The flow of economic data in4Q 2012 will continue to point to widespread weakness.….
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Prospects for the euro area have improved significantly thanks to developments at the institutional level in the past two months, and in particular to the ECB’s commitment to step up its role in managing the crisis. However, real data will continue for a while to be affected by uncertainty and high market volatility, as was the case between the late Spring and early Summer of this year. It should also be considered that the partial easing of pressures on financial conditions, if confirmed, will pass through to the real economy with a lag, and in any case will be hindered by the deep fiscal consolidation process in almost all member states. Therefore, out estimates for 2H 2012 continue to point to a slight contraction in GDP (-0.3% q/q in 3Q and -0.04% in 4Q). Confidence surveys, which are the first indicators available to draw a picture of economic conditions and to incorporate the effects of market changes, confirm our view in September. The euro area ZEW index recovered significantly (+17, around half a standard deviation), while staying well below the long-term average, but the current views component worsened for Europe and Germany. The composite PMI dropped surprisingly to 45.9, from 46.3 previously, as opposed to expectations for a recovery to 46.6.
This month’s decline, however, is entirely ascribable to France, where the services index plunged to 46.1 from 49.2, balanced only in part by the German index’s return to 50.6 (+2.3 points). The picture is even more worrying for French manufacturing, with a slide of the production index to 42.6 from 46. Therefore, economic data confirm that the slowdown in activity will be contained in Germany and for the euro area as a whole, while signalling that the French cycle may have weakened during the Summer, after proving more resilient than expected in the opening months of the year. The outlook for domestic demand remains rather bleak, as indicated by the preliminary estimate of the households’ confidence index, which surprised the market by dropping even deeper into negative territory in September.
In the United States, growth is persistently unable to accelerate beyond a very modest average rate of 2%. The Summer data did not change the overall picture of weak growth, just sufficient to keep the most sluggish recovery since the post-WWII on track. In 4Q 2012 as well, growth will fail to exceed 2%, leaving monthly job creation around 120k, a level insufficient to push unemployment below 8%. In 4Q, weak growth will hide mixed performances among the components of aggregate demand. Residential investments will be the only structural positive factor in a markedly diverse picture of growth by sector. Residential construction has clearly turned around. All indicators are on the rise: builders’ confidence is at its highest since June 2006, home prices, and the sales of new and existing homes are increasing, housing starts are gradually picking up from the historical lows hit in 2009-11, interest rates on mortgages have started to drop again. The average contribution of residential investments to growth since the end of 2011 has been 0.3pp: we expect this trend to continue. Another positive factor in 4Q should be public spending: this will be a surprising development, as the item has been contributing negatively to growth since mid-2010.
Congress has approved the appropriation bills for the next quarter, which includes, for the first time in many quarters, an increase in expenditure compared to the previous period (around 19 billion dollars). The decision is explained by the run-up to the elections, and is obviously temporary. We forecast a significant increase in fiscal tightening in 2013. However, data-wise the most important feature in 4Q 2012 will probably be a flow of weak indicators for non-residential investments: business confidence is on the decline, and activity in the manufacturing sector is stagnating or contracting. Business orders and shipments are being hindered by fears tied to the fiscal cliff, and by fiscal uncertainties for 2013: that will keep numbers weak, or even negative, at least for a couple of quarters. In this context, consumption will remain weak, compressed by employment levels that are failing to take off, and by the need to cut debt. A further deterrent is the prospect of a drastic rise in taxes in 2013. On the whole, therefore, economic data due from the United States will stay weak, with the exception of the real estate sector.
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