Growth is expected to have lost steam in the second quarter, after a healthy expansion at the start of the year. The latest data continues to point to a two-speed economy, with lingering weakness in the manufacturing sector contrasting relatively robust services sector activity. The manufacturing PMI recorded its worst quarter since Q1 2013 in Q2, and a sharp downturn in industry confidence caused economic sentiment to fall to a near three-year low in June. However, the unemployment rate fell to a new over one-decade low in May and the services business activity index rose to a seven-month high in June. Meanwhile, on 2 July, the European Council nominated Christine Lagarde for ECB President, Ursula von der Leyen to head the European Commission and Charles Michel to lead the European Council. The nominees represent a largely pro-European integration stance and also the continued influence of Germany and France, although ultimately policy will be spearhead by heads of states. • Activity is seen slowing sharply this year amid a less favorable external environment, problems in the manufacturing sector and as uncertainty dent exports and investment growth. However, solid spending will curb the downturn. Risks stem from global protectionism, a sharp slowdown in China, resurging financial turbulence sparked by Italy and Brexit uncertainty. Growth is seen at 1.1% in 2019, which is down 0.1 percentage points from last month’s forecast, and 1.3% in 2020. • Harmonized inflation was steady at May’s 1.2% in June and remains below the ECB’s target of under but close to 2.0%. Moderate economic activity, low inflation expectations and subdued oil prices are expected to keep price pressures modest this year. Our analysts see inflation averaging 1.3% in 2019 and 1.4% in 2020. • Christine Lagarde, managing director of the IMF, was nominated to replace Mario Draghi as ECB president when his term ends on 31 October. Lagarde is expected to continue the course steered by Draghi. At the ECB’s 6 June meeting, the Bank pushed back the timing of a possible rate hike amid persistently low inflation. Shortly after, Draghi stated that more stimulus could be unleashed. Accordingly, our panel sees the refinancing rate ending 2019 at 0.00% and 2020 at 0.02%. • The euro remained broadly stable in recent weeks, as weak economic data and a dovish outlook for the ECB were balanced by dovish expectations for the U.S. Federal Reserve. On 19 July, the currency traded at USD 1.12 per EUR, a 0.1% gain month-on-month. The euro is seen remaining steady this year, then strengthening ahead as monetary policy normalizes. Our panel sees the euro ending 2019 at USD 1.14 per EUR and 2020 at USD 1.18 per EUR.

Insight from FocusEconomics Consensus Forecast Euro Area

Global growth is likely to dim this year, due largely to weaker momentum in developed economies and China. However, tight labor markets and more accommodative monetary policy should prop up activity. A further escalation of trade tensions, particularly between the U.S. and China, is the key downside risk

Canada
Economic growth will likely soften noticeably in 2019 compared to last year, amid weaker domestic demand growth and as a moderating global growth outlook hits exports. Volatile commodity prices, uncertain trade relations with the U.S. and elevated household debt pose downside risks.

Euro Area
Activity is seen slowing sharply this year amid a less favorable external environment, problems in the manufacturing sector and as uncertainty dent exports and investment growth. However, solid spending will curb the downturn. Risks stem from global protectionism, a sharp slowdown in China, resurging financial turbulence sparked by Italy and Brexit uncertainty.

Japan
Lower global demand should cause the economy to slow this year. Nevertheless, front-loading of consumer spending ahead of October’s sales tax hike should boost consumption somewhat. The trade outlook remains a key downside risk to growth, as a recent spat with South Korea adds to the U.S.-China dispute.

United Kingdom

The economy will perform poorly this year, held back by soft business investment and weaker growth in key trading partners. However, solid wage growth should underpin private consumption, while a more expansionary fiscal stance should also provide support. The highly uncertain outcome of Brexit remains the key risk to the outlook.

United States
The economy is expected to maintain its longest expansion in history this year, albeit at a slower pace as intensifying headwinds from weaker global growth and trade tensions weigh on momentum. Sustained consumer spending should taper the slowdown, however. The key risks to the outlook stem from a prolonged trade row and high corporate debt.

Switzerland
Inflation was stable at May’s 0.6% in June, and appears poised to remain feeble this year and next, owing to an overvalued franc and a slowing economy. Volatile oil prices and a potential rise in global economic uncertainty, which could boost safe-haven demand for the franc, could further dampen price pressures.

