Eurozone industrial production is expected to decline by 1.2% MoM in May after the disappointing figures across key countries published this week. In France (−1.7% MoM), and to some extent in Italy (−1.2% MoM), industrial activity was distorted by the higher-than-usual number of holidays. But besides this technical effect, which might be partially unwound in the coming months, the deterioration in business confidence in France is limiting the potential for a rebound. We have revised downwards our forecast for French GDP growth in Q2, from 0.2% QoQ to 0.1% QoQ, which is underpinned by the still largely positive carry-over effect in consumption in goods. In Germany, where the industrial outcome fell by 1.8% MoM, we revised expectations for growth to 0.2% QoQ for Q2 (from 0.3% QoQ initially). Underlying demand, even though easing somewhat, looks sustained, reflected by business surveys and retail sales. Finally, southern European countries also surprised negatively (Italy: −1.2% MoM; Spain: −0.7% MoM), leading us to revise Q2 GDP forecasts marginally to the downside. All in all, poor industrial production figures in May across the Eurozone mean that there is a downside risk to our forecast for Eurozone growth in Q2 (at 0.3% QoQ currently).
The German ZEW index most likely fell for the seventh month in a row as risk aversion made a remarkable return to financial markets and hard-activity data disappointed massively relative to expectations. Current conditions have remained much more resilient in recent months, reflecting the ongoing shift towards a domestically driven recovery in Germany; but even this sub-component could suffer a setback in the near term.
Final Eurozone inflation data is released on Thursday. We expect the ‘flash’ figures to be confirmed, namely headline inflation at 0.5%YoY (May 0.5%YoY) and the core one at 0.8% (May 0.7% YoY). The positive news is probably that core inflation has more or less stabilised since end-2013, which implies that outright deflation fears are probably over-rated. On the other hand, food inflation is continuing to dive (now at −0.2%YoY), in the wake of very negative inflation in fresh products and probably also for more structural reasons. Energy inflation remained close to zero on a YoY basis, despite the short-lived peak in oil prices. We still see Eurozone inflation close to 0.4–0.5%YoY until end-Q3, on the back of negative base effects in energy, before recovering slightly to 0.7–0.8%YoY by year-end.
UK CPI inflation is likely to bounce back in June from 1.5% YoY to 1.8% YoY (0.1% MoM). The timing of Easter played a key role in the sharp decline last month, pushing down inflation in transport costs. Core inflation is also expected to rise from 1.6% YoY to 1.9% YoY. For the rest of the year, CPI inflation is expected to remain volatile, hitting its lowest level in Q4 at close to 1.3% YoY, as the appreciation of the GBP (+4.2% since the beginning of the year) is likely to continue putting downward pressure on inflation in the coming months. Medium-term expectations for rising income growth as a result of the improvement in the labour market are likely to lift inflation gradually back close to target.
The UK labour market most likely improved further in May. Business surveys have shown no signs of easing growth in employment. Both in the services and industrial sectors, the employment components of PMIs increased significantly in Q2 relative to Q1, suggesting an acceleration of growth in job creation. We therefore expect a further decline in the claimant-count ratio (from 3.2% to 3.1%). The ILO measure of the unemployment rate is also likely to have fallen to 6.5% in the three months to May, hitting its lowest level since 2008. Whether or not the decline in the unemployment rate has started to feed through to wages is a crucial question in terms of prospects for monetary policy. Although surveys suggest that upward pressures have started to build up on wages, it has not been visible yet in real data, most likely depressed by the still low level of productivity. What’s more, productivity might even have worsened recently, as suggested by PMI surveys. Therefore, we expect growth in weekly earnings is likely to have remained weak in May (at 0.9% YoY for regular pay growth, still well below inflation).
