Sometimes reality catches up with you quite quickly so this morning Mario Draghi may not want a copy of any French newspapers on holiday. This is because on the way to one of the shorter and maybe shortest policy meeting press conferences we were told this.
The latest economic indicators and survey results have stabilised and continue to point to ongoing solid and broad-based economic growth, in line with the June 2018 Eurosystem staff macroeconomic projections for the euro area.
As you can see below Mario did drift away from this at one point but then returned to it in the next sentence.
Some sluggishness in the first quarter is continuing in the second quarter. But I would say almost all indicators have now stabilised at levels that are above historical averages.
Then we got what in these times was perhaps the most bullish perspective of all.
Now, one positive development is the nominal wage performance where, you remember, we’ve seen a pickup in nominal wage growth across the eurozone. Until recently this pickup was mostly produced by wage drift, while now we are seeing that there is a component, which is the negotiated wage component, which is now – right now the main driver of the growth in nominal wages.
Most countries have a sustained pick up in wage growth as a sort of economic Holy Grail right now. So we were presented with a bright picture overall and as I pointed out yesterday Mario is the master of these events as he was even able to make a mistake about economic reforms by saying there had been some, realise he had just contradicted what is his core message and engage reverse gear apparently unnoticed by the press corps.
This morning brought us to the economic growth news from France which we might have been expecting to be solid and broad-based and this is what we got.
In Q2 2018, GDP in volume terms* rose at the same pace as in Q1: +0.2%
Now that is not really solid especially if we recall it is supposed to be above historical averages so let us also investigate if it is broad-based?
Household consumption expenditure faltered slightly in Q1 2018 (−0.1% after +0.2%): consumption of goods declined again (−0.3% after −0.1%) and that of services slowed down sharply (+0.1% after +0.4%).
The latter slowdown is concerning as we note that estimates put the services sector at just under 79% of the French economy. We also might expect better consumption data as whilst it may be a bit early for Mario’s wages growth claims to be at play household disposable income rose by 2.7% in 2017. However such metrics seem to have dropped a fair bit so far this year as household purchasing power was estimated to have fallen by 0.6% in the opening quarter of this year. So if anything is broad-based here it is the warning about a slowdown we got a few months ago and not the newer more upbeat version.
This was a drag on growth but not in the way you might expect. The easy view would be that French car exports would have been affected by the trade wars developments. But whilst there nay be elements of that it was not exports which were the problem.
Imports recovered sharply in Q2 2018 (+1.7% after −0.3%) after the decrease observed in Q1. Exports also bounced back but to a lesser extent (+0.6% after −0.4%). All in all, foreign trade balance contributed negatively to GDP growth: −0.3 points after a neutral contribution in the previous quarter.
That is a bit like the UK in the first quarter and we await developments as even quarterly trade figures can be unreliable.
Production in goods and services barely accelerated in Q2 2018 (+0.2% after +0.1%)………….Output in manufactured goods fell back again (−0.2% after −1.0%). Production in refinery stepped back (−9.9% after −1.6%) due to technical maintenance; production in electricity and gas dropped too (−1.7% after +1.9%). However, construction bounced back (+0.6% after −0.3%).
As you can see there is not a lot to cheer here as construction may just be correcting the weather effect in the first quarter. There was better news from investment though.
In Q2 2018, total GFCF recovered sharply (+0.7% after +0.1% in Q1 2018), especially because of the upsurge in corporate investment (+1.1% after +0.1%). It was mainly due to the upswing in manufactured goods (+1.2% after −1.1%)
As there was not much of a sign of a manufacturing upswing lets us hope that the optimism ends up being fulfilled as other wise we seem set to see more of this.
Conversely, changes in inventories drove GDP on (+0.3 points after 0.0 points).
We of course are now keen to know how the third quarter has started and what we can expect next? From the official survey published on Tuesday.
The balances of industrialists’ opinion on overall and
foreign demand in the last three months have dropped
again sharply in July – they had reached at the beginning of the year their highest level in seven years, before dropping back in the April survey. Business managers are also less optimistic about overall and foreign demand over the next three months;
If we look at the survey index level the number remains positive overall but the direction of travel is south, not as bad as the credit crunch impact but more like how the Euro area crisis impacted which is odd. Let us now switch to the services sector.
According to business managers surveyed in July
2018, the business climate remains stable in services.
The composite indicator which measures it has stood at
104 since May 2018, above its long-term average
Is stable the new contraction? Perhaps if we allow for the rail strikes in the second quarter but the direction of travel has again been south. If we step back and look at the overall survey which has a long record we see that it recorded a pick up early in 2013 which had some ebbs and flows but the trend was higher and now we are seeing the first turn and indeed sustained fall.
I cannot find anything from the Markit PMI business surveys on this today as presumably they are mulling how they seem now to be a lagging indicator as opposed to a leading one.
The rhetoric of only yesterday has faded quite a bit as we mull these numbers from France. It is the second biggest economy in the Euro area and the story that if we use a rowing metaphor it caught a crab at the beginning of the year now seems untrue. It may even have under performed the UK which is supposed to be on a troubled trajectory of its own. Under the new structure we do not have the official numbers for June in the UK. The surveys quoted above do not seem especially optimistic apart from the Markit ones which of course have been through this phase.
A more optimistic view comes from the monetary data which as I analysed on Wednesday has stopped getting worse and strengthened in terms of broad money and credit. Let me give a nod to the masterful way Mario Draghi presented the narrow money numbers.
The narrow monetary aggregate M1 remained the main contributor to broad money growth. ( It fell…)
So the outlook should be a little better and the year on course for the 1.3% suggested by the average number calculated today. But 0.7%,0.7% to 0.2%,0.2% is quite a lurch.
In other news let me congratulate France on being the football World Cup winners. Frankly they have quite a team there. But in the language world cup there is only one winner as Mario Draghi went to some pains to point out yesterday.
Let me clear: the only version that conveys the policy message is the English version. We conduct our Governing Council in English and agree on an English text, so that’s what we have to look at.
Or as someone amusingly replied to me Irish……