Focus Economics Major Economies Forecast, August 2019

Economic Outlook Moderates

In the second quarter of the year, the Chinese economy expanded at the weakest pace since at least 1992, as the trade war with the United States continued to undermine the external sector and investment. Nominal merchandise exports contracted in Q2, mostly reflecting weak global demand and spillovers from the China-U.S. trade spat. Moreover, trade disputes dragged on investment throughout the quarter despite increased bank lending causing a notable uptick in June. Volatility in China’s economic data is expected to continue further down the road until the trade dispute settles. In this regard, June’s strong economic data for the domestic economy should be taken with a pinch of salt until additional data can corroborate that growth has indeed effectively bottomed out. In late June, China and the U.S. agreed to restart trade negotiations, while the U.S. canceled new tariffs on Chinese exports.

Uncertainty regarding the China-U.S. trade war will continue to weigh on growth this year, while weak global demand and domestic economic imbalances are additional downside risks. That said, the government’s commitment to support the economy via fiscal stimulus and accommodative monetary policy should make the 6.0–6.5% growth target for this year attainable. FocusEconomics panelists see the economy growing 6.2% in 2019, which is down 0.1 percentage points from last month’s forecast, before decelerating to 6.0% in 2020.

Real Sector

Biggest slump in thirty years. In the second quarter of the year, the Chinese economy expanded at the weakest rate since at least 1992, when the National Bureau of Statistics (NBS) started to publish quarterly data. GDP expanded 6.2% in annual terms in Q2 2019, below both Q1’s 6.4% expansion and the 6.3% increase expected by market analysts. Nevertheless, growth is still within the government’s target of between 6.0% and 6.5% for 2019. Although the NBS does not provide a breakdown of GDP by expenditure, additional data suggests that the trade war continued to weigh on exports and outweighed authorities’ efforts to stimulate the domestic economy. Moreover, growth in fixed-asset investment moderated in Q2, mostly reflecting weaker manufacturing investment. Conversely, growth in retail sales was robust in the quarter, suggesting that private consumption is likely supporting overall growth. Seasonally-adjusted quarter-on-quarter GDP growth inched up from 1.4% in Q1 to 1.6% in Q2, while nominal GDP accelerated from a 7.8% year-on-year increase in Q1 to an 8.3% rise in Q2. Although GDP growth slowed in Q2, economic indicators for the domestic economy firmed up in June. Against this backdrop, Ting Lu, Lisheng Wang and Jing Wang, economists at Nomura, comment that: “Bulls might claim that this is a result of the resilience of the Chinese economy and the effectiveness of Beijing’s countercyclical easing measures. We recommend caution, as we see no strong signals that China’s economy bottomed out in June. And, like the blip of a recovery in March, the rebound of official activity data in June may not be sustainable. […] By taking lessons from their reactions to the March data, Beijing will likely interpret and respond to the June data with some extra caution. We believe activity data could drop again in the next few months and assign a high probability to an escalation of US/China trade tensions despite the recent agreement to renew trade negotiations. Thus, we find it quite likely that Beijing will step up policy easing/ stimulus towards Q4 and end-2019.” Looking forward, trade negotiations between China and the United States will continue to shape the economic outlook for the Asian giant. On this point, Yi David Wang, head of China economics at Credit Suisse, noted: “We maintain our annual growth outlook at 6.2% for 2019. There might be upticks to IP momentum as authorities shift their reliance back to infrastructure and real estate. That said, unless a more permanent resolution to trade negotiation is achieved in a timely manner and authorities can improve credit allocation efficiency, the uncertainty impact will be an ongoing drag to China’s manufacturing sector.”

FocusEconomics
FocusEconomics Consensus Forecast East & South Asia

Brent Crude

Brent crude oil prices stabilized in recent weeks after falling sharply in May and the first days of June on the back of fears of a global slowdown and escalating trade tension between China and the United States. On 5 July, oil prices traded at USD 64.2 per barrel, which was 3.3% higher than on the same day last month. Moreover, the benchmark price for global crude oil was 16.7% lower than on the same day last year, although it was up 27.0% on a year-to-date basis. Oil prices were influenced by diverging forces in recent weeks. Uncertainty about the health of the global economy and the trade spat between the two superpowers sparked concerns about a fall in demand for the black gold. Moreover, the U.S. continued to post new oil production highs thanks to its booming shale industry. On the other hand, oil production cuts by OPEC+, falling production in Venezuela, fears of supply disruptions in Libya and Nigeria, and U.S. sanctions against Iran’s oil industry threatened to tighten global oil supply. Looking forward, the decision by OPEC+ to extend oil production cuts until end-March 2020 is expected to support oil prices, as should a better relationship between China and the United States following the meeting between Presidents Donald Trump and Xi Jinping at the 28–29 June G20 summit. Oil prices could get another boost from escalating geopolitical tensions in the Strait of Hormuz, as relations between Iran and the United States deteriorate further. Nevertheless, subdued global growth and strong production in the U.S. will limit the gains. FocusEconomics panelists see prices averaging USD 67.7 per barrel in Q4 2019 and USD 66.2 per barrel in Q4 2020. In light of recent developments, 21 panelists left their forecasts unchanged for Q4 2019 from last month, 4 upgraded their projections, while 14 cut their projections. Diverging forces in the oil market are fueling uncertainty regarding the evolution of oil prices: The panelist forecast range for Q4 2019 spans from a minimum of USD 59.9 per barrel to a maximum of USD 80.0 per barrel.

