The waiting game: Will weak 1Q numbers be a drag?

LAST week brought more evidence that global activities and trade volumes are slowing down. The deceleration led us to revise our outlook for the European Commission Board ( ECB) policy the previous week and prompted an easing in policy from the People’s Bank of China ( PBoC) last week.

We believe the soft patch in activity will be short-lived, for several reasons, including the arrival of significant fiscal stimulus in the US.

Until then, however, markets remain vulnerable to concerns about further deterioration in global demand, protectionist policies, and geopolitical risks.

Incoming data across the globe point to a slowdown in activity. The euro area industrial production contracted in February, for the second consecutive month, on a sharp decline in capital goods production.

Alongside soft readings on manufacturing and services PMIs in the region, these developments led us to revise our outlook for the euro area’s growth in 1Q18 to 1.6 per cent q- o- q saar, from 2.1 per cent previously.

Last week’s results also brought evidence of a slowdown in Japan’s exports in March on the heels of last month’s decline. This has yet to alter our view on the 1Q growth in Japan, due to slowing import growth. However, in our view, weakness in exports reflects softening in global demand. Weakening external demand also weighed on activities in China, where the 6.8 per cent y- o-y growth in real GDP was in line with expectations, but came with a 0.6pp drag from net trade.

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

In the UK, we expect a deceleration in economic activity to 0.4 per cent q- o- q, from 0.5 per cent in 3Q and 0.4 per cent in 4Q. But all hope is not lost. In our view, there are good reasons to believe that global growth will accelerate from the weak 1Q performance.

First of all, it was quite a strong second half of last year and the PMI data were about as good as it gets; although some coming off the boil was to be expected and it does not necessarily reflect a true loss of momentum.

Second, unusually cold weather in Europe may have played a role in the slowdown, and any retrenchment in durables consumption in the US is likely a 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 next quarter.

Yet, the main reason behind our view is the arrival of a fiscal stimulus in the US. If last year was defined by accelerating growth outside of the US, then we believe that this year may very well be defined by a rotation toward faster growth in the US.