Economic update: Q2 economic growth looks like it won’t reach 2014 levels
U.S. economic data last week appears to indicate the economy is not yet rebounding from first quarter weakness. Retail sales remain weak, particularly given the benefits to consumers from lower energy prices. Retail sales were flat in April and year-over-year growth slowed further. Coupled with surprising weakness in the preliminary survey of consumer confidence by the University of Michigan, it appears second quarter growth may not accelerate in a similar fashion as we observed last year.
Industrial production slipped for the fifth month in a row, declining 0.3% in April. The retrenchment in mining and oil production appears to be the main driver of declining activity. The recovery in oil prices indicates activity is likely to stabilize over the next quarter or so, which should provide some lift to economic activity. Energy prices are remaining low, still providing a lift to consumer activity. Initially, consumers appear to have increased their savings rate in the face of lower energy costs, but in the second half of the year we would expect some lift to spending, particularly with energy prices remaining lower than a year ago.
First quarter eurozone gross domestic product (GDP) growth rose at the fastest quarterly rate since 2011, rising 0.4%. The improvement in activity was not consistent across the region, with growth in France accelerating, Germany slowing, and Greece slipping back into recession. Despite the start of European Central Bank (ECB) quantitative easing (QE), growth in Europe is likely to remain slow. Greece remains a risk despite avoiding default on the most recent International Monetary Fund (IMF) debt payment. They now have 30 days to resolve their deficit in IMF reserves and have debts due to the ECB in June and July, which outstrip their current liquidity. Ultimately, negotiations with the European Union and ECB will likely require some debt forgiveness for Greece to remain in the eurozone. Any exit would be traumatic to Greece, but would likely see little contagion to global markets.
Economic data for China continues to slow. Year-over-year growth in industrial output and retail sales slowed for the fifth quarter in a row. China has engaged in some modest monetary stimulus, which is likely to arrest the slowing activity. The People’s Bank of China has cut the required reserve ratio twice so far in 2015, and has cut lending rates and liberalized deposit rates to stimulate economic activity. Measures have been modest but are likely to support some stabilization in the rate of growth late this year.
For more information, please go to: https://reserve.usbank.com/insights/market-economic-update.
Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.
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