WTI Oil

In recent weeks, West Texas Intermediate (WTI) crude oil prices recovered some of the losses recorded in May. WTI crude oil prices traded at USD 57.1 per barrel on 5 July, which was up 10.6% from the same day last month. While the price was down 21.9% from the same day last year, it was 26.4% higher on a year-to-date basis. The recovery in WTI crude oil prices mostly reflects increasing fears of a military confrontation between Iran and the United States in the Persian Gulf, especially after Iran shot down a U.S. drone above the Strait of Hormuz on 20 June. A military conflict in the region could disrupt global oil supply as the strait makes up about one-third of total global seaborne traded oil. Oil prices were also supported by expectations that the U.S. Federal Reserve could cut interest rates in order to rekindle economic growth. That said, the U.S. is currently pumping oil at a pace of above 12 million barrels per day, the highest in the country’s history, which limits any significant upswing in oil prices. Moreover, oil inventories in the United States are falling less than what market analysts had expected, suggesting that underlying demand for the black gold is relatively low. The EIA reported that inventories fell by 1.1 million barrels for the week ending 28 June, while markets had previously expected a drop of 3.7 million barrels. WTI oil prices are expected to rise, mostly on the back of the extension of the oil cut deal by OPEC+, supply concerns in some countries and an improved relationship between China and the United States. For Q4 2019, analysts expect prices to average USD 60.5 per barrel, before declining slightly in Q4 2020 to USD 59.5 per barrel. In response to recent developments, 4 upwardly adjusted their Q4 2019 forecasts compared to last month. Meanwhile, 12 panelists kept their projections unchanged and 14 cut their forecasts. Given current uncertainty, the spread between the minimum and the maximum oil price forecasts remains relatively wide: For Q4 2019, the maximum price forecast is USD 73.0 per barrel, while the minimum is USD 53.0 per barrel.

From: FocusEconomics Consensus Forecast Commodities, July 2019

Russia Economic Outlook July 2019

A second GDP estimate confirmed that the economy ran out of steam in the first quarter, amid a broad-based deceleration. Wholesale and retail trade contracted in Q1 as January’s VAT hike dented consumer demand, while a lackluster outturn in the manufacturing and constructions sectors further derailed growth. Moreover, constrained oil output and weak energy demand from Europe curbed mining activity, bringing merchandise exports to a near halt in Q1. Turning to Q2, soft momentum appears to have persisted. After rebounding in April, economic activity growth tumbled again in May, owing to a deterioration in the manufacturing sector. In addition, weaker household consumption likely played a role, as retail sales growth slid in the month. Going into Q3, the focus is on 1–2 July OPEC+ meeting, where oil output cuts are likely to be extended.

Sliding private consumption and a downbeat external sector will restraint growth this year, although an uptick in public spending should provide some relief. Meanwhile, growth in the short-term should pick up slightly thanks to monetary policy easing, while a stronger boost over the medium-term is expected as the “national projects” plan gains traction. FocusEconomics panelists see growth at 1.4% in 2019, which is unchanged from last month’s forecast. In 2020, GDP is seen increasing 1.8%.

Inflation ticked down to 5.1% in May (April: 5.2%), inching slightly closer to the Central Bank’s 4.0% target. Nevertheless, price pressures remained elevated following from January’s VAT hike and due to rapidly rising food prices. Inflation should ease going forward, supported by a stable ruble and soft consumer demand. Inflation is seen ending 2019 at 4.4% and 2020 at 3.9%.

On 14 June, the Central Bank trimmed its key interest rate by 25 basis points to 7.50%. The decision marked the first rate cut since March 2018 and came against the backdrop of gradually moderating inflation and slower-than-expected economic growth. The Bank’s relatively dovish tone signals that further policy easing is likely in the second half of the year. Accordingly, the majority of our panelists see the Bank cutting the rate by another 25 basis points by the end of the year. Consensus projects it to end 2019 at 7.13%. In 2020, the key rate is expected to end the year at 6.69%.

