By Philip Marey, senior strategist at Rabobank
Tell us we’re OK
After a temporary step back, the S&P500 shrugged off the bad GDP report and resumed its upward trajectory yesterday. Meanwhile, the 10 year US treasury yield moved sideways after a steep decline upon publication of the report. At the same time, EUR/USD drifted upward.
Yesterday, the BEA confirmed that the US economy has had two consecutive quarters of negative GDP growth, which means a ‘technical recession’ in the first half of this year. After -1.6% growth in the first quarter, the advance estimate for the second quarter is -0.9%. While the contraction of GDP in Q1 was largely caused by net exports (more than 3 ppt contributed), inventories contributed more than 2 ppt to the GDP decline in Q2. However, while personal consumption and business investment grew at a decent pace in Q1, personal consumption slowed down considerably in Q2, business investment came to a standstill, and residential investment saw a steep decline. In other words, domestic demand showed a major slowdown in Q2.
This suggests that underlying momentum in the economy is fading and it is only a matter of time before businesses slow down hiring. At the moment, they are still hiring at a high pace to keep up with excess demand for goods and services, but if this comes down, we are going to see a slowdown in employment growth as well. Eventually, when employment growth turns negative and the unemployment rate rises, the NBER will declare an official recession. For a more detailed analysis, including implications for the Fed, we refer to our report Technical recession.
Before and after the GDP release, the White House spin doctors were working overtime to convince the voters that this is not a recession. Treasury Secretary Janet Yellen told us that “the economy’s deceleration would help the US settle into a more steady state of growth.” Does she mean a negative growth rate? The damage control measures culminated in a bizarre press conference where President Biden asked selected captains of industry to tell him that the US economy was strong.
This morning, a series of European GDP reports were published. Our European economist Maartje Wijffelaars provided the following comments. France GDP grew with 0.5% q/q in Q2. This was a bit better than consensus 0.2% q/q and our own forecast of 0.3% q/q. The growth figure was driven by net exports: exports grew, while imports declined. Export growth merely stemmed from increased services exports, while goods exports contracted. Domestic demand (excluding inventories) was flat, with a contraction in private consumption and positive investment growth. The contribution of changes in inventories was slightly positive (+0.1pp). Meanwhile, production of both goods and services went up, while production in construction contracted. Especially the services sector posted upbeat figures, with accommodation and food services leading the way (+6.7% q/q versus -2.1% q/q in Q1). Production of food products and production of energy contracted.
With GDP growth of 1.1% q/q in Q2, Spain posted a much larger growth figure than expected. Growth was driven by large gains in private consumption (+3.2% q/q) and fixed investment (2.8%). The latter was driven by construction investment, whereas machinery and equipment investments contracted. The former likely at least partly results from government subsidies to make buildings more energy efficient. Furthermore, the positive GDP surprise partly results from a larger than expected boost in activity in recreation sectors and a recovery in production and sales after heavy transport strikes end Q1. Going forward, we remain of the view that the economy will substantially slow down and enter contractionary territory over the course of 22H2, when a boost coming from the tourism sector fades and ultra low consumer confidence and historically high inflation (10.5% in July) squeeze household expenditures.
In Germany, GDP growth slowed down quarter-on-quarter to 0.0% in Q2 from 0.8% in Q1 (upward revision from 0.2%). German Q2 GDP was supported by private and public consumption, while net foreign demand made a negative contribution. Destatis blames the pandemic, interruptions in supply chains and the war in Ukraine. Going forward the outlook for Germany is rather bleak, with both the manufacturing and services PMI in negative territory in July and the energy crisis significantly clouding its industry outlook. We forecast the German economy to enter a recession in the second half of this year.