Politics, Policy, Economics - Since 2010

October 2019 Italy Economic Outlook Moderates Former arch-enemies, the 5 Star Movement (M5S) and the Democratic Party (PD), formed a ...

October 2019
Italy Economic Outlook Moderates

Former arch-enemies, the 5 Star Movement (M5S) and the Democratic Party (PD), formed a new government headed by former Prime Minister Giuseppe Conte, which was sworn in on 5 September. Italy’s government bond yield dropped on a swift resolution to the political crisis and the new government’s clearly more pro-European stance. While a deal with EU institutions on the 2020 budget, thus, appears more likely, the new cabinet seems to have a more interventionist approach, which makes the delivery of pro-market economic reforms more unlikely. Meanwhile, revised national accounts data showed that growth was flat in Q2, with both external and domestic demand making a null contribution to growth, which highlighted the broad-based weaknesses within Italy’s ailing economy. Available data for Q3 was also lackluster: Industrial production contracted again in July, and the manufacturing PMI remained entrenched in contractionary territory in August.

Growth is expected to stall this year, restrained by a muted domestic economy. The economy should gain some steam in 2020, on the back of an uptick in domestic demand and a recovery in the industrial sector. However, political uncertainty and resurging financial turbulence, coupled with the huge public debt, pose downside risks. FocusEconomics panelists project growth of 0.1% in 2019 and 0.4% in 2020, which is down 0.1 percentage points from last month’s projection. Harmonized inflation rose to 0.5% in August from July’s 0.3%. The highest price increases were recorded for alcoholic beverages and tobacco, restaurants and hotels, and food and non-alcoholic bevereages.

New coalition avoids snap vote, but structural reforms and political stability likely to remain elusive A new government between former enemies the Five Star Movement (M5S) and the Democratic Party (PD) was rapidly formed at the start of September, ending the political crisis that the League’s Matteo Salvini triggered in August in search of early elections. Financial markets reacted by breathing a sigh of relief, with Italy’s 10-year bond yield dropping to record lows, on hopes that the new government will be less belligerent towards EU institutions and thanks to reduced political risk. Although uncertainty has abated somewhat and early signs suggest Italy will be able to secure a deal with EU institutions on the 2020 budget, the medium-term outlook remains gloomy. The new government is more left-leaning than its predecessor and its 26-point program published in early September, albeit vague, suggests it will not pursue bold structural reforms. The platform is centered on an expansionary fiscal policy and interventionist approach to spur growth and includes higher spending on green initiatives, social programs as well as the introduction of a minimum salary. While expansionary policies could give a marginal short-term boost to activity, weak public finances and sustainability fears will continue to haunt Italy’s longer-term outlook. In addition, the fractured nature of Italian politics and institutions makes it hard for the meaningful change needed to boost Italy’s growth potential. Moreover, the alliance is fragile due to the two parties’ different electoral bases and their record of bitter clashes. Former Prime Minister Matteo Renzi’s recent departure from the PD only complicates governability further, raising the risk of a short-lived government, although Renzi has stated he will continue to support the coalition. The government is still headed by Giuseppe Conte, who filled the role of Prime Minister in the former League-M5S cabinet. Top on the agenda will be a draft budget for 2020, which is due to the Italian parliament by 30 September and to the EU by mid-October. The government will have to find more than EUR 20 billion in savings to meet EU rules on fiscal discipline and avoid the already legislated VAT rise in 2020—which would otherwise depress already muted consumer spending. The appointment of Roberto Gualtieri, a veteran and previous chair of the economic and monetary affairs committee of the European Parliament, together with a commitment to not endanger public finances make a deal with EU institutions on the budget more likely than with the former government.

However, the government will have to cut spending or raise taxes, although its insistence on implementing an expansionary fiscal policy means it will take full advantage of any flexibility the EU Commission grants the country. Assessing the impact on Italy’s fiscal position of the new government, Nicola Nobile, Lead Economist at Oxford Economics, states: “The best that can be said for now is that Italy will probably have a short period of stability with its new pro-European government. […] But as with the previous government, the new ruling coalition will likely push for more fiscal spending, hoping to obtain some flexibility from Brussels. At the moment, we’ve decided to keep our fiscal deficit forecast for 2020 at 2.7% of GDP, below the EU’s 3% threshold but well above the current target for this year of around 2% of GDP. […] Italy’s weak public finances keep it on the edge of fiscal sustainability. Yet our below-consensus GDP forecast does not suggest an imminent fiscal crisis. That’s mainly because existing Italian debt has a relatively long maturity. But a widening fiscal deficit with subdued nominal growth means the public debt (as a % of GDP) will increase next year, continuing the dynamic that started in 2018.” 

