Chart of the Week: While the US is slowing, Europe is slowing faster


Soft auto sales, slowing electronics demand, and a weakening residential market have caused US economic growth to ease from its torrid pace seen earlier this year.
Radhika Rao11 Dec 2018
Photo credit: AFP Photo


Chart of the Week: US-EU growth divergence is widening again

Soft auto sales, slowing electronics demand, and a weakening residential market have caused US economic growth to ease from its torrid pace seen earlier this year. Atlanta Fed’s GDP Nowcast shows growth around 2.5% lately, very good by US long-term trend, but lower than 3-4% tracked during the first three quarters of 2018. While the US has begun to slow, Europe has slowed faster. The economics surprise indices of the US and EU converged in Q3, but since then a spate of poor data releases have made Europe lagging the US considerably again. Looking ahead at 2019, we see the divergence persist during the first half, which would keep flows US centric and continue to keep the USD relatively strong.


Source: Bloomberg, DBS Group Research




China: Domestic demand should have eased further in November. Retail sales and industrial production growth are projected to moderate to 8.2% and 5.5% YoY from 8.6% and 5.9% in October respectively. This largely mirrors the continued decline in the official manufacturing PMI. In particular, the new export order component of the official manufacturing PMI contracted for 6 consecutive months (below 50), due to external uncertainties. Fixed asset investment would have bounced back to 5.9% in November, thanks to an accommodative monetary policy. Looking ahead, the PBOC will likely offer more longer-term cash via MLF and RRR cuts to cope with the deterioration of corporate and local government cash flow. Money supply is therefore expected to increase. New increase in total social financing should hold stable. Yet, off-balance sheet products is set to shrink further after falling for 8 months in a row alongside the government’s effort of controlling financial risk.

Eurozone: This week’s European Central Bank rate review will be key, as policymakers wind down monthly asset purchases. Clear guidance in the run-up leaves the markets well-prepared for an end to QE, with any delay to be construed as a sign of concern over the economy’s growth outlook. Details on reinvestments are also awaited. From an economic perspective, revisions to growth (2018f at 2.0%, 2019f at 1.8%) and inflation (2018f and 2019f at 1.7%) will be eyed, along with fresh forecasts for 2021. Political concerns, softness in real activity and global risks will, however, keep them from committing to further policy normalisation, including changes in the main refinancing and deposit facility rate.

Malaysia: Industrial output for October could see further weakness. Headline industrial production index is expected to moderate to 1.4%, from 2.3% previously. Although the potential adverse impact from the trade war could be a reason but we reckon this could also be due to the current down-cycle in global electronics demand. The electronics cluster is a key driver for the overall manufacturing sector. With global shipment and billing of semiconductors easing despite the festive season, this Christmas is turning out to be relatively quiet for electronics manufacturers. Expect this to weigh on the overall GDP growth in 4Q18 as well.

India: We head into a busy period for data releases. The phase of low inflation is set to continue, with November CPI inflation to ease to 2.6% YoY from October’s 3.3%, way below the mid-point target at 4%. Signs of easing deflation in pulses will not be enough to lift overall food inflation to black in the month, in red for a second month this year. Low oil (cuts in local retail prices) and rupee rebound would have helped at the margin, reinforcing the RBI’s preference to remain on an extended pause. Industrial production likely inched up to 6% YoY in October, lifted by better resource-industries output and cement, along with a bounce in PMI-manufacturing indices. The latter inched up further in November, likely encouraged by easing input cost pressures and hopes of better margins. Apart from data, results of the recently concluded state elections will trickle in Tuesday onwards.

Philippines: BSP policy meeting will be held this Thursday, prior to Fed’s December meeting, another 25bps policy rate hike is likely, in our opinion, for at least two reasons. Firstly, even though CPI has eased by more than what market had expected to 6% from 6.7% previously, core CPI has continued to inch up to 5.1% from 4.95% indicating that demand-side drivers remain quite robust. Easing oil prices give a small window of easing inflationary pressure in addition to the fact that the supply-side contributors will also dissipate in 2019. Inflation would ease from an average 5.2% this year to 4.7% in 2019, but still stay above BSP upper limit of 4%. Secondly, Philippines real rates are still one of the lowest among peers, we think several more rate hikes between December and mid-2019 are warranted to close this gap.

To read the full report, click here to Download the PDF.
 

Radhika Rao

Economist – India, Thailand & Eurozone
radhikarao@dbs.com

 

The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.