US: Little sign of recession...
Financial markets remain nervous about a potential US slowdown and continue to price in a significant chance of a Federal Reserve interest rate cut this year. Our view remains that the Fed will keep policy stable because a) the strength of the labour market, with rising worker pay, should underpin consumer sentiment and spending and b) we remain optimistic that the US-China trade standoff will be resolved. This should help lift much of the gloom surrounding the global economy. Trade and consumer spending will be a key theme for the week ahead and we expect positive news for the US on both.
In terms of retail sales, strong auto sales (volumes rose to an annualised 17.5mn in March from 16.56mn in February) should help. Rising gasoline prices will also boost the value of retail sales. Other categories are likely to post more modest gains, but in general we expect to see robust growth after a soft -0.2% month-on-month outcome in February.
Trade may also improve further given that companies appear to have ramped up imports in 4Q18 to avoid paying the proposed tariff hike on Chinese imports that was set to start on 1 January. This tariff hike was cancelled in mid-December, but given the lags between orders and deliveries across the Pacific, we suspect that the bulk of any rebound in imports will not happen until 2Q. Already, the Atlanta Fed’s GDPNow model is pointing to 1Q GDP growth of 2.3% based on the data received so far, and the upcoming reports have the potential to push that growth rate well above 2.5%, suggesting there is little sign of a recession yet.
UK focus switches back to data as everyone takes a Brexit break
We are delighted to inform readers that after all the turmoil, the next week promises to be relatively Brexit-free. Parliament is on Easter recess, although cross-party talks between the Prime Minister and Labour will continue in the background. Most expect these talks to end unsuccessfully, despite the positions of the two leaders being relatively similar. Assuming these talks don’t bear fruit, the ball will pass back into Parliament’s court – either through further ‘indicative votes’, or maybe even a fourth vote on a version of May’s deal. Read our latest take on Brexit here.
In the meantime, next week will be a big one for UK data. Wage growth looks set to remain strong amid ongoing signs of skill shortages in the jobs market – particularly in areas like construction and hospitality. With consumer price inflation set to remain benign, this makes for a better fundamental backdrop for spending. For now though, it seems the heightened uncertainty took its toll on retail sales during March as individuals held back from making large purchases. With growth set to continue lagging, we no longer expect a Bank of England rate hike this year.
Germany: Quiet, but uplifting?
Next week will be a relatively quiet one for the German economy - only the ZEW index will come out. The latter should probably see another small improvement on the back of stronger financial markets and central banks' dovishness.
Canada: Little argument for price levels to head down
The story behind price levels in March shouldn’t be too dissimilar to that seen in February, as the negative effect of energy prices slowly dissipates. The annual figure for average gasoline prices in Canada – though still in negative territory, is gradually moving towards zero (-1.6% YoY in March). Given such prices feature through different CPI components, particularly transport and food, we think the headline figure will follow a similar upward trajectory.
Our inflation forecast for March is 1.5% YoY - the same as in February. While we aren’t expecting a sizeable move upwards, a move downward in the headline figure is pretty unlikely for now.