The ruble gained ground in recent weeks, strengthening to a 10-month high in mid-June, partly thanks to a strong demand for treasury bonds. Nevertheless, reduced hopes of a Fed rate cut curbed the currency’s gains. On 28 June, the RUB traded at 63.0 per USD, appreciating 2.2% month-on-month. Our analysts expect the ruble to largely stand its ground in the coming quarters. Our panel sees the ruble ending 2019 at 65.6 per USD and 2020 at 66.6 per USD.

REAL SECTOR -> Growth plummets in Q1 on broad-based frailties...
GDP growth plunged to 0.5% year-on-year in the first quarter of 2019, according to a second estimate released by Rosstat. This was notably below Q4’s 2.7% outturn and matched the preliminary figure. A breakdown by sectors revealed broad-based weakness across the economy. Notably, the wholesale and retail trade sector contracted 3.0% in annual terms, weighed on by the hike in the VAT that was introduced in January. In addition, the agricultural sector swung to contraction, declining 1.2% annually in Q1 (Q4: +2.3% year-on-year), while growth in the manufacturing sector picked up pace but remained muted (Q1: +0.6% yoy; Q4: +0.2% yoy). The construction sector also ground to a halt, recording zero growth after several major infrastructure projects were completed in 2018, while the government’s ‘National Projects’ program is off to a slow start. Meanwhile, growth in the mining sector was relatively robust, clocking in at 4.6% in Q1, but was well below Q4’s multi-year high of 7.7% nonetheless.

OUTLOOK -> Economic conditions deteriorate in May
The manufacturing Purchasing Managers’ Index (PMI) produced by IHS Markit
dropped from 51.8 in April to 49.8 in May, marking a nine-month low. As a
result, the index lies below the critical 50-point mark and points to contracting
activity in the manufacturing sector. May’s result reflected a notable drop in
employment, with firms shedding jobs at the fastest pace since March 2016.
In addition, new orders and output also lost steam.
The services sector also lost momentum in May, with the IHS Markit Russia
Services Business Activity index falling to 52.0 from April’s 52.6. Firms
reported a modest rise in new business and services providers shed jobs for
the first time since September. FocusEconomics Consensus Forecast panelists project fixed investment will expand 1.9% in 2019, which is down 0.1 percentage points from last month’s forecast. In 2020, the panel expects fixed investment to grow 2.3%.

Euro area Manufacturing PMI (Final, June): 47.6, Flash: 47.8, Previous: 47.7

Germany Manufacturing PMI (Final, June): 45.0, Flash: 45.4, Previous: 44.3

France Manufacturing PMI (Final, June): 51.9, Flash: 52.0, Previous: 50.6

Italy Manufacturing PMI (June): 48.4, GS: 49.1, Consensus: 48.7, Previous: 49.7

Spain Manufacturing PMI (June): 47.9, GS: 49.8, Consensus: 49.5, Previous: 50.1

Italian manufacturing PMI fell by 1.3pt to 48.4 in June, below market expectations. 

SPAIN
Spanish manufacturing PMI also fell considerably, slipping by 2.7pt to 47.9, well below expectations. This reflected notable weakness in new orders, output, and employment. The drag on the industrial sector was largely attributed to global trade tensions and political uncertainties.

Incoming data points to slightly weaker growth in the second quarter, on the heels of a strong Q1 upturn that was buoyed by a robust rebound in fixed investment. Although industrial production bounced back solidly in April, the composite PMI fell to a five-and-half-year low in May, weighed on by broadly stagnant manufacturing activity. Moreover, while retail sales remained firm in April, employment growth slowed in April and May, which, coupled with consumers turning more pessimistic over the same period, suggests that private consumption has lost some stride. In the political arena, after scoring important wins in the recent national, regional and local elections, acting Prime Minister Pedro Sánchez is set to be sworn in the investiture vote to take place next month. Falling short of a parliamentary majority, however, his Socialist Party (PSOE) is likely to rely on left-wing Unidas Podemos and smaller regional parties to govern.

INDUSTRIAL PRODUCTION

Industrial production rose 1.7% year-on-year in seasonally- and calendar adjusted terms in April, rebounding from March’s revised 3.0% contraction

(previously reported: -3.1% year-on-year). Despite the upturn, the annual

average variation in industrial output remained at minus 0.3% in April, which

had turned negative for the first time in five years in March.

