For some time there has been a very large gap between the euro economic surprise index and the US economic surprise index. This reflects the euro area data consistently beating expectations in early 2015 whereas the opposite has been the case in the US where data have disappointed. However, the surprise gap has started to narrow and we expect this trend to continue over the coming months.
In the case of the euro area, we have already seen the surprise index come down this week as data on German ZEW, euro consumer confidence and Euro Flash PMI undershot expectations, breaking the long string of upward surprises. We see two factors behind this. First, expectations have been raised for economic data making it harder to beat. Second, euro area surveys have now reached quite high levels making it harder to deliver further increases, especially as GDP growth probably peaked in Q1 when the economic tailwind was at its maximum.
The positive growth impulse of the substantial oil price decline was greatest in Q1 and is fading from here as oil prices (in euro) have now reversed half of their decline. The Brent oil price dropped from EUR80/barrel last summer to EUR40/barrel in January. It has since increased to EUR60/barrel. This is likely to dampen private consumption growth in coming quarters from the current elevated levels. While we still expect robust growth in the euro area driven by substantial euro weakness, low bond yields, easing credit and recovery in US and China, we believe the majority of upward surprises on the euro data front is now behind us.
We still look for upward revisions to consensus euro area growth, but mainly because this tends to lack surprises. When it comes to the US we look for the surprise index to climb higher from the very negative levels currently. While it was to some extent expected by us that US manufacturing would face headwinds in Q1 from the stronger USD and the hit to the energy sector, the real disappointment has been in private consumption.
Consumers failed to raise spending in Q1 in response to the decline in gasoline prices, robust employment growth and continued significant wealth gains. However, we believe this consumer softness is temporary due to: (1) pay-back from very high spending last year, (2) negative effects from unusually bad weather over the winter and (3) the above-mentioned strong consumer fundamentals. Looking ahead we expect consumption growth to rise, driving a US recovery in the coming quarters and delivering fewer negative data surprises. Closing of the surprise gap to have impact on financial markets As the surprise gap closes this should give more impetus to a lower EUR/USD. A gradual strengthening of US data would raise expectations of Fed lift-off in September – 3-4 months earlier than the market is currently pricing in.
