Eyes on ECB as Q1 GDP contracts at record rate

Emily Nicol
Chris Scicluna

With the Fed having made clear yesterday evening that it has no intention of reining back its policy stimulus for a long time to come, European countries having maintained progress in reducing the flow of new coronavirus cases and edging gradually to the exit from lockdown measures, and investor sentiment buoyed by hopes of a pharmaceutical breakthrough in the treatment of Covid-19, the mood in Asian financial markets remained largely positive today.

Indeed, Asian equity markets chalked up gains across the board. While the BoJ announced amendments to its ETF purchase plans, most notably linking the amount to be purchased to the amount of stock available to buy on the market rather than its total market cap, the Topix closed up 1.0%, while the Nikkei-225 was up more than twice that, overlooking some inevitably weak Japanese production and retail data. Speaking at the Diet, Kuroda also subsequently suggested that a new BoJ liquidity support facility, which would be targeted at sole traders and perhaps other small/micro firms, could be unveiled before the next Policy Board meeting scheduled for June. Elsewhere, China’s stocks were firmer too despite a mixed bag of PMIs. And US stock futures are up too.

But after the record declines reported this morning from a range of euro area member states in terms of GDP and consumer spending (see detail on these and the Japanese and Chinese data below), and a record quarterly loss reported from BBVA too, European stockmarkets have so far registered a mixture of modest gains and losses. And major government bonds are largely firmer ahead of the release of the headline euro area GDP figure, and at lunchtime, the latest policy announcement from the ECB, which seems bound to be dovish even if there is no major new additional stimulus added today.

There were no surprises from the Fed yesterday evening, with the FOMC leaving all its main policy parameters unchanged and committing to keep policy highly accommodative “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Indeed, in flagging the “considerable risks to the economic policy outlook over the medium term”, a very dovish Powell made clear that the fed funds rate target range might well be unlikely to change for a very long time to come, and suggested that “It may well be the case that the economy will need more support from all of us if the recovery is to be a robust one”. The note on the announcement from Daiwa America Chief Economist Mike Moran can be found here.

Having over the past month or so similarly unveiled a wide range of large-scale actions, we think the ECB is likewise unlikely to announce further major policy initiatives today. However, we do expect the ECB to increase the range of assets purchased to include so-called “fallen angels”, to bring it in line with its recent relaxation of collateral rules. And we would expect the Governing Council to reiterate that it is “ready to adjust all of its instruments, as appropriate” to provide additional stimulus if necessary.

Of course, with data highlighting that the deterioration in economic conditions in the euro area has been far more marked than in the US (see below), there is a possibility that the ECB will ease policy in a significant way today. Indeed, given the record spike in demand for business loans to meet emergency liquidity needs, a 25bps reduction in the minimum interest rate on the TLTRO-III loans to -1.00% would be desirable. As it has scope to keep buying assets at the current pace under the PEPP through to October, however, we think it will wait until the summer before it increases the €750bn envelope of the PEPP programme.

Euro area:
The first estimate of euro area GDP in Q1 is out later this morning and is bound to be horrific. We forecast a drop of 4.5%Q/Q, which is more marked than the Bloomberg consensus and would represent the steepest quarterly contraction on record. Indeed, yesterday’s first estimate from Belgium (-3.9%Q/Q, the biggest quarterly drop on the series) has already been followed by some terrible data from France and Spain, reporting far sharper declines in output.

Indeed, French GDP fell 5.8%Q/Q, similarly the biggest quarterly drop on the series which dates back to 1949, to be down 5.4%Y/Y. Household consumption plunged 6.1%Q/Q (with monthly data reporting a record drop in spending on goods of 17.9%M/M in March), while gross fixed investment declined a steeper 11.8%Q/Q. So, final domestic demand subtracted 6.6ppts from GDP growth. Exports fell by a similar amount (–6.5%Q/Q) with imports down 5.9%Q/Q, but net trade still contributed slightly negatively to GDP growth. In contrast, inventories added 0.9ppts. On the production side, tallying with the Belgian picture, construction output fell most sharply, down 12.6%Q/Q. Meanwhile, marketed services (-5.7%Q/Q) and industrial production (-5.8%Q/Q) fell at a similar rate.