Although the political crisis was swiftly resolved for the time being, political uncertainty remains high and economic weakness will likely continue to beset Italy. The government is unlikely to deliver overdue liberalizing reforms and given the elevated likelihood of future clashes on several government policies, the risk of early elections continues to loom.

No more speculation on a slowdown - it is finally here. Best to get it behind us and get going. Expect two mor rates cuts by year end. -...

No more speculation on a slowdown - it is finally here. Best to get it behind us and get going. Expect two mor rates cuts by year end. - CH

ING Economics: Evidence of the spreading US slowdown
The disappointing run of US data has continued with today’s retail sales numbers for September, which posted the first decline for seven months. Rather than rise 0.3% month-on-month as expected, they actually contracted 0.3% with the report showing broad-based weakness. Just five of the 13 major categories within the report experienced an increase, namely furniture, health, clothing, miscellaneous and eating/drinking. Motor vehicles/parts fell 0.9%, gasoline stations sales fell 0.7%, building materials fell 1% and department store sales fell 1.4% (-7.3% year-on-year). Stripping out the volatile components we find that the “control” group, which better reflects movements in the broader consumer spending component of GDP, was flat on the month versus expectations of a 0.3% MoM gain. With the rate of employment growth clearly slowing and the latest wage growth coming in much softer than expected, there are have been valid questions regarding how long consumer spending can continue to prop up the economy. Today’s report is not encouraging.

The case for more rate cuts:
With the major business surveys such as the ISM and National Federation of Independent Business reports seemingly in freefall and investment lead indicators pointing to contraction, we expect to see the economy to experience sub 2% growth in 4Q19. Add in weaker global growth, the strong dollar and a nagging doubt about the imminent prospects of a meaningful de-escalation of trade tensions and we see the economy expanding just 1.3% in 2020. Given this growth backdrop and the fact recent inflation indicators show signs of softening and the University of Michigan consumer inflation expectations series hit an all-time low, the Federal Reserve will be increasingly nervous about hitting its inflation target. We expect the Federal Reserve to follow up the July and September rate cuts with a further 25bp move in October and another in December.

To download the original paper visit THINK - ING Economics

Crude Oil Brent crude oil prices were volatile in recent weeks, with prices hitting a nearly four-month high on 16 September before fa...

Crude OilBrent crude oil prices were volatile in recent weeks, with prices hitting a nearly four-month high on 16 September before falling sharply afterwards. On 4 October, oil prices traded at USD 59.1 per barrel, which was 2.6% lower than on the same day last month. While the benchmark price for global crude oil was 31.3% lower than on the same day last year, it was up 16.9% on a year-to-date basis. Oil prices surged at the start of September, reflecting news that China and the United States would resume trade talks. The upward trend was reinforced by an alleged attack by Iran-backed Yemeni Houthis on Saudi oil facilities on 14 September. The drone attack shut down more than half of Saudi oil production, which represented the worst sudden disruption to supply in history and prompted Brent crude oil prices to record the biggest jump on record in over three decades. In the following days, oil prices receded as the possibility of a retaliatory attack against Iran by Saudi Arabia and the United States diminished and oil production gradually recovered in the Kingdom. Later in the month and in October, weak economic data among most of the world’s key economies, which could hit demand for the black gold, weighed on prices.

West Texas Intermediate (WTI) crude oil prices declined slightly in recent weeks, weighed on by weak global growth and rising inventories in the United States. WTI crude oil prices traded at USD 52.8 per barrel on 4 October, which was down 6.0% from the same day last month. While the price was down 29.0% from the same day last year, it was 17.0% higher on a year-to-date basis. WTI crude oil prices declined in recent weeks, mostly reflecting weak economic data in the United States as the impact of bold fiscal stimulus implemented in previous years started to fade and trade tensions against China began to erode business confidence. Moreover, the labor market appears to have peaked, which bodes poorly for private consumption going forward. As a result, inventories are building up and, according to EIA data for the week ending 27 September, U.S. crude supplies rose for a third week in a row, by 3.1 million barrels. Low demand and severe financial stress in the shale industry is forcing U.S. energy firms to reduce the number of oil rigs and they are now at levels not seen since May 2017. Fewer oil rigs could lead to a sizeable reduction in oil production in the United States next year.

