit spreads tighter, euro back under 1.30 for the first time in over a year – in its biggest daily percentage fall against the dollar since the height of the debt crisis in November 2011 – and as for the bond market, well, that brings us on to the longer-term trend side of things.
Talking of the height of the debt crisis, back in November ’11 it cost the Italian government 7.9% to raise three-year money. A few months later, after the ECB announced its potential use of an emergency long-dated bond-buying programme, Italy was borrowing for ten years at 5.8%. Finally, just on Thursday last week, Italy raised ten year money at 2.4% and five year at 1.1%, record lows in both cases. And it isn’t just Italy. At the time of writing, two year bond yields are actually negative now in Germany, Denmark, Finland, Belgium, the Netherlands, France, Austria, Slovakia and (wait for it …) Ireland. It puts even the two-year Japanese government bond to shame, and makes the yield on our own 4% 2016 gilt look positively generous at 0.8%. All this is just excellent news, of course, if you’re an indebted sovereign looking to refinance your borrowing at the cheapest rates available in the world.
It doesn’t do to be complacent about Europe, or indeed the world economy in general. But it is encouraging that the ECB has been rising to the market’s demands for action in its own managed, but clearly credible way. European confidence in particular does indeed need all the help it can get. Rock star: play on …
Towards the end of last year this blog noted that growth would be a key theme for 2014: “A gathering of momentum … should see gloom continue to recede from markets which have had to trudge through a bruising and tedious few years.”
And then we had news out yesterday that the US economy shrank a little in Q1, contrary to the advance estimate that it was ever so slightly up. Two weeks previously, the eurozone economy was reported to have grown by 0.2% in the same period – half the forecast rate.
So is growth falling away again? And if so, will we see gloom return?
The answer to the second question, so far, is a clear “no”. The last time we had a negative quarter for US GDP was Q1 2011. When reported in the summer of that year it triggered an almighty panic; this week’s news hardly caused a ripple. Of course the market backdrop is different now, with the sovereign debt crisis not as raw and the credit crunch more distant a memory. But the evidence on the first question suggests that markets are behaving rationally rather than over-exuberantly in taking Q1 data in their stride.
Weakness in the US was widely expected in the first quarter. We know that the very harsh winter had a role to play and there seems to have been some contraction due to inventory building in 2013. Both these may fall away – and other data strongly suggests that they will do so, with durable goods orders, retail sales, manufacturing output and consumer confidence all rebounding from winter lows, real estate activity stabilising with mortgage rates and unemployment measures declining convincingly.
The European picture is a little more equivocal, with much of the shock being due to unexpected stagnation in France (a risk I highlighted back in January). And we wait to see just how negative the effect of last month’s sales tax hike will have been in Japan. At the same time, however, GDP growth here in the UK has held its ground admirably, activity indicators suggest it will continue to do so and only this morning, the consumer confidence index from GfK reached its highest level for over nine years. In Europe too, the broad economic sentiment indicator for the eurozone as a whole has kept on climbing even as French business sentiment has weakened a little.
It is always disappointing to see economies shrink of course, and a blemish on recent quarters for the developed world. Up until the US data revision this week the American, eurozone, Japanese and UK economies had all been growing for four consecutive quarters, the longest unbroken stretch since the early days of recovery from the Great Recession in mid-2009 to 2010. But looking at the bigger picture it seems very unlikely that we are about to experience another round of sclerosis a la 2012.
Altogether, then, the growth picture is consistent with the conclusion drawn last week regarding corporate activity: that we are witnessing an unwelcome hiatus rather than a more serious trend reversal. Again, this is not an especially exciting position for the world to be in; but given the form which excitement has tended to take in recent years, we should not perhaps feel overly glum about this.
To be clear from the outset, this post has nothing to do with Hollandaise sauce. Its focus is the possible extent of the economic setback in France which saw GDP for the third quarter contract by 0.1% in real terms: a worse outcome than that of any other major European economy, of the recently crisis-hit countries of Italy, Spain and Portugal, and of the eurozone as a whole.
It is France’s importance to the last which is of most interest. France is the second-largest economy in the bloc, accounting for more than one fifth of euro-area output. Fears of damage to the eurozone’s prospects from extreme events at its fringes have abated – rightly so, perhaps. But even a relatively mild bout of weakness at its heart could still be damaging, and this risk has only recently begun to attract attention.
Business-focused London freesheet City A.M. ran a piece on the subject last week which provoked an extraordinary rebuttal from the French Embassy, of all places. Referring to “France’s failed socialist experiment” in its headline the piece was crowing, polemical and clearly provocative – well worth reading, in fact – but it is the claims made in the official French defence which need examining.
On growth in particular, Embassy staff refuted the assertion that France’s economy “is shrinking at an accelerating rate” by noting that “the European Commission’s growth forecast for France stands at 0.2% for 2013 and 0.9% for 2014. Real GDP growth is expected to reach 1.7% in 2015.” This is true. Unfortunately, however, the Commission’s European Economic Forecast Autumn 2013, which is where those figures come from, was published on 5 November – 9 days before the actual GDP data for Q3 was released. At the time their quarterly forecast for French growth in the quarter was +0.1% as against +0.2% for the eurozone as a whole. Given the size of its economy the actual outturn of +0.1% for the bloc could be explained by even such a small disappointment from France alone.
Looking forward, even the forecast 0.7% increase in the pace of yearly growth for 2014 was disappointing. True, eurozone members Latvia, Luxembourg and Malta were expected to show lower increases; but then they were expected to have grown at rather higher rates of about 2-4% last year to start with. All of the other eighteen euro countries were forecast to improve more rapidly, as was the UK (+0.9%) and the eurozone itself (+1.5%).
