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German business survey; Italian government crisis; Chinese PMIs


The German IFO survey will shed light on manufacturing activity, the Italian government crisis is likely to come to a head and China’s official Purchasing Managers’ Index (PMI) will probably continue to point to slowing economic growth. 

The Italian government crisis remains in the spotlight. Following Prime Minister Giuseppe Conte’s resignation last week, President of the Republic Sergio Mattarella will hold a second round of talks with the main political parties on Tuesday and Wednesday to assess whether a new government can be formed with the support of an alternative majority in parliament. In recent days, the anti-establishment Five Star Movement and centre-left PD have held behind-the-door discussions about forming a shared government and what the cabinet might look like. Given the history of animosity between the parties, it will be hard to reach an agreement and a coalition government would probably be fragile. But the ball is firmly in Mattarella’s court: if he is not convinced the talks will result in a stable government capable of carrying out key legislation – such as the 2020 budget – he will dissolve parliament and call early elections, which would take place at the end of October at the earliest. Mattarella wants to proceed quickly: last year, negotiations running up to the formation of the last government lasted almost three months. A solution – either in the form of a new coalition government or early elections – should emerge this week. In Europe, national governments are expected to submit their candidates for the next European Commission this week. Candidate interviews will take place in September, followed by a confirmation vote by the European Parliament in October. The political instability in Italy will probably limit its ability to influence the process. In Germany, the IFO business survey is expected to mirror the PMI and edge up slightly to 96. The index has deteriorated sharply since the middle of last year and came in at 95.7 last month, the lowest since December 2012 and well below the long-term average of 98. Across the Atlantic, the US reports durable-goods figures. Core-capital-goods orders (excluding defence and aircrafts) expanded by a solid 1.5% month-on-month in June, although this did not prevent the measure from contracting by 0.5% on an annualised basis over the whole second quarter. Manufacturing surveys suggest orders will continue to trend down over the short term, while consensus estimates expect a modest 0.1% month-on-month increase in July.

The US and Chinese trade teams are scheduled to speak over the phone, just a few days before the US is set to impose a new 10% tariff on almost $150bn-worth of Chinese goods (after delaying levies on a similar amount until December). There is a chance that the tariff may be delayed, although this is unlikely – the US does not want to give the impression that it is capitulating, while China seems reluctant to make concessions at this stage. Meanwhile, China will report industrial profits. Looking beyond volatility around the Chinese New Year, industrial-profit growth has fallen over the past year. Profits shrank by 3.1% year-on-year in June, the worst result since December 2015 and far below the 27.7% year-on-year growth recorded in September 2017. The trade war is probably behind this and is likely to continue to weigh on profits going forward. Meanwhile, the US Conference Board will report consumer confidence. The index has been at elevated levels during the first half of this year, reflecting the strong labour market. Consensus estimates expect confidence to edge down slightly from 135.7 in July to 130 in August. Separately, US house-price inflation should continue to moderate in both June and the second quarter. The main measures all point to lower inflation this year – the S&P/Case-Shiller index expanded by 3.4% year-on-year in May, down from 6.8% a year earlier. But according to the Federal Housing Finance Agency measure, the slowdown has been less severe and house-price inflation is still running at 5%.

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The eurozone reports M3 money and lending data. Bank lending to the private sector has been broadly stable since the middle of last year, growing at about 3% year-on-year. But the headline number masks marked differences across countries: lending growth has been solid in Germany and France, while it has run in negative territory in Italy and Spain.

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The eurozone releases it Economic Sentiment Index (ESI). The measure has trended down since the start of last year, highlighting deteriorating economic conditions across the bloc. The ESI came in at 102.7 in July, which was the lowest result since March 2016. The slowdown has mostly been driven by the cyclically sensitive manufacturing sector, while the services industry has held up better. Recent PMI surveys suggest the ESI will tentatively stabilise in August. In Brazil, GDP is expected to expand by 0.2% quarter-on-quarter in Q2, largely reversing the 0.2% contraction in Q1. Consensus estimates expect the economy will grow by 0.9% over the whole year, down from 1.1% in both 2018 and 2017. Growth has been painfully slow since the oil-related recession of 2015-16. If the much-anticipated pension reform is passed, there will probably be a greater chance that Brazil will be able to keep its public debt at sustainable levels. In turn, this should support business confidence. But there is a sense that the current administration has under-delivered, meaning the boost is likely to be limited. Meanwhile, the US trade deficit for goods should come in at $74bn in July, in line with the June reading. The overall deficit widened to $651bn in the 12 months to June, the highest reading since early 2009. This reflects a $900bn deficit in goods and a $250bn surplus in services.