Natural Gas
Natural gas prices tapered over the prior month on higher than-expected build-ups in storage levels due to weaker demand for electricity and cooling. On 4 October, the Henry Hub Natural Gas price was USD 2.35 per one million British thermal units (MMBtu), which was 3.7% lower than on the same day in the previous month. Moreover, the price was down 20.1% on a year-to-date basis and was 25.8% lower than on the corresponding day in 2018. Prices decreased in mid-September as storage levels jumped to the upper limit of market analysts’ forecast range for the week ending 13 September. Production levels were virtually stable but a drop in cooling demand along the U.S. East Coast and in Texas bolstered natural gas inventories. This trend continued in the second half of September as underground storage inventories increased significantly in the weeks ending 20 and 27 September. Pleasant weather conditions, which led to softer demand for natural gas, coupled with ample production levels, drove the continued build-up in storage. Prices are seen rising going forward, supported by a global shift away from coal towards gas, which is a relatively cleaner non-renewable energy. However, strong U.S. supply due to the burgeoning shale sector could temper any increase.

Coking & Thermal Coal
Coking Coal - Prices for coking coal from Australia fell through mid September, and subsequently remained at a three-year low. On 4 October, Australian coking coal traded at USD 137 per metric ton, which was down 12.3% from the same day in August. Moreover, the price was 36.1% lower on a year-to date basis and was down 35.7% from the same day last year. Excess supply and weaker European demand have weighed on prices, offsetting strong Chinese demand despite weakness in its manufacturing sector. Manufacturing PMI data showed that operating conditions remained under pressure in China through September, while industrial output expanded at the slowest pace in three years in August. Nevertheless, Chinese import growth of coking coal hit an all-time high in August, which will likely prompt the authorities to respond with stricter import rules. Prices should rise going forward on the back of demand from rapidly growing emerging markets like India. However, the deteriorating global outlook remains a risk. Our panelists expect prices to average USD 156 per metric ton in Q4 2019 and USD 162 per metric ton in Q4 2020.

Thermal Coal
Prices were volatile in recent weeks as a short-lived spike at the end of September, due to a pick-up in European demand amid fears of disruptions to Russian gas imports and uncertainty over France’s nuclear power generation outlook, but prices retreated sharply in early October as concerns dissipated. On 4 October, the commodity traded at USD 65.2 per metric ton, which was down 1.7% from the same day last month. Moreover, the price was 36.1% lower on a year-to date basis and was down 42.7% from the same day last year. China’s manufacturing sector—which accounts for the substantial portion of power consumption in the country— remained under pressure in August–September, according to manufacturing PMI data. Despite this, trade data showed strong demand for thermal coal, which is largely used for power generation. Chinese imports of thermal coal rose robustly in August and early data for September hints at the continuation of this trend, despite government efforts to reduce pollution. Therefore the Chinese government will likely ramp up its environmental efforts and tighten import restrictions, which would weigh on prices. Japanese demand, on the other hand, dropped in August amid weakness from steel producers. Compounding demand woes, the Indian government recently announced plans to reduce thermal coal imports, as India moves towards cleaner energy sources. Prices are projected to rise ahead on tight supply as large mining corporations have lost their appetite to expand thermal coal operation amid a global push towards less-polluting energy sources. However, reduced price competitiveness of the commodity and slowing global economic momentum will cap gains. The panel projects that the price of thermal coal will average USD 70.5 per metric ton in Q4 2019 and USD 69.4 per metric ton in Q4 2020.

GasoilEuropean low sulfur gasoil prices are relatively unchanged month-on-month. On 4 October, gasoil traded at USD 562 per metric ton, which was 0.7% lower than on the same day last month. The price was up 15.0% on a year-to-date basis, but was 23.0% lower than on the same day last year. Gasoil prices spiked in mid-September following the attack on Saudi oil facilities, along with prices for oil and its other derivatives, due to the possibility that this could significantly impact supply. However, gasoil prices tailed off thereafter, likely linked to concerns over the health of the global economy and easing worries over the prospects for Saudi oil production. Gasoil prices are seen losing some steam next year, despite the International Maritime Organization’s (IMO) emissions regulations on high-sulfur fuels that come into effect in 2020. The EU’s shift away from diesel vehicles is likely to continue, dampening prices. FocusEconomics panelists see prices averaging USD 586 per metric ton in Q4 2019 and USD 537 per metric ton in Q4 2020.