The British article focused in particular on recent downturns in PMI output indicators, which have fallen from a Q3 average of 49.7 for manufacturing and 49.5 for services to Q4 averages of 48.2 and 48.9 respectively (a level below 50 indicates a contraction in activity). In reply, the Embassy noted that “PMI surveys have been very unreliable in predicting France’s GDP growth over the last few quarters. Business surveys conducted by Insee … have had a better track record and … point to an economic rebound in the last quarter of 2013 [of] +0.4%.”
The point about INSEE vs. PMI statistics is arguable. Take the +0.4% growth estimate for Q4 at face value, however, and the original Commission forecast for calendar 2013 would be achieved. After all, it is not unusual for economic data to show unexpected but ultimately immaterial fluctuations from one release to the next, nor indeed for GDP statistics to be revised up a quarter or several after their initial publication. And market reaction to the disappointing Q3 data was indetectable at the time.
Perhaps the truth lies somewhere between the City’s disdain and the pride of La Défense. (The most recent Bloomberg survey of economists settled the professional consensus for Q4 GDP growth at +0.1%.) A continued period of economic stagnation in France, whatever the cause, would be a matter of regret. Another recession – however shallow or short-lived – would be a setback. Anything more serious would come as a shock.
This blog observed recently that there were no “black swans” last year, making for a welcome change. Let us hope that we will not find one in the shape of another meaningful downturn in France – and therefore, possibly, the eurozone, again. Inauspicious festival as it may be for that country’s President just now, we shall find out when Q4 data is published – on Valentine’s Day.
With 25 December only days away now we might have expected a calm period for markets. The Chinese sometimes enjoy doing things like taking monetary policy decisions on Christmas Day, but whether they are celebrating Christmas, Yuletide or the Holiday Season, western markets and policymakers generally prefer to make a quieter time of it. So it was interesting to see the Fed choose this Wednesday to vote to start tapering off its most recent asset purchase programme.
Fears over tapering reinforced several major market behaviour patterns in 2013, making it one of the year’s key investment themes. Readers may remember the panic which ensued when it was first floated, despite the fact that the Fed’s own research (and calm, thoughtful analysis) suggested that the actual effects of QE3 on the US economy have been negligible. Now tapering is actually to begin, however – from January – market reaction has been quite controlled: the ten year Treasury yield is higher, but only by about 7bp; the trade weighted dollar was stronger by Thursday evening, but by less than 1%; gold fell, but to a price only a little over $10 under its previous low for the year; and the S&P 500 rallied all of 29.65 points on Wednesday before closing yesterday flat.
Speculation, however idle, as to the globally deleterious impact of tapering will certainly continue into the New Year. Perhaps it will continue to have some power as a market theme in 2014. But we have surely reached the point where we can say it is old news. So what other themes may emerge next year?
Growth will be one. This blog has highlighted the importance of a return to growth in Europe, including the UK, in particular. 2013 has already seen the first consecutive quarters of growth across all the major developed economies since 2010. Within the eurozone especially it remains patchy and sclerotic – but better than the alternative, nonetheless. A gathering of momentum in 2014 should see gloom continue to recede from markets which have had to trudge through a bruising and tedious few years. As one rightly respected fund manager put it in his most recent report, when it comes to the rally in developed-world markets, returns “have come from a rerating … But to prosper from here we need growth.”
One other theme which we have followed has been inflation. This has gone right out of fashion as prices have generally been behaving themselves lately. There is nothing to suggest an immediate change here. But a year is plenty of time for labour markets to pick up slack, the more so if the recovery gets a little more earnest – and that alone should begin to see expectations for monetary policy change, whatever happens to other moving parts such as commodity prices. This is a wild card, and like tapering a potentially hazardous one.
A couple of weeks ago we had a look at the impact of higher growth on the UK’s sovereign debt position. There are still countries with serious problems in this area (we might think of Greece in particular), and as a result we cannot discount the possibility of further shocks. But with a more deeply entrenched recovery underway, Britain’s happy story will find other tellers. More and more governments should find themselves closer to balancing, if not actually balancing their books in 2014.
In some cases this will come in the nick of time. Even if inflation expectations do not develop as one of next year’s themes, the burden of debt at the shorter (and cheaper) end of yield curves make higher rates here a potential worry for many borrowers into 2015 and beyond. On the other hand, it is possible that other more problematic sovereigns will join Ireland in revisiting bond markets, putting another stake through the heart of the debt crisis.
Turning to the negative: there were no black swans in 2013. Compared to preceding years this was highly unusual. In 2010 we had the eurozone / sovereign debt crisis, in 2011 the Japanese earthquake and US GDP shock and then in 2012 the Greek elections. These are not things we can plan for. However, with events in the Middle East having moved in favour of Iran this year, and an escalation in tension between China and Japan, it is not obvious that the world has become a materially safer place. In the event that major government bond yields continue to rise a prudent investor (who has been well positioned to date) might look for opportunities to begin diversifying back into these and related assets over the course of next year.
As crystal balls go this one has been kept deliberately opaque. Depending how they play out, these themes could each have very different consequences for market behaviour and the pricing of risk. As a closing observation: even though it has been relatively benign compared to its immediate predecessors, 2013 has still been a nervous year. It still feels as if a large number of market participants and observers are more at home with setbacks than advances.
Should this change convincingly next year it would be something of a theme in itself. In any event, based on vigilant analysis of the fundamentals and a reasoned understanding of price, it should still be possible to make investment sense of 2014, as it has been for the past few years, in spite of everything.