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South Korea reports industrial production, which has been weak this year and is likely to remain subdued in the short term. Persistent trade tensions – particularly with Japan – have weighed down production, which contracted by 1.5% year-on-year over the first half of 2019. In the UK, GfK will release its consumer-sentiment index and Lloyds will publish its Business Barometer. The measures will probably continue to show a dichotomy between consumer confidence, which has been buoyed by the strong labour market, and business, which has been weighed down by Brexit and trade-related worries. Consensus estimates expect the GfK index to edge up from -11 in July to -10 in August, moving closer to its long-term average of -9. But the Lloyd’s Business Barometer is likely to be relatively unchanged at 13, which is well below the long-term average of 31. Meanwhile, Japan reports a raft of economic indicators for July. The unemployment rate should stay at 2.3%, the best result since the early 1990s, while industrial production is likely to expand by 0.4% month-on-month, after increasing by 0.7% in the second quarter and falling by 2.5% in Q1. Finally, retail sales should shrink by 0.6% month-on-month, after growing by 0.4% quarter-on-quarter in Q2. In South Korea, consensus estimates expect the central bank to keep interest rates on hold at 1.5%, following a 25bp rate cut in July. But a few forecasters think the central bank may cut rates again in response to the uncertain economic backdrop. The economy bounced back in the second quarter, after contracting in Q1. But industrial-production growth is still sluggish and trade-related downside risks prevail, while inflation is well below the 2% target. Elsewhere, the eurozone will report both labour-market and inflation data. The unemployment rate is likely to be unchanged at 7.5%, which is the lowest since June 2008, while inflation – as measured by the Harmonised Index of Consumer Prices – will probably also stay the same at 1%. But this masks some underlying crosscurrents – core inflation will probably edge up from 0.9% to 1%, while gasoline prices (which fell by about 1% over the month) should exert some downward pressure. Inflation is currently running at half the European Central Bank’s target and is likely to remain subdued in the coming months. Meanwhile, Canadian GDP is likely to grow by an annualised 2.9% quarter-on-quarter in Q2, after expanding by 0.4% in the first quarter. High-frequency data suggest that the economy should reaccelerate in the second quarter, following a pronounced slowdown over the previous two quarters. But the pick-up may prove temporary, as trade-related uncertainty and oil prices still pose downside risks going forward. Across the border, the US reports personal consumption expenditures (PCE) inflation. Recent readings of consumer-price and producer-price inflation suggest that the core PCE deflator – the Federal Reserve’s (Fed's) favourite gauge of underlying inflation – will be unchanged at 1.6% in July, still below the Fed’s 2% target.

The Chinese National Bureau of Statistics releases its PMI. The official composite PMI was little changed at 53.1 in July (a reading above 50 indicates that activity is expanding). This is consistent with moderating economic growth – the PMI has averaged 53.2 so far this year, down from 53.7 in 2018 and 54.3 in 2017. Consensus estimates expect the manufacturing index to edge down from 49.7 to 49.6 – trade-related uncertainty has weighed heavily on industry, while the services sector has performed better.

Germany holds state elections in Saxony and Brandenburg. According to polls, the traditional Christian Democratic Union and Social Democrats have continued to lose ground to anti-establishment parties like the far-right Alternative for Germany. If local elections confirm this trend, Merkel’s already-fragile coalition government could weaken further. Elsewhere, as part of a two-stage process, the US will impose a new 10% tariff on about $135bn-worth of Chinese imports. The second stage, which covers $165bn-worth of Chinese goods, is scheduled for mid-December. 


Mixed messages from preliminary South Korean trade data 

Source: Refinitiv, as at August 2019.

South Korean trade data for the first 20 days of August – one of the earliest available monthly indicators of global trade trends – showed a tentative improvement in imports, but persistent weakness in exports. Surveys have given off a downbeat message recently: the export-orders component of the global manufacturing PMI survey fell to 48.3 in July, the lowest since October 2012 and consistent with further deterioration in the coming months. Global trade looks in ill-health – it stagnated in May and recorded the worst result since 2009. The outlook remains challenging, with trade tensions – particularly between the US and China – likely here to stay.


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