GasGasoline prices have risen sharply over the last month on supply issues. On 4 October, reformulated blendstock for oxygenate blending (RBOB) gasoline traded at USD 2.67 per gallon, which was up 25.9% from the same day last month. The price was 71.4% higher on a year-to-date basis and was up 13.4% from the same day last year. Gasoline prices have increased over the last month, supported by the lagged impact of the attack on Saudi oil facilities in mid-September, which temporarily boosted oil prices and thus fed through to higher gasoline prices. Moreover, supply in California has been tight in recent weeks, due to unplanned maintenance work at several refineries. This has put further upward pressure on prices even as the impact of the Saudi attack began to ease from late September. Prices will likely retreat moving forward as Californian refineries come back online and U.S. oil production increases. Developments in the U.S.-China trade dispute will remain an important price determinant. FocusEconomics panelists expect gasoline to trade at an average of USD 1.62 per gallon in Q4 2019 and USD 1.66 per gallon again in Q4 2020.

The price of uranium rose slightly in recent weeks, trading at USD 25.7 per pound on 4 October. The price was 1.4% higher than on the same day last month. However, the price was down 10.0% on a year-to-date basis and was 6.4% lower than on the same day last year. Prices were partially supported by opposition to exploratory uranium mining in the Nallamala Forest in eastern India, which is causing problems for the mining industry there and highlights the challenge the domestic industry faces in raising uranium production. On the other hand, calls in the U.S. by Republican lawmakers to ease restrictions on uranium mining in federal lands likely had the opposite effect on prices. Growing global demand for nuclear power and lower output from Kazakhstan and Canada, the world’s leading producers, should support uranium prices in the coming months. Our panelists forecast that prices will average USD 26.5 per pound in Q4 2019 and USD 32.1 per pound in Q4 2020.

German Economic Outlook Worses October 2019  The economy was hamstrung in Q2 by the external sector: Exports contracted strongly and do...

German Economic Outlook Worses October 2019 The economy was hamstrung in Q2 by the external sector: Exports contracted strongly and domestic demand was unable to cushion the downturn. Private consumption growth slowed noticeably and fixed investment contracted. Data for the third quarter, meanwhile, continues to signal diverging trends. Industrial activity remained in a tough spot amid severe weakness in the manufacturing sector. In addition, consumer sentiment averaged lower in Q3 compared to the previous quarter. On the upside, the unemployment rate hit a record low in July, while the services sector expanded robustly in July and August. Against this backdrop, the government unveiled a somewhat looser budget as the fiscal surplus is expected to narrow and announced, on 20 September, a package of stimulus measures to fight climate change; the impact of the latter on the economy should be modest, however. • Economic growth should moderate notably this year, before accelerating slightly next year on rebounding exports. External downside risks, global trade tensions and Brexit, are seen dragging on export demand and the economy at large. However, resilient domestic demand—supported by a tight labor market and loose credit conditions—should buttress economic growth. FocusEconomics Consensus Forecast panelists expect the economy to expand 0.6% in 2019 and 0.9% in 2020, which is down 0.2 percentage points from last month’s forecast.

Harmonized inflation inched down to 1.0% in August from 1.1% in July, owing to cheaper prices for clothing and footwear; accommodation; and transportation offsetting more expensive food and non-alcoholic beverages as well as education. Going forward, inflation should remain subdued on weak economic momentum. Our panelists project average inflation of 1.4% in 2019 and 1.5% in 2020, which is down 0.1 percentage points.

