July 12, 2018 ( Lagos ) : In the US, real GDP growth slowed in the first quarter of 2018 to an annualized pace of 2.0%, the slowest in the last four quarters. One key reason for the slower growth rate was personal consumption expenditure which grew by 1.1% YoY (relative to 4.0% in Q4 17), the slowest pace in the last 18 quarters. Also, government spending grew at just 1.2% annualized clip (relative to 3% in Q4 17) on the back of a slowdown in national defense spending (1.8% vs. 5.5% in Q4 17). 

Consequently, despite the strong growth in private domestic investment of 7.3% YoY (+260bps from prior quarter), the impact of lower government and consumer spending drove the slow economic growth relative to prior quarter. That said, leading indicators guides to a pick-up in Q2 2018 as preliminary estimates of the labor market, retail sales and industrial production have continued to reflect the pass-through of tax reform on after-tax household incomes. 

For context, over Q2 2018, the unemployment rate firmed to 3.8% YoY from 4.1% at the end of Q1 2018. More so, analysts think the Q4 17 growth of 4% YoY was more of an outlier as the strong numbers in consumer spending reflected strong auto sales following the hurricane which drove replacement spending in the period.

Elsewhere, growth decelerated in the Euro area in the first quarter of 2018 to an annualized rate of 2.5% (vs. 2.8% in prior quarter). The slowdown is attributable to contraction in government expenditure (-10bps from prior quarter to 1.2% YoY) and external trade (-210bps from prior quarter to 4.5% YoY) – a fallout of temporary factors including extensive union activities in France, unseasonably cold weather in Germany, and short-term bottlenecks in other nations. 

Unbundling the region revealed that growth slowed in five countries which combined accounts for ~96% of the region’s GDP. Specifically, France (-70bps to 2.2%), Germany (-60bps to 2.3%), Spain (-10bps to 3.0%), Italy (-20bps to 1.4%) and UK: -20bps to 1.2%) all contributed to the slow growth in the region. However, recent events over Q2 2018 appears to have overshadowed the slowdown in Q1 2018. 

For context, EU’s unemployment data in the month of May showed improvement to 8.4%, the lowest rate recorded since December 2008 (vs. 8.5% in prior month and 9.2% in May 2017). To add, within the Euro area, the lowest unemployment rate was observed in Czech Republic (2.3%), and Germany (3.4%). 

Furthermore, the external sector strengthened over the first four months of 2018, with the Euro area recording trade surplus of €64.4 billion (vs. €58.7 billion same period in 2017), as export of €738.2 billion ($711.5 billion in January-April 2017) more than outweighed imports of €673.8 billion ($652.8 billion in January-April 2017).

Still in Europe, UK economy stuttered in Q1 18, rising by 1.2% YoY vs 1.4% recorded in the last quarter of 2017. Going by trend, this is the slowest pace of growth since Q3 12 owing to muted growth in services category1 (1.2% YoY vs 1.1% in Q4 17) which offset sturdy growth seen in industrial production2. On services, the slowdown mirrors activities in financial services (1.7% YoY) which has been decelerating since the start of 2017, while the TS&C3 and DHR4 sectors grew by 2.8% and 0.7% YoY respectively. 

In addition, construction and agricultural sector which jointly accounts for 7% of GDP contracted by 3.3% and 1.3% YoY respectively due to slowdown in consumer spending. On the flipside, industrial production grew by 2.2% YoY (vs. 1.9% YoY in Q4 17) buoyed by improved activities in the manufacturing sector (+2.5% YoY) while the electricity and mining sectors grew by 2.3% and 3.5% YoY respectively. 

For us, analysts believe the tepid growth mirrors the uncertainty over business prospects in the economy ahead of Brexit which has slowed investment spending, while subdued consumer spending reflects the squeeze on consumer real income borne out of rising inflation which touched a four year high in Q4 17 at 2.8%. For context, retail sales which serves as an indicator of consumer spending has been on a downtrend since Q2 17.

The Japanese economy also grew at a slower pace in Q1 18, printing at 1.1% YoY – hinged on the slowdown in household consumption which grew by 1.1% YoY (Q4 17: 1.9%). Furthermore, the economy recorded a slower growth in export (4.8% YoY vs. 6.5% in Q4 17), government spending (0.6% YoY vs. 0.8% in Q4 17) and a further contraction of 5.4% YoY in private investment (Q4 17: -2.4%). 

Beyond first quarter, PMI for the month of April, May and June printed at 53.8, 52.5 and 52.8 index points respectively which speaks to an expansion in the economy. However, export orders contracted in the month of June to 49.5 index points (vs. 51.1 index points in May), a reflection that the on-going trade dispute between China and US is having a toll on the export focused economy. 

For context, the Chinese economy sources most of its automobile parts and electronics from Japan, with China accounting for 19.2% of total exports in 2017.

Reporting for EasyKobo on Thursday, 12 July 2018 in Lagos, Nigeria

Source: ARM Securities Limited

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