April’s increase reflected improved dynamics in most major sectors. The

production of consumer goods rebounded strongly, while capital and

intermediate goods production picked up compared to March. Meanwhile,

energy output contracted for the third month running in April.

On a month-on-month basis, adjusted for seasonal and calendar effects,

factory output climbed 1.8% in April, rebounding from the 1.2% slip logged

in March.

REAL SECTOR
The Spanish Board of Architects approved 9,405 new construction permits in March, according to data published by the Ministry of Public Works. The figure was above both the 8,461 permits granted in March 2018 and the 9,175 permits granted in February. On an annual basis, permits rose 11.2% in March, slightly above February’s 10.5% upturn. The moving three-month sum of permits totaled 27,886 in March, which represented an 18.9% increase from the same period last year and followed the 23.6% expansion recorded in February. That said, the current number of permits represents a mere fraction of the 268,266 permits that were granted during the July–September 2006 peak.

RETAIL SALES
Retail sales rose 2.0% in year-on-year terms in April, marking a six-month high and following the soft 0.2% upturn logged in March. The print largely reflected a strong increase in food sales more than offsetting lower sales of personal equipment goods. On a distribution-based system, sales at small and large chain stores picked up notably compared to March while they rebounded at department stores. Meanwhile, purchases at single retail sales contracted for the second consecutive month in April.

EXTERNAL SECTOR
Spain’s current account balance recorded a tiny surplus of EUR 26 million
in March, smaller than the EUR 389 million surplus recorded in March 2018
but much greater than the EUR 2.8 billion deficit logged in February. In the
12 months up to March 2019, the current account balance reached a surplus
of EUR 9.0 billion, the smallest since October 2014 and below the EUR 9.4
billion recorded in the 12 months up to February.
According to the Bank of Spain, the lower current account surplus compared
to the previous year reflected the smaller trade surplus recorded in March
2019 of EUR 1.2 billion—mainly the result of imports growing more than
exports—below the EUR 1.8 billion logged in March 2018.

Thank you Goldman Sachs and Focus Economics

Comprehensive GDP data for the first quarter confirmed that the relatively robust expansion was mostly propelled by a sharp decline in imports of goods and services. Underlying domestic demand, meanwhile, appeared weak as reflected by lackluster private consumption in Q1, raising concerns over Prime Minister Shinzo Abe’s plans for household demand to drive economic growth. Turning to the second quarter, consumer confidence tumbled to an over three-year low in May, which does not bode well for a recovery in consumer spending and leaves Abe at a crossroad whether to move ahead with a controversial sales tax in October. Japan’s economic prospects are quickly worsening as escalating trade tensions, especially between China and the United States, could further erode global demand and, in turn, Japan’s all-important external sector.

Faltering global demand is expected to weigh on growth this year. Conversely, the economy should benefit from frantic front-loading of consumer purchases ahead of October’s sales tax. The key downside risks are further trade restrictions, which would reduce demand for Japanese goods, as well as weaker global growth, which could strengthen the yen. FocusEconomics panelists see the economy growing 0.8% in 2019, which is unchanged from last month’s forecast, and 0.5% in 2020.

Inflation jumped to 0.9% in April from 0.5% in March. Price pressures nevertheless remain relatively muted, mostly reflecting Japan’s firmly entrenched deflationary mindset, strong productivity gains and increased competition largely thanks to technological progress. Looking forward, the sales tax hike scheduled for October should boost inflation significantly. FocusEconomics panelists expect inflation to average 0.8% in 2019, which is unchanged from last month’s estimate, before reaching 1.1% in 2020. 

The Bank of Japan (BoJ) kept its monetary policy on hold and forward guidance was unchanged at the 19–20 June meeting. The Bank supported its decision on the back of subdued inflationary pressures and an uncertain global economic outlook. That said, the BoJ could expand its monetary stimulus as soon as in Q3 in the event of a rate cut by the Fed. A majority of FocusEconomics panelists expect the BoJ’s short-term policy rate to remain unchanged at minus 0.10% until at least the end of 2020.

Rising global trade tensions continued to fuel demand for safe-haven assets in recent weeks, leading the yen to strengthen against the U.S. dollar. On 20 June, the yen traded at JPY 107.3 per USD, appreciating 2.6% month-on-month. Looking forward, the evolution of the yen will be mostly determined by external events such as the trade war and global growth prospects. Panelists see the yen trading at JPY 108.1 per USD at the end of 2019 and at JPY 106.7 per USD by the end of 2020.