Economy contracts in Q2 as external sector faltersA detailed breakdown of national accounts data saw no revisions to preliminary growth figures. As such, the economy contracted 0.1% on a seasonally and calendar-adjusted quarter-on-quarter basis in Q2, contrasting the 0.4% expansion logged in the first quarter. Meanwhile, on an annual basis, the economy flatlined in Q2 (Q1: +0.8% year-on-year)—marking the first time output has not grown since Q1 2013. A downturn on the external front drove the overall contraction, as the drop in exports outweighed that of imports in the second quarter. In quarter-onquarter terms, exports of goods and services shrank 1.3% in Q2, contrasting a strong 1.8% increase in Q1. Imports of goods and services, meanwhile, fell a relatively modest 0.3% on a quarterly basis in Q2 (Q1: +0.9% quarter-onquarter). As a result, trade subtracted 0.5 percentage points from economic growth in the second quarter, swinging from a 0.5 percentage point contribution in the prior period.

Domestically, dynamics were more upbeat but remained lackluster nonetheless. Private consumption growth stumbled forwards (Q2: +0.1% qoq; Q1: +0.8 qoq), amid deteriorating consumer sentiment and an uptick in the unemployment rate. Furthermore, fixed investment contracted 0.1% quarteron-quarter in Q2 following the robust 1.6% quarter-on-quarter expansion in Q1, due to a considerable downturn in investment activity in the construction sector. That said, government consumption rose 0.5% qoq in Q2 (Q1: +0.8% qoq), which, coupled with a positive contribution from inventories, supported overall domestic demand growth in the second quarter. Looking ahead, most eyes are on the international scene: Ongoing trade conflicts, a disorderly Brexit and an economic slowdown in the Eurozone all threaten to derail the German economic engine further. On top of that, while the second-quarter result suggests that domestic economy continued to perform relatively well, the headwinds at home. As summarized by Carsten Brzeski, chief economist at ING Germany: “On the back of weak confidence indicators, the risk of another contraction of the economy in the third quarter and hence a technical recession has recently increased, not decreased. The resilience of the domestic economy against the industrial slowdown and external woes has only started to weaken since the summer. […] a further escalation of the trade conflict and global uncertainty combined with no fiscal stimulus at all, is currently probably the worst of all nightmares for the German economy.” Calls for increased fiscal stimulus are growing as the Europe’s largest economy is slowing down and faces several downside risks. On 20 September, the government unveiled a EUR 54 billion (approximately 1.5% of GDP) package of green measures for 2020-2023, targeted at fighting climate change. The package still needs to be approved by parliament and includes extra spending and tax breaks. In addition, among the measures are a carbon price and tax incentives for businesses and households to reduce their CO2 emissions. Holger Schmieding, Chief Economist at Berenberg, commentated that “I stick to my earlier estimate that, for the year 2020, the additional fiscal impulse of the two packages combined will be close to €8bn (0.2% of GDP). Unwilling to cut taxes significantly and unable to raise public investment beyond the impressive 10.6% yoy nominal growth rate reached in H1 2019, Germany continues to deliver no more than a slow-motion stimulus. After a fiscal expansion of 0.3%-0.4% of GDP in 2019, we look for an additional fiscal easing of 0.4%-0.5% per year in both 2020 and 2021. It will add up over time and support domestic demand. However, the German stimulus will not be a European let alone a global game changer.” The Central Bank expects economic activity to increase 0.6% in 2019 and 1.6% 2020. FocusEconomics Consensus Forecast panelists foresee economic growth of 0.6%, which is down 0.1 percentage points from last month’s forecast. For 2020, however, the panel expects GDP growth to accelerate to 0.9%, down 0.2 percentage points from last month.

Business confidence slumps to near seven-year low in August, raising concerns of recession
Business sentiment among German firms sank to a near seven-year low in August, with the Ifo business climate index falling to 94.3 points from a revised 95.8 in July (previously reported: 95.7). August’s result marked the fifth consecutive month of tumbling confidence and reflected deepening gloom over the German economy. “There are ever more indications of a recession in Germany. […] Not a single ray of light was to be seen in any of Germany’s key industries”, noted Clemens Fuest, president of the Ifo Institute. August’s result reflected a broad-based deterioration. The all-important manufacturing sector was increasingly pessimistic over the current situation and the expected climate in the months ahead, with confidence hovering at the lowest levels since 2009. Moreover, overall sentiment within the trade sector slipped into negative territory, while confidence in the services sector fell sharply in August—chiefly due to a less favorable assessment of the current climate—although remained positive nonetheless. Similarly, despite falling mildly due to a less positive assessment of the current situation, overall sentiment in the construction sector remained firmly in positive territory.

