Week Ahead & in Review: OECD pessimistic about Europe

Week in Review: The November 2014 OECD Economic Outlook anticipates a bleak scenario for Europe and Japan. The OECD forecasts world growth to rise from 3.3% this year to 3.7% in 2015 and 3.9% in 2016, but in Europe, the forecast is a for a meager 1.1% in 2015 and 1.7% in 2016. The US is seen growing at close to 3% in both years. While acknowledging the positive impact lower oil prices have on demand,  the OECD is concerned, particularly in the case of the euro area, about the negative effects of financial instability, the still stretched balance sheets of households and banks and low confidence. As a result, the OECD recommends, together with further structural reform, that fiscal policies and monetary policies be as accommodating as possible in the euro area.

The European Sentiment Indicator remained broadly stable in the Euro area in November edging up to 100.8, in line with its long term average. The downward trend that developed over the summer now appears to have halted. The headline figure reflects very different situations across sectors and countries. At the sector level, confidence improved in industry and retail trade, remained flat in services and worsened in construction and among consumers. Looking at country developments, the ESI increased in France (+1.5) and Spain (+0.9), remained virtually unchanged in the Netherlands (+0.1) and decreased in Germany (-0.7) and Italy (-1.5). The persistent downward trend in German confidence over the last seven months  (with the exception of October), is worrisome inasmuch as it indicates that Euro area’s growth engine is slowing down. In Portugal, the ESI fell close to one point, due to a deterioration in confidence in services and construction.

Inflation in the euro area fell further in the euro area from 0.4% in October to 0.3% in November. The decline was mostly down to energy prices while core inflation (excluding energy and unprocessed food) remained stable at 0.7%. Nevertheless inflation expectations remain very subdued and core inflation is very far from the ECB target of close to 2%.

In Portugal, the unemployment rate rose to 13.5% in October after 13.3% in August and in September, according to the Portuguese Statistics Office INE. The number of unemployed rose 5.5 thousand in November. Still, the unemployment rate is 2 p.p below the rate one year ago. The data is now available monthly but does not include information on registered unemployment that was used by  Eurostat to estimate monthly numbers for Portugal. According to Eurostat, the unemployment rate rose to 13.4%.

Portuguese GDP growth was upwardly revised in Q3 to 0.3%qoq, 0.1 p.p. higher than the initial estimate. The main driver was private consumption, up 1.3%qoq while investment was also up a respectable 2.2%. On the external front, a small 0.7%qoq rise in exports was more than offset by a large rise in imports, up 2.7%. This means that the contribution from net exports to growth was negative. Overall, the composition of GDP is rather positive, particularly the investment component, as it suggests that weakness over the spring was temporary. Nevertheless, we remain concerned that part of the rise in consumption may be due to civil servants getting back some of the wage cuts that had been applied.

Week ahead: The ECB will hold a rate-setting meeting next week. Expect further news on quantitative easing to come in the New Year

  • Thursday 4 December: ECB rate-setting meeting: expect lots of talk about next steps in quantitative easing
  • Friday 5 December:
    • All important Non-Farm Payrolls in the US: markets expect a 225 thousand rise
    • Factory orders in Germany: as recent data has shown a significant slowdown in Germany, there should be lots of interest on results from the German manufacturing sector.