Economic Outlook – November 2016

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As suggested by the business confidence surveys, third-quarter Eurozone growth did not falter as a result of Brexit. It even accelerated slightly, moving from 1.2% on an annualised quarterly basis in the second quarter to 1.4% according to Eurostat flash estimates (Eurostat do not provide details in flash estimates). Judging by the bounce in the Eurozone composite PMI index, which rose from 52.6 to 53.3, the economic recovery looks to be continuing into the fourth quarter. Current confidence levels are consistent with similar growth figures to the third quarter of 2016.

Only a handful of countries have published their own domestic growth figures. France’s third-quarter GDP rose +0.9% on an annualised basis after shrinking in the second quarter. This modest rebound was chiefly due to stock rebuilding. As is often the case, this came with a rise in imports not offset by a concomitant rise in exports, resulting in foreign trade dragging on growth. Domestic demand remained moderate. In Spain, growth stayed healthy at 2.8% on an annualised quarterly basis despite the country’s long-running political uncertainty that was recently resolved with approval for a minority government.

The credit cycle’s return to form in the Eurozone continues to be a very positive growth factor. The ECB’s third-quarter 2016 bank lending survey showed that the upward trend was losing steam but only marginally. Eurozone banks noted stable lending conditions to enterprises and even expect to tighten them somewhat in the fourth quarter, although this would follow ten consecutive quarters of easing. Meanwhile, household credit standards continued to ease and private sector loan demand remains healthy, in part due to still-low interest rates.

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Republican Donald Trump has been elected as the 45th President of the United States, defying all predictions of a victory for the Democrat candidate, Hillary Clinton. In addition, the Republicans will keep their majorities in both the Senate and the House of Representatives which should, in theory, empower Donald Trump to push forward with his currently sketchy economic plan. However, Republican members of Congress do not unanimously support their president-elect, and he will most likely have to compromise with a majority that is unwilling to stray far from traditional Republican principles. Some moderation of Trump’s very aggressive election campaign positions is only to be expected.

So far the markets have proved resilient, no doubt guided by two Brexit lessons: do not underestimate the likelihood of a surprise outcome (or avoid rising too high  before the result) and do not overestimate the effects of political events (or avoid falling too low after a negative result). If the markets remain healthy, the psychological impact of the election on the real economy should be limited in the short term. In this case, Donald Trump’s election win is neither likely to affect US GDP in the two or three quarters to come, nor dissuade the Federal Reserve from raising rates at its next meeting on December 14th.

The Fed may also be encouraged by the latest buoyant economic data releases. Following a slowdown in the first half of 2016, US third-quarter growth grew at a faster 2.9% annualised rate. The ISM indices are consistent with stable growth for the fourth quarter and the labour market remains healthy. Private-sector job creations fell slightly in October but remain in line with the average level over the last six months.

Unemployment fell from 5.0% to 4.9% and wage growth is clearly gathering pace at +2.8% year-on-year. If the current economic conditions persist, the upward cycle should continue and could even gain pace if Donald Trump’s fiscal stimulus plans become reality in 2017.

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For the third consecutive quarter, Chinese growth has remained stable at +6.7% year-on-year, comfortably in line with the government’s 2016 growth target of between 6.5% and 7.0%. Nominal quarter-on-quarter growth even accelerated. The GDP deflator has recovered, confirming easing deflationary pressures as evidenced by now positive annualised producer prices, which had been in negative territory since March 2012.

September’s data indicate a healthy economic environment going into the fourth quarter: retail sales continue to grow at almost 10% annually, buoyed by booming car sales (+29.5%), and investment spending is still gaining ground, especially in the property market. October’s healthy PMI index readings also bode well for the economy: the composite PMI rose from 51.4 to 52.9, a record high since the start of 2013.

Property prices have risen sharply since the beginning of the year, especially in the larger towns and cities. Nationwide, they are reaching levels unprecedented in the current data series which began in 2010, with September’s reading standing at 16.6% year-on-year. In a bid to reduce the risk of overheating, several local authorities have announced measures aimed at restricting demand which is currently surging: September home sales rose by 35.3% year-on-year. However, these measures to restrict demand may negatively impact investment as well as property-related services in months to come.

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The opinion expressed above is dated November 2016 and is liable to change.

This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.


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