Fra ABN Amro:
Eurozone recession still not most likely, but risks are tilting to the downside
10-year German Bund turned negative
Corporate lending less favorable than it seems
German manufacturing employment shrinks for the first time since the slowdown
ECB will do all it can, but fiscal aid is possible and would be helpful
While Brexit negotiations are come to a deadlock
Reawakening recession fears
On Wednesday, 10-year German debt was auctioned with a negative yield for the first time since the autumn of 2016. The willingness of investors to receive negative yields reflects a flight to safety in assets that are perceived to be “risk free”. This flight for safe haven assets could be driven by a number of developments.
Rising concerns about the ongoing slowdown in Germany and globally, combined with ongoing political uncertainty has moved investors into haven assets already for weeks. Their concerns prove not unjustified. Thursdays release of the manufacturing confidence index from the European Commission (from -0.4 to -1.7), reminded us of the fear that the slowdown may not have bottomed out just yet.
However, other factors play a role as well. Such as investor concerns arising from the latest dovish shift by the Fed last week when it put off any rate hike for the rest of the year. But yields eventually turned negative on Wednesdays auction when Mr. Draghi hinted that the bank’s governing council could tweak its negative interest rate policy to zero in order to limit its impact on banks (see here for our view on hiking rates back to zero).
While we do see risks tilting to the downside – with below consensus GDP growth expectations of 0.8% in 2019 -, we still do not expect a recession in our baseline scenario.
We expect global industrial production to recover somewhat in the second half of this year, which will pull industrial production in the Eurozone along. Another factor of resilience is the service industry. While the forward looking services PMI tend to follow manufacturing PMI, it has shown remarkable resilience since the end of 2018.
Corporate lending sparks could reflect mere volatility
With each economic data point being closely monitored to assess whether the slowdown is coming to a halt, Thursdays hopeful news on bank lending to non-financial businesses might not be more than a month’s data point. In February banks provided loans worth 17 billion euros, a growth of 3,7 % vis-à-vis the same month a year before. The less volatile –
month moving average shows a continuing decline from its peak at 17 bn euro in the
summer of 2018 to 8.6 bn in the last three months.
Moreover underlying country data show that lending growth figures were rather skewed. In Germany and France, non-financial business lending grew around 6% compared to the same month a year earlier, while Italy and Spain, countries that were the main beneficiaries of previous ECB measures for favourable lending conditions (TLTROs), barely saw a lending increase.
Insufficient inflationary pressures
While Eurozone headline inflation for March is coming through on Monday, individual countries’ inflation figures show a mixed picture. Germany is down from 1.7 to at 1.4% (HICP), while others such as Spain or Belgium are up. On aggregate we expect eurozone headline inflation to stay at 1.5% on Monday.