Daily Insight
Group Economics Macro & Financial Markets Research
15 September 2016
Risks to Eurozone Q3 growth Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Euro Macro: Economy starts Q3 on a weak note - Industrial production in the eurozone fell by 1.1% mom in July following an upwardly revised 0.8% increase in June (was 0.6%). The 3m-o-3m growth rate decreased to -0.4% from -0.3% in June. We think the slowdown in the industrial sector was largely due to still sluggish growth of the global economy, a stronger euro and uncertainties related to Brexit and political risks in the eurozone more generally. This was also reflected in drops in business confidence and consumer sentiment in July-August. On the expenditure side of the economy, retail sales were strong in July, rebounding by 1.1% mom after declining by 0.1% in June, but data from Germany and Italy suggest that car sales slowed down that month. Still, it seems that private consumption expanded at a decent pace going into Q3 after a soft Q2. Fixed investment disappointed in Q2 as it was flat. Although a sharp rebound in orders from other eurozone countries for German capital goods in July suggested that fixed investment was picking up, the production of capital goods actually was the weakest component of total production in July (1.7% mom). Overall, it seems that investment will remain sluggish in Q3. In our scenario for eurozone GDP growth we expect 0.3% qoq growth in Q3, the same pace as in Q2. However, the July data suggest that the risks to this outlook are slightly tilted to the downside. (Aline Schuiling)
BoJ view: Rate cut and increase in asset purchases expected - We do not think that the BoJ has reached its limits, but there is limited room left for aggressive easing. We expect the central bank to increase its asset purchase programme by 5-10 trillion yen per year and to extend the range of assets at the Monetary Policy Meeting on 21 September. We do not expect any further increase of the ETF programme. However, we do expect the BoJ to cut the policy rate by 10bp to -0.2%. To reduce the impact for banks, the interest rate on funding through the Loan Support Program will likely also be lowered to -0.2%. An appropriate policy mix, including reforms in the labour market and a fiscal stimulus plan, would increase the effectiveness of the BoJ’s actions, though it is unclear whether we will see the government delivering in the near term. Turning to the implications for the currency markets, we expect hedging of foreign currency flows to support the yen if it were to move to levels above 105 against the dollar and maintain our 2016 year end USD/JPY forecast at 103. For more on this topic, please see our note Japan Watch: Has the BoJ reached its limits? (Maritza Cabezas & Roy Teo). BoE preview: No change in policy seen at today’s MPC – We expect the MPC to keep both its policy rate and target for asset purchases unchanged at the MPC meeting today. When it announced the monetary stimulus package in August, it had hinted that additional measures could follow soon, in particular an additional interest rate cut. However, the macro data has clearly surprised to the upside since then. Most spectacularly, the manufacturing and services PMIs bounced back sharply in August, more than making up for the collapse in July. They suggest that the UK economy is likely to settle in a trend of modest economic growth rather than recession following a short-lived shock immediately after the EU referendum. In our view, this means that the BoE’s August forecast that the UK economy would see average growth of 0.7% next year, has already been overtaken by events. We
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Bloomberg: ABNM