Raymond Van Der Putten
BNP Paribas
Economic growth is picking up after a temporary dip in April. Current business conditions improved further in June and the diffusion indices for the outlook remain well oriented. It will make it easier to implement the second consumption tax hike from 8% to 10% planned for October 2015.
The Economy Watchers are shrugging off the effects of the consumption tax hike in April. The economy contracted sharply in April, but this should only be temporary. In June, the overall index for current conditions improved to 47.1 from 45.1 in the previous month.
The corporate activity related diffusion index was again above 50, after a dip in May. It indicates that production and order receipts have strengthened again. The household activity related index rose for the second consecutive time. Nevertheless, enterprises report that household spending have remained sluggish following the tax hike in April.
The employment index weakened slightly to 57.9, but remained well above the 50 mark, implying that temp agencies and job advertisement papers have seen an increase in job offers. As the Economic Watchers data are not seasonally adjusted this might be partly due to the recruitment of seasonal workers and of new graduates.
The economy watchers expect business conditions to improve further in the coming months, the diffusion indices for future conditions all being above the 50.
However, the Cabinet Office’s business conditions indices point to a less rosy picture. The coincident indicator stabilised in May at 111.1, while the leading indicator weakened for the second consecutive month to 117.1. The Cabinet Office maintained its assessment that the economy is weakening.
The reason for the deterioration of the leading indicator is the increase in inventories of finished goods in the manufacturing sector and the continuing decline in housing starts. The latter was boosted in previous month by the VAT hike. On the other hand, sales in small businesses showed signs of improving after the sharp fall in April. This is also confirmed by the Economy Watchers.
All in all, the economy is recovering well after the tax hike. That is positive news for the government and makes it easier to implement the second hike from 8% to 10% planned for October 2015. Nevertheless, the sluggish world recovery is weighing on the economy, in particular on the manufacturing sector. We expect the economy to grow by around 1.5% q/q annualised rate in the second half of 2014, supported by easy fiscal and monetary policies.
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