Housing starts slipped 0.8% in August to a SAAR of 1.180 million. The impact of Hurricane Harvey on housing starts was limited, although Harvey had a bigger impact on housing completions. Building permits increased due to a 19.6% spike in multi-family permits, suggesting there is still some momentum in the multi-family sector.
Angela Merkel is virtually guaranteed a fourth term in office after Sunday’s election. The question now is whether the complacent and dull election campaign is a taste of what’s in store for the next four years and we are pretty sure it is. Our analysis shows that even the promised tax cuts and some spending increases – about 0.5% of GDP – are likely to lack impact and focus.
Merkel’s CDU is unlikely to command an absolute majority and for now we have few indications who the preferred coalition partner is. Another grand coalition with the Social Democrats (SPD) is quite possible. But none of the possible coalitions would suggest ground-breaking change. Voters are mostly concerned about immigrants and integration, but the mainstream parties offer little policy differentiation on these.
Germany has plenty of long-term challenges that need addressing, including a demographic time bomb and European integration. The fact that the economy is in excellent shape though makes it easy enough for politicians to avoid addressing them for now. Instead, they have opted for popular quick fixes which a healthy surplus allows them to do. Most mainstream parties are dangling the carrot of lowering income tax and higher spending.
This will give the German economy a moderate fiscal boost (which cyclically it doesn’t even need) and provides some modest upside risks to our private consumption forecast for 2018. But coupled with a closed output gap and labour shortages, this is more likely to raise price pressure and increase imports than significantly benefit the domestic economy. Lower fiscal surpluses and more imports might shush some of the international criticism of German economic policy.
The pressure on China’s FX reserves has eased considerably since the start of this year, underpinned by a reduction in financial outflows and a globally weaker US$, which has taken the pressure off the CNY and boosted the value of non-dollar reserve assets.
In our baseline scenario, with the US$ remaining weak globally, we now expect the CNY/US$ rate to strengthen somewhat further to 6.5 (from 6.6 previously) by end-2017 and to continue appreciating modestly in 2018. We do not expect a material relaxation of the policy stance on outflows any time soon, given still sizeable net financial capital outflows. In all, we expect FX reserves to remain broadly constant over the coming 6-9 months.
The increase of the ZEW index along with the earlier Sentix indicator sets an encouraging tone for the September round of sentiment data. They suggest the upcoming composite PMI might have inched up after recent declines from cyclical highs and despite the appreciation of the euro. Overall, it appears that the #Euroboom has more room to run even if growth looks likely to moderate from the high levels in the first half of 2017.
Easing concerns over the cyclical position of the Eurozone could help to focus policy makers’minds on more structural issues. After the upcoming federal election in Germany on Sunday, discussions of further steps to integrate the Eurozone are set to pick up. Although there are plenty of other areas where structural reforms would be welcome as a new ECB analysis shows.
The French economy continues to make steady progress in a self-sustaining phase of the growth cycle. After Q2 GDP growth of 0.5%, current surveys and initial hard data for Q3 point to another 0.5% expansion, which would be the fourth quarter in a row. Nonetheless, following downward revisions to historical data, we have revised our 2017 GDP growth forecast down to 1.7%. But, as industry and services continue to see rising capacity pressures, investment is likely to expand further. Meanwhile, household spending should accelerate on the back of a renewed drop in inflation and further rises in employment.
We look for the FOMC to announce on Wednesday that it will commence its balance sheet reduction plan next month. The announcement and implementation of balance sheet reduction should not lead to a sharp rise in long-term interest rates since it has been well telegraphed.
We do not expect the FOMC to change the fed funds target range of 1% - 1.25%. In fact, we anticipate that Fed officials will forgo any additional interest rate hikes this year due to low inflation readings, notwithstanding the latest August CPI reading.
A key focus will be on the FOMC's view of recent inflation readings and its degree of conviction about whether inflation will hit the 2% target over the medium-term. This in turn will underpin the committee's decision about raising rates further this year and the pace of rate increases next year.
While many on the FOMC continue to assert that the slowing in the pace of inflation is due to "idiosyncratic factors", notable doves on the FOMC have raised concerns that inflation may continue to undershoot the 2% target. Despite the recent jump in the August CPI reading, we look for inflation to remain below its target through 2018.