All in all, Eurozone’s largest economy is suffering from the effects of rising external headwinds, chiefly due to its significant exposure to escalating global trade conflicts and Brexit-related uncertainty. The downturn in the German manufacturing sector appears to be spreading to the wider economy, with domestic demand, which has been solid to date, seemingly losing momentum, and thus raising calls for government stimulus. Looking ahead, the chief economist of ING Germany, Carsten Brzeski, noted that: “The German manufacturing sector still seems to be in free fall. At least in the short run, there is very little hope for a rebound. […] the manufacturing downturn and never-ending external woes have started to bruise the domestic economy. […] The more and harder the domestic economy will be hit by the current slowdown, the higher the likelihood of a significant fiscal package”

From Focus Economic, Major Economies Economic Outlook, October 2019

Turmoils is in the air and October markets tend to be wobbly. Hold tight! - Chaganomics  EU Area Growth shifted into a lower gear in...

Turmoils is in the air and October markets tend to be wobbly. Hold tight! - Chaganomics 

EU Area
Growth shifted into a lower gear in the second quarter. An adverse external environment caused exports to flatline, while household spending lost momentum amid downbeat confidence and diminishing returns to job gains. Data for Q3 suggests that the economy remains stuck in a soft patch and continues to be defined by divergent dynamics in the export-oriented manufacturing sector and the services sector. Industrial production recorded its fourth drop in five months in July and the manufacturing PMI remained in contractionary territory in August, underscoring the sector’s persistent weakness. Conversely, the services PMI rose further into expansionary territory in the same month. Amid soft dynamics, the ECB unveiled a broad stimulus package in September to kick-start activity. However, given already ultra-accommodative conditions, it appears unlikely that it will notably shore up the outlook. Consequently, ECB President Mario Draghi also called on governments with fiscal space to unleash stimulus and some officials are starting to respond.

Headwinds from slowing global growth, trade war uncertainties and issues in the manufacturing sector are seen dragging growth to an over five-year low in 2019. Next year, momentum is expected to be broadly unchanged. Slowing activity in China is expected to weigh on exports, while investment is seen staying soft. Risks linger from trade tensions, a no deal-Brexit and politics. Growth is seen at 1.1% in 2019 and 1.1% again in 2020, which is down 0.1 percentage points from last month’s forecast.

The euro hovered around the lowest levels seen since mid-2017 in September. On 19 September, the currency ended the day at USD 1.11 per EUR, a 0.4% depreciation from the same day in August. Waning economic momentum, muted inflation, ultra-accommodative monetary policy and trade uncertainties have kept the euro weak and these factors are seen lingering ahead. Our panel sees the euro ending 2019 at USD 1.12 per EUR and 2020 at USD 1.16 per EUR.

Growth Sinks
A third estimate confirmed that the Eurozone economy lost traction in the second quarter, suppressed by a weaker performance from both the domestic and external sides of the economy. According to Eurostat, GDP increased a seasonally-adjusted 0.2% in Q2 from the previous quarter, half that of Q1’s 0.4% expansion. Q2’s reading was unchanged from the two flash estimates and marks one of the slowest readings in the past four years. Household spending growth decelerated to 0.2% over the previous quarter in Q2, from Q1’s 0.4% and driving the slowdown in the domestic economy. Diminishing gains in the labor market and lower confidence likely contributed to the slowdown. On a brighter note, fixed investment growth accelerated from 0.2% in Q1 to 0.5% in Q; government consumption, however, slid from 0.4% growth to 0.3%. The external sector subtracted marginally from growth in the quarter as exports growth stalled. Exports growth flatlined in Q2, amid a subdued global economy and overall adverse external environment (Q1: +0.9% quarter-onquarter). Import growth also slowed, coming in at 0.2% in Q2, from 0.4% in Q1. Compared with the same quarter of 2018, seasonally-adjusted GDP rose 1.2% in Q2, slightly below Q1’s 1.3%. The ECB sees the Eurozone economy growing 1.1% in 2019 and 1.2% in 2020. FocusEconomics Consensus Forecast panelists expect the Euro area economy to expand 1.1% in 2019, which is unchanged from last month’s forecast. For 2020, panelists also expect the economy to grow 1.1%, which is down 0.1 percentage points from the previous month’s estimate.

