April monthly survey data were mixed, and taken together represent a setback compared to the previous month……..
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Intesa Sanpaolo – Research Department For professional investors and advisers only
The main issues are the reacceleration of the US economy, after a disappointing opening quarter of the year, and the stabilisation of the emerging economies (which seems to be under way, but needs to be confirmed). In the background, uncertainty generated by the referendum on the United Kingdom’s EU membership, which has already reaped negative effects on business confidence in the country, is also mounting. Voting intention polls are still assigning a dangerously high share of the vote to the “leave” camp.
– The round of April survey data outlined a retreat of the global manufacturing PMI to February levels, to just above the expansion threshold and just under the average since 2007. The decline was sharper in the emerging economies (where indices deteriorated almost across the board) than in the advanced countries. Among the latter, the situation is very mixed: the United States, Japan and the United Kingdom suffered modest declines, balanced in part by improvements in the euro area and Canada. In the services sector, on the other hand, the index remained stable in the euro area, worsened in Japan and in the United Kingdom, and improved in the United States.
– As for the euro area, Q1 GDP growth was stronger than expected, and the confidence surveys carried out in April agree in outlining an improvement in the month after the deterioration recorded between January and March, although data referred to just a single month should be treated with caution. On the other hand, data do point out a much sharper slowdown in the United Kingdom compared to the euro area in terms of new business, a trend which involves manufacturing and services alike, and which continued in April. The number of data releases which fell short of expectations also outlined a clear deterioration since mid-April in the United Kingdom, while remaining stable in the euro area. The deterioration of the economic situation in the United Kingdom is laid bare by both Markit PMI surveys and by the European Commission’s monthly survey. Therefore, evidence is starting to materialise on the adverse effects on economic activity of uncertainty caused by the referendum on the UK’s European Union membership. Furthermore, expectations that in the event of Brexit the pound would undergo a sharp depreciation are probably already having repercussions on the behaviour of investors and businesses, and on capital flows. Already at the April meeting, the Bank of England’s Monetary Policy Committee had warned of a slowdown of growth in the first half of the year as a result of uncertainty over the outcome of the referendum.
– For the time being, the markets are only partially pricing in a Brexit scenario, as survey data are still awarding a slight lead to the pro-EU camp, and the bookmakers seem convinced that the United Kingdom will remain in the European Union. However, broken down voting intention poll data advise great caution: the “remain” campaign seems not to be gaining momentum, and in fact seems to be losing ground. Also, the demographics of “leave” supporters (mostly middle-aged or old electors, who live in England and not in London) indicate a stronger chance of voting intentions translating into actual votes than is the case for the “remain” campaign. Nor does the progress made by UKIP and the Conservatives at the recent local elections seem to bode well in view of the referendum.
– The uncertain trend of global economic data, and the run-up to the UK referendum may explain in part the resurgence of risk aversion observed in the past week, after a couple of favourable months. There were multiple symptoms: global stock indices on the decline, drop in oil prices, lower yields on government bonds with the highest credit ratings, wider sovereign spreads and higher volatility. As regards growth, the main themes are the stabilisation of the emerging economies (which seems to be under way, but needs to be confirmed) and the reacceleration of the US economy, which once again posted a very weak opening quarter. In both cases, no single release next week will be able to provide decisive answers.
Appendix
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