Among other member states, Spanish GDP fell 5.2%Q/Q, similarly the worst on the series, to be down 4.1%Y/Y. Austrian GDP dropped a somewhat more moderate 2.5%Q/Q, although that was still more than twice as fast a decline as was recorded in any single quarter during the global financial crisis. Compared to a year earlier, Austrian GDP was down 2.7%Y/Y. But Lithuania, which has so far escaped the worst of the coronavirus, saw its economy get off lightly, with GDP dropping just 0.2%Q/Q to be still up 2.6%Y/Y. We expect the Italian data later this morning to show a contraction in GDP of about 5%Q/Q. And while the German data won’t be published until 15 May, this morning’s retail sales data from Germany reported a drop of 5.6%M/M, matching the sharpest decline on the data, which was recorded in March 1951.

On a busy day for euro area economic releases, the flash estimate of April euro area inflation is also out later and is set to reveal a sharp decline in the headline rate (from 0.7%Y/Y in March) to close to zero for the first time for almost four years as weaker demand and the plunge in the oil price weighed. Core inflation will also fall from 1%Y/Y previously, albeit probably still above ½%Y/Y. At the country level, the French figures were out a little while ago and reported a smaller-than-expected drop of 0.3ppt in the headline rate on the EU-harmonised measure to 0.5%Y/Y. But the equivalent measure from Spain plunged a steep 0.7ppt to -0.7%Y/Y. And Italian inflation will also fall into negative territory when the data are published later. However, data collection problems will reduce the reliability of the published figures – indeed, INSEE reported that prices of 40% of the items in the French consumer price basket had to be imputed due to the inability to observe prices.

Finally, euro area unemployment figures for March are also out later. Despite the success of the various government job protection programmes, which e.g. have already seen more than half of all French private sector workers register for ‘partial unemployment’ wage subsidies, these data are expected to show a jump in the overall unemployment rate last month by 0.4ppt to 7.7%. German labour market figures for April will be published too.

The latest Japanese output and spending data for March were predictably weak, as Covid-19 started to take its toll on demand. Certainly, manufacturing production fell sharply last month, with the 3.7%M/M drop leaving output down more than 5% compared with a year earlier. And in the absence of an odd surge in production of aircraft parts (+37%M/M) the monthly decline would have been steeper. Indeed, the weakness was broad based across the key sectors, with output of capital goods (excluding transportation) down 8%M/M, durable goods production down more than 3½%M/M and construction goods output down almost 5%M/M. And with demand and activity set to have weakened further at the start of Q2 – the value of exports in the first ten days of the month was down 11%Y/Y – we expect a more extreme contraction in manufacturing output in April. Furthermore, the jump in the inventory-shipment balance (8½%M/M) to its highest level since the global financial crisis would have pointed to the need for further declines in output over the coming six months too even if global and domestic demand wasn’t expected to fall off a cliff.

March retail sales figures unsurprisingly flagged weakening domestic demand, with total sales declining (4½%M/M) at the steepest monthly drop on record when excluding the double-digit declines seen in the immediate aftermath of the consumption tax hikes in 1997, 2014 and 2019. And the detail showed significant weakness in sales of non-essential items – i.e. sales of general merchandise fell more than 12%M/M, while clothing sales fell more than 16½%M/M, the most since the series began in 2002. Today’s consumer confidence survey for April further suggested a likely marked deterioration in consumer spending behaviour over the near term too. In particular, the headline sentiment index fell to a series low of 21.6 – well below the trough during the global financial crisis – with households unsurprisingly more downbeat about their employment and income prospects and therefore much less willing to spend on durable items.

The Chinese PMIs provided somewhat mixed messages at the start Q2. The government’s official headline manufacturing index declined 1.2pts to 50.8 in April as the new orders component slipped back. The private sector Caixin manufacturing PMI was even worse, with the headline index dropping back below the key-50 level as new orders continued to contract in the face of weak external demand – indeed, the new export orders PMI more than reversed the 10pt increase seen in March to 33.7, the lowest reading in the survey’s 17-year history. But as the domestic economy returned closer to some form of normality as lockdowns came to end, the government’s services PMI continued to recover in April, rising 0.9pt to 53.2, with a further improvement in the survey’s new orders, employment and business expectations indices. So, overall the government composite PMI rose 0.4pt to 53.4, the firmest reading so far this year.

The main UK data focus today will be the ONS’ bi-weekly business impact of Covid-19 survey, which will provide an update on the two-week period since 5 April.

In the US, the latest weekly jobless claims figures will likely remain alarming – the median forecast on the Bloomberg survey is for initial claims to slow only moderately to about 3.5mn and continuing claims to approach 20mn. In addition, after yesterday’s Q1 GDP report showed a significant fall in private consumption over the first quarter as a whole, the latest monthly personal income and spending figures for March will provide further insight into the initial hit to private consumption at the end of the first quarter. And the Chicago PMI will provide an update on business conditions at the start of Q2.

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