27 April 2018
US GDP: 1Q good… 2Q GREAT!

US GDP grew 2.3% in 1Q despite tough comparisons and a legacy of seasonal adjustment headwinds. We think it will be above 3% in 2Q

Consumer soft, investment strong

US GDP came in at 2.3% for 1Q18, close to our 2.4% forecast and a bit ahead of the 2% consensus. The details show consumer spending was soft, rising 1.1% with bad weather playing a part, but we also have to remember there was a tough comparison with 4Q17 given the post hurricane rebound in spending we saw back then. Government spending also slowed to 1.2% for similar reasons.

Investment was good, rising 7.3% with structures a big positive while inventory building contributed 0.43 percentage points to growth and net trade added an extra 0.2%. Given the equity market volatility in the quarter and worries about protectionism this is a pretty good outcome all in.

BoJ tweaks its statement - this could be important

The Bank of Japan (BoJ) has removed any reference to reaching its 2% inflation target by some time around fiscal 2019 in its latest statement - this can be interpreted in a number of ways - read on to see which we prefer

Kuroda's linkage of the end of QQE to the inflation target is still haunting him

At a press conference a month or two back, Bank of Japan Governor Haruhiko Kuroda made a link between the end of Qualitative and Quantitative Easing (QQE) and the BoJ achieving its 2% inflation target sometime in 2019. Since then, markets have been wondering if the BoJ was quietly working towards an exit strategy based on this time horizon. Indeed, whilst inflation data were heading higher earlier this year, you could make a case for the BoJ gradually cutting back on its asset purchases, perhaps under cover of similar moves by the ECB to end its QQE purchases by mid-2019. The obvious advantage of such "stealth-unwinding" would be that it would moderate the currency impact on the Japanese yen. 

But whilst the growth data for Japan remains pretty good, the same can't be said of the Eurozone, where 1Q18 delivered a notable soft patch on activity. Moreover, both economies have seen disappointing inflation data recently. So extrapolating from today's run of recent data to less accommodative monetary policy over any sort of reasonable time span is looking very tough for the ECB, and by extension, equally tough for the BoJ. 

So did today's statement change that at all?

What? No inflation target forecast?

With no change to policy and little change to the growth or inflation forecasts, the only thing for markets to focus on was the omission of the forecast that the inflation target (2.0%) would be met sometime around fiscal-year (FY) 2019. 

There are a number of ways you can interpret this. Here are two: 

  1. The BoJ acknowledges the recent softness in inflation, persistent lack of inflation upturn and low probability of meeting its target on the previous timeframe. As a result, the BoJ has dropped it. This would also imply a much lower probability of an end to QQE by mid-2019.  
  2. The BoJ realises the low probability of meeting its 2% target - but also downgrades this as an intermediate target, as the rest of the economy looks in good shape - arguably, this could result in an earlier or unchanged exit strategy for QQE. 2% was always an unrealistic target and dropping the reference merely gets rid of something that was harming credibility.

The ensuing press conference has sought to downplay the significance of this statement change. With the basic message coming out that this was just a "forecast", and not a limit, and that monetary policy was not being determined on a calendar basis, but according to conditions. Together with a downgrading of the balance of risks to the inflation outlook, it looks to us as if there is more truth to scenario 1) than to scenario 2). If so, then we might also expect the JPY to run softer than we have been forecasting.

That said, there is still plenty of ambiguity over this decision, and ongoing problems for the BoJ in meeting its asset purchase targets or maintaining Japanese government bond yields at zero percent. So finding an exit strategy would not be a bad idea. Today's move may be the first in a very long series of changes designed to achieve that.    

China: Revising our yuan forecast

We are revising our yuan forecast to a milder appreciation in 2018 and 2019 because of a weaker business environment and escalating trade and investment tensions

Chinese yuan not as strong as expected

We have been bullish on the yuan, against the backdrop of a strong economy and with business earnings growing at a decent rate. However, this looks to have changed according to recent data (see below). 

Further, escalating tension between China and the US has moved from trade to investment. This could affect business earnings in some sectors negatively. 

The trade tension could also lead to shrinking global trade volumes. This would affect not only China but also the supply chain in Asia to a large extent. Asian currencies, in general, may run much flatter against the dollar, requiring the yuan to also flatten its appreciating path to protect competitiveness.

Silence is golden – the ECB way

A somewhat more cautious ECB plays it safe and buys time the least entertaining way. Crunch time will come in June…or July…or…

Draghi says nothing at all

Very often, even the least informative ECB meetings can at least be entertaining. Today’s ECB meeting, however, set a new milestone in terms of buying time. Unfortunately, in a hardly entertaining way. The unexpected drop in soft and hard data seems to have created new uncertainty at the ECB as regards the future path of monetary policy. It is very hard to believe but according to ECB President Mario Draghi, the ECB did not discuss the monetary policy outlook at all. The most cautious version of buying time, avoiding new speculation and really saying nothing.

The largest part of the ECB’s introductory statement was a verbatim copy of the March statement. Only regarding the economic outlook, Draghi struck a slightly more dovish tone with a subtle change of the wording. According to the ECB, risks to the growth outlook are still “broadly balanced” but contrary to previous meetings, the ECB only mentioned downside risks without the corresponding upside risks. During the Q&A session, Draghi pointed to the fact that the loss of growth momentum was broadly spread across most countries and sectors. However, the main reasons for the downswing were one-off factors.

As regards inflation, Draghi repeated the well-known story of the ECB’s confidence that inflation will converge towards the 2% goal, while at the same time stressing that currently there were very little signs of this actually unfolding.  

The Indian Rupee’s plight is far from over

Expect the rupee's depreciation to nudge the central bank closer to a rate hike but for now, we see USD/INR ending the year at 68.3, higher than our previous forecast of 66.6

The Indian rupee's plight has been underway since mid-2017 but intensified this month after the publication of the US Treasury Currency report. 

Since then, the rupee (INR) has seen a steep fall losing 2.5% of its value against the US dollar to a 13-month low of 66.9, at the time of writing this. We believe its troubles are far from over, as several external and internal factors will continue to expose it to considerable weakness in 2018 and beyond. 

This is why we revise our USD/INR forecast for end-2018 to 68.3 from 66.6.

Belgium: Automation-induced shifts in the labour market

Technological progress is gaining strength. Even though most people see the benefits of this, there is also some concern for the negative effects on the labour market. Automation could make some human labour redundant, leading to higher unemployment. In this study, we investigate if automation has already hit the Belgian job market

A negative relationship

Our new study (read the full study in French or in Dutch) shows that there is already an effect of automation on the Belgian labour market. We looked at job growth of all jobs in Belgium (based on the ISCO classification) over the period 2013-2016 and linked it with the probability of automation of that particular job. The analysis shows that there is indeed a negative relationship.

Job growth was lower for the job categories with a high degree of automation, such as administrative jobs, and higher for job categories that are less automatable, such as managers. On a more disaggregated level, job growth for accountants, a profession that faces high automation risk, was much weaker than growth of jobs with a low probability of automation, such as social workers.

Reading time around about 8 minutes

In Case You Missed It: How much of this surprised you?

US GDP beat expectations, the ECB says nothing at all and the Bank of Japan abandons inflation target timing. We explain why we're revising our yuan and Indian rupee forecast. And if robots are taking over jobs in Belgium, how safe is yours? 

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