Despite a disappointing end to Q2, with output down 0.6% on the month, Eurozone industry still had one of its strongest rates of quarterly growth since 2010. Given that June’s numbers were affected by distortions from some countries –most notably in Germany –we think the underlying health of the industrial sector remains strong heading into H2.
One of the Eurozone economy’s puzzles is how wage growth has remained remarkably subdued despite an almost record number of new jobs created during the current upturn. Our analysis of several employment metrics suggests that this weakness is temporary and that from next year the region’s workers will finally receive bigger pay rises. That’s also good news for the ECB.
The recovery has driven down the unemployment rate to an eight-year low of 9.1%. However, despite this apparent tightening of the labour market, wage growth has been languishing at 1.3% on average in recent years –half of what it was pre-crisis. That has also restrained core inflation, troubling the European Central Bank.
The problem is that traditional metrics have been overstating the strength of the labour market recovery and mask that employers are grappling with a skills mismatch. Our analysis shows that the job finding rate (the rate of which the unemployed transition into employment) is a more accurate gauge of labour market slack than the unemployment rate.
In particular, we show that the unemployment rate has overstated the pace of the labour market recovery since mid-2015, preceding the current apparent breakdown in the Phillips curve,the work-horse model for relating economic slack to core inflation, and also one of the ECB’s main forecasting tools.
Notably, it now takes roughly twice the number of vacancies to achieve the unemployment rate of a decade ago.
Still, the job finding rate has been improving with the economic cycle, which suggests depressed wage growth (and thus core inflation) will not be a permanent feature of this recovery. As the labour market continues to tighten, wages should rise faster from next year. This is also in-line with our forecast for a gradual reduction in ECB asset purchases and policy normalisation.
Growth momentum slowed in July on weaker exports and significantly weaker real estate activity. Housing sales was flat on a year ago and housing starts moving into negative territory, on that basis.
The soft numbers underscore that, despite the strong H1, China’s economic growth is on course to cool in H2; on less accommodative monetary policy and slower growth in real estate. The expected slowdown in China’s economy and imports will make it more difficult for the global economy and global trade to continue to gather pace.
GDP grew 1% q/q in Q2, exceeding expectations. Growth was underpinned by a broad-based acceleration in domestic demand, which more than offset the small contraction from net exports in the quarter.
The strong Q2 GDP outcome points to some upside to our current 2017 GDP growth forecast. However, we do not expect this to impact the BoJ's monetary policy stance. Inflation remains stubbornly low and despite tight labour market conditions, we expect wage growth to fall short of that needed to boost inflation to the BoJ's 2% inflation target.
We retain our forecasts for GDP growth at -1.4% in 2017 and 1.3% in 2018, largely reflecting our expectation for further cuts in oil output as the Saudi-led coalition seeks to balance global markets in the year ahead. With oil output then likely to rebound, we forecast GDP growth will recover to 4-5% a year in 2019-20. With the government likely to absorb most of the fiscal cost of lower output into a higher deficit, we expect the non-oil sector to be more stable, gradually gathering momentum through the coming years.
Canada’s economy continues its string of very strong activity readings, with real GDP rising 0.6% on the month in May. The increase was driven in large part by a very strong gain in energy activity though momentum in the non-energy sector remained solid. We estimate that real GDP grew at an annualized pace of 3.7% in Q2; if this turns out to be the case, Canada will have been the fastest-growing economy in the G7 during the first half of 2017.