Fra ABN Amro:
US consumers down but not out
Retail sales data were weak raising concerns about the US consumer, one of the few bright spots in the global economy
Although consumer spending growth looks to have lost momentum real income growth is still healthy, while confidence is still elevated
We still judge that consumer spending will grow at a decent pace, albeit slowing compared to the buoyant pace we saw for much of last year
We have revised down our eurozone GDP forecast to take it further below consensus on the weakness in exports and capital spending
The ECB looks likely to keep policy easy for even longer
Spanish elections add to European political risk
Chances of a trade truce between the US and China look to be rising
US retail sales fell sharply in December
Perhaps the most important macro report of the last few days was US retail sales, which
was much weaker than expected. Retail sales fell by 1.2% mom in December, the biggest
drop since 2009 (which of course was not a great year for the global economy). Meanwhile, excluding autos and gas, sales were even worse, declining by 1.4%, taking
annualised growth to just 0.6% in Q4, compared to 5.3% in Q3.
Against the background of slowing world trade and global capex spending, this has raised
worries about one of the bright spots in the global economy. Indeed, the resilience and
health of consumers is often used as one of the arguments not to expect recession.
Time to worry about consumers?
So is it time for concern? Let’s start with the data. The first point to make is that retail sales are volatile even on a quarterly basis. As the chart on top right shows, they bounce up and down even at the best of times. Secondly, consumer fundamentals still look good. In the private sector, hourly wage growth is running at 3.2% yoy in January. While, employment continues to grow strongly. Non-farm payrolls were up by 2.1% in the same month. With CPI inflation at 1.6%, that means that real aggregate incomes were up by 3.7% yoy last month.
Meanwhile, consumer confidence is down from its peak, but remains historically high. Finally, household balance sheets look healthy. We do expect consumer spending to slow on a trend basis to average around 2% in the coming quarters. The overall slowdown that we see coming in the economy – driven by weaker investment and exports – should also leave its mark on job growth. In addition, the slowdown in the housing market should lead to less spending related to moving house, such as on furniture.
Indeed, this was visible in December’s retail sales report. Finally, the impact of last year’s interest rates should continue to feed through. However, the positives we outline above should keep consumer spending growing at around a trend pace. Downgrades to eurozone outlook: Turning to Europe, we made downward revisions to our eurozone GDP forecast for this year, with implications for our ECB, bond yield and currency forecasts. We have lowered our GDP growth forecast for 2019 to 0.8% from 1.1% previously, taking us further below consensus forecast (1.4% according to the Bloomberg survey).
Indeed, our projection is for a growth rate less than half of the ECB’s current forecast. The change stems from the recent and ongoing weakness in eurozone and global economic data that suggest the period of weaker economic growth will be more protracted. The weakness in global trade and production looks set to persist as the tightening of global
financial conditions that we saw last year will continue to feed through.
The downturn in eurozone exports is also leading to a slowdown in fixed investment growth. The economy will probably see sub-trend growth rates in the first half of this year, before a return to trend rates in the second half of the year. This is based on the relative resilience of domestic demand combined with an improvement in the global economy. Domestic demand should be underpinned by easy financial conditions, lower headline inflation and some fiscal stimulus.
The improvement in global growth should be supported by the dovish shift by global central banks, which is arresting the tightening of financial conditions. However, central banks have are far from stepping on the gas, so we do not expect a sharp recovery in global growth.
