Kuwait: May 9, 2019
US GROWTH COMFORTABLY BEATS EXPECTATIONS IN 1Q19
The first estimate of US GDP growth in 1Q19 came in at an annualized 3.2%, well above the consensus of 2.3% and accelerating from 2.2% in 4Q18. The strong figure came despite the impact of the federal government shutdown – estimated to have lowered growth by 0.3% – and fears of a broader slowdown linked to tighter monetary policy, fading fiscal stimulus impact, the US-China trade war and a weakening global economy. Although hailed as “an incredible number” by President Trump, robust quarterly performance was driven by rising inventories – which can sometimes foreshadow weaker growth going forward – and a smaller trade deficit mostly reflecting falling imports, while consumer spending growth roughly halved to 1.2%. The underlying picture is therefore somewhat softer than the headline figure suggests, and expectations are for a slower expansion in Q2.
Despite consumers’ softer contribution to growth in Q1, there are grounds for optimism given continued strength of the labor market. Jobs growth in April surpassed expectations at 263,000, unemployment declined to a 49-year low of 3.6% and wage growth, at 3.2% y/y, was above 3% for the ninth consecutive month. Reports from the business sector are less upbeat. ISM indices on manufacturing (52.8) and non-manufacturing (55.5) both eased in April and while at solid levels are well below peaks of above 60 recorded last August/September amid softer orders and reports of labor scarcity. There are also mixed signals on growth from the international trade data, where the deficit narrowed to $49 billion in February (growth-positive) but helped by the first year-on-year fall in imports since 2016.
The Federal Reserve as expected kept interest rates on hold at the 2.25-2.50% target range at the start of May. But in post-meeting comments Chairman Jay Powell adopted a slightly more hawkish tone than expected, stating that there was no “strong case for moving rates in either direction” and that recent softness in inflation – the Fed’s preferred core PCE inflation measure slipped to just 1.6% y/y in March, well below the 2% target – was driven by ‘transitory’, sector specific factors. The comments may have been motivated by a desire to push back against any perceived politicization of the bank in light of President Trump’s rate cut calls. Futures markets have now pushed the probability of a rate cut by end year to below 50%, while the US dollar remained close to a near two-year high on a trade-weighted basis in early May.
EUROPEAN GROWTH ALSO SURPRISES IN THE FIRST QUARTER
Similar to the US, Eurozone growth also provided an upside surprise in the first quarter, raising hopes that the single currency bloc may be starting to emerge from last year’s slowdown. GDP rose 0.4% q/q, above the 0.3% consensus and double the rate of 4Q18. Encouragingly, Italy pulled out of recession with growth of 0.2%, while French growth was steady at 0.3%. Figures for the all-important German economy were not released, though after growth hit a standstill in 4Q18, survey evidence points to the crucial export sector still under pressure from weakness in global manufacturing – which could intensify following the latest US tariff threats on China.
The European Central Bank left policy unchanged at its April meeting, committing to leave borrowing costs on hold until at least the end of the year (versus earlier discussion of rate hikes) but also hinting that policy could still be loosened if conditions remain weak. Pressure on the bank to enact further stimulus may have been eased by relatively decent Q1 growth performance and also the rise in inflation to 1.7% y/y in April, near to the bank’s ‘below but close to’ 2% target. The policy outlook may also be shaped by talk of a more fundamental strategy rethink being mooted by some of the candidates to replace ECB chief Draghi when he departs his post in October.
Meanwhile Brexit continues to weigh on activity in the UK. The composite PMI stood at 50.9 in April, consistent with just-positive growth at the start of 2Q18 from an estimated 0.5% q/q in Q1 boosted by uncertainty-related stockpiling. While the deadline for Brexit has been pushed to end-October giving the UK parliament more time to approve the government’s withdrawal deal with the EU, results from UK local elections in early May point to large-scale voter dissatisfaction with the two major parties and continued pressure on prime minister Theresa May to step down, possibly triggering a general election that could shift the political and economic landscape.