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Europe. China and Asian emerging countries have already seen the trend reversal. Germany and the US are now following suit. Both will see positive GDP growth again in the current quarter. The rest of Europe is, however, still lagging behind. But here too, the worst is already behind us. And at the turn of the year, we expect growth again for the whole of Europe. The (global) recovery will, however, be moderate and pretty bumpy.
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Italy. When the GDP numbers are released this coming Friday, it should be apparent that the recession in Italy already moderated considerably in the second quarter. Nevertheless, GDP growth was probably still clearly in negative territory at -0.5%. The weak spot remains investment activity (see chart). While the rising leading and sentiment indicators argue for further relative improvement, the still low levels do, however, indicate it will be towards the end of the year before the recession draws to a close (pages 2-3).
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United Kingdom. The second quarter was a disappointment. More had been expected of, above all, the UK services sector. But the downturn has already slowed appreciably here as well. As in Italy, however, we do not expect the trend reversal until the turn of the year. It is, therefore, quite possible that after the summer recess the Bank of England will step up to the plate once again in regard to quantitative easing (pages 4-5).
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Further topics:
–Germany: The "jobless" upswing (page 6).
–Data outlook: Industrial production in Europe stabilizes; US purchasing managers more confident again (page 8).
–Market outlook: Govies and FX markets waiting for US non-farm payroll data next Friday (page 17).
Italy: good news before the summer break
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Momentum in Italy’s industrial activity is showing signs of stabilization, paving the way for an easing in the pace of recession. We see GDP dropping 0.5% qoq in 2Q (vs. -2.6% in 1Q), with some downside risks.
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Investment likely remained a weak spot, while a rebound in durable goods spending should push consumption into (moderately) positive territory. The drop in exports is not over yet, but net trade probably added to GDP growth.
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Though still at depressed levels, forward-looking indicators hold on a rising trend and it’s likely that inventories will start to contribute positively to overall GDP sometime in 2H 2009. Accordingly, the improvement in growth momentum should carry over into 3Q.
Economic activity recovers from the lows
Over the last month, hard data have confirmed that the pace of recession eased significantly in 2Q. First and most important, May industrial production surprised on the upside and remained flat vs. April. For the first time since the Lehman crisis – which marked the beginning of a clear phase of “undershooting” – industrial production data seem to be reverting toward the fair value of our survey-based models. For the second quarter, these models point to an industrial production drop in the 3% area. The May industrial production outcome is encouraging because it comes after a sizeable 1.2% increase in April, hinting that momentum in industrial activity is showing signs of stabilization.
Another positive piece of information came from car registration, which in June showed further signs of improvement rising 12.4% yoy vs. -8.6% in May, mostly on government incentives. In seasonally adjusted terms, this implies an 18% qoq gain in 2Q, following a 7.5% drop in 1Q. If we take into account also a rise in the services PMI to an average of 42.5 in 2Q (from 39.3 in the previous quarter), our GDP model shows that our forecast for a 0.5% qoq contraction remains on track, though the algorithm flags some downside risks to this projection.
Whatever the actual GDP outcome – ISTAT will release the preliminary estimate on August 7 – the fact that the most forwardlooking indicators hold on an upward trajectory signals that the improvement in growth momentum will likely carry over into 3Q. A further easing in the intensity of the recession is therefore to be expected in the current quarter. Taking at face value the OECD leading indicator – up in May for the fifth straight month – underpins this.
Consumption improves, capex still under pressure
Let’s now take a look at the expected evolution of the main expenditure components in 2Q. As far as household consumption is concerned, following a 4% annualized contraction between 4Q 2008 and 1Q 2009, we expect a resumption of marginally positive growth, driven by a strong rebound in durable goods spending. Consumption ex-durables is likely to remain subdued, though signs of improvement are emerging also on this front. First of all, the Bloomberg retail PMI, which tracks quite well this aggregate, gained further ground in 2Q, rising to 46.8 vs. 39.6; second, production of non-durable goods seems set to record positive growth in 2Q after four consecutive quarters of contraction. We suspect that tumbling inflation plays a key role in explaining signs of recovery in consumption ex-durables.
After having contracted by 5.0% qoq in 1Q 2009, fixed investment should have shrunk further in 2Q, though at a slower pace. The steep drop in investment goods production continues, and this suggests that capex remained under considerable pressure. However, we see room for a better performance of construction investment, which should have benefited from improved weather conditions: in any case, the rebound we have penciled in is mostly technical and is unlikely to mark the beginning of an expansionary phase. The trend in construction investment remains downwards.
Trade balance data, which are available up to May, show a 4.2% decline in nominal exports and a 7.5% fall in imports in the first two months of 2Q vs. 1Q. This suggests that the drop in real exports was much smaller than the -11.8% qoq recorded in Q1, and that net exports contributed positively to growth after having subtracted 0.6pp in 1Q09 and a cumulative 1.5pp since 3Q08. Moreover, although it is too early to say whether a trend reversal is in sight, a 0.2% mom gain in foreign industrial orders in May adds to signs of stabilization. Note that the improvement in exports had already been flagged by manufacturing surveys: for instance, the foreign orders component of the ISAE survey recovered from its record low hit in March at -69 and was up to -61 in June (long-term average: -19). This is not surprising, as signs of improvement in the global cycle have become increasingly clear and widespread.
De-stocking probably continued, but the tide is turning
On top of this, we assume that the process of stock depletion that started in 1Q continued also in the second quarter. The inventory sub-index of the manufacturing PMI points to significant de-stocking throughout the quarter, and a similar message is conveyed also by the ISAE survey. If we are correct on 2Q, following two quarters of inventory depletion and increasing evidence that the world economic cycle has turned, we have good reason to think that inventories may start delivering a positive contribution to overall GDP in 2H09.
However, even if this were to be the case, in our view it would not be correct to speak about a genuine process of re-stocking. In our forecasts, we assume that inventories will only be brought more in line with the (still subdued) level of demand, after production “overreacted” to the shock that hit the global economy following the Lehman bankruptcy.
