In the light of optimism, lies a weakness

THE equities market has posted a strong rally of late with a majority of the developed economic indices continue to heading further north. Incoming data across the globe point to a slowdown in activity. Recently, the euro area industrial production contracted in February, for the second consecutive month, on a sharp fall in capital goods production.

Alongside soft readings on manufacturing and services PMIs in the region, these developments led us to revise lower our outlook for euro area. There was also evidence of a slower Japan exports in March on the heels of last month’s decline. This has yet to alter our view on 1Q growth in Japan. However, in our view, weakness in exports reflects softening global demand. Weakening external demand also weighed on activity in China, where the 6.8 per cent y- oy growth in real GDP was in line with expectations, but came with a 0.6pp drag from net trade.

Finally, ahead of the coming week’s release of 1Q US GDP, we have revised lower our growth forecast to 1.5 per cent q-o-q, from 2.5 per cent previously, on sluggish growth in household spend- ing and residential investment.

In the UK, we expect a deceleration in economic activity to 0.3 per cent q- o- q, from 0.5 per cent in 3Q and 0.4 per cent in 4Q.

There are good reasons to believe that global growth will accelerate off to a weak 1Q performance. First, it was quite strong in the second half of last year and the PMI data were about as good as it gets. Some came off a boil as to be expected but this does not reflect a true loss of momentum. Second, the unusually cold weather in Europe may have played a role in slowing activity, and any retrenchment in durables consumption in the US is likely payback following the post-hurricane surge in car sales to replace those damaged or lost in the storms.

The rebound in March retail sales in the US creates a healthy take- off point for private consumption in the next quarter. Yet the main reason behind our view is the arrival of fiscal stimulus in the US.

If last year was defined by accelerating growth outside the US, then we believe this year may very well be defined by a rotation toward faster growth in the US. All in, the recent slew of weak economic numbers does not translate to a full-blown weakness in economic fundamentals.

We reckoned the effect is transitory and the economy should be on the growth path once again. However, the market may still be volatile with the on-going trade tension between US and China, and other possible geopolitical tensions resulting from this rift.