Composite PMILeading indicators point to slightly improved dynamics in August in the Euro area’s economy. The Flash Eurozone Composite Purchasing Managers’ Index (PMI), produced by IHS Markit, came in at 51.9, up from July’s 51.5. That said, the reading still marked one of the worst results in the past six years. The PMI lies just above the 50-point threshold that distinguishes expanding business activity in the Eurozone. The details of the release revealed a continued two-speed Eurozone economy. The manufacturing PMI came in at 47.0 in August, up from July’s 46.5 but still signaling contractionary conditions in the sector. Manufacturing output fell for the seven consecutive month and firms shed jobs once again. In contrast, the Services PMI Activity index edged further into expansionary territory in August, coming in at 53.4 (July: 53.2). On a sour note, confidence dropped sharply in August across both sectors. Regarding the Eurozone’s two largest economies, both France and Germany’s composite PMIs edged up in August. However, while France’s manufacturing PMI returned to growth territory, Germany’s continued to point to contractionary conditions. Elsewhere in the region, activity was broadly stable. FocusEconomics Consensus Forecast panelists expect fixed investment to grow 2.6% in 2019, which is unchanged from last month’s forecast. For 2020, panelists see fixed investment increasing 1.6%, which is down 0.2 percentage points from last month’s projection.

Industrial Output continues To DragIndustrial output contracted once again in July, recording the fourth drop in five months. Industrial production fell a seasonally-adjusted 0.4% over the previous month, a softer drop than June’s revised 1.4% decrease (previously reported: -1.6% month-on-month). June’s result had marked the worst reading since September 2018. July’s result undershot market expectations of a mild 0.1% fall. Energy, intermediate goods and non-durable consumer goods output all contracted in July, driving the fall. However, rebounds in capital goods production and durable consumer goods output softened headline figure.

Monetary Policy Changing
The European Central Bank (ECB) unveiled a broad package of stimulus at its meeting on 12 September, in order to revive growth and inflation in the downbeat Eurozone economy. The ECB decided to cut the deposit rate by 10 basis points deeper into negative territory, announced it was restarting quantitative easing, opened up its forward guidance, along with other changes to targeted longer-term refinancing operations (TLTRO III) and reserve remuneration. At large, the measures represented slightly more stimulus than market analysts had expected. Accordingly, the deposit rate now sits at a new record-low of minus 0.50%, while the other main interest rates are unchanged: the refinancing rate at 0.00% and the marginal lending rate at 0.25%. The Bank’s asset purchase programme (APP) will be restarted on 1 November, at a pace of EUR 20 billion per month, slightly below market analysts’ expectations. However, notably, the APP was left open-ended, with President Mario Draghi stating in the accompanying press conference that it will run “for as long as necessary to reinforce the accommodative impact of our policy rates”. Adding to the accommodative measures, the Bank stated it will reprice its TLTRO III’s and include an incentive for banks to increase lending. Moreover, the Bank will introduce a two-tier system for reserve remuneration, which should further support monetary policy transmission and reduce pressure on banks’ lending margins. Soft economic data, persistently low inflation, modest inflation expectations and ample downside risks to the outlook drove the ECB to unleash the shot of stimulus to shore up prospects. While, all-in-all, the measures should loosen monetary conditions and boost activity, it remains to be seen, however, if it will be enough to improve the outlook. A weak industrial sector, a less favorable global backdrop and geopolitical concerns have hampered growth in recent quarters and are seen continuing to plague the outlook ahead.

"This is serious" said the email subject from the economist. Official Release from the ISM: New Orders, Production, and Em...

"This is serious" said the email subject from the economist.

Official Release from the ISM:
New Orders, Production, and Employment Contracting Supplier Deliveries Slowing at a Slower Rate; Backlog Contracting Raw Materials Inventories Contracting; Customers’ Inventories Too Low Prices Decreasing; Exports and Imports Contracting.

Economic activity in the manufacturing sector contracted in September, and the overall economy grew for the 125th consecutive month.

From Goldman Sachs:
The ISM manufacturing index fell against expectations for a rebound in September. The composition of the report was weak, as the key components remained or fell further into contractionary territory, and the new export orders index fell to its lowest level since March 2009. Construction spending rose by less than expected in August and was revised down in prior months. We lowered our Q3 GDP tracking estimate by one tenth to +2.0% (qoq ar). Our September Current Activity Indicator remained unchanged at 1.2% (vs. 1.5% in August).